Interim Results

IQE PLC
24 August 2005


For Immediate Release                                            24 August 2005


                                     IQE plc



             Interim Results for the Half Year Ended 30 June 2005



IQE plc (IQE), the leading global outsource supplier of customised wafers to the
semiconductor industry, today announces its Interim Results for the half year
ended 30 June 2005.



KEY POINTS


•    First half revenues increased by 32% compared with H2/2004 to £9.665m 
     (H2/2004: £7.316m) despite continuing adverse dollar exchange rate. In 
     dollar terms, first half revenues increased by 37% compared with H2/2004

•    Operating profit achieved in June, the first monthly operating profit 
     since June 2001. Achieved at less than 30% capacity utilisation, 
     demonstrating high level of operational gearing

•    Gross loss reduced by £1.425m compared with H2/2004 on sales revenue 
     increase of £2.349m

•    EBITDA loss as detailed in the consolidated profit and loss account reduced 
     by 46% to £1.902m (H2/2004: loss £3.512m)

•    Net cash outflow from operating activities reduced by 30% to £3.118m 
     (H2/2004: outflow £4.456m)

•    Half year cash at £5.928m (H2/2004: £9.923m), ahead of internal budget for 
     first half

•    Operating cash breakeven run rate under tight control at £27m per annum 
     with continued improvements in operating margins

•    Total wafer area shipped increased by 36% to 986,000 sq.inches (H2/2004: 
     727,000 sq.inches)

•    Won major industry award for Ultra Smooth strained silicon product, which 
     was presented at the Semicon West exhibition in July

•    Significant outsourcing research and development wins in first half of 2005

•    Good prospects for continued increases in revenue in the second half of 
     2005 and the achievement of a sustainable positive cash flow

Commenting on the results, Dr Drew Nelson, President and CEO, said .......



'The IQE Group has made major progress in the first half of 2005 towards
reaching operating profitability on an ongoing basis. Revenues rose
substantially despite the adverse impact of the dollar exchange rate in the
early part of H1/2005, fixed costs have been kept under close control and
operational efficiencies have resulted in continued operational margin
improvements. We exceeded our goal of monthly cash breakeven in June and posted
our first monthly operating profit since June 2001 and, although the coming
months will see some variability, we expect to achieve monthly cash breakeven or
above on an ongoing basis during the latter part of H2/2005. The demonstration
of monthly operating profitability is a key milestone, particularly as it was
achieved at less than 30% of our overall capacity, which clearly demonstrates
the high level of operational gearing of our business model. We have substantial
opportunities to further enhance revenues and profitability as a result of
numerous outsource qualification programmes and leading edge materials
development programmes, and remain confident that our wafer outsourcing
strategy, strong investment in productive capacity in prior years and our
business model will lead to significant shareholder returns in the future.'



For further information, please contact:
IQE plc:
Drew Nelson                                                  [phone]
Stuart Hall                                                  [phone]
Chris Meadows                                                [phone]
Buchanan Communications:
Tim Thompson/Nicola Cronk                                    [phone]




1. INTRODUCTION

IQE is widely recognised in its market sector as a world leading supplier of
advanced wafer products and wafer foundry services to the semiconductor
industry.    The diverse range of materials which are produced by the Group's
four divisions form the enabling technology for many leading-edge consumer,
communication and computing applications including mobile phones, satellite
navigation devices, personal computers, telecommunication systems, LED
technology PDAs, CD/DVD systems and a variety of automotive, aerospace,
industrial and medical applications.


The Group's large investment in state-of-the-art manufacturing tools and
facilities, coupled with its unique concentration of world-class expertise and
experience in semiconductor materials, make it the only supplier worldwide to
provide a full range of advanced epi-wafer products using all three leading
technology platforms (MOVPE, MBE and CVD) as well as providing a variety of
advanced substrates.  This in turn makes the Group a highly attractive choice as
the ideal outsource partner.




2. OVERVIEW


Sales revenues increased strongly during the first half of the year as a number
of contracts and qualifications came to fruition, including the major outsource
deal that was completed in November 2004.  Some smaller product development
opportunities were also secured, notably one with a major global player for
advanced materials for future potential integrated circuit (IC) applications. 
Additional product qualification continues to gather pace, with more and more
successful product lines achieving approved status with customers in North
America and the Far East.


Although the number of wafers shipped was slightly less than H2/2004, a
significant change in the product mix towards larger diameter, higher value
wafers meant that the total wafer area shipped increased by 36% to 986,000
sq.inches in H1/2005 (H2/2004: 727,000 sq.inches).


On the basis of this increase, the Group recorded its best sales month for three
years in June 2005 and this resulted in an operating profit being achieved in
that month for the first time in four years.  This was achieved at less than 30%
capacity utilisation, fully proving the business model and demonstrating the
strong operational gearing of the business. Excellent progress was also made in
further improving operational efficiencies and continuing to bear down on the
cost base.  The annualised breakeven revenue run rate in June was around £27m,
which is half the level of two years ago.



3. RESULTS


The Group's operating results for H1/2005, together with comparative figures for
H2/2004 and H1/2004, are detailed in the Consolidated Profit and Loss Account
and Consolidated Cash Flow Statement.


H1/2005 sales were 32% up on the second half of last year at £9.665m (H2/2004:
£7.316m) due to increased revenues at IQE Europe, IQE Inc and IQE Silicon.  With
most of those revenues being earned in US dollars, we were once again adversely
affected by a weak dollar exchange rate which, at USD 1.8889/GBP, was 4% worse
than the rate for the previous half year (H2/2004: USD 1.8208/GBP) and
effectively reduced our sales line by approximately £0.400m.   If the recent
strengthening of the US dollar is maintained, this should contribute to an
improvement in our sales line in H2/2005.


In terms of gross margin, we achieved very significant improvements in
performance as result of a combination of operational efficiencies, cost
reductions and lower supplier prices for raw materials which together reduced
the gross loss in H1/2005 to £0.460m (H2/2004: loss £1.885m).  This is
equivalent to a gross loss of 5% (H2/2004: gross loss 26%). The £1.425m
reduction in gross loss for the half year was achieved on a sales revenue
increase of £2.349m clearly demonstrating the Group's ability to generate
profitability of greater than 50% on incremental revenues.


With many of the key wafer products that have been in research and development
over the last couple of years now moving into pre production or full production,
research and development expenditure has continued to fall. Current expenditure
is being strongly focused on key future materials for both silicon and III-V
wafer products.  Consequently, research and development costs in the first half
were £0.215m (H2/2004: £0.354m) equivalent to 2% of sales (H2/2004: 5%)  All
research and development costs were expensed in the period.


We also achieved savings in respect of selling, general and administration
costs, which comprise distribution costs and other administrative expenses. 
H1/2005 selling, general and administration costs were £2.294m (H2/2004:
£2.494m), which represented an 8% reduction compared with H2/2004 and included
certain restructuring costs of £0.110m.


As a result of the above, our H1/2005 operating loss was reduced to £2.968m
(H2/2004: £4.732m), which represented a 37% reduction compared with H2/2004.  
The pre tax loss for H1/2005 was also significantly down on H2/2004 at £2.912m
(H2/ 2004: pre tax loss £4.597m).


Cash management was a priority for the Group throughout the period with the
focus continuing to be concentrated on reducing operating costs and carefully
managing working capital, which comprises stocks, debtors and creditors. Working
capital increased in H1/2005 by £1.127m (H2/2004: increase £0.884m) in line with
our revenue increase as shown in the Reconciliation of Operating Loss to Net
Cash Outflow from Operating Activities.  This was mainly due to increased trade
debtors generated by improved sales and a planned build-up of finished goods
stock at IQE Inc in accordance with the outsource agreement which was signed
last year.  Including the significant reduction in operating loss compared with
H2 /2004, the net result was an overall reduction in net cash outflow from
operating activities for H1/2005 to £3.118m (H2 /2004: outflow £4.456m).


Capital expenditure was restricted to £0.289m in H1/2005 (H2/2004: £0.215m) with
the majority being incurred at Wafer Technology. Loan and lease repayments
totalled £0.667m in H1/2005 (H2/2004: £1.148m) and this reduced our total
borrowings at the end of the period to £2.541m (H2/2004: £3.160m) with the last
of the major lease repayments being made during the first half.  Gross cash on
hand exiting H1/2005 was £5.928m (H2/2004: £9.923m), ahead of our internal
budget expectations.


As an AIM listed company, the Group will adopt International Financial reporting
Standards (IFRS) for its financial statements for the year ending 31 December
2007.  Accounting for share-based payments (IFRS 2) will be reflected as a
result of the implementation of FRS 20 (share-based payments) with effect from 1
January 2006.





4. OPERATIONS


IQE Inc


The Bethlehem-based wireless materials division experienced a sharp increase in
demand during the first half year from a number of customers for its pHEMT
products for wireless communications applications.  The division achieved a
monthly operating profit in June despite output being limited as a result of an
extensive planned maintenance programme during the first few months of the year.
As previously noted in our AGM statement, we experienced a significant increase
in sales in June as a result of additional capacity becoming available and this
is expected to continue in the second half year.


Additionally, there are several qualification programmes currently underway
which, if successful, should lead to further significant increases in revenue.
The division has also been successful in attracting significant outsource
research and development programmes and recently announced that it had begun
shipping antimonide based epitaxial wafers.  These are particularly attractive
for high-frequency, low noise, low power-consumption electronic devices, and for
long wavelength emitters and detectors.



IQE (Europe) Limited


The Cardiff-based optoelectronic materials division reported significantly
increased revenues which, together with increased batch sizes on a number of
important product lines during the first half year, helped to ensure that it
achieved a monthly operating profit in June and contributed strongly to the
Group recording an operating profit in that month.


The division remains qualified on a wide range of products including lasers and
detectors for telecoms and datacomms applications as well as optical components
for consumer products. Feedback from customers and ongoing market research
suggests a steady and sustained demand for the range of materials produced by
this division for the remainder of the year.  Notable achievements in the first
half year included the development of an industry leading high power visible
laser product for DVD RW applications, particularly for the PC market, and the
qualification of our VCSELs for optical mouse applications.


IQE Silicon Compounds Limited


The Cardiff-based silicon compounds division experienced a strong increase in
demand for its standard Si and SiGe epitaxy from a number of major European-
based customers during the first half year. Some of the increased activity was
as a direct result of a major competitor being acquired as an in-house supplier
for a major, global wafer fabrication business.  Other recent order wins were
due to the increasing use of epitaxy in the fabrication of silicon devices with
many customers believing that outsourcing is the most cost effective way of
acquiring the technology.


The division's key technology lead remains its UltraSmooth strained silicon
product that recently gained a prestigious industry award for 'best enabling
material' at the Semicon West industry show in San Francisco.  This product is
now being used to develop fully bonded strained silicon on insulator wafers in
conjunction with one of our key development partners.  This represents a very
significant milestone in the development of strained silicon, as the SSOI
product is fully compatible with existing fab processes.



Wafer Technology Limited


The Milton Keynes-based substrate division underwent some significant
restructuring during the first half year in order to reduce its cost base and
enable it to be more competitive, given the adverse dollar exchange rate.  Dr
Andrew Johnson, who was appointed General Manager in March 2005, was appointed
Operations Director with effect from June 2005. Following a full review of the
operation, the cost base was significantly reduced through a reduction in
headcount numbers and some operational changes, which will improve manufacturing
efficiencies.


The division already has a world leading position as a supplier of advanced
substrate materials such as antimonides referred to earlier for high-frequency,
low noise, low power-consumption electronic devices.   With improved surface
finish products now undergoing qualification for a wide range of laser
applications and the return of a stronger LED market, which had been weak in the
first half of 2005 as a result of periodic inventory correction, this division
also has strong growth prospects in the second half year.



5. TRADING PROSPECTS


The Group's profile within the industry continues to grow in both new and
established markets as acknowledged by the recent winning of an industry award
for its strained silicon product offering and the continued winning of new
outsource opportunities.  In addition, the Group made major progress in the
first half of 2005 and achieved a significant increase in revenues despite
continuing adverse exchange rates, which culminated in full Group profitability
in June on a capacity utilisation of less than 30%. This was achieved through
strong operational and financial management, increased operational efficiencies
and close cost control across the Group.


The Board believes that the achievement of operating profitability in June 2005
marks a key milestone, clearly demonstrating the Group's strong operational
gearing as revenues increase and offering a highly cost effective outsource
route for major industry players. Further increases in revenue in the second
half of this year and beyond are expected to lead to cash generation on an
ongoing basis, full profitability and strong shareholder returns in the future.





Dr Drew Nelson

President and Chief Executive

IQE plc




INTERIM RESULTS FOR 6 MONTHS TO 30 JUNE 2005


                                               6 months to  6 months to  6 months to  12 months to
CONSOLIDATED PROFIT AND LOSS ACCOUNT           30 Jun 2005  31 Dec 2004  30 Jun 2004   31 Dec 2004

(All figures GBP000s)                   Note     Unaudited    Unaudited    Unaudited       Audited


Turnover from Continuing Operations                  9,665        7,316        8,028        15,344
Cost of Sales                                     (10,125)      (9,201)      (9,956)      (19,157)

Gross Loss                                           (460)      (1,885)      (1,929)       (3,813)
Gross Loss %                                           (5)         (26)         (24)          (25)

Operating Expenses :
     Distribution Expenses                           (870)        (794)        (605)       (1,399)
     Administrative Expenses :
     Research/Development                            (215)        (354)        (481)         (835)
     Other Administrative Expenses
     (including exceptional items)      1,2        (1,424)      (1,700)      (2,604)       (4,304)

                                                   (2,509)      (2,848)      (3,690)       (6,538)

Operating Loss from Continuing Operations          (2,968)      (4,732)      (5,619)      (10,351)
Operating Loss % from Continuing Operations           (31)         (65)         (70)          (67)

Interest Received                                       57          135          111           246

Loss on Ordinary Activities before Taxation        (2,912)      (4,597)      (5,507)      (10,104)


Loss %                                                (30)         (63)         (69)          (66)

Current Taxation                                         0            0            0             0
Deferred Taxation                                        0            0            0             0

Retained Loss for the Period                       (2,912)      (4,597)      (5,507)      (10,104)


Basic Loss Pence per Share               3          (0.92)       (1.46)       (1.75)        (3.20)
Diluted Loss Pence per Share             3          (0.92)       (1.46)       (1.75)        (3.20)


Earnings before Interest, Taxes,
Depreciation and Amortisation (EBITDA)
have been calculated as follows :

Retained Loss for the Period                       (2,912)      (4,597)      (5,507)      (10,104)
Interest Received                                     (57)        (135)        (111)         (246)
Current and Deferred Taxation                            0            0            0             0
Depreciation                                         1,067        1,221        1,019         2,240

Earnings before Interest, Taxes, Depreciation      (1,902)      (3,511)      (4,599)       (8,111)
and Amortisation





                                                  6 months     6 months     6 months    12 months
TOTAL RECOGNISED GAINS AND LOSSES                       to           to           to           to
AND MOVEMENT IN SHAREHOLDERS' FUNDS            30 Jun 2005  31 Dec 2004  30 Jun 2004  31 Dec 2004
                                                                                             
(All figures GBP000s)                            Unaudited    Unaudited    Unaudited      Audited



TOTAL RECOGNISED LOSSES

Loss for the Period                                (2,912)      (4,597)      (5,507)     (10,104)
Currency Translation Differences on Foreign
Currency
     Net Investments                                   134        (125)         (43)        (168)

Total Recognised Losses Relating to the           
Period                                             (2,778)      (4,722)      (5,550)     (10,272)



MOVEMENT IN SHAREHOLDERS' FUNDS

Opening Balance as Previously Reported              15,891       20,560       26,042       26,042

Shares Issued net of Issue Costs                        22           53           68          121
Foreign Exchange Translation Differences               134        (125)         (43)        (168)
Loss Attributable to Members of the Group          (2,912)      (4,597)      (5,507)     (10,104)

Closing Balance                                     13,136       15,891       20,560       15,891






                                                           As At            As At           As At
CONSOLIDATED BALANCE SHEET                                30 Jun           31 Dec          30 Jun
                                                            2005             2004            2004
(All figures GBP000s)                      Note        Unaudited          Audited       Unaudited



Fixed Assets                                                 8,588           9,204         10,363

Current Assets :
    Stocks                                                   4,191           3,433          3,978
    Debtors                                                  3,388           2,604          2,356
    Cash at Bank and in Hand                 4               5,928           9,923         15,552

    Total Current Assets                                    13,507          15,959         21,886

Creditors Falling Due within One Year                      (6,433)         (6,470)        (8,124)

Net Current Assets                                           7,074           9,490         13,762

Total Assets less Current Liabilities                       15,662          18,693         24,125

Creditors Falling Due after more than One
Year :
    Deferred Income                                          (218)           (308)          (385)
    Long Term Borrowings                                   (2,042)         (2,150)        (2,387)

    Total Creditors Falling Due after                     
    more than One Year                                     (2,260)         (2,458)        (2,772)

Provision for Liabilities and Charges                        (266)           (344)          (793)


Net Assets                                                  13,136          15,891         20,560


Capital and Reserves :
    Called-up Share Capital                                  3,159           3,157          3,154
    Share Premium                                          157,216         157,188        157,147
    Shares to be Issued                                        216             225            216
    Investment in Own Shares                                  (13)            (14)           (15)
    Merger Reserve                                           (605)           (605)          (605)
    Profit and Loss Account                              (146,163)       (143,251)      (138,653)
    Exchange Rate Reserve                                    (674)           (808)          (683)


Total Equity Shareholders' Funds                            13,136          15,891         20,560





Approved by the Directors of IQE plc on 23 August 2005


                                             6 months to  6 months to  6 months to 12 months to
CONSOLIDATED CASH FLOW STATEMENT             30 Jun 2005  31 Dec 2004  30 Jun 2004  31 Dec 2004

(All figures GBP000s)                          Unaudited    Unaudited    Unaudited      Audited



Net Cash Outflow from Operating Activities       (3,118)      (4,456)      (4,642)      (9,098)

Returns on Investment and Servicing of Finance :
     Interest Received                                57          135          111          246

Capital Expenditure :
     Payments to Acquire Fixed Assets              (289)        (215)        (134)        (349)

Net Cash Outflow before Management of          
Liquid Resources and Financing                   (3,350)      (4,536)      (4,665)      (9,201)

Management of Liquid Resources                     4,137        5,065        6,921       11,986

                                                     787          529        2,256        2,785
Financing :
     Issues of Ordinary Share Capital                 22           53           68          121
     Repayment of Loans                            (116)        (157)        (202)        (359)
     Repayment of Leases                           (551)        (991)      (1,387)      (2,378)

     Net Cash Outflow from Financing               (645)      (1,095)      (1,521)      (2,616)


Increase/(Decrease) in Cash                          142        (566)          736          170






                                              
RECONCILIATION OF OPERATING LOSS TO            6 months to  6 months to 6 months to   12 months to
NET CASH OUTFLOW FROM OPERATING                30 Jun 2005  31 Dec 2004 30 Jun 2004    31 Dec 2004
ACTIVITIES

(All figures GBP000s)                            Unaudited    Unaudited   Unaudited        Audited


Operating Loss                                     (2,968)      (4,732)     (5,619)       (10,351)

Depreciation of Fixed Assets                         1,067        1,221       1,019          2,240
Loss on Sale of Fixed Assets                             0           17           0             17
Movement in Stocks                                   (759)          545       (514)             31
Movement in Debtors                                  (784)        (248)          83          (165)
Movement in Creditors                                  416      (1,181)         388          (793)
Government Grants Released                           (389)         (78)           0           (78)
Government Grants Received                             300            0           0              0


Net Cash Outflow from Operating Activities         (3,118)      (4,456)     (4,642)        (9,098)








RECONCILIATION OF NET CASH FLOW TO            6 months to   6 months to 6 months to   12 months to
MOVEMENT IN NET FUNDS                         30 Jun 2005   31 Dec 2004 30 Jun 2004    31 Dec 2004

(All figures GBP000s)                           Unaudited     Unaudited   Unaudited        Audited


Increase/(Decrease) in Cash                           142         (566)         736            170

Management of Liquid Resources                    (4,137)       (5,065)     (6,921)       (11,986)
Loans Repaid                                          116           157         202            359
Leases Repaid                                         551           991       1,387          2,378

Change in Net Funds Resulting from Cash Flows      (3,328)       (4,483)     (4,596)        (9,079)

New Finance Leases                                      0             0           0              0
New Loans Non Cash                                      0             0           0              0

Movement in Net Funds                             (3,328)       (4,483)     (4,596)        (9,079)

Opening Net Funds                                   6,763        11,206      15,776          7,959
Exchange Differences                                 (48)            39          27          7,883

Net Funds                                           3,387         6,763      11,206          6,763




                                                           As At            As At            As At
ANALYSIS OF NET FUNDS                                     30 Jun           31 Dec           30 Jun
                                                            2005             2004             2004
                                                      
(All figures GBP000s)                                  Unaudited          Audited        Unaudited


Cash at Bank and in Hand                                   1,251            1,109            1,673
Cash at Bank Accessible between One and Seven Days         4,677            8,814           13,879

Total Cash at Bank and in Hand                             5,928            9,923           15,552

Loans Due after more than One Year                       (2,042)          (2,150)          (2,308)
Loans Due within One Year                                  (449)            (409)            (446)
HP/Finance Leases Due after more than One Year                 0                0             (78)
HP/Finance Leases Due within One Year                       (50)            (601)          (1,514)

Total Borrowings                                         (2,541)          (3,160)          (4,346)

Net Funds                                                  3,387            6,763           11,206



NOTES TO THE INTERIM RESULTS

1   ACCOUNTING POLICIES

    Basis of preparation

    The interim financial information has been prepared on the basis of the material accounting
    policies set out in the 2004 Annual Report and Accounts.  The interim financial information
    was approved by the Board of Directors and Audit Committee on 23 August 2005.  The
    financial information set out above does not constitute statutory accounts within the
    meaning of the Companies Act 1985.  Comparative figures in the financial statements for the
    year ended 31 December 2004 have been taken from the Group's audited statutory accounts on
    which Deloitte & Touche LLP expressed an unqualified opinion.   The results for the six
    months to 30 June 2005, 31 December 2004 and 30 June 2004 are unaudited.

    The statement of interim results will be announced to all shareholders on the London Stock
    Exchange and published on the Group's website on 24 August 2005.   Copies will be available
    to members of the public upon application to the Company Secretary at Pascal Close, Cypress
    Drive, St Mellons, Cardiff CF3 0EG.



    Accounting convention

    The financial information is prepared under the historical cost convention and in
    accordance with applicable UK accounting standards, which have been applied on a consistent
    basis during the period under review.


    Basis of consolidation

    The financial information consolidates the financial statements of the Company and all of
    its subsidiaries.


    The acquisition of EPI Holdings Limited and IQE Inc (formerly Quantum Epitaxial Designs
    Inc) by IQE plc, a new holding Company established for that purpose, on 16 May 1999 has
    been accounted for under merger accounting whereby the financial information is disclosed
    as if the companies had always been part of the Group.  The acquisition of IQE (Europe)
    Limited (formerly Epitaxial Products International Limited) and its subsidiary Epitaxial
    Products Inc by EPI Holdings Limited, a new Company established for that purpose, on 27
    March 1996 and the acquisition of Wafer Technology International Limited and its subsidiary
    Wafer Technology Limited on 22 November 2000 have been accounted for under acquisition
    accounting, whereby these companies became part of the Group on the date of acquisition.


    Turnover

    Turnover represents amounts receivable for goods and services provided in the normal course
    of business net of value added tax and other sales related taxes.   Turnover is recognised
    on despatch of goods.


    Tangible fixed assets

    Tangible fixed assets are stated at cost less accumulated depreciation and provision for
    impairment.   Cost comprises all costs that are directly attributable to bringing the asset
    into working condition for its intended use, as defined by Financial Reporting Standard
    Number 15.    Depreciation has been calculated so as to write down the cost of assets to
    their residual values over the following estimated useful economic lives.  No depreciation
    is provided on land or assets yet to be brought into use.


    Freehold buildings                                25 years
    Short leasehold improvements                      5/27 years
    Plant and machinery                               5/10 years
    Fixtures and fittings                             4/5 years

    Stocks

    Stocks are stated at the lower of cost and net realisable value.


    Research and development

    Research and development expenditure is fully written off when incurred.

    Foreign currencies

    Transactions in foreign currencies during the period are recorded at the rates ruling at
    the dates of the transactions.    Monetary assets and liabilities in foreign currencies 
    are translated into sterling at the rates ruling at the balance sheet date.    All 
    exchange differences are taken to the profit and loss account.    The balance sheets of 
    IQE Inc are translated into sterling at the closing rates of exchange for the period, 
    while the profit and loss accounts are translated into sterling at the average rates of 
    exchange for the period.  The resulting translation differences are taken directly to 
    reserves.


    Pension costs

    The Group operates defined contribution pension schemes. Contributions are charged in the
    profit and loss account as they become payable in accordance with the rules of the schemes.


    Government grants

    Government grants receivable in connection with expenditure on tangible fixed assets are
    accounted for as deferred income, which is credited to the profit and loss account by
    instalments over the expected useful economic life of the related assets on a basis
    consistent with the depreciation policy. Revenue grants for the reimbursement of costs
    incurred are deducted from the costs to which they related, in the period in which the
    costs are incurred.


    Taxation

    Current tax, including UK corporation tax and foreign tax, is provided at amounts expected
    to be paid (or recovered) using the tax rates and laws that have been enacted or
    substantively enacted by the balance sheet date.


    Deferred tax is recognised in respect of all timing differences that have originated but
    not reversed at the balance sheet date where transactions or events that result in an
    obligation to pay more tax in the future or a right to pay less tax in the future have
    occurred at the balance sheet date.   Timing differences are differences between the
    Group's taxable profits and its results as stated in the financial statements that arise
    from the inclusion of gains and losses in tax assessments in periods different from those
    in which they are recognised in the financial statements.


    A net deferred tax asset is regarded as recoverable and therefore recognised only when, on
    the basis of all available evidence, it can be regarded as more likely than not that there
    will be suitable taxable profits from which the future reversal of the underlying timing
    differences can be deducted.


    Deferred tax is measured at the average tax rates that are expected to apply in the periods
    in which the timing differences are expected to reverse, based on tax rates and laws that
    have been enacted or substantively enacted by the balance sheet date.  Deferred tax is
    measured on a non-discounted basis.





    Leases


    Assets held under finance leases and hire purchase contracts are capitalised at their fair
    value on inception of the leases and depreciated over the shorter of the period of the
    lease and the estimated useful economic lives of the assets. The finance charges are
    allocated over the period of the lease in proportion to the capital amount outstanding and
    are charged to the profit and loss account.    Operating lease rentals are charged to the
    profit and loss account in equal amounts over the lease term.    Provision is made at the
    balance sheet date for the present value of future rentals under operating leases on
    vacated properties.


    Financial instruments

    The only derivative instruments utilised by the Group are forward exchange contracts.  The
    Group does not enter into speculative derivative contracts.  Forward exchange contracts are
    used for hedging purposes to alter the risk profile of an existing underlying exposure of
    the Group in line with the Group's risk management policies.




                                                      6 months to     6 months to     6 months to
                                                      30 Jun 2005     31 Dec 2004     30 Jun 2004
2    EXCEPTIONAL ITEMS                                  Unaudited       Unaudited       Unaudited
                                                          GBP000s         GBP000s         GBP000s
     Exceptional items comprise :
     Restructuring costs                                        0               6             221
     Onerous lease provisions                                   0           (398)               0

     Exceptional items                                          0           (392)             221


     The exceptional credit in H2/2004 of £398,000 relates to the release of an onerous lease
     provision in respect of a previously vacant property at Wafer Technology Limited.   Included
     in administration expenses for the six months to June 2005 are restructuring costs of
     £110,000 relating to staff redundancies which, although not exceptional, the Directors
     consider to be one-off expenses in the period.




                                                      6 months to     6 months to     6 months to
                                                      30 Jun 2005     31 Dec 2004     30 Jun 2004
3    LOSS PER SHARE                                     Unaudited       Unaudited       Unaudited

     Retained Loss GBP000s                                (2,912)         (4,597)         (5,507)



     Weighted Average Number of Ordinary              315,813,351     315,466,318     315,401,383
     Shares
     Diluted Share Options                              5,735,597       4,538,582       2,474,166

     Adjusted Weighted Average Number of Ordinary     321,548,948     320,004,900     317,875,549
     Shares


     Basic Loss Pence per Share                            (0.92)          (1.46)          (1.75)
     Diluted Loss Pence per Share                          (0.92)          (1.46)          (1.75)



    Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders
    by the weighted average number of ordinary shares during the period.  Diluted loss per share is
    calculated by adjusting the weighted average number of ordinary shares in issue on the
    assumption of conversion of all dilutive potential ordinary shares.


    FRS 22 requires the presentation of diluted LPS when a company could be called upon to issue
    shares that would decrease net profit or increase net loss per share. For a loss-making company
    with outstanding share options and warrants, net loss per share would only be increased by the
    exercise of the out of the money options and warrants.  Since it seems inappropriate to assume
    that option holders would act irrationally, no adjustment has been made to diluted LPS for out
    of the money share options and warrants.




4   CASH AT BANK AND IN HAND

    Cash at bank at 30 June 2005 includes £1,302,000 (31 December 2004: £1,212,000) which has been
    placed on an interest bearing US dollar escrow account.  The funds are intended to be used to
    purchase equipment from the counter party to the escrow account during the second half of 2005.




INDEPENDENT REVIEW REPORT TO IQE PLC


Introduction


We have been instructed by the company to review the financial information for the six months ended 30 June
2005 the profit and loss account, the statement of total recognised gains and losses and movement in
shareholders' funds, the balance sheet, the cash flow statement, notes to the cash flow statement and related
notes 1 to 4.    We have read the other information contained in the interim report and considered whether it
contains any apparent misstatements or material inconsistencies with the financial information.


This report is made solely to the company, in accordance with Bulletin 1999/4 issued by the Auditing
Practices Board.  Our work has been undertaken so that we might state to the company those matters we are
required to state to them in an independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review
work, for this report, or for the conclusions we have formed.



Directors' responsibilities


The interim report, including the financial information contained therein, is the responsibility of, and has
been approved by, the directors. The directors are also responsible for ensuring that the accounting policies
and presentation applied to the interim figures are consistent with those applied in preparing the preceding
annual accounts except where any changes, and the reasons for them, are disclosed.



Review work performed


We conducted our review in accordance with the guidance contained in Bulletin 1999/4 issued by the Auditing
Practices Board for use in the United Kingdom.  A review consists principally of making enquiries of group
management and applying analytical procedures to the financial information and underlying financial data and,
based thereon, assessing whether the accounting policies and presentation have been consistently applied
unless otherwise disclosed.  A review excludes audit procedures such as tests of controls and verification of
assets, liabilities and transactions.  It is substantially less in scope than an audit performed in
accordance with United Kingdom auditing standards and therefore provides a lower level of assurance than an
audit.  Accordingly, we do not express an audit opinion on the financial information.



Review conclusion


On the basis of our review we are not aware of any material modifications that should be made to the
financial information as presented for the six months ended 30 June 2005.





Deloitte & Touche LLP
Chartered Accountants
Cardiff, United Kingdom



23 August 2005




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