Half-yearly Report

Baronsmead VCT2 plc Half Yearly Financial Report 31 March 2010 The Directors announce the unaudited half-yearly financial report for the six months to 31 March 2010 as follows:- Copies of the half yearly report can be obtained from the following website: www.baronsmeadvct2.co.uk . Investment Objective Baronsmead VCT 2 plc is a tax efficient listed company which aims to achieve long-term investment returns for private investors, including tax-free dividends. Investment policy ● To invest primarily in a diverse portfolio of UK growth businesses, whether unquoted or traded on AIM. ● Investments are made selectively across a range of sectors in companies that have the potential to grow and enhance their value. Dividend policy The Board of Baronsmead VCT 2 aims to sustain a minimum annual dividend level at an average of 5.5p per Ordinary Share, mindful of the need to maintain net asset value. The ability to meet these twin objectives depends significantly on the level and timing of profitable realisations and it cannot be guaranteed. There will be variations in the amount of dividends paid year on year. Since launch the average annual tax-free dividend paid to ordinary shareholders has been 6.3p per share (equivalent to a pre-tax return of 9.4p per share for a higher rate taxpayer). For shareholders who claimed tax reliefs on initial subscription of 20 per cent, 30 per cent or 40 per cent, their returns would have been higher. Secondary market in the shares of Baronsmead VCT 2 plc Shares can be bought and sold using a stockbroker, just like shares in any other listed company. Qualifying purchasers (individuals over the age of 18 and UK resident for tax purposes) can receive VCT dividends (including capital distributions of realised gains on investments) that are not subject to income tax, and capital gains tax is not payable on disposal of the VCT shares. There is no minimum time for which VCT shares bought in the secondary market need to be held, and they can be sold in the normal way. The UK tax treatment of VCTs is on a first in first out basis and therefore tax advice should be obtained before shareholders dispose of their shares and also if they deferred Capital Gains Tax in respect of new shares acquired prior to 6 April 2004. FINANCIAL HEADLINES ● 2.5p - Interim dividend of 2.5p per share payable on 7 June 2010 to shareholders on the register as at 21 May 2010, for the six month period to 31 March 2010. ● +3.7% - NAV per ordinary share increased by 3.7 per cent over the six month period to 31 March 2010 from 86.06p to 89.23p before payment of a 2.5p interim dividend. ● 75.9p - Cumulative dividends total 75.9p per share for founder shareholders since 1998, equivalent to an average annual tax free dividend of 6.3p equal to 9.4p for higher rate taxpayers. ● + 90.6% - NAV total return to shareholders since inception, equivalent to an annualised total return of 5.5 per cent before 20 per cent income tax relief (on subscription, at launch) and 6.9 per cent afterwards. ● + 85.5% - Share Price total return since launch in 1998, compared to the increase in the FTSE All-Share return of 51.5% over the same period. When taking the VCT tax reliefs into account, the positive differential is higher still. Performance Summary to 31 March 2010 Since launch Total return 6 1 3 5 10 % * month year years Years years % % % % % Net Asset 3.7 8.4 (7.1) 13.0 41.6 90.6 Value† Share Price† 3.5 9.6 (6.1) 15.6 23.8 85.5 FTSE All 12.2 52.3 (0.7) 41.3 29.7 51.5 Share * Source: ISIS EP LLP and AIC. † These returns for Baronsmead VCT 2 ignore upfront tax relief and the impact of receiving dividends tax free. Cash Returned to Shareholders The table below shows the cash returned to shareholders dependent on their subscription cost, including their income tax reclaimed on subscription. Net Cumulative Subscription Income cash dividends Net Gross tax annual price reclaim invested Paid* yield± yield † Year p p p p % % subscribed 1998 (April) 100.0 20.0 80.0 75.9 7.9 11.7 - Ordinary 1999 (May) - 102.0 20.4 81.6 72.4 8.1 12.0 Ordinary 2000 137.0 27.4 109.6 69.2 6.2 9.1 (February) - Ordinary 2000 (March) 130.0 26.0 104.0 69.2 6.6 9.8 - Ordinary 2004 100.0 40.0 60.0 27.6 8.4 12.4 (October) - C 2009 (April) 91.6 27.5 64.1 8.0 12.5 18.5 C Share dividend calculated using conversion ration of 0.9657 which is the rate the c shares were converted into ordinary shares. * Includes proposed interim dividend of 2.5p to be paid 7 June 2010. ± Represents the cumulative dividends paid expressed as an annualised percentage of the net cash invested. † The gross equivalent yield had the dividends been subject to higher rate tax (32.5 per cent on dividend income at 31 March 2010). CHAIRMAN'S STATEMENT The3.7 per centgrowth in Net Asset Value per share continues the positive trend since the October 2008 low point and is supported by increasing operating profits from many of our portfolio companies. The 2.5p interim dividend is well covered by two excellent realisations from unquoted investments held for less than three years. RESULTS In the six months to 31 March 2010, the Net Asset Value (NAV) per share increased by 3.7 per cent from 86.06p to 89.23p before payment of a 2.5p per share interim dividend. This dividend is being paid largely from the capital profits realised from the sale of ScriptSwitch and Active Assistance. The increase in NAV per share is due primarily to the 9 per cent increase in the value of the unquoted portfolio. The FTSE All-Share Index increased 12.2 per cent over the same period. At the period end, over 70 per cent of the ordinary capital raised (net of launch costs) prior to 30 September 2007 was invested in VCT qualifying investments and all of the 5 other VCT qualifying tests had also been met. LONG TERM PERFORMANCE The interim dividend will take the cumulative tax free dividends paid to founder shareholders to 75.9p per share. For an investment of £1 (80p after initial tax relief) this is encouraging and represents an average annual tax free dividend of 6.3p (equivalent to 9.4p for higher rate taxpayers). Importantly shareholders who have invested in any of the six prospectus fund raisings by Baronsmead VCT 2 have to date achieved positive absolute total returns. The comparable returns for the FTSE All-Share Index over differing time periods are set out above and show that Baronsmead VCT 2 NAV total returns have exceeded this index over 10 years and since launch. In addition comparisons with returns achieved by other VCTs can be seen on the website of the Association of Investment Companies (AIC) who publish monthly data, www.theaic.co.uk. The returns to shareholders are enhanced by the tax benefits available for VCT investors. At a time of lower investment returns and interest rates, the proportional benefit from these reliefs is greater. The benefit of VCT tax reliefs on dividends, in terms of annual net and gross yields, is shown in the table above titled `Cash Returned to Shareholders'. Over the long term, the benefit of the tax free dividends can be very significant. Had this tax relief not been available since launch an individual, who had been a higher rate tax payer throughout the period, would have needed another 37p per share in dividends to have received the same after tax income from Baronsmead VCT 2. Receipt of tax free VCT dividends will be of significantly increased value in 2010/2011 to those shareholders whose annual income exceeds £150,000 as there is a new dividend tax rate of 42.5%. PORTFOLIO REVIEW Following the sale of six AIM investments and the write down of three, the total portfolio now comprises 66 companies. 41 per cent of the portfolio by value was invested in unquoted companies, 21 per cent in AIM companies, 2 per cent in Wood Street Microcap Investment Fund and the balance of 36 per cent remained in cash or government securities. Ahead of the downturn the Manager targeted investments with reduced exposure to cyclical factors and with distinctive growth strategies less reliant on general economic conditions. This has been justified with relatively robust unquoted valuations throughout the recessionary period and two recent profitable exits. The Manager is also aware of the expected public sector spending cuts and is endeavouring to manage this risk. Some of the portfolio companies do have exposure to the public sector, although the portfolio as a whole is not overly exposed to discretionary public spending which may be cut suddenly. UNQUOTED PORTFOLIO Overall the current portfolio of unquoted investments is valued 26% higher than original cost. Thirteen companies are valued at or higher than cost while five are valued below cost. These period end figures exclude two unquoted company realisations. The sale of ScriptSwitch in October 2009 for 3.7 times cost was covered in the last annual report. Active Assistance was sold in March 2010 for 2.8 times cost, an excellent result over the two years since March 2008 when the investment was made. Based in Sevenoaks, the business provides a national live-in care service for adults and children with spinal cord injuries and neurological conditions. The sale involved a merger with another health care business, First Call Care Services Limited, to create a national provider of both live-in and live-out care to individuals with complex long term conditions. Throughout the recent recession, the focus has been on helping each investee company to manage with relatively low levels of external debt. Within the unquoted portfolio there have been financial restructurings of two companies which converted some of their shareholder loan notes into equity to strengthen the balance sheets and both of these companies continue to trade profitably. Pleasingly profits are also growing in the majority of the remaining unquoted portfolio, which augurs well for the development of future shareholder value. The Manager, ISIS EP LLP, continues to be very actively involved in the strategic development of the Company's investments. AIM-TRADED PORTFOLIO The value of the AIM share portfolio stayed relatively flat over the six months under review following the recovery in share prices in the six months to September 2009. Interest from trade buyers highlighted value in the portfolio and supported ratings. There were two bids during the period and third parties acquired strategic minority stakes in Ffastfill and IDOX which triggered share price gains. Over the six month period new qualifying and non-qualifying investments totalled £620,000 and £614,000 respectively. The holding in the Wood Street Microcap Investment Fund is now valued at £1.03m across 17 non-qualifying investments following a further £500,000 of investment. NEW INVESTMENT The market for investing in unquoted transactions is improving slowly as confidence in the achievability of business plans has returned. The first new unquoted investment for some time was completed just after the period end on 7 April 2010. This was in Surgi C, the UK's leading independent distributor of spinal implants. Based in Birmingham, the business has grown strongly, as a result of a growing product portfolio and the high levels of education and support offered to spinal surgeons. The Manager has an active programme for directly approaching prospective investee companies in selected sectors and this is building a strong pipeline of entrepreneurs who would like to work with the Manager when the timing is right. This continued investment in future dealflow should deliver excellent opportunities in the future. The volume of qualifying AIM opportunities has increased from the depressed levels of 2009. However, conversion rates have so far remained relatively low as the Manager seeks to maintain a high quality threshold for new investments. With capital still scarce for smaller AIM companies and support from the recent recovery in equity markets, prospects for new AIM investment during the remainder of the year are improving. The Manager's intention is to take more influential stakes in a smaller number of AIM investments, where a likely exit strategy to a trade buyer can be envisaged. INVESTMENT AND TAX PLANNING In the 2008/09 tax year Baronsmead VCT and Baronsmead VCT 2 raised approximately £17.5m in aggregate through a Joint Offer. Having raised these funds, Baronsmead VCT 2 did not raise further new funds in the 2009/10 tax year although in the period between mid January to mid March 2010, Baronsmead VCT 3 and Baronsmead VCT 4 similarly raised £16 million in aggregate through a joint offer for subscription. The Board is aware that a number of shareholders would welcome the opportunity to make further tax effective investments in the Company. However, while no plans have yet been considered for fundraising in the 2010/2011 tax year, the Board will advise shareholders as early as possible whether or not raising extra funds for the Company is appropriate. This will enable shareholders to make fully informed personal investment and tax planning decisions as early as possible. In December 2009 participants in the Dividend Reinvestment Plan collectively acquired 308,193 shares. In addition, approximately 43,000 existing shares were bought by other purchasers through the market. 1,060,000 shares were bought back by the Company during the six months to 31 March 2010. The new arrangements applicable to taxpayers with incomes over £100,000 make VCT investments attractive, whether the shares are bought on issue or as a purchase in the market, as dividends will not form part of the taxable income for a qualifying investor. Hopefully this will encourage more activity in the secondary market and thus provide improved opportunities for investors. COMPANY SECRETARY With effect from 1 March 2010 ISIS EP LLP has engaged Capita Sinclair Henderson to provide the Company Secretarial service on its behalf, although ISIS continues to remain responsible and is the named Company Secretary. RECENT HM REVENUE &CUSTOMS/HM TREASURY ANNOUNCEMENTS The Manager, in conjunction with our trade association, the AIC, and other VCT Managers has worked hard over many years to inform HMRC and HM Treasury of the positive economic impact from unquoted private equity backed companies. The resulting AIC report "Supporting enterprise and growth: the role of Venture Capital Trusts" published in March 2010 is based on evidence submitted by 15 VCT Managers and has helped the Government understand the economic return to the State which is generated as a result of encouraging investment in VCTs by providing tax relief. Most notably "of the 303 investee companies who provided data, the net employment impact since VCT investment, has been a 48% increase in the total workforce to over 25,402 employees." The percentage increase in employment was slightly higher for the 24 companies from within the Baronsmead portfolios that were used in the survey. Importantly the size restrictions applying to investee companies are going to be re-examined. A number of new rules introduced since 2006 mean that fewer companies are able to receive newly raised VCT funds. The Government was obliged to introduce these measures at the behest of the European authorities. However in the March 2010 Budget, HM Treasury announced its intention to seek evidence to support the case for revisiting these issues with the European Commission. Specifically, the Government is interested in examining whether there is a case for: * increasing the employee limit to fewer than 100 or 250 full-time employees (from the current limit of 50); * increasing the gross assets limit to £15 million before investment and £16 million after; * increasing the annual investment limit to £5 million per target company; * considering the effectiveness of `gross assets' as a proxy for company size. HM Treasury's action is very welcome and the AIC anticipates working closely with them on these issues. However it is important to note that any changes to the VCT regime would need to be approved by the European Commission. OUTLOOK These recent announcements by the Government and the rhetoric across all the political parties in the 2010 General Election recognises that entrepreneurial companies such as those backed by Baronsmead VCT 2 are believed to be important participants in helping to create UK growth and jobs. We have the funds to invest into such situations. There is also a solid platform within our portfolio companies for further growth and we believe there may be more grounds for optimism than for a few years. Clearly the economic situation necessitates a Government austerity plan, but we believe that it is the growth of smaller companies which will enable the UK to develop in the future. An increasing drive for efficiency in Government spending will provide opportunities for innovation. Many of our investees are showing the resilience and entrepreneurial flair which will enable them to survive and grow in such an environment. The Manager is confident that suitable companies will continue to need finance and, with the continuing famine in cost effective bank finance, Baronsmead VCT 2 is well placed to help and benefit from the future success of such companies. Clive Parritt Chairman 12 May 2010 Table of Investments and Realisations Investments in the six months to 31 March 2010 Number Company Location Sector Activity Investment cost (£'000) Unquoted investments Follow on 1 Crew Clothing London Consumer Branded 51 Company Ltd± Markets clothing retailer Total Unquoted investments 51 AIM-traded and listed investments New investments 1 Green Cirencester Business Small 250 Compliance plc Services business compliance 2 Marwyn Value London Financial Investment 64 Investors plc Services fund Follow on 1 Electric Word London IT & Media Business to 41 plc business publisher 2 Adventis Group London IT & Media Marketing 81 plc services agency 3 Proactis York IT & Media Procurement 219 Holdings plc software 4 Jelf Group plc Bristol Business Financial 210 Services solutions consultancy Paper consideration 1 Chime London IT & Media Marketing 369 Communications services Group plc* agency Total AIM-traded and 1,234 listed investments Collective investment vehicle Follow on 1 Wood Street 500 Microcap Investment Fund Total Collective 500 investment vehicle Total investment in the 1,785 period ± Loan stock received in consideration for accrued interest. * Paper consideration from sale of Essentially Ltd. Realisations inthe six months to 31 March 2010 Value at Realised First 30 September profit/(loss) Overall Investment 2009 this period† multiple Number Company date £'000 £'000 return * AIM-traded realisations 1 Essentially Trade Jun 07 283 86 0.7 Group ltd sale 2 Silverdell plc Market May 08 1 - 0.1 sale 3 Ffastfill plc Part Jun 07 226 133 1.6 sale 4 Research Now plc Market Dec 07 306 70 1.4 sale 5 Character Group Market Feb 08 86 46 0.9 plc sale 6 Cobra Trade May 03 7 (1) - Biomanufacturing sale plc 7 INVU plc Market May 07 4 (3) - sale 913 331 Written off 1 MKM Group plc May 04 6 (6) - 2 Optimisa plc Oct 07 - - - 3 Relax Group plc Feb 08 70 (70) - 76 (76) - Total AIM-traded 989 255 realisations Unquoted realisations 1 Scriptswitch Trade May 07 2,959 189 3.7 sale 2 Active Trade Mar 08 1,044 525 2.8 Assistance sale Total Unquoted reali 4,003 714 sations Total realisations 4,992 969 †Proceeds of £6,000 were also received in respect of an investment, Interactive Prospect Targeting plc, written off in a prior period. A Loss of £15,000 was realised during the period on the redemption on 7 December 2009 of a UK Treasury Gilt which had paid a rate of interest of 5.75%. *Includes interest / dividends received, loan note redemptions and partial realisations in prior periods. Investment Portfolio % of & of 30 September 31 March Equity Equity 2009 2010 held by held by Book valuation╪ valuation % of Baronsmead all cost Net funds* Company Nature of £'000 £'000 £'000 assets VCT 2 plc business Unquoted Reed & Mackay Business 1,211 2,984 3,320 5.5 9.5 40.0 Services Nexus Vehicle Business 1,868 2,528 2,677 4.4 12.6 57.4 Holdings Services Carnell Business 1,499 2,468 1,988 3.3 8.3 37.5 Contractors Services CableCom IT & Media 1,381 1,846 1,858 3.1 10.6 48.0 Networking Holdings Quantix IT & Media 1,194 1,801 1,823 3.0 11.4 48.0 Fisher Outdoor Consumer 1,423 1,433 1,777 2.9 10.5 44.0 Leisure Holdings Markets CSC (World) IT & Media 1,606 1,250 1,666 2.8 8.8 40.0 Independent Healthcare & 801 1,568 1,621 2.7 14.4 60.5 Living Services Education Kafevend Holdings Consumer 1,252 1,346 1,583 2.6 15.8 66.5 Markets Crew Clothing Consumer 983 1,286 1,309 2.2 5.9 24.0 Company Markets Credit Solutions Financial 1,032 1,126 1,128 1.9 8.6 35.0 Services Playforce Business 1,033 1,096 1,113 1.8 9.7 44.0 Holdings Services MLS IT & Media 781 1,132 1,098 1.8 5.3 22.5 Empire World Business 1,297 765 698 1.2 † † Trade Services TVC Group IT & Media 1,233 293 452 0.7 6.4 59.3 Occam DM IT & Media 517 121 362 0.6 5.8 55.2 Kidsunlimited Business 113 113 113 0.2 0.0 0.0 Group Services Xention Discovery Healthcare & 316 63 63 0.1 1.2 5.6 Education Total Unquoted 19,540 23,219 24,649 40.8 AIM IDOX plc IT & Media 1,038 1,081 1,276 2.1 3.2 9.6 Advanced Computer IT & Media 525 1,158 1,204 2.0 0.9 4.5 Software plc Staffline Business 249 499 738 1.2 4.5 9.0 Recruitment Group Services plc Brulines Holdings Business 646 595 647 1.1 1.9 9.6 plc Services Murgitroyd Group Business 319 711 632 1.0 3.1 6.2 plc Services Green Compliance Business 250 - 500 0.8 2.4 14.6 plc Services Jelf Group plc Financial 761 381 475 0.8 1.6 6.9 Services WIN plc IT & Media 413 315 459 0.8 4.3 19.0 Begbies Traynor Financial 231 625 440 0.7 0.7 2.5 Group plc Services Proactis Holdings IT & Media 619 326 426 0.7 5.5 27.0 plc Mount Engineering Business 385 319 330 0.5 2.3 13.4 plc Services Ffastfill plc IT & Media 251 475 325 0.5 0.9 6.6 Kiotech Healthcare & 275 342 298 0.5 2.2 15.8 International plc Education Huveaux plc IT & Media 666 201 291 0.5 1.7 4.4 Vero Software plc IT & Media 500 390 279 0.5 6.2 14.3 Adventis Group IT & Media 361 197 275 0.5 3.1 20.8 Plc InterQuest Group Business 310 270 270 0.4 1.8 7.4 plc Services Electric Word plc IT & Media 241 207 267 0.4 2.8 21.0 EG Solutions plc IT & Media 375 110 216 0.4 3.1 14.2 Driver Group plc Business 438 372 216 0.4 2.3 10.4 Services Cranewave plc IT & Media 71 180 216 0.4 0.2 1.1 Praesepe plc Consumer 525 179 197 0.3 1.1 6.2 Markets Sanderson Group IT & Media 387 102 194 0.3 1.8 6.9 plc Stagecoach Consumer 419 248 189 0.3 4.5 9.1 Theatre Arts plc Markets IS Pharma plc Healthcare & 246 268 179 0.3 1.0 5.9 Education Quadnetics Group Business 296 176 173 0.3 0.6 2.2 plc Services Autoclenz Business 400 134 150 0.2 3.1 12.3 Holdings plc Services Plastics Capital Business 473 151 132 0.2 1.8 10.0 plc Services Tasty plc Consumer 356 226 116 0.2 1.7 13.0 Markets Cohort plc Business 179 189 107 0.2 0.3 1.4 Services Prologic plc IT & Media 310 132 103 0.2 4.1 15.0 Colliers CRE plc Financial 470 158 90 0.2 0.3 0.8 Services Brainjuicer Group IT & Media 50 65 69 0.1 0.4 1.8 plc Marwyn Value Financial 64 - 62 0.1 1.3 6.0 Investors plc Services STM Group plc Financial 140 72 56 0.1 0.5 3.8 Services Tangent Business 180 90 55 0.1 0.8 4.7 Communications Services plc Real Good Food Consumer 620 31 51 0.1 0.7 2.3 Company (The) plc Markets Clarity Commerce IT & Media 50 50 50 0.1 0.3 6.4 Solutions plc Mission Marketing IT & Media 247 60 30 0.1 0.5 1.3 Group (The) plc RTC Group plc Business 355 37 30 0.0 4.2 8.5 Services AorTech Healthcare & 285 28 23 0.0 0.3 0.6 International plc Education Zoo Digital Group IT & Media 438 12 14 0.0 0.3 1.0 plc Higham Systems Business 197 3 6 0.0 0.3 1.0 Services Group Services plc Payzone plc Consumer 109 2 - 0.0 0.1 0.1 Markets Total AIM 15,720 11,167 11,856 19.6 Listed Vectura Group plc Healthcare & 578 1,019 561 0.9 0.4 1.3 Education Chime IT & Media 369 - 301 0.5 0.2 1.5 Communications plc Total Listed 947 1,019 862 1.4 PLUS Chemistry Business 500 109 130 0.2 3.1 6.3 Communications Services Group plc Total PLUS 500 109 130 0.2 New York Stock Ex change Inverness Medical Healthcare & 180 212 225 0.4 0.0 0.1 Inc. Education Total New York 180 212 225 0.4 Stock Exchange Interest bearing securities UK T-Bill 12/04/ 5,998 - 5,998 9.9 10 BlackRock Cash 7,000 7,000 7,000 11.6 Market OEIC JP Morgan Cash 4,800 - 4,800 8.0 Market OEIC Total interest 17,798 7,000 17,798 29.5 bearing secu rities Collective Investment Vehi cles Wood Street 1,025 525 1,034 1.7 Microcap Investment Fund Total Collective 1,025 525 1,034 1.7 Investment Vehi cles Total investments 55,710 56,554 93.6 Net current as 3,836 6.4 sets Net assets 60,390 100.0 ╪ The total investment valuation at 30 September 2009 per the table above does not agree to the audited accounts due to the purchases and sales since that date. * All funds managed by the same investment manager, ISIS EP LLP, including Baronsmead VCT 2. † Following a restructuring the effective ownership % is dependent on final exit proceeds. AIM, Listed and PlusPortfolio Concentration Analysisas at 31 March 2010 % of Investment Book cost Valuation Quoted ranking by £'000 £'000 Portfolio valuation Top Ten 5,012 6,932 53.0 11-20 3,975 3,063 23.4 21-30 3,338 1,955 15.0 30+ 5,022 1,123 8.6 Total 17,347 13,073 100.0 Independent Review Report to Baronsmead VCT 2 plc Introduction We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2010 which comprises the Income Statement, Reconciliation of Movement in Shareholders' Funds, Balance Sheet and Statement of Cash Flows and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules (``the DTR'') of the UK's Financial Services Authority (``the UK FSA''). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this 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 reached. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA. As disclosed in note 1, the annual financial statements of the Company are prepared in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with the Statement Half-Yearly Financial Reports as issued by the UK Accounting Standards Board. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2010 is not prepared, in all material respects, in accordance with the Statement Half-Yearly Financial Reports as issued by the UK Accounting Standards Board and the DTR of the UK FSA. Simon Pasby for and on behalf of KPMG Audit Plc Chartered Accountants Edinburgh 12 May 2010 Responsibility statement of the Directors in respect of the half-yearly fi nancial report We confirm that to the best of our knowledge: ●the condensed set of financial statements has been prepared in accordance with the Statement `Half-yearly financial reports' issued by the UK Accounting Standards Board; ● the Chairman's Statement (constituting the interim management report) includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; ● the Statement of Principal Risks and Uncertainties below is a fair review of the information required by DTR 4.2.7R; and ● the financial statements include a fair review of the information required by DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so. By Order of the Board, Clive Parritt Chairman 12 May 2010 Unaudited Income Statement For the six months to 31 March 2010 Six months to 31 March Six months to 31 March Year to 30 September 2010 2009 2009* Revenue Capital Total Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Unrealised gains/ - 944 944 - (2,581) (2,581) - 343 343 (losses) on investments Realised gains/ - 960 960 - (283) (283) - (154) (154) (losses) on investments Income 932 - 932 715 - 715 1,297 - 1,297 Recoverable VAT - - - 101 303 404 68 299 367 Investment management (151) (454) (605) (138) (414) (552) (291) (872) (1,163) fee Other expenses (161) - (161) (155) - (155) (405) - (405) Profit/(loss) on 620 1,450 2,070 523 (2,975) (2,452) 669 384 285 ordinary activities before taxation Taxation on ordinary (98) 98 - (80) 80 - (120) 120 - activities Profit/(loss) on 522 1,548 2,070 443 (2,895) (2,452) 549 (264) 285 ordinary activities after taxation Return per ordinary 0.76p 2.27p 3.03p 0.71p (4.66p) (3.95p) 0.83p (0.40p) 0.43p share: Basic * These figures are audited. Unaudited Reconciliation of Movement in Shareholders' Funds For the six months to 31 March 2010 Six Six months to months to Year to 31 March 31 March 30 September 2010 2009 2009* £'000 £'000 £'000 Opening shareholders' funds 61,215 54,822 54,822 Profit/(loss) for the period 2,070 (2,452) 285 Purchase of shares for treasury (830) (582) (582) Increase of shares - 7,188 8,881 Expenses of share issues and buybacks (3) (398) (477) Dividends paid (2,062) 4 (1,714) Closing shareholders' funds 60,390 58,582 61,215 * These figures are audited. Notes 1. The unaudited interim results which cover the six months to 31 March 2010 have been prepared in accordance with applicable accounting standards and adopting the accounting policies set out in the statutory accounts of the Company for the period ended 30 September 2009. 2. Return per share is based on a weighted average of 68,375,739 ordinary shares in issue (30 September 2009 - 65,802,901 ordinary shares, 31 March 2009 - 62,168,370 ordinary shares). 3. Earnings for the six months to 31 March 2010 should not be taken as a guide to the results of the full financial year to 30 September 2010. 4. During the six months ended 31 March 2010 the Company purchased 1,060,000 ordinary shares to be held in Treasury at a cost of £829,902. At 31 March 2010 the Company holds 7,053,906 ordinary shares in Treasury. These shares may be re-issued below Net Asset Value as long as the discount at issue is narrower than the average discount at which the shares were bought back. Excluding treasury shares, there were 67,676,288 ordinary shares in issue at 31 March 2010 (30 September 2009 68,736,288 ordinary shares, 31 March 2009 66,896,301 ordinary shares). 5. The interim dividend of 2.5p per share (0.5p revenue and 2.0p capital) will be paid on 7 June 2010 to shareholders on the register on 21 May 2010. The ex-dividend date is 19 May 2010. 6. The financial information contained in this half year report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The information for the year ended 30 September 2009 has been extracted from the latest published audited financial statements. The audited financial statements for the year to 30 September 2009, which were unqualified, have been filed with the Registrar of Companies. No statutory accounts in respect of any period after 30 September 2009 have been reported on by the Company's auditors or delivered to the Registrar of Companies. 7. Copies of the Half-yearly Report have been made available to shareholders and are available from the Registered Office of the Company at 100 Wood Street, London EC2V 7AN. Unaudited Balance Sheet For the six months to 31 March 2010 Six months Six months Year to to to 31 March 31 March 30 September 2010 2009 2009 Total Total Total £'000 £'000 £'000* Fixed Assets Unquoted investments 24,649 27,765 27,222 Traded on AIM 11,856 9,670 11,930 Traded on PLUS 130 82 109 Listed investments 862 651 1,019 Traded on NYSE 225 - 212 Collective investment vehicle 1,034 - 525 Interest bearing securities 17,798 15,567 18,512 56,554 53,735 59,529 Current assets Debtors 207 4,146 554 Cash at bank and on deposit 3,990 1,526 1,684 4,197 5,672 2,238 Creditor (amounts falling due within (361) (825) (552) one year) Net current assets 3,836 4,847 1,686 Total assets less current liabilities 60,390 58,582 61,215 Net assets 60,390 58,582 61,215 Capital and reserves Called-up share capital 7,473 7,289 7,473 Share premium account 12,573 11,143 12,573 Capital redemption reserve 9,254 9,254 9,254 Revaluation reserve 844 (3,108) 1,569 Capital reserve 29,180 33,085 29,665 Revenue reserve 1,066 919 681 Equity shareholders' funds 60,390 58,582 61,215 Six months Six months Year to to to 31 March 31 March 30 September 2010 2009 2009* Total Total Total Net asset value per share 89.23p 87.57p 89.06p Number of shares in issue at balance 67,676,288 66,896,301 68,736,288 sheet date Treasury net asset value per share 88.24p 86.70p 88.13p Number of ordinary shares in issue 67,676,288 66,896,301 68,736,288 Number of ordinary shares held in 7,053,906 5,993,906 5,993,906 Treasury Number of listed ordinary shares 74,730,194 72,890,207 74,730,194 *These figures are audited. Unaudited Statement of Cash Flows Six months Six months Year to to to 31 March 31 March 30 September 2010 2009 2009 Total Total Total £'000 £'000 £'000* Net cash inflow from operating activities 136 227 964 Capital expenditure and financial 5,078 (6,301) (9,190) investment Equity dividends recovered/(paid) (2,062) 4 (1,714) Net cash inflow / (outflow) before 3,152 (6,070) (9,940) financing Issue of shares less buybacks (846) 3,473 7,501 Increase / (decrease) in cash 2,306 (2,597) (2,439) Reconciliation of net cash flow to movement in net cash Increase / (decrease) in cash 2,306 (2,597) (2,439) Net cash at beginning of period 1,684 4,123 4,123 Net cash at end of period 3,990 1,526 1,684 Reconciliation of operating profit / (loss) before taxation to net cash flow from operating activities Profit / (loss) on operating activities 2,070 (2,452) 285 before taxation Realised (gains) / losses on investments (960) 283 154 Unrealised (losses) / gains on investments (944) 2,581 (343) Changes in working capital and other (30) (185) 868 non-cash items Net cash inflow from operating activities 136 227 964 *These figures are audited. Principal Risks and Uncertainties The Company's assets consist of equity and fixed interest investments, cash and liquid resources. Its principal risks are therefore market risk, credit risk and liquidity risk. Other risks faced by the Company include economic, loss of approval as a Venture Capital Trust, investment and strategic, regulatory, reputational, operational and financial risks. These risks, and the way in which they are managed, are described in more detail under the heading Principal risks, risk management and regulatory environment within the Business Review in the Company's Annual Report and Accounts for the year ended 30 September 2009. The Company's principal risks and uncertainties have not changed materially since the date of that report. Related Parties ISIS EP LLP (`the Manager') manages the investments of the Company. The Manager also provides opportunities or procures the provision of secretarial, administrative and custodian services to the Company. Under the management agreement, the Manager receives a fee of 2.0 per cent per annum of the net assets of the Company. This is described in more detail under the heading Management within the Report of the Directors in the Company's Annual Report and Accounts for the year ended 30 September 2009. During the period the Company has incurred management fees of £605,000 and secretarial fees of £ 54,000 payable to the Manager. Going Concern The Directors are of the opinion that it is appropriate to continue to adopt the going concern basis in the preparation of the Half-yearly report, as after making enquires and bearing in mind the nature of the Company's business, assets and cash flow forecasts and due consideration, the Directors are of the opinion that the Company has adequate resources to continue in operational existence for the foreseeable future. Shareholder Information and Contact Details Enquiries Shareholders should contact the following regarding queries: Basic contact details, ie change of address, joining the DRIP queries re: share and tax certificates and bank mandate forms: Computershare (Company Registrar) www-uk.computershare.com/investor Investors who hold ordinary shares in their own name can check their holdings on our Registrar's website www-uk.computershare.com. Please note that to access this facility investors will need to quote the reference number shown on their share certificate. Alternatively, by registering for the Investors' Centre facility on Computershare's website, investors can view details of all their holdings for which Computershare is Registrar, as well as access additional facilities and documentation. Please see www.investorcentre.co.uk for further information. Shareholder Helpline Tel: 0870 703 0137 (Calls charged at national rate). The Shareholder Helpline is available on UK business days between Monday and Friday, 8.30 am to 5 pm. The helpline contains automated self-service functionality which is available 24 hours a day, 7 days a week. Using your Shareholder Reference Number which is available on your share certificate or dividend tax voucher, our self-service functionality will enable you achieve the following things: Automated Functions - confirm the latest share price - confirm your current share holding balance - confirm payment history - order a Change of Address, Dividend Bank Mandate or Stock Transfer Form e-mail: web.queries@computershare.co.uk For information on asset allocations, dividend policies, investment process, DRIP mechanism, share price movements, the share price discount and selling shares: ISIS EP LLP (the Investment Manager) at www.isisep.com e-mail: michael.probin@isisep.com; margaret.barff@isisep.com Tel: Michael Probin 020 7506 5796; Margaret Barff 020 7506 5630. The Baronsmead website (www.baronsmeadvcts.co.uk) links to helpful sites, contains details of the team and some case studies of investments. Share Price The Company's shares are listed on the London Stock Exchange. The mid-price of the Company's shares is given daily in the Financial Times in the Investment Companies section of the London Share Service. Share price information can also be obtained from the link on the Company's website and many financial websites. Trading Shares The Company's shares can be bought and sold in the same way as any other quoted company on the London Stock Exchange via a stockbroker. The market makers in the shares of Baronsmead VCT 2 plc are: Matrix Corporate Capital LLP (the Company's 020 3206 7000 broker) Singer Capital Markets 020 3205 7500 Winterflood 020 3100 0251 Financial Calendar August 2010 Quarterly fact sheet to 30 June 2010 November 2010 Results for the year to 30 September 2010 announced and annual report and accounts sent to shareholders December 2010 Thirteenth Annual General Meeting Corporate Information Directors Registrar and Transfer Office Clive Parritt (Chairman)* Computershare Investor Services PLC Howard Goldring PO Box 82 Godfrey Jillings† The Pavilions Gillian Nott OBE╪^ Bridgwater Road Bristol BS99 6ZZ Secretary Tel: 0870 703 0137 ISIS EP LLP Brokers Registered Office Matrix Corporate Capital LLP 100 Wood Street One Vine Street London EC2V 7AN London W1J 0AM Investment Manager Auditors ISIS EP LLP KPMG Audit Plc 100 Wood Street Saltire Court London EC2V 7AN 20 Castle Terrace Edinburgh EH1 2EG Investor Relations Michael Probin Solicitors 020 7506 5796 Martineau No 1 Colmore Square Registered Number Birmingham B4 6AA 03504214 VCT Status Adviser PricewaterhouseCoopers LLP * Chairman of the Audit Committee 1 Embankment Place † Chairman of Nomination Committee London WC2N 6RH ╪ Chairman of Management Engagement and Remuneration Committee Website www.baronsmeadvct2.co.uk ^ Senior Independent Director Additional Information The information provided in this report has been produced in order for shareholders to be informed of the activities of the Company during the period it covers. ISIS EP LLP does not give investment advice and the naming of companies in this report is not a recommendation to deal in them. Baronsmead VCT 2 plc is managed by ISIS EP LLP which is Authorised and regulated by the FSA. Past performance is not necessarily a guide to future performance. Stockmarkets and currency movements may cause the value of investments and the income from them to fall as well as rise and investors may not get back the amount they originally invested. Where investments are made in unquoted securities and smaller companies, their potential volatility may increase the risk to the value of, and the income from, the investment.

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