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Spark VCT 2 PLC (KAY2)

  Print      Mail a friend       Annual reports

Thursday 09 April, 2009

Spark VCT 2 PLC

Annual Financial Report

1 Financial highlights

Financial highlights as at 31 December 2008

Per ordinary share (pence)        31.12.08        31.12.07         31.10.06     
Net asset value                       36.4            46.5             65.8

Dividend paid                          1.0             1.0              1.0
Cumulative dividend                    6.9             5.9              4.9
Total return per share                                    
SPARK VCT 2 plc                       43.3             52.4            70.7
Return including tax benefits         63.3             72.4            90.7
Total return per 100p invested                            
SPARK VCT 3 plc                       56.7             70.9            87.4
Return including tax benefits         76.7             90.9           107.4

The Directors do not recommend a dividend for the year ended 31 December 2008.

Composition of the fund by value                          
Unquoted venture capital investments                                   65.6%               
Quoted venture capital investments                                      6.0%                
Cash and other net current assets                                      28.4%               

Chairman's statement


In writing my statement this year, it is a pleasure to extend a welcome to the
former shareholders in SPARK VCT 3 plc who are now shareholders in the Company
following the merger which became effective on 27 November 2008.

Shareholders will be aware that over recent months financial and economic
conditions have significantly worsened and the outlook, as it appears at
present, is for difficult conditions for some time to come.

In the Half Yearly Financial Report I commented that, with the change in market
sentiment in the early part of 2008, the environment for achieving exits from
venture capital investments had become more difficult and that one significant
exit opportunity had been lost. At the time of writing this statement, the
environment in this respect shows no sign of improving in the short term.The
environment for the raising of new third-party funding by venture
capital-backed companies also remains very difficult.

During 2008, the focus of the SPARK management team's work has been on the
stabilisation of the portfolio and putting it on a sound footing to weather the
increasingly difficult conditions. This work has built on the new team's
detailed review of the portfolio on which I reported last year, which included
classifying the companies according to their potential to deliver capital
growth, and most importantly identifying those that are key to producing a good
return for the whole portfolio, which has informed all the management's
subsequent decision-making.

The Company's principal objective for 2009 is to ensure that the portfolio
remains stable. Much of the work required will be represented by continued
interaction of individual members of the SPARK management team with investee
companies, working with them to ensure appropriate cost control and management
of cash resources while at the same time focusing strategy and identifying
opportunities for future growth.

At the level of the Fund as a whole, a number of steps have been taken to
position the Company to face the hard times. As reported in the Half Yearly
Financial Report, the decision was taken in early July 2008 to sell the entire
portfolio of listed equities. This transaction was entered into as a
precautionary measure, given the potential requirements for cash over the next
two years in market conditions in which exits may be more difficult to achieve,
and has saved a substantial sum in view of the subsequent fall in the stock
market. Following on from that decision, the Company's financial resources are
now being concentrated on the support of existing portfolio companies. A
cautious approach is being taken to the programme of new investment, pending
greater visibility on the availability of cash from realisation of existing

Results for the year ended 31 December 2008

The movement in net assets and net assets per share in the year ended 31
December 2008 is summarised in the table below.

                                            Venture    and net           Pence
                                            capital    current             per    
                                        investments     assets   Total   Share          
                                              £,000      £'000   £'000               
Net asset value at 31 December 2007          18,322      3,423  21,745   46.5   
Income                                            1        634     635    1.1    
Operating expenses                                -    (1,258) (1,258)   (2.3)  
Net losses on disposal                         (89)      (437)   (526)   (0.9)  
Net loss on revaluation of                  (4,084)          - (4,084)   (7.3)  
Net investment by the Company               (2,895)      2,895       -       -
Assets acquired on merger with SPARK          9,234      3,711  12,945       -
VCT 3 plc                                                                     
Net assets before dividends and              20,489      8,968  29,457    37.1   
share buy-backs                                                               
Dividend paid                                     -      (467)   (467)    (1.0)  
Share buy-backs                                   -      (395)   (395)     0.3    
Net asset value at 31 December 2008          20,489      8,106  28,595    36.4   

Net assets per share, before the payment of dividends and share buy-backs, fell
by 9.4p in the year. The dividend paid during the year (the final dividend in
respect of the period ended 31 December 2007, approved at the last AGM) was 1p
per share.

The total return to shareholders from the launch of the Company in November
2000 to 31 December 2008, inclusive of all dividends paid, now amounts to 43.3p
per share before taking account of tax reliefs.

The total return to original shareholders in SPARK VCT 3 plc from its launch in
December 2001 (under the name Quester VCT 5 plc) to 31 December 2008, inclusive
of all dividends paid, amounts to 56.7p per 100p originally invested, before
taking account of tax reliefs.

Net losses on disposal of investments during the year amounted to £526,000. In
the venture capital portfolio, the loss mainly related to the sale of the
holding in Oxford BioMedica plc following its announcement of a failure in
clinical trials. The sale in early July 2008 of the portfolio of listed
equities, as referred to above, also resulted in a loss but protected the
Company against a much larger loss of value (at the date of this report, of
around £1.5 million) that would have been sustained if the portfolio had been

In respect of venture capital investments held at year end, a reduction in
valuation of £4,084,000 has been recorded for the year. The review of unquoted
valuations at 31 December 2008 has been based mainly on (i) prices of recent
financing rounds and/or the prospective terms of financing rounds expected
within the next 12 months, (ii) earnings multiples, and (iii) industry
valuation benchmarks and/or M&A criteria, in each case under the application of
the International Private Equity and Venture Capital Valuation Guidelines. In a
number of cases, the write-down reflects disappointing business progress by the
investee company, but in the main the valuation changes parallel the reductions
that are being seen in the valuations of financial assets generally.

The Company acquired additional net assets of £12,945,000 as a result of the
merger with SPARK VCT 3 plc. As shareholders will be aware, the merger was
structured as a share-for-share exchange through a Scheme of Arrangement, with
the share exchange ratio being determined by reference to the relative formula
asset values of the two companies (NAV per share, less the expenses of the
transaction). As a result, the merger itself has no impact on the net asset
value per share of the Company (other than in respect of the expenses of the


Patrick Seely, formerly a director of SPARK VCT 3 plc, was appointed to the
Board upon the merger of the two companies. In accordance with the Articles of
Association, he will stand for election at the AGM.


The dividend policy of the Company is to seek to maximise the dividend payable
from available distributable profits.As we have previously made clear, as a
result of the nature of a VCT, dividends payable can vary considerably from
time to time depending on the level of income and capital gains.

Other than the exits from Nomad Payments Limited and Identum Limited, which
were taken into account in the recommendation of the final dividend of the
Company for the period ended 31 December 2007, no profitable realisations have
been achieved during the past year. Accordingly the Board does not recommend a
dividend in respect of the year ended 31 December 2008. In addition, the Board
will carefully consider whether resources are sufficient to make share


Investment in early stage companies in technology sectors has always required a
good deal of patience.The Board is conscious that most of the investments of
both the Company and SPARK VCT 3 plc have involved long holding periods and
that dividends paid to shareholders out of the proceeds of successful
realisations have so far been few in number.

At a time when some of the investments should have been expected to be nearing
readiness for an exit, we are now faced with the most extraordinarily difficult
conditions in global markets. We have to plan for the fact that, in the short
term, exits will be very difficult to achieve. In respect of 2009, as the
outlook appears at present, shareholders are unlikely to see significant
positive returns, either in the form of dividends or capital growth. For the
immediate future, priority must be given to the continued support of the
existing portfolio.

The Board is, however, confident that, after suffering a good deal of attrition
over recent years, the present more concentrated portfolio of venture capital
investments does offer the prospects of significant capital growth from present
levels, permitting dividend distributions in due course, provided that the
investee companies can maintain stability and see their way through these
difficult times.

The Board is mindful of the tax benefits that shareholders have received in
respect of their original investment in the Company or SPARK VCT 3 plc, both in
the form of income tax relief and, in many cases, capital gains deferral.The
Board is also conscious of the potential benefit to shareholders represented by
the opportunity for the Company to pay tax-free dividends. Over the coming
months the Board will be reviewing the future direction of the Company so as to
ensure that returns are delivered to shareholders in the most effective way,
while at the same time ensuring that the ongoing activities of the Company are
appropriately funded.

Robert Wright 
9 April 2009

Fund summary as at 31 December 2008

                               Industry    Cost   Valuation   Equity  % of fund
                               sector      £'000      £'000   % held   by value     
Fifteen largest venture                                                        
capital investments                                                            
Workshare Limited            TMT           2,947       3,066     10.2%    10.7% 
Xention Limited              Healthcare    2,194       1,815      8.5%     6.3%  
Oxford Immunotec Limited     Healthcare    2,388       1,802      8.8%     6.3%  
Xtera Communications, Inc.   TMT           3,068       1,656      1.3%     5.8%  
UniServity Limited           TMT           1,400       1,400      23.2%    4.9%  
Elateral Holdings Limited    TMT             479       1,049      13.8%    3.7%  
Celona Technologies Limited  TMT           2,627         983      12.1%    3.4%  
Vivacta Limited              Healthcare      798         856       5.4%    3.0%  
Level Four Software Limited  TMT             795         795       4.8%    2.8%  
Cluster Seven Limited        TMT             845         765       5.8%    2.7%  
Isango! Limited              TMT             750         750      13.5%    2.6%  
Sift Group Limited           TMT             917         698       8.0%    2.4%  
Antenova Limited             TMT            1,718        659       6.2%    2.3%  
MediGene AG FRANKFURT        Healthcare      797         616       0.6%    2.2%  
Celldex Therapeutics, Inc.   Healthcare     1,537        568       0.7%    2.0%  
                                           23,260     17,478              61.1% 
Other venture capital                                                          
Imagesound plc               TMT              489        489       0.5%    1.7%  
Perpetuum Limited            TMT              479        374       4.4%    1.3%  
We7 Limited                  TMT              334        334       4.1%    1.2%  
Haemostatix Limited          Healthcare       312        312       6.6%    1.1%  
Secerno Limited              TMT              394        291       3.4%    1.0%  
Skinkers Limited             TMT              317        291       1.9%    1.0%  
Portrait Software plc AIM    TMT            1,186        216       2.7%    0.8%  
Allergy Therapeutics plc     Healthcare       795        177       2.2%    0.6%  
Gemini Holdings Limited      Healthcare       245        123       6.9%    0.4%  
Celoxica Holdings plc        TMT              192        104       2.6%    0.4%  
TeraView Limited             Healthcare     1,064        100       5.4%    0.3%  
Other investments: valuations               1,359        200               0.7%  
less than £100,000                                                             
                                            7,166       3,011             10.5% 
Total venture capital                      30,426      20,489             71.6% 
Total unquoted venture capital             25,877      18,782             65.6% 
Total quoted venture capital                4,549       1,707              6.0%  
Total investments                          30,426      20,489             71.6% 
Cash and other net assets                   8,106       8,106             28.4% 
Net assets                                 38,532      28,595            100.0%

Business review

The Business review has been prepared in accordance with Section 234ZZB of the
Companies Act 1985 and forms part of the Directors' report to shareholders.
This Business review does not contain information about environmental matters,
the Company's employees and social and community issues.

Portfolio update and overview

The majority of the Fund's portfolio companies are still at a relatively early
stage in terms of commercial development. The opportunity provided by these
companies is to achieve business growth, and generate a capital return for
investors, by addressing new markets growing on the back of new technologies or
services. Such companies are generally financed entirely by equity raised from
venture capital sources and they are not dependent on borrowings from banks or
other lenders. For early stage companies, there remains the opportunity for
growth to continue, even in present circumstances, though potentially at a
lower rate than might previously have been expected.

Financing conditions for early stage companies needing to raise additional
equity have, however, become extremely difficult. The reduced general
availability of venture capital finance means that such companies may seek to
place greater reliance on their existing investors for funding. In addition, as
far as the companies' business operations are concerned, there is the risk of
slower than expected revenue growth.Among the Fund's investee companies in the
technology, media and telecoms (TMT) sector, companies are potentially
vulnerable to commercial setbacks, such as delays in the award of key customer
contracts by major corporate purchasers (the Fund does not have significant
direct exposure to consumer markets). In the life sciences sector, where a
number of the Fund's investee companies are still at the stage of scientific
development and the planning of partnering arrangements with pharmaceutical
companies, considerations of rate of revenue growth are less directly

In all such companies, whether by reason of the risk of slower than expected
revenue growth or reduced availability of venture capital finance, increased
attention has to be paid to cost control and rates of cash burn. During 2008
and in more recent months SPARK team members have been particularly focused on
working with the portfolio companies to ensure that these issues are addressed.

A stringent approach has been taken to underperforming companies within the
portfolio and during the year decisions were taken to provide no further
support to a number of businesses.

For 2009, the principal objective of the SPARK management team is to ensure
that the portfolio remains stable. Much of the work required will be
represented by continued interaction of individual members of the SPARK
management team with investee companies, working with them to ensure
appropriate cost control and management of cash resources while at the same
time focusing strategy and identifying opportunities for future growth.

Over the longer term, the team's objective is to ensure that management
attention and the Fund's financial resources are focused on those businesses
that are capable of generating the best returns for shareholders and within a
reasonable timeframe.

Opportunities for achieving exits from venture capital investments are
currently difficult to identify. Cash inflows from investment realisations
(subsequent to Nomad Payments Limited and Identum Limited in early 2008) have
been extremely limited.The SPARK management team has taken precautionary
measures to enable the Fund to maintain adequate cash resources at the level of
the portfolio as a whole, including the sale of the portfolio of listed
equities completed in July 2008 as well as the above- mentioned steps to ensure
that portfolio companies' calls on the Fund for additional capital are

The team's current assessment of prospects for individual portfolio companies
is that returns are probably looking more vulnerable, and certainly more
delayed than indicated 12 months ago. We now expect the bulk of the
realisations of the key portfolio companies to be concentrated in 2011 at the

Fund summary

The Fund summary lists the venture capital investments held by the Company at
31 December 2008 with their cost and valuation at that date. The 15 largest
venture capital investments held at 31 December 2008 collectively account for
61.1% of the net assets at the balance sheet date. Highlights of a number of
key developments in the portfolio are set out under "Portfolio progress" below.

Portfolio progress

The venture capital portfolio of the Company includes a number of companies at
development stage and a rather larger proportion in companies at early stage.
Four of the top 15 venture capital investments are in development stage
companies, together accounting for 22.6% of net assets at 31 December 2008. All
four have demonstrated satisfactory business progress over the year, with
organic growth in top-line revenues of between 13% and 40% (Workshare Limited
+13%, Elateral Holdings Limited +40%, Sift Group Limited +20%), while Xtera
Communications, Inc. grew substantially by acquisition and achieved
year-on-year revenue growth of 115%.

Additionally, over the last 12 months, the development of the early stage
companies which have been held in the portfolio for some time and are now in
revenue generation has been positive with encouraging growth, albeit generally
from a small base (examples of year-on-year revenue growth in the TMT sector
Antenova Limited +85%, Celona Technologies Limited +500%, UniServity Limited
+62%; and in life sciences Celldex Therapeutics, Inc. +173%, MediGene AG +37%,
Oxford Immunotec Limited +73%).

In the healthcare sector, the key companies which are still at the stage of
scientific development (Xention Limited, Vivacta Limited and Haemostatix
Limited) have largely met the milestones set for them over 2008.

As noted above, recent months have seen a great deal of activity on the part of
members of the SPARK team in working with the portfolio companies, preparing
them for the increasingly difficult financial and economic climate.Team members
have been particularly focused on cost control and rates of cash burn.At the
same time, there has been an emphasis on working with CEOs on strategic reviews
and the promotion of growth opportunities.

The extent of the activity of SPARK management team members is illustrated by
the fact that, during 2008 and in the current year to date, in relation to the
Fund's top 15 venture capital investments, action has been taken in nine cases
to ensure a reduction in the investee company's cost base, in eight cases
additional venture capital funding has been raised and in nine cases
significant management changes have been made (including a change in the CEO in
four cases, the appointment of a new chairman in five cases and other board
level changes in two cases).

Highlights of specific business achievements during the year from amongst the
largest venture capital investments are as follows:

  * Workshare Limited: Workshare, the global leader in content protection and
    control solutions for secure information management, recently announced
    that more than 11,000 companies now use its latest software product
    Workshare Professional.Workshare remains the de facto standard for
    comparison technology with over 78% of users of its earlier DeltaView
    product now migrated to the improved comparison technology and the
    remaining 22% expected to switch. Workshare added 3,000 new customers in
    2008, and can now count 99% of the top 200 US law firms as customers.
  * Xention Limited: the Cambridge-based biopharmaceutical company specialising
    in the discovery and development of ion channel modulating drugs, recently
    announced signature of a collaborative agreement with Ono Pharmaceutical
    Co. of Japan. Under the agreement Xention will receive an upfront fee and
    milestone fees on meeting specified drug discovery targets as well as
    royalties on the sales of successfully commercialised products. Xention has
    an emerging pipeline of drug candidates in atrial fibrillation and
    over-active bladder which it continues to develop for its own account with
    a view to entering into partnering arrangements with major pharmaceutical
    companies in due course.
  * Oxford Immunotec Limited: the Oxford University spinout company
    commercialising a new test for the diagnosis of tuberculosis, announced in
    July 2008 that it had gained pre-market approval from the US Food and Drug
    Administration (FDA) for its T-SPOT®.TB test. This represents a significant
    milestone for the company: it has already been achieving sales success for
    T-SPOT®.TB in Europe and is now able to access the much larger potential of
    the United States market. The US sales team is now complete and sales in
    the US market are building gradually.
  * Xtera Communications, Inc.: Following the merger of Azea Networks, the UK
    company in which the Fund originally invested, into the US venture-backed
    company Xtera in November 2007, Xtera has since acquired three additional
    companies and created a telecommunications network infrastructure
    specialist that delivers the highest capacity, reach and density (covering
    long-haul, submarine, metro and WAN technologies). Xtera's acquisitions
    strategy has enabled it to address larger opportunities because of its more
    substantial balance sheet and worldwide presence, while at the same time
    reducing operating costs through the integration and consolidation of the
    acquired companies. Overall revenues increased year-on-year by 115%.
  * UniServity Limited: which markets a web-based collaborative learning
    environment for schools, has achieved considerable success in winning
    contracts with Local Education Authorities in the UK and is beginning to
    make progress also in international markets. In November 2008 it announced
    a major step towards breaking into the Chinese market through a strategic
    partnership brokered by SPARK Venture Management Limited with the Chinese
    publishing and media company Time Media Co. Under the terms of the
    framework agreement, Time Media will launch and promote UniServity's highly
    successful web-based learning platform to schools throughout mainland
  * Elateral Holdings Limited: Elateral is a global leader in brand asset
    management software. In the early part of the year, the company was a
    victim of the sentiment change in markets when an acquisition offer was
    withdrawn by a private equity buyer on account of market turmoil. For 2008
    as a whole, Elateral reported top-line revenue growth of 40% and announced
    a number of significant client wins including Autodesk, NetApp and
    Toyota.The company was also able to renew and extend its relationship with
    existing blue chip clients, including Cisco which entered into its ninth
    year of usage of the product.
  * Celona Technologies Limited: Celona Technologies is a developer and vendor
    of data migration software for large companies seeking to upgrade legacy
    systems. The business has suffered from delays in closing big orders and
    has had to adjust its cost base accordingly. Nevertheless, revenues are
    growing rapidly on the back of some major client wins (up by 500%
    year-on-year), and its telecoms sector clients see the company's software
    as increasingly mission-critical regardless of the economic environment.
  * Vivacta Limited: Vivacta is a diagnostics company developing
    instrumentation and cartridges for point-of-care tests.The company has
    achieved its technical targets for its first test. The process of scale-up
    and manufacturing is underway. It is beginning commercial discussions with
    a view to licensing its technology.
  * Level Four Software Limited: Level Four is the leading independent vendor
    of automated testing solutions for banks' networks of automated teller
    machines (ATMs). Based in Dunfermline, Scotland, the company serves a
    global client base of tier one banks and processors through offices in
    Dubai and Charlotte, North Carolina.The company has continued to grow over
    the last 12 months with notable new client wins including Barclays Bank,
    HBOS and National Bank of Kuwait.

• Cluster Seven Limited: Cluster Seven is the leading provider of spreadsheet
management solutions; its product Enterprise Spreadsheet Manager targets the
needs of financial institutions and Fortune 500 financial reporting groups, and
addresses gaps in existing risk management and compliance solutions. During
2008 the business suffered from the well known uncertainty and turbulence in
the financial services industry; nevertheless, the software is now installed in
more than 20 tier one customers and greater emphasis on regulation and
compliance is not only expanding the range of applications for the product, but
also opening the possibility of selling Cluster Seven's solution as an
integrated service for users of broad enterprise solutions.

Among the newer investments in the portfolio, Skinkers Limited, a software
company delivering information broadcast solutions to large enterprises, has
completed the development of the Live Notification Platform, an industry
leading push communications platform, and started winning its first clients.The
downturn in the financial services sector has impacted the sales cycle; however
the company has recently won accounts with MBNA and Capital One and has a good
sales pipeline.The application for MBNA is a new online secure delivery service
and was recently selected as the "Best Online Initiative" by the credit card

New investments

During the year under review, the pace of new investment was constrained by the
existing level of cash resources and the currently poor visibility on the
generation of cash proceeds from realisations. Two new investments were
completed, one in the TMT sector and one in healthcare, as follows:

Company                                                 Sector           £'000

Unquoted companies:

Isango! Limited                                            TMT             450

Gemini Holdings Limited                             Healthcare             217


Isango! Limited is an early stage online travel website company offering users
an authoritative source of travel experiences such as holiday tours,
sightseeing, attractions and activities in more than 50 countries across the
world. Since the investment was completed in the first quarter of the year,
Isango! has been impacted by the downturn but has continued to develop its
partnership strategy and recently became the exclusive partner of Accor Hotels
and for tours and activities.

Gemini Holdings Limited is the holding company of Gemini Biomedical Limited, a
specialist healthcare screening company which provides medical screening
services to life insurance companies and underwriters. Gemini's service is
provided through a network of pharmacies contracted to Gemini and easily
accessed by applicants. Its GemTrack software enables capture of the
comprehensive screening data required for timely and accurate underwriting of

The selection of these two new investments was in line with the indications
given in last year's Business review, namely that the programme of new
investment should be expected to include (a) within the TMT sector, a greater
emphasis on opportunities in the digital  media and software applications
sectors and a reduced exposure to `hardware' investments and (b) in healthcare,
a reduced exposure to drug discovery and a greater emphasis on other areas.

The early progress of Gemini Holdings, since the investment was completed in
the third quarter of 2008, has been disappointing and slower than had been
expected.The company is receiving close attention from members of the SPARK
management team, with fresh milestones being set for the progress expected 
over the coming months.

Follow-on investments

The year to 31 December 2008 saw continued investment in a number of key
companies in the portfolio, although at a much reduced rate overall compared
with 2007, as summarised in the table below (the figures exclude follow-on
investments completed by SPARK VCT 3 plc prior to the date of the merger).

Company                                                      Sector    £'000

Follow-on rounds in unquoted companies:

Antenova Limited                                                TMT      177

Celona Technologies Limited                                     TMT       32

Celoxica Holdings plc                                           TMT       83

Cluster Seven Limited                                           TMT       79

Oxford Immunotec Limited                                 Healthcare       93

We7 Limited                                                     TMT       58

Xention Limited                                           Healthcare     223

Other companies (3)                                                       49


Bridge finance ahead of planned realisation:

Arithmatica Limited                                             TMT      123 


Amongst the companies receiving the most significant amounts of follow-on
finance, Antenova Limited grew top-line revenues by 85% and demonstrated
satisfactory progress in winning more profitable business, but in consequence
required additional working capital to maintain adequate stock levels. The
terms of the funding round completed in the fourth quarter of 2008 were
inevitably less attractive than would have been expected earlier, but by
participating in the round at a level more than pro-rata to its previous
holding, the Company took advantage of these terms to enhance its position in
the investment. Also in the TMT sector, the Company committed £80,000 to Celona
Technologies Limited alongside lead investor Caledonia Investments plc in a £
2.0 million additional funding, upon confirmation of success in winning a new
order from a major European telecoms operator, with £32,000 being advanced
during the fourth quarter. In the healthcare sector, the additional £223,000
advanced to drug discovery company Xention Limited represented the Company's
pro rata share of a first tranche of bridge finance in March 2008.


In the Business review for the period ended 31 December 2007, details were
given of the successful exit from Nomad Payments Limited in January 2008, in a
transaction which realised £3,020,000 (with £2,449,000 received in cash and 
£571,000 currently being held in escrow), and the trade sale of Identum Limited,
also closed in January 2008, which brought in proceeds of £817,000.

In the healthcare sector, the share price of MediGene AG improved over the
first half of the year and the opportunity was taken to sell part of this
holding. It was disappointing, however, that Oxford BioMedica plc announced in
early July that its most important drug candidate TroVax® had failed in a key
kidney cancer test, prompting a collapse in the share price. In the absence of
any likelihood of early recovery, the decision was taken for an immediate sale
of the entire holding.

Overall, a reduction in valuation of Venture Capital Investments of £4,084,000
has been recorded for the year, of which £154,000 has been treated as an
impairment. Of the balance of the revaluations, totalling £3,930,000, a total
of £3,739,000 relates to revaluations of unquoted investments on the basis
described and £191,000 to the effect of market movements on valuations of
quoted Venture Capital Investments.

Valuation changes

The valuations of the unquoted investments in the portfolio have been reviewed
as at 31 December 2008 on the basis of the International Private Equity and
Venture Capital Valuation Guidelines, having regard mainly to (i) prices of
recent financing rounds and/or the terms of financing rounds expected within
the next 12 months (referred to as "price of investment round"), (ii) earnings
multiples and (iii) industry valuation benchmarks and/or M&A valuation criteria
(referred to as industry valuation benchmarks"). In a number of cases
(Arithmatica Limited, Gemini Holdings Limited, Perpetuum Limited, TeraView
Limited), the write-down reflects disappointing business progress by the
investee company, but in the main the valuation changes parallel the reductions
that are being seen in the valuations of financial assets generally.

Unquoted venture capital investments                                     
The net reduction in valuation of unquoted venture capital                    
investments is summarised below.                                              
Company                                                                  £'000     
Antenova Limited                                                         (455)
Arithmatica Limited                                                      (619)
Celona Technologies Limited                                              (892)
Elateral Holdings Limited                                                 570
Gemini Holdings Limited                                                  (123)
Perpetuum Limited                                                        (125)
TeraView Limited                                                         (727)
Workshare Limited                                                        (562)
Xention Limited                                                          (454)
Others (6)                                                               (352)
Quoted venture capital investments                                            
Movements in valuation of the quoted venture capital investments              
over the year were as follows:                                                
Company                                                                  £'000
Allergy Therapeutics plc AIM                                             (246)
Celldex Therapeutics, Inc. NASDAQ                                          249
MediGene AG FRANKFURT                                                       64
Portrait Software Limited AIM                                            (180)
Others (3)                                                                (78)

Listed equity and bond portfolio

The valuation of the listed equity portfolio fell by £287,000 over the half
year to 30 June 2008. In mid July 2008 this entire portfolio was sold (at a
level somewhat below the valuation at 30 June 2008, bringing the loss on this
portfolio to £437,000) in order to protect against the possibility of further
declines in stock markets and ensure the availability of liquidity to fund
necessary follow-on investments and the operations of the Company. In the
event, despite crystallising a loss, this strategy has proved to have been the
correct one, as the value of the portfolio would otherwise have declined by
another £1.5 million as at the date of this report.


The turmoil in capital markets and the increasingly constrained resources of
the Company are now making it more difficult to make confident predictions for
the overall outcome in terms of both valuations and timing of exits.
Nevertheless, there was good growth over the last year, by and large, and many
of the companies have adapted quickly to the changing market.

The early stage of many of the investments means that a considerable degree of
involvement by members of the SPARK management team in individual portfolio
companies will continue to be required for a number of years ahead.

On the assumption of successful progress of the key investments, investors
should now expect that the bulk of the distributions of realisation proceeds
will occur no earlier than 2011.

SPARK Venture Management Limited 
9 April 2009

Directors' responsibility statement

Company law requires the Directors to prepare financial statements for each
financial year that give a true and fair view of the state of affairs of the
Company and of the profit or loss for that year. Under that law the Directors
have elected to prepare the financial statements in accordance with UK
accounting standards.

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

  * select suitable accounting policies and then apply them consistently;
  * make judgements and estimates that are reasonable and prudent;
  * state whether applicable UK accounting standards have been followed,
    subject to any material departures disclosed and explained in the financial
    statements; and
  * prepare the financial statements on the going concern basis unless it is
    inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that the financial statements comply with
the Companies Act 1985. They have general responsibility for taking such steps
as are reasonably open to them to safeguard the assets of the Company and to
prevent and detect fraud and other irregularities.

The financial statements are published on the website, which
is a website maintained by the Manager. The maintenance and integrity of the
website maintained by the Manager is, so far as it relates to the Company, the
responsibility of the Manager. The work carried out by the auditor does not
involve consideration of the maintenance and integrity of this website and
accordingly, the auditor accepts no responsibility for any changes that have
occurred to the financial statements since they were initially presented on the
website. Visitors to the website need to be aware that legislation in the
United Kingdom governing the preparation and dissemination of the financial
statements may differ from legislation in their jurisdiction.

Under applicable law and regulations, the Directors are responsible for
preparing a Directors' report, Directors' remuneration report and corporate
governance statement that comply with that law and those regulations.

The Directors confirm to the best of their knowledge that:

  * the financial statements, prepared in accordance with applicable UK
    accounting standards, give a true and fair view of the assets, liabilities,
    financial position and loss of the Company; and
  * the Directors' report includes a fair review of the development and
    performance of the business and the position of the Company, together with
    a description of the principal risks and uncertainties that the Company
On behalf of the Board

Robert Wright 
9 April 2009

Profit and loss account for the year to 31 December 2008

                                                     Notes    Twelve   Fourteen
                                                           months to  months to
                                                            31.12.08   31.12.07     
                                                               £'000      £'000
Loss on investments at fair value through            10(d)    (4,610)   (7,862)
profit or loss                                                                
Income                                                   2       235      307
Recoverable VAT                                          3       400        -
Investment management fee                                4      (592)     (924)
Other expenses                                           5      (661)     (332)
Loss on operating activities                                  (5,228)   (8,811)
Interest payable on loan notes                          13        (5)       (6)
Loss on ordinary activities before taxation                   (5,233)   (8,817)
Tax on loss on ordinary activities                       7          -        -
Loss on ordinary activities after taxation                    (5,233)  ( 8,817)
Basic and fully diluted loss per share                   9     (9.4)p   (18.5)p
All items in the above statement derive 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.

There are no gains and losses for the year other than those passing through the
profit and loss account of the Company. The accompanying notes are an integral
part of this statement.

Balance sheet as at 31 December 2008

                                                  Note 31 December  31 December      
                                                              2008         2007
                                                             £'000        £'000 
Fixed assets                                                                   

Investments at fair value through profit or                                   
loss                                                 10(a)   20,489       21,534
Current assets                                                                
Debtors                                                11     1,364           14
Cash at bank                                                  7,139          599
                                                              8,503          613
Creditors: amounts falling due within one          
year                                                   12      (397)        (302)
Net current assets                                            8,106          311
Creditors: amounts falling due after more              13       -           (100)
than one year                                                                 
Net assets                                                    28,595       21,745
Capital and reserves                                                          
Called-up share capital                                14       785          467
Share premium account                                  15       339          339
Capital redemption reserve                             15        79           67
Special reserve                                        15     21,196       23,157
Revaluation reserve                                    15     (9,937)      (4,701)
Merger reserve                                         15     12,615         -
Profit and loss account                                15      3,518        2,416
Total equity shareholders'funds                               28,595       21,745
Net asset value per share                              15      36.4p        46.5p

The financial statements were approved by the Directors on 9 April 2009 and
were signed on their behalf by:

Robert Wright 

The accompanying notes are an integral part of this statement.

Cash flow statement for the year to 31 December 2008

                                                      Notes   Twelve  Fourteen
                                                           months to  months to
                                                            31.12.08  31.12.07      
                                                               £'000     £'000
Cash outflow from operating activities                   17   (1,954)    (976)
Financial investment                                                          
Purchase of venture capital investments               10(b)   (1,584)  (4,396)
Purchase of listed equities and fixed                 10(b)     (158)    (645)
interest investments                                                          
Sale of venture capital investments                   10(b)     4,381      982
Sale/redemption of listed equity and fixed            10(b)     2,933    5,287
interest investments                                                          
Amounts recovered from investments previously                      97        -
written off                                                                   
Total net financial investment                                  5,669    1,228
Equity dividends paid                                     8     (467)    (487)
Funds received as part of merger                                3,792        -
Buy-back of ordinary shares                              15     (395)    (907)
Issue of shares under the terms of the                              -       32
dividend reinvestment scheme                                                  
Redemption of loan notes                                 13     (100)        -
Net interest on loan notes                                        (5)      (6)
Total financing                                                 3,292    (881)
Increase/(decrease) in cash for the period                      6,540  (1,116)
Reconciliation of net cash flow to movement                                   
in net funds                                                                  
Increase/(decrease) in cash for the period                      6,540  (1,116)
Net funds at the start of the period                              599    1,715
Net funds at the end of the period                              7,139      599

The accompanying notes are an integral part of this statement.                                   
Net funds comprise cash at bank and on short term deposit.                                  

Reconciliation of movements in shareholders' funds for the year to 31 December


                                         Share     Capital                                   Profit
                              Share    premium  redemption  Special Revaluation   Merger   and loss       
                             Capital   account     reserve  reserve     reserve  reserve    account  Total
                               £'000     £'000       £'000    £'000       £'000    £'000      £'000  £'000
At 1 November 2006               485       309          47   33,730      (4,781)       -      2,134 31,924
Shares issued under                2        30           -        -           -        -          -     32
the dividend                                                                            
reinvestment scheme                                                                     
Shares purchased for             (20)        -          20     (907)          -        -          -   (907)
Realisation of prior               -         -           -        -       3,317        -     (3,317)     -
years' net losses on                                                                     
Transfer from                      -         -           -   (9,666)          -        -      9,666      -
special reserve to                                                                      
profit and loss                                                                         
Net loss on                        -         -           -        -      (3,237)       -      3,237      -
revaluation of                                                                          
Loss on ordinary                   -         -           -        -           -        -     (8,817)(8,817)
activities after                                                                        
Dividends paid                     -         -           -        -           -        -       (487)  (487)
At31 December 2007               467       339          67   23,157      (4,701)       -      2,416 21,745
Shares issued in                 330         -           -        -           -   12,615          - 12,945
connection with the                                                                     
Shares purchased for (12)          -         -          12     (395)          -        -          -   (395)
Realisation of prior               -         -           -        -      (1,306)       -      1,306      -
years' net gains on                                                                     
Transfer from                      -         -           -   (1,566)          -        -      1,566      -
Special reserve to                                                                      
profit and loss                                                                         
Net loss on                        -         -           -        -      (3,930)       -      3,930      -
revaluation of                                                                          
Loss on ordinary                   -         -           -        -           -        -     (5,233)(5,233)
activities after                                                                        
Dividends paid                     -         -           -        -           -        -       (467)  (467)
At 31 December 2008              785       339          79   21,196      (9,937)  12,615      3,518 28,595

The accompanying notes are an integral part of these statements.

Notes to the financial statements

1 Accounting policies

A summary of the principal accounting policies, all of which have been applied
consistently throughout the year, is set out below:

Basis of accounting

These financial statements have been prepared under the historical cost
convention, except for the measurement at fair value of investments, and in
accordance with applicable UK accounting standards.


On 27 November 2008, the Company acquired all the shares in SPARK VCT 3 plc
(VCT 3), by means of a Scheme of Arrangement. Under the Scheme, all the shares
in VCT 3 were cancelled (excluding one share) and new shares in the Company
were issued by the Company to the shareholders of VCT 3.

In accordance with the prospectus, the Company has entered into a transfer
agreement with VCT 3, to transfer the subsidiary's assets and liabilities to
the Company. The Company is excluded from consolidation on the grounds that its
inclusion is not material for the purposes of giving a true and fair view.
Since VCT 3 is the only subsidiary undertaking, consolidated financial
statements are not presented.The book value of the assets and liabilities
transferred equates to the fair values.There are no adjustments required for
accounting policies or other matters and no revaluations.


The Company's business is investing in financial assets with a view to
profiting from their total return in the form of income and capital growth.This
portfolio of financial assets is managed and its performance evaluated on a
fair value basis, in accordance with a documented investment strategy, and
information about the portfolio is provided internally on that basis to the

Accordingly, upon initial recognition (using trade date accounting) the
investments are designated by the Company as `at fair value through profit or
loss'. They are included initially at fair value, which is taken to be their
cost (excluding expenses incidental to the acquisition which are written off to
the profit and loss account).

Subsequently, the investments are valued at `fair value', which is measured as

  * UK listed and AIM-traded investments are valued at their bid prices at the
    close of the year as issued by the London Stock Exchange; investments
    listed overseas are valued at bid prices (where a bid price is available)
    or otherwise at fair value based on published price quotations.
  * unquoted investments, where there is not an active market, are valued using
    an appropriate valuation technique so as to establish what the transaction
    price would have been at the balance sheet date. Such investments are
    valued in accordance with the International Private Equity and Venture
    Capital Valuation Guidelines. Indicators of fair value are derived using
    established methodologies including earnings multiples, prices of recent
    investment rounds, net assets and industry valuation benchmarks. Where the
    Company has an investment in an early stage enterprise, the price of a
    recent investment round is often the most appropriate approach to
    determining fair value. In situations where a period of time has elapsed
    since the date of the most recent transaction, consideration is given to
    the circumstances of the investee company since that date in determining
    fair value. This includes consideration of whether there is any evidence of
    deterioration or strong definable evidence of an increase in value. In the
    absence of these indicators, the investment in question is valued at the
    amount reported at the previous reporting date. Examples of events or
    changes that could indicate such a impairment include:
  * the performance and/or prospects of the underlying business are
    significantly below the expectations on which the investment was based;
  * a significant adverse change either in the investee company's business or
    in the technological, market, economic, legal or regulatory environment in
    which the business operates; or
  * market conditions have deteriorated, which may be indicated by a fall in
    the share prices of quoted businesses operating in the same or related

In accordance with FRS 9 "Associates and Joint Ventures", where the Company
holds more than 20% but less than 50% of an investment and the investment is
not a subsidiary, it is not treated as an associated company.

Gains and losses on investments

When the Company revalues its investments during an accounting period, any
gains or losses are recognised in the profit and loss account within `gains/
(losses) on investments at fair value through profit or loss'. Any losses on
investments that are not considered by the Directors to reflect an impairment
in the value of the investment are subsequently transferred from/to the
revaluation reserve. When an investment is sold or the Directors consider that
its value is impaired, any amount held in the revaluation reserve is
transferred to the profit and loss account. Where the overall result on the
sale of investment is a loss or there is an impairment in the value of an
investment, a transfer is then made from the special reserve to the profit and
loss account, equal to the amount of such losses.


Dividends receivable on listed equity shares are brought into account on the
ex-dividend date. Income receivable on unquoted equity and non-equity shares
and loan notes are brought into account when the Company's right to receive
payment and expect settlement is established. Fixed returns on non-equity
shares and debt securities are recognised on a time apportionment basis
(including amortisation of any premium or discount to redemption) so as to
reflect the effective interest rate, provided there is no reasonable doubt that
payment will be received in due course.


All expenses, including expenses incidental to the acquisition or disposal of
an investment, are accounted for on an accruals basis and are charged wholly to
the profit and loss account. Any costs associated with the issue of shares are
charged to the share premium account. Any costs associated with the buy-back of
shares are charged to the special reserve.


Corporation tax is applied to profits chargeable to corporation tax, if any, at
the applicable rate for the period.The Company has not provided for deferred
tax on any capital gains/losses arising on the revaluation or disposal of
investments as these items are not subject to tax whilst the Company maintains
its Venture Capital Trust status.The Company intends to continue to meet the
conditions required for it to hold approved Venture Capital Trust status for
the foreseeable future. Deferred tax assets in respect of surplus management
expenses are only recognised to the extent that such assets are likely to be
recoverable against future taxable profits of the Company.

Foreign exchange

The currency of the primary economic environment in which the Company operates
(the functional currency) is pounds sterling ("Sterling"), which is also the
presentational currency of the Company. Transactions involving currencies other
than Sterling are recorded at the exchange rate ruling on the transaction date.
At each balance sheet date, monetary items and non-monetary assets and
liabilities that are measured at fair value, which are denominated in foreign
currencies, are retranslated at the closing rates of exchange. Exchange
differences arising on settlement of monetary items and from retranslating at
the balance sheet date of investments and other financial instruments measured
at fair value through profit or loss, and other monetary items, are included in
the profit and loss account. Exchange differences relating to investments and
other financial instruments measured at fair value are subsequently included in
the transfer to the revaluation reserve.


Dividends payable to equity shareholders are recognised in the reconciliation
of movements in shareholders' funds when they are paid, or have been approved
by shareholders in the case of a final dividend and become a liability of the

2 Income

                                                              Twelve  Fourteen
                                                           months to  months to
                                                            31.12.08   31.12.07  
                                                               £'000      £'000 
Dividend income                                                               
- Unlisted companies                                               _         6
- Listed companies - UK                                           28        99
- Listed companies - foreign                                      31        40
Interest receivable                                                           
- Loans to venture capital investee companies                      1        84
- Bank deposits                                                   34        55
Other income                                                     141        23
                                                                 235       307
3 Recoverable VAT                                                             

HM Revenue and Customs (HMRC) announced in March 2008, following the European
Court of Justice decision in the JPMorgan Claverhouse case, that the provision
of management services to Venture Capital Trusts is exempt from VAT.
Accordingly the Manager ceased to charge VAT on management fees payable by the
Company with effect from 30 September 2008.

On the basis of information supplied by the Manager and discussions with the
Company's professional advisors, the Directors consider it virtually certain
that the Company will in the foreseeable future obtain a repayment of VAT of
not less than £400,000. This amount has been recognised as a separate item in
the income statement. It is possible that additional amounts of VAT will be
recoverable in due course but the Directors are unable at this stage to
quantify the sums involved.

4 Investment management fee

                                                              Twelve   Fourteen
                                                           months to  months to
                                                            31.12.08   31.12.07
                                                               £'000      £'000

Investment management fee                                         505      801
Irrecoverable VAT                                                  87      123
                                                                  592      924

SVML provides investment management services to the Company under an agreement
dated 30 October 2000.

SVML is a wholly owned subsidiary of SPARK Ventures plc, a company of which JR
Patel is an executive director and a beneficial shareholder. JR Patel is an
executive director of SVML.

The management fee, which is calculated monthly and is payable quarterly in
advance, is levied at a rate of 2.5% on the Company's net assets. As from the
effective date of the merger with SPARK VCT 3 plc, the investment management
agreement is amended so that the management fee will be reduced to the extent
that the annual running costs (excluding irrecoverable VAT) of the Company does
not exceed 3.0% of year end net assets.The investment management agreement
continues to be terminable by the Company or the Manager on a notice period the
longer of (i) twelve months and (ii) the period from the date on which notice
is given to 9 November 2010. If such notice is given on or after 9 November
2010, the notice period will be twelve months.There are no provisions for
compensation payable in the event of termination.

Irrecoverable VAT was charged on the investment management fee up to 30
September 2008, as mentioned in note 3, in line with the ruling against
HMRC.This amount is part of the total claimed back from HMRC representing VAT
paid on management fees for the three years prior to 30 September 2008.

SVML also provides administrative and secretarial services to the Company for
which it was entitled to a fee of £61,000 for the period (fourteen months ended
31 December 2007: £67,000) adjusted annually in line with changes in the Retail
Price Index.

5 Other expenses

                                                              Twelve    Fourteen
                                                           months to   months to
                                                            31.12.08    31.12.07

                                                               £'000       £'000

Administrative and secretarial services                           61          67

Directors' remuneration (note 6)                                  48          57

Auditor's remuneration

- Fees payable to the Company's auditor for audit of

the financial statements                                          17          16

- Fees payable to the Company's auditor for other

services relating to the merger                                   35           -

- Fees payable to the Company's auditor and its

associates for other services relating to tax                     16           8

Legal and professional expenses, including merger costs          326          32

Insurance                                                          7           8

UKLA, LSE and registrar's fees                                    29          20

Transaction costs                                                 15          29

Irrecoverable VAT                                                 55          41

Other                                                             52          54

                                                                 661         332

6 Directors' remuneration

                                                              Twelve      Fourteen
                                                           months to     months to
                                                            31.12.08      31.12.07

                                                               £'000         £'000

Amounts payable to Directors or companies controlled by them      48            57

7 Tax on ordinary activities

                                                              Twelve       Fourteen
                                                           months to      months to
                                                            31.12.08       31.12.07

                                                               £'000          £'000

Corporation tax                                                    -              -

Reconciliation of loss on ordinary activities to taxation

                                                              Twelve        Fourteen
                                                           months to       months to
                                                            31.12.08        31.12.07

                                                               £'000           £'000

Loss on ordinary activities before taxation                   (5,233)         (8,817)

Tax on loss on ordinary activities at standard UK

corporation tax rate of 28% (31 December 2007: 30%)           (1,465)         (2,645)

Effects of:

Non taxable items - UK dividends and net losses on 
Investments                                                    1,283           2,327

Unutilised management expenses                                   182             318

                                                                   -               -

The Company has excess trading losses of £5,652,000 (2007: £4,616,000) that are
available for offset against future profits.A deferred tax asset of £1,583,000
(2007: £1,385,000) has not been recognised in respect of those losses as they
will be recoverable only to the extent that the Company has sufficient future
taxable profits.

8 Dividends

                                                               Twelve         Fourteen
                                                            months to        months to
                                                             31.12.08         31.12.07

                                                                £'000            £'000

Final dividend: 1p per share paid on 24 June 2008                 467               -

Final dividend: 1 p per share paid on 12 March 2007                 -              487

                                                                  467              487

9 Earnings per share

The loss per share of 9.4p (fourteen months ended 31 December 2007: loss 18.5p) 
is based on the loss on ordinary activities after tax of £5,233,000 
(fourteen months ended 31 December 2007: loss £8,817,000) and on the weighted
average number of ordinary shares in issue during the period of 55,670,213
(fourteen months ended 31 December 2007: 47,714,817).

There is no dilution effect in respect of the year ended 31 December 2008 (31
December 2007: nil).

10 Investments

 a. Summary of investments
                                                                Twelve         Fourteen        
                                                             months to        months to        
                                                              31.12.08         31.12.07            
                                                                 £'000            £'000        
Venture capital investments                                     20,489           18,322
Listed equity investments                                            -            3,212
                                                                20,489           21,534
 b. Movements in investments                                                 
                                                  Venture        Listed           Total
                                                   equity        equity        
                                              investments        investments              
                                                    £'000              £'000      £'000

Cost at 1 January 2008                             23,999              2,236      26,235
Net (loss)/gain at 1 January 2008                  (5,677)               976      (4,701)
Valuation at 1 January 2008                        18,322              3,212      21,534
Movements in the period:                                                     
Acquired as part of merger                          9,234                  -       9,234
Purchases at cost                                   1,584                158       1,742
Disposals - proceeds                               (4,381)            (2,933)     (7,314)
          - net losses on disposal                   (186)              (437)       (623)
Impairment in value                                  (154)                 -        (154)
Net loss on revaluation of                         (3,930)                 -      (3,930)

Valuation at 31 December 2008                      20,489                  -      20,489
Book cost at 31 December 2008                      30,426                  -      30,426
Net loss at 31 December 2008                       (9,937)                 -      (9,937)
Valuation at 31 December 2008                      20,489                  -      20,489

Amounts shown as cost represent acquisition cost, less any reduction made on account
of impairment in value.

10(c) Venture capital investments

                    Valuation                                                            Valuation   
                           at   Acquired                                   Other                at
                     01.01.08  in merger  Additions  Disposals Write-offs  Revaluations   31.12.08
                        £'000      £'000      £'000      £'000      £'000         £'000      £'000

Fifteen largest 
venture capital                                                                     
investments at 
31 Decemner 2008                                                                  
Workshare Limited       2,591      1,037          -          -          -          (562)     3,066
Xention Limited         1,125        921        223          -          -          (454)     1,815
Oxford Immunotec        1,194        515         93          -          -             -      1,802

Xtera Communications,   1,275        381          -          -          -             -      1,656
Uniservity Limited        700        700          -          -          -             -      1,400
Elateral Holdings         479          -          -          -          -           570      1,049
Celona Technologies     1,307        536         32          -          -          (892)       983
Vivacta Limited           286        570          -          -          -             -        856
Level Four Software        95        683         17          -          -             -        795
Cluster Seven Limited     255        510         79          -          -           (79)       765
Isango! Limited             -        300        450          -          -             -        750
Sift Group Limited        698          -          -          -          -             -        698
Antenova Limited          779        158        177          -          -          (455)       659
Medigene AG FRANKFURT     676        197          -       (321)         -            64        616
Celldex Therapeutics,     182        137          -          -          -           249        568
Inc NASDAQ                                                                      
                       11,642      6,645      1,071       (321)         -        (1,559)    17,478
Other unquoted venture 
capital investments     1,745      2,326        507          -       (154)       (1,874)     2,550

Other quoted venture                      
capital investments       784        174          -          -          -          (497)       461
                       14,171      9,145      1,578       (321)      (154)       (3,930)    20,489 
Investments excited
during the year         4,151         89          6     (4,246)         -             -          -

                       18,322      9,234      1,584     (4,567)      (154)       (3,930)    20,489
10(d) Loss on investments                                                                        

The overall loss on investments at fair value through profit or loss disclosed
in the profit and loss account is analysed as follows:

                                                                   Twelve    Fourteen
                                                                months to    to months
                                                                 31.12.08     31.12.07  
                                                                    £'000        £'000 
Net (loss)/gain on disposal                                          (623)          436
Recoveries made in respect of investments                              97             -
previously written off                                                        
Impairment in value of investments                                    (154)       (5,061)
Net loss on revaluation of investments                              (3,930)       (3,237)
                                                                    (4,610)       (7,862)

`Net (loss)/gain on disposal represents the difference between proceeds
received and the carrying values of those investments sold during the year.

10(e) Merger with SPARK VCT 3 plc

During the year the Company merged with SPARK VCT 3 plc by means of a Scheme of
Arrangement ("Scheme").

The Scheme provided that the assets and liabilities of SPARK VCT 3 plc would be
transferred to the Company immediately following the merger.The consideration
was provided by way of loan which was then waived by SPARK VCT 3 plc in
anticipation of the wind-up of that company. The costs of the Scheme were borne
by both companies in an agreed manner as defined in the Scheme.

The merger has been accounted for under the acquisition method of accounting.
The market in VCT shares is highly illiquid and in the opinion of the Directors
does not provide a reliable basis for valuing the share consideration issued.

The fair value of consideration issued is deemed to be the net asset value per
share of SPARK VCT 2 plc shares at the time of acquisition as this is a more
reliable estimate of fair value than the market price at that date.The assets
and liabilities of SPARK VCT 3 plc acquired as set out below:

                                                                     VCT 3 plc
Investments                                                              9,234
Current Assets                                                                
Debtors                                                                    127
Cash                                                                     3,792
Current Liabilities                                                           
Sundry creditors                                                         (208)
Net current assets                                                       3,711
Fair value of assets transferred                                        12,945
Consideration                                                           12,945

In accordance with FRS6, the acquisition of the assets of SPARK VCT 3 plc was a
substantial acquisition. A Summarised Statement of Total Return from 1 January
2008, the beginning of SPARK VCT 3 plc's financial year, to the effective date
of the Scheme on the 27 November 2008 is set out below:

                                                           SPARK          SPARK

                                                       VCT 3 plc      VCT 3 plc

                                                          Period         Twelve

                                                  1 January 2008       months to

                                           to 27 November 2008   31 December 2007

                                                          £'000             £'000

Loss on realisation of investments                          (912)         (3,624)
Income                                                       176             309
Investment management fee                                   (252)           (356)
Other expenses                                              (415)           (252)
Loss on ordinary activities after taxation                (1,403)         (3,923)

The aggregate amount of SPARK VCT 3 plc`s capital and reserves as at 31 December 2008
is nil.

10(f) Significant holdings

Details of shareholdings in those companies where the Company's holding at 31
December 2008 represents more than 20% of the allotted equity share capital of
any class; more than 20% of the allotted share capital; or more than 20% of the
assets of the company itself, are given below. All of the companies are
incorporated in Great Britain.

Company                                Class of share       Number     Proportion
                                                              held  of class held  
UniServity Limited                    Ordinary shares (1p)     6,110       6.7%
                                       Series A Shares        50,198      58.3%

11 Debtors                                                                     
                                                            31.12.08   31.12.07
                                                               £'000      £'000
Other debtors                                                  1,220          -
Prepayments and accrued income                                   144         14
                                                               1,364         14
12 Creditors (amounts falling due within one year)                                             
                                                            31.12.08   31.12.07
                                                               £'000      £'000
Accruals                                                         355        302
Other creditors                                                   42          -
                                                                 397        302
13 Creditors (amounts falling due after more than one year)                                              

During the year the £100,000 redeemable loan notes of the Company in issue at
31 December 2007, which were held by Quester Venture Participations Limited (a
wholly owned subsidiary of the Manager) and a number of individuals (or related
trusts of such individuals) who are shareholders and/or hold or held
appointments with the SPARK group of companies, were redeemed.

These loan notes represented a management performance incentive arrangement
largely held by former members of the Quester management team who were no
longer employed by the Manager and were unlikely in current circumstances to
result in any management performance incentive payments being made. Accordingly
the Directors decided that the performance incentive scheme should be brought
to an end. The loan notes subscribed by the participants were redeemed at par
(together with the related entitlement to accrued interest) but no performance
related payments were made.

14 Called-up share capital

                                                           31.12.08    31.12.07

                                                              £'000       £'000


100,000,000 (31.12.07: 100,000,000) ordinary shares of 1p     1,000       1,000

Allotted, issued and fully paid:

78,534,876 (31.12.07: 46,715,525) ordinary shares of 1p          785        467

As part of the merger 33,046,699 ordinary shares were issued to former
shareholders of SPARK VCT 3 plc.

The Company bought back for cancellation 1,227,348 ordinary shares,
representing 2.6% of the opening issued share capital, at a cost of £394,722.

15 Reserves

                           Share    Capital Special Revaluation  Merger   Profit
                         premium redemption reserve     reserve reserve      and
                         account    reserve                                 loss
                           £'000      £'000   £'000       £'000   £'000    £'000
At 1 January 2008            339         67  23,157      (4,701)      -    2,416
Shares issued in               -          -       -           -  12,615        -
connection with merger                                                         
Shares purchased for           -         12    (395)          -       -        -
Realisation of prior           -          -       -      (1,306)      -    1,306
years' net gains on                                                             
Transfer from special          -          -  (1,566)          -       -   1 ,566
reserve to profit and                                                          
loss account                                                                   
Loss on revaluation of         -          -       -      (3,930)      -    3,930
Loss on ordinary               -          -       -           -       -   (5,233)
activities after                                                               
Dividend                       -          -       -           -       -     (467)
At 31 December 2008          339         79  21,196      (9,937) 12,615    3,518

The capital redemption reserve was created to reflect the repurchase and
cancellation of shares.

The special reserve is a distributable reserve that was created following the
cancellation of the share premium account.This reserve allows the Company,
amongst other things, to fund the buy-back of its ordinary shares as and when
it is considered by the Board to be in the best interests of shareholders and
also to facilitate the payment of dividends to shareholders earlier than would
otherwise have been possible as transfers can be made from this reserve to the
profit and loss account to offset losses on disposal of investments and
impairments in value of investments. Accordingly a transfer of £1,566,000
(including £154,000 representing impairments in value of investments during the
year and £137,000 representing losses of previous years now treated as
impairment in value) has been made from the special reserve to the profit and
loss account.

16 Net asset value per share

The net asset value per share as at 31 December 2008 of 36.4p (31 December
2007: 46.5p) is based on net assets of £28,595,000 (31 December 2007: 
£21,745,000) divided by the 78,534,876 ordinary shares in issue at that date 
(31 December 2007:46,715,525). There is no dilution effect in respect of the
year ended 31 December 2008 (year ended 31 December 2007: nil).

17 Reconciliation of operating loss to net cash outflow from operating

                                                              Twelve   Fourteen
                                                           months to  months to
                                                            31.12.08   31.12.07
                                                               £'000      £'000

Loss on operating activities                                  (5,228)    (8,811)
Loss on investments at fair value through                      4,610      7,862
profit or loss                                                                
(Increase)/decrease in debtors                                (1,224)       134
Decrease in creditors                                           (112)      (161)
Cash outflow from operating activities                        (1,954)      (976)
18 Commitments and guarantees                                                 

As at 31 December 2008 there were legal commitments totalling £80,000 (31
December 2007: £15,000) in respect of further funding to be provided to
existing investee companies.There were no guarantees outstanding
(31 December 2007: £nil).

19 Financial instruments

As a Venture Capital Trust the Company invests in unquoted and AIM-traded UK
companies.In addition to its venture capital portfolio, which is invested
mainly in technology-related companies in the TMT and healthcare sectors, the
Company maintains liquidity balances in the form of cash, listed fixed interest
securities and listed equities held for follow-on financing and new venture
capital investment and debtors and creditors that arise directly from its
operations. At 31 December 2008,71.6% (£20.5 million) of the Company's net
assets were invested in venture capital investments and 28.4% (£8.1 million) in
liquidity balances.

In pursuing its investment policy, the Company is exposed to risks that could
result in a reduction in the value of net assets and consequently funds
available for distribution by way of dividend or for re-investment.

These risks and the management of them, which is the responsibility of the
Manager and monitored by the Directors, are unchanged from the previous
accounting period and are set out below.

Market risk

The fair value or the future cash flows of financial instruments held by the
Company may fluctuate because of changes in market prices. Market risk
comprises currency risk, interest rate risk and other price risk:

  * Currency risk The Company has no significant financial instruments
    denominated in foreign currencies.
  * Interest rate risk
As the Company has no borrowings it only has limited interest rate risk.The
impact is on income and operating cash flows and arises from changes in market
interest rates.

The assets that are exposed to interest rate risk are tabled below. Interest
received on cash balances is at a margin over LIBOR or its foreign currency
equivalent (2007: same).With interest income of £35,000 to 31 December 2008,
any further downward or upward movement in interest rates is unlikely to be

  * Other price risk
Venture capital investments carry a significant risk of failure. The management
of risk within the venture capital portfolio is addressed through careful
investment selection, by diversification across different industry segments
within the TMT and healthcare sectors, by maintaining a wide spread of holdings
in terms of financing stage and by limitation of the size of individual
holdings.There is a concentration of risk due to the focused investment policy.
This risk is mitigated by the specialised expertise of the Manager. The
Directors monitor the Manager's compliance with the investment policy, review
and agree policies for managing this risk and monitor the overall level of risk
on the investment portfolio on a regular basis.

A movement of 7.5% (31 December 2007: 6.9%) (the annual average percent
reduction in total return over the last five accounting periods of the Company)
in the fair value of the total venture capital portfolio would result in a
movement of £1,613,000 (31 December 2007: £1,264,000) in profit before tax,
which would affect the net asset value by 2.05p (31 December 2007: 2.71 p) per

Liquidity risk

The Company's assets comprise quoted and unquoted equity and non-equity shares,
fixed income securities, short term money market investments and cash.Although
the Company's AIM traded and unquoted investments are less liquid than
securities listed on the London Stock Exchange, the Company has 28.4% of the
investment portfolio invested in cash, short-term debtors and creditors and
readily realisable securities, which are sufficient to meet any funding
commitments that may arise. As at the year end, the Company had no borrowings.

Credit risk

Credit risk is the risk that a party to a financial instrument will fail to
discharge an obligation or commitment that it has entered into with the
Company, resulting in a financial loss.

The Investment Manager has in place a monitoring procedure in respect of
counterparty risk which is reviewed on an ongoing basis.

At the reporting date, the Company's financial assets exposed to credit risk
amounted to the following:

                                                         31.12.08    31.12.07

                                                            £'000       £'000

Cash and cash equivalents                                   7,139         599

The risk is managed as follows:

- cash at bank is held only with banks with high quality external credit

The Company also has an exposure to credit risk in respect of the loan stock
investments it has made into investee companies, most of which have no security
attached to them, and where they do, such security ranks beneath any bank debt
that an investee company may owe.

These loan stock investments are made as part of the qualifying investments  
within the investment portfolio, and the risk management processes applied to 
the loan stock investments have already been set out under other price risk 

Capital disclosures

The Company's objective is to deliver, as far as is consistent with venture
capital investment, steady growth in the net asset value of the fund and in
total return (net asset value plus cumulative dividends paid).This is unchanged
from the previous accounting period.

The capital subscribed to the Company by original investors has been managed in
accordance with the Company's objectives. The available capital at 31 December
2008 is £28.6 million (31 December 2007: £21.7 million) as shown in the balance
sheet, which includes the Company's share capital and reserves.

The dividend policy of the Company is unchanged from that set out in the
original prospectus dated 1 November 2000 and is to seek to maximise the
dividend payable from available distributable profits. Owing to the nature of a
VCT, dividends payable can vary considerably from time to time depending both
on the level of income received from investments and, more significantly, on
whether gains on disposal of investments have been made by the VCT and the
return achieved on the realisations. Accordingly the level of dividends will
fluctuate and in some periods it is possible that no dividend will be paid.

The Board periodically reviews the need for share buy-backs.The purpose of
share buy-backs is to satisfy demand from those shareholders who seek to sell
their shares, given that there is a very limited secondary market for shares in
Venture Capital Trusts generally. The Company may be able to buy back limited
volumes of its shares from time to time. However its ability to do so may be
constrained by the level of its own liquid resources,VCT specific legislation
and the regulations of the UKLA. The Company's current policy in this respect
is unchanged from the previous accounting period.

The Company has no borrowings and there are no externally imposed capital
requirements other than the minimum statutory share capital requirements for
public limited companies.

20 Related party disclosures

SPARK Investors Limited (a fellow subsidiary of the Manager), of which JR Patel
is a director, may from time to time be eligible to receive transaction fees
and/or directors' fees from investee companies. During the year ended 31
December 2008, fees of £26,000 attributable to the investments of the Company
were received pursuant to these arrangements (fourteen months ended 31 December
2007: £43,000).

During the year there were no transactions by Directors or in which the Company
has invested (2007: one director made market purchases of shares: Medigene AG
(£10,000), Oxford BioMedica plc (£5,000) and Portrait Software plc (£8,000)).

21 Co-investment

The Company has made venture capital investments in companies in which other
funds managed by SVML have also invested:

For the purposes of this note, the following abbreviations apply:

SPARK Ventures plc - SPK


Quester Venture Partnership - QVP

Isis College Fund Limited Partnerships and Second ISIS College Fund Limited
Partnership - ICF 

Lachesis Seed Fund Limited Partnership - Lachesis

Company                                                       Co-investors

Academia Networks Limited                                     SVCT and ICF

Allergy Therapeutics plc                                      SVCT

Antenova Limited                                              SVCT and QVP

Arithmatica Limited                                           SVCT and QVP

Celldex Therapeutics, Inc.                                    SVCT and QVP

Celona Technologies Limited                                   QVP

Celoxica Holdings plc                                         QVP and ICF

Cluster Seven Limited                                         SVCT and QVP

Elateral Holdings Limited                                     SVCT

Gemini Holdings Limited                                       SVCT

Haemostatix Limited                                           SVCT, QVP and Lachesis

Imagesound plc                                                SVCT

Isango! Limited                                               SVCT and SPK

Level Four Software Limited                                   SVCT and QVP

MediGene AG                                                   SVCT, QVP and ICF

Oxford Immunotec Limited                                      QVP and ICF

Oxonica plc                                                   SVCT and ICF

Secerno Limited                                               SVCT and ICF

Sift Group Limited                                            SVCT

Skinkers Limited                                              SVCT and SPK

Symetrica Limited                                             SVCT

Perpetuum Limited                                             SVCT and QVP

Teraview Limited                                              SVCT

UniServity Limited                                            SVCT

Vivacta Limited                                               SVCT and QVP

Workshare Limited                                             SVCT and QVP

Xention Limited                                               QVP

Xtera Communications, Inc.                                    QVP

22 Post balance sheet events

Subsequent to the year end the Company has not made any new investments in
excess of 20% of the equity capital of an investee company or any follow-on
investments that would raise the Company's existing stake above 20% of the
equity capital of an investee company.



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