Axiomlab Group Plc
26 Curzon Street, London W1J 7TQ

 SHAREHOLDER UPDATE

 28 October 2004

Dear Shareholder,

This is the third update since Axiomlab Plc was delisted from trading on the Alternative Investment Market 2003 and can also be found on our website (www.axiomlab.com). It has been sent in conjunction with the Annual Report and Accounts of Axiomlab Group Plc for the period to the 30 April 2004, but reflects a more current update on the group and portfolio. As you may recall, Axiomlab Group Plc was formed as a new holding company as part of the return of capital procedures. The enclosed outlines the developments of the Axiomlab Group as well as the status of each of our portfolio investments, subject to appropriate commercial confidentiality and sensitivity. 

Overall, the portfolio has matured to the level where we are focusing only on those investments which we believe have the greatest probability of investor return with the consequence of spending less time and resource on the rest of the portfolio. Although our perspectives can change over time, we believe that the most significant shareholder value is likely to come from our investments in Techtran, Energetix and Proactis where we hold substantial stakes, as well as from Tenison and Image-Metrics, which have persuasive business models but where our holding is smaller.

The overhead of the group has been reduced significantly which is only partially captured in the submitted accounts: from a financial perspective, the North West Seed Fund operates as a stand-alone business and Techtran Group, although consolidated in the accounts, is treated as a separate portfolio investment.

Ray Ingleby and Alan Aubrey have moved to non-executive directors of Axiomlab Group and our total cost base has now been substantially reduced to  less than £175,000 per annum, and it has also been decided that it is unlikely that further funding will be made available to the investment portfolio. Accordingly, the directors are evaluating the most prudent use of the group cash resources (excluding any of Techtran’s cash and sufficient overhead for the next few years), including a possible further return of capital to shareholders.

Status of Group

As was stated in the Return of Capital documentation, the main elements of our business are now managing our portfolio of investments and managing third party funds with the overall intention of providing a shareholder return.

Portfolio

Techtran Group Limited

In July 2004, IP2IPO invested £2m in the company for a 19.99% stake.  Axiomlab originally invested circa £1m to launch the business and Axiomlab today has a 66% stake. Also in July, Alan Aubrey took over the role of CEO of the company and the CEO of IP2IPO, Dave Norwood, took a non-executive board seat of Techtran. IP2IPO came to the AIM market in September 2003 at a market capitalisation of £110m and has increased its market capitalization at the time of writing to circa £270m.

The funds invested will be used to further the development of the intellectual property emanating from the University of Leeds. Techtran’s website (www.techtrangroup.com) outlines the approach of the business and gives more detail about the underlying growing portfolio of companies whose development Techtran is supporting.

Energetix Group

Energetix Group (www.energetixgroup.com), which includes our investment in Thermetica Limited, specialises in developing products to meet the needs of the emerging global energy markets.  The company actively seeks intellectual property to develop into commercial products that meet the growing demand for secure, reliable and efficient energy solutions.

A subsidiary company of the group, Energetix MicroPower, was formed in early 2003 as a joint venture between Energetix Group and Battelle Memorial Institute to develop a small scale combined heat and power system from Battelle’s research and development programmes. The group had its first exit in April, successfully selling this division to the Baxi Group.  The sale proceeds were confidential but have both vindicated the model of sourcing and commercializing existing intellectual property as well as providing a financial platform for future growth of its other subsidiary businesses, particularly in the US.

Energetix is currently recruiting the key personnel to support these strategic expansion opportunities and reviewing the option of securing additional funds to support this expansion. The group is expanding its stock of intellectual property to meet the growing needs of the global energy and clean-tech markets. Axiomlab’s equity stake in the group remains at 36%.

Proactis Limited

Proactis (www.proactis.com) had a good year with 14 new accounts resulting from both direct and reseller channels. These included Scottish Borders Council, National Car Rental, Sport England, and Malmaison Hotels. In total, the company serves over 50 clients. Turnover was commensurate with the prior year. The company was also awarded a £150,000 Smart Award for innovation from the DTI for the internationalisation of its PROACTIS Spend Control software package. Axiomlab continues to hold 34% of the equity of the company.

Tenison EDA Limited

Tenison (www.tenison.com) has had an encouraging year with impressive sales to ARM, Conexant, and STMicroelectronics which continue to validate the importance of the software. The last two customers were significant in being repeat orders.

The USA market is seen very much as a strategic necessity in the evolution of the business and the company recently appointed Martin Harding as CEO. Martin is an EDA industry veteran and is based in San Jose, California. On the back of this appointment, the company is keenly evaluating expansion plans and appropriate financing. We currently have circa 16% of the company’s equity.

Image Metrics Plc

Image Metrics (www.image-metircs.com) has had a successful year with revenues approaching £1.5m and the business effectively breaking even. The Animation business unit secured a number of new customers including Sony Computer Entertainment, Electronic Arts, BBC, and Rockstar Games. The company's technology has been used to create highly realistic facial animation sequences by tracking the subtle nuances of the facial performance of acting talent employed by the client.

The Biomedical business unit extended the client relationship with Astra Zeneca, and has added Procter & Gamble. The unit has successfully deployed new software applications in the year. The first application was developed for Astra Zeneca's early stage drug discovery pipeline, in order to automate the analysis of cellular images in pre-clinical trials. The second is a class one medical device for the monitoring of Osteoporosis.

An additional equity investment was secured in September 2004 in which Axiomlab did not participate and it will enable the company to invest more rapidly, accelerating revenue growth in both areas of focus. Axiomlab continues to hold circa 7% of the company.

CSols Limited

CSols (www.csols.com) had a tough trading year with turnover slightly down from the prior year but with increasing losses. The management of the company voiced their concerns and the shareholder group as a whole were not enthusiastic about funding what was essentially a loss-making venture. It was therefore agreed that the US and UK parts of the business would complete separate management buyouts, with the former Plc shareholders retaining 20% of the equity of each spin out business as well as significant rights to an income stream from the royalties of the use of the underlying software. Axiomlab’s share of the equity in each business is approximately 6%.

NetLet Limited

Netlet (www.netlet.co.uk) has continued to operate in a challenging environment and owes much to the support of UNIPOL, the UK’s leading student housing charity. It has successfully rolled out its web-based system at Brighton and Cranfield Universities, but revenue has been negligible. It is in the process of negotiating various partnership deals with the aim of providing new revenue streams and joint marketing opportunities. It also is examining the possibility of entering the market for accommodation services for young professionals.

Netlet is in the process of securing £100,000 of funding.  Axiomlab is not participating in this round and would be diluted to 25% of the overall equity. 

iBase  Systems Limited

iBase (www.ibase.com) underwent a major restructuring exercise between March and September 2004 reducing personnel numbers by half. Trading has been very challenging but there remains a window for iBase to trade successfully out of the difficulties of their marketplace. The institutional investors collectively agreed to waive their board fees and to convert their formal non-executive roles to an informal support of the company. Malcolm Secrett now oversees the business and the company’s cash position is sufficiently secure for the expected trading profile. We do not expect any significant return of value from this investment. Axiomlab’s holding is some 9%.

BraddaHead Limited

In May 2004, after a thorough strategic review of the possibilities for the business and intensive discussions with management, the assets of the company were sold to the Norbain/Baxall group, based in Stockport. The proceeds of the sale amounted to the full payment of the preferred capital as well as a significant premium on the initial equity stake of £32,000. The total sale proceeds are still being estimated by the administrators of the voluntarily dissolved shell but should amount to some £370,000 for Axiomlab.

Casmir Limited

As reported last year, despite significant interest in its technology, Casmir has proved an unsuccessful investment and the company had reached a stage where it seemed prudent to close down operations in an orderly fashion.  The operations of Casmir were outsourced to Azolve Limited which has had some limited success in selling Casmir software. It is still unlikely that Axiomlab will realize any real value form this investment.

Empiricom Technologies Limited

Empiricom remains virtually dormant with no full-time staff and with no real developments of note in the business.  We have chosen to provide very limited support to the business as there remains a small chance that an application may present itself in the future which may allow some value to be retrieved from our investment.

Fund Management

This business is conducted through Axiomlab Investment Management Limited (AIML) and is a 100% owned subsidiary of Axiomlab Group Plc. Funds are managed for third parties in return for a management fee and for a participation or carry in the upside. The fund is regulated by the Financial Services Authority.

The North West Seed Fund which AIML manages for the North West Development Agency  has completed five deals, with a further 5 deals at the Heads of Terms stage. Recent deals since the last shareholder update include ACI-Metrics Limited and Parking Eye UK Limited.  Parking Eye provides an automated enforcement service to the parking industry while ACI-Metrics exploits technology in Near Infrared (NIR) sensing, allowing measurement of materials on a production line or in medical monitoring.

The Creative Capital Fund is anticipated to launch pre-Christmas 2004 with initial funding of £2.5m provided by the London Development Agency (LDA) to invest in creative industry seed deals in the Greater London Area on a matched deal basis. In parallel, we will look to raise a further £7.5m over the next 12 months of which £2.5m will be further provided by the LDA.

---------------------------------

We look forward to hearing your comments and welcome feedback. We again are grateful for your support.

Yours sincerely,

Fred Mendelsohn

Managing Director, Axiomlab Group Plc