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Quester VCT 2 PLC (QUE)

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Friday 13 May, 2005

Quester VCT 2 PLC

Final Results


QUESTER VCT 2 PLC
ANNUAL REPORT 2005

Summary of results for the year ended 28 February 2005

Per Ordinary Share         2005      2004         2003
(pence)                                               
                                                      
Capital Values                                        
                                                      
Net asset value            45.7      49.1         52.0
                                                      
Share price                45.0      49.5         64.5
                                                      
Return and Dividends                                  
                                                      
Dividend                      -         -            -
                                                      
Cumulative dividend        26.6      26.6         26.6
                                                      
Total Return*              72.3      75.7         78.6
                                                      
*Net asset value plus cumulative dividend             

COMPOSITION OF THE FUND BY VALUE

%

Venture capital investments (quoted 25.7%, unquoted 32.6%) 58.3

Listed equity investments* 32.0

Cash and other net current assets* 9.7

100.0

*Retained as a reserve for potential future venture capital investment

DIVIDENDS

The directors do not propose the payment of a dividend in respect of the year
ended 28 February 2005.

CHAIRMAN'S STATEMENT

OVERVIEW

During the year to 28 February 2005, the Company's net asset value per share
fell by 3.4p per

share to 45.7p, a fall of 6.9%. After taking account of share buy-backs of £
575,000, the net asset

value of the Company fell from £21.6 million to £19.5 million over the same
period. This change in net asset value is summarised as follows:

NET ASSETS, REVENUES AND DIVIDENDS

                                                               £'000  Pence per
                                                                          share
                                                                               
Net asset value at 29 February 2004                           21,585       49.1
                                                                               
Income                                                           316        0.7
                                                                               
Other expenses including investment management fee             (863)      (1.9)
                                                                               
Loss on realisation of investments                             (918)      (2.1)
                                                                               
Net unrealised profit on revaluation of investments             (43)      (0.1)
including an amount held in debtors                                            
                                                                               
Share buy-backs*                                               (575)          -
                                                                               
Net asset value at 29 February 2005                           19,502       45.7

* Share buy-back enhanced the net asset value by 0.004p per share

The Company's profit and loss account shows a loss for the year of £1,465,000
equivalent to 3.3p per share. This is made up of income of £316,000 (0.7p per
share) offset by the net write-down of investments of £918,000 (2.1p per share)
and by expenses of £863,000 (1.9p per share). Against this background, the
directors are not proposing a dividend in respect of the year just ended.

PROGRESS OF THE PORTFOLIO

The year has been disappointing. The portfolio has matured slowly. Two
investments have been exchanged for listed stocks, though our ability to
realise them for cash immediately has been constrained. The gains on these
situations have been more than eliminated by seven write-downs arising because
of underperformance against their plans and/or further financings priced below
our carrying value. Approximately 44% of the venture capital portfolio is held
as quoted investments, making the prospect of realisations for cash more
realistic.

We continue to support our portfolio with further follow on investments and
have recently made our first new investment for four years in an AIM traded
stock.

The FTSE All Share portfolio performed well during the period rising from £5.1
million at the start of the year to close at a value of £6.2 million at 28
February 2005.

Further information on the Company's investments is provided in the Investment
Manager's report.

CHANGE OF CORPORATE BROKER AND MARKET MAKERS

In July 2004 the Company changed its corporate brokers to Noble & Company
Limited. Following this change, Winterflood Securities Limited became market
makers in the Company's shares.

PROPOSED MERGER

As shareholders will be aware, the Board of Quester VCT 2 has announced that it
is holding discussions with the boards of Quester VCT plc and Quester VCT 3 plc
to see whether a merger of the three funds might be in the best interests of
shareholders. The three boards now believe that merged entity will benefit
shareholders through a portfolio with greater spread and proportionately
reduced running costs. I will be writing separately to shareholders with a full
explanation of those benefits and details of the proposed merger.

DIVIDEND AND OUTLOOK

Your Board's wish is to achieve realisations from the portfolio and pay
dividends to shareholders. As you will see from the merger documentation, if
you and the shareholders of the other two VCTs approve the transaction, the
merged company intends to pursue the process of selling investments and
distributing part of the proceeds to shareholders, while reinvesting the
balance in new venture capital opportunities.

Jock Birney

Chairman

12 May 2005

INVESTMENT MANAGER'S REPORT

OVERVIEW

There was considerable activity in the venture capital portfolio in the year to
28 February 2005. The net result amounted to a £2.0 million net realised and
unrealised loss in the portfolio, a key component of the 6.9% reduction in net
asset value per share. This is disappointing in the short term, reflecting
performance behind plan by some portfolio companies, and particularly so
against a background of gains on the quoted markets. However the exit
transactions outlined below, are indicative of improved conditions for smaller
companies which has been encouraging and there has also been positive
underlying progress made by a number of the other investments in the portfolio.
The decision to maintain a notional overweighting in FTSE companies held as a
reserve for investment in the venture capital portfolio paid off with a 25.7%
total return being achieved during the year.

PROGRESS OF THE VENTURE CAPITAL PORTFOLIO

During the year to 28 February 2005, an additional of £510,000 was been
invested in five existing portfolio companies, as shown below:

Company                            Industry Sector          Cost
                                                                
                                                           £'000
                                                                
Anadigm Limited                     Semiconductors            80
                                                                
Opsys Management Limited               Electronics             9
                                                                
Linguaphone Group plc               Consumer goods            85
                                                                
Loudeye Corp.                             Internet            72
                                                                
Nomad Softare Limited                     Software           264
                                                                
                                                             510

In addition, a new investment of £193,000 was made in Allergy Therapeutics plc,
an established £18 million turnover company with a range of allergy vaccines
currently in the market and a programme for development of novel vaccines
offering the potential for achievement of significant market expansion. This
investment was made at the time of Allergy Therapeutics's capital raising on
AIM. At 28 February 2005, it was showing an unrealised gain of £71,000.

PORTFOLIO NEWS

Transactions in three companies in the portfolio indicate a much improved
climate for 'exits', namely trade sales or listing on public markets of the
unquoted investments. We expect to continue to achieve further exits, provided
these favourable conditions are maintained. This is a key area of focus for the
Quester investment team, as we seek to deliver exit values ahead of the values
of the investments in the accounts.

On Demand Distribution Limited ('OD2'), which had successfully developed as the
largest music service provider in Europe, was acquired in July 2004 by the
NASDAQ-quoted company Loudeye Corp. ('Loudeye'). The combination of the two
businesses created the biggest business to- business digital media provider in
the world offering the largest digital music catalogue industry. The
consideration was in the form of an initial receipt of Loudeye shares, together
deferred consideration receivable in cash or shares over the following 18
months and an entitlement to an earnout depending upon the future performance
of the combined entity.

Subsequently, this arrangement has been renegotiated by the OD2 shareholders
resulting in an acceleration of the payment of the deferred consideration and
the part crystallisation of the earnout. The valuation of the Loudeye holding
reflected in these accounts reflects this new arrangement and is discounted to
take account of an orderly market agreement and warranty cover. It gives rise
to an unrealised gain of £735,000 as at 28 February 2005.

Quester VCT 2 has been able to sell 26% of its holding of Loudeye shares
subsequent to 28 February 2005 realising some of this gain. The sale proceeds
represent approximately 40% of the total original cost of this investment. The
ultimate return to Quester VCT 2 will depend upon movements in Loudeye's share
price and in the movements of the dollar against sterling. The share price has
been very volatile.

The shares of Imagesound plc, a leading UK supplier of in-store music, radio
and TV services, were admitted to trading on AIM in August 2004 following a
transaction involving a reverse takeover by the original Imagesound company of
an AIM-traded shell and the acquisition of two smaller complementary
businesses. Although market conditions have resulted in a reduction of £168,000
in the carrying value of Quester VCT 2's investment at 28 February 2005 (after
discounting the share price of Imagesound plc by 10% to reflect the terms of a
lock-up), the transaction created a business with a broader spread with a
stronger platform for future growth.

The valuation of Opsys Management Limited (formerly Opsys Limited) is derived
from the share price of Cambridge Display Technology, Inc. ('CDT') which
acquired Opsys Limited in 2003. CDT achieved a NASDAQ listing in December 2004.
Although its share price has been weak in the short term since listing
(resulting in a mark-down in value of the residual investment value of Opsys
Management Limited), ultimately there is the potential for shares in this world
leading displays technology company to recover.

VALUATION CHANGES APPLIED TO VENTURE CAPITAL INVESTMENTS

This year's valuation process has been overseen by a wide range of outside
parties as a result of the proposed merger process.

Holdings in companies whose shares are either listed or traded on AIM are
valued on the basis of mid-market price on 28 February 2005, less a discount,
if appropriate, to reflect any lock-up or orderly market arrangements. During
the year, these quoted investments showed a net appreciation in value of £
699,000. This was largely driven by gains in the investments in Loudeye (£
735,000), Vernalis (£74,000), Allergy Therapeutics (£71,000) and Surfcontrol (£
54,000), offset by unrealized losses in Imagesound (£168,000) and XKO Group (£
63,000).

Following BVCA guidelines, provisions were made against seven unquoted
investments; Anadigm Limited (£224,000), The Casella Group Limited (£72,000),
Communication & Control Electronics Limited (£170,000), HTC Healthcare Group
plc (£543,000),Linguaphone Group plc (£475,000), Nomad Software Limited (£
181,000) and Opsys Management Limited (£294,000). Whilst there is the potential
for some of these valuations to recover, some of the downward revaluations are
considered permanent and, as such, these elements have been treated as
realised. The earnout entitlement held in connection with the sale of CDC
Solutions Limited in 2003 has been valued at £nil; a reduction of £841,000. It
is still possible that some value will be derived from this entitlement based
on 2005 and 2006 performance, but, based on 2004 performance, it has been
appropriate to reduce its carrying value.

SECTOR ANALYSIS OF THE VENTURE CAPITAL PORTFOLIO

The portfolio of Quester VCT 2 is balanced by sector and well spread. A summary
of the sectors

covered by the portfolio is as follows:

Industry sector                   Percentage of Valuation at 28       Number of
                                   portfolio at   February 2005     investments
                                      valuation                                
                                                                               
                                              %           £'000                
                                                                               
Internet                                   30.0           3,409               3
                                                                               
Software                                   22.2           2,526               9
                                                                               
Industrial products & services             20.9           2,371               3
                                                                               
Media                                       7.3             832               1
                                                                               
Healthcare & life sciences                  7.1             810               2
                                                                               
Consumer services                           4.0             457               1
                                                                               
Publishing                                  3.9             448               1
                                                                               
Semiconductors                              2.2             252               1
                                                                               
Consumer goods                              1.5             170               1
                                                                               
Electronics                                 0.9              98               1
                                                                               
                                          100.0          11,373              23

RESERVES FOR FOLLOW-ON INVESTMENT

The overall reserves requirement to support the existing venture capital
portfolio has reduced during the year. This has freed up liquid resources for
investment in new venture capital opportunities: the new investment in Allergy
Therapeutics reflects this change of emphasis for Quester VCT 2 and the
opportunity to make new investments. A further small investment has been made
since the year end and there are others in the pipeline.

LISTED EQUITY PORTFOLIO

At the period end, the value of the listed equity portfolio, comprising 29
investments, was £6.2 million on a cost of £5.6 million. During the year to 28
February 2005, it generated a strong total return of 25.7%, reflecting realised
and unrealised gains of £1.0 million and a dividend yield of £214,000.

OUTLOOK

The proposed merger process involving Quester VCT 2, which is designed to
produce operating efficiency and reduced costs, offers a fundamental change to
the shape and spread of the current venture capital portfolio. If market
conditions for exits remain favourable, there is potential for the increased
level of exit activity, as achieved last year in Quester VCT 2's portfolio, to
be maintained by the merged company across a larger portfolio. Our objective is
to continue to focus on this exit process in order to deliver cash for dividend
payments and continued re-investment in new venture capital opportunities.

Quester Capital Management Limited

Manager

12 May 2005

FUND SUMMARY AS AT 28 FEBRUARY 2005

Quoted venture        Industry sector     Original Valuation Equity %  % of fund
capital                                                                         
                                                                                
Investments                                   Cost             held     by value
                                                                                
                                             £'000 £'000                        
                                                                                
Allergy Therapeutics  Healthcare & life   193      264         0.4%         1.4%
plc                   sciences                                                  
                                                                                
Imagesound plc        Media               1,000    832         6.1%         4.3%
                                                                                
Loudeye Corp.         Internet            1,691    2,426       2.0%        12.4%
                                                                                
Sirius Financial      Software            96       47          0.3%         0.2%
Solutions plc                                                                   
                                                                                
Sopheon plc           Software            134      32          0.1%         0.2%
                                                                                
SurfControl plc       Software            187      516         0.2%         2.6%
                                                                                
The Innovation Group  Software            331      17           -           0.1%
plc                                                                             
                                                                                
Vernalis Group plc    Healthcare & life   965      546         0.4%         2.8%
                      sciences                                                  
                                                                                
XKO Group plc         Software            505      341         1.5%         1.7%
                                                                                
Total quoted venture capital investments  5,102    5,021                   25.7%
                                                                                
Unquoted venture                                                                
capital investments                                                             
                                                                                
Anadigm Limited       Semiconductors      1,587    252          5.1%        1.3%
                                                                                
Artisan Software      Software            1,145    369          7.3%        1.9%
Tools Limited                                                                   
                                                                                
Casella Group         Industrial products 1,206    645          6.7%        3.3%
Limited, The          & services                                                
                                                                                
Community Internet    Internet            1,015    254          7.0%        1.3%
Europe Limited                                                                  
                                                                                
Elateral Holdings     Software            1,942    60           7.2%        0.3%
Limited                                                                         
                                                                                
Footfall Limited      Industrial products 1,450    1,450        8.5%        7.4%
                      & services                                                
                                                                                
HTC Healthcare Group  Consumer services   1,000    457         18.4%        2.3%
plc                                                                             
                                                                                
International         Industrial products 600      276          9.5%        1.4%
Diagnostics Group plc & services                                                
                                                                                
Linguaphone Group plc Consumer goods      1,205    170          7.1%        0.9%
                                                                                
Methuen Publishing    Publishing          448      448         17.5%        2.3%
Limited                                                                         
                                                                                
Nomad Software        Software            1,374    444          8.1%        2.3%
Limited                                                                         
                                                                                
Opsys Management      Electronics         1,392    98            -          0.5%
Limited*                                                                        
                                                                                
Sibelius Software     Software            700      700          6.0%        3.7%
Limited                                                                         
                                                                                
Sift Group Limited    Internet            875      729          5.0%        3.7%
                                                                                
Total unquoted venture capital            15,939   6,352                   32.6%
investments                                                                     
                                                                                
Total venture capital                     21,041   11,373                  58.3%
investments                                                                     
                                                                                
Listed equity investments                 5,578    6,233                   32.0%
                                                                                
Total investments                         26,619   17,606                  90.3%
                                                                                
Cash and other net current assets         1,896    1,896                    9.7%
                                                                                
Net assets                                28,515   19,502                 100.0%

* Formerly Opsys Limited

PROFIT AND LOSS ACCOUNT

FOR THE YEAR ENDED 28 FEBRUARY 2005

                                                   Notes         2005     2004
                                                                              
                                                                £'000    £'000
                                                                              
Loss on realisation of investments                   1          (918)    (457)
                                                                              
Income                                               2            316      370
                                                                              
Investment management fee                            3          (531)    (580)
                                                                              
Other expenses                                       4          (332)    (363)
                                                                              
Loss on ordinary activities before taxation                   (1,465)  (1,030)
                                                                              
Tax on ordinary activities                                          -        -
                                                                              
Loss on ordinary activities after taxation                    (1,465)  (1,030)
                                                                              
Dividends paid and proposed                                         -        -
                                                                              
Transfer from reserves                                        (1,465)  (1,030)
                                                                              
Basic and diluted loss per share                     6         (3.3)p   (2.3)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.

In accordance with Financial Reporting Standard (FRS) 14, the outstanding
option currently gives rise to no dilution to the loss per share.

The accompanying notes are an integral part of this statement.

STATEMENT OF TOTAL RECOGNISED GAINS & LOSSES

FOR THE YEAR ENDED 28 FEBRUARY 2005

                                                   Notes         2005     2004
                                                                              
                                                                £'000    £'000
                                                                              
Loss on ordinary activities after taxation                    (1,465)  (1,030)
                                                                              
Net unrealised gain/(loss) on revaluation of                      707    (291)
investments                                                                   
                                                                              
Unrealised loss on write down of debtors                        (750)        -
                                                                              
Total losses recognised during the year                       (1,508)  (1,321)
                                                                              
Total recognised losses per share                    6         (3.4)p   (3.0)p

The accompanying notes are an integral part of this statement.

NOTE OF HISTORICAL COST PROFITS & LOSSES

FOR THE YEAR ENDED 28 FEBRUARY 2005

                                                                 2005      2004
                                                                               
                                                                £'000     £'000
                                                                               
Loss on ordinary activities after taxation                    (1,465)   (1,030)
                                                                               
Realisation of prior years' net unrealised losses             (3,790)   (2,036)
on investments                                                                 
                                                                               
Historical cost loss on ordinary activities before            (5,255)   (3,066)
taxation                                                                       
                                                                               
Historical cost loss for the year retained after              (5,255)   (3,066)
taxation and dividends                                                         

The accompanying notes are an integral part of this statement.

BALANCE SHEET

AS AT 28 FEBRUARY 2005

                                                            2005      2004     
                                                                               
                                                   Note     £'000     £'000    
                                                                               
Fixed assets                                                                   
                                                                               
Investments                                                 17,606    17,219   
                                                                               
Current assets                                                                 
                                                                               
Debtors                                                     453       1,399    
                                                                               
Cash at bank                                                1,839     3,146    
                                                                               
                                                            2,292     4,545    
                                                                               
Creditors (amounts falling due within one year)             (396)     (179)    
                                                                               
Net current assets                                          1,896     4,366    
                                                                               
Net assets                                                  19,502    21,585   
                                                                               
Capital and reserves                                                           
                                                                               
Called-up equity share capital                              2,132     2,198    
                                                                               
Share premium account                                       704       704      
                                                                               
Special reserve                                             16,587    22,277   
                                                                               
Revaluation reserve                                         (416)     (4,163)  
                                                                               
Profit and loss account                                     495       569      
                                                                               
Total equity shareholders' funds                            19,502    21,585   
                                                                               
Net asset value per share                            6      45.7p     49.1p    

The financial statements were approved by the directors on 12 May 2005 and were
signed on their behalf by:

JD Birney

Chairman

The accompanying notes are an integral part of this statement.

CASHFLOW STATEMENT

FOR THE YEAR ENDED 28 FEBRUARY 2005

                                                 2005         2004        
                                                                          
                                                 £'000        £'000       
                                                                          
Cash outflow from operating activities           (225)        (1,700)     
                                                                          
Financial investment                                                      
                                                                          
Purchase of venture capital investments          (703)        (1,289)     
                                                                          
Purchase of listed equities and fixed interest   (1,098)      (1,784)     
investments                                                               
                                                                          
Sale/redemption of venture capital investments   194          2,897       
                                                                          
Recoveries made in respect of investments        133          -           
previously written-off                                                    
                                                                          
Sale/redemption of listed equity and fixed       967          3,480       
interest investments                                                      
                                                                          
Total financial investment                       (507)        3,304       
                                                                          
Financing                                                                 
                                                                          
Buy-back of shares                               (575)        (285)       
                                                                          
(Decrease)/increase in cash for the year         (1,307)      1,319       
                                                                          
Reconciliation of net cash flow to movement in                            
net funds                                                                 
                                                                          
(Decrease)/increase in cash for the year         (1,307)      1,319       
                                                                          
Net funds at the start of the year               3,146        1,827       
                                                                          
Net funds at the end of the year                 1,839        3,146       

The accompanying notes are an integral part of this statement.

NOTES TO THE FINANCIAL STATEMENTS

1 Loss on realisation of investments

                                                          2005             2004
                                                                               
                                                         £'000            £'000
                                                                               
Realised net gain on disposal                               48              424
                                                                               
Write-off of investments                               (1,008)          (1,062)
                                                                               
Write back of investments previously                         -              181
written-off                                                                    
                                                                               
Write-down of debtors                                     (91)                -
                                                                               
Recoveries made in respect of                              133                -
investments previously written-off                                             
                                                                               
                                                         (918)            (457)

2 Income                                                  2005       2004      
                                                                               
                                                          £'000      £'000     
                                                                               
Dividend income                                                                
                                                                               
Unquoted companies                                        3          5         
                                                                               
Listed equity shares                                      214        186       
                                                                               
Interest receivable                                                            
                                                                               
Listed fixed interest securities                          -          49        
                                                                               
Loans to unquoted companies                               54         49        
                                                                               
Bank deposits                                             45         38        
                                                                               
Sundry income                                             -          43        
                                                                               
                                                          316        370       

3 Investment management fee

Quester Capital Management Limited ('QCML') provides investment management
services to the Company under an agreement dated 9 February 1998.

QCML is a wholly owned subsidiary of Querist Limited, a company in which APG
Holmes and JA Spooner are beneficial shareholders. APG Holmes and JA Spooner
are executive directors of QCML.

The management fee for the year amounted to £531,000 (2004: £580,000) and the
related irrecoverable VAT amounted to £88,000 (2004: £97,000). The basis for
determining the management fee, which is payable quarterly in advance, was
modified during the financial year. Under the new basis the quarterly fee is
levied at the rate of one quarter of 2.5% on the lower of the audited net asset
value of the Company at the end of the preceding financial period or the
closing net asset value of the Company at the end of each respective quarter.
Previously, the fee was determined annually and was equal to 2.5% of the
audited net asset value of the Company at the end of the preceding financial
period. The agreement is terminable by either party by written notice of not
less than twelve months.

QCML also provides administrative and secretarial services to the Company for
which it is entitled to a fee of £46,000 (2004: £45,000) per annum (linked to
the movement in the RPI). This fee is included in other expenses (note 4).

4 Other expenses

                                                             2005         2004
                                                                              
                                                            £'000        £'000
                                                                              
Administration and secretarial services                        46           45
                                                                              
Directors' remuneration (see note 5)                           51           51
                                                                              
Auditor's remuneration                                                        
                                                                              
Audit services                                                 18           20
                                                                              
Non-audit services                                              9           10
                                                                              
Legal and professional                                         26           30
                                                                              
UKLA, LSE and registrar's fees                                 14           15
                                                                              
Irrecoverable VAT                                             118          129
                                                                              
Other                                                          50           63
                                                                              
                                                              332          363

5 Directors' remuneration

                                                             2005          2004
                                                                               
                                                            £'000         £'000
                                                                               
Fees paid to directors                                         12            12
                                                                               
Amounts paid to third parties, excluding VAT, in               39            39
consideration of the services of directors                                     
                                                                               
                                                               51            51

6 Loss per share

The 3.3p loss per share (2004: 2.3p) is based on the loss on ordinary
activities after taxation of £1,465,000 (2004:£1,030,000) and on shares of
43,499,729 (2003: 44,394,772), being the weighted average number of shares in
issue during the year.

The total recognised losses per share of 3.4p (2004: 3.0p) is based on the
total net losses recognised for the year of £1,508,000 (2004: £1,321,000) and
on 43,499,729 (2004: 44,394,772) ordinary shares, being the weighted average
number of shares in issue during the year.

7 Net asset value per share

The calculation of net asset value per share as at 28 February 2005 of 45.7p
(2004: 49.1p) is based on net assets of £19,502,000 (2004: £21,585,000) divided
by the 42,646,264 (2004: 43,959,973) ordinary shares in issue at that date.
There is no dilution effect in respect of either the year ended 28 February
2005 or the year ended 28 February 2004.

The financial information set out above does not constitute the Company's
statutory accounts for the year ended 28 February 2005. The statutory accounts
for the year ended 28 February 2005 will be finalised on the basis of the
financial information presented by the directors in the preliminary
announcement.

A copy of the above document will be submitted to the UK Listing Authority, and
will shortly be available for inspection at the UK Listing Authority's Document
Viewing Facility, which is situated at:

Financial Services Authority

25 The North Colonnade

Canary Wharf

London

E14 5HS

Copies of the full financial statements for the year ended 28 February 2005 are
expected to be posted to shareholders on 19 May 2005 and will be available to
the public at the registered office of the Company at 29 Queen Anne's Gate,
London, SW1H 9BU.


                                                                                                                                     

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