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# UNITED
STATESSECURITIES AND EXCHANGE COMMISSION

# Washington D.C. 20549

# FORM 10-K

X ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal
year ended October 31, 2006

or

TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition
period from ____ to ____

Commission File Number
001-32906

|CurrencySharesSM British Pound Sterling Trust         
|------------------------------------------------------
|Sponsored by Rydex Specialized Products LLC,          
|d/b/a Rydex Investments                               
|(Exact name of registrant as specified in its charter)

|New York                        | No. 03-6118853                   
|------------------------------- | ---------------------------------
|(State or other jurisdiction of | (IRS Employer Identification No.)
|incorporation or organization) 

|9601 Blackwell Road, Suite 500           |           
|---------------------------------------- | ----------
|Rockville, Maryland                      | 20850     
|(Address of principal executive offices) | (Zip Code)

(301)
           296-5100 (Registrants telephone number, including area code)

N/A (Former name,
former address and former fiscal year, if changed since last report)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No .

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated
filer  Accelerated filer  Non-accelerated filer X

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).  Yes  No X.

Aggregate
market value of registrants common stock held by non-affiliates of the registrant,
based upon the closing price of a share of the registrants common stock on October
31, 2006 as reported by the New York Stock Exchange on that date: $57,417,000.

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# Cautionary Statement
Regarding Forward-Looking Information

This
Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and within the Private Securities Litigation Reform Act
of 1995. These statements are predictions and actual events or results may differ
materially from those expressed in our forward-looking statements. Risks and uncertainties
may cause our actual results to differ materially from those expressed in our
forward-looking statements. These uncertainties and other factors include, but are not
limited to, the following:

The
value of the Shares relates directly to the value of the British Pound Sterling held by
the Trust and fluctuations in the price of the British Pound Sterling could materially
adversely affect an investment in the Shares. Readers are urged to review the Risk
Factors section beginning on page 3 for a description of other risks and
uncertainties that may affect an investment in the Shares.

The
discussion and analysis which follows may contain statement that relate to future events
or future performance. In some cases, such forward-looking statements can be identified by
terminology such as anticipate, expect, intend,
plan, believe, seek, outlook and
estimate as well as similar words and phrases that signify forward-looking
statements. Neither the Sponsor nor any other person assumes responsibility for the
accuracy or completeness of forward-looking statements. Further, these forward-looking
statements are made as of the date of this report, and will not be revised or updated to
reflect actual results or changes in the Sponsors expectations or predictions.

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# CURRENCYSHARESSM
BRITISH POUND STERLING TRUST INDEX

|Caption  |                                                                                                 | Page
|-------- | ----------------------------------------------------------------------------------------------- | ----
|PART I   |                                                                                                 |     
|Item 1.  | Business.                                                                                       | 1   
|Item 1A. | Risk Factors.                                                                                   | 3   
|Item 1B. | Unresolved Staff Comments.                                                                      | 8   
|Item 2.  | Properties.                                                                                     | 8   
|Item 3.  | Legal Proceedings.                                                                              | 8   
|Item 4.  | Submission of Matters to a Vote of Security Holders.                                            | 8   
|PART II 
|Item 5.  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of      | 9   
|         | Equity Securities.                                                                             
|Item 6.  | Selected Financial Data.                                                                        | 9   
|Item 7.  | Managements Discussion and Analysis of Financial Condition and Results of Operations.          | 10  
|Item 7A. | Quantitative and Qualitative Disclosures about Market Risk.                                     | 12  
|Item 8.  | Financial Statements and Supplementary Data.                                                    | 12  
|Item 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.          | 12  
|Item 9A. | Controls and Procedures.                                                                        | 12  
|Item 9B. | Other Information.                                                                              | 13  
|PART III
|Item 10. | Directors and Executive Officers of the Registrant.                                             | 14  
|Item 11. | Executive Compensation.                                                                         | 14  
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. | 14  
|Item 13. | Certain Relationships and Related Transactions.                                                 | 14  
|Item 14. | Principal Accounting Fees and Services.                                                         | 14  
|PART IV 
|Item 15. | Exhibits, Financial Statement Schedules.                                                        | 15  

ii

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# Item 1. BUSINESS

# OVERVIEW

The CurrencySharesSM
British Pound Sterling Trust (the Trust) is a grantor trust that was formed on
June 8, 2006. The Trust issues shares (the Shares) in blocks of 50,000 (a
Basket) in exchange for deposits of British Pound Sterling and distributes
British Pound Sterling in connection with the redemption of Baskets. The Shares began
trading on the New York Stock Exchange (NYSE) under the ticker symbol
FXB on June 26, 2006.

The investment objective of the Trust
is for the Shares to reflect the price of British Pound Sterling plus accrued interest,
less the expenses of the Trusts operations. The Shares are intended to offer
investors an opportunity to participate in the market for the British Pound Sterling
through an investment in securities. The Shares are intended to provide institutional and
retail investors with a simple, cost-effective means of gaining investment benefits
similar to those of holding the British Pound Sterling. The Shares are bought and sold on
the NYSE like any other exchange-listed security, except that they are traded until 4:15
PM (New York time) instead of 4:00 PM (New York time). The Shares are backed by the assets
of the Trust, which does not hold or use derivative products. The value of the holdings of
the Trust is reported on the Trusts website, www.currencyshares.com, every business
day.

# THE TRUST

General

The Trust holds British Pound
Sterling and, from time to time, issues Baskets in exchange for deposits of British Pound
Sterling and distributes British Pound Sterling in connection with redemptions of Baskets.
The British Pound Sterling held by the Trust will be sold only (1) if needed to pay Trust
expenses, (2) in the event the Trust terminates and liquidates its assets or (3) as
otherwise required by law or regulation.

The
Sponsor

The Sponsor of the Trust generally
oversees the performance of the Trustee and the Trusts principal service providers,
but does not exercise day-to-day oversight over the Trustee or the Trusts service
providers. The Sponsor is Rydex Specialized Products LLC, a Delaware limited liability
company.

The Trusts only ordinary
recurring expense is expected to be the Sponsors fee. The Sponsor is responsible for
payment of the following administrative and marketing expenses of the Trust: the
Trustees monthly fee, typical maintenance and transaction fees of the Depository,
NYSE listing fees, printing and mailing costs, audit fees and expenses, up to $100,000 per
annum in legal fees and expenses, and applicable license fees. The Sponsor also paid the
costs of the Trusts organization and the costs of the initial sale of the Shares,
including the applicable SEC registration fees. The Sponsors fee accrues daily at an
annual nominal rate of 0.40% of the British Pound Sterling in the Trust. The Sponsor was
paid $54,489 for the period covered by this report.

The
Trustee

The Bank of New York, a banking
corporation with trust powers organized under the laws of the State of New York, serves as
the Trustee. The Trustee is responsible for the day-to-day administration of the Trust,
including keeping the Trusts operational records.

Net
Asset Value

The Trustee calculates, and the
Sponsor publishes, the Trusts Net Asset Value (NAV) each business day.
To calculate the NAV, the Trustee adds to the amount of British Pound Sterling in the
Trust at the end of the preceding day accrued but unpaid interest, British Pound Sterling
receivable under pending purchase orders and the value of other Trust assets, and
subtracts the accrued but unpaid Sponsors fee, British Pound Sterling payable under
pending redemption orders and other Trust expenses and liabilities, if any. The NAV is
expressed in U.S. Dollars (USD) based on the Noon Buying Rate,
which is the USD/British Pound Sterling exchange rate as determined by the Federal Reserve
Bank of New York as of 12:00 PM (New York time) on each day that the NYSE is open for
regular trading. If, on a particular evaluation day, the Noon Buying Rate has not been
determined and announced by 2:00 PM (New York time), then the most recent Noon Buying Rate
is used to determine the NAV of the Trust unless the Trustee, in consultation with the
Sponsor, determines that such price is inappropriate to use as the basis for such
valuation.

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The Trustee also determines the NAV
per Share, which equals the NAV of the Trust divided by the number of outstanding Shares.
The NAV of the Trust and NAV per Share are published by the Sponsor on each day that the
NYSE is open for regular trading and is posted on the Trusts website,
www.currencyshares.com.

Depository
and Deposit Accounts

JPMorgan Chase Bank, N.A., London
Branch is the Depository. The Depository maintains two deposit accounts for the Trust, a
primary deposit account which earns interest and a secondary deposit account which does
not earn interest (collectively, the Deposit Accounts). Interest on the
primary deposit account accrues daily and is paid monthly. If the Sponsor believes that
the interest rate paid by the Depository is not competitive, the Sponsors recourse
is to remove the Depository by terminating the Deposit Account Agreement and closing the
accounts. The Depository is not paid a fee for its services to the Trust. The Depository
may earn a spread or margin over the rate of interest it pays to
the Trust on the British Pound Sterling deposit balances. The secondary deposit account is
used only in connection with mid-month creations and redemptions of Baskets, to account
for interest that has been earned on the primary deposit account during the month but not
yet paid, and to receive interest earned on the primary deposit account, pay Trust
expenses and distribute any excess interest to Shareholders on a monthly basis.

Each month the Depository deposits
into the secondary deposit account accrued but unpaid interest and the Trustee will
withdraw British Pound Sterling from the secondary deposit account to pay the accrued
Sponsors fee for the previous month plus other Trust expenses, if any. In the event
that the interest deposited exceeds the sum of the Sponsors fee for the prior month
plus other Trust expenses, if any, then the Trustee will direct that the excess be
converted into USD at a prevailing market rate and the Trustee will distribute the USD as
promptly as practicable to Shareholders on a pro rata basis (in accordance with the number
of Shares that they own).

Trust
Expenses

In certain exceptional cases the
Trust may pay expenses in addition to the Sponsors fee. These exceptions include
expenses not assumed by the Sponsor, taxes and governmental charges, expenses and costs of
any extraordinary services performed by the Trustee or the Sponsor on behalf of the Trust
or action taken by the Trustee or the Sponsor to protect the Trust or the interests of
Shareholders, indemnification of the Sponsor under the Depositary Trust Agreement, and
legal expenses in excess of $100,000 per year.

Termination

The Trust will terminate upon the
occurrence of any of the termination events listed in the Depositary Trust Agreement and
will otherwise terminate onJune 8, 2046.

# THE SHARES

General

Each Share represents a proportional
interest, based on the total number of Shares outstanding, in the British Pound Sterling
owned by the Trust, plus accrued and unpaid interest less accrued but unpaid expenses
(both asset-based and non-asset based) of the Trust. All Shares are of the same class with
equal rights and privileges. Each Share is transferable, is fully paid and non-assessable

Limited
Rights

The Shares are not a traditional
investment. They are dissimilar from the shares of a corporation operating a
business enterprise, with management and a board of directors. Trust Shareholders do not
have rights normally associated with owning shares of a business corporation, including,
for example, the right to bring oppression or derivative actions.
Shareholders have only those rights explicitly set forth in the Depositary Trust
Agreement. The Shares do not entitle their holders to any conversion or pre-emptive rights
or, except as provided herein, any redemption or distribution rights.

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Voting
and Approvals

Shareholders have no voting rights
under the Depositary Trust Agreement, except in limited circumstances. If the holders of
at least 25% of the Shares outstanding determine that the Trustee is in material breach of
its obligations under the Depositary Trust Agreement, they may provide written notice to
the Trustee (or require the Sponsor to do so) specifying the default and requiring the
Trustee to cure such default. If the Trustee fails to cure such breach within 30 days
after receipt of the notice, the Sponsor may remove the Trustee. The holders of at least
66 2/3% of the Shares outstanding may vote to remove the Trustee. The Trustee must
terminate the Trust at the request of the holders of at least 75% of the outstanding
Shares.

Creation
and Redemption of Shares

The creation and redemption of
Baskets requires the delivery to the Trust or the distribution by the Trust of the amount
of British Pound Sterling represented by the Baskets being created or redeemed. This
amount is based on the combined NAV per Share of the number of Shares included in the
Baskets being created or redeemed, determined on the day the order to create or redeem
Baskets is accepted by the Trustee.

Only Authorized Participants may
place orders to create and redeem Baskets. An Authorized Participant is a Depository Trust
Company participant that is a registered broker-dealer or other securities market
participant, such as a bank or other financial institution that is not required to
register as a broker-dealer to engage in securities transactions and has entered into a
Participant Agreement with the Trustee.

Before initiating a creation or
redemption order, an Authorized Participant must have entered into a Participant Agreement
with the Sponsor and the Trustee. The Participant Agreement provides the procedures for
the creation and redemption of Baskets and for the delivery of British Pound Sterling
required for creations and redemptions. The Participant Agreements may be amended by the
Trustee and the Sponsor. Authorized Participants pay a transaction fee of $500 to the
Trustee for each order that they place to create or redeem one or more Baskets. Authorized
Participants who make deposits with the Trust in exchange for Baskets receive no fees,
commissions or other form of compensation or inducement of any kind from either the
Sponsor or the Trust. No Authorized Participant has any obligation or responsibility to
the Sponsor or the Trust to effect any sale or resale of Shares.

# Item 1A. RISK FACTORS

You should consider carefully the
risks described below before making an investment decision. You should also refer to the
other information included in this report, including the Trusts financial statements
and the related notes.

The value of the Shares relates
directly to the value of the British Pound Sterling held by the Trust. Fluctuations in the
price of the British Pound Sterling could materially and adversely affect the value of the
Shares.

The Shares are designed to reflect
the price of the British Pound Sterling, plus accumulated interest, less the Trusts
expenses. The price of the British Pound Sterling has fluctuated widely over the past
several years. Several factors may affect the price of the British Pound Sterling,
including:

| | Debt
level and trade deficit of the United Kingdom;
|- | ---------------------------------------------------

| | Inflation
rates of the United States and the United Kingdom and investors expectations concerning
inflation rates;
|- | -------------------------------------------------------------------------------------------------------------------

| | Interest
rates of the United States and the United Kingdom and investors expectations concerning
interest rates;
|- | -----------------------------------------------------------------------------------------------------------------

| | Investment
and trading activities of mutual funds, hedge funds and currency funds; and
|- | --------------------------------------------------------------------------------------

| | Global
or regional political, economic or financial events and situations.
|- | --------------------------------------------------------------------------

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In addition, the British Pound
Sterling may not maintain its long-term value in terms of purchasing power in the future.
When the price of the British Pound Sterling declines, the Sponsor expects the price of a
Share to decline as well.

The USD/British Pound Sterling
exchange rate, like foreign exchange rates in general, can be volatile and difficult to
predict. This volatility could materially and adversely affect the performance of the
Shares.

Foreign exchange rates are influenced
by the factors identified immediately above and may also be influenced by: changing supply
and demand for a particular currency; monetary policies of governments (including exchange
control programs, restrictions on local exchanges or markets and limitations on foreign
investment in a country or on investment by residents of a country in other countries);
changes in balances of payments and trade; trade restrictions; and currency devaluations
and revaluations. Also, governments from time to time intervene in the currency markets,
directly and by regulation, in order to influence prices directly. These events and
actions are unpredictable. The resulting volatility in the USD/British Pound Sterling
exchange rate could materially and adversely affect the performance of the Shares.

If interest earned by the Trust
does not exceed expenses, the Trustee will withdraw British Pound Sterling from the Trust
to pay these excess expenses which will reduce the amount of British Pound Sterling
represented by each Share on an ongoing basis and may result in adverse tax consequences.

Each outstanding Share represents a
fractional, undivided interest in the British Pound Sterling held by the Trust. Although
the Trust generates interest, it is possible that the amount of interest earned may not
exceed expenses, in which case the Trustee will withdraw British Pound Sterling from the
Trust to pay these excess expenses. As a result, the amount of British Pound Sterling
represented by each Share may gradually decline over time. This is true even if additional
Shares are issued in exchange for additional deposits of British Pound Sterling into the
Trust, as the amount of British Pound Sterling required to create Shares will
proportionately reflect the amount of British Pound Sterling represented by the Shares
outstanding at the time of creation. Assuming a constant British Pound Sterling price, if
expenses exceed interest earned, the trading price of the Shares will gradually decline
relative to the price of British Pound Sterling as the amount of British Pound Sterling
represented by the Shares gradually declines. In this event, the Shares will only maintain
their original price if the price of British Pound Sterling increases.

Investors should be aware that a
gradual decline in the amount of British Pound Sterling represented by the Shares may
occur regardless of whether the trading price of the Shares rises or falls in response to
changes in the price of British Pound Sterling. The estimated ordinary operating expenses
of the Trust, which accrue daily, are described in The Trust  Trust
Expenses.

The payment of expenses by the Trust
will result in a taxable event to Shareholders.  To the extent Trust expenses exceed
interest paid to the Trust, a gain or loss may be recognized by Shareholders depending on
the tax basis of the tendered British Pound Sterling.

If the Trust incurs expenses in
USD, the Trust is required to sell British Pound Sterling to pay these expenses. The sale
of the Trusts British Pound Sterling to pay expenses in USD at a time of low British
Pound Sterling prices could adversely affect the value of the Shares.

The Trustee will sell British Pound
Sterling held by the Trust if necessary to pay Trust expenses if any incurred in USD,
irrespective of then-current British Pound Sterling prices. The Trust is not actively
managed and no attempt will be made to buy or sell British Pound Sterling to protect
against or to take advantage of fluctuations in the price of British Pound Sterling.
Consequently, the Trusts British Pound Sterling may be sold at a time when the
British Pound Sterling price is low, resulting in a negative effect on the value of the
Shares.

Purchasing activity in the British
Pound Sterling market associated with the purchase of Baskets from the Trust may cause a
temporary increase in the price of British Pound Sterling. This increase may adversely
affect an investment in the Shares.

Purchasing activity associated with
acquiring the British Pound Sterling required for deposit into the Trust in connection
with the creation of Baskets may temporarily increase the market price of British Pound
Sterling, which will result in higher prices for the Shares. Temporary increases in the
market price of British Pound Sterling may also occur as a result of the purchasing
activity of other market participants. Other market participants may attempt to benefit
from an increase in the market price of British Pound Sterling that may result from
increased purchasing activity of British Pound Sterling connected with the issuance of
Baskets. Consequently, the market price of British Pound Sterling may decline immediately
after Baskets are created. If the price of British Pound Sterling declines, then it is
anticipated that the trading price of the Shares will also decline. In addition, if the
Trust experiences a significant increase in its expenses due to an unexpected event, then
it is anticipated that the unexpected expenses would reduce the NAV of the Trust, which
would cause the trading price of the Shares to decline even if the price of British Pound
Sterling did not decline.

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The Deposit Accounts are not
entitled to payment at any office of JPMorgan Chase Bank, N.A. located in the United
States.

The federal laws of the United States
prohibit banks located in the United States from paying interest on unrestricted demand
deposit accounts. Therefore, payments out of the Deposit Accounts will be payable only at
the London branch of JPMorgan Chase Bank, N.A., located in England. The Trustee will not
be entitled to demand payment of these accounts at any office of JPMorgan Chase Bank, N.A.
that is located in the United States. JPMorgan Chase Bank, N.A. will not be required to
repay the deposit if its London branch cannot repay the deposit due to an act of war,
insurrection or civil strife or an action by a foreign government or instrumentality
(whether de jure or de facto) in England.

Shareholders do not have the
protections associated with ownership of a demand deposit account insured in the United
States by the Federal Deposit Insurance Corporation nor the full protection provided for
bank deposits under English law.

Neither the Shares nor the Deposit
Accounts and the British Pound Sterling deposited in them are a deposit insured against
loss by the FDIC or any other federal agency. Deposits may have only limited protection
under the Financial Services Compensation Scheme of England.

British Pound Sterling deposited
in the Deposit Accounts by an Authorized Participant are commingled with British Pound
Sterling deposited by other Authorized Participants and are held by the Depository in
either the primary deposit account or the secondary deposit account of the Trust. British
Pound Sterling held in the Deposit Accounts is not be segregated from the
Depositorys other assets. If the Depository becomes insolvent, then its assets might
not be adequate to satisfy a claim by the Trust or any Authorized Participant. In
addition, in the event of the insolvency of the Depository or the U.S. bank of which it is
a branch, there may be a delay and costs incurred in recovering the British Pound Sterling
held in the Deposit Accounts.

The Trust has no proprietary rights
in or to any specific British Pound Sterling held by the Depository and will be an
unsecured creditor of the Depository with respect to the British Pound Sterling held in
the Deposit Accounts in the event of the insolvency of the Depository or the U.S. bank of
which it is a branch. In the event the Depository or the U.S. bank of which it is a branch
becomes insolvent, the Depositorys assets might not be adequate to satisfy a claim
by the Trust or any Authorized Participant for the amount of British Pound Sterling
deposited by the Trust or the Authorized Participant, in such event, the Trust and any
Authorized Participant will generally have no right in or to assets other than those of
the Depository.

In the case of insolvency of the
Depository or JPMorgan Chase Bank, N.A., the U.S. bank of which the Depository is a
branch, a liquidator may seek to freeze access to the British Pound Sterling held in all
accounts by the Depository, including the Deposit Accounts. The Trust and the Authorized
Participants could incur expenses and delays in connection with asserting their claims.
These problems would be exacerbated by the reality that the Deposit Accounts will not be
held in the U.S. but instead will be held at the London branch of a U.S. national bank,
where it will be subject to English insolvency law. Further, under U.S. law, in the case
of the insolvency of JPMorgan Chase Bank, N.A., the claims of creditors in respect of
accounts (such as the Trusts Deposit Accounts) that are maintained with an overseas
branch of JPMorgan Chase Bank, N.A. will be subordinate to claims of creditors in respect
of accounts maintained with JPMorgan Chase Bank, N.A. in the U.S., greatly increasing the
risk that the Trust and the Trusts beneficiaries would suffer a loss.

The Shares are a new securities
product. Their value could decrease if unanticipated operational or trading problems were
to arise.

The mechanisms and procedures
governing the creation, redemption and offering of the Shares have been developed
specifically for this offering. Unanticipated issues might arise with respect to the
mechanics of Trust operations and the trading of the Shares. These issues could have a
material, adverse effect on the value of an investment in the Shares. In addition, to the
extent that unanticipated operational or trading problems or issues arise, the
Sponsors past experience and qualifications might not be suitable for solving the
problems.

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Shareholders do not have the
protections associated with ownership of shares in an investment company registered under
the Investment Company Act of 1940.

The Investment Company Act is
designed to protect investors by preventing: insiders from managing investment companies
to their benefit and to the detriment of public investors; the issuance of securities
having inequitable or discriminatory provisions; the management of investment companies by
irresponsible persons; the use of unsound or misleading methods of computing earnings and
asset value; changes in the character of investment companies without the consent of
investors; and investment companies from engaging in excessive leveraging. To accomplish
these ends, the Investment Company Act requires the safekeeping and proper valuation of
fund assets, restricts greatly transactions with affiliates, limits leveraging, and
imposes governance requirements as a check on fund management. The Investment Company Act
applies to a range of investment company structures, but, in practice, primarily regulates
a company holding a portfolio of investment securities such as publicly traded stocks,
bonds and money market instruments: selected by an affiliated investment adviser pursuant
to the companys stated investment objectives, policies, restrictions, strategies and
techniques where the investment adviser manages the portfolio and otherwise operates the
company on a day-to-day basis for a management fee and other charges and expenses and, in
doing so, has conflicts of interest with the company; valued, priced for sale and
redemption, physically held and traded in securities markets pursuant to computational,
custody and brokerage and other transactional requirements peculiar to such a portfolio of
investment securities; and overseen by the companys board of directors that is
elected, constituted and governed pursuant to specified standards developed in the context
of such a portfolio of investment securities.

The Trust is not registered as an
investment company under the Investment Company Act and is not required to register under
that Act. Consequently, Shareholders do not have the regulatory protections afforded to
investors in registered investment companies.

Shareholders do not have the
rights enjoyed by investors in certain other financial instruments.

As interests in a grantor trust, the
Shares have none of the statutory rights normally associated with the ownership of shares
of a business corporation, including, for example, the right to bring
oppression or derivative actions. Apart from the rights afforded
to them by federal and state securities laws, Shareholders have only those rights relative
to the Trust, the Trust property and the Shares that are set forth in the Depositary Trust
Agreement. In this connection, the Shareholders have limited voting and distribution
rights. They do not have the right to elect directors. See The Shares  Limited
Rights for a description of the limited rights of the Shareholders.

The Shares may trade at a price
which is at, above, or below the NAV per Share.

The NAV per Share fluctuates with
changes in the market value of the Trusts assets. The market price of Shares can be
expected to fluctuate in accordance with changes in the NAV per Share, but also in
response to market supply and demand. As a result, the Shares might trade at prices at,
above or below the NAV per Share.

# The Sponsors failure to
successfully maintain the adequacy of the Trusts disclosure controls and procedures
could have a material adverse impact on the Trusts ability to report financial results
in an accurate and timely manner.

The Sponsors assessment of the
effectiveness of the Trusts disclosure controls and procedures, as of October 31, 2006,
identified a material weakness in the Trusts internal controls over the accuracy of its
interest income, as more fully described in Item 9A of this report. Shareholders cannot
be assured that the Trust will not have material weaknesses in its internal controls in
the future. A failure in the effectiveness of the Trusts system of disclosure controls
and procedures could have a material adverse impact on the Trusts ability to report
financial results in an accurate and timely manner.

The interest rate earned by the
Trust, although competitive, may not be the best rate available. If the Sponsor determines
that the interest rate is inadequate, then its sole recourse is to remove the Depository
and terminate the Deposit Accounts.

The Depository is committed to
endeavor to pay a competitive interest rate on the balance of British Pound Sterling in
the primary deposit account of the Trust. Interest on the primary deposit account accrues
daily and is paid monthly. The Sponsor discloses the current interest rate on the
Trusts website. If the Sponsor believes that the interest rate paid by the
Depository is not adequate, the Sponsors sole recourse is to remove the Depository
and terminate the Deposit Accounts. The Depository will not be paid a fee for its services
to the Trust; rather, it will generate income or loss based on its ability to earn a
spread or margin over the interest it pays to the Trust by using
the Trusts British Pound Sterling to make loans or in other banking operations. For
these reasons, you should not expect that the Trust will be paid the best available
interest rate at any time or over time.

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---

The Depository owes no fiduciary
duties to the Trust or the Shareholders, is not required to act in their best interest and
could resign or be removed by the Sponsor, which would trigger early termination of the
Trust.

The Depository is not a trustee for
the Trust or the Shareholders. As stated above, the Depository is not obligated to
maximize the interest rate paid to the Trust. In addition, the Depository has no duty to
continue to act as the depository of the Trust. The Depository can terminate its role as
depository for any reason whatsoever upon 90 days notice to the Trust. Such a
termination might result, for example, if the Sponsor determines that the interest rate
paid by the Depository is inadequate. In the event that the Depository was to resign or
be removed, the Trust will be terminated.

# Shareholders may incur
significant fees upon the termination of the Trust.

The occurrence of any one of several
events would either require the Trust to terminate or permit the Sponsor to terminate the
Trust. For example, if the Depository were to resign or be removed, then the Sponsor would
be required to terminate the Trust. Shareholders tendering their Shares within 90 days of
the Trusts termination will receive the amount of British Pound Sterling represented
by their Shares. Shareholders may incur significant fees if they choose to convert the
British Pound Sterling they receive to U.S. Dollars.

Redemption orders are subject to
rejection by the Trustee under certain circumstances.

The Trustee will reject a redemption
order if the order is not in proper form as described in the Participant Agreement or if
the fulfillment of the order, in the opinion of its counsel, might be unlawful. Any such
rejection could adversely affect a redeeming Shareholder. For example, the resulting delay
would adversely affect the value of the Shareholders redemption distribution if the
NAV were to decline during the delay. In accordance with the Depositary Trust Agreement,
the Sponsor and the Trustee disclaim any liability for any loss or damage that may result
from any such rejection.

Substantial sales of British Pound
Sterling by the official sector could adversely affect an investment in the Shares.

The official sector consists of
central banks, other governmental agencies and multi-lateral institutions that buy, sell
and hold British Pound Sterling as part of their reserve assets. The official sector holds
a significant amount of British Pound Sterling that can be mobilized in the open market.
In the event that future economic, political or social conditions or pressures require
members of the official sector to sell their British Pound Sterling simultaneously or in
an uncoordinated manner, the demand for British Pound Sterling might not be sufficient to
accommodate the sudden increase in the supply of British Pound Sterling to the market.
Consequently, the price of the British Pound Sterling could decline, which would adversely
affect an investment in the Shares.

Shareholders that are not
Authorized Participants may only purchase or sell their Shares in secondary trading
markets.

Only Authorized Participants may
create or redeem Baskets of Shares through the Trust. All other investors that desire to
purchase or sell Shares must do so through the NYSE or in other markets, if any, in which
the Shares are traded.

The liability of the Sponsor and
the Trustee under the Depositary Trust Agreement is limited and, except as set forth in
the Depositary Trust Agreement, they are not obligated to prosecute any action, suit or
other proceeding in respect of any Trust property.

The Depositary Trust Agreement
provides that neither the Sponsor nor the Trustee assumes any obligation or is subject to
any liability under the Trust Agreement to any Shareholder, except that they each agree to
perform their respective obligations specifically set forth in the Depositary Trust
Agreement without negligence or bad faith. Additionally, neither the Sponsor nor the
Trustee is obligated to, although each may in its respective discretion, prosecute any
action, suit or other proceeding in respect of any Trust property. The Depositary Trust
Agreement does not confer upon Shareholders the right to prosecute any such action, suit
or other proceeding.

7

---

The Depositary Trust Agreement may
be amended to the detriment of Shareholders without their consent.

The Sponsor and the Trustee may amend most
provisions (other than those addressing core economic rights) of the Depositary Trust
Agreement without the consent of any Shareholder. Such an amendment could impose or
increase fees or charges borne by the Shareholders. Any amendment that increases fees or
charges (other than taxes and other governmental charges, registration fees or other
expenses), or that otherwise prejudices any substantial existing rights of Shareholders,
will not become effective until 30 days after written notice is given to Shareholders.

The License Agreement with The
Bank of New York may be terminated by The Bank of New York in the event of a material
breach. Termination of the License Agreement might lead to early termination and
liquidation of the Trust.

The Bank of New York
(BNY) and an affiliate of the Sponsor have entered into a License Agreement
granting the Sponsors affiliate a license to certain patent applications made by BNY
covering systems and methods for securitizing a commodity. The Sponsors affiliate
has sublicensed the license to the Sponsor. The license is limited to a non-exclusive
grant for the life of BNYs patents and patent applications. The License Agreement
provides that each of the parties may provide notice of intent to terminate the License
Agreement in the event the other party commits a material breach. If the License Agreement
is terminated and one or more of BNYs patent applications issue as patents, then BNY
may claim that the operation of the Trust violates its patent or patents and seek an
injunction forcing the Trust to cease operation and the Shares to cease trading. In that
case, the Trust might be forced to terminate and liquidate, which would adversely affect
Shareholders.

# Item 1B. UNRESOLVED
STAFF COMMENTS

None.

# Item 2. PROPERTIES

The principal offices of the Sponsor and
the Trust are at 9601 Blackwell Road, Suite 500, Rockville, Maryland 20850 which is leased
by an affiliate of the Sponsor. Neither the Sponsor nor the Trust owns or leases any other
property.

# Item 3. LEGAL PROCEEDINGS

None.

# Item 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS

None.

8

---

# PART II

# Item 5.   MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.

The Shares have traded on the NYSE
under the symbol FXB since the Trusts initial public offering on June
26, 2006. For each of the quarters during the fiscal year ended October 31, 2006, the high
and low sale prices of the Shares as reported for NYSE transactions were as follows:

|Fiscal Year Ended October 31, 2006:     | High    | Low    
|--------------------------------------- | ------- | -------
|Quarter Ended                           |         |        
|July 31, 2006 (beginning June 26, 2006) | $187.42 | $181.83
|October 31, 2006                        | $191.39 | $185.63

Please see Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Liquidity for a summary of distributions made by the Trust to Shareholders from the
Trusts inception through October 31, 2006.

The number of record holders of
Shares of the registrant as of December 29, 2006 was approximately 56.

The Trust does not purchase Shares
directly from its shareholders and the Trust did not redeem any Baskets from Authorized
Participants in the fourth quarter of the fiscal year covered by this report.

# Item 6. SELECTED
FINANCIAL DATA

As disclosed in the Current Report on
Form 8-K filed by the Trust on January 22, 2007 and discussed further in this report, the
Trust will be amending its Quarterly Report on Form 10-Q for the fiscal quarter ended July
31, 2006. Accordingly, the balances for the line items set forth in the table below for
the quarter ended July 31, 2006 reflect the corrected balances which will be restated with
the amended Quarterly Report and are not consistent with those included in the original
interim financial statements currently on file with the SEC.

|Income                          | June 8, 2006
[Date of Inception]
to July 31, 2006
(as restated) | Three Months
Ended
October 31, 2006 | June 8, 2006
[Date of Inception]
to October 31, 2006
|------------------------------- | --------------------------------------------------------------- | ----------------------------------- | ----------------------------------------------------
|Interest income                 |                                                                 |                                     | $                                                   
|                                |                                                                 |                                     |                                                     
|Total Income                    |                                                                 |                                     |                                                     
|Expenses                        |                                                                 |                                    
|Sponsors fee                   |                                                                 |                                     |                                                     
|                                |                                                                 |                                     |                                                     
|Total Expenses                  |                                                                 |                                     |                                                     
|Net Income                      |                                                                 |                                     | $                                                   
|Other Comprehensive Income      |                                                                 |                                    
|Currency translation adjustment |                                                                 |                                     |                                                     
|                                |                                                                 |                                     |                                                     
|Total Comprehensive Income      |                                                                 |                                     | $                                                   
|                                |                                                                 |                                     |                                                     
|Earnings per share              |                                                                 |                                     | $                                                   
|Weighted-average Shares         |                                                                 |                                    
|Outstanding                     |                                                                 |                                     |                                                     
|Cash Dividends per Share        |                                                                 |                                     | $                                                   

For the fiscal year ended October 31,
2006, total assets were $57,468,666 and net cash flows were $57,251,816.

9

---

# Item 7.   MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# MOVEMENTS IN THE PRICE
OF BRITISH POUND STERLING

The investment objective of the Trust
is for the Shares to reflect the price of the British Pound Sterling plus accrued
interest, less the expenses of the Trusts operations. The Shares are intended to
provide institutional and retail investors with a simple, cost-effective means of gaining
investment benefits similar to those of holding British Pound Sterling. Each outstanding
Share represents a proportional interest in the British Pound Sterling held by the Trust.
The following chart provides recent trends in the price of British Pound Sterling. The
chart illustrates movements in the price of British Pound Sterling in USD during the
period from August 1, 2005 to October 31, 2006, and is based on the Noon Buying Rate as
determined by the Federal Reserve Bank of New York:



Historical values of the Noon Buying
Rate can be obtained at http://www.ny.frb.org/markets/fxrates/noon.cfm.

# NAV PER SHARE, VALUATION
OF BRITISH POUND STERLING

The following chart illustrates the
movement in the price of the Shares based on NAV per Share and the midpoint between the
bid and ask prices offered on the NYSE as of the Noon Buying Rate
versus the corresponding British Pound Sterling (expressed as a multiple of 100 British
Pound Sterling  Noon Buying Rate x 100):



10

---

# LIQUIDITY

The Sponsor is not aware of any
trends, demands, conditions or events that are reasonably likely to result in material
changes to the Trusts liquidity needs. The Depository maintains two deposit accounts
for the Trust, a primary deposit account that earns interest and a secondary deposit
account that does not earn interest. Interest on the primary deposit account accrues daily
and is paid monthly. The interest rate paid as of October 31, 2006 was an annual nominal
rate of 4.52%. The following chart provides the daily rate paid by the Depository since
June 26, 2006, the date the Shares began trading on the NYSE:



In exchange for its fee, the Sponsor
has assumed most of the expense incurred by the Trust. As a result, the only ordinary
expense of the Trust during the period covered by this report was the Sponsors fee.
Each month the Depository deposits into the secondary deposit account accrued but unpaid
interest and the Trustee withdraws British Pound Sterling from the secondary deposit
account to pay the accrued Sponsors fee for the previous month plus any other Trust
expenses. When the interest deposited exceeds the sum of the Sponsors fee for the
prior month plus other Trust expenses, if any, the Trustee converts the excess into USD at
a prevailing market rate and distributes the USD as promptly as practicable to
Shareholders on a pro rata basis (in accordance with the number of Shares that they own).
Distributions during the fiscal year ended October 31, 2006 are as follows:

|         
|---------
|
|
|10/2/2006
|9/1/2006 
|8/1/2006 
|7/3/2006 

11

---

# CRITICAL ACCOUNTING
ESTIMATES

As discussed in Item 6 of this
report and Note 3 to the Financial Statements, the Trust will be amending its
Quarterly Report on Form 10-Q for the fiscal quarter ended  July 31,
2006. In connection with this amendment, the Sponsors management has determined
that there was a material weakness in the controls of the Trust as of October 31,
2006. This weakness and its remediation is explained in further detail in Item 9A of
this report.

The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States of America requires the Sponsors management to make estimates and assumptions
that affect the reported amounts of the assets and liabilities and disclosures of
contingent liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the period covered by this report.

The Trustee calculates the
Trusts NAV each business day. For NAV calculation purposes, British Pound Sterling
Deposits (cash) are translated at the Noon Buying Rate as determined and published by the
Federal Reserve Bank of New York as of 12:00 PM (New York time) on each day that the NYSE
is open for regular trading. If, on a particular evaluation day, the Noon Buying Rate has
not been determined and announced by 2:00 PM (New York time), then the most recent Noon
Buying Rate is used to determine the NAV of the Trust unless the Trustee, in consultation
with the Sponsor, determines that such price is inappropriate to use as the basis for such
valuation.

The functional currency of the Trust
is the British Pound Sterling in accordance with Financial Accounting Standard 52, Foreign
Currency Translation.

# RESULTS OF OPERATIONS

The Trust was formed on June 8, 2006
when the Sponsor deposited 100 British Pound Sterling with the Depository in exchange for
one Share. The Depository received 15,000,000 British Pound Sterling on behalf of the
Trust in exchange for 150,000 Shares on June 21, 2006. Trading in the Shares of the Trust
on the NYSE commenced on June 26, 2006. Through October 31, 2006 an additional
150,000 Shares had been created in exchange for 15,000,000 British Pound Sterling and the
seed capital of 100 British Pound Sterling had been redeemed.

As of October 31, 2006 the amount of
British Pound Sterling owned by the Trust was 30,000,000 valued at $57,449,178 based on
the NAV on October 31, 2006.

# Item 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

# Item 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

See Index to Financial Statements on
page F-1 for a list of the financial statements being filed therein.

Item 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

# Item 9A. CONTROLS AND
PROCEDURES.

The Sponsor maintains disclosure
controls and procedures on behalf of the Trust. The term disclosure controls and
procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934)
means controls and other procedures that are designed to ensure that information required
to be disclosed in the reports that the Trust files or submits to the SEC under the
Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. The Trusts disclosure controls and
procedures are designed by or under the supervision of the Sponsors chief executive
officer and chief financial officer who exercise oversight over the Trust as the Trust has
no officers. The chief executive officer and chief financial officer of the Sponsor have
evaluated the effectiveness of the Trusts disclosure controls and procedures as of
October 31, 2006. Based on that evaluation, the chief executive officer and chief
financial officer of the Sponsor have concluded that the disclosure controls and
procedures of the Trust were not effective as a result of the material weakness discussed
below as of the period covered by this annual report.

12

---

A material weakness is a control
deficiency, or a combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financials will not be
prevented or detected.

As of October 31, 2006, the Trust did
not maintain effective control over the accuracy of its interest income. Specifically, the
Trust did not maintain effective control to ensure that the portion of foreign currency
received in Basket creations and paid out in Basket redemptions was included in the
calculation of income of the Trust, rather than in capital in accordance with generally
accepted accounting principles and that the calculation was reviewed appropriately by the Sponsor.
This control deficiency resulted in the restatement of the Trusts
fiscal 2006 condensed financial statements for all interim periods and audit adjustments
to the fiscal 2006 financial statements prepared by the Sponsor. Additionally, this
control deficiency, if not corrected, could result in a misstatement of interest income
and accrued interest that would result in a material misstatement of annual or interim
financial statements that would not be prevented or detected. Accordingly, the
Sponsors management has determined that this control deficiency constitutes a
material weakness.

# Remediation Plan

The Sponsor has worked with and will
continue to work with the Trustee that provides financial statement information for the
Trust to remedy the issue. The Trustee has advised the Sponsor that it has implemented
procedures and controls to better assure that these payments will be accounted for
properly in the current year and all future financial statements of the Trust. In
addition, the Sponsor has enhanced procedures and controls around the review of all
financial statement information provided by the Trustee to better assure that this type of
error, or others like it, is detected in all future financial statements.

# Changes in Internal
Control Over Financial Reporting

There were no changes in the
Trusts internal control over financial reporting that occurred during the
Trusts last fiscal quarter that have materially affected, or are reasonably likely
to materially affect, the Trusts internal control over financial reporting.

# Item 9B. OTHER
INFORMATION.

Not applicable.

13

---

# PART III

Item 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT.

Not applicable.

# Item 11. EXECUTIVE COMPENSATION.

Not applicable.

Item 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

None.

Item 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Not applicable.

# Item 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES.

PricewaterhouseCoopers LLP is the
independent registered public accounting firm for the Trust. Fees for services performed
by PricewaterhouseCoopers LLP for the period from June 8, 2006 through October 31, 2006
were:

|Audit Fees         |  |  | $ | 13,500.00 | 
|------------------ |  |  | - | --------- | 
|Audit-related fees |  |  |   | 7,143.00  | 
|Tax fees           |  |  |   | 0.00      | 
|All other Fees     |  |  |   | 0.00      | 
|                   |  | 
|                   |  |  | $ | 20,643.00 | 
|                   |  | 

14

---

# PART IV

# Item 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.

# FINANCIAL STATEMENTS

See Index to Financial Statements on
Page F-1 for a list of the financial statements being filed as a part of this report.
Schedules have been omitted since they are either not required, not applicable or the
information has otherwise been included.

# EXHIBITS

|Exhibit |            
|------- | -----------
|No.     | Description

|3.1 | Certificate
of Formation of Rydex Specialized Products LLC, incorporated herein by reference to
Exhibit 3.1 filed with Form S-1 Registration Statement (File number 333-132361) filed on
March 13, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 | Limited
Liability Company Agreement of Rydex Specialized Products, LLC, incorporated herein by
reference to Exhibit 3.2 filed with Form S-1 Registration Statement (File number
333-132361) filed on March 13, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.1 | Form
of Depositary Trust Agreement, incorporated herein by reference to Exhibit 4.1 filed with
Amendment No. 2 to Form S-1 Registration Statement (File number 333-132361) filed on June 9,
2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 | Form
of Participant Agreement, incorporated herein by reference to Exhibit 4.2 filed with
Amendment No. 2 to Form S-1 Registration Statement (File number 333-132361) filed on June
9, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 | Form
of Deposit Account Agreement, incorporated herein by reference to Exhibit 10.1 filed with
Amendment No. 2 to Form S-1 Registration Statement (File number 333-132361) filed on June
9, 2006.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 | Form
of Sublicense Agreement, incorporated herein by reference to Exhibit 10.2 filed with Form
S-1 Registration Statement (File number 333-132361) filed on March 13, 2006.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.1 | Certification
by Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.
|---- | -----------------------------------------------------------------------------------------------------------------------

|31.2 | Certification
by Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.
|---- | -----------------------------------------------------------------------------------------------------------------------

|32.1 | Certification
by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 | Certification
by Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

# CurrencySharesSM
British Pound Sterling TrustFinancial Statements as of October 31, 2006  Index

|                                                                 | Page
|---------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm          | F-2 
|Statements of Financial Condition at October 31, 2006            | F-3 
|and at June 8, 2006 (date of inception)                         
|Statement of Income and Comprehensive Income for the period from | F-4 
|June 8, 2006 (date of inception) to October 31, 2006            
|Statement of Changes in Shareholders' Equity for the period from | F-5 
|June 8, 2006 (date of inception) to October 31, 2006            
|Statement of Cash Flows for the period from                      | F-6 
|June 8, 2006 (date of inception) to October 31, 2006            
|Notes to the Financial Statements                                | F-7 

F-1

---

# Report of Independent
Registered Public Accounting Firm

To the Shareholders of
CurrencySharesSM British Pound Sterling Trust:

In our opinion, the accompanying
statements of financial condition and the related statements of income and comprehensive
income, of changes in shareholders equity and of cash flows present fairly, in all
material respects, the financial position of CurrencySharesSM British Pound Sterling
Trust (the Trust) at October 31, 2006 and June 8, 2006 (commencement of operations), and
the results of its operations and its cash flows for the period from June 8, 2006
(commencement of operations) to October 31, 2006 in conformity with accounting principles
generally accepted in the United States of America.  These financial statements are the
responsibility of the Trusts management.  Our responsibility is to express an opinion on
these financial statements based on our audits.  We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting Oversight
Board (United States).  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis for our
opinion.

PricewaterhouseCoopers LLPBaltimore, Maryland
January 26, 2007

F-2

---

# CurrencySharesSM
British Pound Sterling Trust

# Statements of
Financial Condition

|                                                              | October 31, 2006 | June 8, 2006
[Date of Inception]
|------------------------------------------------------------- | ---------------- | --------------------------------
|Assets                                                        |                  |                                 
|Current Assets                                                |                  |                                 
|British Pound Sterling deposits, interest bearing             |                  |                                 
|Receivable from accrued interest                              |                  |                                 
|                                                              |                  |                                 
|Total Assets                                                  |                  |                                 
|                                                              |                  |                                 
|Liabilities and Shareholders Equity                          |                  |                                 
|Current Liabilities                                           |                  |                                 
|Accrued Sponsors fee                                         |                  |                                 
|                                                              |                  |                                 
|Total Liabilities                                             |                  |                                 
|Commitments and Contingent Liabilities (note 9)               |                  |                                 
|Redeemable Capital Shares, at redemption value, no par value, |                  |                                 
|8,000,000 authorized - 300,000 issued and outstanding         |                  |                                 
|Shareholders Equity - Retained Earnings and Cumulative       |                  |                                 
|Translation  Adjustment                                       |                  |                                 
|                                                              |                  |                                 
|Total Liabilities and Shareholders Equity                    |                  |                                 
|                                                              |                  |                                 

See Notes to
Financial Statements.

F-3

---

# CurrencySharesSM
British Pound Sterling Trust

# Statement of Income
and Comprehensive Income

|Income                              | June 8, 2006
[Date of Inception]
to October 31, 2006
|----------------------------------- | ----------------------------------------------------
|Interest income                     |                                                     
|                                    |                                                     
|Total Income                        |                                                     
|Expenses                            |                                                     
|Sponsors fee                       |                                                     
|                                    |                                                     
|Total Expenses                      |                                                     
|Net Income                          |                                                     
|                                    |                                                     
|Other Comprehensive Income          |                                                     
|Currency translation adjustment     |                                                     
|                                    |                                                     
|Total Comprehensive Income          |                                                     
|                                    |                                                     
|Earnings per share                  |                                                     
|Weighted-average Shares Outstanding |                                                     
|Cash Dividends per Share            |                                                     

See Notes to
Financial Statements.

F-4

---

# CurrencySharesSM
British Pound Sterling Trust

# Statement of Changes
in Shareholders Equity

|                                                            | June 8, 2006
[Date of Inception]
to October 31, 2006
|----------------------------------------------------------- | ----------------------------------------------------
|Retained Earnings Balance, Beginning of Period              |                                                     
|Net Income                                                  |                                                     
|Dividends from Net Investment Income                        |                                                     
|Adjustment of redeemable capital shares to redemption value |                                                     
|                                                            |                                                     
|Retained Earnings Balance, End of Period                    |                                                     
|                                                            |                                                     
|Cumulative Translation Adjustment, Beginning of Period      |                                                     
|Currency translation adjustment                             |                                                     
|Adjustment of redeemable capital shares to redemption value |                                                     
|                                                            |                                                     
|Cumulative Translation Adjustment, End of Period            |                                                     
|                                                            |                                                     

See Notes to
Financial Statements.

F-5

---

# CurrencySharesSM
British Pound Sterling Trust

# Statement of Cash Flows

|                                                                          | June 8, 2006
[Date of Inception]
to October 31, 2006
|------------------------------------------------------------------------- | ----------------------------------------------------
|Cash flows from operating activities                                      |                                                     
|Cash received for interest income                                         |                                                     
|Cash paid for expenses                                                    |                                                     
|                                                                          |                                                     
|Net cash provided by operating activities                                 |                                                     
|Cash flows from financing activities                                      |                                                     
|Cash received on issuance of redeemable shares                            |                                                     
|Cash paid to redeem redeemable shares                                     |                                                     
|Cash paid for distributions                                               |                                                     
|                                                                          |                                                     
|Net cash provided by financing activities                                 |                                                     
|Adjustment to period cash flows due to currency movement                  |                                                     
|Increase in cash                                                          |                                                     
|Cash at beginning of period                                               |                                                     
|                                                                          |                                                     
|Cash at end of period                                                     |                                                     
|                                                                          |                                                     
|Reconciliation of net income to net cash provided by operating activities |                                                     
|Net income                                                                |                                                     
|Adjustments to reconcile net income to net cash provided                  |                                                     
|by operating activities                                                   |                                                     
|Increase in receivable from accrued interest                              |                                                     
|Currency translation adjustment                                           |                                                     
|Increase in accrued sponsor fee                                           |                                                     
|                                                                          |                                                     
|Net cash provided by operating activities                                 |                                                     
|                                                                          |                                                     

See Notes to
Financial Statements.

F-6

---

# NOTES TO FINANCIAL
STATEMENTS

# 1. Organization and
Description of the Trust

The CurrencySharesSM
British Pound Sterling Trust (the Trust) was formed under the laws of the
state of New York on June 8, 2006 when Rydex Specialized Products LLC d/b/a Rydex
Investments (the Sponsor) deposited 100 British Pound Sterling in the
Trusts primary deposit account held by JPMorgan Chase Bank N.A., London Branch (the
Depository). The Sponsor is a Delaware limited liability company whose sole
member is PADCO Advisors II, Inc. (also d/b/a Rydex Investments). The Sponsor
is responsible for, among other things, overseeing the performance of The Bank of New York
(the Trustee) and the Trusts principal service providers, including the
preparation of financial statements. The Trustee is responsible for the day-to-day
administration of the Trust.

The investment objective of the Trust
is for the Trusts shares (the Shares) to reflect the price in USD of the
British Pound Sterling plus accrued interest less Trusts expenses and liabilities.
The Shares are intended to provide investors with a simple, cost-effective means of
gaining investment benefits similar to those of holding British Pound Sterling. The
Trusts assets primarily consist of British Pound Sterling on demand deposit in two
deposit accounts maintained by the Depository: a primary deposit account which earns
interest and a secondary deposit account which does not earn interest. The secondary
deposit account is used only in connection with mid-month creations and redemptions of
blocks of 50,000 Shares (Baskets). The secondary account is used to account
for interest that has been earned on the primary deposit account during the month but not
yet paid and to receive interest earned on the primary deposit account, pay Trust expenses
and distribute any excess interest to shareholders on a monthly basis.

The accompanying audited financial
statements were prepared in accordance with accounting principles generally accepted in
the United States of America.

# 2. Significant
Accounting Policies

# A. Use of Estimates

The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the
reported amounts of the assets, liabilities and disclosures of contingent liabilities at
the date of the financial statements and the reported amounts of revenue and expenses
during the period. Actual results could differ from those estimates.

# B. Foreign Currency
Translation

The Trustee calculates the
Trusts net asset value (NAV) each business day, as described in Note 5.
For NAV calculation purposes, British Pound Sterling Deposits (cash) are translated at the
Noon Buying Rate, which is the U.S. Dollar (USD)/ British Pound Sterling
exchange rate as determined and published by the Federal Reserve Bank of New York as of
12:00 PM (New York time) on each day that the New York Stock Exchange (NYSE)
is open for regular trading.

The functional currency of the Trust
is the British Pound Sterling in accordance with Financial Accounting Standard
(FAS) 52, Foreign Currency Translation. For financial statement reporting
purposes, the U.S. Dollar is the reporting currency. As a result, the financial statements
are translated from British Pound Sterling to USD. The Noon Buying Rate on the last day of
the period is used for translation in the statements of financial condition. The average
Noon Buying Rate for the period is used for translation in the statement of income and
comprehensive income and the statement of cash flows. Any currency translation adjustment
is included in comprehensive income.

F-7

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# C. Federal Income Taxes

The Trust is treated as a
grantor trust for federal income tax purposes and, therefore, no provision for
federal income taxes is required. Interest, gains and losses are passed
through to the holders of Shares (Shareholders) of the Trust.

Shareholders generally will be
treated, for U.S. federal income tax purposes, as if they directly owned a pro-rata share
of the assets held in the Trust. Shareholders also will be treated as if they directly
received their respective pro-rata shares of the Trusts income, if any, and as if
they directly incurred their respective pro-rata shares of the Trusts expenses. The
acquisition of Shares by a U.S. Shareholder as part of a creation of a Basket will not be
a taxable event to the Shareholder.

The Sponsors fee accrues daily
and is payable monthly. For U.S. federal income tax purposes, an accrual-basis U.S.
Shareholder generally will be required to take into account as an expense its allocable
share of the USD-equivalent of the amount of the Sponsors fee that is accrued on
each day, with such USD-equivalent being determined by the currency exchange rate that is
in effect on the respective day. To the extent that the currency exchange rate on the date
of payment of the accrued amount of the Sponsors fee differs from the currency
exchange rate in effect on the day of accrual, the U.S. Shareholder will recognize a
currency gain or loss for U.S. federal income tax purposes.

The Trust does not expect to generate
taxable income except for gain (if any) upon the sale of British Pound Sterling and
interest income. A non-U.S. Shareholder generally will not be subject to U.S. federal
income tax with respect to gain recognized upon the sale or other disposition of Shares,
or upon the sale of British Pound Sterling by the Trust, unless: (1) the non-U.S.
Shareholder is an individual and is present in the United States for 183 days or more
during the taxable year of the sale or other disposition, and the gain is treated as being
from United States sources; or (2) the gain is effectively connected with the conduct by
the non-U.S. Shareholder of a trade or business in the United States.

A non-U.S. Shareholders share
of any interest income earned by the Trust generally will not be subject to U.S. federal
income tax unless the Shares owned by such non-U.S. Shareholder are effectively connected
with the conduct by the non-U.S. Shareholder of a trade or business in the United States.

# D. Revenue Recognition

Interest on the primary deposit
account accrues daily as earned and is received on a monthly basis.

# E. Dividends

To the extent that the interest earned
by the Trust exceeds the sum of the Sponsors fee for the prior month plus other
Trust expenses, if any, the Trust will distribute, as a dividend, the excess interest
earned in British Pound Sterling effective on the first business day of the subsequent month.
The Trustee will direct that the excess British Pound
Sterling be converted into USD at the prevailing market rate and the Trustee will
distribute the USD as promptly as practicable to Shareholders on a pro rata basis (in
accordance with the number of Shares that they own). For the month of October,
2006, an income distribution of $ 0.65688 per share was paid on November 8,
2006.

# 3. Restatement of
Interim Financial Statements (unaudited)

The Sponsor will restate the interim
financial statements previously filed with the Trusts unaudited Quarterly Report on Form 10-Q
of the Trust for the quarterly period ended July 31, 2006 in an amendment to such Form
10-Q. The restated financial statements will correct an error in accounting for the
portion of British Pound Sterling received in Basket creations and paid out in Basket
redemptions that related to accrued interest. Such interest receipts or payments were
incorrectly included in the calculation of interest receivable and interest income of the Trust, rather than
cash and redeemable capital shares. Additionally, the translation of these receipts
or payments to USD resulted in adjustments to the corresponding Currency Translation Adjustment
balances.

F-8

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The restatement will have the
following impact on the financial statements for the Trusts quarterly period ended
July 31, 2006:

Statements of Income and
Comprehensive Income

|                                | Inception to Date
July 31, 2006
|------------------------------- | -------------------------------
|
|Interest Income                 |                                
|Net Income                      |                                
|Currency Translation Adjustment |                                
|Total Comprehensive Income      |                                
|Earnings Per Share              |                                

Statements of Changes in Shareholders
Equity

|                                        | Inception to Date
July 31, 2006
|--------------------------------------- | -------------------------------
|
|Net Income                              |                                
|Adjustment of redeemable capital shares |                                
|to redemption value                     |                                
|Currency Translation Adjustment         |                                
|Adjustment of redeemable capital shares |                                
|to redemption value                     |                                

F-9

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Statement of Cash Flows

|                                               | Inception to Date
July 31, 2006
|---------------------------------------------- | -------------------------------
|
|Cash received for interest income              |                                
|Net cash provided by operating activities      |                                
|Cash received on issuance of redeemable shares |                                
|Cash paid to redeem redeemable shares          |                                
|Net cash provided by financing activities      |                                
|Net Income                                     |                                

The Sponsor intends to file these
amended interim financial statements as soon as practical.

# 4. British Pound
Sterling Deposits

British Pound Sterling principal
deposits are held in a British Pound Sterling-denominated, interest-bearing demand
account. For the year ending October 31, 2006, there were British Pound Sterling principal
deposits of 45,000,000 and British Pound Sterling principal redemptions of 15,000,100
resulting in an ending British Pound Sterling principal balance of 30,000,000. This
equates to $57,252,000. In addition, net interest associated with creation and redemption
activity is held in a British Pound Sterling-denominated non-interest-bearing account, and
any balance is distributed in full as part of the monthly income distributions.

# 5. Redeemable Capital
Shares

Shares are classified as
redeemable for financial statement purposes, since they are subject to
redemption. Shares are issued and redeemed continuously in Baskets of 50,000 Shares in
exchange for British Pound Sterling. Individual investors cannot purchase or redeem Shares
in direct transactions with the Trust. Only Authorized Participants (as defined below) may
place orders to create and redeem Baskets. An Authorized Participant is a DTC participant
that is a registered broker-dealer or other institution eligible to settle securities
transactions though the book-entry facilities of the DTC and which has entered into a
contractual arrangement with the Trust and the Sponsor governing, among other matters, the
creation and redemption process. Authorized Participants may redeem their Shares at any
time in the prescribed Baskets.

Due to expected continuing creations
and redemptions of Baskets and the three-day period for settlement of each creation or
redemption, the Trust reflects Shares created as a receivable. Shares redeemed are
reflected as a liability on the trade date. Outstanding Shares are reflected at a
redemption value, which is the NAV per Share at the period end date. Adjustments to
redeemable capital shares at redemption value are recorded against retained earnings, or,
in the absence of retained earnings, by charges against the cumulative translation
adjustment.

F-10

---

Activity
in redeemable capital Shares is as follows:

|                                                               | Period from June 8, 2006
[Date of Inception]
to October 31, 2006
|-------------------------------------------------------------- | ----------------------------------------------------------------
|Shares                                                         | U.S. Dollar Amount                                              
|Opening balance                                                |                                                                 
|Shares issued                                                  |                                                                 
|Shares redeemed                                                |                                                                 
|Adjustment to period Shares due to currency movement and other |                                                                 
|                                                               |                                                                 
|Ending Redemption Balance                                      |                                                                 
|                                                               |                                                                 

The Trustee calculates the
Trusts NAV each business day. To calculate the NAV, the Trustee subtracts the
Sponsors accrued fee through the previous day from the British Pound Sterling held
by the Trust (including all unpaid interest accrued through the preceding day) and
calculate the value of the British Pound Sterling in USD based upon the Noon Buying Rate.
If, on a particular evaluation day, the Noon Buying Rate has not been determined and
announced by 2:00 PM (New York time), then the most recent Federal Reserve Bank of New
York determination of the Noon Buying Rate shall be used to determine the NAV of the Trust
unless the Trustee, in consultation with the Sponsor, determines that such price is
inappropriate to use as the basis for such valuation. In the event that the Trustee and
the Sponsor determine that the most recent Federal Reserve Bank of New York determination
of the Noon Buying Rate is not an appropriate basis for valuation of the Trusts
British Pound Sterling, they shall determine an alternative basis for such evaluation to
be employed by the Trustee. The Trustee also determines the NAV per Share, which equals
the NAV of the Trust divided by the number of outstanding Shares. Shares deliverable under
a purchase order are considered outstanding for purposes of determining NAV per Share;
Shares deliverable under a redemption order are not considered outstanding for this
purpose.

# 6. Sponsors Fee

The Sponsors fee accrues daily
at an annual nominal rate of 0.40% of the British Pound Sterling in the Trust (including
all unpaid interest but excluding unpaid fees, each as accrued through the immediately
preceding day) and is paid monthly.

The Sponsor assumes and pays the
following administrative and marketing expenses incurred by the Trust: the Trustees
monthly fee, NYSE listing fees, SEC registration fees, typical maintenance and transaction
fees of the Depository, printing and mailing costs, audit fees and expenses, up to
$100,000 per year in legal fees and expenses, and applicable license fees. The Sponsor has
also paid the costs of the Trusts organization and the initial sales of the Shares,
which were approximately $347,000 when the Trust was formed.

In certain exceptional cases the
Trust will pay for some expenses in addition to the Sponsors fee. These exceptions
include expenses not assumed by the Sponsor, taxes and governmental charges, expenses and
costs of any extraordinary services performed by the Trustee or the Sponsor on behalf of
the Trust or action taken by the Trustee or the Sponsor to protect the Trust or the
interests of Shareholders, indemnification of the Sponsor under the Depositary Trust
Agreement, and legal expenses in excess of $100,000 per year.

# 7. Related Parties

The Sponsor is a related party of the
Trust. The Sponsor oversees the performance of the Trustee and the Trusts principal
service providers, including the preparation of financial statements, but does not
exercise day-to-day oversight over the Trustee or the Trusts service providers. The
Sponsor has paid the costs of the Trusts organization and the initial sales of the
Shares, as described in Note 6.

F-11

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# 8. Concentration Risk

All of the Trusts assets are
British Pound Sterling, which creates a concentration risk associated with fluctuations in
the price of British Pound Sterling. Accordingly, a decline in the price of British Pound
Sterling relative to USD will have an adverse effect on the value of the Shares. Factors
that may have the effect of causing a decline in the price of British Pound Sterling
include national debt levels and trade deficits, domestic and foreign inflation rates,
domestic and foreign interest rates, investment and trading activities of institutions and
global or regional political, economic or financial events and situations. Substantial
sales of British Pound Sterling by the official sector (central banks, other governmental
agencies and related institutions that buy, sell and hold British Pound Sterling as part
of their reserve assets) could adversely affect an investment in the Shares.

# 9. Commitments and
Contingencies

Under the Trusts organizational
documents, the Sponsor is indemnified against any liability or expense it incurs without
negligence, bad faith or willful misconduct on its part. The Trusts maximum exposure
under these arrangements is unknown, as this would involve future claims that may be made
against the Trust that have not yet occurred.

F-12

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# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Rockville, State of Maryland, on January 29,
2007.

| | CURRENCYSHARESSM                 
| | ---------------------------------
| | BRITISH POUND STERLING TRUST     
| | By Rydex Specialized Products LLC
| | Sponsor of the CurrencySharesSM  
| | British Pound Sterling Trust     
| | By:  /s/ Carl G. Verboncoeur     
| | Carl G. Verboncoeur              
| | CEO and Treasurer                

Pursuant
to the requirements of the Securites Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities* and on
the dates indicated.

|Signature               | Capacity                         | Date            
|----------------------- | -------------------------------- | ----------------
|/s/ Carl G. Verboncoeur | Director, CEO and Treasurer      | January 29, 2007
|                        | (principal executive officer)   
|Carl G. Verboncoeur    
|/s/ Nick Bonos          | Director and CFO                 | January 29, 2007
|                        | (principal financial officer and
|Nick Bonos              | principal accounting officer)   
|/s/ Michael Byrum       | Director and Secretary           | January 29, 2007
|                       
|Michael Byrum          

The
registrant is a trust and the persons are signing in their capacities as officers or
directors of Rydex Specialized Products LLC, the Sponsor of the registrant.