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Quester VCT 2 PLC (QUE)

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Friday 22 October, 2004

Quester VCT 2 PLC

Interim Results

                               Quester VCT 2 plc                               

           Interim statement for the six months ended 31 August 2004           

Financial highlights

Per ordinary share (pence)                 6 months    Year to 29   6 months to
                                       to 31 August      February     31 August
                                               2004          2004          2003
Capital values                                                                 
Net asset value                                47.7          49.1          54.5
Share price                                    42.5          49.5          49.5
Return and dividends                                                           
Dividend                                          -             -             -
Cumulative dividend                            26.6          26.6          26.6
Total return *                                 74.3          75.7          81.1
Total return* inclusive of the                 94.3          95.7         101.1
initial 20% income tax relief                                                  

*Net asset value plus cumulative dividend per share

Key points from the Chairman's statement and Investment Manager's report

  * The Company's net asset value per share has reduced by 1.4pence per share
    to 47.7pence
  * The Statement of Total Return shows an aggregate loss for the period of £
  * We are pleased to be able to report the trade sale of one venture capital
    investment and the flotation of one other on AIM
  * The directors have decided that Quester VCT 2 should commit a limited
    amount of its surplus liquid assets for investment in new venture capital
    opportunities. One such new investment was made in October in the
    AIM-traded company Allergy Therapeutics plc



During the six months to 31 August 2004, the Company's net asset value per
share has reduced by 1.4pence per share to 47.7pence, a fall of 2.9%. After
taking account of share buy-ins of £249,000, the net asset value of the Company
fell from £21.6million at 29 February 2004 to £20.7million over the same
period. The change in net asset value is summarised as follows:

                                               £'000          share
Net asset value at 29 February 2004           21,585           49.1
Net profit on realisation of investments          73            0.2
Income                                           217            0.5
Expenses                                       (483)          (1.1)
Net unrealised loss on revaluation of          (464)          (1.1)
Share buy-ins                                  (249)            0.1
Net asset value at 31 August 2004             20,679           47.7


The profit and loss account shows a net loss for the period of £193,000. This
is comprised of investment income and net gains on realisation of investments
of £290,000 less expenses of £483,000.

The Statement of Total Return, which includes net unrealised losses on
investments of £464,000 as well as the loss reported in the Profit and Loss
account, shows an aggregate loss for the period of £657,000.

Against the background of the results now reported, your directors have decided
not to pay an interim dividend.


The venture capital portfolio has produced an unrealised gain of £157,000 on
the sale of On Demand Distribution to Loudeye Corporation, for which Quester
VCT 2 received quoted stock. However, this was offset by other write downs,
including that of Imagesound, which is now traded on AIM and continues to show

During the six months, a further £264,000 has been invested in four existing
portfolio companies as part of the planned follow-on investment programme. No
new investments were made. However, as demand for follow on investment has
reduced across the existing portfolio, the directors have decided that Quester
VCT 2 should commit a limited amount of its surplus liquid assets for
investment in new venture capital opportunities. One such new investment was
made in October in the AIM-traded company Allergy Therapeutics plc.

As at 30 September 2004, the value of the Company's quoted investments had
risen so as to increase net asset value per share by 0.6pence.

Further details on portfolio performance are provided in the Investment
Manger's Report.


Many of our portfolio companies have now reached, or are reaching, financial
stability (cash flow break even) and some are making useful profits. The rate
of growth in their sales and profits will now determine the extent to which
they create value for Quester VCT 2. While opportunities have been taken, for
strategic reasons, to merge certain of our companies into larger groups, these
transactions have not at this stage resulted in meaningful uplifts in values
and exits for cash have not yet arisen. Thus the disappointing performance of
certain other unquoted investments, combined with the costs associated with the
running of the Company, has resulted in a marginal decline in the net asset
value over the six month period.

Jock Birney


22 October 2004



During the half year a majority of companies in the venture capital portfolio
have achieved improving underlying performance, with results in line with their
budgets for the six months to 31 August 2004. It is, however, too soon for
these more promising signs to impact investment values.

Companies seeking to introduce innovative technology to new markets continue to
find the markets tough: they are progressing, but more slowly than either we,
or the management teams concerned, would like. In two cases, we have had to
make further provisions against unquoted investments, as a result of continued
underperformance of the businesses concerned.

An encouraging development in recent months has been the re-emergence of M&A
activity in the unquoted company sector and the revival of new issue activity
on AIM, reflected in the case of Quester VCT 2 by one trade sale and one AIM
flotation and, since the half year end, one new AIM-traded investment, as
detailed below.


We are pleased to be able to report the trade sale of one venture capital
investment and the flotation of one other on AIM.

 a. On Demand Distribution Limited ('OD2'), which has successfully developed as
    the largest digital music service provider in Europe, was acquired in June
    2004 by the NASDAQ-quoted company Loudeye Corporation ('Loudeye'). The
    combination of the two businesses creates the largest business-to-business
    digital media provider in the world with the largest digital music
    catalogue in the industry. For Quester VCT 2, the initial consideration
    received in the form of Loudeye shares - based on the price on NASDAQ as at
    31 August 2004 - and the accounting value of the deferred consideration
    receivable over the next 18 months (discounted to take account of an
    orderly market agreement and the time factor respectively) together amount
    to £1,848,000, producing an unrealised gain of £157,000.
The ultimate return to Quester VCT 2 will depend upon movements in Loudeye's
share price, which has been volatile over recent months, the movements of the
dollar against sterling and the future performance of the business itself
(under an earn-out entitlement).

 b. The shares of Imagesound plc, a leading UK supplier of in-store music,
    radio and TV services, were admitted to trading on AIM in August 2004
    following a transaction involving a reverse takeover by the original
    Imagesound company of an AIM-traded shell and the acquisition of two
    smaller complementary business. Although market conditions have resulted in
    a reduction in the carrying value of Quester VCT 2's investment of £219,000
    at 31 August 2004 (after discounting the share price of Imagesound plc by
    10% to reflect the terms of a lock-up), the transaction has had the benefit
    of creating a business with a broader spread and putting it in a stronger
    position for future growth.
In addition to these two corporate transactions, particularly clear positive
progress was made during the period by Vernalis Group plc, which is listed on
the London Stock Exchange. In July it announced an agreement with Endo
Pharmaceuticals Holdings Inc for Vernalis to license exclusive North American
sales and marketing rights to a key migraine product to Endo. This transaction
could result in revenues for Vernalis of more than $400million. This resulted
in the Vernalis share price increasing by approximately 94% following the
announcement to 95pence. As at 19 October 2004, the share price was 85pence.
The investment in Vernalis, results from its share for share acquisition of
Ribotargets in which Quester VCT 2 had invested £965,000. This investment is
now represented by a 0.5% stake in Vernalis valued at £571,000 at the period

These are the clear highlights of the period. There have been weak spots too.
The performance of Nomad Software Limited has been behind plan and its
valuation has been written down accordingly. Recent action has been taken to
strengthen the management team and further finance has been made available to
support the continued development of the business.

The performance of Communication & Control Electronics Limited continued to be
unsatisfactory and this company has entered a process of administration leading
to a sale of the business. The valuation has been written down to reflect the
amount expected to be recovered.

The interim statement shows a net total loss attributable to the Company's
investments of £391,000, which comprises a net profit on realisation of
investments of £73,000 and a net unrealised loss on revaluation of investments
of £464,000. Of this net total loss, an amount of £443,000 is attributable to
the venture capital portfolio and is summarised on a company-by-company basis
as follows:

Quoted investments                                           £'000
Imagesound plc                                               (219)
Loudeye Corporation Inc                                        157
Surfcontrol plc                                               (74)
Sirius Group plc                                               (2)
Sopheon plc                                                   (13)
The Innovation Group plc                                       (5)
Vernalis Group Plc                                              99
XKO Group plc                                                (101)
Unquoted investments                                              
Communication & Control Electronics Limited                  (141)
Nomad Software Limited                                       (181)
Recovery in respect of investment previously                    37
written off                                                       
Net loss on venture capital investments                      (443)


Further investment from the Company's retained liquid reserves has been made in
the following portfolio companies to support the continued development of their

Company                                  Industry sector           £'000
Nomad Limited                            Software                    107
Anadigm Limited                          Semiconductors               80
On Demand Distribution Limited           Internet                     72
Opsys Limited                            Electronics                   5

Over the recent difficult years for small companies, we have maintained a
cautious reserving policy, which has enabled Quester VCT 2 to continue to
support promising investments. In some cases, in the short term, the terms of
the investment transactions have resulted in a need to reduce previous carrying
values in accordance with valuation guidelines. However, if the projects
continue to develop in line with their medium term potential these provisions
may be reversed.

As demand for follow-on investments has reduced across the existing portfolio,
we have decided that Quester VCT 2 should now be able to consider a modest
level of new venture capital investment, thereby adding a fresh dimension to
the portfolio.

The first of these new investments has been made, since the end of the
half-year, in Allergy Therapeutics plc, an established £18million turnover
company with a range of allergy vaccines currently in the market and a
programme for development of novel vaccines offering the potential for
achievement of significant market expansion. An investment of £193,000 has been
made as part of a placing in connection with the admission of the company's
shares to trading on AIM.


The listed equity portfolio, covering 32 investments, stood at a valuation of £
5.4million at 31 August 2004 (against a cost of £5.8million). During the six
months to this date the portfolio showed a total return of 10.4%, including a
yield of 5%.


Members of the Quester team continue to work closely with the management of key
investee companies to help build value in the portfolio. We believe that the
management teams we are working with are highly motivated to deliver growth in
investment values and we share their optimism that this can be achieved over
the medium term.

Quester Capital Management Limited

22 October 2004

As at 31 August 2004

                                        Cost  Valuation % of equity  % of fund
                                                               held   by value
Quoted venture capital investment      £'000      £'000                       
Imagesound plc                         1,000        781        6.2%       3.8%
Loudeye Corporation Inc                1,691      1,848        2.0%       8.9%
Sirius Financial Solutions plc            96         47        0.3%       0.2%
Sopheon plc                              134         25        0.1%       0.1%
SurfControl plc                          186        388        0.2%       1.9%
The Innovation Group plc                 500         15           -       0.1%
Vernalis Group plc                       965        571        0.5%       2.8%
XKO Group plc                            505        303        1.4%       1.5%
Total quoted venture capital           5,077      3,978                  19.3%
Unquoted venture capital                                                      
Anadigm Limited                        1,588        476        4.1%       2.3%
Artisan Software Tools Limited         1,145        369        7.3%       1.8%
Casella Group Limited                  1,206        716        6.7%       3.5%
Communication & Control                  562        141        8.3%       0.7%
Electronics Limited                                                           
Community Internet Europe Limited      1,015        254        7.0%       1.2%
Elateral Holdings Limited              1,942         61        7.2%       0.3%
Footfall Limited                       1,450      1,450        8.5%       7.0%
HTC Healthcare Group plc               1,000      1,000       18.4%       4.8%
International Diagnostics Group          620        296        9.6%       1.4%
Linguaphone Group plc                  1,120        560        7.1%       2.7%
Methuen Publishing Limited               501        501       17.5%       2.4%
Nomad Software Limited                 1,218        288        8.1%       1.3%
Opsys Limited                          1,392        392        4.3%       1.9%
Sibelius Software Limited                700        700        6.0%       3.4%
Sift Group Limited                       875        728        5.0%       3.6%
Total unquoted venture capital        16,334      7,932                  38.3%
Total venture capital investments     21,411     11,910                  57.6%
Listed equity investments              5,818      5,418                  26.2%
Total investments                     27,229     17,328                  83.8%
Cash and other net assets              3,351      3,351                  16.2%
Net assets                            30,580     20,679                 100.0%



                                              6 months  Year ended     6 months
                                              ended 31 29 February     ended 31
                                                August  2004 £'000  August 2003
                                                  2004                    £'000
Net profit/(loss) on realisation of                 73       (457)           70
Income                                             217         370          221
Investment management fee                        (270)       (580)        (292)
Other expenses                                   (213)       (363)        (211)
Loss on ordinary activities before taxation      (193)     (1,030)        (212)
Tax on ordinary activities                           -           -            -
Loss on ordinary activities after taxation       (193)     (1,030)        (212)
Dividends                                            -           -            -
Transfer from reserves                           (193)     (1,030)        (212)
Loss per share                                  (0.4)p      (2.3)p       (0.5)p


                                               6 months Year ended    6 months
                                                  ended                  ended
                                              31 August   February   31 August
                                                   2004       2004        2003
                                                  £'000      £'000            
Loss for the period                               (193)    (1,030)       (212)
Net unrealised (loss)/gain on revaluation         (464)      (291)       1,298
of investments                                                                
Total recognised (losses)/gains relating to       (657)    (1,321)       1,086
the period                                                                    
Total recognised (losses)/gains per share        (1.5)p     (3.0)p        2.4p

All items in the above statement are derived from continuing operations. The
Company has only one class of business and derives its income from investments
made in shares and securities and from bank deposits.


                                  Note  31 August 29 February  31 August
                                             2004        2004       2003
                                            £'000       £'000      £'000
Fixed assets                                                            
Investments                                17,328      17,219     23,284
Current assets                                                          
Debtors                                     1,256       1,399        113
Cash at bank                                2,212       3,146        946
                                            3,468       4,545      1,059
Creditors: amounts falling due              (117)       (179)      (129)
within one year                                                         
Net current assets                          3,351       4,366        930
Net assets                                 20,679      21,585     24,214
Capital and reserves                                                    
Called up equity share capital              2,170       2,198      2,221
Share premium account                1        704         704        704
Special reserve                      1     21,439      22,277     24,680
Revaluation reserve                  1    (4,104)     (4,163)    (3,740)
Profit and loss account              1        470         569        349
Total equity shareholders' funds           20,679      21,585     24,214
Net asset value per share                   47.7p       49.1p      54.5p


                                        6 months  Year ended   6 months
                                           ended                  ended
                                                 29 February           
                                       31 August              31 August
                                            2004        2004       2003
                                           £'000       £'000      £'000
Net cash outflow from operating            (148)     (1,700)      (338)
Net capital expenditure and financial      (536)       3,304      (481)
Financing                                  (250)       (285)       (62)
(Decrease)/increase in cash for the        (934)       1,319      (881)
Reconciliation of net cash flow to                                     
movement in net funds                                                  
(Decrease)/increase in cash for the        (934)       1,319      (881)
Net funds at the start of the period       3,146       1,827      1,827
Net funds at the end of the period         2,212       3,146        946


1. Movement in reserves

                                     Share  Special Revaluation Profit and loss
                                   premium  reserve     reserve         account
                                              £'000       £'000           £'000
At 1 March 2004                        704   22,277     (4,163)             569
Share buy-ins                            -    (221)           -               -
Transfer of realised losses to           -        -         523           (523)
profit and loss account                                                        
Transfer from special reserve to         -    (617)           -             617
profit and loss account                                                        
Net unrealised loss on revaluation       -        -       (464)               -
Of investments                                                                 
Retained loss for the period             -        -           -           (193)
At 31 August 2004                      704   21,439     (4,104)             470

 2. The financial information contained in this report has been prepared on the
    basis of the accounting policies set out in the Annual Report.
 3. The number of ordinary shares in issue as at 31 August 2004 was 43,394,448
    (31 August 2003: 44,426,712).
 4. The calculation of earnings per share for the period is based on loss after
    tax of £193,000 divided by the weighted average number of shares in issue
    during the period being 43,799,358 ordinary shares of 5p each.
 5. The unaudited financial statements set out above do not constitute
    statutory accounts within the meaning of Section 240 of the Companies Act
 6. Copies of the unaudited interim results are expected to be sent to
    shareholders on 27 October 2004. Further copies can be obtained from the
    Company's registered office.
A copy of the above document is to be submitted to the UK Listing Authority,
and will shortly be available for inspection at the UK Listing Authority's
Document Viewing Facility, which is situated at:

Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS