H&Q LIFE SCIENCES INVESTORS

Semiannual Report

March 31, 2012

(Unaudited)

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To our Shareholders:

On March 31, 2012, the net asset value (NAV) per share of the Fund was $14.71. During the six month period ended March 31, 2012, total return at NAV of your Fund was 35.23%, with distributions reinvested. During the most recent quarter ended March 31, 2012, total return at NAV of your Fund was 17.63%, with distributions reinvested. The total investment return at market with distributions reinvested was 42.21% during the six month period ended March 31, 2012 and was 22.94% during the quarter ended March 31, 2012. Total return at market and NAV outperformed the NBI and the S&P 500 Index for the six month period ending March 31, 2012. Comparisons to relevant indices are listed below:

Investment Returns				Quarter Ended 3/31/12				Six-Months Ended 3/31/12
Investment Return at Market					22.94	%			42.21	%
Net Asset Value					17.63	%			35.23	%
NASDAQ Biotech Index (NBI)					18.21	%			32.35	%
S&P 500 Index					12.59	%			25.89	%

 

Portfolio Highlights

Overall, we are pleased with the performance of the Fund in the six month period ending March 31, 2012, both on an absolute basis and relative to the NBI and S&P 500 Index. It has been a very busy six months in the healthcare sector with several factors contributing to overall performance of the Fund and the sector. These include elevated merger and acquisition activity, the release of significant new clinical data, the approval of several new drugs and prominent Supreme Court hearings debating the constitutionality of recent healthcare reform legislation.

In this period, we believe that merger and acquisition (M&A) activity has been a key factor affecting sector performance. Public discussion of Express Scripts, Inc.'s offer to acquire Medco Health Solutions, Inc., made in July 2011, was highly visible during the report period and the transaction closed just after the end of the report period. Roche Holding AG's attempt to acquire Illumina Inc. also received

1

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considerable attention in the press even though the transaction was not ultimately completed. In addition, a number of other transactions were either proposed, announced or completed. These included Amgen, Inc.'s acquisition of Micromet, Inc., Celgene Corporation's acquisition of Avita Medical LTD, Cubist Pharmaceuticals, Inc.'s acquisition of Adolor Corporation, Jazz Pharmaceuticals, Inc.'s acquisition of Azur Pharma plc and Watson Pharmaceuticals, Inc.'s acquisition of Actavis Group. We think this M&A trend, which has occurred in a number of healthcare subsectors, continues to drive interest and valuation in the broad healthcare sector. We think that as long as the trend continues, healthcare has a good chance to outperform the broader market.

Positive clinical trial data also appears to be producing positive investor sentiment in the healthcare sector. We would highlight the disease Hepatitis C as an example. For many years this disease was treated by combination drug regimens that, in general, were only moderately effective, required long treatment duration and exhibited significant side effects. Approximately one year ago, new polymerase inhibitor drugs were introduced into the marketplace by Vertex Pharmaceuticals, Inc. and Merck & Co., Inc. These drugs, Incivek and Victrelis, respectively, when used with other existing medications, revolutionized the treatment of Hepatitis C, significantly improving efficacy without a substantial increase in side effects. Adoption of these drugs into common use has been rapid. The commercial launch of Incivek, for example, has been considered one of the best drug launches in many years. Both drugs have already reached what is commonly considered "blockbuster" status. Even more remarkable is that a second breakthrough in the treatment of Hepatitis C is already underway. In the last year or so, Pharmasset, Inc. (since acquired by Gilead Sciences, Inc.) demonstrated that one of its drugs, also in combination with several existing drugs, may well be even more effective and safer than the polymerase based drug regimens just introduced. Thus, the remarkable improvement in the standard of care for Hepatitis C patients demonstrated by Vertex's and Merck's novel drugs may well be soon replaced by even more impactful drug combinations from Gilead, Bristol-Myers Squibb Company, Abbott Laboratories and/or others. Furthermore, the impact of these new drug combinations has sparked a further increase in the M&A trend described above. In order to get access to these new therapeutic options, Gilead acquired Pharmasset and Bristol Myers acquired Inhibitex, Inc., each at impressive acquisition valuations. Moreover, M&A activity in the Hepatitus C area seems to have had a positive impact on healthcare sector valuations in general. It appears that investors are anticipating

2

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a broad increase in M&A activity. This sentiment has had a positive impact on valuations of a number of healthcare sector companies and has contributed to the general outperformance of the healthcare sector in general and the NBI in particular.

Other clinical trial data and product approvals are also impressive. Biogen Idec, Inc.'s BG-12 product for the treatment of Multiple Sclerosis continues to show promising efficacy. Medivation, Inc.'s Enzalutamide and Johnson & Johnson's Zytiga have each demonstrated impressive efficacy in prostate cancer. We now expect that one or more of three prominent drugs in development to treat obesity may be approved, after having each been strongly challenged during the regulatory approval process. With respect to approvals, 2011 concluded with a significant increase in the number of new molecular entities approved by FDA relative to recent years. This approval trend has continued in 2012. Examples wthin the last year include approvals of Vertex Pharmaceutials Inc.'s Kalydeco in Cystic Fibrosis, Regeneron Pharmaceuticals, Inc.'s Eylea in age-related macular edema, Takeda Pharmaceuticals Company Limited/Affymax, Inc.'s Omontys in anemia, Corcept Therapeutics, Inc.'s Korlym in Cushing's Syndrome, Seattle Genetics, Inc.'s Adcetris in Hodgkin's lymphoma and Amlyin Pharmaceuticals, Inc.'s Bydureon in diabetes. We see this approval trend as a sign both that the sector continues to develop novel new drugs and that the FDA continues to approve drugs that demonstrate impressive efficacy. We think these trends have been well documented and should extend positive sentiment about the sector.

Arguably the key healthcare event in this report period was the Supreme Court hearings arguing the constitutionality of key components of the Affordable Care Act (often referred to as the ACA). Since this law was passed in 2010, a number of key aspects have been challenged in the U.S. court system. In late March 2012, the Supreme Court held hearings examining various aspects of the law including: 1) the constitutionality of the so called individual mandate (which requires nearly all Americans to buy health insurance), 2) whether the individual mandate is severable from the rest of the ACA, 3) whether the proposed expansion of Medicaid is constitutional, and 4) whether the Supreme Court can even rule on items 1 through 3 above now or must wait until 2014 or later. Though it appears to be a minority opinion, it is our view that the ACA will be left largely intact by the Supreme Court. We expect that the Supreme Court will render its opinion on these matters by approximately midyear 2012.

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It is our view that many things have gone well for the healthcare sector in recent months. This has driven sector valuations upward. Overall, we remain positive about the sector. And while we may see some sort of pullback in the intermediate term (in recognition of the significant upside move observed in recent months), we still feel that the population demographics we have discussed in previous updates provides the possibility of additional upside in the healthcare sector.

Investment Changes

During the six month period ended March 31, 2012, other Fund activities have occurred. Within the public portfolio, the Fund established positions in several companies. Notable examples include Aegerion Pharmaceuticals, Inc., Alere Inc., Bruker Corporation, Covance Inc., Endo Pharmaceuticals Holdings, Inc., Illumina, Impax Laboratories Inc., Life Technologies Corporation, Medivation, Momenta Pharmaceuticals, Inc., Regeneron, Thermo Fisher Scientific, Inc., Vivus Inc., and Watson. Examples of exited positions include Adolor (acquired by Cubist), Affymax, Auxilium Inc., Corcept, Incyte Corporation, Inhibitex (acquired by Bristol Myers) and Pharmasset, Inc. (acquired by Gilead). Within the restricted portfolio, representative new positions included investments in Verastem, Inc. and Puma Biotechnology, Inc., each which attained a public listing after our investment. Concentric Medical, Inc., acquired by Stryker Corporation, was the notable exit from the restricted portfolio. In addition, Ceres Inc. completed an IPO and will exit the restricted portfolio after expiration of the Fund's trading restrictions.

As always, if you have questions, please feel free to call us at 617-772-8500.

Daniel R. Omstead, Ph.D.
President

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H&Q LIFE SCIENCES INVESTORS

LARGEST HOLDINGS BY ISSUER
(Excludes Short-Term Investments)

As of March 31, 2012
(Unaudited)

Issuer - Sector				% of Net Assets
Teva Pharmaceutical Industries Ltd. Generic Pharmaceuticals					4.5	%
Celgene Corporation Biotechnologies/Biopharmaceuticals					4.0	%
Alexion Pharmaceuticals, Inc. Biotechnologies/Biopharmaceuticals					3.9	%
Gilead Sciences, Inc. Biotechnologies/Biopharmaceuticals					3.8	%
Akorn, Inc. Generic Pharmaceuticals					3.3	%
Vertex Pharmaceuticals, Inc. Biotechnologies/Biopharmaceuticals					3.2	%
Mylan, Inc. Generic Pharmaceuticals					3.1	%
Perrigo Company Generic Pharmaceuticals					3.0	%
Regeneron Pharmaceuticals, Inc. Biotechnologies/Biopharmaceuticals					2.7	%
Illumina, Inc. Medical Devices & Diagnostics					2.5	%

 

PORTFOLIO

As of March 31, 2012

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H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

				CONVERTIBLE SECURITIES AND WARRANTS - 8.3% of Net Assets
SHARES				Convertible Preferred and Warrants (Restricted) (a) (b) - 8.3%				VALUE
				Biotechnologies/Biopharmaceuticals - 1.3%
	574,015			Celladon Corporation Series A-1				$	257,733
	2,227,272			EBI Life Sciences, Inc. Series A (c)					9,800
	2,227,272			Euthymics Biosciences, Inc. Series A (c)					2,043,967
	239,236			MacroGenics, Inc. Series D					156,006
	2,227,272			Neurovance, Inc. Series A (c)					173,282
									2,640,788
				Drug Discovery Technologies - 0.0%
	1,587,302			Agilix Corporation Series B (c)					0
				Healthcare Services - 2.0%
	3,589,744			PHT Corporation Series D (c)					3,338,462
	802,996			PHT Corporation Series E (c)					746,786
	99,455			PHT Corporation Series F (c)					92,493
									4,177,741
				Medical Devices and Diagnostics - 5.0%
	2,379,916			CardioKinetix, Inc. Series C					618,778
	4,277,223			CardioKinetix, Inc. Series D					470,495
	8,462,336			CardioKinetix, Inc. Series E					846,234
	N/A			CardioKinetix, Inc. warrants (expiration 12/11/19) (d)					0
	N/A			CardioKinetix, Inc. warrants (expiration 6/03/20) (d)					0
	N/A			CardioKinetix, Inc. warrants (expiration 7/07/21) (d)					0
	2,161,090			Dynex Technologies, Inc. Series A					388,996
	98,824			Dynex Technologies, Inc. warrants (expiration 4/01/19)					0
	7,877			Dynex Technologies, Inc. warrants (expiration 5/06/19)					0
	2,446,016			Labcyte, Inc. Series C					1,280,000
	2,161,090			Magellan Diagnostics, Inc. Series A					1,275,043
	98,824			Magellan Diagnostics, Inc. warrants (expiration 4/01/19)					0
	7,877			Magellan Diagnostics, Inc. warrants (expiration 5/06/19)					0
	1,031,992			OmniSonics Medical Technologies, Inc. Series A-1					1,032
	877,747			OmniSonics Medical Technologies, Inc. Series B-1					878

 

The accompanying notes are an integral part of the financial statements.
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H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

SHARES				Convertible Preferred and Warrants (Restricted) (a) (b) - continued				VALUE
	9,606,373			Palyon Medical Corporation Series A (c)				$	1,537,020
	43,478			TherOx, Inc. Series H					49,739
	99,646			TherOx, Inc. Series I					113,995
	3,280,000			Tibion Corporation Series B					1,640,000
	2,606,033			Veniti, Inc. Series A (c)					2,255,000
									10,477,210
PRINCIPAL AMOUNT				Convertible Notes - 0.0% (a)
				Drug Discovery Technologies - 0.0%
$	700,000			deCode Genetics, Inc., 3.50% due 4/15/11					0
				TOTAL CONVERTIBLE SECURITIES AND WARRANTS (Cost $24,899,375)					17,295,739
SHARES				COMMON STOCKS AND WARRANTS - 81.6%
				Biotechnologies/Biopharmaceuticals - 41.4%
	25,950			Acorda Therapeutics, Inc. (b)					688,972
	81,100			Aegerion Pharmaceuticals, Inc. (b)					1,121,613
	87,744			Alexion Pharmaceuticals, Inc. (b)					8,147,908
	104,752			Alkermes plc (b)					1,943,150
	306,603			Amarin Corporation plc (b) (f)					3,470,746
	29,301			Amgen, Inc.					1,992,175
	3,939,544			Antisoma plc (b) (e)					111,726
	99,795			ARIAD Pharmaceuticals, Inc. (b)					1,591,730
	82,000			Athersys, Inc. warrants (Restricted, expiration 6/08/12) (a) (b)					0
	25,082			Biogen Idec, Inc. (b)					3,159,580
	107,767			Celgene Corporation (b)					8,354,098
	168,851			Ceres, Inc. (Restricted) (a) (b)					2,429,935
	1,892			Ceres, Inc. warrants (Restricted, expiration 9/05/15) (a) (b)					1,570
	174,224			Cornerstone Therapeutics, Inc. (b)					1,038,375
	67,501			Cubist Pharmaceuticals, Inc. (b)					2,919,418
	93,420			Curis, Inc. (b)					450,284
	175,991			Dendreon Corporation (b)					1,875,184
	114,913			Elan Corporation plc (b) (f)					1,724,844
	163,151			Gilead Sciences, Inc. (b)					7,969,926
	268,122			Human Genome Sciences, Inc. (b)					2,209,325
	272,079			Keryx Biopharmaceuticals, Inc. (b)					1,354,953
	27,683			Momenta Pharmaceuticals, Inc. (b)					424,104

 

The accompanying notes are an integral part of the financial statements.
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H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

SHARES				Biotechnologies/ Biopharmaceuticals - continued				VALUE
	315,055			Nektar Therapeutics (b)				$	2,495,236
	262,647			Neurocrine Biosciences, Inc. (b)					2,093,297
	312,230			NPS Pharmaceuticals, Inc. (b)					2,135,653
	113,100			OncoGenex Pharmaceutical, Inc. (b)					1,503,099
	37,500			OncoGenex Pharmaceutical, Inc. warrants (Restricted, expiration 10/22/15) (a) (b)					123,000
	48,743			Onyx Pharmaceuticals, Inc. (b)					1,836,636
	343,067			Puma Biotechnology, Inc. (Restricted) (a) (b)					1,286,501
	N/A			Puma Biotechnology, Inc. warrants (Restricted, expiration 10/04/21) (a) (b)					0
	48,995			Regeneron Pharmaceuticals, Inc. (b)					5,713,797
	195,000			Targacept, Inc. (b)					998,400
	64,581			United Therapeutics Corporation (b)					3,043,703
	274,325			Verastem, Inc. (Restricted) (b)					2,698,535
	161,202			Vertex Pharmaceuticals, Inc. (b)					6,610,894
	111,941			VIVUS, Inc. (b)					2,503,001
									86,021,368
				Drug Delivery - 2.1%
	4,133,334			A.P. Pharma, Inc. (b)					1,529,333
	2,066,667			A.P. Pharma, Inc. warrants (Restricted, expiration 7/01/16) (a) (b)					330,667
	711,350			IntelliPharmaCeutics International, Inc. (b) (c)					2,006,007
	319,800			IntelliPharmaCeutics International, Inc. warrants (Restricted, expiration 2/01/13) (a) (b) (c)					140,712
	319,800			IntelliPharmaCeutics International, Inc. warrants (Restricted, expiration 2/01/16) (a) (b) (c)					332,592
									4,339,311
				Drug Discovery Technologies - 0.0%
	1,601,039			MZT Holdings, Inc. (b) (c)					64,842
	46			Zyomyx, Inc. (Restricted) (a) (b)					11
									64,853
				Generic Pharmaceuticals - 17.1%
	580,157			Akorn, Inc. (b)					6,787,837
	162,487			Impax Laboratories, Inc. (b)					3,993,930
	279,254			Mylan, Inc. (b)					6,548,506
	60,055			Perrigo Company					6,204,282
	209,841			Teva Pharmaceutical Industries Ltd. (f)					9,455,436
	37,820			Watson Pharmaceuticals, Inc. (b)					2,536,209
									35,526,200

 

The accompanying notes are an integral part of the financial statements.
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H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

SHARES				Healthcare Services - 2.4%				VALUE
	321,791			Addus HomeCare Corporation (b)				$	1,592,865
	148,148			Aveta, Inc. (Restricted) (a) (g)					1,259,258
	43,400			Covance, Inc. (b)					2,067,142
									4,919,265
				Medical Devices and Diagnostics - 10.5%
	113,185			Accuray, Inc. (b)					799,086
	130,851			Alere, Inc. (b)					3,403,434
	127,413			Bruker Corporation (b)					1,950,693
	130,000			Ceracor Laboratories, Inc. (Restricted) (a) (b)					82,757
	42,028			Gen-Probe, Inc. (b)					2,791,080
	35,561			iCAD, Inc. (b)					17,425
	119,389			iCAD, Inc. (Locked-up until 6/30/12) (Restricted) (a)					55,576
	26,533			iCAD, Inc. (Locked-up until 12/31/12) (Restricted) (a)					11,701
	17,668			IDEXX Laboratories, Inc. (b)					1,545,067
	100,700			Illumina, Inc. (b)					5,297,827
	67,000			Life Technologies Corporation (b)					3,270,940
	447,080			Medwave, Inc. (b)					0
	62,005			OmniSonics Medical Technologies, Inc. (Restricted) (a) (b)					62
	21,531			Palomar Medical Technologies, Inc. (b)					201,100
	139			Songbird Hearing, Inc. (Restricted) (a) (b)					93
	42,333			Thermo Fisher Scientific, Inc.					2,386,734
									21,813,575
				Pharmaceuticals - 8.1%
	27,590			Endo Pharmaceuticals Holdings, Inc. (b)					1,068,561
	51,377			Medivation, Inc. (b)					3,838,889
	47,597			Sanofi, CVR (expiration 12/31/20) (b) (h)					64,256
	447,983			Santarus, Inc. (b)					2,620,700
	43,217			Shire plc (f)					4,094,811
	238,638			Warner Chilcott plc (b)					4,011,505
	625,000			Zogenix, Inc. (b)					1,250,000
									16,948,722
				TOTAL COMMON STOCKS AND WARRANTS (Cost $149,748,229)					169,633,294
				EXCHANGE TRADED FUND - 1.0%
	16,860			iShares Nasdaq Biotechnology Index Fund					2,078,838
				TOTAL EXCHANGE TRADED FUND (Cost $2,050,784)					2,078,838

 

The accompanying notes are an integral part of the financial statements.
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H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

PRINCIPAL AMOUNT				SHORT-TERM INVESTMENT - 6.7%				VALUE
$	13,822,000			Repurchase Agreement, State Street Bank and Trust Co., repurchase value $13,822,012, 0.01%, dated 03/30/12, due 04/02/12 (collateralized by U.S. Treasury Note 4.23%, 06/30/16, market value $14,102,344)				$	13,822,000
				TOTAL SHORT-TERM INVESTMENT (Cost $13,822,000)					13,822,000
				TOTAL INVESTMENTS BEFORE MILESTONE INTERESTS - 97.6% (Cost $190,520,388)					202,829,871
INTEREST				MILESTONE INTERESTS (Restricted) (a) (b) - 3.1%
				Biotechnologies/Biopharmaceuticals - 1.8%
	1			Targegen Milestone Interest					3,724,119
				Medical Devices and Diagnostics - 1.3%
	1			Interlace Medical Milestone Interest					2,135,066
	1			Xoft Milestone Interest					657,952
									2,793,018
				TOTAL MILESTONE INTERESTS (Cost $4,543,753)					6,517,137
				TOTAL INVESTMENTS - 100.7% (Cost $195,064,141)					209,347,008
				OTHER LIABILITIES IN EXCESS OF ASSETS - (0.7)%					(1,364,689	)
				NET ASSETS - 100%				$	207,982,319

 

(a)  Security fair valued.

(b)  Non-income producing security.

(c)  Affiliated issuers in which the Fund holds 5% or more of the voting securities (total market value of $12,740,963).

(d)  Number of warrants to be determined at a future date.

(e)  Foreign security.

(f)  American Depository Receipt

(g)  Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers.

(h)  Contingent Value Rights

 

The accompanying notes are an integral part of the financial statements.
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H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

Other Information

The Fund uses a three-tier hierarchy to prioritize the assumptions, referred to as inputs, used in valuation techniques to measure fair value. The three-tier hierarchy of inputs is summarized in three broad levels. Level 1 includes quoted prices in active markets for identical investments. Level 2 includes prices determined using other significant observable inputs (including quoted prices for similar investments, interest rates, credit risk, etc.). Level 3 includes prices determined using significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments). These inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used as of March 31, 2012 to value the Fund's net assets. For the six months ended March 31, 2012, there were no transfers between Levels 1 and 2.

Assets at Value				Level 1				Level 2				Level 3				Total
Convertible Securities and Warrants
Biotechnologies/Biopharmaceuticals												$	2,640,788			$	2,640,788
Drug Discovery Technologies													0				0
Healthcare Services													4,177,741				4,177,741
Medical Devices and Diagnostics													10,477,210				10,477,210
Common Stocks and Warrants
Biotechnologies/Biopharmaceuticals				$	79,481,827								6,539,541				86,021,368
Drug Delivery					3,535,340								803,971				4,339,311
Drug Discovery Technologies					64,842								11				64,853
Generic Pharmaceuticals					35,526,200								—				35,526,200
Healthcare Services					3,660,007								1,259,258				4,919,265
Medical Devices and Diagnostics					21,663,386								150,189				21,813,575
Pharmaceuticals					16,948,722								—				16,948,722
Exchange Traded Fund					2,078,838								—				2,078,838
Short-Term Investment					—			$	13,822,000				—				13,822,000
Milestone Interests
Biotechnologies/Biopharmaceuticals					—				—				3,724,119				3,724,119
Medical Devices and Diagnostics					—				—				2,793,018				2,793,018
Other Assets					—				—				1,365,576				1,365,576
Total				$	162,959,162			$	13,822,000			$	33,931,422			$	210,712,584

The accompanying notes are an integral part of the financial statements.
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H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2012

(Unaudited)

(continued)

Other Information, continued

The following is a reconciliation of level 3 assets for which significant unobservable inputs were used to determine fair value. Realized and unrealized gain (loss) disclosed in the reconciliation are included in Net Realized and Unrealized Gain (Loss) on the Statement of Operations.

Level 3 Assets				Balance as of September 30, 2011				Realized gain/loss and change in unrealized appreciation (depreciation)				Cost of purchases				Proceeds from sales				Net transfers in (out of) Level 3				Balance as of March 31, 2012
Convertible Securities and Warrants
Biotechnologies/ Biopharmaceuticals				$	2,123,763			($	6,831	)		$	756,423			($	232,567	)			—			$	2,640,788
Drug Discovery Technologies					3,200,737				(779,945	)			28				(2,420,820	)			—				0
Healthcare Services					3,503,912				673,829				—				—				—				4,177,741
Medical Devices and Diagnostics					17,269,542				(571,308	)			756,215				(6,977,239	)			—				10,477,210
Common Stocks and Warrants
Biotechnologies/ Biopharmaceuticals					61,875				446,383				6,039,911				(8,628	)			—				6,539,541
Drug Delivery					890,798				(86,827	)			—				—				—				803,971
Drug Discovery Technologies					11				—				—				—				—				11
Healthcare Services					1,333,332				(74,074	)			—				—				—				1,259,258
Medical Devices and Diagnostics					150,808				46,964				—				(47,583	)			—				150,189
Milestone Interests
Biotechnologies/ Biopharmaceuticals					4,627,443				(35,878	)			—				(867,446	)			—				3,724,119
Medical Devices and Diagnostics					3,424,284				1,303,656				620				(1,935,542	)			—				2,793,018
Other Assets					746,232				—				1,094,439				(475,095	)			—				1,365,576
Total				$	37,332,737			$	915,969			$	8,647,636			($	12,964,920	)			—			$	33,931,422
Net change in unrealized appreciation (depreciation) from investments still held as of March 31, 2012																								$	1,678,334

 

In May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-04 "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS")." ASU 2011-04 includes common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 will require reporting entities to disclose the following information for fair value measurements categorized within Level 3 of the fair value hierarchy: quantitative information about the unobservable inputs used in the fair value measurement, the valuation processes used by the reporting entity, and a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs. In addition, ASU 2011-04 will require reporting entities to make disclosures about amounts and reasons for all transfers into and out of Level 1 and Level 2 fair value measurements. The new and revised disclosures are effective for interim and annual reporting periods beginning after December 15, 2011. At this time, management is evaluating the implications of ASU No. 2011-04 and its impact on the financial statements.

The accompanying notes are an integral part of the financial statements.
12

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H&Q LIFE SCIENCES INVESTORS

STATEMENT OF ASSETS AND LIABILITIES

MARCH 31, 2012

(Unaudited)

ASSETS:
Investments in unaffiliated issuers, at value (cost $176,499,645)				$	190,088,908
Investments in affiliated issuers, at value (cost $14,020,743)					12,740,963
Milestone interests, at value (cost $4,543,753)					6,517,137
Cash					586
Dividends and interest receivable					21,834
Receivable for investments sold					1,768,097
Prepaid expenses					46,354
Receivable from investment adviser					37,712
Other assets (See Note 1)					1,365,575
Total assets					212,587,166
LIABILITIES:
Payable for investments purchased				$	4,211,121
Accrued advisory fee					194,547
Accrued shareholder reporting fees					51,992
Accrued trustee fees					8,281
Accrued other					138,906
Total liabilities					4,604,847
NET ASSETS				$	207,982,319
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per share, unlimited number of shares authorized, amount paid in on 14,137,535 shares issued and outstanding				$	169,484,213
Accumulated net investment loss					(928,339	)
Accumulated net realized gain on investments, milestone interests and options					25,143,578
Net unrealized gain on investments and milestone interests					14,282,867
Total net assets (equivalent to $14.71 per share based on 14,137,535 shares outstanding)				$	207,982,319

 

The accompanying notes are an integral part of these financial statements.
13

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H&Q LIFE SCIENCES INVESTORS

STATEMENT OF OPERATIONS

SIX MONTHS ENDED MARCH 31, 2012

(Unaudited)

INVESTMENT INCOME:
Dividend income (net of foreign tax of $21,001)				$	685,854
Interest Income					698
Total investment income					686,552
EXPENSES:
Advisory fees					1,083,360
Legal fees					127,249
Trustees' fees and expenses					102,557
Shareholder reporting					88,735
Administration and auditing fees					78,182
Custodian fees					41,248
Transfer agent fees					26,640
Excise tax					37,712
Other (see Note 2)					66,920
Total expenses					1,652,603
Less: Expenses reimbursed by investment adviser (see Note 2)					(37,712	)
Net Expenses					1,614,891
Net investment loss					(928,339	)
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments in unaffiliated issuers					24,358,642
Investments in affiliated issuers					2,463,416
Closed or expired option contracts written					22,579
Net realized gain					26,844,637
Change in unrealized appreciation (depreciation)
Investments in unaffiliated issuers					29,556,780
Investments in affiliated issuers					(2,295,598	)
Milestone interests					1,267,778
Option contracts written					(24,255	)
Change in unrealized appreciation (depreciation)					28,504,705
Net realized and unrealized gain (loss)					55,349,342
Net increase in net assets resulting from operations				$	54,421,003

 

The accompanying notes are an integral part of these financial statements.
14

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H&Q LIFE SCIENCES INVESTORS

STATEMENTS OF CHANGES IN NET ASSETS

				Six months ended March 31, 2012 (Unaudited)				Year ended September 30, 2011
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment loss				($	928,339	)		($	3,801,035	)
Net realized gain					26,844,637				32,456,390
Change in net unrealized appreciation					28,504,705				8,811,693
Net increase in net assets resulting from operations					54,421,003				37,467,048
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized capital gains					(12,581,680	)			(20,290,994	)
Total distributions					(12,581,680	)			(20,290,994	)
CAPITAL SHARE TRANSACTIONS:
Fund shares repurchased (975,059 and 8,068,135 shares, respectively) (See Notes 1 and 5)					(10,877,720	)			(107,138,775	)
Reinvestment of distributions (534,180 and 804,408 shares, respectively)					6,465,683				9,089,235
Total capital share transactions					(4,412,037	)			(98,049,540	)
Net increase (decrease) in net assets					37,427,286				(80,873,486	)
NET ASSETS:
Beginning of period					170,555,033				251,428,519
End of period				$	207,982,319			$	170,555,033
*Includes accumulated net investment loss of:				($	928,339	)		$	0	(a)

 

(a)  Reflects reclassifications to the Fund's capital accounts to reflect income and gains available for distribution under income tax regulations.

 

The accompanying notes are an integral part of these financial statements.
15

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H&Q LIFE SCIENCES INVESTORS

STATEMENT OF CASH FLOWS

SIX MONTHS ENDED MARCH 31, 2012

(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Purchases of portfolio securities				($	68,894,827	)
Purchases to close option contracts written					(32,115	)
Net maturities of short-term investments					(9,400,730	)
Sales of portfolio securities					96,889,728
Proceeds from option contracts written					11,620
Interest income received					422
Dividend income received					668,780
Other operating receipts (expenses paid)					(2,249,147	)
Net cash provided from operating activities					16,993,731
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions paid					(6,115,997	)
Fund shares repurchased					(10,877,720	)
Net cash used for financing activities					(16,993,717	)
NET INCREASE IN CASH					14
CASH AT BEGINNING OF PERIOD					572
CASH AT END OF PERIOD				$	586
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH PROVIDED FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations				$	54,421,003
Purchases of portfolio securities					(68,894,827	)
Purchases to close option contracts written					(32,115	)
Net maturities of short-term investments					(9,400,730	)
Sales of portfolio securities					96,889,728
Proceeds from option contracts written					11,620
Accretion of discount					(269	)
Net realized gain on investments and options					(26,844,637	)
Decrease in net unrealized appreciation (depreciation) on investments and options					(28,504,705	)
Increase in dividends and interest receivable					(17,081	)
Increase in accrued expenses					25,695
Increase in prepaid expenses and other assets					(659,951	)
Net cash provided from operating activities				$	16,993,731

 

Noncash financing activities not included herein consist of reinvested distributions to shareholders of $6,465,683.

Noncash operating activity not included herein consists of corporate actions of $108,346.

 

The accompanying notes are an integral part of these financial statements.
16

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H&Q LIFE SCIENCES INVESTORS

FINANCIAL HIGHLIGHTS

				Six months ended March 31, 2012				Year ended September 30,
				(Unaudited)				2011				2010				2009				2008				2007
OPERATING PERFORMANCE FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Net asset value per share, Beginning of period				$	11.70			$	11.51			$	11.32			$	13.18			$	15.34			$	13.94
Net investment loss (1)					(0.07	)(2)			(0.19	)(3)			(0.09	)(4)			(0.15	)			(0.14	)			(0.09	)
Net realized and unrealized gain (loss)					3.90				1.26				0.53				(1.03	)			(0.87	)			2.63
Total increase (decrease) from investment operations					3.83				1.07				0.44				(1.18	)			(1.01	)			2.54
Distributions to shareholders from:
Net realized capital gain					(0.90	)			(1.01	)			(0.29	)			(0.10	)			(1.15	)			(1.14	)
Return of capital (tax basis)					—				—				—				(0.58	)			—				—
Total distributions					(0.90	)			(1.01	)			(0.29	)			(0.68	)			(1.15	)			(1.14	)
Increase resulting from shares repurchased (1)					0.08				0.13				0.04				—				—				—
Net asset value per share, End of period				$	14.71			$	11.70			$	11.51			$	11.32			$	13.18			$	15.34
Per share market value, End of period				$	13.83			$	10.46			$	9.59			$	9.23			$	10.62			$	13.53
Total investment return at market value					42.21	%*			19.15	%			7.05	%			(5.56	%)			(13.52	%)			10.56	%
RATIOS
Expenses to average net assets					1.79	%**			1.77	%			1.52	%			1.58	%			1.56	%			1.60	%
Expenses to average net assets with reimbursement					1.75	%**			—				—				—				—				—
Net investment loss to average net assets					(1.00	%)**(2)			(1.54	%)(3)			(0.79	%)(4)			(1.38	%)			(0.99	%)			(0.60	%)
SUPPLEMENTAL DATA
Net assets, end of period (in millions)				$	208			$	171			$	251			$	249			$	278			$	308
Portfolio turnover rate					40.86	%*			93.57	%			57.45	%			82.88	%			73.89	%			112.69	%

 

*  Not Annualized.

**  Annualized.

(1) Computed using average shares outstanding.

(2) Includes a special dividend from an issuer in the amount of $1.00 per share. Excluding the special dividend, the ratio of net investment loss to average net assets would have been (1.60%).

(3) Includes a special dividend from an issuer in the amount of $0.02 per share. Excluding the special dividend, the ratio of net investment loss to average net assets would have been (1.66%).

(4) Includes a special dividend from an issuer in the amount of $0.06 per share. Excluding the special dividend, the ratio of net investment loss to average net assets would have been (1.28%).

 

The accompanying notes are an integral part of these financial statements.
17

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H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(Unaudited)

(1)  Organization and Significant Accounting Policies

H&Q Life Sciences Investors (the Fund) is a Massachusetts business trust registered under the Investment Company Act of 1940 as a diversified closed-end management investment company. The Fund's investment objective is long-term capital appreciation through investment in companies in the life sciences industry (including biotechnology, pharmaceutical, diagnostics, managed healthcare and medical equipment, hospitals, healthcare information technology and services, devices and supplies), agriculture and environmental management. The Fund invests primarily in securities of public and private companies that are believed by Hambrecht & Quist Capital Management LLC (the Adviser) to have significant potential for above-average growth.

The preparation of these financial statements requires the use of certain estimates by management in determining the Fund's assets, liabilities, revenues and expenses. Actual results could differ from these estimates and such differences could be material. The following is a summary of significant accounting policies consistently followed by the Fund, which are in conformity with accounting principles generally accepted in the United States of America. Events or transactions occurring after March 31, 2012 through the date that the financial statements were issued have been evaluated in the preparation of the financial statements.

Investment Valuation

Shares of publicly traded investments listed on national securities exchanges or in the over-the-counter market are typically valued at the last sale price, as of the close of trading, generally 4 p.m., Eastern time. The Trustees have established and approved fair valuation policies and procedures with respect to securities for which effective quoted prices may not be available. Shares of publicly traded investments for which market quotations are not readily available, such as stocks for which trading has been halted or for which there are no current day sales, or whose quoted price may otherwise not reflect fair value are valued in good faith by the Adviser using a fair valuation process described below. Restricted securities of companies that are publicly traded are valued typically based on the closing market quote on the valuation date adjusted for the impact of the restriction as determined in good faith by the Adviser also using the fair valuation process described below. Non-traded warrants of publicly traded companies are typically valued using the Black-Scholes model, which incorporates both observable and unobservable inputs. Short-term investments with a maturity of 60 days or less are valued at amortized cost, which approximates fair value.

Convertible preferred shares, warrants or convertible note interests in private companies, milestone interests, other restricted securities, as well as shares of publicly traded companies for which market quotations are not available or which do not reflect fair value, are typically valued in good faith, based upon the recommendations made by the Adviser pursuant to fair valuation policies and procedures approved by the Trustees. Each fair value determination is based on a consideration of relevant factors. Factors the Adviser considers may include (i) the existence of any contractual restrictions on the disposition of securities; (ii) information obtained from the company, which may include an analysis of the company's financial statements, the company's products or intended markets or the company's technologies; (iii) the price of a security negotiated at arm's length in an issuer's completed subsequent round of financing; (iv) the price and extent of public trading in similar securities of the issuer or of comparable companies; or (v) a probability and time value adjusted analysis of contractual term. Where appropriate, multiple valuation methodologies are applied to confirm fair value. Due to the uncertainty inherent in the valuation process, despite the Adviser's good faith effort, such

18

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H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

estimates of fair value may differ significantly from the values that would have been used had a ready market for the investments existed, and differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations currently assigned.

Options on Securities

An option contract is a contract in which the writer (seller) of the option grants the buyer of the option, upon payment of a premium, the right to purchase from (call option) or sell to (put option) the writer a designated instrument at a specified price within a specified period of time. Certain options, including options on indices, will require cash settlement by the Fund if the option is exercised. The Fund may enter into option contracts in order to hedge against potential adverse price movements in the value of portfolio assets, as a temporary substitute for selling selected investments to lock in the purchase price of a security or currency which it expects to purchase in the near future as a temporary substitute for purchasing selected investments, or to enhance potential gain.

The Fund's obligation under an exchange traded written option or investment in an exchange-traded purchased option is valued at the last sale price or in the absence of a sale, the mean between the closing bid and asked prices. Gain or loss is recognized when the option contract expires, is exercised or is closed.

If the Fund writes a covered call option, the Fund foregoes, in exchange for the premium, the opportunity to profit during the option period from an increase in the market value of the underlying security above the exercise price. If the Fund writes a put option it accepts the risk of a decline in the market value of the underlying security below the exercise price. Over-the-counter options have the risk of the potential inability of counterparties to meet the terms of their contracts. The Fund's maximum exposure to purchased options is limited to the premium initially paid. In addition, certain risks may arise upon entering into option contracts including the risk that an illiquid secondary market will limit the Fund's ability to close out an option contract prior to the expiration date and that a change in the value of the option contract may not correlate exactly with changes in the value of the securities or currencies hedged.

All options on securities and securities indices written by the Fund are required to be covered. When the Fund writes a call option, this means that during the life of the option the Fund may own or have the contractual right to acquire the securities subject to the option or may maintain with the Fund's custodian in a segregated account appropriate liquid securities in an amount at least equal to the market value of the securities underlying the option. When the Fund writes a put option, this means that the Fund will maintain with the Fund's custodian in a segregated account appropriate liquid securities in an amount at least equal to the exercise price of the option. The Fund may use option contracts to gain or hedge exposure to financial market risk.

19

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H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

Transactions in call options written for the six months ended March 31, 2012 were as follows:

				Contracts				Premiums
Options outstanding, September 30, 2011					194			$	43,073
Options written					111				11,620
Options terminated in closing purchase transactions					(194	)			(43,073	)
Options exercised					—				—
Options expired					(111	)			(11,620	)
Options outstanding, March 31, 2012					—			$	—

 

Derivatives not accounted for as hedging instruments under ASC 815				Statement of Assets and Liabilities Location				Statement of Operations Location
The Fund had no open options written contracts at March 31, 2012								Net realized gain on investments in unaffiliated issuers				$	0
								Net realized gain on closed or expired option contracts written				$	22,579
								Change in unrealized appreciation (depreciation) on investments in unaffiliated issuers				$	0
								Change in unrealized appreciation (depreciation) on option contracts written				($	24,255	)

 

Milestone Interests

The Fund holds financial instruments which reflect the current value of future milestone payments the Fund may receive as a result of contractual obligations from other parties. The value of such payments are adjusted to reflect the estimated risk with the relative uncertainty of both the timing and the achievement of individual milestones. A risk to the Fund is that the milestones will not be achieved and no payment will be received by the Fund. The milestone interests were received as part of the proceeds from the sale of three private companies.

The following is a summary of the impact of the three milestone interest on the financial statements as of and for the six months ended March 31, 2012:

Statement of Assets and Liabilities, Milestone interests, at value				$	6,517,137
Statement of Assets and Liabilities, Net unrealized loss on investments, milestone interests and options				$	1,973,384
Statement of Operations, Net realized gain on investments in unaffiliated issuers				$	0
Statement of Operations, Change in unrealized appreciation (depreciation) on milestone interests				$	1,267,778

20

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H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

Other Assets

Other assets in the Statement of Assets and Liabilities consists of amounts due to the Fund at various times in the future in connection with the sale of investments in five private companies.

Investment Transactions and Income

Investment transactions are recorded on a trade date basis. Gains and losses from sales of investments are recorded using the "identified cost" method. Interest income is recorded on the accrual basis, adjusted for amortization of premiums and accretion of discounts. Dividend income is recorded on the ex-dividend date, minus any foreign taxes.

The aggregate cost of purchases and proceeds from sales of investment securities (other than short-term investments) for the six months ended March 31, 2012 totaled $72,459,708 and $95,596,344, respectively.

Repurchase Agreements

In managing short-term investments the Fund may from time to time enter into transactions in repurchase agreements. In a repurchase agreement, the Fund's custodian takes possession of the underlying collateral securities from the counterparty, the market value of which is at least equal to the principal, including accrued interest, of the repurchase transaction at all times. In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral by the Fund may be delayed.

Distribution Policy

Pursuant to a Securities and Exchange Commission exemptive order, the Fund has implemented a fixed distribution policy (the Policy) that permits the Fund to make quarterly distributions at a rate set by the Board of Trustees. Under the current Policy, the Fund intends to make quarterly distributions at a rate of 2% of the Fund's net assets to shareholders of record. The Fund intends to use net realized capital gains when making quarterly distributions, if available, but the Policy would result in a return of capital to shareholders if the amount of the distribution exceeds the Fund's net investment income and realized capital gains. Under the Policy realized capital gains in excess of the total distributed would be included in the December distribution. Previously, for the period April 5, 2010 to November 1, 2010, the Fund had made quarterly distributions a rate of 1.25% of the Fund's net assets. The Board of Trustees suspended the Policy on August 4, 2009 and reinstated the Policy on April 5, 2010. Prior to August 4, 2009, the Fund made quarterly distributions a rate of 2% of the Fund's net assets. The Policy has been established by the Board of Trustees and may be changed by them without shareholder approval. The Board regularly reviews the Policy and the distribution rate considering the purpose and effect of the Policy, the financial market environment, and the Fund's income, capital gains and capital available to pay distributions.

The Fund's policy is to declare distributions in stock. The distributions are automatically paid in newly-issued full shares of the Fund unless otherwise instructed by the shareholder. Fractional shares will generally be settled in cash, except for registered shareholders with book entry accounts at the Fund's transfer agent who will have whole and fractional shares added to their accounts. The Fund's transfer agent delivers an election card and instructions to each registered shareholder in connection with each distribution. The number of shares issued will be determined by dividing the dollar amount of the distribution by the lower of net asset value or market price on the pricing date. If a shareholder elects to receive a distribution in cash, rather than in shares, the shareholder's relative ownership in the Fund will be reduced.

21

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H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

The shares reinvested will be valued at the lower of the net asset value or market price on the pricing date. Distributions in stock will not relieve shareholders of any federal, state or local income taxes that may be payable on such distributions.

Share Repurchase Program

In March 2012, the Trustees approved the renewal of the repurchase program to allow the Fund to repurchase up to 12% of its outstanding shares in the open market for a one year period beginning July 11, 2012. Prior to this renewal, in June 2011, the Trustees authorized a share repurchase program to allow the Fund to repurchase up to 12% of its outstanding shares for a one year period beginning July 11, 2011. The share repurchase program is intended to enhance shareholder value and potentially reduce the discount between the market price of the Fund's shares and the Fund's net asset value.

During the period October 01, 2011 to March 31, 2012, the Fund repurchased 975,059 shares at a total cost of $10,877,720. The weighted average discount per share between the cost of repurchase and the net asset value applicable to such shares at the date of repurchase was 9.85%.

During the period July 11, 2011 to September 30, 2011, the Fund repurchased 271,823 shares at a total cost of $2,923,913. The Weighted average discount per share between the cost of repurchase and the net asset value applicable to such shares at the date of repurchase was 10.40%. The Fund also repurchased shares during the year under a tender offer. See Note 5.

Federal Taxes

It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute to its shareholders substantially all of its taxable income and its net realized capital gains, if any. Therefore, no Federal income or excise tax provision is required.

As of March 31, 2012, the Fund had no uncertain tax positions that would require financial statement recognition or disclosure. The Fund's federal tax returns are subject to examination by the Internal Revenue Service for a period of three years.

Distributions

The Fund records all distributions to shareholders from net investment income and realized gains, if any, on the ex-dividend date. Such distributions are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences include temporary and permanent differences from losses on wash sale transactions, installment sale adjustments and ordinary loss netting to reduce short term capital gains. Reclassifications are made to the Fund's capital accounts to reflect income and gains available for distribution under income tax regulations.

Statement of Cash Flows

The cash amount shown in the Statement of Cash Flows is the amount included in the Fund's Statement of Assets and Liabilities and represents cash on hand at its custodian and does not include short-term investments at March 31, 2012.

Indemnifications

Under the Fund's organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The Fund's maximum exposure

22

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H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

under these agreements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.

(2)  Investment Advisory and Other Affiliated Fees

The Fund has entered into an Investment Advisory Agreement (the Advisory Agreement) with the Adviser. Pursuant to the terms of the Advisory Agreement, the Fund pays the Adviser a monthly fee at the rate when annualized of (i) 2.50% of the average net assets for the month of its venture capital and other restricted securities up to 25% of net assets and (ii) for all other net assets, 0.98% of the average net assets up to $250 million, 0.88% of the average net assets for the next $250 million, 0.80% of the average net assets for the next $500 million and 0.70% of the average net assets thereafter. The aggregate fee would not exceed a rate when annualized of 1.36%.

The Fund has entered into a Services Agreement (the Agreement) with the Adviser. Pursuant to the terms of the Agreement, the Fund reimburses the Adviser for certain services related to a portion of the payment of salary and provision of benefits to the Fund's Chief Compliance Officer. During the six months ended March 31, 2012 these payments amounted to $22,667 and are included in the other category in the Statement of Operations, together with insurance and other expenses incurred to unaffiliated entities. Expenses incurred pursuant to the Agreement as well as certain expenses paid for by the Adviser are allocated in an equitable fashion as approved by the Board of the Fund.

During the six months ended March 31, 2012, the adviser agreed to reimburse the fund $37,712 for excise tax expense paid to the United States Treasury for income not distributed in the prior year. This amount is reflected in the Statement of Operations expenses reimbursed by investment adviser.

The Fund pays compensation to Independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The Fund does not pay compensation directly to Trustees or officers of the Fund who are also officers of the Adviser.

(3)  Other Transactions with Affiliates

An affiliate company is a company in which the Fund holds 5% or more of the voting securities. Transactions with such companies during the six months ended March 31, 2012 were as follows:

Issuer				Value on September 30, 2011				Purchases				Sales				Income				Value on March 31, 2012
Agilix Corporation				$	2,635							$	2,644			$	—			$	0
Concentric Medical, Inc.					6,792,332								6,778,583				—				—
EBI Life Sciences, Inc.					—			$	40,942				30,798				—				9,800
Euthymics Biosciences, Inc.					1,967,757				274,005				197,425								2,043,967
IntelliPharmaCeutics International, Inc.					2,785,458				197,313				—				—				2,479,311
MZT Holdings, Inc.					45,630				—				—				—				64,842
Neurovance, Inc.					—				178,443				4,343				—				173,282
Palyon Medical Corporation					1,537,020				—				—				—				1,537,020
PHT Corporation					3,503,912				—				—				—				4,177,741
Veniti, Inc.					2,255,000				—				—				—				2,255,000
				$	18,889,744			$	690,703			$	7,013,793			$	—			$	12,740,963

23

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H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

(4)  Private Companies and Other Restricted Securities

The Fund may invest in private companies and other restricted securities if these securities would currently comprise 40% or less of net assets. The value of these securities represents 16% of the Fund's net assets at March 31, 2012.

At March 31, 2012, the Fund had commitments of $1,013,756 relating to additional investments in two private companies.

The following table details the acquisition date, cost, carrying value per unit, and value of the Fund's private companies and other restricted securities at March 31, 2012. The Fund on its own does not have the right to demand that such securities be registered.

Security (#)				Acquisition Date				Cost				Carrying Value per Unit				Value
Agilix Corporation
Series B Cvt. Pfd.				11/08/01				$	1,565,151			$	0.00			$	0
A.P. Pharma, Inc.
Warrants (expiration 7/01/16)				6/30/11					555				0.16				330,667
Athersys, Inc.
Warrants (expiration 6/08/12)				6/07/07					0				0.00				0
Aveta, Inc.
Common				12/21/05					2,003,155				8.50				1,259,258
CardioKinetix, Inc.
Series C Cvt. Pfd.				5/22/08					1,652,787				0.26				618,778
Series D Cvt. Pfd.				12/10/10					544,972				0.11				470,495
Series E Cvt. Pfd.				9/14/11					803,495				0.10				846,234
Warrants (expiration 12/11/19)				12/10/09, 2/11/10					123				0.00				0
Warrants (expiration 6/03/20)				6/03/10, 9/01/10					123				0.00				0
Warrants (expiration 7/07/21)				7/07/11					48				0.00				0
Celladon Corporation
Series A-1 Cvt. Pfd.				1/27/12					263,032				0.45				257,733
Ceracor Laboratories, Inc.
Common				3/31/98					0				0.64				82,757
Ceres, Inc.
Common				2/24/12††					2,418,136				14.39				2,429,935
Warrants (expiration 9/05/15)				9/05/07					16				0.83				1,570
Dynex Technologies, Inc.
Series A Cvt. Pfd.				1/03/12††					198,655				0.18				388,996
Warrants (expiration 4/01/19)				1/03/12††					0				0.00				0
Warrants (expiration 5/06/19)				1/03/12††					0				0.00				0
EBI Life Sciences, Inc.
Series A Cvt. Pfd.				12/29/11††					10,144				0.00	†			9,800
Euthymics Biosciences, Inc.
Series A Cvt. Pfd.				7/14/10 - 2/28/12					2,050,829				0.92				2,043,967
iCAD, Inc.
Common (Locked-up until 6/30/12)				1/05/11††					180,321				0.47				55,576
Common (Locked-up until 12/31/12)				1/05/11††					0				0.44				11,701
IntelliPharmaCeutics International, Inc.
Warrants (expiration 2/01/13)				1/31/11					0				0.44				140,712
Warrants (expiration 2/01/16)				1/31/11					0				1.04				332,592
Interlace Medical
Milestone Interest				1/14/11					750,766				2,135,066				2,135,066
Labcyte, Inc.
Series C Cvt. Pfd.				7/18/05					1,283,262				0.52				1,280,000
MacroGenics, Inc.
Series D Cvt. Pfd.				9/04/08					878,863				0.65				156,006
Magellan Diagnostics, Inc.
Series A Cvt. Pfd.				11/28/06 - 10/01/09					1,223,270				0.59				1,275,043
Warrants (expiration 4/01/19)				4/03/09					274				0.00				0
Warrants (expiration 5/06/19)				5/12/09					22				0.00				0
Neurovance, Inc.
Series A Cvt. Pfd.				12/29/11††					174,100				0.08				173,282

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H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2012

(continued)

Security (#)				Acquisition Date				Cost				Carrying Value per Unit				Value
OmniSonics Medical Technologies, Inc.
Series A-1 Cvt. Pfd.				10/01/03				$	1,201,037			$	0.00	†		$	1,032
Series B-1 Cvt. Pfd.				6/04/07, 11/15/07					668,068				0.00	†			878
Common				5/24/01, 7/02/07					1,606,361				0.00	†			62
OncoGenex Pharmaceuticals, Inc.
Warrants (expiration 10/22/15)				10/22/10					0				3.28				123,000
Palyon Medical Corporation
Series A Cvt. Pfd.				4/28/09					2,062,094				0.16				1,537,020
PHT Corporation
Series D Cvt. Pfd.				7/23/01					2,804,181				0.93				3,338,462
Series E Cvt. Pfd.				9/12/03 - 10/14/04					627,548				0.93				746,786
Series F Cvt. Pfd.				7/21/08					81,729				0.93				92,493
Puma Biotechnology, Inc.
Common				10/04/11					1,288,108				3.75				1,286,501
Warrants (expiration 10/04/21)				10/04/11					0				0.00				0
Songbird Hearing, Inc.
Common				12/14/00					2,003,239				0.67				93
Targegen
Milestone Interest				7/20/10					3,207,084				3,724,119				3,724,119
TherOx, Inc.
Series H Cvt. Pfd.				9/11/00					2,001,787				1.14				49,739
Series I Cvt. Pfd.				7/08/05					386,640				1.14				113,995
Tibion Corporation
Series B Cvt. Pfd.				2/23/11					1,644,674				0.50				1,640,000
Veniti, Inc.
Series A Cvt. Pfd.				2/28/11					2,266,050				0.87				2,255,000
Verastem, Inc.
Common				1/27/12					2,325,000				9.84				2,698,535
Xoft
Milestone Interest				1/05/11					585,903				657,952				657,952
Zyomyx, Inc.
Common				2/19/99 - 7/22/04					2,601,013				0.25				11
								$	43,362,615							$	32,565,846

 

  (#)  See Schedule of Investments and corresponding footnotes for more information on each issuer.

  †  Carrying value per unit is greater than $0.00 but less than $0.01.

  ††  Interest received as part of a corporate action for a previously owned security.

(5)  Tender Offer

On April 25, 2011, the Trustees approved a tender offer by the Fund to acquire up to 35% of its outstanding shares for cash at a price equal to 98% of the Fund's net asset value per share as of the close of regular trading on the New York Stock Exchange on the business day immediately following the day the offer expires (the "Tender Offer"). The Tender Offer commenced on May 3, 2011 and expired on May 31, 2011.

In connection with the tender offer, the Fund purchased 7,796,312 shares at a total cost of approximately $104,214,862. The tender offer was oversubscribed, and all tenders of shares were subject to proration at a ratio of approximately 67.5157% in accordance with the terms of the tender offer.

 

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H&Q LIFE SCIENCES INVESTORS

INVESTMENT ADVISORY AGREEMENT APPROVAL

The Investment Advisory Agreement (the Advisory Agreement) between the Fund and the Adviser provides that the Advisory Agreement will continue in effect so long as its continuance is approved at least annually by (i) the Trustees of the Fund or the shareholders by affirmative vote of a majority of the outstanding shares and (ii) a majority of the Trustees of the Fund who are not interested persons (the Independent Trustees), by vote cast in person at a meeting called for the purpose of voting on such approval.

On March 20, 2012, the Board, and the Independent Trustees voting separately, determined that the terms of the Advisory Agreement are fair and reasonable and approved the continuance of the Advisory Agreement as being in the best interests of the Fund and its shareholders. In making its determination, the Board considered materials that were specifically prepared by the Adviser at the request of the Board and Fund counsel for purposes of the contract review process, including comparisons of (i) the Fund's performance to its benchmark, the NASDAQ Biotech Index (NBI), and to other investment companies, (ii) the Fund's expenses and expense ratios to those of a peer group of other investment companies, and (iii) the Adviser's profitability with respect to its services for the Fund to the profitability of other investment advisers, as described below. The Trustees took into account that the Adviser presently provides investment management services only to the Fund and to H&Q Healthcare Investors and does not derive any benefit from its relationship with the Fund other than receipt of advisory fees pursuant to the Advisory Agreement. The Board also received and reviewed information throughout the year about the portfolio performance, the investment strategy, the portfolio management team and the fees and expenses of the Fund.

In approving the Advisory Agreement, the Board considered, among other things, the nature, extent, and quality of the services to be provided by the Adviser, the investment performance of the Fund and the Adviser, the costs of services provided and profits realized by the Adviser and its affiliates, and whether fee levels reflect economies of scale for the benefit of Fund shareholders and the extent to which economies of scale would be realized as the Fund grows. The Board reviewed information about the foregoing factors and considered changes, if any, in such information since its previous approval. The Board also evaluated the financial strength of the Adviser and the capability of the personnel of the Adviser, specifically the strength and background of its investment analysts. Fund counsel provided the Board with the statutory and regulatory requirements for approval and disclosure of investment advisory agreements. The Board, including the Independent Trustees, evaluated all of the foregoing and, considering all factors together, determined in the exercise of its business judgment that the continuance of the Advisory Agreement is in the best interests of the Fund and its shareholders. The following provides more detail on certain factors considered by the Trustees and the Board's conclusions with respect to each such factor.

The nature, extent and quality of the services to be provided by the Adviser. On a regular basis the Board considers the roles and responsibilities of the Adviser as a whole, along with specific portfolio management, support and trading functions the Adviser provides to the Fund. The Trustees considered the nature, extent and quality of the services provided by the Adviser to the Fund. The Trustees continue to be satisfied with the quality and value of the investment advisory services provided to the Fund by the Adviser, and, in particular, the management style and discipline followed by the Adviser and the quality of the Adviser's research, trading, portfolio management and administrative personnel.

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H&Q LIFE SCIENCES INVESTORS

INVESTMENT ADVISORY AGREEMENT APPROVAL

(continued)

The investment performance of the Fund and the Adviser. On a regular basis the Board reviews performance information for the Fund and discusses the Fund's investment strategy with the Adviser. The Trustees reviewed performance information for the Fund over the past one-, three-, five-, and ten-year periods. Although the NBI's performance exceeded the Fund's returns by net asset value and stock price in recent periods, the Fund's return by net asset value and stock price outperformed the NBI over the long-term. The Trustees continue to be satisfied with the investment performance of the Fund and the Adviser.

The costs of services to be provided and profits to be realized by the Adviser from its relationship with the Fund. The Trustees considered the various services provided by the Adviser to the Fund and reviewed comparative information regarding the expenses and expense ratios of the Fund and a peer group of other investment companies. The Trustees noted that the Adviser's fees are within the range of fees presented in the comparative information and noted that a portion of the Fund's investment portfolio is invested in venture and restricted securities, a portfolio management service that can command higher management fees than those charged by the Adviser pursuant to the Advisory Agreement. The Trustees also considered financial information provided by the Adviser, including financial statements of the Adviser and a comparison of the Adviser's profitability with respect to its services for the Fund to the profitability of other privately held investment advisers. Based on the information provided to and evaluated by the Trustees, the Trustees concluded that the fees charged by the Adviser are fair and reasonable in light of the quality and nature of the services provided by the Adviser and that the profitability of the Adviser's relationship with the Fund has not been excessive. The fees charged by the Adviser are within a reasonable range of fees as compared to fees charged by other investment advisers, and the services provided by the Adviser and the amounts paid under the Advisory Agreement are sufficiently favorable in comparison to the services rendered and fees charged by others for similar services to warrant a finding that fees to be paid by the Fund are fair.

Whether fee levels reflect economies of scale and the extent to which economies of scale would be realized as the Fund grows. The Trustees considered that the Advisory Agreement provides for breakpoints in the advisory fees so that the Fund will share the benefits of the economies of scale that would inure to the Adviser as the Fund's assets increase. The Trustees reviewed the net assets of the Fund over the last five years, the recent investment performance of the Fund, and the management fees of other funds with similar investment objectives. Given the asset size of the Fund, and as economies of scale are still modest at current Fund asset levels, the Trustees determined that the Fund's breakpoint schedule is satisfactory and fair.

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H&Q LIFE SCIENCES INVESTORS

PRIVACY NOTICE

If you are a registered shareholder of the Fund, the Fund and Hambrecht & Quist Capital Management LLC, the Fund's investment adviser, may receive nonpublic personal information about you from the information collected by the transfer agent from your transactions in Fund shares. Any nonpublic personal information is not disclosed to third parties, except as permitted or required by law. In connection with servicing your account and effecting transactions, the information received may be shared with the investment adviser and non-affiliates, including transfer agents, custodians or other service companies. Access to your nonpublic personal information is restricted to employees who need to know that information to provide products or services to you. To maintain the security of your nonpublic personal information, physical, electronic, and procedural safeguards are in place that comply with federal standards. The policies and practices described above apply to both current and former shareholders.

If your Fund shares are held in "street name" at a bank or brokerage, we do not have access to your personal information and you should refer to your bank's or broker's privacy policies for a statement of the treatment of your personal information.

FOR MORE INFORMATION

A description of the Fund's proxy voting policies and procedures and information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, is available (i) without charge, upon request by calling 1-800-451-2597; (ii) by writing to Hambrecht & Quist Capital Management LLC at 2 Liberty Square, 9th floor, Boston, MA 02109; (iii) on the Fund's website at www.hqcm.com; and (iv) on the Securities and Exchange Commission's (SEC) website at www.sec.gov.

The Fund's complete Schedule of Investments for the first and third quarters of its fiscal year will be filed quarterly with the SEC on Form N-Q. This Schedule of Investments will also be available on the Fund's website at www.hqcm.com or the SEC's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington, DC or by calling 1-800-SEC-0330.

DISTRIBUTION POLICY

The Fund has a fixed distribution policy as described in the Notes to Financial Statements. For more information contact your financial adviser.

PORTFOLIO MANAGEMENT

Daniel R. Omstead, Ph.D., Christopher Brinzey, M.B.A., Frank Gentile, Ph.D. and Jason C. Akus, M.D./M.B.A. are members of a team that analyzes investments on behalf of the Fund. Dr. Omstead exercises ultimate decision making authority with respect to investments.

HOUSEHOLDING

A number of banks, brokers and financial advisers have instituted "householding". Under this practice, which has been approved by the SEC, only one copy of shareholder documents may be delivered to multiple shareholders who share the same address and satisfy other conditions. Householding is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. If you do not want the mailing of your shareholder documents to be combined with those of other members of your household, please contact your bank, broker or financial adviser.

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H&Q LIFE SCIENCES INVESTORS

New York Stock Exchange Symbol: HQL
NAV Symbol: XHQLX

2 Liberty Square, 9th Floor
Boston, Massachusetts 02109
(617) 772-8500
www.hqcm.com

Officers

Daniel R. Omstead, Ph.D., President
Laura Woodward, CPA, Chief Compliance Officer,
Secretary and Treasurer

Trustees

Michael W. Bonney
Rakesh K. Jain, Ph.D.
Daniel R. Omstead, Ph.D.
Oleg M. Pohotsky
William S. Reardon, CPA
Uwe E. Reinhardt, Ph.D.
Lucinda H. Stebbins, CPA

Investment Adviser

Hambrecht & Quist Capital Management LLC

Administrator & Custodian

State Street Bank and Trust Company

Transfer Agent

Computershare, Inc.

Legal Counsel

Dechert LLP

Shareholders with questions regarding share transfers may call

1-800-426-5523

Daily net asset value may be obtained from

our website (www.hqcm.com) or by calling

1-800-451-2597

001CS60314

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