NORTHERN 2 VCT PLC — Annual Report 2012

Mar 31, 2012

Northern2VCTPLC

Annualreport and financialstatements March 2012

Northern 2VCT PLC is aVenture Capital Trust(VCT) managed by NVM PrivateEquity Limited.

Itinvests mainly in unquoted venture capital holdings and aims to provide high long-term tax-free returns to shareholders through a combination of dividend yield and capital growth.

• Financialsummary
• Chairman'sstatement
• Directors and advisers
• Shareholderinformation
• Businessreview
• Investment portfolio
• Fifteen largest private equity investments
• Directors'report
• Directors'remuneration report
• Corporate governance
• Directors'responsibilitiesstatement
• Independent auditor'sreport
• Income statement
• Reconciliation of movementsin shareholders' funds
• Balance sheet
• Cash flow statement
• Notesto the financialstatements

Financial summary

	Year ended 31 March 2012	14months ended 31 March 2011
Net assets	£55.1m	£45.7m
Net asset value pershare	80.3p	79.5p
Return pershare
Revenue	1.9p	2.1p
Capital	5.5p	4.8p
Total	7.4p	6.9p
Dividend pershare declared in respect
ofthe year(2011: 14 month period)	5.5p	6.5p
Cumulative return to shareholderssince launch
Net asset value pershare	80.3p	79.5p
Dividends paid pershare*	58.9p	52.4p
Net asset value plus dividends paid pershare	139.2p	131.9p
Share price at end of year	66.25p	65.00p
Discountto net asset value	17.5%	18.2%

*Excluding proposed final dividend

Key dates

Results announced 18 May 2012

Shares quoted ex dividend 27 June 2012

Annual general meeting 11 July 2012 (12.00 noon, Life Bioscience Centre, Times Square,Newcastle upon TyneNE1 4EP)

Final dividend paid (to shareholders on register on 29 June 2012) 20 July 2012

Chairman's statement

The company's net assets now exceed £50 million and we have a strong reserve of cash for future investment.

I ampleased to reportto shareholders on a year during which your company has achieved growth inNAV pershare whilstmaintaining its long-termdividend record, completed a fullysubscribed tender offerfor 10% ofthe issued share capital and raised a further £15million through a successful public share offer.

Results and dividend

TheNAV pershare at 31 March 2012 was 80.3p, compared with 79.5p as at 31 March 2011. The totalreturn pershare forthe year asshown in the income statement was 7.4p, equivalentto 9.3% ofthe openingNAV.Overthe same period the FTSE All-Share index (totalreturn)increased by 1.4%.

Investmentincome wasslightly down by comparison with the preceding period. The total expense ratio (annualrunning expenses, excluding performance-relatedmanagement fees, expressed as a percentage of average net assets)fellto 2.50% (preceding period 2.70%),reflecting the increased asset base ofthe company.

An interimdividend of 2.0p pershare was paid in January 2012. The directors propose a final dividend of 3.5p pershare,making a total of 5.5p forthe year which isin line with ourstated objective. Thisisthe eighth successive yearin which the company has paid a total dividend of atleast 5.5p, despite the very low level ofmarketinterestrates overthe pastthree years. The total dividend paid in respect ofthe 14month period ended 31 March 2011 was 6.5p, as an extra 1.0p was paid to reflectthe extended accounting period.

Subjectto approval by shareholders atthe annual generalmeeting,the final dividend will be paid on 20 July 2012 to shareholders on the register on 29 June 2012.

Shareholder issues and corporate governance

In September 2011 we announced proposals for a tender offerto shareholders and a public offer of new ordinary sharesin the company. I ampleased to reportthat both were very successfully completed during the second half ofthe financial year. As a result ofthe tender offerthe company repurchased 5,746,834 ordinary shares,representing 10% ofthe company'sissued share capital, at a 3% discountto the latest publishedNAV – a total paymentto shareholders of £4.3million. The public offer of new ordinary shares, launched inNovember 2011,raised a total of £15.0million (before expenses) andwasfully subscribedby 14February – an excellent outcome in a period whenmany other VCT share issuesfell well short oftheirtargets. A substantial proportion ofthe fundsraised came fromexistingNorthern 2 VCT shareholders and I would like to take this opportunity to thank them, and all ourinvestors, fortheirsupport. The company's net assets now exceed £50million and we have a strong reserve of cash forfuture investment.

Notwithstanding the tender offerthe company has continued to follow a policy ofrepurchasing itssharesin themarket at a discount of 15% to NAV, inordertoprovide liquidity forshareholders wishing to realise theirinvestmentin the company.During the year we repurchased a total of 475,000 sharesin themarket at a cost of £315,000, an average price of 66p pershare.

NVM Private Equity'srecent VCT investor seminar was well attended and wellreceived, and your directors hope tomeet asmany shareholders as possible atthe nextseminar which willtake place in January 2013.

Your company complies with current best practice in corporate governance, asset outin the AIC Code.

Investment portfolio

The venture capital portfolio has produced encouraging results against a difficult background in theUK economy and financial markets. Three new holdingstotalling £3.0million were acquired and a satisfactory exit was achieved fromthe investmentin PromanexGroupHoldings, which wassold for cash proceeds of £2.1million compared with an original cost of £1.7million. The new financial year has begun with a good level of activity in terms of potential new investments and exits and we expectto see further progress on both frontsin the comingmonths.

VCT qualifying status

The company has continued tomeetthe qualifying conditionslaid down byHM Revenue&Customsformaintaining its approval as a VCT. The board retains PricewaterhouseCoopers LLP asindependent advisers on VCT taxationmatters.

VCT legislation

TheGovernment announced atthe time ofthe 2011 Budget over a year ago thatthe VCT rules would be changed with effectfromApril 2012, so asto relax the limits on the size of qualifying companies and increase the amount offunding which companies can raise fromVCTs. In July 2011HM Treasury published a consultation paper confirming itsintention to implement these reforms, with a new annual limit of £10million on the amount any qualifying company could raise fromVCTs, and also to refocus VCT investment on "genuine risk capital investments".

Subsequently a degree of uncertainty has been created by the draftlegislation contained in the 2012 Finance Bill, published on 29 March, which included some significant changesto what had previously been proposed – in particular a reduction to £5million in the annual investmentlimit per company. The VCT industry isstill awaiting clarification fromHM Treasury and the European Commission in relation to severalspecific issues. Your board believesthat generalist VCTssuch asNorthern 2 VCT have been a highly effective catalystto economic growth, corporate development,technological innovation, job creation and the generation oftax and otherrevenuesforthe Treasury. This view issupported by research recently published by the AIC,to which ourinvestment managers contributed, and itisto be hoped thatthe future legislative framework willreflect the importantrole which VCTs can play.

David GravellsChairman

Outlook

Our venture capital investments have continued to show resilience in a largely unfavourable environment. There is no sign at present of an easing in the economic conditions and this emphasisesthe need tomaintain high standards in the selection andmonitoring ofinvestments. We have a strong balance sheet and amaturing portfolioandthis givesus a goodbase fromwhich tomake further progressin the coming year.

David Gravells

Chairman 18 May 2012

Directors andadvisers

David Gravells MSc JP (Chairman)

aged 62, is an experienced entrepreneur with a wide experience of private equity-financed businesses.He was appointed to the board in 2007 and became chairman in 2008.

Alastair Conn FCA

aged 56, isfinancial director ofNVM Private Equity Limited.He qualified as a chartered accountant with Price Waterhouse and was a co-founder ofNVM in 1988.He was appointed to the board in 1999.

Michael Denny

aged 69, was chairman ofNVM Private Equity Limited until hisretirementin 2008.He is a nonexecutive director ofNorthern Venture Trust PLC and is a past chairman ofthe British Private Equity and Venture Capital Association.He was appointed to the board in 1999.

Christopher Fletcher CA

aged 60, is a non-executive director ofthe Association ofInvestment Companies and wasmanaging director of BaillieGifford'slife and retail operations until hisretirementin April 2011.He previously spentten years as a corporate finance partnerin the Edinburgh office of KPMG, where he advised on a wide variety of businesstransactions.He was appointed to the board in 1999.

Frank Neale MBA

aged 61, is a partnerin IRRfc, a private equity advisory business.He is a past vice-chairman ofthe British Private Equity and Venture Capital Association and is a non-executive director ofNorthern Investors Company PLC.He was appointed to the board in 1999.

Secretary and registered office

Christopher Mellor FCA MCSI NorthumberlandHouse Princess Square Newcastle upon TyneNE1 8ER Telephone: 0191 244 6000 Fax: 0191 244 6001 E-mail: n2vct@nvm.co.uk

Registered number 3695071

Investment manager

NVM Private Equity Limited NorthumberlandHouse Princess Square Newcastle upon TyneNE1 8ER

Fixed-interest investment advisers

Sarasin&Partners LLP JuxonHouse 100 St Paul's Churchyard London EC4M 8BU

Independent auditors

KPMGAudit Plc Saltire Court 20 Castle Terrace Edinburgh EH1 2EG

Taxation advisers

PricewaterhouseCoopers LLP 1 Embankment Place London WC2N6RH

Solicitors

SJ Berwin LLP 10Queen Street Place London EC4R 1BE

Stockbroker

Singer Capital Markets Limited 1Hanover Street London W1S 1YZ

Bankers

Barclays Bank PLC 71Grey Street Newcastle upon TyneNE1 6EF

Registrars

Equiniti Limited AspectHouse Spencer Road Lancing BN99 6DA Shareholder helpline: 0800 028 2349

Shareholder information

The trustinvests mainly in unquoted venture capital holdings.

The company

Northern 2 VCT PLC is a Venture Capital Trust (VCT)launched in January 1999. The company investsmainly in unquoted venture capital holdings, with itsremaining assetsinvested in a portfolio oflisted fixed-interestinvestments and bank deposits.

The company is amember ofthe Association ofInvestment Companies(AIC).

Northern 2 VCT PLC ismanaged byNVM Private Equity Limited (NVM), an independent specialistfirmof venture capitalmanagers based inNewcastle upon Tyne and Reading. NVM also acts asmanager ofthree otherlisted investment companies,Northern Investors Company PLC,Northern Venture Trust PLC andNorthern 3 VCT PLC, and has a total of over £200million undermanagement.

Venture Capital Trusts

Venture Capital Trusts(VCTs) were introduced by the Chancellor ofthe Exchequerin the November 1994 Budget,the relevantlegislation being contained in the Finance Act 1995. VCTs are intended to provide ameans whereby private individuals can investin small unquoted trading companiesin theUK, with an incentive in the formof a range oftax benefits. With effect from6 April 2006,the benefitsto eligible investorsinclude:

• income tax relief at up to 30% on new subscriptions of up to £200,000 pertax year, provided the shares are held for atleastfive years;
• exemption fromincome tax on dividends paid by VCTs(such dividendsmay include the VCT's capital gains as well asitsincome); and
• exemption fromcapital gainstax on disposals ofsharesin VCTs.

Subscribersforsharesin VCTs between 6 April 2004 and 5 April 2006 were entitled to income tax relief at 40% ratherthan 30% and the shares had to be held for atleast three yearsratherthan five years. Priorto 6 April 2004,subscribersforsharesin VCTs were entitled to income tax relief at 20% and could also obtain capital gains deferralrelief. Capital gains deferred by pre-6 April 2004 subscriptions are not affected by the subsequent changes in VCT tax reliefs.

Financial calendar

The company'sfinancial calendar forthe year ending 31 March 2013 is asfollows:

November 2012

Half-yearly financialreportforthe sixmonths ending 30 September 2012 published

January 2013

Interimdividend paid

May 2013

Final dividend and resultsfor year to 31 March 2013 announced

June 2013

Annualreport and financialstatements published

July 2013

Annual generalmeeting;final dividend paid

Share price

The company'sshare price is carried daily in the Financial Times,theDaily Telegraph, theNewcastle Journal and TheHerald. The company's FTSE Actuaries classification is "Investment Companies – VCTs".

A range ofshareholderinformation is provided on the internet at www.shareview.co.uk by the company's registrars, Equiniti Limited, including details ofshareholdings, indicative share prices and information on recent dividends(see page 4 for contact detailsfor Equiniti Limited).

Share price information can also be obtained via theNVM website at www.nvm.co.uk.

Dividend investment scheme

The company operates a dividend investment scheme, giving shareholdersthe option of reinvesting their dividendsin new shares in the company with the benefit ofthe tax reliefs currently available to VCT subscribers. Information aboutthe scheme can be obtained fromthe Company Secretary (see page 4 for contact details).

Business review

The company's objective is to provide high long-term tax-free returns to investors through a combination of dividend yield and capital growth.

Thisreview has been prepared by the directors in accordance with the requirements of Section 417 ofthe Companies Act 2006, and forms part ofthe directors'reportto shareholders. The company'sindependent auditors are required by law to report on whetherthe information given in the directors'report(including the businessreview)is consistent with the financial statements. The auditors' opinion isincluded in theirreport on page 26.

Objectives and investment policy

The company's objective isto provide high long-termtax-free returnsto investors through a combination of dividend yield and capital growth, by investing in a portfoliomainly comprising holdingsinUK unquoted companies.

The company is aVenture Capital Trust approved byHMRevenue&Customs. In ordertomaintain approved status,the companymust comply on a continuing basiswith the provisions of Section 274 ofthe Income TaxAct 2007; in particular, the company isrequired at alltimesto hold at least 70%ofitsinvestments(as defined in the legislation)inVCT-qualifying holdings, ofwhich atleast 30%must comprise eligible ordinary shares. Forthis purpose a "VCT-qualifying holding" currently consists of up to £1million invested in any one tax yearin newshares or securities of aUK unquoted company (which may be quoted onAIM)which is carrying on a qualifying trade, andwhose gross assets and number of employees atthe time ofinvestment do not exceed prescribed limits. The definition of "qualifying trade" excludes certain activities such as property investment and development, financialservices and assetleasing.

The 2012 Finance Bill includes proposals to (i)increase the limits on gross assets and employee numbers,(ii)remove the £1million limit on the amountwhich aVCT can investin a qualifying holding in any one tax year and (iii) place an overall limit of £5million on the amountwhich any company can raise from VCTs and other StateAided fundswithin a 12month period. The Finance Bill has not yet been enacted and the proposals are also subjectto European Commission approval.

The company'sinvestment policy has been designed to enable the company to comply with the VCT qualifying conditionsset out above. The directorsintend thatthe long-term disposition ofthe company's assets will be approximately 80% in a portfolio of VCTqualifying unquoted and AIM investments and 20% in otherinvestmentsselected with a view to producing an enhanced return while avoiding undue capital volatility,to provide a reserve ofliquidity which willmaximise the company's flexibility asto the timing ofinvestment acquisitions and disposals, dividend payments and share buy-backs. Within the VCT-qualifying portfolio investments will be structured using variouslisted and unlisted investment instruments, including ordinary and preference shares, loan stocks and convertible securities, to achieve an appropriate balance ofincome and capital growth, having regard to the VCT legislation. This portfolio will be diversified by investing in a broad range ofindustry sectors and by holding investmentsin companies at differentstages ofmaturity in the corporate development cycle. The normal investment holding period will be in the range fromthree to seven years.Up to approximately 10% by value ofthe company'sinvestmentsmay be in early stage companies with high growth potential.

The targetsize range for VCT-qualifying investmentsisfromapproximately £250,000 to £1million, with an average investment of over £500,000. As a result, and based on the company's present gross assets of approximately £55million, no single investment would normally representin excess of 2% ofthe company'stotal assets atthe time of acquisition.Howevershareholdersshould be aware thatthe company's VCT-qualifying investments are held with a view to long-term capital growth as well asincome and will often have limitedmarketability; as a resultitis possible thatindividual holdingsmay grow in value to the point where they represent a significantly higher proportion oftotal assets priorto a realisation opportunity being available. Investments will normally bemade using the company's equity shareholders'funds and itis notintended thatthe company will take on any long-termborrowings.

The company is entitled to participate pro rata to net assetsin all investment opportunities developed byNVM Private Equity Limited (NVM) and regularly invests alongside other fundsmanaged byNVM.Under a co-investment scheme introduced in 2006,NVM executives are required to invest personally alongside the fundsin each new investee company on a predetermined basis.

Table 1: Venture capital portfolio cash flow

Year ended	New investment £000	Disposal proceeds £000	Net inflow/ (outflow) £000
31 January 2008	5,186	9,174	3,988
31 January 2009	6,932	7,205	273
31 January 2010	2,688	11,440	8,752
31 March 2011 (14 month period)	10,993	2,545	(8,448)
31 March 2012	3,691	4,716	1,025
Total	29,490	35,080	5,590

Table 2: Movements in net assets and net asset value per share

		Pence per ordinary
	£000	share
Net asset value at 31 March 2011	45,713	79.5
Netrevenue (investmentincome lessrevenue expenses and tax)	1,115	1.9
Capitalsurplus arising on investments: Realised net gains on disposals Movementsin fair value ofinvestments	786 3,124	1.3 5.4
Management expenses allocated to capital account(net oftax relief)	(659)	(1.2)
Totalreturn forthe year asshown in income statement	4,366	7.4
Issue of new shares(net of expenses)	13,418	(0.1)
Sharesre-purchased for cancellation	(4,639)	–
Net movement forthe year before dividends	13,145	7.3
Net asset value at 31 March 2012 before dividendsrecognised	58,858	86.8
Dividendsrecognised in the financialstatementsforthe year	(3,730)	(6.5)
Net asset value at 31 March 2012	55,128	80.3

Investment management

NVM has acted asthe company'sinvestment managersince inception.NVM has an experienced teamof venture capital executives based in its officesinNewcastle upon Tyne and Reading and currently has over £200million undermanagementin three VCTs and one investmenttrust.

The board'smanagement engagement committee reviewsthe terms ofNVM's appointment asinvestmentmanager on a regular basis. The principalterms ofthe company'smanagement agreement with NVM are set outinNote 3 to the financial statements.

Overview of the year

During the year underreview Northern 2 VCT achieved anNAV totalreturn to ordinary shareholders, before dividends, of 7.4p per share, equivalentto 9.3% ofthe opening net asset value pershare of 79.5p. Themovement in total net assets and net asset value pershare issummarised in Table 2.

The net cash inflow fromthe venture capital portfolio was £1.0million, comprising new investments of £3.7million lesssale proceeds of £4.7million. Portfolio cash flow overthe pastfive yearsissummarised in Table 1.

Aftertaking account of other cash flows, including netshare issue proceeds of £13.4million,the company'stotal cash balances increased overthe year by £11.1million to £15.1million. In addition the company holds listed fixed-interestinvestments valued at £5.6million.

Business reviewcontinued

Age ofinvestment Up to 1 year 5.5%

• 1-3 years 39.5% 3-5 years 21.6%
• 5-7 years 10.2% Over 7 years 23.2%

Industry sector

IT services	35.7%
Construction	3.4%
Consumer	11.4%
Industrial	12.5%
Businessservices	30.7%
Healthcare/biotechnology	6.3%

Dividends

The directors have proposed dividends of 5.5p pershare in respect ofthe year, comprising 1.8p revenue dividend and a 3.7p capital distribution.

Investment portfolio

During the year ended 31 March 2012,three new holdings were added to the venture capital portfolio at a cost of £3.0million, and additional investmentstotalling £0.7million weremade in existing portfolio companies. The portfolio at 31 March 2012 comprised 42 holdings with an aggregate value of £35.5million.

A summary ofthe venture capital holdings at 31 March 2012 is given on page 11, with information on the fifteen largestinvestments on pages 12 to 15.

New investments

The new investments completed during the year were:

• TinglobalHoldings(£988,000) supplier ofrefurbishedmid-range computer equipment, Cirencester
• Lineup Systems(£974,000) –multi-channel advertising andmedia software business, London

• Volumatic (£1,000,000) –manufacturer ofintelligent cash handling equipment, Birmingham

The investmentin Volumatic was an addition to a previousinvestment of £995,000 in Evolve Investments which acquired Volumatic in the year.

Investment realisations

Details ofinvestmentsales during the year are given inNote 9 on page 35. Themostsignificant realisations(original cost orsales proceedsin excess of £0.25m)in the year are summarised in Table 3.

PromanexGroupHoldings wassold to Costain Group for cash in August 2011 in a deal which not only generated a capitalsurplus overthe original cost, but also facilitated the payment of approximately £0.5million ofrolled up investmentincome not previously recognised inNorthern 2 VCT's accounts. A further £0.8million of deferred proceedsfromthe 2009 sale ofDxS wasrecognised during the year. BritspaceGroup, which had been written down to nil value in the 31March 2011 accounts, wassold for a nominalsumfollowing a period of underperformance.

Portfolio composition

The pie charts above show the composition of the investment portfolio at 31 March 2012 by value according to age, industry sector,financing stage and whether quoted or unquoted. The portfolio is well diversified and the company has continued to invest primarily inmanufacturing and service businesses whichmeetthe managers' key criteria of good value, growth potential,strongmanagement and ability to generate cash.

Our portfolio companies have generallymade good progress during the year underreview, despite the continuation of challenging conditionsin theUK economy and financial markets. The trend in the underlying trading results ofmany companies has been positive and this has been reflected in the directors' valuation ofinvestments at 31 March 2012. CloserStillHoldings and Kerridge Commercial Systems,the two largestinvestments by value, have seen strong value growth in the year as both businesses continue to performwell.

As at 31 March 2012 the number ofinvestments falling into each valuation category was as shown in Table 4.

.

Net asset value (p)

*14month period

Financing stage

Early stage 9.9% Expansion 47.8%

MBO/MBI 42.3%

Quotation

Unquoted	91.1%
AIM	8.2%
London Stock	0.7%
Exchange

Table 3: Significant investment realisations

Company	Date of original investment	Original cost £000	Sales proceeds £000	Realised surplus/ (deficit) £000
PromanexGroupHoldings – trade sale	2007	1,695	2,136	441
DxS – deferred sale proceeds	2001	–	831	831
IGDoors – loan stock repayment	2003	257	296	39
Envirotec – loan stock repayment	2005	600	720	120
Individual Restaurant Company –marketsale (AIM quoted)	2000	250	4	(246)
TikitGroup –marketsale (AIM quoted)	1999	266	342	76
ColliersInternationalUK–inadministration (AIMquoted)	2001	439	–	(439)
BritspaceGroup – trade sale	2002	1,596	–	(1,596)

Table 4: Investment valuation by category

Category	Number of investments	Valuation £000	% of portfolio by value
Unquoted investments at directors' valuation
Earningsmultiple	18	22,723	64.0
Original cost	6	5,751	16.2
Original costless provision	4	500	1.4
Net assets	5	3,380	9.5
Quoted investments at bid price
Listed on London Stock Exchange	1	260	0.7
Quoted on AIM	8	2,902	8.2
Total	42	35,516	100.0

Key performance indicators

The directorsregard the following asthe key indicators pertaining to the company's performance:

Net asset value and totalreturn to shareholders:the charts atthe bottomof the opposite page show themovementin net asset value and totalreturn (net asset value plus cumulative dividends) pershare overthe pastfive financial years.

Dividend distributions:the charts atthe bottomofthis and the opposite page show the dividends(including proposed final dividends) declared in respect of each ofthe pastfive financial years and on a cumulative basissince inception.

Total expense ratio:the chart below shows total annualrunning expenses(including investmentmanagementfees charged to capital reserve but excluding performance-related fees) as a percentage ofthe average net assets attributable to shareholdersfor each ofthe pastfive financial years.

Maintenance of VCT qualifying status:the directors believe thatthe company has at all timessince inception complied with the VCT qualifying conditionslaid down byHM Revenue &Customs.

per share (p)

Total expense ratio (%) *Annualised

Business reviewcontinued

Risk management

The board carries out a regularreview of the risk environmentin which the company operates. The principalrisks and uncertainties identified by the board are asfollows:

Investmentrisk:themajority ofthe company's investments are in small andmedium-sized unquoted and AIM quoted companies which are VCT qualifying holdings, and which by their nature entail a higherlevel ofrisk and lower liquidity than investmentsin large quoted companies. The directors aimto limitthe risk attaching to the portfolio as a whole by carefulselection and timely realisation of investments, by carrying outrigorous due diligence procedures and bymaintaining a wide spread of holdingsin terms offinancing stage and industry sector. The board reviews the investment portfolio with the investment manager on a regular basis.

Financialrisk: asmost ofthe company's investmentsinvolve amedium-to long-term commitment and are relatively illiquid,the directors considerthatitisinappropriate to finance the company's activitiesthrough borrowing except on an occasionalshort-term basis. Accordingly they seek tomaintain a proportion ofthe company's assetsin cash or cash equivalentsin orderto be in a position to take advantage of new unquoted investment opportunities. The company has very little direct exposure to foreign currency risk and does not enterinto derivative transactions.

Economic risk: eventssuch as economic recession or generalfluctuation in stockmarkets and interestratesmay affectthe valuation ofinvestee companies and their ability to access adequate financialresources, as well as affecting the company's own share price and discountto net asset value.

Stock marketrisk:some ofthe company's investments are quoted on the London Stock Exchange orthe AIM market and will be subjecttomarketfluctuations upwards and downwards. Externalfactorssuch asterrorist activity can negatively impactstockmarkets worldwide and the AIM marketis no exception to this. In times of adverse sentimentthere tends to be very little, if any,market demand forshares in the smaller companies quoted on AIM.

Creditrisk:the company holds a number of financial instruments and cash deposits and is dependent on the counterparties discharging their commitment. The directorsreview the creditworthiness ofthe counterpartiesto these instruments and cash depositsin addition to ensuring no significant concentration of credit risk is with any one counterparty.

Liquidity risk:the company'sinvestments may be difficultto realise. The factthat a stock is quoted on AIM does not guarantee itsliquidity and theremay be a large spread between bid and offer prices.Unquoted investments are not traded on a recognised stock exchange and are inherently illiquid.

Politicalrisk: in ordertomaintain its approval as a VCT,the company isrequired to comply with current VCT legislation in theUK as well asthe European Commission's State Aid rules. Politicallymotivated changesto theUK legislation orthe State Aid rulesin the future could have an adverse effect on the company's ability to achieve satisfactory investment returns whilstretaining its VCT approval. The board and themanagermonitor political developments and where appropriate seek tomake representations either directly orthrough the relevanttrade bodies.

Internal controlrisk:the board regularly reviewsthe systemofinternal controls, both financial and non-financial, operated by the company and themanager. These include controls designed to ensure thatthe company's assets are safeguarded and that proper accounting records aremaintained.

VCT qualifying statusrisk:the company is required at alltimesto observe the conditions laid down in the Income Tax Act 2007 forthe maintenance of approved VCT status. The loss ofsuch approval could lead to the company losing its exemption fromcorporation tax on capital gains,to investors being liable to pay income tax on dividendsreceived fromthe company and, in certain circumstances,to investors being required to repay the initial income tax relief on theirinvestment. The manager keepsthe company's VCT qualifying status under continualreview and reportsto the board on a quarterly basis. The board has also retained PricewaterhouseCoopers LLP to undertake an independent VCT status monitoring role.

Future prospects

Ourinvestmentmanagerreports an encouraging level of new investment enquiries as well assome promising opportunitiesfor exits. Although the operating environmentfor smaller private companiesremains difficult we expectthe portfolio tomake further progress overthe next 12months.

By order of the Board

C D Mellor Secretary 18 May 2012

Investmentportfolio

as at 31 March 2012

	Cost £000	Valuation £000	% of net assets by value
Fifteen largest venture capital investments(see pages 12 to 15)
Kerridge Commercial Systems	1,740	4,464	8.1
Closerstill Holdings	1,001	2,747	5.0
Volumatic	1,995	1,995	3.6
Paladin Group	1,538	1,914	3.5
Alaric Systems	1,269	1,651	3.0
Arleigh International	900	1,428	2.6
WearInns	1,116	1,357	2.5
Kitwave One	1,246	1,262	2.3
Control Risks Group Holdings	746	1,244	2.2
IG Doors	487	1,209	2.2
Cawood Scientific	1,031	1,179	2.1
Advanced Computer Software Group*	381	1,163	2.1
Axial Systems Holdings	1,004	1,008	1.8
Tinglobal Holdings	988	988	1.8
Lineup Systems	974	974	1.8
	16,416	24,583	44.6
Other venture capital investments
RCC Lifesciences	995	965	1.8
Promatic Group	987	904	1.6
Direct Valeting	504	746	1.4
Lanner Group	772	728	1.3
Mantis Deposition Holdings	692	692	1.3
Closer2 Investments	678	678	1.2
e-know.net	435	656	1.2
KPJ Software Services	633	571	1.0
Envirotec	375	534	1.0
S&P Coil Products	232	530	1.0
Optilan Group	1,000	500	0.9
Altacor	424	424	0.8
Longhirst Venues	375	404	0.7
Brady*	314	402	0.7
Tikit Group*	263	388	0.7
SinclairIS Pharma*	425	383	0.7
Andor Technology*	66	368	0.7
Interlube Systems	50	320	0.6
Vectura Group**	235	260	0.5
Gentronix	457	199	0.3
Cello Group*	251	108	0.2
Spectrum Interactive	311	83	0.2
Adept Telecom*	235	79	0.1
Summit Corporation*	236	11	–
Crantock Bakery	1,107	–	–
Warmseal Windows(Newcastle)	818	–	–
Astbury Marsden Holdings	1,177	–	–
Total venture capital investments	30,463	35,516	64.5
Listed fixed-interest investments	5,884	5,644	10.2
Total fixed assetinvestments	36,347	41,160	74.7
Net current assets		13,968	25.3
Net assets		55,128	100.0

* Quoted on AIM

** Listed on London Stock Exchange

Fifteen largest private equity investments

Kerridge Commercial Systems

Cost	£1,740,000
Valuation	£4,464,000
Basis of valuation	Earningsmultiple
Equity held	8.3% (NVM fundstotal 45.0%)
Business/location	Software developerfor wholesale and retail distribution sectors,Hungerford
History	Management buy-outfromADP Inc, March 2010, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends nil, loan stock interest £126,000

Audited financial information:

Year ended 30 September	2011 £m	2010* £m
Sales	18.9	11.6
Profit before tax	1.2	0.7
Profit aftertax	0.9	0.5
Net assets	2.4	1.7

*6 months ended 30 September

Volumatic

Cost	£1,995,000
Valuation	£1,995,000
Basis of valuation	Cost
Equity held	15.5% (NVM fundstotal 46.5%)
Business/location	Manufacturer ofintelligent cash handling equipment, Birmingham
History	Management buy-out, March 2012, led byNVM Private Equity
OtherNVM funds investing	Northern Venture Trust,Northern 3 VCT
Income in year	Nil

Audited financial information:

First audited accounts will be forthe period ended 31 March 2012

Closerstill Holdings

Cost	£1,001,000
Valuation	£2,747,000
Basis of valuation	Earningsmultiple
Equity held	12.0% (NVM funds 47.6%)
Business/location	Business-to-business exhibition management, London
History	Acquisition capitalfinancing in September 2008, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends nil, loan stock interest £40,000

Audited financial information:

Year ended 31December	2010 £m	2009* £m
Sales	4.7	1.7
Profit/(loss) before tax	0.2	(1.0)
Profit/(loss) aftertax	0.2	(1.0)
Net assets	0.9	0.5

*16 months ended 31 December

Paladin Group

Cost	£1,538,000
Valuation	£1,914,000
Basis of valuation	Earningsmultiple
Equity held	13.2% (NVM fundstotal 53.1%)
Business/location	Provider of propertymanagement services, Bath
History	Development capital investment,June 2006, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends nil, loan stock interest £57,000

Audited financial information:

Year ended 31 March	2011 £m	2010 £m
Sales	16.6	19.6
Profit/(loss) before tax	0.1	(1.1)
Profit/(loss) aftertax	0.1	(0.9)
Net assets	1.2	1.2

Alaric Systems

Cost	£1,269,000
Valuation	£1,651,000
Basis of valuation	Earningsmultiple
Equity held	8.4% (NVM fundstotal 33.8%)
Business/location	Developer of electronic payment protection software, London
History	Development capitalfinancing inNovember 2000, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust
Income in year	Nil

Audited financial information:

Year ended 31 March	2011 £m	2010 £m
Sales	5.5	3.9
Profit before tax	0.4	0.1
Profit aftertax	0.4	0.1
Netliabilities	(1.1)	(1.5)

Arleigh International

Cost	£900,000
Valuation	£1,428,000
Basis of valuation	Earningsmultiple
Equity held	12.1% (NVM fundstotal 41.7%)
Business/location	Suppliers of accessories and sparesto the holiday home and boatingmarkets,Nuneaton
History	Management buy-outfromFirstserve,October 2004, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends £33,000, loan stock interest £76,000

Audited financial information:

Year ended 31December	2010 £m	2009 £m
Sales	13.2	12.0
Profit before tax	0.8	0.9
Profit aftertax	0.5	0.6
Net assets	0.7	1.7

Wear Inns

Cost	£1,116,000
Valuation	£1,357,000
Basis of valuation	Net assets
Equity held	13.7% (NVM fundstotal 52.0%)
Business/location	Owner ofmanaged public houses, Newcastle upon Tyne
History	Acquisition capitalfinancing in February 2006, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends nil, loan stock interest £84,000

Audited financial information:

Year ended 31 March	2011 £m	2010 £m
Sales	6.3	3.8
Profit/(loss) before tax	0.1	(0.1)
Profit/(loss) aftertax	0.1	(0.1)
Net assets	0.2	0.1

Kitwave One

Cost	£1,246,000
Valuation	£1,262,000
Basis of valuation	Earningsmultiple
Equity held	6.1% (NVM fundstotal 38.3%)
Business/location	Wholesaler of confectionery,soft drinks, snacks, beers, wines and tobacco,North Shields
History	Growth capital investmentin March 2011, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends nil, loan stock interest £74,000

Audited financial information:

First audited accounts will be forthe period ended 30 April 2012

Fifteen largest private equity investments continued

Control Risks Group Holdings

Cost	£746,000
Valuation	£1,244,000
Basis of valuation	Earningsmultiple
Equity held	1.3% (NVM fundstotal 10.4%)
Business/location	Specialistrisk consultancy, London
History	Growth capitalfinancing in March 2011, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends £37,000

Audited financial information:

Year ended 31 March	2011 £m	2010 £m
Sales	172.8	136.6
Profit before tax	8.9	5.1
Profit aftertax	4.9	4.2
Net assets	15.4	8.3

IG Doors

Cost	£487,000
Valuation	£1,209,000
Basis of valuation	Earningsmultiple
Equity held	10.0% (NVM fundstotal 35.0%)
Business/location	Manufacture ofsteel andGRP composite doors, Cwmbran
History	Management buy-outfromExpamet International,November 2003, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends £20,000, loan stock interest £56,000

Audited financial information:

Year ended 31December	2010 £m	2009 £m
Sales	18.6	14.7
Profit before tax	1.4	0.1
Profit aftertax	0.9	0.1
Net assets	2.3	1.2

Cawood Scientific

Cost	£1,031,000
Valuation	£1,179,000
Basis of valuation	Earningsmultiple
Equity held	11.4% (NVM fundstotal 48.0%)
Business/location	Laboratory servicesforland-based industries, Bracknell/Cawood
History	Management buy-outfinancing inDecember 2010, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends nil, loan stock interest £73,000

Audited financial information:

Period ended 31 March	2011* £m
Sales	2.2
Profit before tax	0.1
Loss aftertax	(0.3)
Net assets	0.6

*11 months ended 31 March

Advanced Computer Software Group

Cost	£381,000
Valuation	£1,163,000
Basis of valuation	Bid price (AIM)
Equity held	0.6% (NVM fundstotal 2.3%)
Business/location	Provider ofsoftware to the healthcare sector, London
History	Reverse take-over of an AIM quoted company and additionalfundraising, August 2008
OtherNVM funds investing	Northern Venture Trust,Northern 3 VCT
Income in year	Nil

Audited financial information:

Year ended 28 February	2011 £m	2010 £m
Sales	95.4	30.2
Profit before tax	3.1	4.2
Profit aftertax	4.2	3.2
Net assets	84.6	78.6

Axial Systems Holdings

Cost	£1,004,000
Valuation	£1,008,000
Basis of valuation	Earningsmultiple
Equity held	8.0% (NVM fundstotal 45.7%)
Business/location	Supplier of distributed networkmanagement solutions, Maidenhead
History	Management buy-outfromprivate ownership, March 2008, led byNVM Private Equity
OtherNVM funds investing	Northern Investors Company,Northern Venture Trust,Northern 3 VCT
Income in year	Dividends nil, loan stock interest £42,000

Audited financial information: Audited financial information:

Year ended 31 May	2011 £m	2010 £m
Sales	17.1	18.3
Profit before tax	0.4	0.2
Profit aftertax	0.1	–
Net assets	1.4	1.3

Tinglobal Holdings

Cost	£988,000
Valuation	£988,000
Basis of valuation	Cost
Equity held	12.8% (NVM fundstotal 38.4%)
Business/location	Supplier ofrefurbishedmid-range computer equipment, Cirencester
History	Management buy-outfromventure capital ownership,June 2011, led byNVM Private Equity
OtherNVM funds investing	Northern Venture Trust,Northern 3 VCT
Income in year	Nil

First audited accounts will be forthe period ending 31 May 2012

Lineup Systems

Cost	£974,000
Valuation	£974,000
Basis of valuation	Cost
Equity held	17.4% (NVM fundstotal 52.2%)
Business/location	Multi-channel advertising andmedia software, London
History	Development capital financing, December 2011, led byNVM Private Equity
OtherNVM funds investing	Northern Venture Trust,Northern 3 VCT
Income in year	Nil

Audited financial information:

First audited accounts will be forthe period ended 31 March 2012

Directors'report

The directors have managed the affairs ofthe company with the intention of maintaining its status as an approved venture capitaltrust.

The directors presenttheirreport and the audited financialstatementsforthe year ended 31March 2012.

Activities and status

The principal activity ofthe company during the year wasthemaking oflong termequity and loan investments,mainly in unquoted companies.

The directors havemanaged the affairs ofthe company with the intention ofmaintaining its status as an approved venture capitaltrust forthe purposes of Section 274 ofthe Income Tax Act 2007. The directors considerthatthe company was not at any time up to the date of thisreport a close company within themeaning of Chapter 2 of Part 10 ofthe Corporation Tax Act 2010.

The directors are required by the articles of association to propose an ordinary resolution at the company's annual generalmeeting in 2017 thatthe company should continue as a venture capitaltrustfor a furtherfive year period, and at each fifth subsequent annual generalmeeting thereafter. If any such resolution is not passed, the directorsshall within fourmonths convene a generalmeeting to consider proposalsforthe reorganisation or winding-up ofthe company.

Business review

The directors are required by Section 417 of the Companies Act 2006 to include a business review in theirreportto shareholders. The businessreview isset out on pages 6 to 10 and isincluded in the directors'report by reference.

Corporate governance

The statement on corporate governance set out on pages 20 to 24 isincluded in the directors' report by reference.

Results and dividend

The return on ordinary activities aftertax for the year of £4,366,000 has been transferred to reserves.

The second interimdividend of 1.0p per share and the final dividend of 3.5p pershare in respect ofthe period ended 31 March 2011 and the interimdividend of 2.0p pershare in respect ofthe year ended 31 March 2012 were paid during the year at a cost of £3,730,000 and have been charged to reserves.

If approved by shareholders,the proposed final dividend of 3.5p pershare forthe year ended 31 March 2012 will be paid on 20 July 2012 to shareholders on the register on 29 June 2012.

Provision of information to auditors

Each ofthe directors who held office atthe date of approval ofthis directors'report confirmsthat,so far as he is aware,there is no relevant auditinformation of which the company's auditors are unaware and that he hastaken allthe stepsthat he oughtto have taken as a directorin ordertomake himself aware of any relevant auditinformation and to establish thatthe company's auditors are aware ofthatinformation.

Going concern

Aftermaking the necessary enquiries,the directors believe thatitis appropriate to continue to apply the going concern basis in preparing the financialstatements.

Directors

The directors ofthe company during the year and theirinterestsin respect of which transactions are notifiable to the company underDisclosure and Transparency Rule 3.1.2R (and so far asthe company is, or ought upon reasonable enquiry to become, aware,the interests oftheir connected persons)in the issued ordinary shares of 5p ofthe company as at 31 March 2012 are shown in Table 1.

All ofthe directors'share interests were held beneficially. There have been no changes in the directors'share interests between 31 March 2012 and the date ofthisreport.

Underthe Listing Rulesthe company disclosesthat on 9 January 2012 the company re-purchased 139,217 ordinary sharesfrom Mr A M Conn, a director ofthe company,for a consideration of £103,299 (74.2p pershare) pursuantto the tender offerto shareholders made on 9December 2011.On 11 January 2012 Mr Conn subscribed £137,475 for 169,723 new ordinary shares at a price of 81.0p pershare underthe public offerforsubscription which opened on 9November 2011.

None ofthe directors has a contract ofservice with the company and, except asmentioned below underthe heading "Management", no contract or arrangementsubsisted during or atthe end ofthe yearin which any director was materially interested and which wassignificant in relation to the company's business.

Directors' and officers' liability insurance

The company has, as permitted by the Companies Act 2006,maintained insurance cover on behalf ofthe directors and secretary indemnifying themagainst certain liabilities whichmay be incurred by any ofthemin relation to the company.

Creditor payment policy

The company's payment policy forthe forthcoming financial yearisto agree terms of payment before businessistransacted and to settle accountsin accordance with those terms. There were no amounts owing to trade creditors at 31 March 2012.

Table 1: Directors' interests in ordinary shares

	31 March 2012	1 April 2011
D P A Gravells(Chairman)	5,526	5,526
A M Conn	310,963	257,842
E M P Denny	125,000	125,000
C G A Fletcher	75,012	62,504
Sir Frederick Holliday (retired 19 July 2011)	–	10,100
F L G Neale	80,626	68,377

Management

NVM Private Equity Limited (NVM) has acted asinvestment adviser andmanagerto the company since incorporation. The principal terms ofthe company'smanagement agreement withNVM are set outinNote 3 to the financialstatements. Mr A M Conn is an executive director ofNVM.

With effectfromApril 2006 amanagement performance incentive scheme wasintroduced under which investment executives employed byNVM are required to invest personally (and on the same terms asthe company and other fundsmanaged byNVM)in the ordinary share capital ofinvestee companiesin which the company invests. The directorsreview the operation ofthe scheme annually.

Asrequired by the Listing Rules,the directors confirmthatin their opinion the continuing appointment ofNVM asinvestmentmanager on the terms agreed isin the interests ofthe company'sshareholders as a whole.NVM has demonstrated its commitmentto and expertise in venture capital investment over an extended period, as a result of which the company has established a consistentlong-termperformance record.NVM has also performed its company secretarial and accounting duties efficiently and effectively.

Share capital – purchase of shares

During the yearthe company purchased through a tender offer and cancelled 5,746,834 ofits own shares,representing 10.0% ofthe called-up share capital ofthe company atthe beginning ofthe year,for a consideration, including expenses, of £4,324,000.During the yearthe company purchased, in themarket, for cancellation 475,000 ofits own shares, representing 0.8% ofthe called-up share capital ofthe company atthe beginning ofthe year, for a consideration of £315,000. Purchases weremade in line with the company's policy of purchasing available shares at a discount to net asset value.

Atthe 2011 annual generalmeeting shareholders authorised the company to purchase in themarket up to 5,746,880 ordinary shares(equivalentto approximately 10% of the then issued ordinary share capital) at a minimumprice of 5p pershare and amaximum price pershare of notmore than 105% ofthe averagemarket value forthe ordinary shares in the company forthe five business days prior to the date on which the ordinary shares were purchased. As at 31 March 2012 475,000 shares had been purchased underthis authority, which atthat date remained effective in respect of 5,271,880 shares;the authority will lapse atthe conclusion ofthe 2012 annual generalmeeting ofthe company on 11 July 2012.

Share capital – issue of shares

During the yearthe company issued 16,929,558 new ordinary sharesfor a cash consideration of £13,836,000 through a public offerfor subscription and 462,399 new ordinary shares for a cash consideration of £349,000 through the company's dividend investmentscheme. Details of allotments during the year are given inNote 14 to the financialstatements.

Fixed assets

Movementsin fixed assetinvestments during the year are set outinNote 8 to the financialstatements.

Annual general meeting

Notice ofthe 2012 annual generalmeeting to be held on 11 July 2012 isset outin a separate circularto shareholders along with explanatory comments on the resolutions.

Substantial shareholdings

No disclosures ofmajorshareholdings had been made to the company underDisclosure and Transparency Rule 5 (VoteHolder and Issuer Notification Rules) as atthe date ofthisreport.

Independent auditors

KPMGAudit Plc have indicated their willingness to continue as auditors ofthe company and resolutionsto re-appointthemand to authorise the directorsto fix theirremuneration will be proposed atthe annual generalmeeting.

By order of the Board

C D Mellor

Secretary 18 May 2012

Directors' remunerationreport

The board currently comprises five directors, all of whom are non-executive.

Thisreport has been prepared by the directors in accordance with the requirements ofthe Companies Act 2006. A resolution to approve the report will be proposed atthe annual generalmeeting.

The company'sindependent auditors, KPMG Audit Plc, are required to give their opinion on certain information included in thisreport, as indicated below. Theirreport on these and other mattersisset out on page 26.

Board of directors

The board currently comprisesfive directors, all of whomare non-executive. The board does not have a separate remuneration committee, asthe company has no employees or executive directors. The board has established a nomination committee, comprising MrDP A Gravells(Chairman), Mr E M PDenny, Mr CGA Fletcher and Mr F LGNeale, which considers the selection and appointment of directors andmakesrecommendationsto the board asto the level of directors'fees. The board has notretained external advisersin relation to remunerationmatters but has access to information about directors'fees paid by other companies of a similarsize and type.

Remuneration policy

The board considersthat directors'feesshould reflectthe time commitmentrequired and the high level ofresponsibility borne by directors, and should be broadly comparable to those paid by similar companies. Itis not considered appropriate that directors'remuneration should be performance-related, and none ofthe directorsis eligible for bonuses, pension benefits,share options, long-termincentive schemes or other benefitsin respect oftheir services as non-executive directors ofthe company. Mr A M Conn participatesin performance incentive arrangements established forthe benefit of certain executives ofNVM, as described in the directors'report on page 17.

Directors'feeswere reviewed by the nomination committee during itsmeeting inMarch 2012, when itwasrecommended thatfeesshould be increased to £20,500 (previously £18,750) per annumforthe chairman and £15,750 (previously £14,500)for other directorsforthe year ending 31March 2013. The lastincreasewasforthe period ended 31March 2011. The articles of association place an overall limit(currently £150,000perannum)ondirectors'remuneration.

Directors' fees (audited information)

The fees paid to individual directorsin respect ofthe year ended 31 March 2012 and the 14month period ended 31 March 2011 are shown in Table 1.

MrAMConnwaivedhis entitlementtodirectors' feesinrespectofbothperiods.MrCGAFletcher's fees up to April 2011 were paid to BaillieGifford &Co in consideration for hisservices.

Terms of appointment

The articles of association provide that directorsshallretire and be subjectto reelection atthe first annual generalmeeting aftertheir appointment and any director who was not appointed orre-appointed at one ofthe preceding two annual generalmeetingsshall retire and be subjectto re-election at each annual generalmeeting thereafter.None of the directors has a service contract with the company.On being appointed orre-elected, directorsreceive a letterfromthe company setting outthe terms oftheir appointment and theirspecific duties and responsibilities. A director's appointmentmay be terminated on threemonths' notice being given by the company and in certain other circumstances.

Company performance

The graph opposite comparesthe totalreturn (assuming all dividends are re-invested)to ordinary shareholdersin the company overthe five years ended 31 March 2012 with the total return froma notional investmentin the FTSE All-Share index overthe same period. Thisindex is considered to be themost appropriate broad equitymarketindex for comparative purposes.

By order of the Board

C D Mellor Secretary 18 May 2012

Table 1: Directors' fees

	Year ended 31 March 2012	14 months ended 31 March 2011
D P A Gravells(Chairman)	18,750	21,875
A M Conn	–	–
E M P Denny	14,500	16,917
C G A Fletcher	14,500	16,917
Sir Frederick Holliday (retired 19 July 2011)	4,380	16,917
F L G Neale	14,500	16,917

Return to shareholders in Northern 2 VCT PLC

Corporate governance

The company is committed to maintaining high standards in corporate governance.

The board ofNorthern 2 VCT PLC has considered the principles and recommendations ofthe Association ofInvestment Companies Code of CorporateGovernance (AIC Code) by reference to the related Association ofInvestment Companies CorporateGovernanceGuide for Investment Companies(AICGuide). The AIC Code, as explained by the AICGuide, addresses allthe principlesset outin theUK Corporate Governance Code, as well assetting out additional principles and recommendations on issuesthat are ofspecific relevance to the company. The AIC Code can be viewed at www.theaic.co.uk/Documents/Technical/AIC CodeofCorporateGovernanceMarch2010.pdf.

The board considersthatreporting against the principles and recommendations ofthe AIC Code, and by reference to the AICGuide (which incorporatestheUK Corporate Governance Code), will provide better information to shareholders.

The company is committed tomaintaining high standardsin corporate governance and during the year ended 31 March 2012 complied with the recommendations ofthe AIC Code and the relevant provisions oftheUK Corporate Governance Code, except asset out below.

The Combined Code includes provisionsrelating to the role ofthe chief executive, executive directors'remuneration and the need for an internal auditfunction. Forthe reasonsset outin the AICGuide, and in the preamble to theUK CorporateGovernance Code,the board considersthese provisions are notrelevant to the position ofthe company, which is an externallymanaged venture capitaltrust. The company hastherefore notreported furtherin respect ofthese provisions.

Board of directors

The company has a board offive non-executive directors,themajority of whomare considered to be independent ofthe company'sinvestment manager,NVM Private Equity. The boardmeets regularly on a quarterly basis, and on other occasions asrequired. The board isresponsible to shareholdersforthe effective stewardship of the company's affairs and has a formalschedule ofmattersspecifically reserved forits decision which include:

• consideration oflong-termstrategic issues;
• valuation ofthe unquoted investment portfolio; and
• ensuring the company's compliance with good practice in corporate governance matters.

A brief biographicalsummary of each director is given on page 4.

The chairman, MrDP AGravells, leadsthe board in the determination ofitsstrategy and in the achievement ofits objectives. The chairman is responsible for organising the business ofthe board, ensuring its effectiveness and setting its agenda, and has no involvementin the day to day business ofthe company.He facilitates the effective contribution ofthe directors and ensuresthatthey receive accurate,timely and clearinformation and thatthey communicate effectively with shareholders.

The board has established a formal process, led by the chairman,forthe annual evaluation ofthe performance ofthe board, its principal committees and individual directors. The directors aremade aware on appointmentthat their performance will be subjectto regular evaluation. The performance ofthe chairman is evaluated by ameeting ofthe other boardmembers underthe leadership of Mr F LGNeale.

The company secretary, Mr CD Mellor, is responsible for advising the board through the chairman on all governancematters. All ofthe directors have accessto the advice and services ofthe company secretary, who has administrative responsibility forthemeetings ofthe board and its committees.Directorsmay also take independent professional advice atthe company's expense where necessary in the performance oftheir duties. Mr F LG Neale isthe seniorindependent non-executive director ofthe company.

The company's articles of association and the schedule ofmattersreserved to the board for decision provide thatthe appointment and removal ofthe company secretary is amatter forthe full board.

The company's articles of association require that one third ofthe directorsshould retire by rotation each year and seek re-election at the annual generalmeeting, and that directors appointed by the board should seek re-appointment atthe next annual general meeting. The board complies with the requirement ofthe Combined Code that all directors are required to submitthemselves forre-election atleast every three years.

Independence of directors

The board regularly reviewsthe independence ofitsmembers andissatisfiedthatthe company's directors are independentin character and judgement and (with the exception of Mr A M Conn who is a director and employee ofNVMPrivate Equity,the company'sinvestment manager and Mr E M PDenny who is a former director and employee ofNVM Private Equity) there are no relationships or circumstances which could affecttheir objectivity. Mr F LG Neale is a non-executive director ofNorthern Investors Company PLC, which is alsomanaged byNVM Private Equity, but after careful consideration the board has concluded that MrNeale'sindependence is not affected by thisrelationship.

TheAIC Code recommendsthatwhere a director hasserved formore than nine years,the board should state itsreasonsfor believing thatthe individualremainsindependent. The board is of the viewthat a termofservice in excess of nine yearsis not ofitself prejudicialto a director's ability to carry out his duties effectively and from an independent perspective;the nature ofthe company's businessissuch thatindividual directors' experience and continuity of board membership can significantly enhance the effectiveness ofthe board as awhole.However the board has as amatter of good practice adopted theAIC Code recommendation that directorswho have served formore than nine yearsshould seek annualre-election, and acknowledgesthat periodic refreshment of itsmembership is desirable.

Board committees

The board has appointed three standing committeestomake recommendationsto the board in specific areas. The board does not have a separate remuneration committee, asthe company has no employees or executive directors.Detailed information relating to the remuneration of directorsis given in the directors'remuneration report on pages 18 and 19.

Audit Committee

During the yearthe audit committee comprised:

Mr CGA Fletcher(Chairman) Professor Sir FrederickHolliday (retired 19 July 2011) Mr F LGNeale MrDP AGravells(appointed 22 March 2012)

The audit committee'sterms ofreference include the following roles and responsibilities:

• monitoring andmaking recommendations to the board in relation to the company's published financialstatements and other formal announcementsrelating to the company'sfinancial performance;

• monitoring andmaking recommendations to the board in relation to the company's internal control(including internalfinancial control) and riskmanagementsystems;
• periodically considering the need for an internal auditfunction;
• making recommendationsto the board inrelationtotheappointment,re-appointment and removal ofthe external auditors and approving the remuneration and terms of engagement ofthe external auditors;
• reviewing andmonitoring the external auditors' independence and objectivity and the effectiveness ofthe audit process,taking into consideration relevantUK professional and regulatory requirements;
• monitoring the extentto which the external auditors are engaged to supply non-audit services; and
• ensuring thatthe investmentmanager has arrangementsinplace forthe investigation and follow-up of any concernsraised confidentially by themanager'sstaffin relation to the propriety offinancial reporting or othermatters.

The committee reviewsitsterms ofreference and its effectiveness annually and recommends to the board any changesrequired as a result ofthe review. The terms ofreference are available on requestfromthe company secretary and on theNVM Private Equity website,www.nvm.co.uk. The audit committee meetsthree times per year and has direct accessto KPMGAudit Plc,the company's external auditors. The board considersthatthe members ofthe committee are independent and have collectively the skills and experience required to discharge their duties effectively, and thatthe chairman ofthe committee meetsthe requirements oftheUK Corporate Governance Code asto recent and relevant financial experience.

The company does not have an independent internal auditfunction asitis not deemed appropriate given the size ofthe company and the nature ofthe company's business.

During the year ended 31 March 2012 the audit committee discharged itsresponsibilities by:

• monitoring and approving the external auditors'terms of engagement and remuneration;
• monitoring the external auditors' plan forthe audit ofthe company'sfinancial statements, including identification of key risks and confirmation of auditor independence;
• monitoringNVM Private Equity'sstatement ofinternal controls operated in relation to the company's business and assessing the effectiveness ofthose controlsinminimising the impact of key risks;
• monitoring periodic reports on the effectiveness ofNVM Private Equity's compliance procedures;
• monitoring the appropriateness of the company's accounting policies;
• monitoring the company's draft annual financialstatements, half-yearly results statement and interimmanagement statements priorto board approval;
• monitoring the external auditors' detailed reportsto the committee on the annual financialstatements; and
• recommending to the board and shareholders the reappointment of KPMGAudit Plc asthe auditors ofthe company.

Corporate governance continued

Nomination Committee

During the yearthe nomination committee comprised:

MrDP AGravells(Chairman) Mr E M PDenny Mr CGA Fletcher Professor Sir FrederickHolliday (retired 19 July 2011) Mr F LGNeale

The nomination committee considersthe selection and appointment of directors and makes annualrecommendationsto the board asto the level of directors'fees. The committee monitorsthe balance ofskills, knowledge and experience offered by boardmembers, and satisfiesitselfthatthey are able to devote sufficienttime to carry outtheirrole efficiently and effectively. When recommending new appointmentsto the board the committee draws on itsmembers' extensive business experience and range of contactsto identify suitable candidates and would considerthe use offormal advertisements and external consultants where appropriate.New directors are provided with briefingmaterialrelating to the company, itsinvestmentmanagers and the venture capital industry as well asto their own legalresponsibilities as directors. The committee has written terms ofreference which are reviewed annually and are available on requestfromthe company secretary and on theNVM Private Equity website, www.nvm.co.uk.

Management Engagement Committee

During the yearthemanagement engagement committee comprised:

MrDP AGravells(Chairman) Mr CGA Fletcher Professor Sir FrederickHolliday (retired 19 July 2011) Mr F LGNeale

Themanagement engagement committee undertakes a periodic reviewofthe performance ofthe investmentmanager,NVM Private Equity, and ofthe terms ofthemanagement agreement including the level offees payable and the length ofthe notice period. The principalterms ofthe agreement are set outinNote 3 to the financial statements on page 32.

Attendance at board and committee meetings

Table 1 sets outthe number offormal board and committeemeetings held during the year ended 31 March 2012 and the number attended by each director compared with themaximum possible attendance.

Corporate responsibility

The board aimsto ensure thatthe company takes a positive approach to corporate responsibility, in relation both to itself and to the companiesitinvestsin. This entails maintaining a responsible attitude to ethical, environmental, governance and social issues, and the encouragement of good practice in investee companies. The board seeksto avoid investing in companies which do not operate within relevant ethical, environmental and social legislation or otherwise failto comply with appropriate industry standards.

Investor relations

In fulfilment ofthe chairman's obligations undertheUK CorporateGovernance Code,the chairman givesfeedback to the board on issues raised with himby shareholders with a view to ensuring thatmembers ofthe board develop an understanding ofthe views ofshareholders abouttheir company. The board recognisesthe value ofmaintaining regular communications with shareholders. Formalreports are sentto shareholders atthe half-year and year-end stages, and an opportunity is given to shareholders atthe annual generalmeeting to question the board and the investmentmanager onmattersrelating to the company's operation and performance. Proxy voting figuresfor each resolution are announced at generalmeetings and aremade available publicly following the relevantmeeting.

Furtherinformation can also be obtained via theNVM Private Equity website at www.nvm.co.uk.

Internal control

The directors have overallresponsibility for ensuring thatthere are in place systems of internal control, both financial and non-financial, andforreviewing theireffectiveness.Thepurpose ofthe internalfinancial controlsisto ensure that proper accounting records aremaintained, the company's assets are safeguarded and the financial information used within the business and for publication is accurate and reliable; such a systemcan provide only reasonable and not absolute assurance againstmaterial misstatement orloss. The board regularly reviewsfinancial performance and results with the investmentmanager. Responsibility for accounting,secretarialservices and physical custody of documents oftitle relating to venture capital investments has been contractually delegated toNVM Private Equity underthe management agreement.NVM Private Equity hasestablisheditsownsystemofinternal controls in relation to thesematters, details of which have been reviewed by the audit committee.

Non-financial internal controlsinclude the systems of operational and compliance controls maintainedby theinvestmentmanagerinrelation to the company's business as well asthe management of key risks asreferred to in the section headed "Riskmanagement" below.

The directors confirmthat bymeans ofthe proceduresset out above, and in accordance with "Internal Controls:Guidance forDirectors on the Combined Code", published by the Institute of Chartered Accountantsin England and Wales,they have established a continuing processforidentifying, evaluating andmanaging the significant potentialrisksfaced by the companyandhavereviewedtheeffectiveness ofthe internal controlsystems. This process has been in place throughout and subsequent to the accounting period underreview.

Risk management

Riskmanagementis discussed in the business review on page 10.

Table 1: Directors' attendance at meetings

	Board	Audit committee	Nomination committee	Management engagement committee
Number ofmeetings held	6	3	1	1
Attendance (actual/possible):
DP AGravells(Chairman)	6/6	1/1	1/1	1/1
A M Conn	6/6	N/A	N/A	N/A
E M PDenny	6/6	N/A	1/1	N/A
CGA Fletcher	6/6	3/3	1/1	1/1
Sir FrederickHolliday	1/2	1/1	0/0	0/0
F LGNeale	6/6	3/3	1/1	1/1

Share capital, rights attaching to the shares and restrictions on voting and transfer

As at 31 March 2012 there were 68,638,871 ordinary sharesin issue (as atthat date none ofthe issued shares were held by the company astreasury shares). Subjectto any suspension or abrogation ofrights pursuantto relevant law orthe company's articles of association, the shares confer on their holders(otherthan the company in respect of any treasury shares) the following principalrights:

• (a) the rightto receive out of profits available for distribution such dividends asmay be agreed to be paid (in the case of a final dividend in an amount not exceeding the amountrecommended by the board as approved by shareholdersin general meeting orin the case of an interim dividend in an amount determined by the board). All dividends unclaimed for a period of 12 years after having become due forpayment are forfeitedautomatically and cease to remain owing by the company;
• (b) the right, on a return of assets on a liquidation,reduction of capital or otherwise,to share in the surplus assets ofthe company remaining after payment ofitsliabilities pari passu with the other holders of ordinary shares; and
• (c) the rightto receive notice of and to attend and speak and vote in person or by proxy at any generalmeeting ofthe company. On a show of hands everymember present orrepresented and voting has one vote and on a poll everymember present or represented and voting has one vote for every share of which thatmemberisthe holder;the appointment of a proxymust be received notlessthan 48 hours before the time ofthe holding ofthe relevant meeting or adjournedmeeting or, in the case of a polltaken otherwise than at or on the same day asthe relevantmeeting or adjournedmeeting, be received after the poll has been demanded and notless than 24 hours before the time appointed forthe taking ofthe poll.

These rights can be suspended. If amember, or any other person appearing to be interested in shares held by thatmember, hasfailed to comply within the time limitsspecified in the company's articles of association with a notice pursuantto Section 793 ofthe Companies Act 2006 (notice by company requiring information aboutinterestsin itsshares),the company can untilthe default ceasessuspend the rightto attend and speak and vote at a generalmeeting and ifthe sharesrepresent atleast 0.25% of their classthe company can also withhold any dividend or othermoney payable in respect ofthe shares(without any obligation to pay interest) and refuse to accept certain transfers ofthe relevantshares.

Shareholders, either alone or with other shareholders, have otherrights asset out in the company's articles of association and in the Companies Act 2006.

Amembermay choose whether hisshares are evidenced by share certificates(certificated shares) or held in electronic (uncertificated) formin CREST (theUK electronic settlement system). Anymembermay transfer all or any of hisshares,subjectin the case of certificated sharesto the rulesset outin the company's articles of association orin the case of uncertificated sharesto the regulations governing the operation of CREST (which allow the directorsto refuse to register a transfer astherein set out);the transferorremains the holder ofthe shares untilthe name ofthe transferee is entered in the register ofmembers. The directorsmay refuse to register a transfer of certificated sharesin favour ofmore than four personsjointly or where there is no adequate evidence of ownership orthe transferis not duly stamped (ifso required). The directorsmay also refuse to register a share transferifitisin respect of a certificated share which is notfully paid up or on which the company has a lien provided that, where the share transferisin respect of any share admitted to theOfficial List maintained by theUK Listing Authority, any such discretionmay not be exercised so asto prevent dealingstaking place on an open and proper basis, orifin the opinion ofthe directors (and with the concurrence oftheUK Listing Authority) exceptional circumstancessowarrant, provided thatthe exercise ofsuch power will not disturb themarketin those shares. Whilst there are no squeeze-out and sell outrules relating to the sharesin the company's articles of association,shareholders are subjectto the compulsory acquisition provisionsin Sections 974 to 991 ofthe Companies Act 2006.

Corporate governance continued

Amendment of articles of association

The company's articles of associationmay be amended by themembers ofthe company by specialresolution (requiring amajority of atleast 75% ofthe persons voting on the relevantresolution).

Appointment and replacement of directors

A personmay be appointed as a director of the company by the shareholdersin general meeting by ordinary resolution (requiring a simplemajority ofthe persons voting on the relevantresolution) or by the directors; no person, otherthan a directorretiring by rotation or otherwise,shall be appointed orreappointed a director at any generalmeeting unless he isrecommended by the directors or, notless than seven normore than 42 clear days before the date appointed forthemeeting, notice is given to the company ofthe intention to propose that person for appointment or re-appointmentin the formandmannerset outin the company's articles of association.

Each director who is appointed by the directors (and who has not been elected as a director ofthe company by themembers at a general meetingheldintheintervalsincehisappointment as a director ofthe company)isto be subject to election as a director ofthe company by the members atthe first annual generalmeeting ofthe company following his appointment. At each annual generalmeeting ofthe company one third ofthe directorsforthe time being, orif their numberis notthree or an integralmultiple ofthree thenumbernearesttobutnot exceeding one third, are to be subjectto re-election.

The Companies Act 2006 allowsshareholders in generalmeeting by ordinary resolution (requiring a simplemajority ofthe persons voting on the relevantresolution)to remove any director before the expiration of his or her period of office, but without prejudice to any claimfor damages which the directormay have for breach of any contract ofservice between himor her and the company.

A person also ceasesto be a directorif he or she resignsin writing, ceasesto be a director by virtue of any provision ofthe Companies Act, becomes prohibited by law frombeing a director, becomes bankrupt oristhe subject of a relevantinsolvency procedure, or becomes of unsoundmind, orifthe board so decides following atleastsixmonths' absence without leave orif he orshe becomessubjectto relevant procedures underthemental health laws, asset outin the company's articles of association.

Powers of the directors

The company's articles of association specify that,subjectto the provisions ofthe Companies Act 2006,the articles of association ofthe companyandanydirectionsgivenbyshareholders by specialresolution,the business ofthe company isto bemanaged by the directors, whomay exercise allthe powers ofthe company, whetherrelating to themanagement ofthe business or not. In particularthe directorsmay exercise on behalf ofthe company its powersto purchase its own sharesto the extent permitted by shareholders. Authority was given atthe company's 2011 annual generalmeeting to makemarket purchases of up to 5,746,880 ordinary shares at any time up to the 2012 annual generalmeeting and otherwise on the termsset outin the relevantresolution, and authority is being sought atthe annual general meeting to be held on 11 July 2012 asset out in a separate circular.

By order of the Board

C D Mellor Secretary 18 May 2012

Directors'responsibilities statement

The directors are responsible for preparing the annualreport and the financialstatementsin accordance with applicable law and regulations.

Company law requiresthe directorsto prepare financialstatementsforeachfinancial year.Under thatlaw the directors have elected to prepare the financialstatementsin accordance with UK Accounting Standards and applicable law (UKGenerally Accepted Accounting Practice).

Under company law the directorsmust not approve the financialstatements unlessthey are satisfied thatthey give a true and fair view ofthe state of affairs ofthe company and ofthe profit orloss ofthe company forthe period.

In preparing these financialstatements, the directors are required to:

• selectsuitable accounting policies and then apply themconsistently;
• make judgements and estimatesthat are reasonable and prudent;
• state whether applicableUK Accounting Standards have been followed,subject to anymaterial departures disclosed and explained in the financialstatements; and

• prepare the financialstatements on the going concern basis unlessitisinappropriate to presume thatthe company will continue in business.

The directors are responsible for keeping adequate accounting recordsthat are sufficient to show and explain the company'stransactions and disclose with reasonable accuracy at any time the financial position ofthe company and enablethemtoensurethatitsfinancialstatements comply with the Companies Act 2006. They have generalresponsibility fortaking such steps as are reasonably open to themto safeguard the assets ofthe company and to prevent and detectfraud and otherirregularities.

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

The company'sfinancialstatements are published on theNVM website, www.nvm.co.uk. Themaintenence and integrity ofthis website isthe responsibility ofNVM and notthe company. Legislation in theUK governing the preparation and dissemination offinancialstatementsmay differfromlegislation in otherjurisdictions. The directors confirmthatto the best of their knowledge:

• the financialstatements, prepared in accordance with the applicable accounting standards, give a true and fair view ofthe assets, liabilities,financial position and profit orloss ofthe company; and
• the directors'reportincludes a fairreview ofthe development and performance ofthe business and the position ofthe company,together with a description ofthe principalrisks and uncertainties thatthe company faces.

By order of the Board

C D Mellor

Secretary 18 May 2012

Independent auditor's report

To the members of NORTHERN 2 VCT PLC

We have audited the financialstatements of Northern 2 VCT PLC forthe year ended 31 March 2012 set out on pages 28 to 40. The financial reporting framework that has been applied in their preparation is applicable law andUK Accounting Standards(UKGenerally Accepted Accounting Practice).

Thisreportismade solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 ofthe Companies Act 2006.Our audit work has been undertaken so that we mightstate to the company'smembersthose matters we are required to state to themin an auditor'sreport 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 and the company'smembers, as a body,for our audit work,forthisreport, orforthe opinions we have formed.

Respective responsibilities of directors and auditor

As explainedmore fully in the directors' responsibilitiesstatementset out on page 25, the directors are responsible forthe preparation ofthe financialstatements and for being satisfied thatthey give a true and fair view.Our responsibility isto audit, and express an opinion on,the financialstatementsin accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require usto comply with the Auditing Practices Board's(APB's) Ethical Standardsfor Auditors.

Scope of the audit of the financial statements

A description ofthe scope of an audit offinancial statementsis provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm.

Opinion on financial statements

In our opinion the financialstatements:

• give a true and fair view ofthe state ofthe company's affairs as at 31 March 2012 and ofits profitforthe yearthen ended;
• have been properly prepared in accordance withUKGenerally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements ofthe Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006

In our opinion:

• the part ofthe directors'remuneration reportto be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the directors'report forthe financial yearfor which the financial statements are prepared is consistent with the financialstatements.

Matters on which we are required to report by exception

We have nothing to reportin respect of the following:

Underthe Companies Act 2006 we are required to reportto you if, in our opinion:

• adequate accounting records have not been kept, orreturns adequate for our audit have not been received frombranches not visited by us; or
• the financialstatements and the part ofthe directors'remuneration report to be audited are notin agreement with the accounting records and returns; or
• certain disclosures of directors'remuneration specified by law are notmade; or
• we have notreceived allthe information and explanation we require for our audit; or
• a corporate governance statement has not been prepared by the company.

Underthe ListingRuleswe are requiredtoreview:

• the directors'statement,set out on page 16, in relation to going concern;
• the part ofthe corporate governance statement on pages 20 to 24 relating to the company's compliancewiththenineprovisions ofthe June 2010UKCorporateGovernance Code specified for ourreview; and
• certain elements ofthe reportto shareholders by the board on directors'remuneration.

CatherineBurnet(Senior StatutoryAuditor) for and on behalf ofKPMG Audit Plc, StatutoryAuditor CharteredAccountants Edinburgh

18 May 2012

Financial statements

Income statement

forthe year ended 31 March 2012

		Year ended 31 March 2012			14 months ended 31 March 2011
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£000	£000	£000	£000	£000	£000
Gain on disposal of investments	8	–	786	786	–	1,065	1,065
Movementsin fair value of investments 8, 15		–	3,124	3,124	–	2,206	2,206
		–	3,910	3,910	–	3,271	3,271
Income	2	1,961	–	1,961	2,034	–	2,034
Investmentmanagementfee	3	(231)	(884)	(1,115)	(263)	(983)	(1,246)
Recoverable VAT		–	–	–	72	215	287
Other expenses	4	(327)	(14)	(341)	(329)	–	(329)
Return on ordinary activities before tax		1,403	3,102	4,415	1,514	2,503	4,017
Tax on return on ordinary activities	5	(288)	239	(49)	(321)	215	(106)
Return on ordinary activities aftertax		1,115	3,251	4,366	1,193	2,718	3,911
Return pershare	7	1.9p	5.5p	7.4p	2.1p	4.8p	6.9p

• The total column ofthisstatementisthe profit and loss account ofthe company. The supplementary revenue return and capitalreturn columns have been prepared under guidance published by the Association ofInvestment Companies.

• There are no recognised gains orlosses otherthan those disclosed in the income statement.

• All itemsin the above statement derive fromcontinuing operations.

• The accompanying notes are an integral part ofthisstatement.

Reconciliationofmovements inshareholders'funds

forthe year ended 31 March 2012

		Year ended 31 March 2012	14 months ended 31 March 2011
	Notes	£000	£000
Equity shareholders' funds at 1 April 2011		45,713	44,349
Return on ordinary activities aftertax		4,366	3,911
Dividendsrecognised in the year	6	(3,730)	(3,113)
Net proceeds ofshare issues	14	13,418	1,272
Shares purchased for cancellation	14	(4,639)	(706)
Equity shareholders' funds at 31 March 2012		55,128	45,713

• The accompanying notes are an integral part ofthisstatement.

Balance sheet

as at 31 March 2012

	Notes	31 March 2012 £000	31 March 2011 £000
Fixed assets
Investments	8	41,160	41,984
Current assets
Debtors	12	311	798
Cash and deposits		15,116	3,996
		15,427	4,794
Creditors(amountsfalling due within one year)	13	(1,459)	(1,065)
Net current assets		13,968	3,729
Net assets		55,128	45,713
Capital and reserves
Called-up equity share capital	14	3,432	2,873
Share premium	15	23,009	35,461
Capitalredemption reserve	15	721	410
Capitalreserve	15	22,473	6,167
Revaluation reserve	15	4,695	(31)
Revenue reserve	15	798	833
Total equity shareholders' funds		55,128	45,713
Net asset value pershare	16	80.3p	79.5p

• The accompanying notes are an integral part of thisstatement.

The financialstatements on pages 28 to 40 were approved by the directors on 18 May 2012 and are signed on their behalf by:

DPAGravells CGAFletcher Director Director

Cashflowstatement

forthe year ended 31 March 2012

		Year ended 31 March 2012 £000	14 months ended 31 March 2011 £000
Net cash inflow from operating activities		1,931	839
Taxation
Corporation tax paid		(81)	(22)
Financial investment
Purchase of investments		(3,691)	(14,839)
Sale/repayment of investments		7,912	6,385
Net cash inflow/(outflow) from financial investment		4,221	(8,454)
Equity dividends paid		(3,730)	(3,113)
Net cash inflow before financing		2,341	(10,750)
Financing
Issue ofshares		14,185	1,340
Share issue expenses		(767)	(68)
Purchase ofsharesfor cancellation		(4,639)	(706)
Net cash inflow from financing		8,779	566
Increase/(decrease) in cash and deposits		11,120	(10,184)
Reconciliation ofreturn before tax
to net cash flow from operating activities
Return on ordinary activities before tax		4,415	4,017
Gain on disposal of investments		(786)	(1,065)
Movementsin fair value of investments		(3,124)	(2,206)
Decrease/(increase) in debtors		487	(140)
Increase in creditors		939	233
Net cash inflow from operating activities		1,931	839
Analysis of movementin netfunds	1 April 2011 £000	Cash flows £000	31 March 2012 £000

Cash and deposits	3,996	11,120	15,116

Notes to the financial statements

forthe year ended 31 March 2012

1. Accounting policies

A summary ofthe principal accounting policies, all of which have been consistently applied throughoutthe year and the preceding period, isset out below.

(a) Basis of accounting

The financialstatements have been prepared on a going concern basis underthe historical cost convention, exceptforthe revaluation of certain financial instruments, and in accordance withUKGenerally Accepted Accounting Practice (UKGAAP). Where presentational guidance set outin the Statement of Recommended Practice (SORP) "Financial Statements ofInvestment Trust Companies",revised in January 2009, is consistent with the requirements ofUK GAAP,the directors have soughtto prepare the financialstatements on a consistent basis compliant with the recommendations of the SORP.

(b) Valuationofinvestments

Purchases and sales ofinvestments are recognised in the financialstatements atthe date oftransaction (trade date).

Thecompany'sinvestmentshavebeendesignated bythedirectorsasfairvaluethroughprofitandloss atthetimeofacquisitionandaremeasuredat subsequentreportingdatesatfairvalue.Inthe caseofinvestmentsquotedonarecognisedstock exchange,fairvalueisestablishedbyreferenceto theclosingbidpriceontherelevantdateorthelast tradedprice,dependingontheconventionofthe exchangeonwhichtheinvestmentisquoted.In thecaseofunquotedinvestments,fairvalueis establishedinaccordancewithindustryguidelines byusingmeasurementsofvaluesuchasprice ofrecenttransaction,earningsmultipleand netassets;wherenoreliablefairvaluecanbe estimatedusingsuchtechniques,unquoted investmentsarecarriedat costsubjectto provisionforimpairmentwherenecessary.

Gains andlosses arising fromchangesinfair valueofinvestments are recognisedaspartofthe capitalreturnwithinthe income statement and allocatedtothe revaluationreserve. Transaction costs attributable tothe acquisitionordisposalof investments are chargedtocapitalreturnwithin the income statement.

Those venture capital investmentsthatmay be termed associated undertakings are carried atfair value as determined by the directorsin accordance with the company's normal policy and are not equity accounted asrequired by the Companies Act 2006. The directors consider that, asthese investments are held as part of the company's portfolio with a view to the ultimate realisation of capital gains, equity accounting would not give a true and fair view ofthe company'sinterestsin these investments. Quantification ofthe effect ofthis departure is not practicable. Carrying investments atfair value isspecifically permitted under Financial Reporting Standard 9 "Associates and Joint Ventures", where venture capital entities hold investments as part of a portfolio.

(c) Income

Dividendsreceivable on quoted equity shares are broughtinto account on the ex-dividend date.Dividendsreceivable on unquoted equity shares are broughtinto account when the company'srightto receive paymentis established and there is no reasonable doubt that payment will be received. Fixed returns on non-equity shares and debtsecurities are recognised on an effective interestrate basis, provided there is no reasonable doubtthat payment will be received in due course.

(d) Expenses

All expenses are accounted for on an accruals basis. Expenses are charged to revenue return within the income statement exceptthat:

• expenses which are incidentalto the acquisition or disposal of an investment are allocated to capitalreturn asincurred; and
• expenses are split and allocated partly to capitalreturn where a connection with themaintenance or enhancement ofthe value ofthe investments held can be demonstrated, and accordingly the basic element ofthe investmentmanagementfee has been allocated 25% to revenue return and 75% to capitalreturn, in orderto reflect the directors' expected long-termview of the nature ofthe investmentreturns ofthe company. The performance-related element ofthe investmentmanagementfee has been charged 100% to capitalreturn.

(e) Revenue and capital

The revenue column ofthe income statement includes all income and revenue expenses ofthe company. The capital column includesrealised and unrealised gains and losses on investments and that part ofthe investmentmanagement fee which is allocated to capitalreturn.

(f)Taxation

UKcorporationtaxpayable isprovidedontaxable profits atthe currentrate. The tax charge for the yearis allocated between revenue return and capitalreturn on the "marginal basis" asrecommended in the SORP. Provision ismade for deferred taxation on alltiming differences calculated atthe currentrate oftax relevantto the benefit orliability.

(g) Dividendspayable

Dividendspayable are recognisedasdistributions in the financialstatements when the company's liability tomake payment has been established.

(h) Provisions

A provision isrecognised in the balance sheet when the company has a legal or constructive obligation as a result of a past event and itis probable that an outflow of economic benefits will be required to settle the obligation. No provision is establishedwhere a reliable estimate ofthe obligation cannot bemade. Provisions are allocated to revenue or capital depending on the nature ofthe circumstances.

(i) Capital reserve

The following are accounted forin the capital reserve: gains orlosses on the realisation of investments;realised and unrealised exchange differences of a capital nature;the cost of repurchasing ordinary shares, including stamp duty and transaction costs; and other capital charges and credits charged to this account in accordance with the above policies.

(j) Revaluationreserve

Changesin fair value ofinvestments are dealt with in thisreserve.

Notes to the financial statements continued

forthe year ended 31 March 2012

2. Income

	Year ended 31 March 2012 £000	14 months ended 31 March 2011 £000
Franked investment income
Unquoted companies	176	351
Quoted companies	22	18
Interestreceivable
Bank deposits*	12	21
Loansto unquoted companies	1,489	1,276
Listed fixed-interest investments	262	351
Sundry income*	–	17
	1,961	2,034

* Denotesincome arising from investments not designated asfair value through profit orloss at the time of acquisition.

3. Investment management fee

		Year ended 31 March 2012		14 months ended 31 March 2011
	Revenue	Capital	Total	Revenue	Capital	Total
	£000	£000	£000	£000	£000	£000
Investmentmanagementfee:
Basic	231	694	925	263	789	1,052
Performance-related	–	190	190	–	194	194
	231	884	1,115	263	983	1,246

NVM Private Equity Limited (NVM) providesinvestmentmanagement and secretarialservicesto the company under an agreement dated 20December 1999, whichmay be terminated at any time by notlessthan twelvemonths' notice being given by either party.

NVM receives a basicmanagementfee, payable quarterly in advance, atthe rate of 2.06% per annumof net assets calculated half-yearly as at 31 March and 30 September.NVM bearsthe cost of Sarasin&Partners'feesformanaging the listed fixed-interest portfolio.NVM also provides administrative and secretarialservicesto the company for a fee of £49,000 per annum(linked to themovementin the RPI). Thisfee isincluded in other expenses (seeNote 4).

NVM is also entitled to receive a performance-relatedmanagementfee equivalentto 9.5% ofthe amount, if any, by which the totalreturn in each financial year(expressed as a percentage of opening net asset value) exceeds a performance hurdle. The hurdle is a composite rate based on 7% on average long-terminvestments and base rate on average cash and near-cash investments during the year. Following a period in which net assets decline, a "high watermark" will apply to the calculation ofthe performance-related fee but will be then adjusted downwardsto the extentthat a positive return is achieved in the following financial year. The performance-relatedmanagementfee issubjectto an overall cap of 2.25% of net assets.

The totalrunning costs ofthe company, excluding performance-relatedmanagementfees, are capped at 3.0% ofits net assets andNVM has agreed that any excess will be refunded by way of a reduction in itsfees.

4. Other expenses

	Year ended 31 March 2012 £000	14 months ended 31 March 2011 £000
Administrative and secretarialservices	49	53
Directors'remuneration	67	90
Auditors'remuneration – auditservices	18	17
Legal and professional expenses	29	23
Share issue promoter's commission	26	29
Irrecoverable VAT	24	14
Other expenses	114	103
	327	329

Information on directors'remuneration is given in the directors'remuneration report on pages 18 and 19.

5. Tax on return on ordinary activities

		Year ended 31 March 2012		14 months ended 31 March 2011
	Revenue	Capital	Total	Revenue	Capital	Total
	£000	£000	£000	£000	£000	£000
(a) Analysis of charge/(credit) forthe year UK corporation tax payable/(recoverable) on the return forthe year	288	(239)	49	321	(215)	106
(b) Tax reconciliation
Return on ordinary activities before tax	1,403	3,012	4,415	1,514	2,503	4,017
Return on ordinary activities multiplied by the standard rate of UK corporation tax of 26% (2011 28%)	365	783	1,148	424	701	1,125
Effect of: UK dividends notsubject to tax Capitalreturns notsubject to tax Unrealised adjustmentsto fair value Disallowable expenses Marginalrelief Adjustment to tax charge in respect of prior years	(51) – – – (2) (24)	– (204) (812) – (6) –	(51) (204) (812) – (8) (24)	(103) – – – –	– (298) (618) – – –	(103) (298) (618) – – –
Current tax charge/(credit) forthe year	288	(239)	49	321	(215)	106

(c) Factors which may affectfuture tax charges

The directors are not aware of anymatters whichmay affectthe tax chargesin future periods. There is no provided or unprovided deferred tax as at 31 March 2012.

Approved venture capitaltrusts are exemptfromtax on capital gains within the company. Since the directorsintend thatthe company will continue to conductits affairsso astomaintain its approval as a venture capitaltrust, no current or deferred tax has been provided in respect of any capital gains orlosses arising on the revaluation or disposal ofinvestments.

TheGovernment has announced itsintention to furtherreduce theUK corporation tax rate to 23% by 1 April 2014.

6. Dividends

	Year ended 31 March 2012		14 months ended 31 March 2011
	Revenue	Capital	Total	Revenue	Capital	Total
	£000	£000	£000	£000	£000	£000
(a) Recognised as distributionsin the
financialstatementsforthe year
Previous year'ssecond interim	–	575	575	–	–	–
Previous year'sfinal	575	1,430	2,005	566	1,417	1,983
Current year'sinterim	575	575	1,150	565	565	1,130
	1,150	2,580	3,730	1,131	1,982	3,113
b) Paid and proposed in respect ofthe year
Firstinterimpaid – 2.0p (2011 2.0p) pershare	575	575	1,150	565	565	1,130
Second interimproposed – nil(2011 1.0p) pershare	–	–	–	–	575	575
Final proposed – 3.5p (2011 3.5p) pershare	560	1,892	2,452	575	1,437	2,012
	1,135	2,467	3,602	1,140	2,577	3,717

The revenue dividends paid and proposed in respect ofthe yearformthe basisfor determining whetherthe company has complied with the requirements of Section 274 ofthe Income Tax Act 2007 asto the distribution ofinvestmentincome.

The proposed final dividend of 3.5p pershare forthe year ended 31 March 2012 issubjectto approval by shareholders atthe annual generalmeeting on 11 July 2012 and has not been recognised as a liability in these financialstatements.

Notes to the financial statements continued

forthe year ended 31 March 2012

7. Return per share

The calculation ofthe return pershare is based on the return on ordinary activities aftertax forthe year of £4,366,000 (2011 £3,911,000) and on 58,988,708 (2011 56,667,849)shares, being the weighted average number ofsharesin issue during the year.

8. Investments

All investments are designated asfair value through profit orloss on initialrecognition,therefore all gains and losses arise on investments designated atfair value through profit orloss.

Financial Reporting Standard 29 'Financial Instruments:Disclosures'(FRS 29)requires an analysis ofinvestments valued atfair value based on the reliability and significance ofthe information used tomeasure theirfair value. The level is determined by the lowest(thatisthe leastreliable or independently observable)level ofinputthatissignificantto the fair valuemeasurementforthe individual investmentin its entirety asfollows:

• Level 1 investments with quoted pricesin an activemarket.
• Level 2 investments whose fair value is based directly on observable currentmarket prices orindirectly being derived frommarket prices.
• Level 3 investments whose fair value is determined using a valuation technique based on assumptionsthat are notsupported by observable currentmarket prices or based on observablemarket data.

	31 March 2012 £000	31 March 2011 £000
Level 1
Quoted venture capital investments	3,162	2,915
Listed fixed-interest investments	5,644	8,955
Level 2
None	–	–
Level 3
Unquoted venture capital investments	32,354	30,114
	41,160	41,984

Movementsin investments during the year are summarised asfollows:

	Venture capital – unquoted Level 3 £000	Venture capital – unquoted Level 1 £000	Listed fixed- interest Level 1 £000	Total £000
Book cost at 31 March 2011	28,930	3,379	9,076	41,385
Fair value adjustment at 31 March 2011	1,184	(464)	(121)	599
Fair value at 31 March 2011	30,114	2,915	8,955	41,984
Movementsin the year:
Purchases at cost	3,498	193	–	3,691
Disposals – proceeds	(4,285)	(431)	(3,196)	(7,912)
– netrealised gains/(losses)	818	4	(36)	786
Movementsin fair value	2,209	481	(79)	2,611
Fair value at 31 March 2012	32,354	3,162	5,644	41,160
Comprising:
Book cost at 31 March 2012	28,057	2,406	5,884	36,347
Fair value adjustment at 31 March 2012	4,297	756	(240)	4,813
	32,354	3,162	5,644	41,160
Equity shares	14,737	3,162	–	17,899
Preference shares	413	–	–	413
Interest-bearing securities	17,204	–	5,644	22,848
	32,354	3,162	5,644	41,160

8.Investments continued

The gains and lossesincluded in the above table have all been recognised in the income statement on page 28.

FRS 29 requires disclosure, by class offinancial instrument, ifthe effect of changing one ormore inputsto reasonably possible alternative assumptions would resultin a significant change to the fair valuemeasurement. The information used in determination ofthe fair value of Level 3 investmentsis chosen with reference to the specific underlying circumstances and position of each investee company.On that prudent basisthe directors consider thatthe impact of changing one ormore ofthe inputsto reasonably possible alternative assumptions would not change the fair value significantly.

At 31 March 2012 there were commitmentstotalling £2,605,000 (31 March 2011 £759,000)in respect ofinvestments approved by themanager but not yet completed.

9. Investment disposals

Disposals of venture capital investments during the year were asfollows:

				Realised gain/(loss)
		Carrying value		against carrying
	Original cost	priorto disposal	Disposal proceeds	value
	£000	£000	£000	£000
Individual Restaurant Company	250	3	4	1
Britspace Group – trade sale	1,596	122	–	(122)
Promanex Group Holdings – trade sale	1,695	2,135	2,136	1
Direct Valeting – loan stock repayment
and preference share redemption	102	102	122	20
DxS – deferred consideration	–	–	831	831
IG Doors – loan stock repayment	257	257	296	39
Envirotec – loan stock repayment	600	720	720	–
Twenty	198	30	–	(30)
ColliersInternationalUK	439	38	–	(38)
S&P Coil Products – loan stock repayment	81	89	89	–
TikitGroup	266	298	342	44
Others	54	100	176	76
	5,538	3,894	4,716	822

10. Unquoted investments

The cost and carrying value ofmaterial investmentsin unquoted companies held at 31 March 2012 are shown below. Forthis purpose any investment included in the table ofthe fifteen largest venture capital investments on page 11, orin the corresponding table in the previous year's annualreport, isregarded asmaterial.

		31 March 2012	31 March 2011
	Total cost £000	Carrying value £000	Total cost £000	Carrying value £000
Kerridge Commercial Systems
Ordinary shares	175	2,899	175	1,476
Loan stock	1,565	1,565	1,565	1,565
	1,740	4,464	1,740	3,041
CloserStillHoldings
Ordinary shares	192	1,938	192	712
Loan stock	809	809	809	809
	1,001	2,747	1,001	1,521
Volumatic (formerly Evolve Investments)
Ordinary shares	216	216	100	100
Loan stock	1,779	1,779	895	895
	1,995	1,995	995	995
PaladinGroup
Ordinary shares	389	765	389	291
Loan stock	1,149	1,149	918	918
	1,538	1,914	1,307	1,209

Notes to the financial statements continued

forthe year ended 31 March 2012

10. Unquoted investments continued

		31 March 2012	31 March 2011
	Total	Carrying	Total	Carrying
	cost	value	cost	value
	£000	£000	£000	£000
Alaric Systems
Ordinary shares	995	1,097	995	630
Loan stock	274	554	274	570
	1,269	1,651	1,269	1,200
Arleigh International
Ordinary shares	44	572	44	543
Loan stock	856	856	895	895
	900	1,428	939	1,438
WearInns
Ordinary shares	276	517	276	276
Loan stock	840 1,116	840 1,357	840 1,116	840 1,116
Kitwave One
Ordinary shares	127	143	127	127
Loan stock	1,119	1,119	1,119	1,119
	1,246	1,262	1,246	1,246
Control Risks Group Holdings
Ordinary shares	746	1,244	746	746
	746	1,244	746	746
IGDoors
Ordinary shares	101	765	101	719
Loan stock	386	444	643	643
	487	1,209	744	1,362
Cawood Scientific
Ordinary shares	118	266	118	118
Loan stock	913 1,031	913 1,179	913 1,031	913 1,031
Axial SystemsHoldings
Ordinary share	145	149	145	282
Loan stock	859	859	859	859
	1,004	1,008	1,004	1,141
TinglobalHoldings
Ordinary shares	228	228	–	–
Loan stock	760	760	–	–
	988	988	–	–
Lineup Systems
Ordinary shares	174	174	–	–
Loan stock	800	800	–	–
	974	974	–	–
PromanexGroupHoldings
Ordinary shares	–	–	618	1,059
Loan stock	–	–	1,076	1,076
	–	–	1,694	2,135
Crantock Bakery
Ordinary shares	225	–	225	477
Loan stock	882	–	882	882
	1,107	–	1,107	1,359

10. Unquoted investments continued

	31 March 2012		31 March 2011
	Total cost £000	Carrying value £000	Total cost £000	Carrying value £000
Envirotec
Ordinary shares	225	354	225	531
Loan stock	150	180	750	900
	375	534	975	1,431
RCC Lifesciences
Ordinary shares	100	70	100	100
Loan stock	895	895	895	895
	995	965	995	995

Additional information relating tomaterial investmentsin unquoted companiesis given on pages 12 to 15.

11. Significant interests

Details ofshareholdingsin those companies where the company's holding at 31 March 2012 represents(1)more than 20% ofthe allotted equity share capital of any class,(2)more than 20% ofthe total allotted share capital or(3)more than 20% ofthe assets ofthe company itself, are given below. All ofthe companies named are incorporated inGreat Britain.

	Class ofshares(nominal value	Proportion of
Company	£1 unlessstated)	Number held	class held
Direct Valeting Limited	A ordinary (1p)	149,700	30.0%
	Preference	412,500	30.0%

12. Debtors

	31 March 2012 £000	31 March 2011 £000
Prepayments and accrued income Other debtors	311 –	404 394
	311	798

13. Creditors (amounts falling due within one year)

	31 March 2012 £000	31 March 2011 £000
Accruals and deferred income Provision forinvestmentliabilities(Note 18)	1,268 117	329 630
Corporation tax payable	74	106
	1,459	1,065

Notes to the financial statements continued

forthe year ended 31 March 2012

14. Called-up equity share capital

	31 March 2012 £000	31 March 2011 £000
Allotted and fully paid: 68,638,871 (2011 57,468,808) ordinary shares of 5p	3,432	2,873

The capital ofthe company ismanaged in accordance with itsinvestment policy with a view to the achievement ofitsinvestment objective, asset out on page 6. The company is notsubjectto externally imposed capitalrequirements.

During the yearthe company issued 16,929,558 ordinary sharesfor cash at an average price of 81.7p (a premiumof 76.7p) pershare pursuantto a public offerforsubscription and 462,339 ordinary sharesfor cash at an average price of 75.5p (a premiumof 70.5p) pershare in connection with the dividend investmentscheme. 6,221,834 ordinary shares were re-purchased for cancellation during the year at a cost of £4,639,000.

15. Reserves

	Share premium £000	Capital redemption reserve £000	Capital reserve £000	Revaluation reserve £000	Revenue reserve £000
At 1 April 2011	35,461	410	6,167	(31)	833
Premiumon issue of ordinary shares	13,315	–	–	–	–
Share issue expenses	(767)	–	–	–	–
Shares purchased for cancellation –market purchases	–	24	(315)	–	–
Shares purchased for cancellation – tender offer	–	287	(4,324)	–	–
Reduction in share premiumaccount	(25,000)	–	25,000	–	–
Share premiumreduction expenses	–	–	(14)	–	–
Realised on disposal ofinvestments	–	–	786	–	–
Transfer on disposal ofinvestments	–	–	(1,602)	1,602	–
Movementsin fair value ofinvestments	–	–	–	2,611	–
Provision forinvestmentliabilities(Note 18)	–	–	–	513	–
Managementfee capitalised net of associated tax	–	–	(645)	–	–
Revenue return on ordinary activities aftertax	–	–	–	–	1,115
Dividendsrecognised in the year	–	–	(2,580)	–	(1,150)
At 31 March 2012	23,009	721	22,473	4,695	798

At 31 March 2012 distributable reserves amounted to £23,271,000 (2011 £6,879,000), comprising the capitalreserve,the revenue reserve and that part ofthe revaluation reserve relating to holding gains/losses on readily realisable listed fixed-interestinvestments.

On 20October 2011 shareholders approved a specialresolution to reduce the share premiumaccount ofthe company by £25,000,000. Court consent to the reduction was granted on 14December 2011, and accordingly on that date the share premiumaccount wasreduced by £25,000,000 and an equivalentsumwas credited to the capitalreserve (which is a distributable reserve).

16. Net asset value per share

The calculation of net asset value pershare as at 31 March 2012 is based on net assets of £55,128,000 (2011 £45,713,000) divided by the 68,638,871 (2011 57,468,808) ordinary sharesin issue atthat date.

17. Financial instruments

The company'sfinancial instruments comprise equity and fixed-interestinvestments, cash balances and liquid resourcesincluding debtors and creditors. The company holdsfinancial assetsin accordance with itsinvestment policy ofinvestingmainly in a portfolio of VCT-qualifying unquoted and AIM-quoted securities whilst holding a proportion ofits assetsin cash or near-cash investmentsin orderto provide a reserve ofliquidity.

Fixed assetinvestments(seeNote 8) are valued atfair value. For quoted investmentsthisis either bid price orthe latesttraded price, depending on the convention ofthe exchange on which the investmentis quoted.Unquoted investments are carried atfair value as determined by the directors in accordance with current venture capital industry guidelines. The fair value of all otherfinancial assets and liabilitiesisrepresented by their carrying value in the balance sheet.

In carrying on itsinvestment activities,the company is exposed to varioustypes ofrisk associated with the financial instruments andmarketsin which it invests. Themostsignificanttypes offinancialrisk facing the company aremarketrisk, creditrisk and liquidity risk. The company's approach tomanaging these risksisset out below together with a description ofthe nature and amount ofthe financial instruments held atthe balance sheet date.

17. Financial instruments continued

Marketrisk

The company'sstrategy formanaging investmentrisk is determined with regard to the company'sinvestment objective, as outlined in the business review on page 6. Themanagement ofmarketrisk is part ofthe investmentmanagement process and is a centralfeature of venture capital investment. The company's portfolio ismanaged in accordance with the policies and procedures described in the corporate governance statement on pages 20 to 24, having regard to the possible effects of adverse pricemovements, with the objective ofmaximising overallreturnsto shareholders. Investmentsin unquoted companies, by their nature, usually involve a higher degree ofrisk than investmentsin companies quoted on a recognised stock exchange, though the risk can bemitigated to a certain extent by diversifying the portfolio across businesssectors and asset classes. The overall disposition of the company's assetsismonitored by the board on a quarterly basis.

Details ofthe company'sinvestment portfolio atthe balance sheet date are set out on page 11. An analysis ofinvestments between debt and equity instrumentsis given inNote 8.

5.7% (31 March 2011 6.4%) by value ofthe company's net assets comprises equity securitieslisted on the London Stock Exchange or quoted on AIM. A 5%movementin the bid price ofthese securities as at 31 March 2012 would have changed net assets and the totalreturn forthe year by £158,000 (31 March 2011 £146,000).

58.7% (31 March 2011 65.9%) by value ofthe company's net assets comprisesinvestmentsin unquoted companies held atfair value. The valuation methods used by the company include the application of a price/earningsratio derived fromlisted companies with similar characteristics, and consequently the value ofthe unquoted element ofthe portfolio can be indirectly affected by pricemovements on the London Stock Exchange. A 5%movementin the valuation ofthe unquoted investments at 31 March 2012 would have changed net assets and the totalreturn forthe year by £1,618,000 (31 March 2011 £1,506,000).

Interestrate risk

Some ofthe company'sfinancial assets are interest-bearing, of which some are atfixed rates and some variable. As a result,the company is exposed to fair value interestrate risk due to fluctuationsin the prevailing levels ofmarketinterestrates.

(a) Fixed rate investments

The table below summarises weighted average effective interestratesforthe company'sfixed rate interest-bearing financial instruments:

	Total fixed rate portfolio £000	Weighted average interest rate %	31 March 2012 Weighted average period for which rate isfixed Years	Total fixed rate portfolio £000	Weighted average interest rate %	31 March 2011 Weighted average period for which rate isfixed Years
Listed fixed-interest investments	5,644	3.4%	1.4	8,955	2.9%	1.9
Short-term cash deposits	6,000	1.3%	0.2	2,000	0.7%	0.1
Fixed-rate investmentsin unquoted companies	2,087	9.8%	1.2	2,685	9.8%	2.2
	13,731			13,640

Due to the relatively short period tomaturity ofthe fixed rate investments held within the portfolio, itis considered that an increase or decrease of 25 basis pointsin interestrates as atthe reporting date would not have had a significant effect on the company's net assets ortotalreturn forthe year.

(b) Floating rate investments

The company'sfloating rate investments comprise floating-rate loansto unquoted companies and cash held in interest-bearing deposit accounts. The benchmark rate which determinesthe rate ofinterestreceivable on such investmentsistheUK bank base rate, which was 0.5% at 31 March 2012 (31 March 2011 0.5%). The amounts held in floating rate investments atthe balance sheet date were asfollows:

	31 March 2012 £000	31 March 2011 £000
Floating rate loansto unquoted companies Interest-bearing deposit accounts	15,117 9,116	16,123 1,996
	24,233	18,119

Notes to the financial statements continued

forthe year ended 31 March 2012

17. Financial instruments continued

Credit risk

Creditrisk isthe risk that a counterparty to a financial instrument willfailto discharge an obligation or commitmentthatit has entered into with the company. The investmentmanager and the board carry out a regularreview of counterparty risk. The carrying values offinancial assetsrepresentthemaximumcreditrisk exposure atthe balance sheet date.

At 31 March 2012 the company'sfinancial assets exposed to creditrisk comprised the following:

	31 March 2012 £000	31 March 2011 £000
Listed fixed-interestinvestments	5,644	8,955
Short-termcash deposits	6,000	2,000
Fixed-rate investmentsin unquoted companies	2,087	2,685
Floating rate loansto unquoted companies	15,117	16,123
Interest-bearing deposit accounts	9,116	1,996
Accrued dividends and interestreceivable	298	396
	38,262	32,155

Creditrisk relating to listed fixed-interestinvestmentsismitigated by investing in a portfolio ofinvestmentinstruments of high credit quality, comprising securitiesissued by theUKGovernment, EuropeanUnion governments andmajorUK and international companies and institutions. Creditrisk relating to loansto and preference sharesin unquoted companiesis considered to be part ofmarketrisk.

Those assets ofthe company which are traded on recognised stock exchanges are held on the company's behalf by third party custodians(Bank ofNew York Mellon Corporation in the case oflisted fixed-interestinvestments and BrewinDolphin Limited in the case of quoted equity securities). Bankruptcy orinsolvency of a custodian could cause the company'srights with respectto securities held by the custodian to be delayed orlimited.

Creditrisk arising on transactions with brokersrelatesto transactionsin quoted securities awaiting settlement. Risk relating to unsettled transactions is considered to be low due to the shortsettlement period involved and the high credit quality ofthe brokers used. The board furthermitigatesthe risk bymonitoring the quality ofservice provided by the brokers.

The company'sinterest-bearing deposit accounts aremaintained withmajorUK clearing banks.

There were no significant concentrations of creditrisk to counterparties at 31 March 2012 or 31 March 2011.No individualfinancial asset exposed to creditrisk exceeded 10.0% ofthe company's net assets at 31 March 2012 (31 March 2011 4.3%).

Liquidity risk

The company'sfinancial assetsinclude investmentsin unquoted equity securities which are nottraded on a recognised stock exchange and which generallymay be illiquid. As a result,the companymay not be able to realise some ofitsinvestmentsin these instruments quickly at an amount close to theirfair value in ordertomeetitsliquidity requirements, orto respond to specific eventssuch as a deterioration in the creditworthiness of any particularissuer.

The company'slisted fixed-interestinvestments are considered to be readily realisable asthey are of high credit quality as outlined above.

The company'sliquidity risk ismanaged on a continuing basis by the investmentmanagerin accordance with policies and procedureslaid down by the board. The company's overall liquidity risks aremonitored on a quarterly basis by the board.

The companymaintainssufficientinvestmentsin cash and readily realisable securitiesto pay accounts payable and accrued expenses. At 31 March 2012 these investments were valued at £20,760,000 (31 March 2011 £12,951,000).

18. Contingencies

At 31 March 2011 a provision of £630,000 wasmade in respect ofliabilities expected to arise under guarantees given to secure certain liabilities and obligations of an investee company. This provision wastreated as an unrealised lossin the revaluation reserve and wasincluded in creditors(amounts falling due within one year).During the year ended 31 March 2012 paymentstotalling £122,000 weremade underthe guarantees and treated asrealised capital losses, and £391,000 ofthe provision has been released, leaving a residual provision of £117,000 as at 31 March 2012. There were no unprovided contingentliabilities at 31 March 2012 or 2011.

At 31 March 2012 contingent assets notrecognised in the financialstatementsin respect of potential deferred proceedsfromthe sale ofinvestee companies amounted to approximately £510,000 (31 March 2011 £1,385,000). The extentto which these amounts will become receivable in due course is dependent on future events.

N o rth e r n 2 VCT P L C

N o r t h u m b e r l a n d H o u s e P r i n c e s s S q u a r e N e w c a s t l e u p o n Ty n e N E 1 8 E R

T 0 1 9 1 2 4 4 6 0 0 0 F 0 1 9 1 2 4 4 6 0 0 1 E n 2 v c t @ n v m . c o . u k

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