Edgar Filing: H&Q LIFE SCIENCES INVESTORS

H&Q LIFE SCIENCES INVESTORS

4,484,838 SHARES
ISSUABLE UPON EXERCISE OF NON-TRANSFERABLE RIGHTS
TO SUBSCRIBE FOR SUCH SHARES

NEW YORK STOCK EXCHANGE SYMBOL: HQL

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H&Q Life Sciences Investors is issuing non-transferable rights ("Rights") to
its Shareholders of record as of the close of business on August 18, 2006 (the
"Record Date"). These Rights will allow you to subscribe for one (1) Share of
the Trust for every three (3) Rights held (the "Offer"). You will receive one
Right for each whole Share that you hold of record as of the Record Date,
rounded down to the nearest number of Rights evenly divisible by three. The
Rights will not be listed for trading on the New York Stock Exchange ("NYSE") or
any other exchange. You may also purchase Shares not acquired by other
Shareholders subject to certain limitations and subject to allotment as
described in this Prospectus.

THE SUBSCRIPTION PRICE PER SHARE WILL BE 95% OF THE VOLUME WEIGHTED AVERAGE
SHARE PRICE OF A SHARE ON THE NYSE ON SEPTEMBER 22, 2006 (THE "PRICING DATE")
AND THE FOUR PRECEDING BUSINESS DAYS.

RIGHTS MAY BE EXERCISED AT ANY TIME UNTIL 5:00 P.M. EASTERN TIME, ON
SEPTEMBER 21, 2006, UNLESS THE OFFER IS EXTENDED AS DISCUSSED IN THIS
PROSPECTUS. As the Offer expires before September 22, 2006, Shareholders who
exercise their Rights will not know the Subscription Price at the time they
exercise their Rights. For additional information regarding the Offer, please
call The Altman Group (the "Information Agent") at (800)-870-0126.

The Trust is a diversified, closed-end management investment company whose
shares of beneficial interest are listed and traded on the NYSE under the symbol
"HQL." The Trust's investment objective is to seek long-term capital
appreciation by investing primarily in equity and related securities (including
securities subject to legal or contractual restrictions as to resale) of U.S.
and foreign companies principally engaged in the development, production or
distribution of products or services related to scientific advances in life
sciences (including biotechnology, pharmaceuticals, diagnostics, managed
health-care and medical equipment, hospitals, healthcare information technology
and services, devices, supplies and other healthcare-related subsectors),
agriculture and environmental management ("Life Sciences Companies"). The Trust
emphasizes investment in securities of emerging growth Life Sciences Companies,
which may offer limited products or services or which are at the research and
development stage with no marketable or approved products or technologies. The
Trust may also invest up to 40% of its net assets in securities subject to legal
or contractual restrictions as to resale ("Restricted Securities"). The Trust's
investments in Restricted Securities may include "start-up", early and later
stage financings of privately held companies (sometimes referred to as"venture
capital" investments), private placements by public companies, and interests in
joint ventures and limited partnership. See "Risk Factors--Investment in
Emerging Growth Companies" and "Risk Factors--Liquidity of Portfolio." The Trust
may also invest in securities of large, well-known companies with existing
products in the life sciences industries. The Trust may not be able to achieve
its investment objective. FOR A DISCUSSION OF THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE TRUST, SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS."

The Fund adopted a managed distribution policy in May 1999 pursuant to an
exemptive order obtained from the Securities and Exchange Commission ("SEC" or
"Commission). In accordance with the policy, since March 2000, the Fund has made
regular quarterly distributions at a rate equal to 2.0% of the Fund's net asset
value. The Fund's Board may terminate the managed distribution policy at any
time; any such change or termination may have an adverse effect on the market
price for the Fund's shares.

To the extent that the Fund's taxable income in any fiscal year exceeds the
aggregate amount distributed based on a fixed percentage of its net asset value,
the Fund would make an additional distribution in the amount of that excess near
the end of the calendar year. To the extent that the aggregate amount
distributed by the Fund based on a fixed percentage of its net asset value
exceeds its current and accumulated earnings and profits, the amount of that
excess would constitute a return of capital or net realized capital gains for
tax purposes.

The actual sources of the Fund's quarterly distributions may be net
investment income, net realized capital gains, return of capital or a
combination of the foregoing and may be subject to retroactive
recharacterization at the end of the Fund's fiscal year based on tax
regulations. The actual amounts attributable to each of these sources will be
reported to shareholders in January of each year on Form 1099-DIV.

This Prospectus sets forth concisely the information about the Trust you
should know before investing, including information about risks. You should read
this Prospectus and retain it for future reference. A Statement of Additional
Information dated August 17, 2006 (the "SAI") containing additional information
about the Trust has been filed with the SEC and is incorporated by reference in
its entirety into this Prospectus. All inquiries regarding the Fund, including
request for a copy of the SAI, the table of contents of which appears on
page 52 of this Prospectus, and the Fund's annual and semi-annual reports may be
obtained without charge by contacting the Information Agent at (800)870-0126.
The Commission maintains a website (http://www.sec.gov) that contains material
incorporated by reference in this Prospectus and SAI and other information
regarding the Trust. The Fund's annual and semi-annual reports are also
available on the Fund's website at www.hqcm.com.

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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

ESTIMATED ESTIMATED PROCEEDS
SUBSCRIPTION ESTIMATED TO TRUST OR OTHER
PRICE(1) SALES LOAD PERSONS(2)

Per Share................................................ $13.91 NONE $13.91
Total Maximum............................................ $62,384,097 NONE $62,384,097

(FOOTNOTES SET FORTH ON NEXT PAGE)

August 17, 2006

(CONTINUED FROM PREVIOUS PAGE)

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(1) Estimated on the basis of the volume weighted average share price of a Share
on the NYSE on August 14, 2006 and the four preceding business days. The
Trust may increase the number of Shares subject to subscription by up to 25%
of the Shares offered hereby, or up to an additional 1,121,210 Shares, for
an aggregate total of 5,606,048 Shares. If the Trust increases the number of
Shares subject to subscription by 25%, the total maximum Estimated
Subscription Price will be approximately $77,980,128 and the total maximum
Estimated Proceeds to the Trust will be approximately $77,980,128. No sales
load will be charged by the Trust in connection with this Offer. However,
Shareholders that choose to exercise their Rights through broker-dealers,
banks and nominees may incur a servicing fee charged by such broker-dealer,
bank or nominee.

(2) Before deduction of expenses related to the Offer incurred by the Trust,
estimated at approximately $462,000.

The Trust may increase the number of Shares subject to subscription by up to
25%, or up to an additional 1,121,210 Shares, for an aggregate total of
5,606,048 Shares.

As a result of the terms of the Offer, Shareholders who do not fully
exercise their Rights, including the Over-Subscription Privilege described in
the section of this Prospectus entitled "The Offer--Over-Subscription
Privilege," will, upon the completion of the Offer, own a smaller proportional
interest in the Trust than they owned before the Offer. The Offer will result in
either a dilution or accretion of NAV for all Shareholders, whether or not they
exercise some or all of their Rights, because the Subscription Price per Share
may be less than or greater than the then-current NAV. The amount of dilution or
accretion might be significant. See "The Offer."

The Trust's investment adviser is Hambrecht & Quist Capital Management, LLC
(the "Investment Adviser"). The employees of the Trust's Investment Adviser and
the Trustees and officers of the Trust may purchase Shares through the Primary
Subscription and the Over-Subscription Privilege on the same terms as other
Shareholders.

Information about the Trust can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, DC. Call
(202) 551-8090 for information on the operation of the Public Reference Room.
This information is also available at the Commission's Internet site at
http://www.sec.gov, and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the Securities and Exchange
Commission, 100 F Street, NE, Washington, DC 20549.

PROSPECTUS SUMMARY

YOU SHOULD CONSIDER THE MATTERS DISCUSSED IN THIS SUMMARY BEFORE INVESTING
IN THE TRUST THROUGH THE OFFER. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS.

THE OFFER

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H&Q Life Sciences Investors (the "Trust") is issuing to its
The Offer shareholders of record ("Shareholders") as of the close of
business on August 18, 2006 (the "Record Date") non-transferable
rights ("Rights") to subscribe for an aggregate of 4,484,838
shares of beneficial interest ("Shares") of the Trust (the
"Offer"). You will receive one Right for each whole Share you
held as of the Record Date, rounded down to the nearest number of
Rights evenly divisible by three. You may subscribe for one Share
for every three Rights you hold (the "Primary Subscription"). Any
Shareholder on the Record Date who is issued fewer than three
Rights will not be entitled to subscribe for a share in the
Offer.
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Subscription Price The subscription price per Share (the "Subscription Price") will
be 95% OF THE VOLUME WEIGHTED AVERAGE SHARE PRICE OF A SHARE ON
THE NYSE ON SEPTEMBER 22, 2006 (THE "PRICING DATE") AND THE FOUR
PRECEDING BUSINESS DAYS.

AS THE EXPIRATION DATE IS BEFORE THE PRICING DATE, SHAREHOLDERS
WHO CHOOSE TO EXERCISE THEIR RIGHTS WILL NOT KNOW THE
SUBSCRIPTION PRICE AT THE TIME THEY EXERCISE THEIR RIGHTS.
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Subscription Period Rights may be exercised at any time during the subscription
period (the "Subscription Period"), which starts on September 5,
2006 and ends at 5:00 p.m., Eastern Time, on September 21, 2006
(the "Expiration Date").
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The Trust may, at its discretion, issue up to an additional 25%
of the Shares in the Offer to honor over-subscription requests if
there are not enough Shares available from the Primary
Subscription to honor all over-subscription requests (the
"Over-Subscription Privilege"). If there are enough Shares left
after the Primary Subscription, all over-subscriptions will be
Over-Subscription honored in full. If there are not enough Shares available to
Privilege honor all over-subscriptions (after giving effect to any increase
in the number of Shares to be offered), the available Shares will
be allocated pro rata among those Shareholders who over-subscribe
based on the number of Rights originally issued to them by the
Trust. The number of Shares issued to Shareholders who subscribe
pursuant to the Over-Subscription Privilege will generally be in
proportion to the number of Shares owned by them in the Fund on
the Record Date. The allocation process may involve a series of
allocations to assure that the total number of Shares available
for over-subscriptions is distributed on a pro rata basis.
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Fractional Shares Fractional Shares will not be issued upon the exercise of Rights.
Therefore, shares will be issued for Rights submitted in
multiples of three only.
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The Trust's Investment Adviser believes that increasing the
Purpose of the Offer Trust's assets for investment through the Offer will benefit the
Trust and its Shareholders by allowing the Trust to take further
advantage of available investment opportunities in securities of
companies in the life sciences industries ("Life Sciences
Companies"). While there can be no assurance that any benefits
will be realized, increasing the Trust's investment assets
through the Offer is intended to:

- allow the Trust to make greater or additional investments at
a time when the Trust's investment adviser believes that
securities of selected Life Sciences Companies, including
specialty and generic pharmaceuticals companies, medical
technology companies, life sciences information services and
other innovative life sciences product and biotechnology
companies, are positioned for price appreciation due to
(i) demographic changes, (ii) recent developments in the
pharmaceutical, biotechnology and medical technology
industries relating to products that have or will extend or
improve the quality of patients' lives, and (iii) the recent
passage of a Medicare reform bill that may spur dramatic
growth in prescription volume;

- increase the Trust's average investment size, giving the
Trust additional negotiating leverage and pricing influence
over venture capital, private investments in public entities
(PIPEs) and other private equity investments and investments
in the public markets; and

- provide the Trust with the ability to make additional
investments without realizing capital gains on current
investments or otherwise selling current investments at an
unfavorable time.

In addition, if the Offer is fully subscribed, the Offer may
possibly reduce operating costs per Share. The Offer allows you
the opportunity to purchase additional Shares of the Trust at a
price that will be below market value at the Expiration Date. See
"The Offer--Purpose of the Offer."
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The Trust expects to invest the net proceeds of the Offer
Use of Proceeds primarily in securities of Life Sciences Companies, particularly
investments in specialty and generic pharmaceuticals companies,
heath services management, medical devices, and other innovative
life sciences product and biotechnology companies. Any
investments will be made in accordance with the Trust's
investment objective and policies. Investment of the proceeds is
expected to take up to six months from their receipt by the
Trust, depending on market conditions and the availability of
appropriate securities. See "Use of Proceeds."
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The Trust will suspend the Offer until it amends this Prospectus
Notice of NAV Decline if, after the effective date of this Prospectus, the Trust's NAV
declines more than 10% from its NAV as of that date. If that
occurs, the Trust will notify you of the decline and permit you
to cancel your exercise of your Rights. Shareholders will have
their payment for additional shares returned to them if they opt
to cancel the exercise of their Rights.
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How to Obtain - Contact your broker, bank or trust company.
Subscription Information - Contact The Altman Group (the "Information Agent") toll-free
at (800) 870-0126.
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How to Subscribe You may subscribe in one of two ways:

- Deliver a completed Exercise Form and payment to
Computershare Trust Company, N.A., (the "Subscription
Agent") by the Expiration Date.

- If your Shares are held in a brokerage, bank or trust
account, have your broker, bank or trust company deliver an
Exercise Form and payment or a Notice of Guaranteed Delivery
to the Subscription Agent by the Expiration Date.
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Tax Consequences For Federal income tax purposes, neither the receipt nor the
exercise of the Rights will result in taxable income to
Shareholders. You will not realize a taxable loss if your Rights
expire without being exercised. See "The Offer--Certain Federal
Income Tax Consequences of the Offer."
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IMPORTANT DATES TO REMEMBER

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Record Date............................................... August 18, 2006

Subscription.............................................. September 5--September 21, 2006*

Deadline for delivery of Exercise Form together with
payment of Estimated Subscription Price or for delivery of
Notice of Guaranteed Delivery............................. September 21, 2006*

Expiration Date........................................... September 21, 2006*

Pricing Date.............................................. September 22, 2006*

Deadline for payment of final Subscription Price pursuant
to Notice of Guaranteed Delivery.......................... September 26, 2006*

Confirmation to Registered Shareholders**................. October 2, 2006*

For Registered Shareholders** Purchases--deadline for
payment of unpaid balance if final Subscription Price is
higher than Estimated Subscription Price.................. October 12, 2006*
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* Unless the Offer is extended.

** Registered Shareholders are those Shareholders who are the record owners of
Trust Shares (that is, their names appear directly on the records of the
Trust's transfer agent) and whose Shares are not held through a
broker-dealer or other nominee or intermediary.

THE TRUST

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The Trust The Trust is a diversified, closed-end management investment
company. The Trust was organized as a Massachusetts business
trust on February 20, 1992 and commenced operations on
May 8, 1992. As of August 14, 2006, the Trust had 13,454,515
Shares outstanding. Shares of the Trust are traded on the
NYSE under the symbol "HQL." As of August 14, 2006, the
Trust's NAV was $14.06 and the Trust's last reported share
price of a Share on the NYSE was $14.73.
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Distributions The Trust intends to make quarterly distributions to its
Shareholders equal to 2.0% of the Trust's net asset value.
Net realized capital gains in excess of the total
distributed under this policy are generally included in the
December distribution. The Trust's quarterly distribution
policy may be changed by the Board of Trustees without
Shareholder approval.

The current distribution policy is to declare distributions
in stock. Stock distributions will automatically be paid in
newly-issued full Shares of the Trust plus cash in lieu of
any fraction of a Share, unless otherwise instructed by the
Shareholder. If a Shareholder elects to receive a
distribution in cash, rather than in Shares, the
Shareholder's relative ownership in the Trust will be
reduced.

The first regular quarterly distribution to be paid on
Shares acquired upon exercise of Rights will be the first
quarterly distribution the record date for which occurs
after the issuance of the Shares. The Shares issued in the
Offer will not be entitled to the distribution declared to
Shareholders of record on September 8, 2006 which is payable
in September 2006. SEE "Dividends and Distributions."
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General Investment The Trust's investment objective is to seek long-term
Guidelines capital appreciation by investing primarily in securities of
Life Sciences Companies. Under normal market conditions, the
Trust expects to invest at least 80% of its net assets in
securities of Life Sciences Companies. This policy may not
be changed without 60 days' prior notice to Shareholders.
The Trust will not have less than 25% of its net assets
invested in Life Sciences Companies. A company will be
deemed to be a Life Sciences Company if, at the time the
Trust makes an investment therein, 50% or more of such
company's sales, earnings or assets arise from or are
related to healthcare, agriculture or environmental
management, as the case may be. The Trust may also invest in
securities of companies that do not satisfy the above
criteria but that are expected by the Investment Adviser to
have 25% or more of sales, earnings or assets arising from
or dedicated to healthcare, agriculture or environmental
management, but investments in such securities will not
count toward achieving the percentages mentioned above. The
Investment Adviser determines, in its discretion, whether a
company is a Life Sciences Company.

The Trust may invest up to 25% of its net assets in
securities of foreign issuers, expected to be located
primarily in Western Europe, Canada and Japan, and
securities of U.S. issuers traded in foreign markets
("Foreign Securities"). The Trust may buy and sell
currencies for the purpose of settlement of transactions in
Foreign Securities.
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Venture Capital Investments The Trust emphasizes investment in securities of emerging
growth Life Sciences Companies. These investments are often
venture capital investments. The Trust may invest up to 40%
of its net assets in securities subject to legal or
contractual restrictions as to resale ("Restricted
Securities"), including venture capital investments. The
Trust's investments in Restricted Securities may include
"start-up," early and later stage financings of
privately-held companies and private placements in public
companies. See "Investment Objective and Policies."
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Investment Adviser Hambrecht & Quist Capital Management LLC serves as
Investment Adviser to the Trust. The Investment Adviser also
serves as investment adviser to H&Q Healthcare Investors
("HQH"), a closed-end management investment company that
invests in companies in the healthcare industries. See
"Management of the Trust--Investment Adviser." The majority
of the Trust's Board of Trustees is unaffiliated with the
Investment Adviser; nevertheless, the Trust may be subject
to certain potential conflicts of interest. See "Portfolio
Transactions and Brokerage."
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Portfolio Management Currently Daniel R. Omstead, Ph.D., Christopher F. Brinzey,
M.B.A., Frank T. Gentile, Ph.D. and Jason C. Akus,
M.D./M.B.A. are members of the team that makes investments
on behalf of the Trust. These members also perform other
duties, including making investment decisions on behalf of
HQH. See "Management of the Trust--Investment Adviser."
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Compensation of Investment Starting July 1, 2006, for the services provided by the
Adviser Investment Adviser under the Investment Advisory Agreement
between the Investment Adviser and the Trust ("Advisory
Agreement"), the Trust pays a fee, computed and payable
monthly, equal, when annualized, to (i) 2.5% of the average
net assets for the month of its venture capital and other
Restricted Securities (as defined) up to 25% of net assets
and (ii) for the month, for all other 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 monthly fee may
not exceed a rate when annualized of 1.375% (approximately
0.11% per month). Prior to July 1, 2006, the Trust paid a
fee computed and payable monthly, equal, when annualized, to
(i) 2.5% of the average net assets for the month of its
venture capital and other Restricted Securities (as defined)
up to 25% of net assets and (ii) for the month, for all
other assets, 1.0% of the average net assets up to
$250 million, 0.90% 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 monthly fee could not exceed a rate when
annualized of 1.375% (approximately 0.11% per month).
Because the advisory fee is based on the average net assets
of the Trust, and since the Offer is expected to result in
an increase in net assets, the Investment Adviser will
benefit from the Offer by an increase in the dollar amount
of the fee. Shareholders may also benefit from the Offer
because it may also marginally reduce the total expense
ratio, even for non-participating shareholders.
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RISK FACTORS AND SPECIAL CONSIDERATIONS

THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS THAT MAY BE DEEMED TO BE
"FORWARD-LOOKING STATEMENTS." ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF UNCERTAINTIES SET
FORTH BELOW AND ELSEWHERE IN THE PROSPECTUS. SEE "RISK FACTORS," STARTING ON
PAGE 31, FOR A MORE COMPLETE DESCRIPTION OF RISKS THAT MAY BE ASSOCIATED WITH AN
INVESTMENT IN THE TRUST.

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Dilution--Net Asset Value Shareholders who do not fully exercise their Rights
and Non- including the Over-Subscription Privilege described in the
Participation in the Offer section of this Prospectus entitled "The
Offer-Over-Subscription Privilege," will, at the completion
of the Offer, own a smaller proportional interest in the
Trust than if they exercised their Rights. As a result of
the Offer shareholders may experience dilution in NAV per
Share if the Subscription Price is below the then current
NAV per Share. If the Subscription Price per Share is below
the then current NAV per Share, shareholders will experience
an immediate dilution of the aggregate NAV of their Shares
if they do not participate in the Offer and will experience
a reduction in the NAV per Share whether or not they
participate in the Offer. The Trust cannot state precisely
the extent of this dilution (if any) if shareholders do not
exercise their Rights because the Trust does not know what
the NAV per Share will be at the time of the Offer or what
proportion of the Rights will be exercised. Assuming, for
example, that all Rights are exercised, the Estimated
Subscription Price is $13.91 and the Trust's NAV per Share
is $14.06, the Trust's NAV per Share (after payment of
estimated offering expenses) would be reduced by
approximately $0.06 per share. See "RISK FACTORS--DILUTION
OF NET ASSET VALUE AND EFFECT OF NON-PARTICIPATION IN THE
OFFER."
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Share Price Volatility Volatility in the market price of Shares may increase during
the rights offering period. The Offer may result in some
Shareholders selling their Shares, which would exert
downward price pressure on the price of Shares, while others
wishing to participate in the Offer may buy Shares, having
the opposite effect.
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Under-Subscription It is possible that the Offer will not be fully subscribed.
Under-subscription of the Offer could have an impact on the
net proceeds of the Offer and the ratios described herein.
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Market Risk As with any investment company that invests in equity
securities, the Trust is subject to market risk--the
possibility that the prices of equity securities will
decline over short or extended periods of time. As a result,
the value of an investment in the Trust's Shares will
fluctuate with the market. You could lose money over short
or long periods of time.

Political and economic news can influence market-wide trends
and can cause disruptions in the U.S. or world financial
markets. Other factors may be ignored by the market as a
whole but may cause movements in the price of one company's
stock or the stock of companies in one or more industries.
All of these factors may have a greater impact on initial
public offerings and emerging company shares.
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Selection Risk Different types of equity securities tend to shift into and
out of favor with investors, depending on market and
economic conditions. The performance of funds that invest in
equity securities of Life Sciences Companies may at times be
better or worse than the performance of funds that focus on
other types of securities or that have a broader investment
style.
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Concentration in the Life Under normal market conditions, the Trust expects to invest
Sciences Industries at least 80% of its net assets in securities of Life
Sciences Companies. The Trust will not have less than 25% of
its net assets invested in Life Sciences Companies. As a
result, the Trust's portfolio may be more sensitive to, and
possibly more adversely affected by, regulatory, economic or
political factors or trends relating to the life sciences
industries than a portfolio of companies representing a
larger number of industries. As a result of its
concentration policy, the Trust's investments may be subject
to greater risk and market fluctuation than a fund that has
securities representing a broader range of investments.

Life Sciences Companies have in the past been characterized
by limited product focus, rapidly changing technology and
extensive government regulation. In particular,
technological advances can render an existing product, which
may account for a disproportionate share of a company's
revenue, obsolete. Obtaining governmental approval from
agencies such as the Food and Drug Administration (FDA) for
new products can be lengthy, expensive and uncertain as to
outcome. These factors may result in abrupt advances and
declines in the securities prices of particular companies
and, in some cases, may have a broad effect on the prices of
securities of companies in particular life sciences
industries.

Intense competition exists within and among certain life
sciences industries, including competition to obtain and
sustain proprietary technology protection, including
patents, trademarks and other intellectual property rights,
upon which Life Sciences Companies can be highly dependent
for maintenance of profit margins and market exclusivity.
The complex nature of the technologies involved can lead to
patent disputes, including litigation that could result in a
company losing an exclusive right to a patent.

Cost containment measures implemented by the federal
government, state governments and the private sector have
adversely affected certain sectors of the life sciences
industries. The implementation of any such further cost
containment measures may have an adverse effect on some
companies in the life sciences industries.

Product development efforts by Life Sciences Companies may
not result in commercial products. Even after a product is
commercially released, governmental agencies may require
additional clinical trials or change the labeling
requirements for products, if additional product side
effects are identified, which could have a material adverse
effect on the market price of the securities of those Life
Sciences Companies. Certain Life Sciences Companies in which
the Trust may invest may be exposed to potential product
liability risks that are inherent in the testing,
manufacturing, marketing and sale of pharmaceutical, medical
device or other products. There can be no assurance that a
product liability claim would not have a material adverse
effect on the business, financial condition or securities
prices of a company in which the Trust has invested.
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All of these factors may cause the value of the Trust's
Shares to fluctuate significantly over relatively short
periods of time.
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Investment in Emerging The Trust emphasizes investment in equity securities of
Growth Companies emerging Life Sciences Companies. While these securities
offer the opportunity for significant capital gains,
investments also involve a degree of risk that can result in
substantial losses. There can be no assurance that in the
future securities of start-up or emerging growth companies
will yield returns commensurate with their associated risks.
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Liquidity of Portfolio The Trust may invest substantially all of its net assets in
securities of emerging growth Life Sciences Companies,
including venture capital and other private equity
investments. Venture capital and other private equity
investments are limited to 40% of the Trust's net assets.
Some of these securities are traded in the over-the-counter
market or on stock exchanges where the low trading volume of
a particular security may result in abrupt and erratic price
movements. An investment in such securities may have limited
liquidity, and the Trust may find it necessary to sell at a
discount from recent prices or to sell over extended periods
of time when disposing of such Securities. Restricted
Securities in which the Trust may invest cannot be sold
except in a public offering registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to
an exemption from the Securities Act or in compliance with
applicable Securities and Exchange Commission (the
"Commission") regulations.
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Valuation of Restricted Some of the Trust's investments generally have no
Securities including Venture established trading market or are subject to restrictions on
Capital Investments resale. Because of the type of investments that the Trust
makes and the nature of its business, the valuation process
requires an analysis of various factors. The Trust's fair
value methodology includes the examination of, among other
things, (i) the existence of any contractual restrictions
on the disposition of the securities; (ii) information
obtained from the issue which may include an analysis of the
company's financial statements, the company's products or
intended markets, or the company's technologies; and
(iii) the price of a security negotiated at arm's-length in
an issuer's subsequent completed round of financing.

As there is typically no readily available market value for
the venture capital investments and some of the Restricted
Securities in the Trust's portfolio, venture capital
investments and such Restricted Securities in the Trust's
Portfolio are valued at fair value as determined in good
faith by the Board of Trustees pursuant to a valuation
policy and a consistently applied valuation process. Because
of the inherent uncertainty of determining the fair value of
investments that do not have a readily available market
value, the fair value of the Trust's investments determined
in good faith by the Board of Trustees, or in accordance
with valuation procedures approved by the Board of Trustees,
may differ significantly from the values that would have
been used had a ready market existed for the investments,
and the differences could be material. There is no single
standard for determining fair value in good faith. As a
result, determining fair value requires that judgment be
applied to the specific facts and circumstances of each
portfolio investment subject to fair value determinations,
while employing a consistently applied valuation process for
the types of investments the Trust makes.
------------------------------------------------------------------------------------------
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Foreign Securities The Trust may invest up to 25% of its net assets in Foreign
Securities. Foreign Securities may be less liquid and have
prices that are more volatile than securities of comparable
U.S. companies. An investment in Foreign Securities may also
involve currency risk.
------------------------------------------------------------------------------------------

Key Personnel There may be only a limited number of securities
professionals who have comparable experience to that of the
Trust's existing portfolio management team in the area of
Life Sciences Companies. If one or more of the team members
dies, resigns, retires or is otherwise unable to act on
behalf of the Investment Adviser, there can be no assurance
that a suitable replacement could be found immediately.
------------------------------------------------------------------------------------------

Concentration of Investments The Trust may from time to time concentrate its investments
in a few issuers and take large positions in those issuers.
As a result, the Trust may be subject to a greater risk of
loss than an investment company that diversifies its
investments more broadly. Taking larger positions is also
likely to increase the volatility of the Trust's net asset
value reflecting fluctuation in the value of its large
holdings.
------------------------------------------------------------------------------------------

Discount to NAV Market price risk is a risk separate and distinct from the
risk that the Trust's net asset value will decrease.
Although the Trust's Shares have recently traded on the NYSE
at a market price above their net asset value (a premium),
the Trust's Shares have traded in the market below (a
discount), at and above net asset value since the
commencement of the Trust's operations. There can be no
assurance that the Trust's shares will trade at a premium in
the future or that any such premium is sustainable. The
Trust's Shares have traded at discounts of as much as 35.95%
since the Trust commenced operations. The Trust cannot
predict whether the Shares will trade in the future at,
above or below their net asset value. See "Share Price and
NAV under Financial Highlights and Investment Performance"
for quarterly discount and/or premium information.
------------------------------------------------------------------------------------------

Declaration of Trust The Trust's Declaration of Trust ("Declaration of Trust"),
dated February 20, 1992, as amended, presently has
provisions that could have the effect of limiting the
ability of other entities or persons to (1) acquire control
of the Trust, (2) cause it to engage in certain
transactions, or (3) modify its structure. These provisions
may be considered "anti-takeover" provisions.
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------

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Repurchase of Shares You may dispose of your Shares on the NYSE or other markets
on which the Shares may trade, but because the Trust is a
closed-end investment company, you do not have the right to
redeem your Shares. At least once a year the Trustees
consider whether the Trust should repurchase its Shares in
the open market or make a tender offer. Any repurchases will
comply with the provisions of the Investment Company Act of
1940, as amended ("Investment Company Act"), and
Massachusetts law that apply to open market transactions.
There is no assurance that any action undertaken to
repurchase Shares will result in the Shares trading at a
price which approximates net asset value. Repurchases of
Shares by the Trust would also decrease its total assets and
may increase its expenses as a percentage of average net
assets as a result. The Trust's net income will be reduced
by the amount of any interest owed on any borrowings made to
finance any Share repurchase transactions. The Trust has no
current plans to repurchase its Shares.
------------------------------------------------------------------------------------------

Related Party Transactions The majority of the Board is unaffiliated with the
Investment Adviser; nevertheless, the Trust may be subject
to certain potential conflicts of interest. Although the
Trust has no obligation to do so, it may place brokerage
orders with brokers who provide supplemental investment
research and market and statistical information about the
life sciences industries to the Investment Adviser. In
addition, other investment companies advised by the
Investment Adviser may concurrently invest with the Trust in
both Restricted Securities and publicly held securities. The
Investment Adviser may also provide managerial assistance to
issuers of securities in which the Trust invests. The Trust
also may invest, subject to applicable law, in companies in
which the principals of the Investment Adviser or Trustees
of the Trust have invested or for which they serve as
directors or executive officers.
------------------------------------------------------------------------------------------
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TRUST EXPENSES

FEES AND EXPENSES

ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS
ATTRIBUTABLE TO SHARES)
Management Fee............................................ 1.30%

Other Expenses(1)......................................... 0.36%
----
Total Annual Expenses(2).................................. 1.66%
====

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

(1) "Other Expenses" have been estimated for the current fiscal year.

(2) The estimated 1.66% expense ratio assumes that the Offer is fully
subscribed, yielding estimated proceeds (net of offering expenses) of
approximately $61,922,097 (assuming a Subscription Price of $13.91 per
Share) and that, as a result, based on the Trust's net assets attributable
to Shareholders on August 14, 2006 of $189,222,947, the net assets
attributable to Shareholders would be $251,145,044.

HYPOTHETICAL EXAMPLE

The following hypothetical example demonstrates the projected dollar amount
of total cumulative expenses that would be incurred over various periods with
respect to a hypothetical investment in Shares of the Trust. These amounts are
based upon payment by the Trust of investment advisory fees and other expenses
at the levels set forth in the table above.

You would directly or indirectly pay the following expenses on a $1,000
investment in the Trust, assuming (i) all dividends and other distributions are
reinvested at NAV, (ii) the market price at the time of investment was equal to
the net asset value per share, (iii) the percentage amounts listed under Annual
Expenses above remain the same in the years shown, and (iv) a 5% annual return:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ -------- -------- --------

$17 $52 $90 $197

See also Note (2) above for assumptions made in calculating the expenses in
this hypothetical example. See "Financial Highlights" for the Trust's actual
ratio of expenses to average net assets for the fiscal year ended September 30,
2005.

The purpose of the table above is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly as an investor in
the Trust. For more information regarding the management fees paid by the Trust,
refer to the section of this Prospectus entitled "Management of the
Trust--Investment Adviser."

The above table and the assumption in the hypothetical example of a 5%
annual return are required by regulations of the Commission applicable to all
investment companies. The assumed 5% annual return is not a prediction of, and
does not represent, the projected or actual performance of the Trust's Shares.
For more complete descriptions of certain of the Trust's costs and expenses, see
"Management of the Trust--Investment Adviser."

THIS HYPOTHETICAL EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES, AND THE TRUST'S ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.

FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the
Trust's financial performance. Information is shown for the six month period
ended March 31, 2006 and the Trust's last ten fiscal years. Certain information
reflects financial results from a single Trust Share. In the table, "total
investment return at market value" represents the rate that an investor would
have earned on an investment in the Fund. The information for the fiscal years
ended September 30, 2005 and September 30, 2004 was audited by Deloitte & Touche
LLP, an independent registered public accounting firm. Financial highlights
information included for the fiscal years ended September 30, 2003, 2002, and
2001 was audited by PricewaterhouseCoopers LLP, whose report dated November 25,
2003 expressed an unqualified opinion on those financial statements and
financial highlights. Financial highlights information for the fiscal years
ended September 30, 2000, 1999, 1998, 1997 and 1996 was audited by Arthur
Andersen LLP, whose report dated November 3, 2000 expressed an unqualified
opinion on those financial statements and financial highlights. The report of
Deloitte & Touche LLP, together with the financial statements of the Trust, are
included in the Trust's September 30, 2005 Annual Report, and are included
elsewhere in this Prospectus.

FOR THE
SIX-MONTHS
ENDED
MARCH 31, FOR THE YEAR ENDED SEPTEMBER 30,
2006 ------------------------------------------------------------------------
(UNAUDITED) 2005 2004 2003 2002(1) 2001
------------ ------------ ------------ ------------ ------------ ------------

Net asset value per share:
Beginning of period................ $ 18.19 $ 15.90 $ 16.68 $ 15.14 $ 23.09 $ 39.37
------------ ------------ ------------ ------------ ------------ ------------
Net investment loss(2)............. $ 0.01(3) $ (0.21) $ (0.26) $ (0.21) $ (0.26) $ (0.22)
Net realized and unrealized gain
(loss) on investments............ $ 0.56 3.79 0.86 3.55 (4.83) (12.14)
------------ ------------ ------------ ------------ ------------ ------------
Total increase (decrease) from
investment operations............ $ 0.57 $ 3.58 $ 0.60 $ 3.34 $ (5.09) $ (12.36)
------------ ------------ ------------ ------------ ------------ ------------
Capital gain distributions to
shareholders..................... $ (1.41) $ (1.29) $ (1.38) $ (1.80) $ (2.86) $ (3.92)
------------ ------------ ------------ ------------ ------------ ------------
Net asset value per share:
End of period...................... $ 17.35 $ 18.19 $ 15.90 $ 16.68 $ 15.14 $ 23.09
============ ============ ============ ============ ============ ============
Per share market value:
End of period...................... $ 17.11 $ 16.85 $ 16.20 $ 15.28 $ 11.79 $ 18.45
Total investment return at market
value............................ 10.73% 12.77% 15.52% 47.65% (25.82)% (29.07)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of period........ $230,090,053 $229,291,326 $191,837,984 $190,352,471 $157,585,450 $215,162,600
Ratio of operating expenses to
average net assets............... 1.67%* 1.74% 1.73% 1.74% 1.71% 1.58%
Ratio of net investment loss to
average net assets............... 0.07%*(3) (1.29)% (1.56)% (1.38)% (1.25)% (0.83)%
Portfolio turnover rate............ 27.97% 73.79% 34.93% 32.36% 17.36% 16.49%
Number of shares outstanding at end
of period........................ 13,262,472 12,605,204 12,066,409 11,412,475 10,409,622 9,318,998

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

(1) In 2002, the Fund adopted the provisions of the AICPA Audit and Accounting
Guide for Investment Companies and began accreting discounts and amortizing
premiums on all debt securities. The effect of this change for the year
ended September 30, 2002 was a decrease in net investment loss per share of
$.006, an increase in net realized and unrealized loss on investments per
share of $.006, and a decrease in the ratio of net investment loss to
average net assets from (1.28%) to (1.25%). Per share data and ratios for
the periods prior to October 1, 2001 have not been restated to reflect this
change in presentation.

(2) Net investment loss per share has been computed using average shares
outstanding.

(3) Includes a special dividend from an issuer in the amount of $0.10 per share.
Excluding the special dividend, the ratio of net investment income/(loss) to
average net assets would have been (1.14%) annualized.

* Annualized.

FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE (CONTINUED)

FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------

Net asset value per share:
Beginning of year........................... $ 17.804 $ 13.713 $ 18.825 $ 18.445 $ 15.179
------------ ------------ ------------ ------------ ------------
Net investment loss(2)...................... $ (0.300) $ (0.205) $ (0.239) $ (0.072) $ (0.220)
Net realized and unrealized gain (loss) on
investments............................... 24.756 4.576 (4.133) 2.092 3.486
------------ ------------ ------------ ------------ ------------
Total increase (decrease) from investment
operations................................ $ 24.456 $ 4.371 $ (4.372) $ 2.020 $ 3.266
------------ ------------ ------------ ------------ ------------
Capital gain distributions to
shareholders.............................. $ (2.895) $ (0.280) $ (0.740) $ (1.640) --
------------ ------------ ------------ ------------ ------------
Net asset value per share:
End of year................................. $ 39.365 $ 17.804 $ 13.713 $ 18.825 $ 18.445
============ ============ ============ ============ ============
Per share market value:
End of year................................. $ 31.313 $ 14.125 $ 10.875 $ 15.125 $ 15.000
Total investment return at market value..... 155.36% 39.9% 23.89% (12.86)% 16.50%
RATIOS AND SUPPLEMENTAL DATA:
Net assets at end of year................... $318,271,356 $131,562,804 $100,030,321 $131,987,733 $123,146,793
Ratio of operating expenses to average net
assets.................................... 1.51% 1.60% 1.62% 1.67% 1.61%
Ratio of net investment loss to average net
assets.................................... (1.06)% (1.30)% (1.50)% (1.38)% (1.25)%
Portfolio turnover rate..................... 12.70% 23.49% 18.21% 18.94% 19.51%
Number of shares outstanding at end of
year...................................... 8,085,152 7,389,487 7,294,722 7,011,362 6,676,420

PORTFOLIO CHARACTERISTICS

A substantial portion of the Trust's investment portfolio consists of
venture capital and private equity investments. As of June 30, 2006, 20.80% of
the Trust's assets were invested in Restricted Securities of 26 Life Sciences
Companies, two of which companies are publicly-traded. The Trust continues to
value these publicly traded securities at or below current market prices as they
remain restricted as to resale.

From inception, the Trust has made 237 venture capital investments in 85
private companies and 18 private placements in public companies.

The following sets forth certain information with respect to the composition
of the Trust's investment portfolio as of June 30, 2006.

H&Q LIFE SCIENCES INVESTORS

PORTFOLIO--AS OF JUNE 30, 2006

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

RESTRICTED UNRESTRICTED TOTAL

BIOPHARMACEUTICALS 0.13% 25.49% 25.62%
DRUG DELIVERY 0.00% 2.56% 2.56%
DRUG DISCOVERY TECHNOLOGIES 3.54% 5.27% 8.81%
EMERGING BIOPHARMACEUTICALS 5.01% 18.91% 23.92%
GENERIC PHARMACEUTICALS 0.00% 4.33% 4.33%
HEALTHCARE SERVICES 4.09% 4.42% 8.51%
MEDICAL DEVICES AND DIAGNOSTICS 7.15% 14.51% 21.66%
SHORT-TERM INVESTMENTS 0.00% 4.59% 4.59%

The following table sets forth the Trust's ten largest holdings as a
percentage of net assets as of June 30, 2006.

THE TRUST'S TEN LARGEST HOLDINGS BY ISSUER
(AS OF JUNE 30, 2006)

% OF NET
ASSETS
------------

Conor Medsystems, Inc....................................... 4.96%
Gilead Sciences, Inc........................................ 4.49%
Concentric Medical, Inc..................................... 3.45%
Cubist Pharmaceuticals, Inc................................. 3.17%
Genzyme Corporation......................................... 2.63%
IDEXX Laboratories, Inc..................................... 2.21%
CardioNet, Inc.............................................. 1.98%
PHT Corporation............................................. 1.74%
Lexicon Genetics, Inc....................................... 1.72%
Align Technology, Inc....................................... 1.72%

SHARE PRICE AND NAV

The Trust's Shares are publicly-held and have been listed and are trading on
the NYSE under the symbol "HQL". The following table sets forth for the quarters
indicated the high and low closing prices per Share on the NYSE, the
corresponding NAV, the percentage premium or discount at such closing prices,
and the number of Shares traded. The NAV as of the close of business on
August 14, 2006 was $14.06 and the last reported sales price of a Share that day
was $14.73.

CORRES- CORRES-
MARKET PONDING MARKET PONDING
QUARTER PRICE(1) NET ASSET PREMIUM/ PRICE(1) NET ASSET PREMIUM/ TRADING
ENDED HIGH VALUE(2) (DISCOUNT)(2) LOW VALUE(2) (DISCOUNT)(2) VOLUME(1)
--------------------- -------- --------- ------------- -------- --------- ------------- ----------

Fiscal 2004
Dec. 31............ $16.48 $17.20 (4.20)% $15.51 $16.85 (8.00)% 1,332,250
Mar. 31............ 18.37 18.21 0.90 15.84 16.96 (6.60) 2,043,800
June 30............ 18.24 18.94 (3.70) 15.38 16.84 (8.70) 1,558,800
Sept. 30........... 16.20 15.90 1.90 13.79 15.02 (8.20) 1,257,200
Fiscal 2005
Dec. 31............ 16.93 16.22 4.40 15.56 15.80 (1.50) 1,257,200
Mar. 31............ 16.69 16.15 3.30 14.36 15.57 (7.80) 1,583,300
June 30............ 16.10 16.30 (1.20) 14.24 15.17 (6.10) 1,494,200
Sept. 30........... 17.51 18.04 (2.90) 15.88 16.64 (4.60) 1,599,100
Fiscal 2006
Dec. 31............ 17.42 17.29 0.80 15.43 15.68 (1.60) 1,690,300
Mar. 31............ 17.77 16.98 4.70 15.62 16.23 (3.80) 2,351,400
June 30............ 17.22 17.15 0.41 14.67 14.42 1.73 1,673,400

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

(1) Source: Factset

(2) Based on the Trust's computations, on the day that the high or low market
price was recorded.

Shares of the Trust have frequently traded at a discount to NAV but have
occasionally traded at a premium to NAV. There can be no assurance that Shares
will trade at premium to NAV in the future. Certain features of and steps taken
by the Trust may have tended to reduce the discount from net asset value at
which its Shares might otherwise have traded, although the Trust is not able to
determine what effect, if any, these various features and steps may have had.
The Trust's current 2% distribution policy (see "Dividends and Distributions"),
begun in May 1999, may have contributed to this effect. The Trust's Declaration
of Trust also requires that the Board annually consider and vote upon the
conversion of the Trust to an open-end company. This trend may also have
resulted in whole or in part from other factors, such as the Trust's investment
performance and the performance of the life sciences industry generally.

INVESTMENT PERFORMANCE

The table below presents average annual total returns of the Trust's Shares
on two separate bases. The first column presents the Trust's market value
return, which is the average annual rate of return, based on the Trust's market
value, on an amount invested in the Trust from the beginning to the end of the
stated period and assumes reinvestment of net investment income dividends and
capital gains distributions. This figure reflects the actual experience of a
Shareholder, before commission costs, who bought and sold Shares of the Trust at
the beginning and ending dates. The second column features the NAV return, which
presents the same information, but values the Trust at NAV rather than market
value.

The record of the NASDAQ Biotech Index ("NBI") has been included so that the
Trust's results may be compared with an unmanaged capitalization-weighted index
comprised of approximately150

small and large biotech companies. The record of the S&P 500 has been included
so that the Trust's results may be compared with an unmanaged, base-weighted
aggregate methodology index including 500 leading companies in leading
industries in the United States, focused on the large-cap segment of the market.

The figures for each index assume reinvestment of dividends. It is not
possible to invest directly in any index.

H&Q LIFE SCIENCES INVESTORS ANNUALIZED RETURNS (FOR PERIODS ENDED JUNE 30, 2006)

NASDAQ
BIOTECH INDEX S&P 500
HQL STOCK* HQL NAV* ("NBI")** INDEX**
----------- --------- -------------- --------

1 YEAR........................................... 10.55% 1.76% 7.60% 8.63%
3 YEARS.......................................... 11.54% 6.00% 3.39% 11.22%
5 YEARS.......................................... 4.02% (1.19)% (6.03)% 2.49%
10 YEARS......................................... 11.46% 8.40% 9.69% 8.32%

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

* Source: Based on the Trust's computations

** Source: Factset, Annualized Compounded Return, dividends reinvested on
ex-date

THE ABOVE RESULTS REPRESENT PAST PERFORMANCE AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUTURE PERFORMANCE. The information is provided for purposes of
presenting an historical perspective of the Trust. The investment return and net
asset and market prices will fluctuate, so that Shares may be worth more or less
than their original cost when sold.

THE OFFER

TERMS OF THE OFFER

The Trust is issuing to its Shareholders non-transferable Rights to
subscribe for an aggregate of 4,484,838 Shares. The Trust may increase the
number of Shares subject to subscription by up to 25% of the Shares, for an
aggregate total of 5,606,048 Shares. Shareholders will receive one
non-transferable Right for each Share held as of the Record Date, rounded down
to the nearest number of Rights evenly divisible by three. The Rights entitle a
Shareholder to acquire, at the Subscription Price, one Share for every three
Rights held. If you exercise all of the Rights issued to you, you may subscribe
for Shares which were not otherwise subscribed for by others in the Primary
Subscription.

Rights may be exercised at any time during the Subscription Period, which
commences on September 5, 2006 and ends at 5:00 p.m., Eastern Time, on
September 21, 2006, unless extended by the Trust (such date, as it may be
extended, is referred to in this Prospectus as the "Expiration Date").

Fractional Shares will not be issued upon the exercise of Rights. Therefore,
shares will be issued for Rights submitted in multiples of three only.

The Rights are non-transferable. Therefore, only the underlying Shares will
be listed for trading on the NYSE or any other exchange.

For purposes of determining the number of Shares a Shareholder may acquire
pursuant to the Offer, broker-dealers whose Shares are held of record by Cede &
Co., Inc. ("Cede"), nominee for the Depository Trust Company, or by any other
depository or nominee, will be deemed to be the holders of the Rights that are
issued to Cede or such other depository or nominee on their behalf. Shares
acquired pursuant to the Over-Subscription Privilege are subject to allotment,
which is more fully discussed under "The Offer--Over-Subscription Privilege."

The Subscription Price will be BE 95% OF THE VOLUME WEIGHTED AVERAGE SHARE
PRICE OF A SHARE ON THE NYSE ON SEPTEMBER 22, 2006 (THE "PRICING DATE") AND THE
FOUR PRECEDING BUSINESS DAYS. As the Expiration Date is before the Pricing Date,
Shareholders who choose to exercise their Rights will not know the Subscription
Price at the time they exercise their Rights.

The Rights will be evidenced by Exercise Forms which will be mailed to
Shareholders. You may exercise your Rights by completing an Exercise Form and
delivering it, together with payment by means of (i) a check or money order or
(ii) a Notice of Guaranteed Delivery to the Subscription Agent during the
Subscription Period. The methods by which Rights may be exercised and Shares
paid for are set forth below in "Exercise of Rights" and "Payment for Shares."

PURPOSE OF THE OFFER

The Board of Trustees of the Trust (the "Board") has determined that it is
in the best interests of the Trust and its Shareholders to increase the assets
of the Trust available for investment through the Offer, so that the Trust will
be in a better position to more fully take advantage of available investment
opportunities in Life Sciences Companies, including investments in specialty and
generic pharmaceuticals companies, medical technology, life sciences information
services and other innovative life sciences products and biotechnology
companies. The Board was informed by the Investment Adviser that high quality
venture capital investment opportunities are available and that Shareholders
could potentially realize significant benefits from increased investment in both
venture capital and publicly-traded Life Sciences Companies. The Board also
reviewed data suggesting that increased asset size could favorably affect the
Trust's expense ratio since the additional assets raised in the Offer were
expected to allow the Trust to spread fixed costs over a larger number of
Shares. The Board unanimously approved the Offer and concluded that increasing
the assets of the Trust through the Offer would be beneficial to the Trust and
its Shareholders. However, there can be no assurance that the anticipated
benefits discussed herein will occur as a result of increasing the assets of the
Trust through the Offer.

In determining that the initiation of the Offer and the proposed terms of
the Offer were in the best interest of Shareholders, the Board considered a
variety of factors, including those set forth below:

RECENT DEVELOPMENTS IN CERTAIN LIFE SCIENCES SECTORS. Demographic changes
continue to create new medical opportunities. The Managed Care Institute has
estimated that by the year 2010 over 13% of the population will be 65 or older
vs. 12% in 2002. This population consumes three to four times the healthcare
goods and services as the rest of the population. This will drive an increase in
all types of medical products, from drugs to orthopedic procedures. Furthermore,
Medicare enrollment is expected to increase significantly in the coming years.
This trend will dramatically increase the demand for new healthcare services and
technologies.

In addition, recent developments in the pharmaceutical, biotechnology, and
medical technology industries have produced a series of blockbuster products
that are expected to improve the quality of patients' lives. Hundreds of
therapeutic products to treat a variety of diseases or conditions have completed
human clinical trials and are awaiting FDA marketing approval; there are
approximately 1,000 products in late stage human clinical trials, and thousands
of products are in earlier stage trials and pre-clinical development. The last
five years has seen the commercialization of products that have advanced the
treatment of cancer, rheumatoid arthritis, erectile dysfunction, psoriasis,
multiple sclerosis and depression. In the next five years, the Investment
Adviser anticipates approval of other novel products which are expected to have
a significant impact in treating sleep disorders, obesity, cardiovascular
disease, additional indications in cancer, and chronic and acute pain.

The Investment Adviser also believes that the recent Medicare drug bill will
alter the healthcare landscape. Under this bill, it is estimated that at least
10 million people will have gained coverage of a

prescription drug benefit. The Investment Adviser believes that there will be a
dramatic growth in prescription volume resulting from passage of the Medicare
bill.

Based on these trends and events, the Investment Adviser continues to
believe, and has advised the Board of Trustees, that there are outstanding
opportunities for investment in life sciences and biotechnology related
companies. In addition to the companies and products in which investments have
already been made the Investment Adviser, sees great promise from several
developing trends. In particular, the Investment Adviser sees tremendous
potential in the areas of 1) generic pharmaceuticals, 2) specialty
pharmaceuticals, 3) disease management, 4) novel medical devices, 5) novel drugs
derived from known and novel targets and 6) products which will benefit from
impending changes in the regulatory landscape. A major benefit to our
shareholders from the proposed rights offering will be our ability to
incrementally invest in additional companies on the forefront of these
developing trends.

Completion of the Offer will allow the Fund to continue to invest in and/or
own stock in the companies in which it has already invested and still take
advantage of these developing trends. Without completing the proposed Offer, the
Fund may well have to choose between maintaining some of its existing
investments and investing in companies which will take advantage of the
developing trends.

INCREASED INVESTMENT SIZE. The Investment Adviser believes that larger
investments by the Trust provide additional negotiating leverage and pricing
influence over venture capital, private investments in public entities (PIPEs),
and other private equity investments and investments in the public markets. With
an increased asset base through the Offer, the Trust may be able to make
investments of the size necessary to achieve more favorable investment terms.

ADDITIONAL INVESTMENTS. In order to take advantage of new investment
opportunities in the life sciences industries without the Offer, the Trust might
be required to sell a portion of its existing investment which would result in
transaction costs and may result in a realization of significant capital gains
or otherwise take place at a time when the investment sold may not have fully
achieved the Trust's investment objective for it. The Offer provides the Trust
with the ability to both capitalize on new investment opportunities and maintain
its investment in existing assets.

OPPORTUNITY TO PURCHASE BELOW MARKET PRICE. The Offer affords existing
Shareholders the opportunity to purchase additional Shares at a price that will
be below market value at the Expiration Date. However, Shareholders who do not
fully exercise their Rights will own, upon completion of the Offer, a smaller
proportional interest in the Trust than they owned before the Offer. The Board
of Trustees took this into account in adopting the Subscription Price formula
applicable to the Offer and selecting the ratio of Rights offered relative to
the number of Shares held on the Record Date. See "Risk Factors."

REDUCTION IN OPERATING COSTS PER SHARE. The Board was advised by the
Investment Adviser that the Trust could potentially achieve additional economies
of scale as a result of an increase in the Trust's total assets. The Investment
Adviser believes that the increase in assets from the Offer could reduce the
Trust's expenses as a percentage of average net assets per Share because fixed
costs would be spread over a greater number of Shares.

The Board voted unanimously to approve the terms of the Offer. One of the
Trust's Trustees who voted to authorize the Offer is affiliated with the
Investment Adviser and, therefore, could benefit indirectly from the Offer. The
other seven Trustees are not "interested persons" of the Trust within the
meaning of the Investment Company Act. The Investment Adviser may also benefit
from the Offer because its fee is based on the net assets of the Trust. See
"Management of the Trust--Investment Adviser." It is not possible to state
precisely the amount of additional compensation the Investment Adviser might
receive as a result of the Offer because it is not known how many Shares will be
subscribed for and because the proceeds of the Offer will be invested in
additional portfolio securities, which will fluctuate in value. However, if the
Offer is fully subscribed, it would add (net of offering

expenses) approximately $61,922,097 to the net assets of the Fund. This amount,
assuming no fluctuation due to changes in the market, would add $792,603 to the
Investment Adviser's annual compensation based upon an advisory fee of 1.28%.
The Fund's assets could increase further if the Shares subject to the
Over-Subscription Privilege considered by the Board were to be issued.

The Board considered the possibility of a decline in the market price of
Shares of the Fund. The Board was advised by the Investment Adviser that, if
market conditions were to become less favorable, the Investment Adviser may
desire to reevaluate the Offer. The Investment Adviser indicated to the Board
that, should the Fund begin to trade at a significant discount to NAV, it would
re-examine the Offer and may consider recommending cancellation of the Offer or
a change in the terms of the Offer.

The Fund will suspend the Offer until it amends this Prospectus if, after
the effective date of this Prospectus, the Fund's NAV declines more than 10%
from its NAV as of that date. A shareholder who exercises Rights pursuant to the
Primary Subscription is hereinafter referred to as an "Exercising Shareholder".
In such event, the Fund will notify Shareholders and permit Exercising
Shareholders to cancel exercise of their Rights. Exercising Shareholders will
have their payment for additional Shares returned to them if they opt to cancel
the exercise of their Rights.

The Trust may, in the future, choose to make additional rights offerings
from time to time for a number of shares and on terms that may or may not be
similar to this Offer. Any such future rights offerings will be made in
accordance with the then applicable requirements of the Investment Company Act
and the Securities Act.

There can be no assurance that the Trust or its Shareholders will achieve
any of the foregoing objectives or benefits through the Offer.

OVER-SUBSCRIPTION PRIVILEGE

If some Shareholders do not exercise all of the Rights initially issued to
them in the Primary Subscription, such Shares which have not been subscribed for
will be offered, by means of the Over-Subscription Privilege, to Shareholders
who have exercised all the Rights initially issued to them and who wish to
acquire more than the number of Shares for which the Rights issued to them are
exercisable. Shareholders who exercise all the Rights initially issued to them
will be asked to indicate, on the Exercise Form which they submit with respect
to the exercise of the Rights, how many Shares they are willing to acquire
pursuant to the Over-Subscription Privilege. The Trust may, at its discretion,
issue up to an additional 25% of the Shares in the Offer to honor
over-subscription requests if sufficient Shares are not available from the
Primary Subscription to honor all over-subscriptions. If sufficient Shares
remain, all over-subscriptions will be honored in full. If sufficient Shares are
not available to honor all over-subscriptions (after giving effect to any
increase in the number of Shares to be offered), the available Shares will be
allocated among those who over-subscribe based on the number of Rights
originally issued to them by the Trust, so that the number of Shares issued to
Shareholders who subscribe pursuant to the Over-Subscription Privilege will
generally be in proportion to the number of Shares owned by them in the Trust on
the Record Date. The allocation process may involve a series of allocations to
assure that the total number of Shares available for over-subscriptions is
distributed on a pro-rata basis. The Over-Subscription Privilege may result in
additional dilution of interest and voting rights to Shareholders, and
additional reduction in the Trust's NAV per share.

The Trustees and officers of the Trust and employees of the Investment
Adviser may purchase Shares in the Offer and pursuant to the Over-Subscription
Privilege. Any such purchases will be made on the same terms applicable to other
Shareholders.

THE SUBSCRIPTION PRICE

The Subscription Price per Share will be 95% OF THE VOLUME WEIGHTED AVERAGE
SHARE PRICE OF A SHARE ON THE NYSE ON SEPTEMBER 22, 2006 (THE "PRICING DATE")
AND THE FOUR PRECEDING BUSINESS DAYS.

The Trust announced the Offer after the close of trading on the NYSE on
March 15, 2006. The NAV at the close of business on March 15, 2006 and
August 14, 2006 was $17.15 and $14.06, respectively, and the last reported share
price of a Share on the NYSE on those dates was $17.25 and $14.73, respectively.
Since the Expiration Date occurs before the Pricing Date, Shareholders who
decide to acquire Shares on the Primary Subscription or pursuant to the
Over-Subscription Privilege will not know the purchase price for such Shares
when they make such decision. Information about the Trust's NAV may be obtained
by calling (800) 451-2597.

EXPIRATION OF THE OFFER

Rights will expire at 5:00 p.m., Eastern Time, on the Expiration Date and
thereafter may not be exercised, unless the Offer is extended.

Any extension, termination, or amendment will be followed as promptly as
practical by announcement thereof, such announcement in the case of an extension
to be issued no later than 9:00 a.m., Eastern time, on the next business day
following the previously scheduled Expiration Date. The Trust will not, unless
otherwise obligated by law, have any obligation to publish, advertise, or
otherwise communicate any such announcement other than by making a release to
the Dow Jones News Service or such other means of announcement as the Trust
deems appropriate.

The Fund may elect to terminate the Offer, if in the judgment of the Fund's
Board of Trustees, market circumstances significantly change. In such event, the
Fund's Board of Trustees would likely determine that the risks associated with
proceeding with the offer would be greater to the Fund and the shareholders than
the risks associated with early termination, which risks could include negative
public perception of the Fund and a negative impact on the Fund's performance.

SUBSCRIPTION AGENT

The Subscription Agent is Computershare Trust Company, N.A. which will
receive, for its administrative, processing, invoicing and other services as
Subscription Agent, a fee estimated to be $25,000, which includes reimbursement
for all out-of-pocket expenses related to the Offer. SIGNED EXERCISE FORMS
SHOULD BE SENT TO COMPUTERSHARE TRUST COMPANY, N.A., by one of the methods
described below:

SUBSCRIPTION CERTIFICATE
DELIVERY METHOD ADDRESS
--------------------------------------------- ---------------------------------------------

By First Class Mail.......................... Computershare
Attn: HQL Rights Offering
P.O. Box 859208
Braintree, MA 02185

By Overnight Courier or Express Mail......... Computershare
Attn: HQL Rights Offering
161 Bay State Drive
Braintree, MA 02184

By Broker-Dealer or other Nominee............ Shareholders whose Shares are held in a
brokerage, bank or trust account may contact
their broker or other nominee and instruct
them to submit an Exercise Form or a Notice
of Guaranteed Delivery and Payment on their
behalf.

DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID
DELIVERY.

INFORMATION AGENT

Any questions or requests for assistance may be directed to the Information
Agent at its telephone number and address listed below:

The Altman Group, Inc.
1200 Wall Street West, 3rd Floor
Lyndhurst, New Jersey 07071
Toll Free: (800)-870-0126

You may also call the Trust at (617) 772-8500 or contact your bank, broker
or other nominee for information with respect to the Offer.

The Information Agent will receive a fee estimated to be approximately
$6,800, which includes reimbursement for all out-of-pocket expenses related to
its services as Information Agent.

EXERCISE OF RIGHTS

Rights may be exercised by completing and signing the reverse side of the
Exercise Form which accompanies this Prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Exercise Form to the
Subscription Agent, together with payment for the Shares as described below
under "Payment for Shares." Completed Exercise Forms and related payments must
be received by the Subscription Agent before 5:00 p.m., Eastern time, on or
before the Expiration Date (unless payment is effected by means of a Notice of
Guaranteed Delivery as described below under "Payment for Shares") at the
offices of the Subscription Agent at the address set forth above. Rights may
also be exercised through an Exercising Shareholder's broker, who may charge
such Exercising Shareholder a servicing fee.

Shareholders for whom there is not a current address ("stop mail" accounts)
will not be mailed this Prospectus or other subscription materials. Shareholders
whose record addresses on the Record Date are outside of the United States will
not be mailed Exercise Forms.

EXERCISING SHAREHOLDERS WHO ARE RECORD OWNERS. Exercising Shareholders may
choose between either option set forth under "Payment for Shares" below. If time
is of the essence, option (2) will permit delivery of the Exercise Form and
payment after the Expiration Date.

INVESTORS WHOSE SHARES ARE HELD BY A BROKER-DEALER OR OTHER
NOMINEE. Exercising Shareholders whose Shares are held by a Nominee such as a
broker-dealer, bank or trust company must contact the Nominee to exercise their
Rights. In that case, the Nominee will complete the Exercise Form on behalf of
the Exercising Shareholder and arrange for proper payment by one of the methods
set forth under "Payment for Shares" below.

NOMINEES. Nominees who hold Shares for the account of others should notify
the respective beneficial owners of such Shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
exercising the Rights. If the beneficial owner so instructs, the Nominee should
complete the Exercise Form and submit it to the Subscription Agent with the
proper payment described under "Payment for Shares" below.

All questions as to the validity, form, eligibility (including times of
receipt and matters pertaining to beneficial ownership) and the acceptance of
subscription forms and the Subscription Price will be determined by the Trust,
which determinations will be final and binding. No alternative, conditional or
contingent subscriptions will be accepted. The Trust reserves the absolute right
to reject any or all subscriptions not properly submitted or the acceptance of
which would, in the opinion of the Trust's counsel, be unlawful. The Trust also
reserves the right to waive any irregularities or conditions, and the Trust's
interpretations of the terms and conditions of the Offer shall be final and
binding. Any

irregularities in connection with subscriptions must be cured within such time
as the Trust shall determine unless waived. Neither the Trust nor the
Subscription Agent shall be under any duty to give notification of defects in
such subscriptions or incur any liability for failure to give such notification.
Subscriptions will not be deemed to have been made until such irregularities
have been cured or waived.

PAYMENT FOR SHARES

You may exercise your Rights and pay for Shares subscribed for pursuant to
the Primary Subscription and Over-Subscription Privilege in one of the following
ways:

(1) DELIVER EXERCISE FORM AND PAYMENT TO THE SUBSCRIPTION AGENT BY THE
EXPIRATION DATE:

Exercising Shareholders may deliver to the Subscription Agent at any of the
offices set forth above on page 20 (i) a completed and executed Exercise Form
indicating the number of Rights they have been issued and the number of Shares
they are acquiring pursuant to the Primary Subscription, as well as the number
of any additional Shares they would like to subscribe for under the
Over-Subscription Privilege and (ii) payment for all such ordered Shares based
on the Estimated Subscription Price of $13.91 per Share, both no later than
5:00 p.m., Eastern Time, on the Expiration Date.

The Subscription Agent will deposit all checks received by it for the
purchase of Shares into a segregated interest bearing account of the Trust (the
interest from which will belong to the Subscription Agent) pending proration and
distribution of Shares.

A PAYMENT PURSUANT TO THIS METHOD (1) MUST BE IN U.S. DOLLARS BY MONEY ORDER
OR CHECK DRAWN ON A BANK LOCATED IN THE U.S., (2) MUST BE PAYABLE TO "H&Q LIFE
SCIENCES INVESTORS" AND (3) MUST ACCOMPANY AN EXECUTED EXERCISE FORM FOR SUCH
SUBSCRIPTION TO BE ACCEPTED. THIRD (OR MULTIPLE) PARTY CHECKS WILL NOT BE
ACCEPTED.

(2) CONTACT YOUR BROKER, BANK OR TRUST COMPANY TO DELIVER NOTICE OF
GUARANTEED DELIVERY TO THE SUBSCRIPTION AGENT BY THE EXPIRATION DATE:

Exercising Shareholders may request a NYSE or National Association of
Securities Dealers, Inc. member, bank or trust company to execute a Notice of
Guaranteed Delivery (or equivalent electronic information) and deliver it, by
facsimile or otherwise, to the Subscription Agent by 5:00 p.m., Eastern time, on
the Expiration Date indicating (i) the number of Rights they wish to exercise,
the number of Primary Subscription Shares they wish to acquire, and the number
of Over-Subscription Privilege Shares for which they wish to subscribe and
(ii) guaranteeing delivery of payment and a completed Exercise Form from such
Exercising Shareholder by September 21, 2006. You must arrange for payment to
the nominee, who will in turn submit your Exercise Form and payment on your
behalf by September 26, 2006. The Subscription Agent will not honor a Notice of
Guaranteed Delivery unless the completed Exercise Form is received by the
Subscription Agent by the close of business on September 21, 2006 and full
payment for the Shares is received by it by the close of business on
September 26, 2006.

On October 2, 2006 (the "Confirmation Date"), the Subscription Agent will
send a confirmation to each Exercising Shareholder (or, if the Shares are held
by a depository or other nominee, to such depository or other nominee), showing
(i) the number of Shares acquired pursuant to the Primary Subscription,
(ii) the number of Shares, if any, acquired pursuant to the Over-Subscription
Privilege, (iii) the per Share and total purchase price for the Shares, and
(iv) any additional amount payable by such Exercising Shareholder to the Trust
or any excess to be refunded by the Trust to such Exercising Shareholder in each
case based upon the final Subscription Price. Any additional payment required
from an Exercising Shareholder must be received by the Subscription Agent by,
October 12, 2006 (the "Final Payment Date"). Any excess payment to be refunded
by the Trust to an Exercising Shareholder

will be mailed by the Subscription Agent to the holder as promptly as
practicable after the Final Payment Date. In the case of any Shareholder who
exercises his or her right to acquire Shares pursuant to the Over-Subscription
Privilege, any excess payment which would otherwise be refunded to the
Shareholder will be applied by the Trust toward payment for additional Shares
acquired pursuant to exercise of the Over-Subscription Privilege. Any additional
payment required from a Shareholder must be received by the Subscription Agent
by the close of business on October 12, 2006 Any excess payment to be refunded
by the Trust to a Shareholder will be mailed by the Subscription Agent to such
Shareholder as promptly as possible within ten (10) business days after the
Confirmation Date. All payments by a Shareholder must be made in United States
dollars by money order or check drawn on a bank located in the United States of
America and payable to H&Q LIFE SCIENCES INVESTORS.

Issuance and delivery of certificates for the Shares purchased are subject
to actual collection of checks and actual payment pursuant to any Notice of
Guaranteed Delivery.

If an Exercising Shareholder does not make payment of any additional amounts
due by October 12, 2006 the Trust reserves the right to take any or all of the
following actions: (i) apply any payment received by it toward the purchase of
the greatest whole number of Shares which could be acquired by such Exercising
Shareholder upon exercise of the Primary Subscription and/or Over-Subscription
Privilege based on the amount of such payment; (ii) allocate the Shares subject
to subscription rights to one or more other Shareholders; (iii) sell all or a
portion of the Shares deliverable upon exercise of subscription rights on the
open market and apply the proceeds thereof to the amount owed; and/or
(iv) exercise any and all other rights or remedies to which it may be entitled,
including, without limitation, the right to set-off against payments actually
received by it with respect to such subscribed Shares.

AN EXERCISING SHAREHOLDER WILL NOT HAVE THE RIGHT TO CANCEL THE EXERCISE OF
RIGHTS OR RESCIND A PURCHASE AFTER THE SUBSCRIPTION AGENT HAS RECEIVED PAYMENTS,
EITHER BY MEANS OF A NOTICE OF GUARANTEED DELIVERY OR A CHECK OR MONEY ORDER,
EXCEPT AS DESCRIBED UNDER "THE OFFER-NOTICE OF NAV DECLINE."

The risk of delivery of subscription forms and payments to the Subscription
Agent will be borne by the Exercising Shareholder and not the Trust, the
Subscription Agent or the Information Agent. If the mail is used to exercise
Rights, it is recommended that such Exercise Forms and payment be sent by
registered mail, properly insured, with return receipt requested, and that a
sufficient number of days be allowed to ensure delivery to the Trust and
clearance of payment before 5:00 p.m., Eastern time, on the Expiration Date.
Because uncertified personal checks may take at least five business days to
clear and may, at the discretion of the Trust, not be accepted if not cleared
before the Expiration Date, you are strongly encouraged to pay, or arrange for
payment, by means of certified or bank cashier's check.

NOTICE OF NAV DECLINE

The Trust will suspend the Offer until it amends this Prospectus if, after
the effective date of this Prospectus, the Trust's NAV declines more than 10%
from its NAV as of that date. In such event, the Trust will notify you of any
such decline and thereby permit you to cancel your exercise of your Rights.
Shareholders will have their payment for additional Shares returned to them if
they opt to cancel the exercise of their Rights.

DELIVERY OF SHARES

Shareholders whose Shares are held of record by Cede or by any other
depository or Nominee on their behalf or their broker-dealers' behalf will have
any Shares that they acquire pursuant to the Offer credited to the account of
Cede or such other depository or nominee. With respect to all other
Shareholders, Shares will be issued after the expiration of the Offer, and
clearance of checks, which can take up to 17 business days.

EMPLOYEE PLAN CONSIDERATIONS

Shareholders that are employee benefit plans subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (including
corporate savings and 401(k) plans), and plans that are subject to Code
Section 4975, such as profit sharing/retirement plans for self-employed
individuals and Individual Retirement Accounts (collectively, "Retirement
Plans") should be aware that additional contributions of cash to Retirement
Plans (other than rollover contributions or trustee-to-trustee transfers from
other Retirement Plans) to exercise Rights would be treated as Retirement Plan
contributions and therefore, when taken together with contributions previously
made, may be treated as excess or nondeductible contributions and may be subject
to excise taxes. In the case of Retirement Plans qualified under Section 401(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), additional cash
contributions could cause violations of the maximum contribution limitations of
Section 415 of the Code or other qualification rules. Retirement Plans in which
contributions are so limited should consider whether there is an additional
source of funds available within the Retirement Plan, such as a reallocation
from another investment option or other liquidation of assets, with which to
exercise the Rights. Because the rules governing Retirement Plans are extensive
and complex, Retirement Plans contemplating the exercise of Rights should
consult with their counsel before such exercise.

Retirement Plans and other tax exempt entities should also be aware that if
they borrow to finance their exercise of Rights, they may become subject to the
tax on unrelated business taxable income under Section 511 of the Code. If any
portion of an Individual Retirement Account ("IRA") is used as security for a
loan, the portion so used will be treated as a distribution to the IRA
depositor.

ERISA contains fiduciary responsibility requirements, and ERISA and the Code
contain prohibited transactions rules that may affect the exercise of Rights.
Due to the complexity of these rules and the penalties for noncompliance,
Retirement Plans should consult with their counsel regarding the consequences of
their exercise of Rights under ERISA and the Code.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER

The following discussion summarizes the principal federal income tax
consequences of the Offer to Shareholders and Exercising Shareholders. It is
based upon the Code, U.S. Treasury regulations, Internal Revenue Service rulings
and policies and judicial decisions in effect on the date of this Prospectus.
This discussion does not address all federal income tax aspects of the Offer
that may be relevant to a particular Shareholder because of his individual
circumstances or to Shareholders subject to special treatment under the Code
(such as insurance companies, financial institutions, tax-exempt entities,
dealers in securities, foreign corporations, and persons who are not citizens or
residents of the U.S.), and it does not address any state, local or foreign tax
consequences. Accordingly, each Shareholder should consult his or her own tax
advisor as to the specific tax consequences of the Offer to him or her. Each
Shareholder should also review the discussion of certain tax considerations
affecting the Trust and Shareholders set forth under "Taxation" below.

For federal income tax purposes, neither the receipt nor the exercise of the
Rights by Shareholders will result in taxable income to those Shareholders, and
no loss will be realized if the Rights expire without exercise.

The Shareholder's basis in the Right will be zero unless either (i) the fair
market value of the Right on the date of distribution is 15% or more of the fair
market value on such date of the Shares with respect to which the Right was
distributed, or (ii) the Shareholder elects, on its federal income tax return
for the taxable year in which the Right is received, to allocate part of the
basis of such Shares to the Right. If either of clauses (i) and (ii) is
applicable, then if the Right is exercised, the Exercising Shareholder will
allocate its basis in the Shares with respect to which the Right was distributed
between such Shares and the Right in proportion to the fair market values of
each on the date of distribution.

The holding period of a Right received by a Shareholder includes the holding
period of the Shares with regard to which the Right is issued. If the
Shareholder exercises a Right, the holding period of the Shares acquired begins
on the date the Right is exercised.

In the event a Shareholder allows rights to expire without exercising them,
the Rights will be deemed to have a zero basis and, therefore, the Shareholder
will not recognize any loss upon the expiration of the Rights. In addition, the
tax basis of the Shares with respect to which the expired Rights were
distributed will remain unchanged compared to their basis prior to the Offer.

The Shareholder's basis for determining gain or loss upon the sale of a
Share acquired upon the exercise of a right will be equal to the sum of the
Shareholder's basis in the Right, if any, and the Subscription Price. Gain or
loss recognized by a Shareholder upon the sale of a Share acquired through the
Offer will be capital gain or loss (assuming the Share was held as a capital
asset at the time of sale) and will be long-term capital gain or loss if the
Share was held for more than a year.

The foregoing is only a summary of the applicable federal income tax laws
presently in effect and does not include any state or local tax consequences of
the Offer. Moreover, the foregoing does not address the many factors that may
determine whether an investor will be liable for the federal alternative minimum
tax. You should consult your own tax advisor concerning the tax consequences of
this transaction.

SPECIAL CONSIDERATIONS

Shareholders who do not fully exercise their Rights should expect that they
will, at the completion of the Offer, own a smaller proportional interest in the
Trust than would otherwise be the case if they exercised their Rights. The Trust
cannot determine the extent of this dilution at this time because it does not
know what proportion of the Trust's Shares will be purchased as a result of the
Offer.

Shareholders who do not fully exercise their Rights may experience dilution
in their holdings because they will indirectly bear the expenses of the Offer.
Further, Shareholders that do not submit subscription requests pursuant to the
Over-Subscription Privilege may also experience dilution in their holdings, if
the Trust offers additional Shares for subscription. The Trust cannot state
precisely the amount of any potential decrease in NAV because it does not know
at this time how many Shares will be subscribed for or what the NAV or market
price per Share will be at the Pricing Date. As of August 14, 2006, the Trust's
Shares traded at a 4.77% premium to NAV. If the Trust's Shares trade at a
similar premium to NAV as of the Pricing Date, the Trust estimates that such
dilution would be minimal. See "Risk Factors--Dilution of NAV and Effect of
Non-Participation in the Offer." Except as described in this Prospectus, you
will have no right to rescind your subscription requests after receipt of your
payment for Shares by the Subscription Agent.

OTHER RIGHTS OFFERINGS

The Trust made a rights offering in November 1993 at a price that was lower
than its then-current NAV, and may have similar rights offerings in the future.
Any such future rights offerings would be separately registered with the
Commission and made by means of separate prospectuses.

RESTRICTION ON FOREIGN SHAREHOLDERS

Shareholders on the Record Date whose record addresses are outside the
United States will receive written notice of the Offer; however, Exercise Forms
will not be mailed to such Shareholders. The Rights to which those Exercise
Forms relate will be held by the Subscription Agent for such foreign
Shareholders' accounts until instructions are received in writing with payment
to exercise the Rights. If no such instructions are received by the Expiration
Date, such Rights will expire. See "Subscription Agent."

USE OF PROCEEDS

Assuming all Shares offered hereby are sold at an estimated Subscription
Price (the "Estimated Subscription Price") of $13.91 per Share, the net proceeds
of the Offer will be approximately $61,922,097, after deducting expenses payable
by the Trust estimated at approximately $462,000. The net proceeds of the Offer
will be invested in accordance with the Trust's investment objective and
policies. See "Investment Objective and Policies." Various factors affect
investments in emerging growth companies that are different from factors
affecting investments in large well-known companies, including the additional
research required to investigate a large number of small companies and the
volatility and illiquidity of securities of those companies. Accordingly,
initial investment of the proceeds in publicly-traded securities may take place
during a period of up to six months following completion of the Offer, depending
on market conditions and the availability of appropriate securities. Restricted
Securities may be purchased as appropriate opportunities arise, which could take
up to one year or longer, and the Trust may choose to be more fully invested in
publicly-traded securities during such period. Pending investment in the
securities described above, the proceeds will be held in obligations of the U.S.
Government, its agencies or instrumentalities ("U.S. Government Securities"),
highly rated money market instruments or mutual funds that invest in such
instruments. As a result of this short-term investment of the proceeds, a lower
return may be realized.

INVESTMENT OBJECTIVE AND POLICIES

GENERAL

The Trust's investment objective is to seek long-term capital appreciation
by investing primarily in Life Sciences Companies. The Trust's investment
objective is a fundamental policy and may not be changed without the affirmative
vote of the holders of a majority of the outstanding Shares (as such term is
defined in Section 2(a)(42) of the Investment Company Act). For a more detailed
description of the Trust's investment objective and policies see "Additional
Information about Investments, Investment Techniques and Risks" and "Investment
Restrictions" in the SAI. For a description of the risks that may be associated
with an investment in the Trust, see the section of this Prospectus entitled
"Risk Factors."

In an effort to achieve its investment objective, the Trust will invest
primarily in securities of U.S. and foreign companies that are believed by the
Investment Adviser to have significant potential for above-average, long-term
growth in revenues and earnings. The Investment Adviser expects that such
companies generally will possess most of the following characteristics: strong
market position for their services or products, experienced business management,
recognized technological expertise and the ability either to generate funds
internally to finance growth or to secure outside sources of capital. The
Investment Adviser will typically attempt to invest in securities that sell at
price-earnings ratios or at multiples of underlying asset or potential values
which, relative to other comparable securities or to the company's growth
expectations, the Investment Adviser believes, do not fully reflect the
company's potential.

The Trust emphasizes investment in securities of emerging growth Life
Sciences Companies which may offer limited products or services or which are at
the research and development stage with no marketable or approved products or
technologies. The Trust may also invest up to 40% of its net assets in
Restricted Securities. The Trust may invest in securities of large, well-known
companies with existing products in the life sciences industries that are
believed by the Investment Adviser to be undervalued in relation to their
long-term growth potential or asset value.

The Trust may invest up to 25% of its net assets in Foreign Securities. The
Trust may buy and sell currencies for the purpose of settlement of transactions
in Foreign Securities.

Under normal market conditions, the Trust will invest at least 80% of its
total assets in securities of Life Sciences Companies. The Trust expects to
invest primarily in securities of Life Sciences Companies in the healthcare
industry (which includes the biotechnology sector) and is required, except

for temporary defensive purposes, to invest at least 25% of its net assets in
such companies. For purposes of satisfying the foregoing requirements, a company
will be deemed to be a Life Sciences Company if, at the time the Trust makes an
investment therein, 50% or more of such company's sales, earnings efforts or
assets arise from or are related to healthcare, agriculture or environmental
management, as the case may be. The Trust may also invest in companies that do
not satisfy the above criteria but that are expected by the Investment Adviser
to have 25% or more of sales, earnings efforts or assets arising from or
dedicated to healthcare, agriculture or environmental management, but
investments in such securities will not count toward achieving the percentages
mentioned above. Determinations as to whether a company is a Life Sciences
Company will be made by the Investment Adviser in its discretion.

The equity and related securities in which the Trust may invest consist of
common stock of Life Sciences Companies and, to a lesser extent, of preferred
stock, convertible debt, limited partnership interests and warrants or other
rights to acquire common or preferred stocks of such companies. The Trust's
investments in venture capital opportunities, which are considered Restricted
Securities, will be made primarily in convertible preferred stock. The Trust may
also purchase non-convertible debt securities in connection with its venture
capital investments, and otherwise when the Investment Adviser believes that
such investments would be consistent with the Trust's investment objective.
While these debt investments typically will not be rated, the Investment Adviser
believes that, in light of the risk characteristics associated with investments
in emerging growth companies (see "Risk Factors"), if such investments were to
be compared with investments rated by S&P or Moody's, they may be rated as low
as "C" in the rating categories established by S&P and Moody's. Such securities
are commonly referred to as "junk bonds" and are considered, on balance, as
predominantly speculative.

Investments will not be made in any company with the objective of exercising
control over that company's management. The Trust nevertheless may, provide
managerial assistance to any such company as is normally the case with venture
capital funds. The Trust may also make investments contemporaneously with other
venture capital groups that may provide issuers with significant managerial
assistance.

SHORT SALES, WHEN-ISSUED, DELAYED DELIVERY TRANSACTIONS AND REPURCHASE
AGREEMENTS

The Trust may, to a limited degree, engage in short sales, when-issued and
delayed delivery transactions, enter into repurchase agreements and lend its
portfolio securities. Short sales are transactions in which the Trust sells a
security it does not own in anticipation of an expected decline in the price of
that security. In such a transaction, the Trust must borrow the security to make
the delivery to the buyer. The price at which the Trust purchases the security
to cover its borrowing (together with the transaction and carrying costs
associated with the short sale) may be more or less than the sale price of the
security. The Trust may also make short sales "against the box", which are the
short sales of a security the Trust owns or has the right to acquire at no
additional cost. A short sale "against the box" may be used to defer recognition
for federal income tax purposes of any net gain or loss on securities.
"When-issued" securities are securities whose terms are available and for which
a market exists, but which are not available for immediate delivery. "Delayed
delivery" transactions are those in which the Trust purchases a security but
settlement of the transaction is to occur after the customary settlement date.
Purchases of when-issued or delayed delivery securities are made at a fixed
price for delivery at a later date. The value of the security at the settlement
date may be more or less than the purchase price. Short sales (other than
"against the box") and when-issued and delayed delivery transactions are subject
to certain asset coverage requirements. The Trust will cover its positions in
such instruments consistent with Commission guidelines. For example, the Trust
may maintain with its custodian a segregated account consisting of cash, U.S.
Government Securities or high quality liquid debt obligations having a value at
least equal to the Trust's obligations under such instruments.

The Trust may invest in repurchase agreements with respect to 10% of its net
assets. Repurchase agreements allow the Trust to acquire a security subject to
the obligation of the seller to repurchase

and the Trust to resell such security at a fixed time and price reflecting the
Trust's costs and interest. It is the Trust's present intention to enter into
repurchase agreements for a relatively short period (usually not more than one
week) only with commercial banks and registered broker-dealers and only with
respect to U.S. Government Securities and money market instruments. The Trust
intends to take possession of collateral to secure a seller's repurchase
obligation, and the Investment Adviser will monitor repurchase transactions to
ensure that the value of the underlying securities will at all times be at least
equal to the total amount of the repurchase obligation, including an interest
factor. If the seller defaults, the Trust could realize a loss on the sale of
the underlying security to the extent that the proceeds of sale, including
accrued interest, are less than the resale price provided in the agreement,
including interest. The Trust may also choose to lend its portfolio securities,
subject to the limitation that all such loans will not exceed 20% of the Trust's
net assets. Loans must be collateralized, on each business day, by an amount of
cash, bank letters of credit or U.S. Government Securities equal to the value of
the loaned securities.

PUT OR CALL OPTIONS

The Trust may purchase and sell (or write) put or call options on any
security in which it is permitted to invest or on any index of securities or
other index the change in value of which has a high degree of correlation with
the changes in value of the Trust's portfolio securities, and may purchase and
sell (or write) on a covered basis financial futures contracts and options on
such futures.

The Trust may also enter into forward foreign currency exchange contracts
and may purchase and sell (or write) exchange-traded or OTC options on
currencies, foreign currency futures contracts and options on foreign currency
futures contracts to protect against a decline in the U.S. dollar equivalent
value of its foreign currency portfolio securities or the payments thereon that
may result from an adverse change in foreign currency exchange rates. Although
the Trust believes that use of such strategies may benefit the Trust, if the
Investment Adviser's judgment about the general direction of securities market
movements, foreign exchange rates or interest rates is incorrect, the Trust's
overall performance could be poorer than if it had not pursued those strategies.
The use of these strategies entails certain risks. Under normal market
conditions, the Trust does not intend to engage in the practices described in
this section to any significant extent.

CASH, U.S. GOVERNMENT SECURITIES, MONEY MARKET INSTRUMENTS OR MONEY MARKET
MUTUAL FUNDS

When, in the opinion of the Investment Adviser, adverse market conditions or
industry expectations support such action, the Trust may, for temporary
defensive purposes, invest up to 100% of its net assets in cash, U.S. Government
Securities, money market instruments or money market mutual funds. Money market
instruments in which the Trust may invest include certificates of deposit and
bankers' acceptances issued by domestic branches of federally-insured U.S. banks
and savings and loan associations and commercial paper and high and upper medium
grade corporate debt securities rated, as of the date of purchase, among the
following rating categories of the indicated rating service: bonds--Moody's Aaa,
Aa or A; S&P AAA, AA or A; notes-Moody's MIG-1, MIG-2 or MIG-3; S&P SP-1 + to
SP-2; commercial paper--Moody's P-1; S&P A-1. The Trust also may invest in
shares of money market mutual funds that invest in money market instruments and
U.S. Government Securities. Money market mutual funds are investment companies
and the Trust's investments in those companies are subject to certain
limitations. See "Investment Restrictions". As a shareholder in money market
mutual funds, the Trust will bear its ratable share of such companies' expenses,
including investment adviser or management fees, and will remain subject to the
payment of fees to the Investment Adviser to the extent that the Trust assumes a
temporary defensive position for the purpose of avoiding losses, it will not
participate in the capital appreciation, if any, of securities in which the
Trust would normally invest.

The Trust also has adopted certain other investment restrictions in an
effort to achieve its investment objective. See "Investment Restrictions".

RECENT DEVELOPMENTS IN THE LIFE SCIENCES SECTOR

Demographic changes continue to create new medical opportunities. It is
estimated that by the year 2010 over 13% of the population will be 65 or older
vs. 12% in 2002. This population consumes three to four times the healthcare
goods and services as the rest of the population. This will drive an increase in
all types of medical products, from drugs to orthopedic procedures. Furthermore,
Medicare enrollment is expected to increase significantly in the coming years.
This trend will dramatically increase the demand for new healthcare services and
technologies.

In addition, hundreds of recent developments in the pharmaceutical,
biotechnology, and medical technology industries have produced a series of
blockbuster products that have or will extend or improve the quality of
patients' lives. Therapeutic products to treat a variety of diseases or
conditions have completed human clinical trials and are awaiting FDA marketing
approval; there are over 1,000 late stage clinical trials ongoing for new and
old drugs, and thousands of products are in earlier stage trials and
pre-clinical development. The last five years has seen the commercialization of
products that have made incredible advances in treating cancer, rheumatoid
arthritis, erectile dysfunction, psoriasis, multiple sclerosis and depression.
In the next five years, the Investment Adviser anticipates approval of other
novel products which will have a comparable impact in treating sleep disorders,
obesity, cardiovascular disease, additional indications in cancer, and chronic
and acute pain.

The Investment Adviser also believes that the recent Medicare drug bill will
dramatically alter the healthcare landscape. Under this bill, it is estimated
that at least 10 million people will gain new coverage of a prescription drug
benefit. The Investment Adviser believes that there will be a dramatic growth in
prescription volume resulting from passage of the Medicare bill. Based on these
trends and events, the Investment Adviser continues to believe there are
outstanding opportunities for investment in healthcare and biotechnology related
companies. HQL continues to be invested in a number of very promising companies
and the Investment Adviser looks forward to continued price appreciation in
these companies.

In addition to the companies and products in which investments have already
been made, the Investment Adviser sees great promise from several developing
trends. In particular, the Investment Adviser sees tremendous potential in the
areas of 1) generic pharmaceuticals, 2) specialty pharmaceuticals, 3) disease
management, 4) novel medical devices, 5) novel drugs derived from known and
novel targets and 6) products which will benefit from impending changes in the
regulatory landscape. A major benefit to our shareholders from the proposed
rights offering will be our ability to incrementally invest in additional
companies on the forefront of these developing trends.

Investments in the healthcare industry are likely to continue to be a
principal component of the Trust's portfolio. The healthcare industry
constitutes a large segment of the US economy. The U.S. Department of Health and
Human Services ("HHS") reports that national health care expenditures in 2004
represented 1.9 trillion dollars, 16% of the U.S. gross national product..
Healthcare Spending is likely to increase significantly as Americans over
65 years of age increase in proportion of the rest of society and as the obesity
epidemic in the United States becomes even more common. It is estimated that by
the year 2010 over 13% of the population will be 65 or older compared to 12% in
2002. Additionally, the U.S. Centers for Disease Control (CDC) has reported that
42 states have obesity rates greater than or equal to 20% in 2004.

To better describe the potential opportunities in various sub-sectors, the
following information describes examples of trends in key sub-sectors.

i. GENERIC PHARMACEUTICALS. The global generic drug industry is about
$356 billion in size and, according to numbers from the Generic
Pharmaceuticals Association ("GPhA"), this number could reach
$60 billion by 2008. This growth has been driven by a number of factors,
the most important of which has been the utilization of generic drugs as
a low cost alternative. One

recently published statistic by the Managed Care Institute showed that a
1% increase in generic drug utilization could reduce annual drug
spending by 1%. With healthcare drug costs as the fastest growing
segment of healthcare, and more specifically branded pharmaceuticals,
the increased utilization of generics has, and will be, a rational
choice.
While cost savings have motivated the success of generics to this point,
other growth drivers motivate us to increase the Trust's exposure to the
generic drug space going forward. The Investment Adviser is seeing a
more aggressive approach by the generic drug manufacturers to file for
generic alternatives. This has led to an increase in the number of new
Abbreviated New Drug Application ("ANDAs"). We are also seeing a shift
in the FDA approach towards the generic drug companies as exemplified by
a median approval time that has dropped nearly nine months in the last
eight years. Finally, the Investment Adviser is expecting multiple
blockbuster drugs to go off patent over the next few years with branded
product sales of close to $60 billion. While these numbers are subject
to a number of factors including patent disputes, the genericization of
these products would double the size of the generic market, making it
the fastest growing pharmaceutical sector in healthcare.

ii. SPECIALTY PHARMACEUTICALS. The specialty pharmaceutical sector is
evolving into a sector that the Investment Adviser anticipates will be
a high growth area of the healthcare industry and a key component to
the Trust's portfolio. Early in the evolution of this sector, specialty
pharmaceuticals were used to describe companies built around drug
delivery systems or companies built around older, under-promoted,
acquired products. The business models of these companies were low
margin businesses surviving on single digit royalty streams and
products where pricing pressures existed.
Today these companies are migrating to higher value proprietary models.
Drug delivery companies are taking existing, validated molecules and
using their delivery systems, including oral, transdermal, and
sustained release systems, to supersede intravenous, injectable or
multiple dose a day dosage regimes. The companies pursuing this life
cycle extension strategy are improving therapy not only through greater
patient compliance with prescription directions, but also through
improved administration of consistently efficacious quantities of the
drug. Companies pursuing the acquisitive business model are looking to
in-license later staged products, develop their R&D budget, expand
their sales forces and compete with biotech and pharmaceuticals in
niche markets. These companies are characterized by low risk R&D
strategies, using validated molecular targets.

iii. DISEASE MANAGEMENT. As healthcare costs spiraled in the 1980's, the
healthcare industry turned to managed care companies as a way of
minimizing the excess administrative burden of the cost plus model. As
managed care evolved and expanded, it began to rely on information
technology to help manage the increasingly complex relationships and
growing number of "transactions" between patient, provider, and payor.
Companies in these sectors performed well. However, today managed care
requires new tools. People are living longer and want to live better.
Demographic changes and an aging population use substantially more
healthcare services than do younger individuals. The Managed Care
Institute expects Medicare enrollment to increase in the coming years.
The Investment Adviser believes this trend will increase the demand for
new healthcare services and technologies focused on maximizing the
benefit of every healthcare dollar spent. Creative disease management
programs to manage high risk populations could be implemented by large
employers and other healthcare providers. New devices and healthcare
services that improve overall wellness, and quality of life will become
popular with the graying of America. Other services of healthcare with
a focus on cutting unnecessary costs will be focused on the better
management of information, particularly such areas as claims
processing, patient management direct costs and quality

control, and ultimately automation of patient records. The Investment
Adviser expects that these areas will provide opportunities for
investment.

iv. NOVEL MEDICAL DEVICES. Medical technology includes all products used in
healthcare other than pharmaceuticals. Products range from crutches to
spine implants to drug-eluting stents and other medical technology
accounts for 15% of all dollars spent in healthcare--more money than is
spent on all 400 pharmaceuticals and biotechnology products combined.
Currently there are approximately 170 publicly traded medical
technology companies. Of these companies, approximately 200 are
currently valued at under $200M in market capitalization. Medical
technology company valuations are directly correlated with the
underlying company fundamentals; and thus stock performance is a
function of operational performance. The Investment Adviser believes
that medical technology companies which achieve good earnings
performance will produce returns that are less susceptible to
fluctuations in general market conditions relative to big
pharmaceuticals, healthcare services, and biotechnology companies. The
Investment Adviser expects that Medical Technology Companies will be
well represented in the Trust.

v. NOVEL DRUGS FROM KNOWN OR NOVEL TARGETS. The Adviser believes that the
use of genomic approaches will continue to allow us to identify and
clinically validate new molecular targets. Most existing drugs interact
with one or more of under 200 target molecules in the body. The genomic
era of the last five to ten years has identified thousands of new
potential targets through which new and novel medicines should be able
to beneficially intervene in disease processes, particularly in cancer.
The recent approvals of Avastin and Velcade are examples of approved
drugs that address novel targets. In addition, the Investment Adviser
sees tremendous potential in the use of immuno-stimulation to help
manage cancer. The Investment Adviser anticipates continued development
of monoclonal antibodies for oncology indications. In the area of target
selection, the Investment Adviser sees increased use of structural
biology, pathways analysis, imaging technology, and biomarker
development. This area presents a significant potential opportunity for
investments by the Trust.

vi. REGULATORY CHANGES. In the recent past, the FDA has made a number of
changes to its requirements for drug development that the Investment
Adviser believes create new opportunities for investment by the Trust.
For example, the FDA has recently developed the special protocol
assessment (SPA) development route for biologics. This approach allows
sponsoring companies to obtain a binding A PRIORI agreement with the
FDA on the approvability of a drug based on the success of a defined
clinical trial. The Investment Adviser thinks this approach adds
clarity to the likelihood of success of certain products. The
Investment Adviser further thinks that its expertise in evaluating
these trial designs gives it (and therefore the Trust) a competitive
advantage in selecting companies for investment. The Investment Adviser
also anticipates the FDA will soon define a path to approval of generic
biologics as there is currently no viable path. Once an approved
approach is defined, the Investment Adviser believes a number of
companies will seek approval of generic biologies. The Investment
Adviser expects that this area will provide additional opportunities
for investments.

RISK FACTORS

An investment in the Shares of the Trust involves a high degree of risk.
Prospective investors should consider carefully the following risk factors in
addition to the other information set forth in this Prospectus.

Because the Trust intends to invest substantially all of its assets in
equity securities of Life Sciences Companies, an investor should be aware of
certain special considerations and risk factors relating to

investments in such companies. No assurance can be given that Life Sciences
Companies will grow, that a sufficient number of appropriate investments will be
available or that the Trust's particular investment choices will be successful.
Investors should also be aware of considerations and risks relating to the
Trust's investment practices. An investment in the Trust should not itself be
considered a balanced investment program and is intended to provide
diversification only as part of a more complete investment program. The Trust is
intended for long-term investors not seeking current income.

DILUTION OF NET ASSET VALUE AND EFFECT OF NON-PARTICIPATION IN THE OFFER

As a result of the terms of the Offer, shareholders who do not fully
exercise their Rights, including the Over-Subscription Privilege, will, at the
completion of the Offer, own a smaller proportional interest in the Trust than
they owned prior to the Offer. In addition, an immediate dilution of the NAV per
Share may be experienced by all shareholders as a result of the Offer whether or
not they exercise any or all of their Rights, if the Subscription Price of each
Share is less than the then current NAV per Share and the number of Shares
outstanding after the Offer increases in greater proportion than the increase in
the net assets of the Trust. Because it is not known at this time how many
Shares will be subscribed for or what the Subscription Price will be, it is not
possible to state precisely the amount of dilution you may experience. For
example, if the assumed Subscription Price is $13.91, representing a market
price of 95% of NAV, assuming that all Rights are exercised in the Primary
Subscription and all Shares are issued pursuant to the Over-Subscription
Privilege, the Trust's NAV would be reduced by approximately $0.06 per Share or
approximately 0.41% of NAV. The example assumes a NAV of $14.06 per Share, based
on the Trust's NAV after the close of trading on Monday, August 14, 2006. Since
May 8, 1992 (commencement of operations), Shares of the Trust have traded at
various times at, above and below the NAV.

If the Subscription Price is greater than the then current NAV per Share and
the number of Shares outstanding after the Offer increases proportionately less
than the increase in net assets of the Trust, all shareholders may experience an
immediate accretion of the aggregate NAV per share, whether or not they exercise
any of all of their Rights.

If you do not participate in the Over-Subscription Privilege, your
percentage ownership may also be diluted. Although it is not possible to state
precisely the amount of such a decrease or increase in value, because it is not
known at this time how many Shares will be subscribed for or what the
Subscription Price will be, such dilution or accretion might be substantial.

MARKET RISK

As with any investment company that invests in equity securities, the Trust
is subject to market risk--the possibility that the prices of equity securities
will decline over short or extended periods of time. As a result, the value of
an investment in the Trust's Shares will fluctuate with the market. You could
lose money over short or long periods of time.

SELECTION RISK

Different types of equity securities tend to shift into and out of favor
with investors, depending on market and economic conditions. The performance of
funds that invest in Life Sciences Companies may at times be better or worse
than the performance of funds that focus on other types of securities or that
have a broader investment style.

CONCENTRATION ON LIFE SCIENCES COMPANIES

Under normal market conditions, the Trust expects to invest primarily in
securities of Life Sciences Companies representing a small number of industries
and to invest at least 25% of its net assets in securities of Life Sciences
Companies in the healthcare industry. The Trust's portfolio may therefore be
more sensitive to, and possibly more adversely affected by, regulatory, economic
or political factors or trends relating to the healthcare, agriculture and
environmental management industries than a portfolio of companies representing a
larger number of industries. This risk is in addition to the risks normally
associated with any strategy seeking capital appreciation by investing in a
portfolio of equity securities.

Life sciences Companies are characterized by limited product focus, rapidly
changing technology and extensive government regulation. In particular,
technological advances can render an existing product, which may account for a
disproportionate share of a company's revenue, obsolete. Obtaining governmental
approval from agencies such as the FDA and the U.S. Department of Agriculture
for new products can be lengthy, expensive and uncertain as to outcome. Such
delays in product development may result in the need to seek additional capital,
potentially diluting the interests of existing investors such as the Trust. In
addition, governmental agencies may, for a variety of reasons, restrict the
release of certain innovative technologies of commercial significance, such as
genetically altered material. These various factors may result in abrupt
advances and declines in the securities prices of particular companies and, in
some cases, may have a broad effect on the prices of securities of companies in
particular life sciences industries.

While a concentration of investments in any life sciences industry or in
Life Sciences Companies generally may increase the risk and volatility of an
investment company's portfolio, the Trust will endeavor to reduce risk by having
a portfolio of investments that is diversified within its stated objective and
policies. Such volatility is not limited to the biotechnology sector, and
companies in other sectors may be subject to similar abrupt movements in the
market prices of their securities. No assurance can be given that future
declines in the market prices of securities of companies in the industries in
which the Trust may invest will not occur, or that such declines will not
adversely affect the net asset value of the Trust or the price of the Shares.

With respect to healthcare, cost containment measures already implemented by
the federal government, state governments and the private sector have adversely
affected certain sectors of these industries. There is increasing discussion at
all levels of government as to how to extend health insurance coverage to the
millions of people in the United States who are currently uninsured, while also
restraining the growth of total healthcare expenditures. The implementation of
any of the measures under discussion may create increased demand for healthcare
products and services but also may have an adverse effect on some companies in
the healthcare industries. No assurance can be given that healthcare reform
legislation will be enacted or, if enacted, as to its ultimate form. Increased
emphasis on managed care in the United States may put pressure on the price and
usage of products sold by Life Sciences Companies in which the Trust may invest
and may adversely affect the sales and revenues of Life Sciences Companies.

Product development efforts by Life Sciences Companies may not result in
commercial products for many reasons, including, but not limited to, failure to
achieve acceptable clinical trial results, limited effectiveness in treating the
specified condition or illness, harmful side effects, failure to obtain
regulatory approval, and high manufacturing costs. Even after a product is
commercially released, governmental agencies may require additional clinical
trials or change the labeling requirements for products if additional product
side effects are identified, which could have a material adverse effect on the
market price of the securities of those Life Sciences Companies.

claim would not have a material adverse effect on the business, financial
condition or securities prices of a company in which the Trust has invested.

All of these factors may cause the value of the Trust's Shares to fluctuate
significantly over relatively short periods of time.

INVESTMENT IN EMERGING GROWTH COMPANIES

The Trust emphasizes investment in equity securities of emerging growth Life
Sciences Companies. While these securities offer the opportunity for significant
capital gains, such investments also involve a degree of risk that can result in
substantial losses. Some of the Life Sciences Companies in which the Trust may
invest are expected to be companies that are in a "start-up" stage of
development, have little or no operating history, operate at a loss or with
substantial variations in operating results from period to period, have limited
products, markets, financial resources or management depth, or have the need for
substantial additional "follow-on" capital to support expansion or to achieve or
maintain a competitive position. Such additional investments may dilute the
interests of prior investors, such as the Trust. Some of these Life Sciences
Companies may be emerging companies at the research and development stage with
no marketable or approved products or technology. There can be no assurance that
securities of start-up or emerging growth companies will, in the future, yield
returns commensurate with their associated risks.

LIQUIDITY OF PORTFOLIO INVESTMENTS

The Trust may invest substantially all of its net assets in securities of
emerging Life Sciences Companies that are traded in the over-the-counter markets
or on stock exchanges where the low trading volume of a particular security may
result in abrupt and erratic price movements. An investment in such securities
may have limited liquidity, and the Trust may find it necessary to sell at a
discount from recent prices or to sell over extended periods of time when
disposing of such securities. In addition, the Trust may invest up to 40% of its
net assets in Restricted Securities, which by their terms are illiquid because
they are subject to legal or contractual restrictions on resale. The Trust
cannot sell Restricted Securities except in a public offering registered under
the Securities Act or pursuant to an exemption from registration under the
Securities Act, including a transaction in compliance with Rule 144 under the
Securities Act. Rule 144 permits only limited sales under specified conditions
unless the Trust has held the securities for at least two years and is
unaffiliated with the issuer. Restricted Securities are expected to include
venture capital investments that may take many years from the date of initial
investment to reach a state of maturity when public disposition or other value
realization events can be considered or expected. Adverse conditions in the
securities markets at certain times may preclude a public offering of an
issuer's unregistered securities. The lack of an active secondary market and
resale restrictions may result in the inability of the Trust to sell a security
at an attractive price and may substantially delay the sale of a security that
the Trust seeks to sell. Companies whose securities are not publicly-traded are
also not subject to the same disclosure and other legal requirements as are
applicable to companies with publicly-traded securities. Restricted Securities
eligible for resale to qualified institutional buyers pursuant to Rule 144A
under the Securities Act are subject to the 40% limitation described above.

VALUATION OF RESTRICTED SECURITIES INCLUDING VENTURE CAPITAL INVESTMENTS

Some of the Trust's investments generally have no established trading market
or are subject to restrictions on resale. Because of the type of investments
that the Trust makes and the nature of its business, the valuation process
requires an analysis of various factors. The Trust's fair value methodology
includes the examination of, among other things, (i) the existence of any
contractual restrictions on the disposition of the securities; (ii) information
obtained from the issue, which may include an analysis of the company's
financial statements, the company's products or intended markets,

or the company's technologies; and (iii) the price of a security negotiated at
arm's-length in an issuer's completed subsequent round of financing.

Since there is typically no readily available market value for the venture
capital investments and some of the Restricted Securities in the Trust's
portfolio, venture capital investments and such Restricted Securities in the
Trust's portfolio are valued at fair value as determined in good faith by the
Board of Trustees pursuant to a valuation policy and a consistently applied
valuation process. Because of the inherent uncertainty of determining the fair
value of investments that do not have a readily available market value, the fair
value of the Trust's investments determined in good faith by the Board of
Trustees, or in accordance with valuation procedures approved by the Board of
Trustees, may differ significantly from the values that would have been used had
a ready market existed for the investments, and the differences could be
material. There is no single standard for determining fair value in good faith.
As a result, determining fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment subject to fair
value determination while employing a consistently applied valuation process for
the types of investments the Trust makes.

FOREIGN SECURITIES

The Trust may invest up to 25% of its net assets in Foreign Securities.
Foreign Securities may be less liquid and have prices that are more volatile
than securities of comparable U.S. companies. Foreign stock exchanges and
brokers are generally subject to less governmental supervision and regulation
than U.S. exchanges and brokers, and commissions on foreign stock exchanges are
generally higher than negotiated commissions in the United States. Sometimes
there are delays in the settlement of transactions effected in foreign markets.
Certain countries restrict foreign investments in their securities markets.
These restrictions may limit or prohibit investment in certain countries or in
certain industries or market sectors, or may increase the cost of investing in
securities of particular companies.

Foreign companies are not generally subject to uniform accounting, auditing
and financial reporting standards or to other regulatory requirements comparable
to those applicable to U.S. companies. There may be less available information
concerning non-U.S. issuers of securities held by the Trust than is available
concerning U.S. companies. In some foreign countries, nationalization,
expropriation, confiscatory taxation or establishment of exchange controls are
possible. Income earned in a foreign nation may be subject to taxation
(including withholding taxes on interest and dividends), or other taxes may be
imposed on investments in Foreign Securities. Other risks associated with
investments in Foreign Securities include difficulties in pursuing legal
remedies and obtaining judgments in foreign courts, political or social
instability and diplomatic developments that could adversely affect the Trust's
investments in companies located in foreign countries. An investment in Foreign
Securities may also involve a degree of currency risk.

JUNK BONDS AND UNRATED DEBT SECURITIES

The Trust may invest up to 10% of its net assets, in the aggregate, in
non-convertible debt securities of Life Sciences Companies. These securities and
other investments in such companies will not normally be rated, but the
Investment Adviser believes that such securities may be comparable to securities
rated as low as "C" in the rating categories established by S&P and Moody's.
These securities, which are commonly referred to as "junk bonds", are regarded,
on balance, as predominantly speculative in terms of the capacity of the issuer
to pay interest or repay principal in accordance with the terms of the
obligation and accordingly involve more credit risk than securities rated in the
higher rating categories. Such debt securities are dependent upon favorable
business, financial or economic conditions, may be subordinated to senior debt
and can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

The market prices of such securities tend to reflect individual corporate
developments to a greater extent than do securities rated in the higher rating
categories, which react primarily to fluctuations in the general level of
interest rates. Junk bonds also tend to be more sensitive to economic conditions
than higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding junk bonds may depress
the price for such securities. These and other factors adversely affecting the
market prices of such securities will adversely affect the Trust's net asset
value. Although some risk is inherent in all securities ownership, holders of
debt securities have a claim on the assets of the issuer prior to the holders of
equity securities. Therefore, an investment in debt securities generally entails
less risk than an investment in equity securities of the same issuer.

Junk bonds are frequently issued by corporations in the growth stage of
their development. They may also be issued in connection with a corporate
reorganization or a corporate takeover. Companies that issue such securities
often are highly leveraged and may not have available to them more traditional
methods of financing. Therefore, the risk associated with acquiring the
securities of such issuers generally is greater than is the case with higher
rated securities. For example, during an economic downturn such issuers may not
have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations may also be adversely affected
by specific corporate developments, the issuer's inability to meet specific
projected business forecasts or the unavailability of additional financing. The
risk of loss from default by the issuer is significantly greater for the holders
of such securities because such securities are often unsecured and subordinated
to other creditors of the issuer.

The Trust may have difficulty disposing of junk bonds and unrated debt
securities because they may not have an active secondary market. The lack of an
active secondary market may have an adverse effect on market prices and the
Trust's ability to dispose of particular issues and may also make it more
difficult for the Trust to obtain accurate market quotations for purposes of
valuing these securities.

SUBSTANTIAL COMPETITION

Intense competition exists within and among certain life sciences
industries, including competition to obtain and sustain proprietary technology
protection. Life Sciences Companies can be highly dependent on the strength of
patents for maintenance of profit margins and market exclusivity. The complex
nature of the technologies involved can lead to patent disputes, including
litigation that could result in a company losing an exclusive right to a patent.
Competitors of Life Sciences Companies, particularly of the emerging growth Life
Sciences Companies that the Trust emphasizes, may have substantially greater
financial resources, more extensive development, manufacturing, marketing and
service capabilities, and a larger number of qualified managerial and technical
personnel. Such competitors may succeed in developing technologies and products
that are more effective or less costly than any that may be developed by Life
Sciences Companies in which the Trust invests and may also prove to be more
successful in production and marketing. Competition may increase further as a
result of potential advances in the life sciences and greater availability of
capital for investment in these fields.

PRODUCT LIABILITY EXPOSURE

Certain Life Sciences Companies in which the Trust may invest may be exposed
to potential product liability risks that are inherent in the testing,
manufacturing, marketing and sale of pharmaceutical and medical device products.
There can be no assurance that a product liability claim would not have a
material adverse effect on the business, financial condition or securities
prices of a company in which the Trust has invested.

KEY PERSONNEL

Investment decisions on behalf of the Trust are made by a team of
individuals. Some members of the group have experience in financial analysis of
public and private companies. Others have deep scientific backgrounds and
considerable operating experience in biotechnology and/or pharmaceutical
companies. One member has a medical degree. The Investment Adviser believes that
the investment process benefits from a considered evaluation of potential
investments by a group containing a variety of specialized backgrounds. The team
currently in place is composed of members with a variety of specialized
backgrounds. The Investment Adviser believes that no single individual in the
group is individually critical but believes that the overall capability is key.
There may be only a limited number of professionals who have, in total,
comparable relevant experience to that of the current group. If one

or more team members dies, resigns, retires or is otherwise unable to act on
behalf of the Investment Adviser, there can be no assurance that a suitable
replacement could be found immediately.

DIVERSIFIED STATUS

The Trust operates as a "diversified" management investment company, as
defined in the Investment Company Act. Under this definition, at least 75% of
the value of the Trust's total assets must, at the time of investment, consist
of cash and cash items (including receivables), U.S. Government Securities,
securities of other investment companies, and other securities limited in
respect of any one issuer to an amount not greater in value than 5% of the value
of the Trust's total assets and to not more than 10% of the voting securities of
a single issuer. This limit does not apply, however, to 25% of the Trust's
assets, which may be invested in a single issuer. Notwithstanding its
diversified status, the Trust may, from time to time, concentrate its
investments in a few issuers and take large positions in those issuers,
consistent with being a "diversified" investment company. As a result, the Trust
may be subject to a greater risk of loss than an investment company that
diversifies its investments more broadly. Taking larger positions is also likely
to increase the volatility of the Trust's net asset value reflecting fluctuation
in the value of its large holdings.

DISCOUNT TO NAV

The Shares are listed on the New York Stock Exchange under the symbol "HQL."
The shares of closed-end investment companies frequently trade at a discount to
NAV, but may trade at a premium. This is characteristic of shares of a
closed-end fund and is a risk separate and distinct from the risk of a decline
in the NAV as a result of a fund's investment activities. Because of this factor
and the nature of the Trust's investment objective and policies, the Trust is
designed primarily for long-term investors and should not be considered a
vehicle for trading purposes. Since its initial public offering in May 1992,
Shares have traded at various times at both a discount and a premium to NAV but,
generally shares have traded at a discount. The risk that the Shares may trade
at a discount to NAV may be greater for investors expecting to sell their Shares
in a relatively short period of time. The Trust cannot predict whether the
Shares will trade in the future at, above or below NAV.

CERTAIN PROVISIONS OF THE DECLARATION OF TRUST

The Trust's Declaration of Trust has provisions that could have the effect
of limiting the ability of other entities or persons to (1) acquire control of
the Trust, (2) cause it to engage in certain transactions or (3) modify its
structure. The Board is divided into three classes, each having a term of three
years. Each year the term of office of one class will expire: Daniel R. Omstead,
Ph.D, Lucinda H. Stebbins, CPA and Henri Termeer will continue until 2009,
Robert P. Mack, M.D., Eric Oddleifson and Oleg M. Pohotsky will continue in
office until 2008, Lawrence S. Lewin and Uwe E. Reinhardt, Ph.D. will continue
in office until 2007. This provision could delay for up to two years the
replacement of a majority of the Board. A Trustee may be removed from office by
Shareholders only by a vote of two-thirds of the outstanding Shares of the
Trust. Subject to the requirements of the Investment Company Act, vacancies on
the Board of Trustees may be filled by the remaining Trustees for the balance of
the term of the class.

When a Principal Shareholder (as defined below) is a party to the
transaction, the affirmative vote or consent of the holders of 75% of the
Trust's Shares outstanding and entitled to vote will be required to authorize
any of the following types of transactions:

(i) the merger or consolidation of the Trust with or into any Principal
Shareholder;

(ii) the issuance of any securities of the Trust to any Principal
Shareholder for cash (except pursuant to any cash dividend reinvestment
program available to all Shareholders and approved by the Trustees);

(iii) the sale, lease or exchange of all or a substantial part of the assets
of the Trust to or with any Principal Shareholder (except assets having
an aggregate fair market value of less than $1,000,000, aggregating for
the purpose of such computation all assets sold, leased or exchanged in
any series of similar transactions within a 12-month period); or

(iv) the sale or lease to the Trust, in exchange for securities of the
Trust, of any assets of any Principal Shareholder (except assets having
an aggregate fair market value of less than $1,000,000, aggregating for
the purpose of such computation all assets sold, leased or exchanged in
any series of similar transactions within a 12-month period).

However, such 75% vote or consent will not be required with respect to the
foregoing transactions where the Board approves by resolution a memorandum of
understanding with the Principal Shareholder with respect to, and substantially
consistent with, such transaction. For this purpose, a "Principal Shareholder"
is any corporation, person or other entity which is the beneficial owner,
directly or indirectly, of more than five percent (5%) of the outstanding Shares
or any "affiliate" or "associate" (as those terms are defined in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of 1934 as
in effect on April 21, 1987) of a Principal Shareholder. In addition to the
Shares which a corporation, person or other entity beneficially owns directly,
(a) any corporation, person or other entity shall be deemed to be the beneficial
owner of any Shares (i) which it has the right to acquire pursuant to any
agreement or upon exercise of the conversion rights or warrants, or otherwise
(but excluding share options granted by the Trust) or (ii) which are
beneficially owned, directly or indirectly (including Shares deemed owned
through application of clause (i) above), by any other corporation, person or
entity with which it or its affiliate or associate has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of Shares, or which is its affiliate or associate, and (b) the
outstanding Shares shall include Shares deemed owned through application of
clauses (i) and (ii) above but shall not include any other Shares which may be
issuable pursuant to any agreement, or upon exercise of conversion rights or
warrant, or otherwise.

These provisions could have the effect of depriving Shareholders of an
opportunity to sell their Shares at a premium over prevailing market price by
discouraging a third party from seeking to obtain control of the Trust in a
tender offer or similar transaction. The Board has determined that the 75%
voting requirements described above, which are greater than the minimum
requirements under state law or the Investment Company Act, are in the best
interests of the Shareholders.

REPURCHASE OF SHARES

You may dispose of your Shares on the NYSE or other markets on which the
Shares may trade, but because the Trust is a closed-end investment company, you
do not have the right to redeem your Shares. The Trustees, however, intend to
consider, from time to time, but not less frequently than annually, the
desirability of open market purchases or tender offers. Any Share repurchases
will be made in accordance with the applicable provisions of the Investment
Company Act and Massachusetts law in open market transactions. Shares
repurchased by the Trust will be held in its treasury. Although the Trust has no
present intention of doing so, it reserves the right to incur debt to finance
such repurchases or tender offers, provided that it will not repurchase
securities during the periods when it has outstanding borrowings in excess of 5%
of its net assets. Interest on any borrowings to finance Share repurchase
transactions will increase the Trust's expenses and will reduce the Trust's net
income. There can be no assurance that Share repurchases, if any, will cause the
Shares to trade at a price equal to or in excess of their net asset value.
Nevertheless, the possibility that a portion of the Trust's outstanding Shares
may be the subject of repurchases may reduce the spread between market price and
net asset value that might otherwise exist. The Trust may not repurchase Shares
except (i) on a securities exchange and after notification to Shareholders of
its intent to purchase Shares within the six months preceding the purchase,
(ii) pursuant to a tender offer to all Shareholders, or (iii) as otherwise

permitted by the Commission. Any related interest charges will be paid by the
Trust and borne pro rata by the Shareholders indirectly through their interest
in the Trust.

If the Trust repurchases its Shares for a price below their NAV, the NAV of
those Shares that remain outstanding would be enhanced, but this does not
necessarily mean that the market price of those outstanding Shares would be
affected, either positively or negatively. There is no assurance that any action
undertaken to repurchase Shares will result in the Shares trading at a price
which approximates net asset value. Repurchases of Shares by the Trust would
also decrease its total assets and accordingly may increase its expenses as a
percentage of average net assets. Further, interest on any borrowings to finance
any such share repurchase transactions would reduce the Trust's net income. The
Trust has no current plans to repurchase its Shares.

RELATED PARTY TRANSACTIONS

The majority of the Board is unaffiliated with the Investment Adviser;
nevertheless, the Trust may be subject to certain potential conflicts of
interest. Although the Trust has no obligation to do so, it may place brokerage
orders with brokers who provide supplemental investment research and market and
statistical information about the life sciences industries. In addition, other
investment companies advised by the Investment Adviser may concurrently invest
with the Trust in both Restricted Securities and publicly traded securities
under certain conditions. The Investment Adviser may also provide managerial
assistance to issuers of securities in which the Trust invests.

The Trust also may invest, subject to applicable law, in companies in which
the principals of the Investment Adviser or Trustees of the Trust have invested,
or for which they serve as directors or executive officers. The Investment
Company Act prohibits the Trust from engaging in certain transactions involving
its "affiliates," including, among others, the Trust's Trustees, officers and
employees, the Investment Adviser and any "affiliates" of such affiliates except
pursuant to an exemptive order or the provisions of certain rules under the
Investment Company Act. In the view of the staff of the Commission, other
investment companies advised by the Investment Adviser may, in some instances,
be viewed to be affiliates of the Trust. Such legal restrictions and delays and
costs involved in obtaining necessary regulatory approvals may preclude or
discourage the Trust from making certain investments and no assurance can be
given that any exemptive order sought by the Trust will be granted.

INVESTMENT TECHNIQUES

In addition to the investment practices described above, the Trust may
utilize the following investment practices:

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Trust may purchase securities on a "when issued" basis or a "delayed
delivery" basis. A "when issued" basis refers to a transaction involving
securities that have been authorized but have not yet been issued. A delayed
delivery transaction is one in which a contract to purchase or sell a security
is agreed upon at a fixed price in the future at a date beyond the customary
settlement period. When-issued and delayed delivery transactions involve the
risk that the value of the securities involved may change before they are
delivered to the Trust. In addition, the counterparty could fail to perform its
part of the contract by failing to buy from or sell to the Trust as previously
agreed.

REPURCHASE AGREEMENTS

A repurchase agreement allows the Trust to buy a security on an agreement
with the seller in which the seller agrees to buy back the security, with
interest, at a later date. It is the Trust's present intention to enter into
repurchase agreements for a relatively short period (usually not more than one

week) only with commercial banks and registered broker-dealers and only with
respect to U.S. Government Securities and money market instruments. A repurchase
agreement involves the risk that the seller could be unable or unwilling to
honor its commitment to repurchase the securities, in which case the Trust would
suffer a loss.

LOANS OF PORTFOLIO SECURITIES

In an attempt to make productive use of its assets, the Trust may lend its
portfolio securities on a short-term basis, subject to the limitation that the
Trust will not lend a security if, as a result of such loan, all securities then
subject to loans would exceed 20% of the Trust's net assets. In the event that
the Trust invests the cash collateral from such loans of portfolio securities,
the Trust may realize additional gains or losses. Lending portfolio securities
involves the risk that the borrower could fail to return the securities
borrowed, in which case the Trust could suffer a loss.

HEDGING

In order to hedge against changes in the value of its portfolio securities,
the Trust may from time to time engage in certain hedging strategies. The Trust
will engage in hedging activities from time to time in the Investment Adviser's
discretion, and may not necessarily be engaging in such activities when
movements in the securities markets, foreign exchange rates, or interest rates
that could affect the value of the assets of the Trust occur. The risks of
hedging include the possibility that interest rates, securities prices and
currency exchange rates may not move in the direction that the portfolio
managers anticipated. In addition, the skills involved in employing hedging
strategies differ from the skills involved in selecting portfolio securities,
and the derivative instruments used in hedging strategies may imperfectly
correlate with the underlying security, interest rate or currency being hedged.
Hedging strategies can also expose the Trust to the risk of its inability to
close-out a hedged position and adverse price movements may result in a loss
substantially greater than the Trust's initial investment in the hedging
instrument (potential loss in some hedging strategies is unlimited).

FUTURES CONTRACTS

The Trust may enter into contracts for the purchase or sale for future
delivery (a "futures contract") of baskets of securities, financial indices,
financial instruments or foreign currencies. The Trust would purchase or sell
futures contracts to attempt to protect the value of its securities from
market-wide price movements and fluctuations in interest or foreign exchange
rates without actually buying or selling securities or foreign currency. Similar
to the risks of hedging, the risks of futures contracts include the possibility
that interest rates, securities prices and currency exchange rates may not move
in the direction anticipated. The skills involved in selecting futures contracts
differ from the skills involved in selecting portfolio securities. In addition,
the futures contract may imperfectly correlate with the underlying security,
interest rate or currency underlying the contract, and there can be no assurance
that a liquid market will exist at a time when the Trust seeks to close out a
futures position.

FOREIGN CURRENCY TRANSACTIONS

The Trust may enter into forward foreign currency exchange contracts and may
purchase and sell foreign currency futures contracts to protect against a
decline in the U.S. dollar equivalent value of its foreign currency portfolio
securities or the payments thereon that may result from an adverse change in
foreign currency exchange rates. Foreign currency exchange rates may fluctuate
significantly over short periods of time and may also be affected by political
developments, including intervention by U.S. or foreign governments.

Under normal market conditions, the Trust currently does not intend to
engage in the foregoing practices or investments with the exception of
investments in money market instruments.

MANAGEMENT OF THE TRUST

BOARD OF TRUSTEES

Under the Trust's Declaration of Trust and the laws of the Commonwealth of
Massachusetts, the Trust's business and affairs are managed under the direction
of its Board. Investment decisions for the Trust are made by the Investment
Adviser, subject to any direction it may receive from the Board, which
periodically reviews the Trust's investment performance. The Statement of
Additional Information includes additional information about the members of the
Board and is available, without charge, upon request, by calling the Information
Agent at (800) 870-0126.

INVESTMENT ADVISER

The Investment Adviser is a limited liability company organized under the
laws of the State of Delaware and registered as an investment adviser under the
Investment Advisers Act of 1940, as amended. The Investment Adviser is located
at 30 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328.

At inception, Hambrecht & Quist Capital Management Incorporated
("HQCM, Inc.") was the Trust's investment adviser. HQCM, Inc. was formed as a
wholly-owned subsidiary of Hambrecht & Quist Group. HQCM, Inc. remained the
Investment Adviser as The Chase Manhattan Corporation ("Chase") first acquired
Hambrecht & Quist Group and then merged with J.P. Morgan Incorporated to
form J.P. Morgan Chase & Co. In 2002, the management of HQCM, Inc. formed the
Investment Adviser as an independent entity to effect a buyout of HQCM, Inc. In
this transaction, the Investment Adviser acquired certain of the assets of
HQCM, Inc., and substantially all of the management and staff of HQCM, Inc.
became employees of the Investment Adviser. The Investment Adviser is owned by
Daniel R. Omstead, Mary Omstead and the Alan G. Carr Irrevocable Trust.
Mr. Carr, a former portfolio manager, president and trustee of the Trust, passed
away in October 2003. Dr. Omstead is currently the President and Chief Executive
Officer of the Investment Adviser. Mary Omstead is Dr. Omstead's wife. Under the
terms of the Investment Adviser's current Amended and Restated Limited Liability
Company Agreement, the Investment Adviser will purchase the Alan G. Carr
Irrevocable Family Trust's interest in the Investment Adviser.

The Investment Adviser also provides investment advisory services to another
closed-end investment company, H&Q Healthcare Investors ("HQH"), which invests
in companies in the health care industries. As of June 30, 2006, the Investment
Adviser managed approximately $571 million in assets for the Trust and HQH.

The Investment Advisory Agreement between the Investment Adviser and the
Trust (the "Advisory Agreement") provides that, subject to the supervision and
direction of the Board, the Investment Adviser is responsible for the actual
management of the Trust's portfolio. The Investment Adviser is also obligated to
supervise or perform certain administrative and management services for the
Trust and is obligated to provide the office space, facilities, equipment and
personnel necessary to perform its duties under the Advisory Agreement. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. However, the Investment Adviser may consider
investment analysis from various sources, including broker-dealers with which
the Trust does business.

bookkeeping services, the calculation of the net asset value of shares of the
Trust, internal auditing services, and other clerical services in connection
therewith, and prepares or supervises and directs a third party administrator or
custodian in the preparation of reports to shareholders of the Trust, tax
returns and reports to and filings with the Commission and state Blue Sky
authorities. The Investment Adviser also provides investment research and
supervision of the Trust's investments and conducts a continual program of
investment, evaluation and, if appropriate, sale and reinvestment of the Trust's
assets. In addition, the Investment Adviser furnishes the Trust with whatever
statistical information the Trust may reasonably request with respect to the
securities that the Trust may hold or contemplate purchasing.

Starting July 1, 2006, for the services provided by the Investment Adviser
under the Advisory Agreement, the Trust pays a fee, computed and payable
monthly, equal when annualized to (i) 2.5% of the average net assets for the
month of its venture capital and other Restricted Securities (as defined) up to
25% of net assets and (ii) for the month, for all other 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 monthly fee may not
exceed a rate when annualized of 1.375% (approximately 0.11% per month). Prior
to July 1, 2006, the Trust paid a fee computed and payable monthly, equal, when
annualized, to (i) 2.5% of the average net assets for the month of its venture
capital and other Restricted Securities (as defined) up to 25% of net assets and
(ii) for the month, for all other assets, 1.0% of the average net assets up to
$250 million, 0.90% 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 monthly fee could not exceed a rate when
annualized of 1.375% (approximately 0.11% per month). Because the advisory fee
is based on the average net assets of the Trust and since the Offer is expected
to result in an increase in net assets, the Investment Adviser should benefit
from the Offer by an increase in the dollar amount of the fee. The investment
advisory fee paid by the Trust exceeds that paid by most registered investment
companies to their investment advisers. The Trust believes that the fee is
commensurate with the nature and quality of the services required for
identifying, evaluating and monitoring the Trust's Restricted Securities
investments. A discussion regarding the basis for the Board of Trustee approval
of the Investment Advisory Agreement is available in the September 30, 2005
annual report to shareholders.

Under the Advisory Agreement, the Investment Adviser has agreed to bear all
expenses in connection with the performance of its services under the Advisory
Agreement, including compensation of and office space for officers and employees
of the Trust connected with investment and economic research, trading and
investment management of the Trust, as well as the fees of all Trustees of the
Trust who are "affiliated persons" of the Investment Adviser, as that term is
defined in the Investment Company Act, or any of its "affiliated persons." Under
the Advisory Agreement, the Trust must pay (or, if Trust expenses are paid by
the Investment Adviser, shall reimburse the Investment Adviser for) all other
expenses incurred in the organization and operation of the Trust including,
among other things, expenses for legal and auditing services, costs of printing
proxy statements, prospectuses, share certificates and shareholder reports,
charges of the custodian, any sub-custodian and transfer agent, expenses in
connection with the Dividend Reinvestment Plan, the Commission, and National
Association of Securities Dealers, Inc. fees, fees and expenses of the Trustees
who are not "affiliated persons" of the Investment Adviser or any of its
"affiliated persons," accounting and valuation costs, administrator's fees,
membership fees in trade associations, fidelity bond coverage for the Trust's
officers and employees, errors and omissions insurance coverage for Trustees and
officers, interest, brokerage costs, taxes, stock exchange listing fees and
expenses, expenses of qualifying the Trust's Shares for sale in various states,
expenses associated with personnel performing exclusively shareholder servicing
functions, certain other organization expenses, litigation and other
extraordinary or non-recurring expenses, and other expenses properly payable by
the Trust. The Trust may enter into arrangements to have third parties assume
any expenses for which it is responsible.

PORTFOLIO MANAGEMENT

At the current time a team of analysts, including Daniel R. Omstead,.Ph.D.,
Christopher F. Brinzey, M.B.A., Frank T. Gentile, Ph.D., and Jason C. Akus,
M.D./M.B.A. are members of the team that makes investments on behalf of the
Trust. These members also perform other duties including making investments on
behalf of HQH. Each of the members of the team listed below has been on the
Trust's portfolio management team, which is responsible for the day-to-day
management of the Trust's portfolio, since joining the Investment Adviser. Each
team member's business experience for at least the last five years is included
below.

Daniel R. Omstead, Ph.D., is President and Chief Executive Officer of the
Investment Adviser. He is also President of the Trust and HQL. Before joining
the Investment Adviser, Dr. Omstead was President and CEO of
Reprogenesis, Inc., a private development stage biotech company developing
therapies in the field of regenerative medicine. In 2000, Reprogenesis was
merged with two other biotech companies to form Curis, Inc. Before joining
Reprogenesis, Dr. Omstead was Senior Vice President, Research and Development at
Cytotherapeutics, Inc., a public biotech company that developed CNS therapies.
Before entering the biotech industry, Dr. Omstead was employed for 14 years in
the pharmaceutical industry at Ortho Pharmaceutical Corporation and at the R.W.
Johnson Pharmaceutical Research Institute, both divisions of Johnson & Johnson
and at Merck Sharpe & Dohme Research Laboratories, a division of Merck &
Company, Inc. While at Johnson & Johnson, Dr. Omstead participated in the
development of Orthoclone OKT3-TM-, Eprex-TM-/Procrit-TM- and other biological
products. While at Merck, he worked on the development of Recombivax-TM-,
Mefoxin-TM-, Heartguard-TM- and other traditional drug products. Dr. Omstead
holds Doctoral and Master's Degrees in Chemical Engineering and Applied
Chemistry from Columbia University and a B.S. degree in Civil Engineering from
Lehigh University.

Christopher F. Brinzey is Senior Vice President, Research of the Investment
Adviser. Mr. Brinzey joined the Investment Adviser in February of 2001 and is
responsible for investment research and venture investment due diligence in the
following areas: specialty pharmaceuticals and life sciences information
technology and services. Before joining the Investment Adviser, Mr. Brizney was
a senior analyst for Advest Incorporated's life sciences research team where he
covered and helped to finance a number of companies in the life sciences
information technology and eHealth sector. Other prior work experience includes
project management and consulting for SunGard Financial Systems, a subsidiary of
SunGard Data Systems, a global IT solutions and eProcessing company.
Mr. Brinzey received a B.A. in psychology from Hobart College and an MBA from
Northeastern University.

Frank T. Gentile, Ph.D., is Senior Vice President, Research of the
Investment Adviser. Dr. Gentile joined the Investment Adviser in
September 2002. His emphasis is on the analysis of private and public companies
in the fields of Functional Genomics and Proteomics, as well as Cell and Gene
Therapy. Previously Dr. Gentile was Vice President, Technology Program
Management at Millennium Pharmaceuticals. At Millennium, Dr. Gentile was
responsible for management of all technology platform development programs.
Before joining Millennium, Dr. Gentile was Vice President of Product Development
at Curis, Inc., a biotechnology company in Cambridge developing products in the
area of Regenerative Medicine. From 1997 to 2000, he was Director and then Vice
President, Program Management at Reprogenesis, Inc. From 1990-1997 he was
employed at CytoTherapeutics, Inc., where he held several scientific and
management positions. Dr. Gentile received a B.E. degree in Chemical Engineering
from The Cooper Union and a Ph.D. in Chemical Engineering from MIT. Before
working in industry, he was a post-doctoral fellow at the Swiss Federal
Institute of Technology (ETH) in Zurich, Switzerland. He is also an Adjunct
Associate Professor of Biotechnology at Brown University. He has written over
120 peer reviewed publications and holds 30 U.S. patents in the area of
biotechnology.

Jason C. Akus, M.D./M.B.A., is Vice President, Research and is responsible
for investment research and due diligence in the biotechnology, medical device,
and diagnostic areas. Dr. Akus joined

the Investment Adviser in July of 2001 after graduating from Tufts with an M.D.
and M.B.A. Dr. Akus also graduated from Tufts with a B.S. in Mathematics. During
medical school, Dr. Akus consulted for a variety of life sciences information
technology companies. See "Investment Adviser and Investment Advisory Agreement"
in the Statement of Additional Information for further information about
compensation of these persons, management of client assets by these persons and
ownership of Trust Shares by these persons.

CODE OF ETHICS

The Board approved a Code of Ethics under Rule 17j-1 of the Investment
Company Act that covers the Trust and the Investment Adviser. The Code of Ethics
establishes procedures for personal investing and restricts certain
transactions. Employees subject to the Code of Ethics may invest in securities
for their personal investment accounts, including, in certain cases, securities
that may be purchased or held by the Trust. See "Code of Ethics" in the
Statement of Additional Information.

DESCRIPTION OF THE TRUST

The Trust is a diversified, closed-end management investment company. The
Trust was organized as a Massachusetts business trust on February 20, 1992
pursuant to a Declaration of Trust governed by Massachusetts law and commenced
operations on May 8, 1992. The Declaration of Trust is referred to in this
Prospectus as the "Declaration of Trust" unless the context requires otherwise.
The Trust's principal offices are located at 30 Rowes Wharf, Fourth Floor,
Boston, MA 02110-3328.

The Trust's capitalization consists of an unlimited number of shares of
beneficial interest, $.01 par value. Each Share represents an equal
proportionate beneficial interest in the Trust and, when issued and outstanding,
will be fully paid and non-assessable by the Trust. Upon any liquidation of the
Trust, Shareholders will be entitled to share pro rata in the net assets of the
Trust available for distribution after paying or adequately providing for the
payment of all liabilities. The Trust will send annual and semi-annual financial
statements to Shareholders and may also issue more abbreviated interim reports
to update Shareholders on a quarterly basis. The Trust will hold annual meetings
of its Shareholders in accordance with the provisions of the Trust's By-laws and
the rules of the NYSE.

Shareholders are entitled to one vote for each whole Share held and a
proportionate fractional vote for each fractional Share held. The Trust's Shares
do not have cumulative voting rights, which means that the holders of more than
50% of the Shares of the Trust voting for the election of Trustees can elect all
of the Trustees, and, in such event, the holders of the remaining Shares will
not be able to elect any Trustees. The Trust has a staggered Board, whereby one
class of Trustees is elected each year.

There were 13,454,515 Shares outstanding as of the Record Date. Assuming
that all Rights are exercised pursuant to the Primary Subscription, an
additional 4,484,838 Shares will be issued. The Trust may, at its discretion,
issue up to an additional 25% of the Shares in the Offer to honor
over-subscription requests if sufficient Shares are not available from the
Primary Subscription to honor all over-subscriptions.

For information regarding risk factors pertaining to the Trust, see "Risk
Factors."

As of August 7, 2006, to the best of the Trust's knowledge, and based solely
on Schedule 13D/G filings made with the Commission, there was no person who
controlled the Trust.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to policies established by the Board, the Investment Adviser is
primarily responsible for the execution of the Trust's portfolio transactions
and the allocation of brokerage. In executing such transactions, the Investment
Adviser will seek to obtain the best price and execution for the Trust, taking
into account such factors as price, size of order, difficulty of execution,
operational facilities of

the firm involved, the firm's risk in positioning a block of securities, and
research, market and statistical information provided by such firm. While the
Investment Adviser generally seeks reasonably competitive commission rates, the
Trust will not necessarily pay the lowest commission available.

The Trust intends to purchase and hold securities for capital appreciation
and it is not anticipated that frequent portfolio changes will be made for
short-term trading purposes or to take advantage of short-term swings in the
market. However, changes may be made in the portfolio consistent with the
investment objective and policies of the Trust whenever changes are believed by
the Investment Adviser to be in the best interest of the Trust and its
Shareholders. Risk factors, particularly those relating to a specific security
investment or to the market and economic conditions, may also affect the rate at
which the Trust buys and sells its portfolio holdings. The Trust has no fixed
policy with respect to portfolio turnover rate. The Trust may engage in
short-term trading or portfolio securities, including initial public offerings,
which may result in increasing the Trust's portfolio turnover rate. The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of long-term portfolio securities by the average monthly value of the
Trust's long-term portfolio securities. A high rate of portfolio turnover (100%
or more) could produce higher trading costs and taxable distributions, which
would detract from the Trust's performance. The Trust's portfolio turnover rate
for the fiscal years ended September 30, 2005 and September 30, 2004 was 73.79%
and 34.93%, respectively.

NET ASSET VALUE

The NAV of the Trust's Shares is calculated at the close of regular trading
on the NYSE (generally 4:00 p.m., Eastern Time) every day that the NYSE is open.
The Trust makes this information available daily by telephone (800) 451-2597,
via its web site (www.hqcm.com) and through electronic distribution for media
publication, including major internet-based financial services web sites and
portals (bloomberg.com, yahoo.com, cbsmarketwatch.com, etc.). Currently, The
Wall Street Journal, The New York Times and Barron's publish NAVs for closed-end
investment companies at least weekly.

Portfolio securities that are traded on one or more U.S. national securities
exchanges or in the over-the-counter market that are National Market System
securities are valued at the last sale price or, lacking any sales, at the mean
between last bid and asked prices. Other over-the-counter securities are valued
at the most recent bid prices as obtained from one or more dealers that make
markets in the securities. Redeemable securities issued by a registered open-end
investment company are valued at net asset value per share. Other securities are
valued at the mean between the closing bid and asked prices. Short-term
investments that mature in 60 days or less are valued at amortized cost, unless
the Board determines that such valuation does not constitute fair value.

Bonds, other than convertible bonds, are valued using a third-party pricing
system. Convertible bonds are valued using this pricing system only on days when
there is no sale reported. Temporary cash investments with maturity of 60 days
or less are valued at amortized cost. Puts and calls generally are valued at the
close of regular trading on the securities or commodities exchange on which they
are primarily traded. Options on securities generally are valued at their last
bid price in the case of exchange-traded options or, in the case of OTC-traded
options, the average of the last bid price as obtained from two or more dealers
unless there is only one dealer, in which case that dealer's price is used.
Forward foreign currency contracts are valued on the basis of the value of the
underlying currencies at the prevailing currency exchange rate. The prevailing
currency exchange rate shall be determined within one hour of when the most
recently available exchange rate information has been received based on
information obtained from a bank or banks.

Securities that are primarily traded on foreign securities exchanges
generally are valued at the last sale price on the exchange on which they are
primarily traded. Foreign securities that are primarily traded on the foreign
over-the-counter market are generally valued at the last sale quotation, if
market quotations are available, or the last reported bid price if there is no
active trading in a particular security on a given day. However, if intervening
events result in market volatility that significantly affects the value of any
such foreign securities after the close of trading on the relevant foreign
market, but before the Trust values its Shares on any particular day on which
the Trust is required to value its Shares, the Trust is required to determine
the value of such securities at "fair value," as determined in good faith by or
under the direction of the Board of Trustees.

Quotations of foreign securities in foreign currencies are converted, at
current exchange rates, to their U.S. dollar equivalents to determine their
current value. In addition, to the extent that the Trust values its foreign
securities (other than ADR's and ADS's) as of the close of trading on various
exchanges and over-the-counter markets throughout the world, the calculation of
the Trust's net asset value may not take place contemporaneously with the
valuation of foreign securities held by the Trust.

The value of any security or other asset for which market quotations are not
readily available shall be determined in a manner that most fairly reflects the
security's (or asset's) "fair value". Each such determination is based on a
consideration of all relevant factors, which are likely to vary from one pricing
context to another. Examples of such factors may include, but are not limited
to: (1) the type of the security; (2) the size of the holding (including percent
of outstanding securities of issuer held by the Trust); (3) the initial cost of
the security; (4) the existence of any contractual restrictions on the
security's disposition and the time to freedom from such restrictions; (5) the
price and extent of public trading in similar securities of the issuer or of
comparable companies; (6) quotations or prices from broker-dealers and/or
pricing services; (7) information obtained from the issuer, analysts, and/or the
appropriate stock exchange (for exchange-traded securities); (8) an analysis of
the company's financial statements; (9) an evaluation of the forces that
influence the issuer and the market(s) in which the security is purchased and
sold (e.g., the existence of pending merger activity, public offerings or tender
offers that might affect the value of the security); and (10) the price of
securities in a subsequent round of financing of an issuer in an arm's-length
transaction, if the round includes a new third party investor.

Sometimes a "significant valuation event" may cause the market value of a
security to differ from the fair market value of that security. A "significant
valuation event" is an event that causes or is likely to cause a market
quotation to be unavailable or unreliable, and may include: situations relating
to a single issue in a market sector; significant fluctuations in U.S. or
foreign markets; market disruptions or closings caused by human error, equipment
failures, natural disasters, armed conflicts, acts of God, governmental actions
or other developments, as well as the same or similar events which may affect
specific issues or the securities markets even though not tied directly to the
securities markets. A significant valuation event occurring after the close of
trading but before the time of valuation may mean that the closing price for the
security does not constitute a readily available market quotation. If a
significant valuation event has occurred, the security will be valued at fair
value as determined in good faith by the Board in accordance with the procedures
herein described. Such valuations and procedures will be reviewed periodically
by the Board.

The fair value of investments for which no market exists cannot be precisely
determined. With respect to securities of a company in its early stage of
development, valuation will typically be based upon the original cost to the
Trust. This methodology will typically be used until significant developments
affecting the portfolio company provide a basis for a change in valuation. The
status of portfolio companies is monitored for progress against plan,
advancement of the stage of product development, and other factors. When
revenues and earnings are present they are monitored. Valuation changes are
event driven. When an appropriate event occurs (e.g., the completion of a third
party transaction or a significant change in business model) valuation is
changed accordingly. In addition, the Trust will typically base changes in
valuation on actual transactions or on actual firm offers by

sophisticated independent investors unaffiliated with the Adviser. Legal or
contractual restrictions on the sale of portfolio securities by the Trust will
be considered in the valuation of such securities.

Other assets, which include cash, prepaid and accrued items, accounts
receivable and income on investments and from the sale of portfolio securities,
are carried in accordance with generally accepted accounting principles, as are
all liabilities. Liabilities primarily include accrued expenses, sums owed for
securities purchased and dividends payable.

DIVIDENDS AND DISTRIBUTIONS

The Trust expects to distribute to Shareholders annually dividends of all or
a portion of its investment company taxable income, if any. For federal income
tax purposes, the Trust is required to distribute substantially all of its
investment company taxable income for each year. Net capital gain (i.e., the
excess of net long-term capital gain over net short-term capital loss), if any,
may be distributed or may be retained at the discretion of the Board.
"Investment company taxable income," as used herein, includes all interest and
other ordinary income earned by the Trust on its portfolio holdings and net
short-term capital gains in excess of net long-term capital losses, less the
Trust's expenses. See "Taxation--Distributions."

Various factors will affect the level of the Trust's income, including the
asset mix, the performance of the companies represented in the Trust's
portfolio, and the Trust's use of hedging and fluctuations in the rate of
exchange between foreign currencies and the U.S. dollar to the extent the Trust
has invested in Foreign Securities. Notices will be provided in accordance with
Section 19(a) of the Investment Company Act.

QUARTERLY DISTRIBUTION POLICY

In May 1999, the Trust's Board of Trustees adopted a managed distribution
policy with respect to the Trust's Shares. Under the managed distribution
policy, the Trust intends to make quarterly distributions to its Shareholders
equal to 2.0% of the Trust's net asset value. The current distribution policy is
to declare distributions in stock. Distributions will automatically be paid in
newly-issued full Shares of the Trust plus cash in lieu of any fraction of a
Share, unless otherwise instructed by the Shareholder. The Trust's transfer
agent delivers an election card and instructions to each registered Shareholder
in connection with each distribution. For shareholders other than registered
shareholders with book entry accounts at the Trust's transfer agent, fractional
shares will generally be settled in cash. 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 value 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 Trust will be reduced. Distributions in stock will not
relieve shareholders of any federal, state or local income taxes that may be
payable on such distributions.

If, for any taxable year, the total distributions required for the Trust's
distribution policy exceed the Trust's annual investment company taxable income
and net long-term capital gains, the excess will generally be treated as a
return of capital (up to the amount of the Shareholder's adjusted tax basis in
his or her Shares). The amount treated as a tax-free return of capital will
reduce a Shareholder's adjusted basis in his or her own Shares, thereby
increasing his or her potential gain or reducing his or her potential loss on
the sale of his or her Shares.

gains may be subject to taxation, although Shareholders may receive credit for
taxes paid by the Trust. It is anticipated that net realized capital gains in
excess of the total distributed under this policy would be included in the
December distribution.

This distribution policy may, under certain circumstances, have certain
adverse consequences to the Trust and its Shareholders. To make such
distributions, the Trust may have to sell a portion of its investment portfolio
at a time when independent investment judgment might not dictate such action.
The Trust's quarterly distribution policy may be changed by the Board of
Trustees without Shareholder approval.

The Trust's most recent distribution of $0.35 per Share was payable to
Shareholders of record on June 9, 2006. That distribution was paid in Shares on
June 30, 2006. For the 2005 calendar year, the Trust distributed a total of
$2.06 per Share. The first regular quarterly distribution to be paid on Shares
acquired upon exercise of Rights will be the first quarterly distribution the
record date for which occurs after the issuance of the Shares. The Shares issued
in the Offer will not be entitled to the distribution to be declared to
Shareholders of record on September 8, 2006 which is payable in September 2006.

DIVIDEND REINVESTMENT PLAN

Since the Fund's managed distribution policy was adopted in May 1999, the
Fund's distributions have been made under the managed distribution policy rather
than the Dividend Reinvestment Plan (the "Plan"). The Plan is currently
inactive. Under the Plan each Shareholder holding Shares of the Trust would
automatically be a participant in the Trust's Plan, unless the Shareholder
elects not to participate in the Plan. Under the Plan, whenever the Trust
declared a distribution of dividends and capital gains payable in Shares or
cash, the distribution of dividends and capital gains was automatically
reinvested by Computershare Shareholder Services, Inc. (the "Plan Agent"), in
whole or fractional Shares of the Trust, as the case may be, for the accounts of
the participating shareholders. Shareholders who specifically elected not to
participate in the Plan received all distributions of dividends and capital
gains in cash paid by check in U.S. dollars mailed directly to the shareholders
(or if the Shares are held in street or other nominee name, then to the nominee)
by the Dividend Disbursing Agent. Shareholders may receive more detailed
information regarding the Plan from the Plan Agent.

The Plan Agent served as agent for the Shareholders in administering the
Plan. Participants in the Plan would receive Shares valued on the valuation
date, generally at the lower of market price or NAV, except as specified below.
The valuation date will be the dividend or distribution payment date or a date
determined by the Board of Trustees. Whenever the market price per Share is
equal to or exceeds NAV on the valuation date, participants will be issued
Shares at the greater of (i) NAV or (ii) 95% of the then-current market price of
the Shares. If the NAV of the Shares on the valuation date exceeded the market
price of the Shares at that time, participants will received Shares from the
Trust valued at the market price. The market price of the Shares on a particular
date was the last sales price on the NYSE on that date or, if no sale occurred
on the NYSE on that date, then the mean between the closing bid and asked
quotations for the Shares on the NYSE on such date; and NAV per Share on a
particular date as determined by or on behalf of the Trust.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the terms and conditions of the Plan may be amended or supplemented
by the Plan Agent or the Trust at any time or times but, except when necessary
or appropriate to comply with applicable law or the rules or policies of the
Commission or any other regulatory authority, only by mailing to the
Shareholders appropriate written notice at least 90 days before the effective
date of the change. All correspondence concerning the Plan should be directed to
the Plan Agent, Computershare at P.O. Box 43010, Providence, RI 02940-3010
Shareholders may also contact the Plan Agent toll-free by telephone at
(800) 426-5523.

The current distribution policy is to declare distributions in stock. Stock
distributions will automatically be paid in newly-issued full Shares of the
Trust plus cash in lieu of any fraction of a

Share, unless otherwise instructed by the Shareholder. If a Shareholder elects
to receive a distribution in cash, rather than in Shares, the Shareholder's
relative ownership in the Trust will be reduced.

TAXATION

The following discussion is based upon the advice of Dechert LLP, counsel
for the Trust, and is a general summary of the principal U.S. federal income tax
considerations regarding an investment in the Trust. The discussion is based on
laws, regulations, rulings and decisions currently in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. The discussion below does not purport to deal with all of the
federal income tax consequences applicable to the Trust, or to all categories of
investors, some of which may be subject to special rules. Each prospective
shareholder is urged to consult with his or her own tax adviser with respect to
the specific federal, state, local, foreign and other tax consequences of
investing in Shares of the Trust.

TAXATION OF THE TRUST

The Trust intends to qualify and has elected to be treated each taxable year
as a regulated investment company ("RIC") under the Code. The principal federal
income tax benefits of qualifying as a RIC, as compared to an ordinary taxable
corporation, are that a RIC generally is not itself subject to federal income
tax on ordinary investment income and net capital gains that are currently
distributed to its shareholders, and that the character of long-term capital
gains which are recognized and properly designated by a RIC flows through to its
shareholders, who receive (or are deemed to receive) distributions of such
income. However, the Trust would be subject to corporate income tax (currently
at a maximum marginal rate of 35%) on any undistributed income.

DISTRIBUTIONS

Distributions of the excess, if any, of net long-term capital gains over net
short-term capital losses designated by the Trust as capital gain dividends will
be taxable to shareholders as long-term capital gains, whether paid in cash or
reinvested in the Trust's Shares, regardless of how long the shareholders have
held the Trust's Shares, and will not be eligible for the dividends received
deduction for corporations.

Dividends paid from investment company taxable income generally, if any,
will be taxable to shareholders generally as ordinary income whether paid in
cash or reinvested in the Trust's Shares. The Trust intends to distribute to its
shareholders substantially all of its investment company taxable income
(including distributions of net short-term capital gains), if any, for each
year. It is anticipated that the Trust's income distributions will be paid
annually in additional Shares unless the shareholder elects payment in cash.

A portion of the dividends paid by the Trust may be treated as "qualified
dividend income" which is taxable to individuals at the same rates that are
applicable to long-term capital gains. A Trust distribution is treated as
qualified dividend income to the extent that the Trust receives dividend income
from taxable domestic corporations and certain qualified foreign corporations,
provided that certain holding period and other requirements are met by both the
Trust and the Shareholder. Trust distributions generally will not qualify as
qualified dividend income to the extent attributable to interest, capital gains,
REIT distributions and distributions from certain non-U.S. corporations. The
lower rates on qualified dividends and capital gains are scheduled to expire
after 2008 in the absence of further legislation enacted by Congress.

If a portion of the Trust's income consists of dividends paid by U.S.
corporations, a portion of the dividends paid by the Trust may be eligible for
the corporate dividends-received deduction provided that certain holding period
and other requirements are met by both the Trust and the corporate Shareholder.

Each year, Shareholders will be notified as to the amount and federal tax
status of all dividends and capital gains paid during the prior year. Such
dividends and capital gains may also be subject to state or local taxes.
Dividends declared in October, November, or December with a record date in such
month and paid during the following January will be treated as having been paid
by the Trust and received by Shareholders on December 31 of the calendar year in
which declared, rather than the calendar year in which the dividends are
actually received.

Gain or loss realized upon the sale or exchange of Shares will be a capital
gain or loss if the Shares are capital assets in the Shareholder's hands and
generally will be long-term or short-term, depending upon the Shareholder's
holding period for the Shares. You should be aware that any loss realized upon
the sale or exchange of Shares held for six months or less will be treated as a
long-term capital loss to the extent of any distributions or deemed
distributions of long-term capital gain to the Shareholder with respect to such
Shares. In addition, any loss realized on a sale or exchange of Shares will be
disallowed to the extent the Shares disposed of are replaced within a period of
61 days beginning 30 days before and ending 30 days after the Shares are
disposed of, such as pursuant to the Plan. In such case, the basis of Shares
acquired will be adjusted to reflect the disallowed loss.

If a Shareholder has not furnished a certified correct taxpayer
identification number (generally a Social Security number) and has not certified
that withholding does not apply, or if the Internal Revenue Service has notified
the Trust that the taxpayer identification number listed on the account is
incorrect according to their records or that the Shareholder is subject to
backup withholding, federal law generally requires the Trust to withhold 28%
from any dividends and/or redemptions (including exchange redemptions). Amounts
withheld are applied to federal tax liability; a refund may be obtained from the
Service if withholding results in overpayment of taxes. Federal law also
requires the Trust to withhold up to 30% or the applicable tax treaty rate from
ordinary dividends paid to certain nonresident alien and other non-U.S.
shareholder accounts.

This is a brief summary of some of the tax laws that affect an investment in
the Trust. Moreover, the foregoing does not address the many factors that may
determine whether an investor will be liable for the federal alternative minimum
tax. Please see the SAI and a tax adviser for further information.

CUSTODIAN, ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT, REGISTRAR, AND SUBSCRIPTION AGENT

The Trust's securities and cash are held under a custodian contract by State
Street Bank and Trust Company (the "Custodian"), whose principal business
address is 225 Franklin Street, Boston, MA 02110. The Custodian also performs
certain accounting related functions for the Trust, including calculation of NAV
and net income.

State Street Bank and Trust Company (the "Administrator") also serves as
administrator to the Trust pursuant to an Administration Agreement. Under the
Administration Agreement the Trust's assets are combined with assets of HQH. The
combined assets are charged fee computed and payable monthly at an annual rate
of (i).034% of the first $150 million; (ii) .024% of the next $150 million; and
(iii) .014% on assets in excess of $300 million, subject to annual minimum fee
of $77,500. The Administrative Agreement covers administrative costs including
out-of-pocket expenses incurred in the ordinary course of providing services
under the Administration Agreement.

Computershare Shareholder Services, Inc. serves as Dividend Disbursing
Agent. Computershare Shareholder Services, Inc, a fully owned subsidiary of
Computershare Trust Company, N.A., serves as (1) the Plan Agent for the Trust's
Dividend Reinvestment Plan, (2) the Transfer Agent and Registrar for Shares of
the Trust and (3) the Subscription Agent in connection with the Offer.
Computershare Shareholder Services, Inc. has its principal business at 250 Royal
Street, Canton, MA 02021.

LEGAL MATTERS

The validity of the Shares offered hereby will be passed on for the Trust by
Dechert LLP, 200 Clarendon Street, 27th Floor, Boston, Massachusetts 02116-5021.

EXPERTS

The audited financial statements of the Trust included in this prospectus
have been audited by Deloitte & Touche LLP, independent registered public
accounting firm, whose report dated November 18, 2005 expresses an unqualified
opinion. The financial highlights for the years ended September 30, 2003, 2002
and 2001 were audited by PricewaterhouseCoopers LLP, whose report dated
November 25, 2003 expresses an unqualified opinion. These highlights are
included in reliance upon such reports and upon the authority of such firms as
experts in accounting and auditing. Certain information appearing under the
caption "Financial Highlights" for the fiscal years ended September 30, 2000,
1999, 1998, 1997 and 1996 were audited by Arthur Andersen LLP. Arthur Andersen
LLP ceased operations in 2002.

REPORTS TO SHAREHOLDERS

The Trust will send unaudited semiannual reports and audited annual reports,
including a list of investments held, to shareholders. The Trust has in the past
also issued more abbreviated interim reports to Shareholders on a quarterly
basis.

ADDITIONAL INFORMATION

The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act and in
accordance therewith is required to file reports, proxy statements and other
information with the Commission. Any such reports, proxy statements and other
information filed by the Trust can be inspected and copied (at prescribed rates)
at the public reference facilities of the Commission, 100 F Street, NE,
Washington, DC 20549. The Trust's Shares are listed on the NYSE. Reports, proxy
statements and other information concerning the Trust can also be inspected and
copied at the Library of the NYSE, 20 Broad Street, New York, NY 10005.

This Prospectus constitutes a part of a registration statement on Form N-2
(together with the SAI and all the exhibits and appendices thereto, the
"Registration Statement") filed by the Trust with the Commission under the
Securities Act and the Investment Company Act. This Prospectus and the SAI do
not contain all of the information set forth in the Registration Statement.
Reference is hereby made to the Registration Statement and related exhibits for
further information with respect to the Trust and the Shares offered hereby.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Prospectus constitute forward-looking statements,
which involve known and unknown risks, uncertainties and other factors that may
cause the actual results, levels of activity, performance or achievements of the
Trust to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, those listed under "Risks" and
elsewhere in this Prospectus. As a result of the foregoing and other factors, no
assurance can be given as to the future results, levels of activity or
achievements, and neither the Trust nor any other person assumes responsibility
for the accuracy and completeness of such statements. To the extent required by
law, the Trust undertakes to supplement this Prospectus to reflect any material
changes to the Trust after the date of this Prospectus.

TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

Additional Information About Investments, Investment
Techniques and Risks...................................... 2
Investment Restrictions..................................... 10
Trustees and Officers....................................... 11
Compensation Table for the Fiscal Year Ended September 30,
2005...................................................... 18
The Trust................................................... 19
Investment Adviser and Investment Advisory Agreement........ 21
Proxy Voting Policies and Procedures........................ 25
Code of Ethics.............................................. 25
Net Asset Value............................................. 26
Portfolio Transactions and Brokerage........................ 27
Quarterly Distribution Policy............................... 30
Tax Matters................................................. 31
Administration, Custodian and Transfer Agent, Dividend
Disbursing Agent and Registrar............................ 36
Financial Statements........................................ 37
Appendix A--Trustee and Investment Adviser Proxy Voting
Policies and Procedures................................... 38

FINANCIAL STATEMENTS

H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2006

(UNAUDITED)

SHARES VALUE
------ -----------

CONVERTIBLE SECURITIES--16.1% OF NET ASSETS

CONVERTIBLE PREFERRED (RESTRICTED)--15.1%

DRUG DISCOVERY TECHNOLOGIES--1.7%

1,587,302 Agilix Corporation Series B(a)(b)........................... $ 380,952
250,000 Ceres, Inc. Series C(a)..................................... 1,500,000
21,462 Ceres, Inc. Series C-1(a)................................... 128,772
175,540 Ceres, Inc. Series D(a)..................................... 1,053,240
455,203 Cougar Biotechnology Inc. Series A(a)....................... 787,501
932,488 Galileo Pharmaceuticals, Inc. Series F-1(a)................. 93
200,000 Zyomyx, Inc. Series A New(a)................................ 20,000
200 Zyomyx, Inc. Series B New(a)................................ 20

EMERGING BIOPHARMACEUTICALS--4.6%

744,921 Agensys, Inc. Series C(a)................................... 2,200,201
1,724,138 Corus Pharma, Inc. Series C(a).............................. 1,000,000
1,212,121 Raven biotechnologies, Inc. Series B(a)..................... 1,006,060
1,872,772 Raven biotechnologies, Inc. Series C(a)..................... 1,554,401
2,722,014 Raven biotechnologies, Inc. Series D(a)..................... 800,000
1,415,385 TargeGen, Inc. Series C(a).................................. 1,840,001
30,920 Therion Biologics Corporation Series A(a)................... 37,722
160,000 Therion Biologics Corporation Series B(a)................... 195,200
271,808 Therion Biologics Corporation Series C(a)(c)................ 331,606
22,224 Therion Biologics Corporation Series C-2(a)(c).............. 27,113
28,991 Therion Biologics Corporation Sinking Fund(a)............... 290
1,645,000 Xanthus Life Sciences, Inc. Series B(a)..................... 1,645,000

HEALTHCARE SERVICES--3.3%

1,051,429 CardioNet, Inc. Series C(a)................................. 3,680,001
322,168 CytoLogix Corporation Series A(a)(b)........................ 265,789
151,420 CytoLogix Corporation Series B(a)(b)(c)..................... 124,922
3,589,744 PHT Corporation Series D(a)(b).............................. 2,800,000
802,996 PHT Corporation Series E(a)(b).............................. 626,337

MEDICAL DEVICES AND DIAGNOSTICS--5.5%

3,235,293 Concentric Medical, Inc. Series B(a)(b)..................... 4,529,410
1,162,790 Concentric Medical, Inc. Series C(a)(b)..................... 1,627,906
455,333 Concentric Medical, Inc. Series D(a)(b)..................... 637,466
177,778 EPR, Inc. Series A(a)....................................... 1,778
2,446,016 Labcyte, Inc. Series C(a)................................... 1,280,000
130,000 Masimo Corporation Series D................................. 1,430,000

The accompanying notes are an integral part of these financial statements.
53

FINANCIAL STATEMENTS (CONTINUED)

H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2006

(UNAUDITED)

SHARES VALUE
------ -----------

1,088,436 OmniSonics Medical Technologies, Inc. Series B(a)........... $ 1,454,151
1,031,992 OmniSonics Medical Technologies, Inc. Series C(a)........... 1,200,000
43,478 TherOx, Inc. Series H(a).................................... 165,217
99,646 TherOx, Inc. Series I(a)(c)................................. 384,733
-----------
$34,715,882
-----------

PRINCIPAL
AMOUNT
---------

CONVERTIBLE NOTES (RESTRICTED)--1.0%

DRUG DISCOVERY TECHNOLOGIES--0.9%

$2,000,000 Matritech Inc., 15.00% due 2009(c).......................... $ 2,000,000

HEALTHCARE SERVICES--0.1%

200,000 CardioNet, Inc. Cvt. Note, 8.00% due 2006(c)................ 200,000
112,224 CytoLogix Corporation Cvt. Note, 6.75%(b)(d)................ 112,224
-----------
$ 2,312,224
-----------
TOTAL CONVERTIBLE SECURITIES
(COST $44,781,381).......................................... $37,028,106
-----------

SHARES
------

COMMON STOCKS--80.5%

BIOPHARMACEUTICALS--25.5%

311,111 Akorn, Inc. (Restricted)(a)(c).............................. $ 1,285,200
201,250 Alexza Pharmaceuticals, Inc.(a)............................. 1,962,187
52,500 Amgen, Inc.(a).............................................. 3,819,375
468,500 Bioenvision, Inc.(a)........................................ 3,340,405
534,805 Critical Therapeutics, Inc.(a).............................. 2,722,157
282,253 Cubist Pharmaceuticals, Inc.(a)............................. 6,483,351
28,200 Curis, Inc.(a).............................................. 67,116
269,341 Encysive Pharmaceuticals Inc.(a)............................ 1,317,077
26,500 Genentech, Inc.(a).......................................... 2,239,515
95,107 Genzyme Corporation(a)...................................... 6,393,093
140,675 Gilead Sciences, Inc.(a).................................... 8,752,798
217,825 Idenix Pharmaceuticals Inc.(a).............................. 2,955,885
132,797 Inhibitex Inc.(a)........................................... 964,106
400,950 Insmed Inc.(a).............................................. 781,853
540,559 Inspire Pharmaceuticals, Inc.(a)............................ 2,827,124
93,810 MedImmune, Inc.(a).......................................... 3,431,570

The accompanying notes are an integral part of these financial statements.
54

FINANCIAL STATEMENTS (CONTINUED)

H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2006

(UNAUDITED)

SHARES VALUE
------ ------------

94,540 Myriad Genetics Inc.(a)..................................... $ 2,466,549
670,000 Point Therapeutics, Inc.(a)................................. 2,318,200
378,480 SGX Pharmaceuticals, Inc.(a)................................ 3,603,130
263,751 Vivus, Inc.(a).............................................. 878,291
------------
58,608,982
------------

DRUG DELIVERY--2.9%

526,855 DepoMed, Inc.(a)............................................ 3,440,363
141,710 Noven Pharmaceuticals, Inc.(a).............................. 2,552,197
29,594 Penwest Pharmaceuticals Co.(a).............................. 641,894
------------
6,634,454
------------

DRUG DISCOVERY TECHNOLOGIES--5.5%

46,560 Avalon Pharmaceuticals, Inc.(a)............................. 235,128
138,288 Avalon Pharmaceuticals, Inc. (Restricted)(a)................ 663,437
50,578 Cougar Biotechnology Inc. (Restricted)(a)................... 87,500
436,232 deCODE Genetics, Inc.(a).................................... 3,782,131
531,700 Pharmacopeia Drug Discovery, Inc.(a)........................ 3,152,981
120,737 Senomyx, Inc.(a)............................................ 1,987,331
128,050 ZymoGenetics, Inc.(a)....................................... 2,768,441
200,000 Zyomyx, Inc. (Restricted)(a)................................ 2,000
------------
12,678,949
------------

EMERGING BIOPHARMACEUTICALS--22.2%

213,170 ACADIA Pharmaceuticals, Inc.(a)............................. 3,406,456
427,604 Ariad Pharmaceuticals, Inc.(a).............................. 2,813,634
243,828 Barrier Therapeutics, Inc.(a)............................... 2,360,255
368,929 Cytokinetics, Inc.(a)....................................... 2,689,492
45,570 DOV Pharmaceutical, Inc.(a)................................. 728,209
588,800 Epix Pharmaceuticals, Inc.(a)............................... 2,060,800
319,380 Exelixis, Inc.(a)........................................... 3,835,754
456,549 Kosan Biosciences, Inc.(a).................................. 2,689,074
970,000 Lexicon Genetics, Inc.(a)................................... 5,373,800
31,059 Momenta Pharmaceuticals, Inc.(a)............................ 610,620
41,707 Myogen, Inc.(a)............................................. 1,511,045
51,080 Myogen, Inc. warrants(a).................................... 1,452,204
322,410 Neurogen Corporation(a)..................................... 1,995,718
158,337 Nitromed, Inc.(a)........................................... 1,330,031
153,300 Rigel Pharmaceuticals, Inc.(a).............................. 1,761,417
595,700 Sangamo BioSciences, Inc.(a)................................ 3,544,415

The accompanying notes are an integral part of these financial statements.
55

FINANCIAL STATEMENTS (CONTINUED)

H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2006

(UNAUDITED)

SHARES VALUE
------ ------------

455,320 Seattle Genetics, Inc.(a)................................... 2,349,451
296,924 Sirna Therapeutics, Inc.(a)................................. $ 2,001,268
28,604 Telik, Inc.(a).............................................. 553,773
375,384 Tercica, Inc.(a)............................................ 2,515,073
194,916 Theravance, Inc.(a)......................................... 5,465,445
146,982 Therion Biologics Corporation (Restricted)(a)............... 1,470
------------
51,049,404
------------

GENERIC PHARMACEUTICALS--5.0%

305,100 Caraco Pharmaceutical Laboratories, Ltd.(a)................. 3,966,300
429,582 Impax Laboratories, Inc.(a)................................. 4,291,524
76,608 Teva Pharmaceutical Industries, Ltd. ADR.................... 3,154,717
------------
11,412,541
------------

HEALTHCARE SERVICES--3.7%

148,148 Aveta, Inc. (Restricted)(a)................................. 1,999,998
17,416 DakoCytomation, Inc. (Restricted)(e)........................ 181,301
204,805 Emageon, Inc.(a)............................................ 3,479,637
106,500 National Medical Health Card Systems, Inc.(a)............... 2,982,000
204,139 Syntiro Healthcare Services (Restricted)(a)................. 204
------------
8,643,140
------------

MEDICAL DEVICES AND DIAGNOSTICS--15.7%

99,720 Adeza Biomedical Corporation(a)............................. 2,107,084
87,850 Affymetrix, Inc.(a)......................................... 2,892,901
458,850 Align Technology, Inc.(a)................................... 4,207,654
298,577 Conor Medsystems, Inc.(a)................................... 8,778,164
58,800 Conor Medsystems, Inc. (Restricted)(a)...................... 1,642,284
57,920 IDEXX Laboratories, Inc.(a)................................. 5,001,971
130,000 Masimo Corporation (Restricted)............................. 1,300
447,080 Medwave, Inc. (Restricted)(a)(c)............................ 1,448,539
195,217 Orchid Cellmark, Inc.(a).................................... 1,120,546
784,900 Orthovita, Inc.(a).......................................... 3,249,486
139,019 Songbird Hearing, Inc. (Restricted)(a)...................... 1,390
927,713 Third Wave Technologies, Inc.(a)............................ 2,903,742
382,583 VNUS Medical Technologies, Inc.(a).......................... 2,903,805
------------
36,258,866
------------
TOTAL COMMON STOCKS
(COST $145,340,739)......................................... $185,286,336
============

The accompanying notes are an integral part of these financial statements.
56

FINANCIAL STATEMENTS (CONTINUED)

H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

MARCH 31, 2006

(UNAUDITED)

PRINCIPAL
AMOUNT VALUE
--------- ------------

REPURCHASE AGREEMENT--0.1%

$ 128,000 State Street Bank and Trust Co. (collateralized by U.S.
Treasury Bond 4.25%, 8/15/15, market value $133,854); 1.40%
due 04/03/06 (Cost $128,000)................................ $ 128,000

SHORT-TERM INVESTMENT--3.9%

9,000,000 General Electric Capital Corp.; 4.63% due 04/03/06 (Cost
$8,997,685)................................................. 8,997,685
------------
TOTAL INVESTMENTS--100.6%
(COST $199,247,805)......................................... $231,440,127
------------
OTHER LIABILITIES IN EXCESS OF ASSETS--(0.6%)............... (1,350,074)
------------
NET ASSETS--100%............................................ $230,090,053
============

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

(a) Non-income producing security.

(b) Affiliated issuers in which the Fund holds 5% or more of the voting
securities (Total Market Value of $11,105,006).

(d) Variable maturity.

(e) Foreign Security.

ADR American Depository Receipt.

The accompanying notes are an integral part of these financial statements.
57

H&Q LIFE SCIENCES INVESTORS

STATEMENT OF ASSETS AND LIABILITIES

March 31, 2006

(UNAUDITED)

ASSETS:
Investments in non affiliated issuers, at value
(identified cost $188,252,243; see Schedule of
Investments)............................................ $220,335,121
Investments in affiliated issuers, at value (identified
cost $10,995,562; see Schedule of Investments).......... 11,105,006
Cash........................................................ 973
Interest receivable....................................... 102,764
Receivable for investments sold........................... 548,396
Prepaid expenses.......................................... 37,208
------------
Total assets............................................ $232,129,468
------------
LIABILITIES:
Payable for investments purchased......................... $ 1,653,882
Accrued advisory fee...................................... 240,181
Accrued audit fee......................................... 44,680
Accrued administration fee................................ 5,200
Accrued legal fees........................................ 8,035
Accrued shareholder reporting fees........................ 60,373
Accrued other............................................. 27,064
------------
Total liabilities....................................... $ 2,039,415
------------
NET ASSETS.................................................. $230,090,053
============
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per share,
unlimited number of shares authorized, amount paid in on
13,262,472 shares issued and outstanding................ $187,923,589
Accumulated net investment income......................... 75,059
Accumulated net realized gain on investments.............. 9,899,085
Net unrealized gain on investments........................ 32,192,320
------------
Total net assets (equivalent to $17.35 per share based
on 13,262,472 shares outstanding)..................... $230,090,053
============

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

H&Q LIFE SCIENCES INVESTORS

STATEMENT OF OPERATIONS

For the Six Months Ended March 31, 2006

(UNAUDITED)

INVESTMENT INCOME:
Dividend income (net of foreign tax of $1,678)............ $ 8,260
Special dividend.......................................... 1,312,446
Interest income from non affiliated issuers............... 553,391
Interest income from affiliated issuers................... 3,788
-----------
Total investment income................................. $ 1,877,885
-----------
EXPENSES:
Advisory fees............................................. $ 1,387,445
Trustees' fees and expenses............................... 83,887
Accounting, administration and auditing fees.............. 76,311
Shareholder reporting..................................... 51,688
Legal fees................................................ 47,320
Custodian fees............................................ 41,314
Transfer agent fees....................................... 27,300
Stock exchange listing fee................................ 13,177
Other (see note (3))...................................... 74,370
-----------
Total expenses.......................................... 1,802,812
-----------
Net investment income................................. $ 75,073
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments.......................... $14,303,339
Decrease in net unrealized gain on investments............ (6,035,540)
-----------
Net realized and unrealized gain on investments......... $ 8,267,799
-----------
Net increase in net assets resulting from
operations.......................................... $ 8,342,872
===========

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

H&Q LIFE SCIENCES INVESTORS

STATEMENTS OF CHANGES IN NET ASSETS

FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
2006 2005
------------ -------------
(UNAUDITED)

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income (loss).............................. $ 75,073 $ (2,587,561)
Net realized gain on investments.......................... 14,303,339 26,035,268
Decrease/increase in net unrealized gain on investments... (6,035,540) 21,315,662
------------ ------------
Net increase in net assets resulting from operations.... $ 8,342,872 $ 44,763,369
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized capital gains................................ $(17,939,117) $(15,828,633)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in reinvestment of distributions
(657,268 and 538,795 shares, respectively).............. $ 10,394,972 $ 8,518,606
------------ ------------
Net increase in net assets.............................. $ 798,727 $ 37,453,342
NET ASSETS:
Beginning of period....................................... 229,291,326 191,837,984
------------ ------------
End of period............................................. $230,090,053 $229,291,326
============ ============
ACCUMULATED NET INVESTMENT INCOME INCLUDED IN NET ASSETS AT
END OF THE PERIOD......................................... $ 75,059 $ (14)

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

H&Q LIFE SCIENCES INVESTORS

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31, 2006

(UNAUDITED)

CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Purchases of portfolio securities......................... $(58,577,431)
Net maturities of short-term investments.................. 6,600,807
Sales of portfolio securities............................. 59,998,463
Interest income received.................................. 13,868
Dividends received........................................ 1,320,706
Operating expenses paid................................... (1,832,590)
------------
Net cash provided from operating activities............. $ 7,523,823
------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Cash distributions paid, net.............................. $ (7,544,145)
------------
Net cash used in financing activities................... $ (7,544,145)
------------
NET DECREASE IN CASH........................................ $ (20,322)
CASH AT BEGINNING OF PERIOD................................. 21,295
------------
CASH AT END OF PERIOD....................................... $ 973
============
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...... $ 8,342,872
Purchases of portfolio securities......................... (58,577,431)
Net maturities of short-term investments.................. 6,600,807
Sales of portfolio securities............................. 59,998,463
Accretion of discount..................................... (476,255)
Net realized gain on investments.......................... (14,303,339)
Decrease in net unrealized gain on investments............ 6,035,540
Increase in dividends and interest receivable............. (67,056)
Decrease in accrued expenses.............................. (41,947)
Decrease in prepaid expenses.............................. 12,169
------------
Net cash provided from operating activities............. $ 7,523,823
============

Noncash financing activities not included herein consist of reinvested
distributions of $10,394,972.

Noncash operating activities not included herein consist of one conversion
of restricted preferred stock with a cost of $2,005,767 to restricted common
stock of the same issuer.

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

H&Q LIFE SCIENCES INVESTORS

FINANCIAL HIGHLIGHTS

(SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING

THROUGHOUT THE PERIOD INDICATED)

FOR THE SIX
MONTHS
ENDED FOR THE YEAR ENDED SEPTEMBER 30,
MARCH 31, ---------------------------------------------------------------------------------
2006 2005 2004 2003 2002(1) 2001
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED)

Net asset value per share:
Beginning of period....... $ 18.19 $ 15.90 $ 16.68 $ 15.14 $ 23.09 $ 39.37
------------ ------------ ------------ ------------ ------------ ------------
Net investment income
(loss)(2)................. $ 0.01(3) $ (0.21) $ (0.26) $ (0.21) $ (0.26) $ (0.22)
Net realized and unrealized
gain (loss) on
investments............... 0.56 3.79 0.86 3.55 (4.83) (12.14)
------------ ------------ ------------ ------------ ------------ ------------
Total increase (decrease)
from investment
operations................ $ 0.57 $ 3.58 $ 0.60 $ 3.34 $ (5.09) $ (12.36)
------------ ------------ ------------ ------------ ------------ ------------
Capital gains distributions
to shareholders........... $ (1.41) $ (1.29) $ (1.38) $ (1.80) $ (2.86) $ (3.92)
------------ ------------ ------------ ------------ ------------ ------------
Net asset value per share:
End of period............. $ 17.35 $ 18.19 $ 15.90 $ 16.68 $ 15.14 $ 23.09
============ ============ ============ ============ ============ ============
Per share market value: End
of period................. $ 17.11 $ 16.85 $ 16.20 $ 15.28 $ 11.79 $ 18.45
Total investment return at
market value.............. 10.73% 12.77% 15.52% 47.65% (25.82)% (29.07)%
RATIOS AND SUPPLEMENTAL
DATA:
Net assets at end of
period.................... $230,090,053 $229,291,326 $191,837,984 $190,352,471 $157,585,450 $215,162,600
Ratio of operating expenses
to average net assets..... 1.67%* 1.74% 1.73% 1.74% 1.71% 1.58%
Ratio of net investment
income/ (loss) to average
net assets................ 0.07%*(3) (1.29)% (1.56)% (1.38)% (1.25)% (0.83)%
Portfolio turnover rate..... 27.97% 73.79% 34.93% 32.36% 17.36% 16.49%
Number of shares outstanding
at end of period.......... 13,262,472 12,605,204 12,066,409 11,412,475 10,409,622 9,318,998

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

(2) Net investment income/(loss) per share has been computed using average
shares outstanding.

* Annualized.

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

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

March 31, 2006

(UNAUDITED)

(1) ORGANIZATION

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 securities of companies in the
healthcare industries. The Fund invests primarily in securities of public and
private companies that are believed to have significant potential for
above-average growth. The Fund was organized on February 20, 1992 and commenced
operations on May 8, 1992.

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. 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.

INVESTMENT SECURITIES & INVESTMENT INCOME

Investments traded on national securities exchanges or in the
over-the-counter market that are National Market System securities are valued at
the last sale price or, lacking any sales, at the mean between the last bid and
asked prices. Other over-the-counter securities are valued at the most recent
bid prices as obtained from one or more dealers that make markets in the
securities. Exchange traded investments for which market quotations are not
readily available is valued at fair value as determined in good faith by the
Trustees of the Fund. The value of venture capital and other restricted
securities is determined in good faith by the Trustees. However, because of the
uncertainty of venture capital and other restricted security valuations, these
estimated values may differ significantly from the values that would have been
used had a ready market for these securities existed, and the differences could
be material. See note 4 below. Short-term investments with maturity of 60 days
or less are valued at amortized cost.

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.

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, 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 or limited.

FEDERAL INCOME TAXES

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

March 31, 2006

(UNAUDITED)

income and its net realized capital gains, if any. Therefore, no Federal income
or excise tax provision is required.

DISTRIBUTIONS

The Fund records all distributions to shareholders from net investment
income, if any, and realized gains on the ex-dividend date. Such distributions
are determined in conformity with income tax regulations. Due to permanent
book/tax differences in accounting for certain transactions, certain
distributions may be treated as distributions from capital as opposed to
distributions of net investment income or realized capital gains.

DISTRIBUTION POLICY

Distributions will automatically be paid in newly issued shares of the Fund
unless otherwise instructed by the shareholder. Pursuant to an SEC exemptive
order, the Fund has implemented a fixed distribution policy that permits the
Fund 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. This could 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. It is anticipated that net realized capital
gains in excess of the total distributed under this policy would be included in
the December distribution.

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, 2006.

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 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) SECURITIES TRANSACTIONS

The aggregate cost of purchases and proceeds from sales of investment
securities (other than short-term investments) for the six months ended
March 31, 2006 totaled $59,673,874 and $57,818,230 respectively.

At March 31, 2006, the total cost of securities for Federal income tax
purposes was $199,247,805. The net unrealized gain for Federal income tax
purposes on securities held by the Fund was $32,192,320 including gross
unrealized gain of $61,780,901 and gross unrealized loss of $29,588,581.

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

March 31, 2006

(UNAUDITED)

(3) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

The Fund has entered into an Investment Advisory Agreement (the Advisory
Agreement) with Hambrecht & Quist Capital Management, LLC (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) 2.5% 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 the month, for all other assets, 1.0% of the average
net assets up to $250 million, 0.9% of the average net assets for the next
$250 million, 0.8% of the average net assets for the next $500 million and 0.7%
of the average net assets thereafter. The aggregate fee may not exceed a rate
when annualized of 1.375%. Beginning July 1, 2006 the Fund will pay a monthly
rate when annualized of (i) 2.5% 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 the month, for all other 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 may not exceed a rate when annualized of
1.375%

As of February 2005, Daniel R. Omstead, Ph.D, Christopher F. Brinzey,
M.B.A., Frank T. Gentile, Ph.D. and Jason C. Akus, M.D./M.B.A. are members of
the team that makes investments on behalf of the Fund. These members also
perform other duties, including making investment decisions on behalf of another
closed-end investment Company, H&Q Healthcare Investors, which invests in the
healthcare industries.

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, 2006 these payments amounted to $29,694 and are included in the
"other" category in the Statement of Operations, together with insurance
expenses of $26,464 incurred to unaffiliated entities. Such expenses are the
major components of "other" in the Statement of Operations. Expenses incurred
pursuant to the Agreement as well as certain expenses paid for by the Adviser
are allocated in an equitable fashion to the Fund.

Certain officers and Trustees of the Fund are also officers of the Adviser.
Trustees who are not affiliates of the Adviser receive an annual fee of $20,000
plus $500 for each Committee on which they serve and $500 for each meeting
attended.

An affiliate company is a company in which the Fund holds 5% or more of the
voting securities. Transactions with such companies, all of which are venture
capital companies, during the six months ended March 31, 2006 were as follows:

VALUE ON VALUE ON
ISSUER OCTOBER 1, 2005 PURCHASES SALES INCOME MARCH 31, 2006
------ ---------------- ---------- --------- -------- ---------------

Agilix Corporation............... $ 380,952 $ -- $ -- $ -- $ 380,952
Concentric Medical, Inc.......... 6,794,782 -- -- -- 6,794,782
CytoLogix Corporation............ 502,935 -- -- 3,788 502,935
PHT Corporation.................. 3,426,337 -- -- -- 3,426,337
----------- --------- --------- ------ -----------
$11,105,006 $ 0 $ 0 $3,788 $11,105,006
=========== ========= ========= ====== ===========

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

March 31, 2006

(UNAUDITED)

(4) VENTURE CAPITAL AND OTHER RESTRICTED SECURITIES

The Fund may invest in venture capital and other restricted securities if
these securities would currently constitute 40% or less of net assets. The value
of these securities represents 19% of the Fund's net assets at March 31, 2006.

During the year ended September 30, 2004, restricted securities from one
issuer were exchanged for cash in connection with a corporate action, a portion
of which has been retained by the issuer in an escrow account pending resolution
of certain contingencies and whose estimated value of $456,340 at March 31, 2006
has been determined by the Trustees. The value of the escrow account is included
in the Receivable for Investments Sold in the Statement of Assets and
Liabilities.

The following table details the acquisition date, cost, carrying value per
unit, and value of the Fund's venture capital and other restricted securities at
March 31, 2006, as determined by the Trustees of the Fund. With the exception of
Conor Medsystems, Inc. Restricted common stock the Fund on its own does not have
the right to demand that such securities be registered. Subject to certain
conditions the Fund has the right to request registration of Conor
Medsystems, Inc. Restricted common stock.

ACQUISITION CARRYING VALUE
SECURITY(F) DATE COST PER UNIT VALUE
----------- ---------------- ----------- --------------- -----------

Agensys, Inc.
Series C Cvt. Pfd............... 2/14/02, 9/27/05 $ 2,204,684 $ 2.95 $ 2,200,201
Agilix Corporation
Series B Cvt. Pfd............... 11/8/01 2,009,507 0.24 380,952
Akorn, Inc.
Restricted Common............... 3/7/06 1,400,000 4.13 1,285,200
Avalon Pharmaceuticals, Inc.
Restricted Common............... 10/22/01-2/11/05 2,145,319 4.80 663,437
Aveta, Inc.
Restricted Common............... 12/21/05 1,999,998 13.50 1,999,998
CardioNet, Inc.
Series C Cvt. Pfd............... 5/3/01-3/25/03 3,700,899 3.50 3,680,001
Convertible Note................ 8/15/05 200,000 1.00 200,000
Ceres, Inc.
Series C Cvt. Pfd............... 12/23/98 1,000,875 6.00 1,500,000
Series C-1 Cvt. Pfd............. 3/31/01 74,325 6.00 128,772
Series D Cvt. Pfd............... 3/14/01 1,046,778 6.00 1,053,240
Concentric Medical, Inc.
Series B Cvt. Pfd............... 5/7/02-1/24/03 2,219,473 1.40 4,529,410
Series C Cvt. Pfd............... 12/19/03 999,999 1.40 1,627,906
Series D Cvt. Pfd............... 9/30/05 638,511 1.40 637,466
Conor Medsystems, Inc.
Restricted Common............... 10/23/03-8/6/04 351,643 27.93 1,642,284
Corus Pharma, Inc.
Series C Cvt. Pfd............... 4/8/04 2,001,540 0.58 1,000,000

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

March 31, 2006

(UNAUDITED)

ACQUISITION CARRYING VALUE
SECURITY(F) DATE COST PER UNIT VALUE
----------- ---------------- ----------- --------------- -----------

Cougar Biotechnology Inc.
Series A Cvt. Pfd............... 3/30/06 $ 787,501 $ 1.73 $ 787,501
Restricted Common............... 3/30/06 87,500 1.73 87,500
CytoLogix Corporation
Series A Cvt. Pfd............... 1/13/98-7/21/99 1,077,912 0.83 265,789
Series B Cvt. Pfd............... 1/11/01 506,622 0.83 124,922
Convertible Note................ 5/29/02 112,224 1.00 112,224
Dako A/S
Restricted Common............... 6/14/04 734,913 10.41 181,301
EPR, Inc.
Series A Cvt. Pfd............... 3/9/94 800,331 0.01 1,778
Galileo Pharmaceuticals, Inc.
Series F-1 Cvt. Pfd............. 8/18/00 2,001,929 0.00 93
Labcyte, Inc.
Series C Cvt. Pfd............... 7/18/05 1,282,337 0.52 1,280,000
Masimo Corporation
Series D Cvt. Pfd............... 8/14/96 910,176 11.00 1,430,000
Restricted Common............... 3/31/98 0 0.01 1,300
Matritech, Inc.
Convertible Note................ 1/17/06 2,000,000 1.00 2,000,000
Medwave, Inc.
Restricted Common............... 2/21/06 1,224,999 3.24 1,448,539
Omnisonics Medical
Technologies, Inc.
Series B Cvt. Pfd............... 5/24/01 1,606,312 1.34 1,454,151
Series C Cvt. Pfd............... 10/1/03 1,200,224 1.16 1,200,000
PHT Corporation
Series D Cvt. Pfd............... 7/23/01 2,803,841 0.78 2,800,000
Series E Cvt. Pfd............... 9/12/03-12/17/03 627,472 0.78 626,337
Raven biotechnologies, Inc.
Series B Cvt. Pfd............... 12/12/00 2,001,150 0.83 1,006,060
Series C Cvt. Pfd............... 11/26/02 1,554,400 0.83 1,554,401
Series D Cvt. Pfd............... 6/23/05 803,610 0.29 800,000
Songbird Hearing, Inc.
Restricted Common............... 12/14/00 2,003,239 0.01 1,390
Syntiro Healthcare Services
Restricted Common............... 2/5/97 800,325 0.001 204
TargeGen, Inc.
Series C Cvt. Pfd............... 8/30/05 1,842,205 1.30 1,840,001

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

March 31, 2006

(UNAUDITED)

ACQUISITION CARRYING VALUE
SECURITY(F) DATE COST PER UNIT VALUE
----------- ---------------- ----------- --------------- -----------

Therion Biologics Corporation
Series A Cvt. Pfd............... 8/20/96-10/16/96 $ 289,847 $ 1.22 $ 37,722
Series B Cvt. Pfd............... 6/22/99 600,929 1.22 195,200
Series C Cvt. Pfd............... 9/26/01-10/15/01 1,019,568 1.22 331,606
Series C-2 Cvt. Pfd............. 8/13/03 40,003 1.22 27,113
Sinking Fund Cvt. Pfd........... 10/18/94-4/3/96 582,505 0.01 290
Restricted Common............... 6/30/93 251,642 0.01 1,470
TherOx, Inc.
Series H Cvt. Pfd............... 9/11/00 2,001,626 3.80 165,217
Series I Cvt. Pfd............... 7/8/05 386,273 3.86 384,733
Xanthus Life Sciences, Inc.
Series B Cvt. Pfd............... 12/5/03-3/23/06 1,645,880 1.00 1,645,000
Zyomyx, Inc.
Series A New Cvt. Pfd........... 2/19/99-1/12/04 199,800 0.10 20,000
Series B New Cvt. Pfd........... 3/31/04 112 0.10 20
New Restricted Common........... 2/19/99-7/22/02 2,401,101 0.01 2,000
----------- -----------
$58,182,059 $44,342,729(g)
=========== ===========

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

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

(g) Represents 19% of the Fund's net assets as of March 31, 2006.

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

March 31, 2006

(UNAUDITED)

(5) SOURCES OF NET ASSETS

The changes in the sources of net assets for the period from October 1, 2005
through March 31, 2006 are as follows:

CAPITAL PAID ACCUMULATED ACCUMULATED NET
IN ON SHARES NET NET REALIZED UNREALIZED
OF BENEFICIAL INVESTMENT GAIN ON GAIN ON TOTAL NET
INTEREST GAIN INVESTMENTS INVESTMENTS ASSETS
------------- ------------- ------------- ------------ ------------

As of October 1, 2005:.... $177,528,617 $ (14) $ 13,534,863 $38,227,860 $229,291,326
For the period from
October 1, 2005 through
March 31, 2006:
Net investment income... -- 75,073 -- -- 75,073
Net realized gains...... -- -- 14,303,339 -- 14,303,339
Distributions........... -- -- (17,939,117) -- (17,939,117)
Value of shares issued
in reinvestment of
dividends............. 10,394,972 -- -- -- 10,394,972
Decrease in net
unrealized gain on
investments........... -- -- -- (6,035,540) (6,035,540)
------------ ------- ------------ ----------- ------------
As of March 31, 2006:..... $187,923,589 $75,059 $ 9,899,085 $32,192,320 $230,090,053
============ ======= ============ =========== ============

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE TRUSTEES AND SHAREHOLDERS OF H&Q LIFE SCIENCES INVESTORS:

We have audited the accompanying statement of assets and liabilities of H&Q
Life Sciences Investors (the "Fund"), including the schedule of investments, as
of September 30, 2005, and the related statements of operations and cash flows
for the year then ended, and the statements of changes in net assets and the
financial highlights for each of the two years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the years ended September 30, 2003, 2002, and 2001 were audited
by other auditors whose report, dated November 23, 2003, expressed an
unqualified opinion on the financial highlights.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of September 30, 2005, by correspondence with the
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of H&Q
Life Sciences Investors as of September 30, 2005, the results of its operations
and its cash flows for the year then ended, and the changes in its net assets
and the financial highlights for each of the two years in the period then ended,
in conformity with accounting principles generally accepted in the United States
of America.

DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 18, 2005

The following are the financial statements and related notes from the
Trust's September 30, 2005 Annual Report to Shareholders, including the Schedule
of Investments, the Statement of Assets and Liabilities, the Statement of
Operations, the Statement of Changes in Net Assets, the Statement of Cash Flows
and the five year Financial Highlights. It is expected that the unaudited
financial statements included in the Trust's Semi-Annual Report to Shareholders
for the six months ended March 31, 2006 will be mailed to Shareholders and
available on the Trust's website (www.hqcm.com) on or around June 1, 2006.

H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2005

SHAES VALUE
----- ------------

CONVERTIBLE SECURITIES--15.8% OF NET ASSETS

CONVERTIBLE PREFERRED (RESTRICTED)--15.6%

DRUG DISCOVERY TECHNOLOGIES--1.8%

1,587,302 Agilix Corporation Series B(a)(b)........................... $ 380,952
566,958 Avalon Pharmaceuticals, Inc. Series B(a).................... 871,876
250,000 Ceres, Inc. Series C(a)..................................... 1,500,000
18,296 Ceres, Inc. Series C-1(a)(c)................................ 109,776
174,200 Ceres, Inc. Series D(a)(c).................................. 1,045,200
932,488 Galileo Pharmaceuticals, Inc. Series F-1(a)................. 326,371
200,000 Zyomyx, Inc. Series A New(a)................................ 20,000
200 Zyomyx, Inc. Series B New(a)................................ 20

EMERGING BIOPHARMACEUTICALS--5.0%

744,921 Agensys, Inc. Series C(a)................................... 2,200,201
1,724,138 Corus Pharma, Inc. Series C(a).............................. 2,000,000
1,212,121 Raven biotechnologies, Inc. Series B(a)..................... 1,006,060
1,872,772 Raven biotechnologies, Inc. Series C(a)..................... 1,554,401
2,431,611 Raven biotechnologies, Inc. Series D(a)..................... 800,000
1,415,385 TargeGen, Inc. Series C(a).................................. 1,840,001
30,920 Therion Biologics Corporation Series A(a)................... 37,722
160,000 Therion Biologics Corporation Series B(a)................... 195,200
271,808 Therion Biologics Corporation Series C(a)(c)................ 331,606
22,224 Therion Biologics Corporation Series C-2(a)(c).............. 27,113
28,991 Therion Biologics Corporation Sinking Fund(a) 290
1,400,000 Xanthus Life Sciences, Inc. Series B(a)..................... 1,400,000

HEALTHCARE SERVICES--3.3%

1,051,429 CardioNet, Inc. Series C(a)(c).............................. 3,680,001
322,168 CytoLogix Corporation Series A(a)(b)........................ 265,789
151,420 CytoLogix Corporation Series B(a)(b)(c)..................... 124,922
3,589,744 PHT Corporation Series D(a)(b).............................. 2,800,000
802,996 PHT Corporation Series E(a)(b).............................. 626,337

MEDICAL DEVICES AND DIAGNOSTICS--5.5%

The accompanying notes are an integral part of these financial statements.
71

H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2005

SHAES VALUE
----- ------------

43,478 TherOx, Inc. Series H(a).................................... $ 165,217
99,646 TherOx, Inc. Series I(a)(c)................................. 384,733
------------
$ 35,854,499
------------

PRINCIPAL
AMOUNT
---------

DRUG DISCOVERY TECHNOLOGIES--0.0%

$ 132,340 Avalon Pharmaceuticals, Inc. 8% Cvt. Note, due 2006......... $ 85,499

HEALTHCARE SERVICES--0.2%

200,000 CardioNet, Inc. 8% Cvt. Note, due 2006...................... 200,000
112,225 CytoLogix Corporation 6.75% Cvt. Note(b)(d)................. 112,224
------------
$ 397,723
------------
TOTAL CONVERTIBLE SECURITIES
(COST $43,873,557).......................................... $ 36,252,222
------------

SHARES
------

COMMON STOCKS--76.9%

BIOPHARMACEUTICALS--15.4%

385,500 Bioenvision, Inc.(a)........................................ $ 3,095,565
518,905 Critical Therapeutics, Inc.(a).............................. 4,888,085
159,672 Critical Therapeutics warrants(a)........................... 453,468
390,603 Cubist Pharmaceuticals, Inc.(a)............................. 8,413,589
33,807 Genzyme Corporation(a)...................................... 2,421,934
140,675 Gilead Sciences, Inc.(a).................................... 6,859,313
300,809 Inspire Pharmaceuticals, Inc.(a)............................ 2,286,148
170,850 MedImmune, Inc.(a).......................................... 5,749,103
312,200 Vivus, Inc.(a).............................................. 1,120,798
------------
35,288,003
------------

DRUG DELIVERY--3.6%

112,360 Connetics Corporation(a).................................... 1,900,008
499,955 DepoMed, Inc.(a)............................................ 3,239,708
141,710 Noven Pharmaceuticals, Inc.(a) 1,983,940
58,626 Penwest Pharmaceuticals Co.(a).............................. 1,027,714
------------
8,151,370
------------

DRUG DISCOVERY TECHNOLOGIES--4.3%

46,560 Avalon Pharmaceuticals, Inc. (Restricted)(a)................ 368,057
439,232 deCODE Genetics, Inc.(a).................................... 3,685,156

The accompanying notes are an integral part of these financial statements.
72

H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2005

SHARES VALUE
------ ------------

245,200 Pharmacopeia Drug Discovery, Inc.(a)........................ $ 877,816
120,737 Senomyx, Inc.(a)............................................ 2,056,151
180,050 ZymoGenetics, Inc.(a)....................................... 2,970,825
200,000 Zyomyx, Inc. (Restricted)(a)................................ 2,000
------------
9,960,005
------------

EMERGING BIOPHARMACEUTICALS--29.0%

277,235 ACADIA Pharmaceuticals, Inc.(a)............................. 3,152,162
187,600 Applera Corporation--Celera Genomics Group(a)............... 2,275,588
366,659 Ariad Pharmaceuticals, Inc.(a).............................. 2,724,276
239,420 Barrier Therapeutics, Inc.(a)............................... 2,008,734
409,329 Cytokinetics, Inc.(a)....................................... 3,331,938
177,000 DOV Pharmaceutical, Inc.(a)................................. 3,005,460
97,704 Dyax Corporation(a)......................................... 546,165
442,800 Epix Pharmaceuticals, Inc.(a)............................... 3,409,560
500,925 Exelixis, Inc.(a)........................................... 3,842,095
94,680 Incyte Corporation(a)....................................... 444,996
501,100 Kosan Biosciences, Inc.(a).................................. 3,642,997
815,000 Lexicon Genetics, Inc.(a)................................... 3,243,700
31,059 Momenta Pharmaceuticals, Inc.(a)............................ 846,358
219,740 Myogen, Inc.(a)............................................. 5,163,890
51,080 Myogen, Inc. warrants(a).................................... 801,956
158,810 Neurogen Corporation(a)..................................... 1,092,613
61,077 Nitromed, Inc.(a)........................................... 1,099,386
270,044 Nuvelo, Inc.(a)............................................. 2,592,422
78,100 Protein Design Labs, Inc.(a)................................ 2,186,800
153,300 Rigel Pharmaceuticals, Inc.(a).............................. 3,643,941
340,700 Sangamo BioSciences, Inc.(a)................................ 1,495,673
455,320 Seattle Genetics, Inc.(a)................................... 2,390,430
526,924 Sirna Therapeutics, Inc.(a)................................. 2,318,466
192,354 Telik, Inc.(a).............................................. 3,146,911
226,384 Tercica, Inc.(a)............................................ 2,553,611
259,216 Theravance, Inc.(a)......................................... 5,453,905
146,982 Therion Biologics Corporation (Restricted)(a)............... 1,470
------------
66,415,503
------------

GENERIC PHARMACEUTICALS--4.0%

277,300 Caraco Pharmaceutical Laboratories, Ltd.(a)................. 2,409,737
240,882 Impax Laboratories, Inc.(a)................................. 2,921,899
48,300 IVAX Corporation(a)......................................... 1,273,188
79,300 Teva Pharmaceutical Industries, Ltd. ADR.................... 2,650,206
------------
9,255,030
------------

The accompanying notes are an integral part of these financial statements.
73

H&Q LIFE SCIENCES INVESTORS

SCHEDULE OF INVESTMENTS

SEPTEMBER 30, 2005

SHARES VALUE
------ ------------

HEALTHCARE SERVICES--1.5%
17,416 DakoCytomation, Inc. (Restricted)(e)........................ $ 181,300
233,705 Emageon, Inc.(a)............................................ 3,169,040
204,139 Syntiro Healthcare Services (Restricted)(a)................. 204
------------
3,350,544
------------
MEDICAL DEVICES AND DIAGNOSTICS--19.1%
64,095 Adeza Biomedical Corporation(a)............................. 1,115,894
74,250 Affymetrix, Inc.(a)......................................... 3,432,577
458,850 Align Technology, Inc.(a)................................... 3,083,472
618,799 Conor Medsystems, Inc. (Restricted)(a)...................... 13,814,688
83,350 IDEXX Laboratories, Inc.(a)................................. 5,574,448
169,413 Intralase Corporation(a).................................... 2,492,065
130,000 Masimo Corporation (Restricted)(a).......................... 1,300
36,455 Molecular Devices Corporation(a)............................ 761,545
123,562 Natus Medical, Inc.(a)...................................... 1,503,750
260,227 Orchid Cellmark, Inc.(a).................................... 2,211,930
784,900 Orthovita, Inc.(a).......................................... 3,359,372
139,019 Songbird Hearing, Inc. (Restricted)(a)...................... 1,390
499,050 Third Wave Technologies, Inc.(a)............................ 2,470,297
382,583 VNUS Medical Technologies, Inc.(a).......................... 3,986,515
------------
43,809,243
------------
TOTAL COMMON STOCKS
(COST $130,380,503)......................................... $176,229,698
------------

PRINCIPAL
AMOUNT
---------

SHORT-TERM INVESTMENTS--6.6%
$7,300,000 American Express Credit Corp.; 3.58%--3.74%, due
10/03/05--10/14/05.......................................... $ 7,296,220
7,950,000 General Electric Capital Corp.; 3.69%--3.72%, due
10/05/05--10/14/05.......................................... 7,943,865
------------
TOTAL SHORT-TERM INVESTMENTS (COST $15,240,085)............. $ 15,240,085
------------
TOTAL INVESTMENTS--99.3% (COST $189,494,145)................ $227,722,005
------------
OTHER ASSETS IN EXCESS OF LIABILITIES--0.7%................. 1,569,321
------------
NET ASSETS--100%............................................ $229,291,326
============

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

(a) Non-income producing security.

(b) Affiliated issuers in which the Fund holds 5% or more of the voting
securities (Total Market Value of $11,105,006).

(d) Variable maturity.

(e) Foreign Security.

ADR American Depository Receipt.

The accompanying notes are an integral part of these financial statements.
74

H&Q LIFE SCIENCES INVESTORS

STATEMENT OF ASSETS AND LIABILITIES

SEPTEMBER 30, 2005

ASSETS:
Investments in non affiliated issuers, at value
(identified cost $178,499,628; see Schedule of
Investments)............................................ $216,616,999
Investments in affiliated issuers, at value (identified
cost $10,994,517; see Schedule of Investments).......... 11,105,006
Cash...................................................... 21,295
Interest receivable....................................... 35,708
Receivable for investments sold........................... 2,447,860
Prepaid expenses.......................................... 49,377
------------
Total assets............................................ $230,276,245
------------
LIABILITIES:
Payable for investments purchased......................... $ 557,439
Accrued advisory fee...................................... 243,838
Accrued audit fee......................................... 57,285
Accrued legal fees........................................ 20,368
Accrued shareholder reporting fees........................ 38,691
Accrued other............................................. 67,298
------------
Total liabilities....................................... $ 984,919
------------
NET ASSETS.................................................. $229,291,326
============
SOURCES OF NET ASSETS:
Shares of beneficial interest, par value $.01 per share,
unlimited number of shares authorized, amount paid in on
12,605,204 shares issued and outstanding................ $177,528,617
Accumulated net investment loss........................... (14)
Accumulated net realized gain on investments.............. 13,534,863
Net unrealized gain on investments........................ 38,227,860
------------
Total net assets (equivalent to $18.19 per share based
on 12,605,204 shares outstanding)..................... $229,291,326
============

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

H&Q LIFE SCIENCES INVESTORS

STATEMENT OF OPERATIONS

FOR THE YEAR ENDED SEPTEMBER 30, 2005

INVESTMENT INCOME:
Dividend income (net of foreign tax of $3,893)............ $ 229,637
Interest income from non affiliated issuers............... 648,031
Interest income from affiliated issuers................... 8,847
----------
Total investment income................................. $ 886,515
EXPENSES:
Advisory fees............................................. $2,676,602
Trustees' fees and expenses............................... 163,474
Legal fees................................................ 126,922
Custodian fees............................................ 74,195
Shareholder reporting..................................... 96,470
Accounting, administration and auditing fees.............. 93,021
Transfer agent fees....................................... 55,597
Stock exchange listing fee................................ 27,114
Other (see note (3))...................................... 160,681
----------
Total expenses.......................................... 3,474,076
-----------
Net investment loss................................... $(2,587,561)
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments.......................... $26,035,268
Increase in net unrealized gain on investments............ 21,315,662
-----------
Net realized and unrealized gain on investments....... $47,350,930
-----------
Net increase in net assets resulting from
operations........................................ $44,763,369
===========

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

H&Q LIFE SCIENCES INVESTORS

STATEMENTS OF CHANGES IN NET ASSETS

FOR THE FOR THE
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment loss....................................... $ (2,587,561) $ (3,070,147)
Net realized gain on investments.......................... 26,035,268 22,434,597
Increase/decrease in net unrealized gain on investments... 21,315,662 (12,204,850)
------------ ------------
Net increase in net assets resulting from operations.... $ 44,763,369 $ 7,159,600
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized capital gains................................ $(15,828,633) $(16,063,421)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Value of shares issued in reinvestment of distributions
(538,795 and 653,934 shares, respectively).............. $ 8,518,606 $ 10,389,334
Net increase in net assets.............................. $ 37,453,342 $ 1,485,513
NET ASSETS:
Beginning of year......................................... 191,837,984 190,352,471
------------ ------------
End of year............................................... $229,291,326 $191,837,984
============ ============
Accumulated net investment loss included in net assets at
end of year............................................. $ (14) $ 0
============ ============

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

H&Q LIFE SCIENCES INVESTORS

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED SEPTEMBER 30, 2005

CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Purchases of portfolio securities......................... $(138,246,171)
Net maturities of short-term investments.................. (1,325,186)
Sales and maturities of portfolio securities.............. 149,331,532
-------------
Interest income received.................................. 25,360
Dividends received........................................ 229,637
Operating expenses paid................................... (3,415,021)
-------------
Net cash provided from operating activities............. $ 6,600,151
-------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Cash distributions paid, net.............................. $ (7,310,027)
-------------
Net cash used for financing activities.................. $ (7,310,027)
-------------
NET DECREASE IN CASH........................................ $ (709,876)
CASH AT BEGINNING OF YEAR................................... 731,171
-------------
CASH AT END OF YEAR......................................... $ 21,295
=============
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...... $ 44,763,369
Purchases of portfolio securities......................... $(138,246,171)
Net maturities of short-term investments.................. (1,325,186)
Sales and maturities of portfolio securities.............. 149,331,532
Accretion of discount..................................... (618,892)
Net realized gain on investments.......................... (26,035,268)
Increase in net unrealized gain on investments............ (21,315,662)
Increase in interest receivable........................... (12,626)
Increase in accrued expenses.............................. 58,953
Decrease in prepaid expenses.............................. 102
-------------
Net cash provided from operating activities............. $ 6,600,151
=============

Noncash financing activities not included herein consist of reinvested
distributions of $8,518,606.

Noncash operating activities not included herein consist of three
conversions of restricted preferred stock with a cost of $7,156,360 to
restricted common stock each of the same issuer.

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

H&Q LIFE SCIENCES INVESTORS

FINANCIAL HIGHLIGHTS

(SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE
PERIOD INDICATED)

FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
2005 2004 2003 2002(1) 2001
------------ ------------ ------------ ------------ ------------

Net asset value per share:
Beginning of year.......... $ 15.90 $ 16.68 $ 15.14 $ 23.09 $ 39.37
------------ ------------ ------------ ------------ ------------
Net investment loss(2)..... $ (0.21) $ (0.26) $ (0.21) $ (0.26) $ (0.22)
Net realized and unrealized
gain (loss) on
investments.............. 3.79 0.86 3.55 (4.83) (12.14)
------------ ------------ ------------ ------------ ------------
Total increase (decrease)
from investment
operations............... $ 3.58 $ 0.60 $ 3.34 $ (5.09) $ (12.36)
------------ ------------ ------------ ------------ ------------
Capital gain distributions
to shareholders.......... $ (1.29) $ (1.38) $ (1.80) $ (2.86) $ (3.92)
------------ ------------ ------------ ------------ ------------
Net asset value per share:
End of year................ $ 18.19 $ 15.90 $ 16.68 $ 15.14 $ 23.09
============ ============ ============ ============ ============
Per share market value:
End of year................ $ 16.85 $ 16.20 $ 15.28 $ 11.79 $ 18.45
Total investment return at
market value............. 12.77% 15.52% 47.65% (25.82)% (29.07)%
RATIOS AND SUPPLEMENTAL
DATA:
Net assets at end of
year..................... $229,291,326 $191,837,984 $190,352,471 $157,585,450 $215,162,600
Ratio of operating expenses
to average net assets.... 1.74% 1.73% 1.74% 1.71% 1.58%
Ratio of net investment
loss to average net
assets................... (1.29)% (1.56)% (1.38)% (1.25)% (0.83)%
Portfolio turnover rate.... 73.79% 34.93% 32.36% 17.36% 16.49%
Number of shares
outstanding at end of
year..................... 12,605,204 12,066,409 11,412,475 10,409,622 9,318,998

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

(1) In 2002, the Fund adopted the provisions of the AICPA Audit and Accounting
Guide for Investment Companies and began accreting discounts and amortizing
premiums on all debt securities. The effect of this change for the year
ended September 30, 2002 was a decrease in net investment loss per share of
$.006, an increase in net realized and unrealized loss on investments per
share of $.006, and a decrease in the ratio of net investment loss to
average net assets from (1.28%) to (1.25%). Per share data and ratios for
the period prior to October 1, 2001 have not been restated to reflect this
change in presentation.

(2) Net investment loss per share has been computed using average shares
outstanding.

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

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

(1) ORGANIZATION

INVESTMENT SECURITIES & INVESTMENT INCOME

Investments traded on national securities exchanges or in the
over-the-counter market that are National Market System securities are valued at
the last sale price or, lacking any sales, at the mean between the last bid and
asked prices. Other over-the-counter securities are valued at the most recent
bid prices as obtained from one or more dealers that make markets in the
securities. Exchange traded investments for which market quotations are not
readily available are valued at fair value as determined in good faith by the
Trustees of the Fund. The value of venture capital and other restricted
securities is determined in good faith by the Trustees. However, because of the
uncertainty of venture capital and other restricted security valuations, these
estimated values may differ significantly from the values that would have been
used had a ready market for these securities existed, and the differences could
be material. See note 4 below. Short-term investments with maturity of 60 days
or less are valued at amortized cost.

REPURCHASE AGREEMENTS

In connection with transactions in repurchase agreements, the Fund's
custodian takes possession of the underlying collateral securities, 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 or limited.

FEDERAL INCOME 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.

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2005

DISTRIBUTIONS

DISTRIBUTION POLICY

Pursuant to Section 852 of the Internal Revenue Code, the Fund has
designated $15,828,633 as a long-term capital gain distribution for its taxable
year ended September 30, 2005.

STATEMENT OF CASH FLOWS

INDEMNIFICATIONS

(2) SECURITIES TRANSACTIONS

The aggregate cost of purchases and proceeds from sales of investment
securities (other than short-term investments) for the year ended September 30,
2005 totaled $137,914,676 and $151,209,219 respectively.

At September 30, 2005, the total cost of securities for Federal income tax
purposes was $189,728,428. The net unrealized gain for Federal income tax
purposes on securities held by the Fund was $37,993,577 including gross
unrealized gain of $61,132,191 and gross unrealized loss of $23,138,614.

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2005

(3) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES

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 a portion of the payment of salary and provision of benefits to the Fund's
Chief Compliance Officer. During the year ended September 30, 2005 these
payments amounted to $66,017 and are included in the "other" category in the
Statement of Operations, together with insurance expenses of $55,489 incurred to
unaffiliated entities. Such expenses are the major components of "other" in the
Statement of Operations. Expenses incurred pursuant to the Agreement as well as
certain expenses paid by the Adviser are allocated in an equitable fashion to
the Fund.

An affiliate company is a company in which the Fund holds 5% or more of the
voting securities. Transactions with such companies during the year ended
September 30, 2005 were as follows:

VALUE ON VALUE ON
OCTOBER 1, SEPTEMBER 30,
ISSUER 2004 PURCHASES SALES INCOME 2005
------ ---------- --------- --------- -------- -------------

Agilix Corporation.......................... $ 380,952 $ -- $ -- $ -- $ 380,952
Concentric Medical, Inc..................... 3,782,351 637,466 -- -- 6,794,782
CytoLogix Corporation....................... 502,935 -- -- 8,847 502,935
PHT Corporation............................. 3,271,255 155,082 -- -- 3,426,337
---------- -------- --------- ------ -----------
$7,937,493 $792,548 $ -- $8,847 $11,105,006
---------- -------- --------- ------ -----------

(4) VENTURE CAPITAL AND OTHER RESTRICTED SECURITIES

The Fund may invest in venture capital and other restricted securities if
these securities would currently comprise 40% or less of net assets. The value
of these securities represents 22% of the Fund's net assets at September 30,
2005.

During the year ended September 30, 2004, restricted securities from one
issuer were exchanged for cash in connection with a corporate action, a portion
of which has been retained by the issuer in an

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2005

escrow account pending resolution of certain contingencies and whose estimated
value of $456,340 at September 30, 2005 has been determined by the Trustees. The
value of the escrow account is included in the Receivable for Investments Sold
in the Statement of Assets and Liabilities.

The following table details the acquisition date, cost, carrying value per
unit, and value of the Fund's venture capital and other restricted securities at
September 30, 2005, as determined by the Trustees of the Fund

CARRYING
ACQUISITION VALUE
SECURITY(F) DATE COST PER UNIT VALUE
----------- ---------------- ----------- -------- -----------

Agensys, Inc.
Series C Cvt. Pfd....................... 2/14/02, 9/27/05 $ 2,203,583 $ 2.95 $ 2,200,201
Agilix Corporation
Series B Cvt. Pfd....................... 11/8/01 2,009,507 0.24 380,952
Avalon Pharmaceuticals, Inc.
Series B Cvt. Pfd....................... 10/22/01 2,005,767 1.54 871,876
Convertible Note........................ 2/11/05 132,340 0.65 85,499
Restricted Common....................... 9/29/05 488,880 7.91 368,057
CardioNet, Inc.
Series C Cvt. Pfd....................... 5/3/01-3/25/03 3,699,455 3.50 3,680,001
Convertible Note........................ 8/14/05 200,000 1.00 200,000
Ceres, Inc.
Series C Cvt. Pfd....................... 12/23/98 1,000,875 6.00 1,500,000
Series C-1 Cvt. Pfd..................... 3/31/01 74,325 6.00 109,776
Series D Cvt. Pfd....................... 3/14/01 1,046,778 6.00 1,045,200
Concentric Medical, Inc.
Series B Cvt. Pfd....................... 5/7/02-1/24/03 2,219,473 1.40 4,529,410
Series C Cvt. Pfd....................... 12/19/03 999,999 1.40 1,627,906
Series D Cvt. Pfd....................... 9/30/05 637,466 1.40 637,466
Conor Medsystems, Inc.
Restricted Common....................... 10/23/03-8/6/04 1,954,131 22.33 13,814,688
Corus Pharma, Inc.
Series C Cvt. Pfd....................... 4/8/04 2,001,540 1.16 2,000,000
CytoLogix Corporation
Series A Cvt. Pfd....................... 1/13/98-7/21/99 1,077,912 0.83 265,789
Series B Cvt. Pfd....................... 1/11/01 506,622 0.83 124,922
Convertible Note........................ 5/29/02 112,224 1.00 112,224
DakoCytomation, Inc.
Restricted Common....................... 6/14/04 734,913 10.41 181,300
EPR, Inc.
Series A Cvt. Pfd....................... 3/9/94 800,331 0.01 1,778
Galileo Pharmaceuticals, Inc.
Series F-1 Cvt. Pfd..................... 8/18/00 2,001,929 0.35 326,371
Labcyte, Inc.
Series C Cvt. Pfd....................... 7/18/05 1,280,000 0.52 1,280,000

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2005

CARRYING
ACQUISITION VALUE
SECURITY(F) DATE COST PER UNIT VALUE
----------- ---------------- ----------- -------- -----------

Masimo Corporation
Series D Cvt. Pfd....................... 8/14/96 $ 910,027 $11.00 $ 1,430,000
Restricted Common....................... 3/31/98 0 0.01 1,300
Omnisonics Medical Technologies, Inc.
Series B Cvt. Pfd....................... 5/24/01 1,606,312 1.34 1,454,151
Series C Cvt. Pfd....................... 10/1/03 1,200,224 1.16 1,200,000
PHT Corporation
Series D Cvt. Pfd....................... 7/23/01 2,803,841 0.78 2,800,000
Series E Cvt. Pfd....................... 9/12/03-12/17/03 627,472 0.78 626,337
Raven biotechnologies, Inc.
Series B Cvt. Pfd....................... 12/12/00 2,001,150 0.83 1,006,060
Series C Cvt. Pfd....................... 11/26/02 1,554,400 0.83 1,554,401
Series D Cvt. Pfd....................... 6/23/05 800,000 0.33 800,000
Songbird Hearing, Inc.
Restricted Common....................... 12/14/00 2,003,239 0.01 1,390
Syntiro Heathcare Services
Restricted Common....................... 2/5/97 800,325 0.001 204
TargeGen, Inc.
Series C Cvt. Pfd....................... 8/30/05 1,840,001 1.30 1,840,001
Therion Biologics Corporation
Series A Cvt. Pfd....................... 8/20/96-10/16/96 289,847 1.22 37,722
Series B Cvt. Pfd....................... 6/22/99 600,929 1.22 195,200
Series C Cvt. Pfd....................... 9/26/01-10/15/01 1,019,568 1.22 331,606
Series C-2 Cvt. Pfd..................... 8/13/03 40,003 1.22 27,113
Sinking Fund Cvt. Pfd................... 10/18/94-4/3/96 582,505 0.01 290
Restricted Common....................... 6/30/93 251,642 0.01 1,470
TherOx, Inc.
Series H Cvt. Pfd....................... 9/11/00 2,001,626 3.80 165,217
Series I Cvt. Pfd....................... 7/8/05 384,734 3.86 384,733
Xanthus Life Sciences, Inc.
Series B Cvt. Pfd....................... 12/5/03 1,400,880 1.00 1,400,000
Zyomyx, Inc.
Series A New Cvt. Pfd................... 2/19/99-1/12/04 199,800 0.10 20,000
Series B New Cvt. Pfd................... 3/31/04 112 0.10 20
New Restricted Common................... 2/19/99-7/22/02 2,401,101 0.01 2,000
----------- -----------
$52,507,788 $50,622,631(g)
=========== ===========

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

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

(g) Represents 22% of the Fund's net assets as of September 30, 2005.

H&Q LIFE SCIENCES INVESTORS

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2005

(5) SOURCES OF NET ASSETS

The changes in the sources of net assets for the period from October 1, 2004
through September 30, 2005 are as follows:

CAPITAL PAID ACCUMULATED ACCUMULATED NET
IN ON SHARES NET NET REALIZED UNREALIZED
OF BENEFICIAL INVESTMENT GAIN ON GAIN ON TOTAL NET
INTEREST LOSS INVESTMENTS INVESTMENTS ASSETS
------------- ----------- ------------ ----------- ------------

As of October 1, 2004:........... $169,010,011 $ -- $ 5,915,775 $16,912,198 $191,837,984
For the period from October 1,
2004 through September 30,
2005:
Net investment loss............ -- (2,587,561) -- -- (2,587,561)
Net realized gains............. -- -- 26,035,268 -- 26,035,268
Distributions.................. -- -- (15,828,633) -- (15,828,633)
Value of shares issued in
reinvestment of dividends.... 8,518,606 -- -- -- 8,518,606
Increase in net unrealized gain
on investments............... -- -- -- 21,315,662 21,315,662
Reclassification for federal
income tax purposes.......... -- 2,587,547 (2,587,547) -- --
------------ ----------- ------------ ----------- ------------
As of September 30, 2005:........ $177,528,617 $ (14) $ 13,534,863 $38,227,860 $229,291,326
============ =========== ============ =========== ============

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST OR THE TRUST'S INVESTMENT ADVISER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF BENEFICIAL INTEREST OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF BENEFICIAL INTEREST BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY SUCH
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME AFTER THE DATE HEREOF. HOWEVER, IF ANY MATERIAL CHANGE
OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THE PROSPECTUS
WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.

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

TABLE OF CONTENTS

PAGE
--------

Prospectus Summary........................ 1
Trust Expenses............................ 11
Financial Highlights and Investment
Performance............................. 12
The Offer................................. 16
Use of Proceeds........................... 26
Investment Objective and Policies......... 26
Risk Factors.............................. 31
Investment Techniques..................... 39
Management of the Trust................... 41
Description of the Trust.................. 44
Portfolio Transactions and Brokerage...... 44
Net Asset Value........................... 45
Dividends and Distributions............... 47
Taxation.................................. 49
Custodian, Administrator, Transfer Agent,
Dividend Disbursing Agent, Registrar,
And Subscription Agent.................. 50
Legal Matters............................. 51
Experts................................... 51
Reports to Shareholders................... 51
Additional Information.................... 51
Special Note Regarding Forward-Looking
Statements.............................. 51
Table of Contents of Statement of
Additional Information.................. 52
Financial Statements...................... 53
Report of Independent Registered Public
Accounting Firm......................... 70

4,484,838 SHARES

H&Q LIFE SCIENCES
INVESTORS

ISSUABLE UPON EXERCISE OF

NON-TRANSFERABLE RIGHTS TO

SUBSCRIBE FOR SUCH SHARES

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

PROSPECTUS

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

August 17, 2006

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

H&Q LIFE SCIENCES INVESTORS

STATEMENT OF ADDITIONAL INFORMATION

AUGUST 17, 2006

H&Q Life Sciences Investors (the "Trust") is a diversified, closed-end,
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Trust's investment
objective is to seek long-term capital appreciation by investing primarily in
equity and related securities (including securities subject to legal or
contractual restrictions as to resale) of U.S. and foreign companies principally
engaged in the development, production or distribution of products or services
related to scientific advances in life sciences (including biotechnology,
pharmaceuticals, diagnostics, managed healthcare and medical equipment,
hospitals, healthcare and information technology and services, devices, supplies
and other healthcare-related subsectors), agriculture and environmental
management ("Life Sciences Companies"). The Trust will invest primarily in
securities of U.S. and foreign companies that are believed by the Investment
Adviser to have significant potential for above-average, long-term growth in
revenues and earnings. The Trust emphasizes investment in securities of emerging
growth Life Sciences Companies, some of which may offer limited products or
services or which are at the research and development stage with no marketable
or approved products or technologies. The securities of most emerging growth
Life Sciences Companies in which the Trust will invest are expected to be traded
in the over-the-counter market. The Trust may also invest up to 40% of its net
assets in securities subject to legal or contractual restrictions as to resale
("Restricted Securities"), including venture capital investments. Such
securities may be acquired in connection with venture capital opportunities, as
well as in private placements of public companies. No assurance can be given
that the Trust will achieve its investment objective. The Trust's investment
adviser is Hambrecht & Quist Capital Management, LLC (the "Investment Adviser").

This Statement of Additional Information ("SAI") is not a prospectus,
but should be read in conjunction with the Prospectus for the Trust dated August
17, 2006 (the "Prospectus"). This SAI does not include all information that a
prospective investor should consider before purchasing shares of beneficial
interest ("Shares") of the Trust, and investors should obtain and read the
Prospectus prior to purchasing Shares. A copy of the Prospectus may be obtained
without charge, by calling the Information Agent at (800) 870-0126. This SAI
incorporates by reference the entire Prospectus.

The Prospectus and this SAI omit certain of the information contained
in the Trust's registration statement filed with the Securities and Exchange
Commission (the "Commission"). Information about the Trust can be reviewed and
copied at the Commission's Public Reference Room in Washington, DC. Call (202)
942-8090 for information on the operation of the Public Reference Room. This
information is also available in the Commission's Internet site at
http://www.sec.gov, and copies may be obtained upon payment of a duplicating fee
by writing the Public Reference Section of the Commission, Washington, DC
20549-0102.

TABLE OF CONTENTS

Additional Information About Investment, Investment Techniques and Risks.....................2
Investment Restrictions.....................................................................10
Trustees and Officers.......................................................................11
Compensation Table for the Fiscal Year Ended September 30, 2005.............................18

The Trust...................................................................................19
Investment Adviser and Investment Advisory Agreement........................................21
Proxy Voting Policies and Procedures........................................................25
Code of Ethics..............................................................................25
Net Asset Value.............................................................................26
Portfolio Transactions and Brokerage........................................................27
Quarterly Distribution Policy...............................................................30

Tax Matters.................................................................................31
Administrator, Custodian and Transfer Agent, Dividend Disbursing Agent and Registrar........36
Financial Statements........................................................................37
Appendix A--- Trustee and Investment Adviser Proxy Voting Policies and Procedures...........38

ADDITIONAL INFORMATION ABOUT INVESTMENTS,
INVESTMENT TECHNIQUES AND RISKS

Some of the different types of securities in which the Trust may
invest, subject to its investment objective, policies and restrictions, are
described in the Prospectus under "Investment Objective and Policies" and "Risk
Factors." Additional information concerning certain of the Trust's investments,
investment techniques and investment restrictions is set forth below.

The Trust may utilize the following investment practices:

SHORT SALES

In furtherance of its objective of capital appreciation, the Trust may
effect short sales of any securities that it has the authority to purchase,
subject to the limitation that the Trust will not effect a short sale if, as a
result of such sale, the current market value of securities sold short would
exceed 25% of the Trust's net assets. Short sales are transactions in which the
Trust sells a security it does not own in anticipation of an expected decline in
the price of that security. In such a transaction, the Trust must borrow the
security to make delivery to the buyer. The Trust is obligated to replace the
borrowed security and may realize a gain if it purchases the security for
replacement at a lower price. However, the price at which the Trust purchases
the security may be more or less than the price at which the security was sold.
The Trust will incur a loss as a result of a short sale if the cost of
purchasing the borrowed security, and transaction and carrying costs associated
with the short sale, are more than the amount realized from the short sale.
Although the Trust's potential for gain as a result of a short sale is limited
to the price at which it sold the security short less the cost of borrowing the
security, its potential for loss is theoretically unlimited because there is no
limit to the cost of replacing the borrowed security.

If the Trust borrows a security in order to enter into a short sale,
the proceeds of the short sale will be retained by a broker, as security for the
borrowing to the extent necessary to meet margin requirements, until the short
position is closed out. The Trust is also required to pay to the lender of the
security the amount of any dividends or interest paid on the borrowed security.
To borrow the security, the Trust also may be required to pay a premium, which
would increase the cost of the security sold short. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any premium
or dividends or interest paid on the borrowed security that the Trust may be
required to pay in connection with the short sale.

A short sale "against the box" is a transaction in which the Trust
enters into a short sale of a security that the Trust owns or has the right to
acquire at no additional cost. The proceeds of a short sale are held by a broker
until the Trust delivers the security to close the short position, at which time
the Trust will receive the net proceeds from the sale. A short sale "against the
box" may be used to defer recognition for federal income tax purposes of any net
gain or loss in the securities while the securities are subject to such a
position. The diversification requirements applicable to the Trust to maintain
its status as a regulated investment company under the federal income tax laws
may limit the extent to which the Trust will be able to engage in short sales.
See "Tax Matters."

When the Trust engages in short sales other than "against the box," the
Trust will "cover" its position. For example, the Trust may cover by holding a
call option on the security sold short having a strike price no higher than the
price at which the security was sold or, the Trust may maintain in an account
with its custodian a segregated amount of cash or U.S. Government Securities,
high quality debt obligations or other liquid securities equal to the excess of
(1) the market value of the securities sold short at the time they were sold
short, over (2) any cash, U.S. Government Securities, high quality debt
obligations or other liquid securities required by the broker to be deposited as
collateral in connection with the short sale (not including the proceeds from
the short sale). Until the borrowed security is replaced, the Trust will
maintain this account at a level so that the amount deposited in the account,
plus the collateral deposited with the broker, will equal the current market
value of the securities sold short, but not less than the market value of the
securities at the time they were sold short.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Trust may purchase securities on a "when issued" basis or a
"delayed delivery" basis. "When-issued" securities are securities whose terms
are available and for which a market exists, but which are not available for
immediate delivery. "Delayed delivery" transactions are those in which the Trust
purchases a security but settlement of the transaction is to occur after the
customary settlement date. The Trust will enter into such transactions for the
purpose of acquiring securities that it wishes to purchase but that are not
currently available for purchase. The Trust may dispose of a commitment to
purchase prior to settlement. However, the Trust does not intend to make such
purchases for speculative purposes. When such transactions are negotiated, the
purchase price is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. During the period between
commitment and settlement, no payment is made for the securities purchased, and
no interest or dividends accrue to the Trust. However, the securities are
subject to market fluctuation, and the value at settlement may be less than the
purchase price. While awaiting settlement, the Trust will cover its position
consistent with Commission guidelines. For example, the Trust could maintain
with in segregated account cash, U.S. Government Securities, high quality debt
obligations or other liquid securities having a value at least equal to its
purchase commitments. The commitment to purchase a security for which payment
will be made on a future date may be deemed a separate security and involves a
risk of loss if the security declines prior to the settlement date, which risk
is in addition to the risk of decline of the Trust's other assets.

REPURCHASE AGREEMENT

A repurchase agreement is an arrangement under which the Trust acquires
a security subject to the obligation of the seller to repurchase and the Trust
to resell such security at a fixed time and price (representing the Trust's cost
and interest). It is the Trust's present intention to enter into repurchase
agreements for a relatively short period (usually not more than one week) only
with commercial banks and registered broker-dealers and only with respect to
U.S. Government Securities and money market instruments. The Repurchase
agreements may also be viewed as loans made by the Trust, which are
collateralized by the securities subject to repurchase. The Trust intends to
take possession of collateral, and the Investment Adviser will monitor
repurchase transactions to ensure that the value of the underlying securities
will at all times be at least equal to the total amount of the repurchase
obligation, including the interest factor. If the seller defaults the Trust
could realize a loss on the sale of the underlying security to the extent that
the proceeds of sale, including accrued interest, are less than the resale price
provided in the agreement, including interest. In addition, if the seller should
be involved in bankruptcy or insolvency proceedings, the Trust may incur delay
and costs in selling the underlying security or may suffer a loss of principal
and interest if the Trust is treated as an unsecured creditor and required to
return the underlying collateral to the seller. The Trust may not enter into
repurchase agreements with respect to more than 10% of its net assets.

LOANS OF PORTFOLIO SECURITIES

In an attempt to make productive use of its assets, the Trust may lend
its portfolio securities, subject to the limitation that the Trust will not lend
a security if, as a result of such loan, all securities then subject to loans
would exceed 20% of the Trust's net assets. Under applicable regulatory
requirements (which are subject to change), the loan collateral must, on each
business day, be at least equal to the value of the loaned securities and must
consist of cash, bank letters of credit or U.S. Government Securities. To be
acceptable as collateral, letters of credit must obligate a bank to pay amounts
demanded by the Trust if the demand meets the terms of the letter. Such terms
and the issuing bank must be satisfactory to the Trust. When the Trust lends a
security, it continues to be entitled to receive any dividends or interest on
the loaned security and also receives one or more of: (i) a negotiated loan fee;
(ii) interest on securities used as collateral for the loan; or (iii) interest
on short-term debt securities purchased with the loan collateral. Either type of
interest may be shared with the borrower of the security. The Trust may also pay
reasonable finder's, custodian and administrative fees. The terms of the Trust's
loans of securities must meet certain requirements under the Internal Revenue
Code of 1986, as amended, such as providing that the Trust may terminate the
loan upon no more than five days' notice, and must permit the Trust to reacquire
loaned securities in time to vote on any important matter. The Trust will make
such loans only to banks and dealers with which it may enter into repurchase
agreements. If the borrower fails to return the loaned security, the Trust's
risks include: (1) any costs in disposing of the collateral; (2) loss from a
decline in value of the collateral to an amount less than 100% of the securities
loaned; (3) being unable to exercise its voting or consent rights with respect
to the security; (4) any loss arising from the Trust being unable to settle a
sale of such securities in a timely manner; and (5) the inability of the Trust
to reacquire the loaned securities.

HEDGING

Although the Trust believes that use of such strategies will benefit
the Trust, if the Investment Adviser's judgment about the general direction of
securities market movements, foreign exchange rates or interest rates is
incorrect the Trust's overall performance could be poorer than if it had not
pursued those strategies. Moreover, changes in the value of the instruments that
the Trust purchases to hedge its portfolio securities may not correlate
precisely with changes in the value of the portfolio securities the Trust is
attempting to hedge. In addition, in situations where the Trust has insufficient
cash, it may have to sell assets from its portfolio to meet margin requirements
at a time when it may be disadvantageous to do so. The Trust's hedging
activities may also result in a higher portfolio turnover rate and additional
brokerage costs.

OPTIONS ON SECURITIES. The Trust may purchase and sell (or write) put
or call options on any security in which it is permitted to invest or on any
security the change in value of which has positive or negative correlation with
the changes in value of the Trust's portfolio securities.

PURCHASING PUT AND CALL OPTIONS. By purchasing a call option on a
security, the Trust will obtain the right to buy the securities underlying the
option from its counterparty at a specified exercise price prior to or at the
expiration of the option. The Trust might for example, purchase call options in
anticipation of an increase in the price of the security. Conversely, when the
Trust purchases a put option on a security it gives the Trust the right to sell
the securities underlying the option to its counterparty at the exercise price
prior to or at the expiration of the option. The Trust might for example,
purchase put options in anticipation of a decline in the market value of
securities in its portfolio (or which the Trust intends to or has the right to
acquire).

In case of either put or call options that it has purchased, if the
option expires without being sold or exercised, the Trust will experience a loss
in the amount of the option premium plus any related commissions.

WRITING PUT AND CALL OPTIONS. When the Trust sells (writes) put and
call options, it receives a premium as the writer of the option. By selling
(writing) a call option, the Trust will obligate itself to sell the securities
underlying the option to its counterparty at the specified exercise price prior
to or at the expiration of the option if it is assigned an exercise notice. If
the price of the underlying securities at expiration of the option is below the
exercise price, the Trust will retain the full amount of the option premium.
That amount, less the commission paid for the option, provides a partial hedge
against any decline that may have occurred in the Trust's portfolio securities.
During the term of the option, however, a covered call writer has, in return for
the premium on the option, given up the opportunity for capital appreciation
above the exercise price of the option if the value of the underlying securities
increases, but has retained the risk of loss should the price of the underlying
security decline. Conversely, by selling (writing) a put option, the Trust
obligates itself to buy the securities underlying the option from its
counterparty at the exercise price prior to or at the expiration if it is
assigned an exercise notice. Writing a put option constitutes a partial hedge
against increasing prices of securities the Trust intends to purchase. If the
price of the securities at the expiration of the option is higher than the
exercise price, the Trust will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of securities
which the Trust intends to purchase. A secured put writer, however, retains the
risk of loss should the market value of the underlying security decline below
the exercise price of the option, less the premium received on the sale of the
option.

CLOSING PURCHASE OR SALE TRANSACTIONS. Prior to exercise or expiration,
an option position can be terminated only by entering into a closing purchase or
sale transaction. Closing purchase transactions are ordinarily effected to
realize a profit on an outstanding call option, to prevent an underlying
security from being called, to permit the sale of an underlying security or to
enable another call option on the underlying security (with either a different
exercise price or expiration date or both) to be written. If the Trust is not
able to enter into a closing transaction or an offsetting position, it will be
required to maintain the securities subject to the call, or the collateral
underlying the put, even though it might not be advantageous to do so, until a
closing transaction can be entered into or the option is exercised or expires.

The Trust's ability to close out its position as a writer of an option
is dependent upon the existence of a liquid secondary market. There is no
assurance that a liquid market will exist, particularly in the case of OTC
options, since OTC options will generally be closed out only by entering into a
closing transaction with a dealer. In the case of OTC options, the Trust is also
subject to the credit risk associated with its counterparties.

STOCK INDEX OPTIONS. The Trust may purchase and sell (write) options on
stock indices ("index options"). Index options are similar to options on
securities except that, rather than taking or making delivery of securities
underlying the option at a specified price upon exercise, an index option gives
the holder the right to receive cash upon exercise of the option if the level of
the stock index upon which the option is based is greater, in the case of a
call, or less, in the case of a put, than the exercise price of the option.

The Trust will enter into transactions in index options for a number of
reasons including, for example, to hedge against adverse price movements in the
stock market generally or in particular market segments. If the Investment
Adviser anticipates a general market decline, the Trust could purchase a stock
index put option. If the expected market decline materialized, the resulting
decrease in the value of the Trust's portfolio securities would be offset to the
extent of the increase in the value of the put option. If the Investment Adviser
anticipates a market rise, the Trust may purchase a stock index call option to
enable the Trust to participate in the rise until the Trust completes
anticipated purchases of securities. Purchasing and selling stock index options
may also enable the Investment Adviser to achieve changes in equity positions
more efficiently. Stock index options involve risks similar to those associated
with options on securities. Because exercises of stock index options are settled
in cash, however, call writers such as the Trust cannot provide in advance for
their potential settlement obligations by acquiring and holding the underlying
securities.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

FUTURES CONTRACTS. The Trust may enter into contracts for the purchase
or sale for future delivery (a "futures contract") of baskets of securities,
financial indices, financial instruments or foreign currencies. The Trust would
purchase or sell futures contracts to attempt to protect the value of its
securities from market-wide price movements and fluctuations in interest or
foreign exchange rates without actually buying or selling securities or foreign
currency.

A "sale" of a futures contract (or a "short" futures position) means
the assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time.

OPTIONS ON FUTURES CONTRACTS. Upon exercise of a call option, the Trust
receives a long position in the underlying futures contract. As with the
purchase of futures contracts, when the Trust is not fully invested it may
purchase a call option on a futures contract to hedge against a market advance
in which it would not otherwise participate. The purchase of a put option on a
futures contract is similar in some respects to the purchase of protective put
options on portfolio securities. Upon exercise of a put option, the Trust
receives a short position in the underlying futures contract. For example, the
Trust may purchase a put option on a futures contract to hedge the Trust's
portfolio against the risk of declining securities values. The writing of a call
option on a futures contract constitutes a partial hedge against declining
prices of the components of the futures contract, whereas the writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the financial instrument which is deliverable upon termination of the
futures contracts. If the options expire unexercised, the Trust will retain the
full amount of the option premium, which provides a partial hedge against any
increase in the price of securities which the Trust intends to purchase. If a
put or call option the Trust has written is exercised, the Trust will incur a
loss which will be reduced by the amount of the premium it receives.

MARGIN REQUIREMENTS. At the time a futures contract is purchase or
sold, the Trust must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin on U.S. exchanges may range
from approximately 3% to approximately 15% of the value of the securities or
commodities underlying the contract. Under certain circumstances, however, such
as periods of high volatility, the Trust may be required by an exchange to
increase the level of its initial margin payment. Additionally, initial margin
requirements may be increased generally in the future by regulatory action. An
outstanding futures contract is valued daily and the payment in cash of
"variation margin" may be required, a process known as "mark to the market".

REGULATORY LIMITATIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS ON
FUTURES CONTRACTS. Regulations of the CFTC applicable to the Trust currently
require that all of the Trust's futures and options on futures transactions
constitute bona fide hedging transactions or be undertaken incidental to the
Trust's activities in the securities markets. In accordance with CFTC
regulations, the Trust may not purchase or sell futures contracts or options
thereon if immediately thereafter the sum of the amounts of initial margin
deposits on the Trust's existing futures and options on futures positions and
premiums paid for options on futures would exceed 5% of the fair market value of
the Trust's total assets. The Investment Adviser reserves the right to comply
with such different standard as may be established by CFTC rules and regulations
with respect to the purchase or sale of futures contracts or options thereon.

CONSIDERATIONS CONCERNING FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. Futures contracts entail special risks. The ordinary spreads between
values in the cash and futures markets, due to differences in the character of
these markets, are subject to distortions relating to (1) investor's obligations
to meet additional variation margin requirements, (2) decisions to make or take
delivery, rather than entering into offsetting transactions and (3) the
difference between margin requirements in the securities markets and margin
deposit requirements in the futures markets. The possibility of such distortion
means that a correct forecast of general market, foreign exchange rate or
interest rate trends by the Investment Adviser may still not result in a
successful transaction. The Trust's ability to establish and close out positions
in futures contracts and options on futures contracts will be subject to the
development and maintenance of a liquid market. Although the Trust generally
will purchase or sell only those futures contracts and options thereon for which
there appears to be a liquid market, there is no assurance that a liquid market
on an exchange will exist for any particular futures contract or option thereon
at any particular time. Under certain circumstances, exchanges may establish
daily limits in the amount that the price of a futures contract or related
options contract may vary either up or down from the previous day's settlement
price. Once the daily limit has been reached in a particular contract, no trades
may be made that day at a price beyond that limit.

EXCHANGE RATE RISK

The Trust may enter into forward foreign currency exchange contracts
("forward contracts") and may purchase and sell (or write) exchange-traded or
OTC options on currencies, foreign currency futures contracts and options on
foreign currency futures contracts to protect against a decline in the U.S.
Dollar equivalent value of its foreign currency portfolio securities or the
payments thereon that may result from an adverse change in foreign currency
exchange rates. The accurate projection of short-term currency market movements
is extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.

FORWARD CONTRACTS. A forward contract obligates one party to purchase
and the other party to sell a definite amount of a given foreign currency at
some specified future date. In some circumstances the purchase or sale of
appropriate forward contracts may help offset declines in the U.S. Dollar
equivalent value of the Trust's foreign currency denominated assets and income
available for distribution to the Trust's shareholders that result from adverse
changes in the exchange rate between the U.S. Dollar and the various foreign
currencies in which the Trust's assets or income may be denominated. The U.S.
Dollar equivalent value of the principal of and rate of return on foreign
currency denominated securities will decline if the exchange rate of the U.S.
Dollar rises in relation to that currency. Such declines could be partially or
completely offset by an increase in the value of a forward contract on that
foreign currency.

While the use of foreign currency forward contracts may protect the
Trust against declines in the U.S. Dollar equivalent value of its assets, their
use will reduce the possible gain from advantageous changes in the value of the
U.S. Dollar against particular currencies in which their assets are denominated.
Moreover, the use of foreign currency forward contracts will not eliminate
fluctuations in the underlying U.S. Dollar equivalent value of the prices of or
rates of return on the assets held in the portfolio and the use of such
techniques will subject the Trust to certain risks.

The foreign exchange markets can be highly volatile, subject to sharp
price fluctuations. In addition, trading forward contracts can involve a degree
of leverage. As a result, relatively small movements in the rates of exchange
between the currencies underlying a contract could result in immediate and
substantial losses to the Trust. Trading losses that are not offset by
corresponding gains in assets being hedged could sharply reduce the value of the
Trust's portfolio.

OPTIONS ON FOREIGN CURRENCIES. Similarly, the Trust may purchase and
sell (or write) put and call options on foreign currencies to protect against a
decline in the U.S. Dollar equivalent value of its portfolio securities or
payments due thereon or a rise in the U.S. Dollar equivalent cost of securities
that it intends to purchase. A foreign currency put option grants the holder the
right, but not the obligation, at a future date to sell a specified amount of a
foreign currency to its counterparty at a predetermined price. Conversely, a
foreign currency call option grants the holder the right, but not the
obligation, to purchase at a future date a specified amount of a foreign
currency at a predetermined price. Where currency exchange rates do not move in
the direction or to the extent anticipated, however, the Trust could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.

As with options on securities or futures contracts, the Trust may write
options on foreign currencies in order to receive a premium that may wholly or
partially offset any declines in the value of its portfolio securities
denominated in foreign currencies. When the Trust writes options on foreign
currencies, the Trust also may be required to forego all or a portion of the
benefits that might otherwise have been obtained from favorable movements in
exchange rates.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS ON FOREIGN
CURRENCIES. Buyers and sellers of foreign currency futures contracts are subject
to the same risks that apply to the use of futures generally. In addition, there
are risks associated with foreign currency futures contracts and their use as
hedging devices similar to those associated with options on foreign currencies
described above. Further, settlement of a foreign currency futures contract must
occur within the country issuing the underlying currency. Thus, the Trust must
accept or make delivery of the underlying foreign currency in accordance with
any U.S. or foreign restrictions or regulations regarding the maintenance of
foreign banking arrangements by U.S. residents and may be required to pay any
fees, taxes or charges associated with such delivery that are assessed in the
country of the underlying currency.

Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts is
relatively new. The ability to establish and close out positions in such options
is subject to the maintenance of a liquid secondary market. To mitigate this
problem, the Trust will not purchase or write options on foreign currency
futures contracts unless and until, in the Investment Adviser's opinion, the
market for such options has developed sufficiently that the risks in connection
with such options are not greater than the risks in connection with transactions
in the underlying foreign currency futures contracts. Compared to the purchase
or sale of foreign currency futures contracts, the purchase of call or put
options thereon involves less potential risk to the Trust because the maximum
amount at risk is the premium paid for the option (plus transaction costs).
However, there may be circumstances when the purchase of a call or put option on
a foreign currency futures contract would result in a loss, such as when there
is no movement in the price of the underlying currency or futures contract,
whereas use of the underlying futures contract would not result in a loss.

COVERAGE REQUIREMENTS

All options on securities, securities indices, other indices and
foreign currencies written by the Trust are required to be covered. When the
Trust writes a call option during the life of the option, the Trust may own or
have the contractual right to acquire the securities or foreign currency subject
to the option, or may maintain with the Trust's custodian in a segregated
account cash, U.S. Government Securities, other appropriate high quality liquid
debt obligations or other liquid securities in an amount at least equal to the
market value of the securities or foreign currency underlying the option or may
utilize any other instrument or transaction consistent with Commission
guidelines. When the Trust writes a put option, the Trust may maintain with the
Trust's custodian in a segregated account cash, U.S. Government Securities,
other appropriate high quality debt obligations or other liquid securities in an
amount at least equal to the exercise price of the option or may utilize any
other instrument or transaction consistent with Commission guidelines.

All futures and forward currency contracts purchased or sold by the
Trust are also required to be covered. When the Trust purchases a futures or
forward currency contract, the Trust will maintain with the Trust's custodian in
a segregated account an amount of cash, U.S. Government Securities, other
appropriate high quality liquid debt obligations or other liquid securities so
that the amount so segregated, plus the amount of initial and variation margin
held in the account of its broker, if applicable, equals the market value of the
futures or forward currency contract or may utilize any other instrument or
transaction consistent with Commission guidelines.

When the Trust sells a futures or forward currency contract, during the
life of the futures or forward currency contract, the Trust will own or have the
contractual right to acquire the securities or foreign currency subject to the
futures or forward currency contract, or will maintain with the Trust's
custodian in a segregated account cash, U.S. Government Securities, other
appropriate high quality liquid debt obligations or other liquid securities in
an amount at least equal to the market value of the securities or foreign
currency underlying the futures or forward currency contract or may utilize any
other instrument or transaction consistent with Commission guidelines.

If the market value of the contract moves adversely to the Trust, or if
the value of the securities in the segregated account declines, the Trust will
be required to deposit additional cash or securities in the segregated account
at a time when it may be disadvantageous to do so.

INVESTMENT RESTRICTIONS

The Trust has adopted certain fundamental restrictions, which, like its
investment objective, may not be changed without the affirmative vote of the
holders of a majority of the Trust's outstanding Shares. As used in this
Statement of Additional Information, a "majority of the Trust's outstanding
Shares" means the lesser of (i) 67% of the Shares represented at a meeting at
which more than 50% of the outstanding Shares are represented or (ii) more than
50% of the outstanding Shares. The Trust may not:

1. With respect to 75% of its total assets, invest in securities of any one
issuer if immediately after and as a result of such investment more than 5% of
the total assets of the Trust, taken at market value, would be invested in the
securities of such issuer, or purchase more than 10% of the outstanding voting
securities of any one issuer. These restrictions do not apply to investments in
U.S. Government Securities.

2. Purchase or sell physical commodities or physical commodities contracts.

3. Purchase or sell real estate; provided that the Trust may invest in
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein.

4. Underwrite securities of other issuers, except to the extent that, in
connection with the disposition of its portfolio securities, the Trust may be
deemed an underwriter under federal or state securities laws.

5. Issue senior securities or borrow amounts in excess of 10% of its net assets
at the time of borrowing, and then only from banks (except in the case of
reverse repurchase agreements) as a temporary measure for extraordinary or
emergency purposes or for the repurchase of its securities. The Trust will not
repurchase its securities during periods when it has outstanding borrowings in
excess of 5% of its net assets. The Trust will not borrow for investment
purposes.

6. Make loans of money, which for the purposes of this restriction does not
include the purchase of debt obligations in which the Trust may invest
consistent with its investment objective and policies. The Trust reserves the
authority to enter into repurchase agreements and to make loans of its portfolio
securities to qualified institutional investors, brokers, dealers, banks or
other financial institutions, so long as the terms of the loans are not
inconsistent with the requirements of the Investment Company Act. Such loans of
portfolio securities may not exceed an aggregate amount of 20% of the Trust's
net assets.

7. Purchase securities of other investment companies, if (a) more than 10% of
its total assets would be invested in securities of other investment companies,
(b) more than 5% of its total assets would be invested in the securities of any
one investment company, or (c) the Trust would own more than 3% of any other
investment company's securities.

8. Invest less than 25% of its net assets in securities of Life Sciences
Companies in the healthcare industry, except that, during periods in which the
Investment Adviser believes the healthcare industry is affected by adverse
economic conditions, the Trust may temporarily have less than 25% of the value
of its net assets so invested.

Except as otherwise noted, all percentage limitations set forth above
apply immediately after a purchase and a subsequent change in the applicable
percentage resulting from market fluctuations does not require elimination of
any security from the portfolio. For purposes of the investment restriction that
prohibits the Trust from purchasing more than 10% of the outstanding voting
securities of any issuer indicated in item number 1 above, the Board of Trustees
has determined that for purposes of that restriction, the Trust will consider
outstanding voting securities of an issuer to include any security of the issuer
that entitles the owner or holder to vote for the election of directors of the
issuer (a "voting security") and any other outstanding security of the issuer
that is exercisable for or convertible into a voting security within 60 days
from the date of the calculation.

TRUSTEES AND OFFICERS

The Trust's Declaration of Trust provides that the Trust will indemnify
Trustees and officers and may indemnify employees and agents of the Trust
against liabilities and expenses incurred in connection with claims or
litigation in which they may be involved because of their offices with the
Trust. However, nothing in the Declaration of Trust or the By-laws of the Trust
protects or indemnifies a Trustee, officer, employee or agent against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.

The names of the Trustees and officers of the Trust, their addresses,
age and principal occupations during the past five years, and, in the case of
the Trustees, their positions with certain other organizations and publicly-held
companies, are provided in the tables below. Trustees that are deemed
"interested persons" (as that term is defined in Section 2(a)(19) of the
Investment Company Act) of the Trust or the Investment Adviser are included in
the table titled "Interested Trustees." Trustees who are not interested persons
as described above are referred to as "Independent Trustees". The Trust and H&Q
Healthcare Investors ("HQH"), another closed-end investment company advised by
the Investment Adviser, are the only two portfolios in the Fund Complex.

TRUSTEES

INDEPENDENT TRUSTEES:
Lawrence S. Lewin rustee (since 1992) Executive Consultant (since 1999) of 2
Age:68 nd Chairman (since The Lewin Group (healthcare public
000) policy and management consulting), a
subsidiary of Quintiles Transnational
Corp.; Director (since 2003) of Medco
Health Solutions, Inc.; Director (since
2001) of CardioNet, Inc.(mobile cardiac
outpatient telemetry); Director (since
2005) of Care Fusion (provides
solutions for patient care providers)
T and Director (since 1984) of
a Intermountain Healthcare (non-profit
2 organization).
Robert P. Mack rustee (since 1992) Orthopedic Surgeon at Orthopedic 2
Age:70 T Associates of Aspen (since 2000).

POSITION(S) HELD NUMBER OF
WITH TRUST, TERM PORTFOLIOS IN
OF OFFICE (2) AND TRUST COMPLEX
NAME, ADDRESS (1) AND LENGTH OF TIME PRINCIPAL OCCUPATION(S) DURING PAST 5 OVERSEEN BY
AGE SERVED YEARS AND OTHER DIRECTORSHIPS HELD TRUSTEE
--------------------------- ------------------------ ----------------------------------------- ---------------------
Eric Oddleifson Trustee (since 1992) Self-employed Consultant (since 2
Age:71 November 2005); Investment Committee
Chair (from 2003-2005) and
Partner (from 1997-2003) of
GMO Renewable Resources LLC
(timber investment
management).
Oleg M. Pohotsky rustee (since 2000) Self-employed Financial Consultant 2
Age:59 (since 2002). Senior Vice President
(from 1991-2001) of FAC/Equities, a
T division of First Albany
Corporation (investment
bank).
Uwe E. Reinhardt, Ph.D. rustee (since 1992) rofessor of Economics (since 1968) at 2
Age:68 Princeton University; Director (since
P000) of Triad Hospitals, Inc.;
2irector of Boston Scientific (since
D002); Director of Amerigroup, Inc.
2since 2002); Director of Duke
T (niversity (since 2001);
Director of Uhe Duke
University Health System
Tsince 2001) and Director
of the (ational Bureau of
Economic Research
Lucinda Stebbins, CPA Nsince 2002).
Age: 60 rustee (since 2006) ( 2
elf-employed Financial Consultant
Ssince 2004); Director of
Deutsche (sset Management
(2002-2004); Senior Aice
President Scudder
Investments V2000-2002).
T (
Henri A. Termeer rustee (since 1992) hairman (since 1988), Chief Executive 2
Age:60 fficer (since 1985) and President
since 1983) of Genzyme Corporation
human healthcare products); Director
Csince 1987) of ABIOMED, Inc.; Director
O1996-2002) of Diaqirl.
(
(
(
T (

INTERESTED TRUSTEES:
POSITION(S) HELD NUMBER OF
WITH TRUST, TERM PORTFOLIOS IN
OF OFFICE (2) AND TRUST COMPLEX
NAME, ADDRESS (1) AND LENGTH OF TIME PRINCIPAL OCCUPATION(S) DURING PAST 5 OVERSEEN BY
AGE SERVED YEARS AND OTHER DIRECTORSHIPS HELD TRUSTEE
--------------------------- ------------------------ ----------------------------------------- ---------------------
Daniel R. Omstead, Ph.D. President (since President of HQH and HQL (since 2001); 2
(3) 001); Trustee (since Trustee of HQH and HQL (since 2003);
Age:53 003) President, Chief Executive Officer and
Managing Member of Hambrecht & Quist
Capital Management LLC (since 2002);
President and Chief Executive Officer
(2001-2002) and Managing Director
(2000-2002) of Hambrecht & Quist
Capital Management, Inc.; Director
(since 2003) of Concentric Medical,
Inc.; President and Chief Executive
2 Officer (from 1998-2000) of
2 Reprogenesis, Inc. (biotech company).

(1) The address for each Trustee is c/o the Trust at the Trust's address as
set forth above. (2) Each Trustee currently is serving a three year term.
(3) Trustee considered to be an "interested person" within the meaning of
the Investment Company Act of 1940, as amended (the "1940 Act") through
position or affiliation with Hambrecht & Quist Capital Management, LLC, the
Trust's investment adviser. Trustee also serves as Executive Officer. Each
Officer serves in such capacity for an indefinite period of time at the
pleasure of the Trustees.

EXECUTIVE OFFICERS WHO ARE NOT TRUSTEES

(1) The address for each Executive Officer is c/o the Trust at the Trust's
address as set forth above.

(2) Each Officer serves in such capacity for an indefinite period of time
at the pleasure of the Trustees.

OWNERSHIP OF SECURITIES

As of March 15, 2006, the Trust's Trustees and executive officers, as a
group, beneficially owned less than 1% of the Trust's outstanding Shares. The
information as to beneficial ownership of securities which appears below is
based on statements furnished to the Trust by its Trustees and executive
officers.

To the knowledge of the Trust, as of August 7, 2006, there were no
control persons of the Trust and no persons were known to own, either
beneficially or of record, 5% or more of the Shares of the Trust.

As of March 15, 2006, the dollar range of equity securities owned
beneficially by each Trustee in the Trust and in any registered investment
companies overseen by the Trustee within the same family of investment companies
as the Trust is as follows:

INDEPENDENT TRUSTEES

AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY TRUSTEE
DOLLAR RANGE OF EQUITY IN FAMILY OF INVESTMENT
NAME OF DIRECTOR SECURITIES IN THE TRUST COMPANIES
-------------------------------- --------------------------------------- -------------------------------------------
Lawrence S. Lewin $10,0001-$50,000 $50,001-$100,000
Robert P. Mack, M.D. None $50,001-$100,000
Eric Oddleifson $50,001-$100,000 Over $100,000
Oleg M. Pohotsky None None
Uwe E. Reinhardt, Ph.D. $1-$10,000 $10,001-$50,000
Lucinda H. Stebbins, CPA None None
Henri A. Termeer None None

INTERESTED TRUSTEES

Dr. Omstead and Ms. Eckert serve as executive officers of the Trust. As of
December 31, 2005, the executive officers of the Trust beneficially owned 3,999
Shares of the Trust, or less than 1% of the Shares outstanding on that date.

STANDING COMMITTEES

AUDIT COMMITTEE. The Trust has an Audit Committee comprised solely of
Trustees who are not "interested persons" (as that term is defined in Section
2(a)(19) of the Investment Company Act) of the Trust or the Investment Adviser
and who are "independent" as defined in the New York Stock Exchange ("NYSE")
Listing Standards (each an "Independent Trustee"). The Trust's Board of Trustees
has adopted a written charter for the Audit Committee. The principal purpose of
the Trust's Audit Committee is to assist the Board of Trustees in fulfilling its
responsibility to oversee the integrity of the Trust's financial statements and
the Trust's compliance with legal and regulatory requirements to oversee
management's conduct of the Trust's financial reporting process, including
reviewing the financial reports and other financial information provided by the
Trust, the Trust's systems of internal accounting and financial controls and the
annual independent audit process.

For the Trust, the Audit Committee's role is one of oversight, and it
is recognized that the Trust's management is responsible for preparing the
Trust's financial statements and that the outside auditor is responsible for
auditing those financial statements. Although the Audit Committee member must be
financially literate and one member must have accounting or financial management
expertise (as determined by the Board of Trustees in its business judgment),
Audit Committee members are not professionally engaged in the practice of
accounting or auditing and are not experts in the fields of accounting or
auditing, including with respect to auditor independence. Audit Committee
members rely, without independent verification, on the information provided to
them and on the representations made by management and the Trust's independent
public accountants.

The members of the Trust's Audit Committee are Messrs. Oddleifson,
Pohotsky, Reinhardt and Ms. Stebbins. Mr. Pohotsky is the Chairman of the
Trust's Audit Committee. The Trust's Audit Committee held five meetings during
the fiscal year ended September 30, 2005.

GOVERNANCE COMMITTEE. The Trust has a Governance Committee comprised
solely of Independent Trustees who are "independent" as defined in the NYSE
Listing Standards. The Trust's Board of Trustees has adopted a written charter
for the Governance Committee. The Trust's Governance Committee's mission under
its charter is to review, evaluate, and enhance the effectiveness of the Trust's
Board of Trustees in its role in governing the Trust and to oversee management
of the Trust in accordance with the Corporate Governance Guidelines, which have
been adopted by the Trust's Board of Trustees.

The Trust's Governance Committee shall review, discuss and make
recommendations to the Board of Trustees relating to those issues that pertain
to the effectiveness of the Board of Trustees in carrying out its
responsibilities in governing each Trust and overseeing each Trust's management.
The members of the Trust's Governance Committee are Messrs. Lewin, Termeer, Dr.
Mack and Ms. Stebbins. Mr. Lewin is the Chairman of the Trust's Governance
Committee. The Trust's Governance Committee met twice during the fiscal year
ended September 30, 2005.

NOMINATING COMMITTEE. The Trust has a Nominating Committee comprised
solely of Independent Trustees who are "independent" as defined in the NYSE
Listing Standards. The Trust's Board of Trustees has adopted a written charter
for the Nominating Committee. The Nominating Committee charter is not available
on the Trust's website, but was included as Exhibit A to the Trust's Joint Proxy
dated May 10, 2006.

The charter of the Nominating Committee provides that each prospective
trustee candidate have a college degree or equivalent business experience, and
that each candidate is not serving in a similar capacity on the board of a
registered investment company which (i) is not sponsored or advised by the
Trust's investment adviser or its affiliates and (ii) the Board in its
discretion has determined to be competitive with the Fund taking into account
such registered investment company's investment mandate. The Trust's Nominating
Committee may also take into account other factors when considering and
evaluating potential trustee candidates, including but not limited to: (i)
availability and commitment to attend meetings and perform responsibilities of
the Board; (ii) relevant industry and related experience; (iii) educational
background; (iv) financial expertise; (v) the candidate's ability, judgment and
expertise; and (vi) the overall diversity of the Board's composition.

The Trust's Nominating Committee may identify prospective trustees from
any reasonable source, including, but not limited to, the consultation of
third-party trustee search services. The Trust's Nominating Committee will
consider potential trustee candidates recommended by shareholders, provided that
the proposed candidates (i) satisfy any minimum qualifications of the Trust for
its trustees; (ii) are not "interested persons" (as that term is defined in
Section 2(a)(19) of the 1940 Act) of the Trust or the Investment Adviser; and
(iii) are "independent" as defined in the NYSE Listing Standards. In order to be
evaluated by the appropriate Committee, trustee candidates recommended by
shareholders must also meet certain eligibility requirements as set out in the
Committee's Charter. Other than those eligibility requirements, the Committee
shall not evaluate shareholder trustee nominees in a different manner than other
nominees. The standard of the Committee is to treat all equally qualified
nominees in the same manner.

All shareholder recommended nominee submissions must be received by the
Trust by the deadline for submission of any shareholder proposals which would be
included in the Trust's proxy statement for the next annual meeting of the
Trust. Each nominating shareholder or shareholder group must meet the
requirements stated in the Nominating Committee Charter. A nominating
shareholder or shareholder group may not submit more than one nominee per year.
When nominating a trustee candidate, shareholders must include in their notice
to the Trusts' Secretary: (i) the shareholder's contact information; (ii) the
trustee candidate's contact information and the number of fund shares owned by
the proposed candidate; (iii) all information regarding the candidate that would
be required to be disclosed in solicitations of proxies for elections of
trustees required by Regulation 14A of the Securities Act of 1934, as amended;
and (iv) a notarized letter executed by the trustee candidate, stating his or
her intention to serve as nominee and be named in the Trust's proxy statement,
if nominated by the Board of Trustees, and to be named as a trustee if so
elected. Once a nomination has been timely received in proper form, the nominee
will be asked to complete an eligibility questionnaire to assist the Trust in
assessing the nominee's qualifications as a potential Independent Trustees and
as someone who is "independent" under the NYSE Listing Standards. The Nominating
Committee will make such determinations in its sole discretion and such
determinations shall be final.

The members of each Trust's Nominating Committee are Messrs. Lewin and
Termeer and Dr. Mack. Mr. Lewin is the Chairman of each Trust's Nominating
Committee. The Trust's Nominating Committee met one time during the fiscal year
ended September 30, 2005.

VALUATION COMMITTEE. The Board has delegated to the Trust's Valuation
Committee general responsibility for determining, in accordance with the Trust's
valuation procedures, the value of assets held by the Trust on any day on which
the net asset value per share is determined. The Valuation Committee may
appoint, and has appointed, a Sub-Committee made up of employees and officers of
the Investment Adviser, to deal in the first instance with day to day valuation
decisions, subject to oversight by the Valuation Committee. The Valuation
Committee shall meet as often as necessary to ensure that each action taken by
the Sub-Committee is reviewed within approximately a calendar quarter of the
occurrence. In connection with its review, the Valuation Committee shall ratify
or revise the pricing methodologies authorized by the Sub-Committee since the
last meeting of the Valuation Committee. The Valuation Committee is charged with
the responsibility of determining the fair value of the Trust's securities or
other assets in situations set forth in the Trust's valuation procedures.

The members of the Trust's Valuation Committee are Messrs.
Oddleifson and Pohotsky and Dr. Mack. The Trust's Valuation Committee held four
meetings during the fiscal year ended September 30, 2005.

QUALIFIED LEGAL COMPLIANCE COMMITTEE. The Trust has a Qualified Legal
Compliance Committee ("QLCC") comprised solely of Independent Trustees. The
Trust's Board of Trustees has adopted a written charter for the QLCC. The
principal purpose of the Trust's QLCC is to review and respond to reports of
Evidence of a Material Violation (as defined in the QLCC charter). Reporting
Evidence of a Material Violation is required under the Standards of Professional
Conduct for Attorneys adopted by the Commission under the Sarbanes-Oxley Act of
2002 (the "Standards"). Under the Standards, if an attorney appearing and
practicing before the Commission in the representation of an issuer, such as the
Trust, becomes aware of Evidence of a Material Violation by the issuer or by any
officer, trustee, employee or agent of the issuer, the Standards provide for the
attorney to report such evidence to the issuer's QLCC forthwith. In discharging
its role, the QLCC is granted the power to investigate any Evidence of a
Material Violation brought to its attention with full access to all books,
records, facilities and personnel of the Trust and the power to retain outside
counsel, auditors or other experts for this purpose.

The members of the Trust's QLCC are Messrs. Lewin, Oddleifson and Pohotsky.
Mr. Pohotsky is the Chairman of the Trust's QLCC. The Trust's QLCC did not meet
during the fiscal year ended September 30, 2005.

COMPENSATION OF TRUSTEES

For the fiscal year ended September 30, 2005, the Trust paid its
Independent Trustees a retainer fee of $20,000. The Trust currently pays each
Independent Trustee $500 for each Board and Committee meeting attended in person
and $250 for each Board and Committee meeting attended by phone. The Chairman of
the Board of Trustees, the Chairman of the Audit Committee and the Chairman of
the Valuation Committee of the Trust each receives an additional annual fee of
$2,500. Currently, the Chairman of the Nominating Committee and the Chairman of
the Governance Committee receives an additional fee of $1,250. Independent
Trustees are also reimbursed for travel expenses incurred in connection with
attending such meetings. For the fiscal year ended September 30, 2005, the
Independent Trustees as a group received $155,958 for fees and reimbursed
expenses. The Trust did not pay any additional compensation to the Trustees for
the fiscal year ended September 30, 2005. The Trust has entered into a Services
Agreement (the "Agreement") with the Investment Adviser. Pursuant to the terms
of the Agreement, the Trust reimburses the Investment Adviser for a portion of
payment of salary and provision of benefits to the Trust's Chief Compliance
Officer. During the year ended September 30, 2005 these payments amounted to
$66,017. Trustees and officers of the Trust other than the Chief Compliance
Officer, who hold positions with the Investment Adviser, receive indirect
compensation from the Trust in the form of the investment advisory fee paid to
the Investment Adviser. The following table sets forth information regarding
compensation of Trustees by the Trust for the year ended September 30,2005, but
does not include expenses.

COMPENSATION TABLE
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005

PENSION OR ESTIMATED TOTAL
RETIREMENT ANNUAL COMPENSATION
AGGREGATE ENEFITS ACCRUED BENEFITS FROM TRUST AND
COMPENSATION BS PART OF TRUST UPON TRUST COMPLEX
NAME OF TRUSTEE FROM TRUST A EXPENSE RETIREMENT PAID TO TRUSTEES
----------------------------------- ------------------ ------------------ ------------------- ------------------

INDEPENDENT TRUSTEES:
Lawrence S. Lewin $ 27,000 N/A N/A $ 54,000
Robert P. Mack, M.D. $ 24,250 N/A N/A $ 48,500
Eric Oddleifson $ 27,000 N/A N/A $ 54,000
Oleg M. Pohotsky $ 31,000 N/A N/A $ 62,000
Uwe E. Reinhardt, Ph.D. $ 22,000 N/A N/A $ 44,000
Henri A. Termeer $ 22,000 N/A N/A $ 44,000
INTERESTED TRUSTEE:
Daniel R. Omstead, Ph.D. $ 0 N/A N/A $ 0

THE TRUST

The Trust's capitalization consists of an unlimited number of Shares,
$.01 par value. Each Share represents an equal proportionate beneficial interest
in the Trust and, when issued and outstanding, will be fully paid and
non-assessable by the Trust. Upon any liquidation of the Trust, Shareholders
will be entitled to share pro rata in the net assets of the Trust available for
distribution after paying or adequately providing for the payment of all
liabilities. The Trust will send annual and semi-annual financial statements to
Shareholders and may also issue more abbreviated interim reports to update
Shareholders on a quarterly basis. The Trust will hold annual meetings of its
Shareholders in accordance with the provisions of the Trust's By-laws and the
rules of the New York Stock Exchange ("NYSE").

The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust under
certain circumstances may be determined to be personally liable as partners for
the Trust's obligations. However, the Trust's Declaration of Trust contains an
express disclaimer of shareholder liability for the acts or obligations of the
Trust and provides for indemnification and reimbursement of expenses out of the
Trust's property for any shareholder held personally liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring financial loss on
account of a Trust liability is limited to circumstances in which the Trust is
unable to meet its obligations from the liquidation of its portfolio
investments.

The overall management of the Trust is vested in the Board. The Board
approves all significant agreements between the Trust and persons or companies
furnishing services to it, including the Trust's agreements with its Investment
Adviser, Administrator, Custodian, any foreign sub-custodians, Registrar and
Transfer Agent. The management of the day-to-day operations of the Trust is
delegated to its officers and to the Investment Adviser, subject always to the
investment objective and policies of the Trust and to general supervision by the
Board.

In addition, the Declaration of Trust requires the affirmative vote or
consent of the holders of 75% of the Shares of the Trust to authorize certain
transactions with a person or entity that is directly, or indirectly through
affiliates, the beneficial owner of 5% or more of the outstanding Shares of the
Trust unless the Board takes certain actions to approve such a transaction.
These provisions could make it more difficult to change the management of the
Trust and could have the effect of depriving Shareholders of an opportunity to
sell their Shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Trust in a tender offer or
similar transaction. See "Risk Factors -- Certain Provisions of the Declaration
of Trust" in the Trust's Prospectus.

REPURCHASE OF SHARES AND TENDER OFFERS

The Trust is a closed-end, management investment company and as such
its Shareholders do not, and will not, have the right to redeem their Shares of
the Trust. The Trustees, however, intend to consider, from time to time, but not
less frequently than annually, the desirability of open market purchases or
tender offers. Any such repurchases will be made in accordance with the
applicable provisions of the Investment Company Act and Massachusetts law in
open market transactions. Shares repurchased by the Trust will be held in its
treasury. Although the Trust has no present intention of doing so, it reserves
the right to incur debt to finance such repurchases or tender offers, provided
that it will not repurchase securities during the periods when it has
outstanding borrowings in excess of 5% of its net assets. See "Investment
Restrictions." Interest on any borrowings to finance Share repurchase
transactions will increase the Trust's expenses and will reduce the Trust's net
income. There can be no assurance that Share repurchases, if any, will cause the
Shares to trade at a price equal to or in excess of their net asset value.
Nevertheless, the possibility that a portion of the Trust's outstanding Shares
may be the subject of repurchases may reduce the spread between market price and
net asset value that might otherwise exist. The Trust may not repurchase Shares
except (1) on a securities exchange and after notification to Shareholders of
its intent to purchase Shares within the six months preceding the purchase, (2)
pursuant to a tender offer to all Shareholders, or (3) as otherwise permitted by
the Commission.

The Shares of the Trust will trade in the open market at a price which
will be a function of several factors, including their supply, demand,
investment performance and yield. The shares of closed-end investment companies
generally sell at market prices varying from their net asset value ("NAV") and
such shares frequently trade at a discount to NAV, but in some cases trade at a
premium. The market price of the Shares will be determined by factors including
trading volume of such Shares, general market and economic conditions and other
factors beyond the control of the Trust. Therefore, the Trust cannot predict
whether its Shares will trade at, below or above NAV. When the Trust repurchases
its Shares for a price below their NAV, the NAV of those Shares that remain
outstanding will be enhanced, but this does not necessarily mean that the market
price of those outstanding Shares will be affected, either positively or
negatively.

CONVERSION TO OPEN-END INVESTMENT COMPANY STATUS

Under the Declaration of Trust, the conversion of the Trust from a
closed-end to an open-end investment company would require (1) the approval of
the Board of Trustees, and (2) the affirmative vote or consent of the holders of
66 2/3% of the Shares outstanding and entitled to vote. Such a vote would be in
addition to any vote or consent required in addition to the vote or consent of
Shareholders otherwise required by law or any agreement between the Trust and
the NYSE. The Investment Company Act requires that the Trust receive a vote of a
majority of its outstanding voting Shares in order to convert the Trust from a
closed-end to an open-end investment company.

Such amendment would have to be approved by the Board prior to its
submission to Shareholders. The Board is required under the Declaration of Trust
to consider and vote annually upon the proposal to convert to open-end status. A
proposal to convert the Trust to an open-end company might be supported or
opposed by the Board depending on the Board's judgment as to its advisability in
light of circumstances prevailing at the time.

Shareholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by or under the Investment Company Act) at their NAV, less such
redemption charge, if any, as might be in effect at the time of a redemption.
Conversion to an open-end investment company could require the disposal of
illiquid investments to meet current requirements of the Commission that no more
than 15% of an open-end investment company's assets consist of illiquid
securities, and would likely require involuntary liquidation of portfolio
securities, and the inherent realization of net long-term capital gains in
connection therewith, to meet periodic requests for redemption. Moreover, Shares
of the Trust would no longer be listed on the NYSE.

INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENT

Hambrecht & Quist Capital Management LLC, a limited liability company
under the laws of the State of Delaware, serves as the investment adviser to the
Trust. The Investment Adviser is an investment adviser registered under the
Investment Advisers Act of 1940, as amended. The Investment Adviser is located
at 30 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328.

At inception, Hambrecht & Quist Capital Management Incorporated ("HQCM,
Inc.") was the Trust's investment adviser. HQCM, Inc. was formed as a
wholly-owned subsidiary of Hambrecht & Quist Group. HQCM, Inc. remained the
Investment Adviser as The Chase Manhattan Corporation ("Chase") first acquired
Hambrecht & Quist Group and then merged with J.P. Morgan Incorporated to form
J.P. Morgan Chase & Co. In 2002, the management of HQCM, Inc. formed an
independent entity, Hambrecht & Quist Capital Management LLC ("HQCM LLC"), to
effect a buyout of HQCM, Inc. In this transaction, HQCM LLC acquired certain of
the assets of HQCM, Inc., and substantially all of the management and staff of
HQCM, Inc. became employees of HQCM LLC. HQCM LLC, the Trust's current
investment adviser, is owned by Daniel R. Omstead, Mary Omstead and the Alan G.
Carr Irrevocable Trust. Mr. Carr, a former portfolio manager, president and
trustee of the Trust, passed away in October 2003. Dr. Omstead is currently the
President and Chief Executive Officer of the Investment Adviser. Mary Omstead is
Dr. Omstead's wife. Under the terms of HQCM LLC's current Amended and Restated
Limited Liability Company Agreement, HQCM LLC will purchase the Alan G. Carr
Irrevocable Family Trust's interest in HQCM LLC.

The Investment Advisory Agreement between the Investment Adviser and
the Trust (the "Advisory Agreement") provides that, subject to the supervision
and direction of the Board, the Investment Adviser is responsible for the actual
management of the Trust's portfolio. The Investment Adviser is also obligated to
supervise or perform certain administrative and management services for the
Trust and is obligated to provide the office space, facilities, equipment and
personnel necessary to perform its duties under the Advisory Agreement. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. However, the Investment Adviser may consider
investment analysis from various sources, including broker-dealers with which
the Trust does business. See "Portfolio Transactions and Brokerage."

Subject to the supervision and direction of the Board of Trustees of
the Trust, the Investment Adviser manages the Trust's portfolio in accordance
with the Trust's investment objective and policies as stated in the Trust's
Prospectus; makes investment decisions for the Trust; places purchase and sale
orders for portfolio transactions for the Trust; supplies the Trust with office
facilities (which may be in the Investment Adviser's own offices), statistical
and research data, data processing services, clerical, internal executive and
administrative services, and stationery and office supplies; supplies or directs
and supervises a third party administrator or custodian in the provision to the
Trust of accounting and bookkeeping services, the calculation of the net asset
value of shares of the Trust, internal auditing services, and other clerical
services in connection therewith; and prepares or supervises and directs a third
party administrator or custodian in the preparation of reports to shareholders
of the Trust, tax returns and reports to and filings with the Commission and
state Blue Sky authorities. In providing these services, the Investment Adviser
provides investment research and supervision of the Trust's investments and
conducts a continual program of investment, evaluation and, if appropriate, sale
and reinvestment of the Trust's assets. In addition, the Investment Adviser
furnishes the Trust with whatever statistical information the Trust may
reasonably request with respect to the securities that the Trust may hold or
contemplate purchasing.

The Investment Adviser will not participate directly in the capital
appreciation of Restricted Securities. The Investment Adviser may also provide
managerial assistance to issuers of securities in which the Trust invests. For
purposes of calculation of the investment advisory fee, "average net assets" for
any month shall be equal to the average of the net asset value of such assets as
of the last business day of such month and the net asset value of the
appropriate assets as of the last business day of the preceding month. In
determining average net assets for purposes of clauses (1) and (2) above,
liabilities and expenses of the Trust shall be allocated pro rata based on the
ratio that the assets referred to in each clause bear to the total assets of the
Trust. Such fee shall be payable for each month within five business days after
the end of such month.

For purposes of the calculation of the investment advisory fee,
"venture capital and other Restricted Securities" shall be securities of issuers
for which no market quotations are readily available and securities of companies
for which market quotations are readily available but which are subject to legal
or contractual restrictions on resale. Securities of companies for which public
information is available but as to the sale of which the safe harbor provided by
Rule 144(k) is not available shall be considered to be subject to legal or
contractual restrictions on resale.

The investment advisory fee paid by the Trust exceeds that paid by most
registered investment companies to their investment advisers. The Trust believes
that the fee is commensurate with the nature and quality of the services
required for identifying, evaluating and monitoring the Trust's Restricted
Securities investments.

The Advisory Agreement provides that the Investment Adviser shall not
be liable for any loss incurred by any act or omission of any broker. The
Advisory Agreement also provides that the Investment Adviser shall not be liable
to the Trust or to any Shareholder of the Trust for any error or judgment or for
any loss suffered by the Trust in connection with rendering services under the
Advisory Agreement except (1) a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services (in which case any
award of damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the Investment Company Act) or (2) a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Investment
Adviser, or reckless disregard of its obligations and duties under the Advisory
Agreement. Subject to the foregoing, the Advisory Agreement also provides that
the Trust shall indemnify the Investment Adviser, and any officer, director and
employee of the Investment Adviser to the maximum extent permitted by Article V
of the Trust's Declaration of Trust.

For the fiscal years ended September 30, 2005, September 30, 2004 and
September 30, 2003, the Trust paid the Adviser $2,676,602, $2,651,448 and
$2,320,306, respectively, in advisory fees.

The services of the Investment Adviser to the Trust are not deemed to
be exclusive, and nothing in the Advisory Agreement prevents the Investment
Adviser, or any affiliate thereof, from providing similar services to other
companies and other clients or from engaging in other activities.

Under the Advisory Agreement, the Trust must pay (or, in the event that
such expenses are paid by the Investment Adviser, shall reimburse the Investment
Adviser for) all other expenses incurred in the organization and operation of
the Trust including, among other things, expenses for legal and auditing
services, costs of printing proxy statements, prospectuses, stock certificates
and shareholder reports, charges of the custodian, any sub-custodian and
transfer agent, expenses in connection with the Dividend Reinvestment Plan, the
Commission, and National Association of Securities Dealers, Inc. fees, fees and
expenses of the Trustees who are not "affiliated persons" of the Investment
Adviser or any of its "affiliated persons," accounting and valuation costs,
administrator's fees, membership fees in trade associations, fidelity bond
coverage for the Trust's officers and employees, errors and omissions insurance
coverage for Trustees and officers, interest, brokerage costs, taxes, stock
exchange listing fees and expenses, expenses of qualifying the Trust's Shares
for sale in various states, expenses associated with personnel performing
exclusively shareholder servicing functions, certain other organization
expenses, litigation and other extraordinary or non-recurring expenses, and
other expenses properly payable by the Trust. The Trust may enter into
arrangements to have third parties assume any expenses for which it is
responsible.

Unless earlier terminated as described below, the Advisory Agreement
will remain in effect from year to year if approved annually (1) by the Board or
by the holders of a majority of the Trust's outstanding Shares and (2) by the
majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement may be terminated
without penalty by (1) the Trust or the Investment Adviser at any time without
penalty upon not less than 30 and no more than 60 days' written notice or (2) a
vote of the holders of a majority of the Trust's outstanding Shares, and will
automatically terminate in the event of its assignment. Action by the Trust
under (1) above may be taken either by (i) vote of a majority of its Trustees,
or (ii) the affirmative vote of a majority of the outstanding shares of the
Trust.

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

On April 20, 2006, 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 Trust 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 Trust counsel for purposes of the
contract review process, including comparisons of (i) the Trust's performance to
its benchmark and to certain other investment companies, (ii) the Trust'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 Trust to the profitability of other investment managers. The Trustees
took into account that the Adviser presently provides investment management
services only to the Trust and to HQH and does not derive any benefit from its
relationship with the Trust other than receipt of advisory fees pursuant to the
Advisory Agreement. The Board also considered information received periodically
about the portfolio, performance, investment strategy, portfolio management team
and fees and expenses of the Trust.

The Investment Adviser's use of the term "H&Q" is pursuant to a written
license agreement (the "License Agreement"), a copy of which the Investment
Adviser has provided to the Trust. Under the License Agreement, the Investment
Adviser may sublicense the term "H&Q" to an investment company for which it
serves as investment adviser, for use as part of the investment company's name,
pursuant to a written sublicense agreement that (a) is at least as protective of
the rights of the licensor under the License Agreement as the License Agreement
and (b) does not permit the investment company to sub-sublicense the term "H&Q".
The Trust has agreed that its right to use the term "H&Q" is subject in all
respects to the terms of the License Agreement. The Trust has also agreed that
if the License Agreement terminates for any reason, or if the Investment Adviser
ceases to act as investment adviser to the Trust, the Trust's sublicense to use
the term "H&Q" as part of its name will terminate, at which time the Trust will
take all necessary action to change its name to a name not including such term.
The Investment Adviser may at any time permit others to use the term "H&Q" under
a similar sublicense.

PORTFOLIO MANAGEMENT

Currently Daniel R. Omstead, Ph.D., Christopher F. Brinzey, M.B.A., Frank
T. Gentile, Ph.D. and Jason C. Akus, M.D./M.B.A. are members of the team that
makes investments on behalf of the Trust. These members also perform other
duties, including making investment decisions on behalf of H&Q Healthcare
Investors, a closed-end mutual fund, but do not otherwise manage any other
accounts.

SECURITY OWNERSHIP OF PORTFOLIO MANAGERS

As of March 15, 2006, the dollar range of Trust securities beneficial
owned by Dr. Omstead was $50,001 - $100,000. As of August 15, 2006, none of the
other members of the team owned securities of the Trust.

PORTFOLIO MANAGER COMPENSATION STRUCTURE

Dr. Omstead receives a base salary as compensation for his contribution
to the portfolio management team and for his contribution to the general
management of the Adviser. As part owner of the Investment Adviser, Dr. Omstead
receives additional compensation from the Trust indirectly by virtue of the
investment advisory fee paid to the Investment Adviser.

Mr. Brinzey, Dr. Gentile and Dr. Akus receive a combination of base
compensation and discretionary compensation, in the form of a cash bonus paid
annually. The methodology used to determine compensation is applied to all
accounts managed by the team. Two components are described in detail below.

BASE SALARY COMPENSATION. The team members receive a base salary
compensation linked to individual experience and responsibilities. The amount of
base salary is reviewed annually.

DISCRETIONARY COMPENSATION. Discretionary Compensation is in the form
of a cash bonus, paid annually, which may be up to 60% of the team member's base
salary. Several factors affect discretionary compensation, which can vary by
team member and circumstances. The discretionary compensation component is
determined based on four factors including investment performance of accounts
managed by the team relative to an appropriate benchmark and/or peer funds,
performance of specific investments proposed by the individual, financial
performance of the Investment Adviser and a qualitative assessment of the
individual overall contribution to the investment team and to the Investment
Adviser. Discretionary compensation is evaluated annually after the completion
of the Trust's fiscal year.

PROXY VOTING POLICY AND PROCEDURES

The Board of Trustees of the Trust has adopted a proxy voting policy
and procedure (the "Proxy Voting Policy"), pursuant to which the Trustees have
delegated proxy voting responsibility to the Investment Adviser in accordance
with the Fund's Proxy Voting Policy. A copy of the Proxy Voting Policy for the
Trust and the Investment Adviser are attached as Appendix A to this SAI.

A description of the Trust's proxy voting policies and procedures and
information on how the Trust voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30, 2005 is available (i)
without charge, upon request by calling 1-800-451-2597; (ii) by writing to
Hambrecht & Quist Capital Management, LLC at 30 Rowes Wharf, Suite 430, Boston,
MA 02110-3328; (iii) on the Trust's website at www.hqcm.com; and (iv) on the
SEC's website at www.sec.gov.

CODE OF ETHICS

The Trust's Board of Trustees and the Investment Adviser have approved
a Code of Ethics under Rule 17j-1 of the Investment Company Act that covers
certain personnel of the Trust and the Investment Adviser. The Code of Ethics
establishes procedures for personal investing and restricts certain transactions
by certain personnel covered by the Code of Ethics. Persons subject to the Code
of Ethics may invest in securities for their personal investment accounts,
including, in certain cases, securities that may be purchased or held by the
Trust. The Code of Ethics applies to investments by covered persons in their
personal accounts, the accounts of family members living in the same household,
and accounts in which the covered person has a beneficial interest (i.e.,
ownership, voting or investment control). Some of the restrictions set forth in
the Code of Ethics do not apply to the Trust's Independent Trustees. In general
terms, the Code of Ethics is designed to ensure that the investing activities of
covered personnel are conducted in a manner that avoids potential or actual
conflicts of interest with the Trust and its Shareholders and that covered
personnel conduct their personal investing in a manner consistent with their
fiduciary duty towards the Trust and its shareholders.

The Code of Ethics requires pre-clearance for certain investments in
equities (not including mutual funds), imposes reporting requirements, and
imposes sanctions for violations. Specifically, among other things, the Code of
Ethics prohibits sales of securities to or purchases of securities from the
Trust and prohibits the purchase or sale of any security under consideration for
trading by the Trust within seven days before or after the Trust trades in the
security.

The Trust's Code of Ethics is filed as an exhibit to this registration
statement. In addition, you may read and copy the Code of Ethics at the
Commission's Public Reference Room in Washington, DC. You may obtain information
on operations of the Public Reference Room by calling the Commission at (202)
551-8090. In addition, the Code of Ethics is available on the EDGAR Database on
the Commission Internet site at http://www.sec.gov. You may obtain copies of the
Code of Ethics, after paying a duplicating fee, by electronic request at the
following email address: publicinfo@sec.gov, or by writing to the Commission's
Public Reference Section, 100 F Street, NE, Washington, DC 20549.

NET ASSET VALUE

The net asset value ("NAV") of the Trust's Shares is calculated at the
close of regular trading on the NYSE (generally 4:00 p.m., Eastern time) every
day that the NYSE is open. The Trust makes this information available daily by
telephone (800) 451-2597, via its web site (www.hqcm.com) and through electronic
distribution for media publication, including major internet-based financial
services web sites and portals (bloomberg.com, yahoo.com, cbsmarketwatch.com,
etc.). Currently, The Wall Street Journal, The New York Times and Barron's
publish NAVs for closed-end investment companies at least weekly.

NAV is calculated by dividing the value of the securities held by the
Trust plus any cash or other assets minus all liabilities, including accrued
expenses, by the total number of Shares outstanding at such time. Securities for
which market quotations are readily available are valued at market price.
Portfolio securities that are traded on one or more U.S. national securities
exchanges or in the over-the-counter market that are National Market System
securities are valued at the last sale price or, lacking any sales, at the mean
between last bid and asked prices. Other over-the-counter securities are valued
at the most recent bid prices as obtained from one or more dealers that make
markets in the securities. Redeemable securities issued by a registered open-end
investment company are valued at net asset value per share. Other securities are
valued at the mean between the closing bid and asked prices. Short-term
investments that mature in 60 days or less are valued at amortized cost, unless
the Board determines that such valuation does not constitute fair value.

Bonds, other than convertible bonds, are valued using a third-party
pricing system. Convertible bonds are valued using this pricing system only on
days when there is no sale reported. Temporary cash investments with maturity of
60 days or less are valued at amortized cost. Puts and calls generally are
valued at the close of regular trading on the securities or commodities exchange
on which they are primarily traded. Options on securities generally are valued
at their last bid price in the case of exchange-traded options or, in the case
of OTC-traded options, the average of the last bid price as obtained from two or
more dealers unless there is only one dealer, in which case that dealer's price
is used. Forward foreign currency contracts are valued on the basis of the value
of the underlying currencies at the prevailing currency exchange rate. The
prevailing currency exchange rate shall be determined within one hour of when
the most recently available exchange rate information has been received based on
information obtained from a bank or banks.

Securities that are primarily traded on foreign securities exchanges
generally are valued at the last sale price on the exchange on which they are
primarily traded. Foreign securities that are primarily traded on the foreign
over-the-counter market are generally valued at the last sale quotation, if
market quotations are available, or the last reported bid price if there is no
active trading in a particular security on a given day. However, if intervening
events result in market volatility that significantly affects the value of any
such foreign securities after the close of trading on the relevant foreign
market, but before the Trust values its Shares on any particular day on which
the Trust is required to value its Shares, the Trust may, but is not required
to, determine the value of such securities at "fair value," as determined in
good faith by or under the direction of the Board of Trustees.

Quotations of foreign securities in foreign currencies are converted,
at current exchange rates, to their U.S. Dollar equivalents in order to
determine their current value. In addition, to the extent that the Trust values
its foreign securities (other than ADR's and ADS's) as of the close of trading
on various exchanges and over-the-counter markets throughout the world, the
calculation of the Trust's net asset value may not take place contemporaneously
with the valuation of foreign securities held by the Trust.

The value of any security or other asset for which market quotations
are not readily available shall be determined in a manner that most fairly
reflects the security's (or asset's) "fair value." Each such determination is
based on a consideration of all relevant factors, which are likely to vary from
one pricing context to another. Examples of such factors may include, but are
not limited to: (1) the type of the security; (2) the size of the holding
(including percent of outstanding securities of issuer held by the Trust); (3)
the initial cost of the security; (4) the existence of any contractual
restrictions on the security's disposition and the time to freedom from such
restrictions; (5) the price and extent of public trading in similar securities
of the issuer or of comparable companies; (6) quotations or prices from
broker-dealers and/or pricing services; (7) information obtained from the
issuer, analysts, and/or the appropriate stock exchange (for exchange-traded
securities); (8) an analysis of the company's financial statements; (9) an
evaluation of the forces that influence the issuer and the market(s) in which
the security is purchased and sold (e.g., the existence of pending merger
activity, public offerings or tender offers that might affect the value of the
security); and (10) the price of securities in a subsequent round of financing
of an issuer in an arm's-length transaction, if the round includes a new third
party investor.

Sometimes a "significant valuation event" may cause the market value of
a security to differ from the fair market value of that security. A "significant
valuation event" is an event that causes or is likely to cause a market
quotation to be unavailable or unreliable, and may include: situations relating
to a single issue in a market sector; significant fluctuations in U.S. or
foreign markets; market disruptions or closings caused by human error, equipment
failures, natural disasters, armed conflicts, acts of God, governmental actions
or other developments, as well as the same or similar events which may affect
specific issues or the securities markets even though not tied directly to the
securities markets. A significant valuation event occurring after the close of
trading but before the time of valuation may mean that the closing price for the
security does not constitute a readily available market quotation. If a
significant valuation event has occurred, the security will be valued at fair
value as determined in good faith by the Board in accordance with the procedures
hereinafter described. Such valuations and procedures will be reviewed
periodically by the Board.

The fair value of investments for which no market exists cannot be
precisely determined. With respect to securities of a company in its early stage
of development, valuation will typically be based upon the original cost to the
Trust. This methodology will typically be used until significant developments
affecting the portfolio company provide a basis for a change in valuation. The
status of portfolio companies is monitored for progress against plan,
advancement of the stage of product development, and other factors. When
revenues and earnings are present they are monitored. Valuation changes are
event driven. When an appropriate event occurs (e.g., the completion of a third
party transaction or a significant change in business model) valuation is
changed accordingly. In addition the Trust will typically base changes in
valuation on actual transactions or on actual firm offers by sophisticated
independent investors unaffiliated with the Investment Adviser. Legal or
contractual restrictions on the sale of portfolio securities by the Trust will
be considered in the valuation of such securities.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to policies established by the Board, the Investment Adviser is
primarily responsible for the execution of the Trust's portfolio transactions
and the allocation of brokerage. In executing transactions for the portfolio and
selecting brokers or dealers (which brokers or dealers may include any affiliate
of the Investment Adviser to the extent permitted by the Investment Company
Act), the Investment Adviser will use its best efforts to obtain the best price
and execution for the Trust. In assessing the best price and execution available
for any portfolio transaction, the Investment Adviser will consider all factors
it deems relevant including, but not limited to, price (including any applicable
brokerage commission or dealer spread), size of order, difficulty of execution,
and operational facilities of the firm involved and the firm's risk in
positioning a block of securities. The Investment Adviser may cause the Trust to
pay a broker-dealer that furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that the Investment Adviser determines
in good faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either the particular transaction or the overall responsibilities of the
Investment Adviser to the Trust. In selecting brokers or dealers to execute a
particular transaction and in evaluating the best price and execution available,
the Investment Adviser may consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act of 1934,
as amended) provided to the Trust and/or other accounts over which the
Investment Adviser exercises investment discretion. Such brokerage and research
services might consist of reports and statistics on specific companies or
industries, general summaries of groups of bonds and their comparative earnings
and yields, or broad overviews of the securities markets and the economy. It is
further understood that such services may be useful to the Investment Adviser in
connection with its services to other clients. While the Investment Adviser
generally seeks reasonably competitive commission rates, the Trust will not
necessarily pay the lowest commission available.

The Trust has no obligation to deal with any broker or group of brokers
in executing transactions in portfolio securities. Brokers who provide
supplemental research, market and statistical information to the Investment
Adviser may receive orders for transactions by the Trust. The term "research,
market and statistical information" includes advice as to the value of
securities, the advisability of purchasing or selling securities and the
availability of securities or purchasers or sellers of securities, and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
Information so received will be in addition to and not in lieu of the services
required to be performed by the Investment Adviser under the Advisory Agreement
and the expenses of the Investment Adviser will not necessarily be reduced as a
result of the receipt of such supplemental information. Such information may be
useful to the Investment Adviser in providing services to clients other than the
Trust, and not all such information may be used by the Investment Adviser in
connection with the Trust. Conversely, such information provided to the
Investment Adviser by brokers and dealers through whom other clients of the
Investment Adviser in the future may effect securities transactions may be
useful to the Investment Adviser in providing services to the Trust. To the
extent the Investment Adviser receives valuable research, market and statistical
information from a broker-dealer, the Investment Adviser intends to direct
orders for Trust transactions to that broker-dealer, subject to the foregoing
policies, regulatory constraints and the ability of broker dealers to provide
competitive prices and commission rates.

The Investment Company Act restricts transactions involving the Trust
and its "affiliates," including among others, the Trust's Trustees, officers and
employees, the Investment Adviser and any "affiliates" of such affiliates.
Subject to any such restrictions, investment companies advised by the Investment
Adviser may concurrently invest with the Trust in Restricted Securities, and the
Trust may also invest in companies in which directors of the Investment Adviser
or Trustees of the Trust have invested or for which they serve as directors or
executive officers. The Trust seeks to deal directly with the dealers who make
markets in the securities involved, except as limited by applicable law and in
those circumstances where better prices and execution are available elsewhere.
Under the Investment Company Act, persons affiliated with the Trust are
generally prohibited from dealing as principal with the Trust in the purchase
and sale of securities. Under certain circumstances, affiliated persons of the
Trust are permitted to serve as its broker in over-the-counter transactions
conducted on an agency basis.

It is likely that, subject to applicable law, the Trust may invest in
securities concurrently being purchased by other investment companies advised by
the Investment Adviser. Such purchases would be made on terms no less favorable
than those under which such investment companies would be acquiring the
securities. In the case of concurrent purchases by the Trust and another
investment company or companies managed by the Investment Adviser, such
purchases would be made where the Investment Adviser has made an independent
decision on behalf of the Trust and such other company that the purchase is
appropriate in light of the investment objectives, policies, restrictions,
current holdings, available cash and portfolio structure of and other factors
affecting each. Such investments will be allocated among clients in a manner
believed by the Investment Adviser to be equitable to each. The Trust may also
from time to time invest in securities of companies in which affiliated persons
of the Trust have invested, subject to the provisions of the Investment Company
Act and the rules and regulations promulgated thereunder.

The Trust's portfolio transactions in Restricted Securities are
generally subject to Rule 144 under the Securities Act. In general, under Rule
144 as currently in effect, if the Trust has beneficially owned Restricted
Securities of a publicly held issuer for more than one but less than two years,
it will be entitled to sell in any three-month period that number of such
securities that will not exceed the greater of 1% of the then outstanding
securities of that class or the average weekly trading volume in securities of
that class in any national securities exchange and/or in the over-the-counter
market during the four calendar weeks immediately preceding the date on which
notice of the sale is filed with the Commission. These volume limitations also
apply to sales by the Trust of the securities of any issuer as to which it is
deemed an affiliate, regardless of whether securities of such issuer are
publicly traded. The above-described sales under Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the issuer. If the Trust is not deemed to have been an
affiliate of the issuer at any time during the 90 days immediately preceding the
sale and has beneficially owned Restricted Securities for at least two years, it
is entitled to sell such securities under Rule 144(k) without regard to whether
the issuer is publicly-held or to the volume limitations or other requirements
described above. When Restricted Securities are sold to the public other than
pursuant to Rule 144 or 144A, the Trust may be deemed an "underwriter" with
respect thereto for purposes of the Securities Act and subject to liability as
such thereunder.

On occasions when the Investment Adviser deems the purchase or sale of
a security to be in the best interest of the Trust as well as other clients, the
Investment Adviser, to the extent permitted by applicable laws and regulations,
may, but shall be under no obligation to, aggregate the securities to be sold or
purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Investment Adviser in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Trust and to such
other clients.

Allocation of transactions, including their frequency, to various
broker-dealers is determined by the Investment Adviser with respect to the
Trust, based on its best judgment and in a manner deemed fair and reasonable to
Shareholders. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price. Certain investments may be
appropriate for the Trust and also for other clients advised by the Investment
Adviser. Investment decisions for the Trust and for other investment accounts
managed by the Investment Adviser are made independently of each other in the
light of differing conditions. However, the same investment decision may be made
for two or more of such accounts. When a purchase or sale of the same security
is made at substantially the same time on behalf of the Trust and one or more
other accounts, the transaction will be averaged as to price, and available
investments allocated as to amount, in a manner the Investment Adviser believes
to be equitable to each such account. Although the Investment Adviser seeks the
most favorable overall net results for all of the accounts in any aggregated
transaction, in some cases, this practice may adversely affect the price paid or
received by the Trust or the size of the position obtained or sold by the Trust.
To the extent permitted by law, the Investment Adviser may aggregate the
securities to be sold or purchase for the Trust with those to be sold or
purchased for other investment companies or accounts in order to obtain best
execution.

For the fiscal years ended September 30, 2005, September 30, 2004 and
September 30, 2003, the Trust paid $813,281, $330,000 and $218,162,
respectively, of brokerage commissions. The increase in commissions in September
30, 2005 was due to strategy specific reallocations and market opportunities.

As stated in the Prospectus, the Trust's portfolio turnover rate for
the fiscal years ended September 30, 2005 and September 30, 2004 was 73.79% and
34.93%, respectively. The increase in portfolio turnover rate was due to
strategy specific reallocations and market opportunities. For a description of
the Trust's portfolio turnover policies, see "Portfolio Transactions and
Brokerage" in the Trust's Prospectus.

QUARTERLY DISTRIBUTION POLICY

In May 1999, the Trust's Board of Trustees adopted a managed
distribution policy with respect to the Trust's Shares. Under the managed
distribution policy, the Trust intends to make quarterly distributions to its
Shareholders equal to 2.0% of the Trust's net asset value. The current
distribution policy is to declare distributions in stock. Distributions will
automatically be paid in newly-issued full Shares of the Trust plus cash in lieu
of any fraction of a Share, unless otherwise instructed by the Shareholder. The
Fund's transfer agent delivers an election card and instructions to each
registered Shareholder in connection with each distribution. For shareholders
other than registered shareholders with book entry accounts at the Trust's
transfer agent, fractional shares will generally be settled in cash. 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 value 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 Trust will be reduced. The
shares will be valued at the lower of 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.

If, for any taxable year, the total distributions required for the
Trust's distribution policy exceed the Trust's annual investment company taxable
income and net long-term capital gains, the excess will generally be treated as
a return of capital (up to the amount of the Shareholder's adjusted tax basis in
his or her Shares). The amount treated as a tax-free return of capital will
reduce a Shareholder's adjusted basis in his or her own Shares, thereby
increasing his or her potential gain or reducing his or her potential loss on
the sale of his or her Shares.

If the Trust's investment company taxable income and net long-term
capital gains for any taxable year or calendar year exceed the amount required
to be distributed under the distribution policy, the Trust will, at a minimum,
make distributions necessary to permit it to qualify for treatment as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). The Trust has the discretion to retain for reinvestment net
long-term capital gains in excess of net short-term capital losses, to the
extent that it does not need to distribute these gains to meet its managed
distribution obligation or tax requirements. Any retained gains may be subject
to taxation, although Shareholders may receive credit for taxes paid by the
Trust. It is anticipated that net realized capital gains in excess of the total
distributed under this policy would be included in the December distribution.

TAX MATTERS

The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Trust and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Trust or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Trust.

TAXATION OF THE TRUST

The Trust intends to qualify and has elected to be treated each taxable
year as a regulated investment company under the Code. The principal federal
income tax benefits of qualifying as a regulated investment company ("RIC"), as
compared to an ordinary taxable corporation, are that a RIC generally is not
itself subject to federal income tax on ordinary investment income and net
capital gains that are currently distributed to its shareholders, and that the
character of long-term capital gains which are recognized and properly
designated by a RIC flows through to its shareholders, who receive (or are
deemed to receive) distributions of such income. However, the Trust is subject
to corporate income tax (currently at a maximum marginal rate of 35%) on any
undistributed income.

To qualify as a RIC, the Trust must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, net income derived from
an interest in a qualified publicly traded partnership and other income derived
with respect to its business of investing in such stock, securities or
currencies (the "Qualifying Income Requirement"); (b) diversify its holdings so
that, at the end of each quarter of the taxable year, (1) at least 50% of the
market value of the Trust's assets is represented by cash and cash items, U.S.
Government Securities, the securities of other RICs and other securities, with
such other securities of any one issuer limited for the purposes of this
calculation to an amount not greater than 5% of the value of the Trust's total
assets and not greater than 10% of the outstanding voting securities of such
issuer, and (2) not more than 25% of the value of its total assets is invested
in the securities of (i) any one issuer (other than U.S. Government Securities
or the securities of other RICs), (ii) two or more issuers (other than the
securities of other RICs) which the taxpayer controls and which are determined
to be in the same or similar trades or businesses; or (iii) one or more
qualified publicly traded partnership; and (c) distribute at least 90% of its
investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of net long-term capital
losses) each taxable year. The U.S. Treasury Department has authority to
promulgate regulations pursuant to which gains from foreign currency (and
options, futures and forward contracts on foreign currency) not directly related
to a RIC's business of investing in stocks and securities would not be treated
as qualifying income for purposes of the Qualifying Income Requirement. To date,
such regulations have not been promulgated.

If for any taxable year the Trust were to fail to qualify as a RIC, all
of the Trust's taxable income would be subject to federal income tax at the
rates applicable to corporations (with no deduction for distributions to
Shareholders), and Trust distributions would be taxable to Shareholders as
dividends to the extent of the Trust's earnings and profits.

Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
avoid the excise tax, the Trust must distribute during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, (2) at least
98% of its capital gains in excess of its capital losses (adjusted for certain
ordinary losses) for the one-year period ending on October 31 of the calendar
year, and (3) all ordinary income and capital gains for previous years that were
not distributed during such years. To avoid application of the excise tax, the
Trust intends to make its distributions in accordance with the calendar year
distribution requirement. A dividend will be treated as paid on December 31 of
the calendar year if it is declared by the Trust in October, November or
December of the year, payable to shareholders of record on a date in such a
month and paid by the Trust during January of the following year. Such dividends
will be taxable to shareholders as of December 31 of the calendar year in which
the dividends are declared, rather than during the calendar year in which the
dividends are received. If the Trust elects to retain net capital gains and
treat such gains as having been distributed, all or a portion of such gains may
not be treated as having been timely distributed for purposes of satisfying the
excise tax calendar year distribution requirement.

DISTRIBUTIONS

Dividends paid from investment company taxable income generally will be
taxable to shareholders generally as ordinary income whether paid in cash or
reinvested in the Trust's Shares. The Trust intends to distribute to its
shareholders substantially all of its investment company taxable income, if any,
for each year. It is anticipated that the Trust's income distributions will be
paid annually in additional Shares unless the shareholder elects payment in
cash.

A portion of the dividends paid by the Trust may be treated as
"qualified dividend income" which is taxable to individuals at the same rates
that are applicable to long-term capital gains. A Trust distribution is treated
as qualified dividend income to the extent that the Trust receives dividend
income from taxable domestic corporations and certain qualified foreign
corporations, provided that certain holding period and other requirements are
met by both the Trust and the shareholder. Trust distributions generally will
not qualify as qualified dividend income to the extent attributable to interest,
capital gains, REIT distributions and distributions from certain non-U.S.
corporations. The lower rates on qualified dividends and capital gains are
scheduled to expire after 2008 in the absence of further legislation enacted by
Congress.

Distributions of the excess, if any, of net long-term capital gains
over net short-term capital losses ("net capital gains") designated by the Trust
as capital gain dividends will be taxable to shareholders as long-term capital
gains, whether paid in cash or reinvested in the Trust's Shares, regardless of
how long the shareholders have held the Trust's Shares, and will not be eligible
for the dividends received deduction for corporations. The Trust may elect to
retain net capital gains. In such event, the Trust will be required to pay
federal income taxes on the undistributed net capital gains, but intends to
elect to treat such capital gains as having been distributed to shareholders. As
a result, such amounts will be included in the gross income of the shareholders
as long-term capital gains and shareholders will be able to claim their
proportionate share of federal income taxes paid by the Trust on such gains as a
credit against their own federal income tax liabilities, and will be entitled to
increase the adjusted tax basis of their Shares of the Trust by an amount equal
to approximately 65% of the amount of the undistributed capital gains included
in their gross income. Organizations or persons not subject to federal income
tax on such capital gains (such as, generally, qualified pension and
profit-sharing funds, including Individual Retirement Accounts and Keogh plans,
and certain trusts, nonresident aliens and foreign corporations) will be
entitled to a refund of their pro rata share of such taxes paid by the Trust
upon filing appropriate returns or claims for refund with the Internal Revenue
Service ("IRS"). Even if the Trust makes such an election, it is possible that
the Trust may incur an excise tax as a result of not having distributed
sufficient net capital gains.

A distribution of an amount in excess of the Trust's current and
accumulated earnings and profits will be treated by a Shareholder as a return of
capital which is applied against and reduces the Shareholder's basis in his or
her Shares. To the extent that the amount of any such distribution exceeds the
shareholder's basis in his or her Shares, the excess will be treated by the
Shareholder as gain from a sale or exchange of the Shares.

If the value of the Trust's Shares is reduced below a Shareholder's
cost as a result of a distribution of investment company taxable income or net
capital gains by the Trust, such distribution will be taxable to the
shareholder. The price of Shares purchased at this time may reflect the amount
of the forthcoming distribution. Those purchasing just prior to a distribution
of investment company taxable income or net capital gains will receive a
distribution which will nevertheless be taxable to them.

Dividends (not including capital gain dividends) received by corporate
shareholders from the Trust qualify for the dividends received deduction for
corporate shareholders to the extent the Trust designates the amount distributed
as eligible for the deduction. The aggregate amount designated by the Trust
cannot exceed the aggregate amount of dividends received by the Trust from
domestic corporations for the taxable year, and the designation of dividend
income must generally be the same for all Shares. The dividends received
deduction for corporate shareholders may be further reduced if the Shares with
respect to which dividends are received are treated as debt-financed or if
either those Shares or the Shares of the Trust are deemed to have been held by
the Trust or its shareholders, respectively, for less than 46 days.

In addition to furnishing any other required tax statements, the Trust
intends to send not later than 60 days after September 30 (the end of the tax
and fiscal year of the Trust) written notices to shareholders regarding the tax
status of all distributions made during such taxable year, the amount qualifying
for the dividends received deduction for corporations and the amount of
undistributed net capital gains and related tax credits.

SALE OF SHARES

Generally, gain or loss realized upon the sale or exchange of Shares
will be capital gain or loss if the Shares are capital assets in the
shareholder's hands and generally will be long-term or short-term, depending
upon the shareholder's holding period for the Shares. Investors should be aware
that any loss realized upon the sale or exchange of Shares held for six months
or less will be treated as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gain to the
shareholder with respect to such Shares. In addition, any loss realized on a
sale or exchange of Shares will be disallowed to the extent the Shares disposed
of are replaced within a period of 61 days beginning 30 days before and ending
30 days after the Shares are disposed of, such as pursuant to the Plan. In such
case, the basis of Shares acquired will be adjusted to reflect the disallowed
loss.

The Trust may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC if at least one-half of
its assets constitute investment-type assets, or 75% or more of its gross income
is investment-type income. If the Trust receives a so-called "excess
distribution" with respect to PFIC stock, the Trust itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Trust to shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Trust held the PFIC shares. The Trust itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Trust taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Gain from
the sale of PFIC shares is treated in the same manner as an excess distribution.
Excess distributions and gain from the sale of PFIC shares are characterized as
ordinary income even though, absent application of the PFIC rules, such gains
and certain excess distributions might have been classified as capital gain.

The Trust may elect to mark to market any PFIC shares in lieu of being
subject to U.S. federal income taxation. At the end of each taxable year to
which the election relates, the Trust would report as ordinary income the amount
by which the fair market value of the PFIC stock exceeds the Trust's adjusted
basis in the stock. Any mark-to-market losses and any loss from an actual
disposition of shares would be deductible as ordinary losses to the extent of
any net mark-to-market gains included in income in prior years. The effect of
the election would be to treat excess distributions and gain on dispositions as
ordinary income which is not subject to a Trust-level tax when distributed to
shareholders as a dividend. Alternatively, the Trust may elect to include as
income and gain its share of the ordinary earnings and net capital gain of
certain PFICs in lieu of being taxed in the manner described above.

CURRENCY FLUCTUATIONS-"SECTION 988" GAINS OR LOSSES

Under the Code, the gains or losses attributable to fluctuations in
exchange rates which occur between the time the Trust accrues receivables or
liabilities denominated in a foreign currency and the time the Trust actually
collects such receivables or pays such liabilities generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of foreign currency
or debt securities denominated in a foreign currency and on disposition of
certain futures and forward contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the currency, security or contract and the date of disposition also are treated
as ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of the
Trust's investment company taxable income to be distributed to its Shareholders
as ordinary income.

HEDGING TRANSACTIONS

Certain futures and foreign currency contracts in which the Trust may
invest are "section 1256 contracts." While gains or losses on section 1256
contracts are considered 60% long-term and 40% short-term capital gains or
losses, certain foreign currency futures and foreign currency contracts may give
rise to ordinary income or loss, as described above. Also, section 1256
contracts held by the Trust at the end of each taxable year (and, generally, for
purposes of the 4% excise tax, on October 31 of each year) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized.

Generally, the hedging transactions undertaken by the Trust may result
in "straddles" for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by the Trust. In addition,
losses realized by the Trust on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences to the Trust of engaging in hedging
transactions are not entirely clear.

The Trust may make one or more of the elections available under the
Code which are applicable to straddles. If the Trust makes any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under the rules that vary
according to the election(s) made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or losses from the
affected straddle positions.

Notwithstanding any of the foregoing, the Trust may recognize gain (but
not loss) from a constructive sale of certain "appreciated financial positions"
if the Trust enters into a short sale, offsetting notional principal contract,
futures or forward contract transaction with respect to the appreciated position
or substantially identical property. Appreciated financial positions subject to
this constructive sale treatment are interests (including options, futures and
forward contracts and short sales) in stock, partnership interests, certain
actively traded trust instruments and certain debt instruments. Constructive
sale treatment does not apply to certain transactions closed before the end of
the thirtieth day after the close of the taxable year, if certain conditions are
met.

FOREIGN WITHHOLDING TAXES

Income received by the Trust from non-U.S. sources may be subject to
withholding and other taxes imposed by other countries. Because it is not
expected that more than 50% of the value of the Trust's total assets at the
close of its taxable year will consist of stock and securities of non-U.S.
corporations, it is not expected that the Trust will be eligible to elect to
"pass-through" to the Trust's shareholders the amount of foreign income and
similar taxes paid by the Trust. In the absence of such an election, the foreign
taxes paid by the Trust will reduce its investment company taxable income, and
distributions of investment company taxable income received by the Trust from
non-U.S. sources will be treated as U.S. source income.

BACKUP WITHHOLDING

The Trust may be required to withhold U.S. federal income tax at the
rate of 28% of all taxable distributions payable to shareholders who fail to
provide the Trust with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against a shareholder's U.S. federal income tax
liability. Certain persons are exempt from the backup withholding requirements.
Questions relating to backup withholding should be directed to your tax adviser.

FOREIGN SHAREHOLDERS

U.S. taxation of a shareholder who, as to the U.S., is a non-resident alien
individual, a foreign trust or estate, a foreign corporation or foreign
partnership ("foreign shareholder") depends on whether the income from the Trust
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.

INCOME NOT EFFECTIVELY CONNECTED

If the income from the Trust is not "effectively connected" with a U.S.
trade or business carried on by the foreign shareholder, distributions of
investment company taxable income will be subject to a U.S. tax of 30% (or lower
treaty rate), which tax is generally withheld from such distributions.

Distributions of capital gain dividends and amounts retained by the
Trust which are designated as undistributed capital gains will not be subject to
U.S. tax at the rate of 30% (or lower treaty rate) unless the foreign
shareholder is a non-resident alien individual and is physically present in the
U.S. for more than 182 days during the taxable year and meets certain other
requirements. However, this 30% tax on capital gains of non-resident alien
individuals who are physically present in the U.S. for more than the 182-day
period only applies in exceptional cases, because any individual present in the
U.S. for more than 182 days during the taxable year is generally treated as a
resident for U.S. federal income tax purposes; in that case, he or she would be
subject to U.S. federal income tax on his or her worldwide income at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In
the case of a foreign shareholder who is a non-resident alien individual, the
Trust may be required to withhold U.S. federal income tax at a rate of 28% of
distributions of net capital gains unless the foreign shareholder certifies his
or her non-U.S status under penalties of perjury or otherwise establishes an
exemption. See "Backup Withholding" above. If a foreign shareholder is a
non-resident alien individual, any gain such shareholder realizes upon the sale
or exchange of such shareholder's Shares of the Trust in the U.S. will
ordinarily be exempt from U.S. tax unless such shareholder is physically present
in the U.S. for more than 182 days during the taxable year and meets certain
other requirements.

However, subject to certain limitations and the receipt of further
guidance from the U.S. Treasury, dividends paid to certain foreign shareholders
may be exempt from U.S. tax through 2007 to the extent such dividends are
attributable to qualified interest and/or net short-term capital gains, provided
that the Trust elects to follow certain procedures. The Trust does not
anticipate following the procedures and as a result, the full amount of
distributions of ordinary dividends, including distributions of any interest or
short-term gains will be subject to withholding at a rate of 30 percent or any
applicable lower treaty rate.

INCOME EFFECTIVELY CONNECTED

If the income from the Trust is "effectively connected" with a U.S.
trade or business carried on by a foreign shareholder, then distributions of
investment company taxable income and capital gain dividends, amounts retained
by the Trust which are designated as undistributed capital gains and any gains
realized upon the sale or exchange of Shares of the Trust will be subject to
U.S. federal income tax at the graduated rates applicable to U.S. citizens,
residents and domestic corporations. Such foreign shareholders that are
corporations may also be subject to the branch profits tax imposed by the Code.

The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign Shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Trust.

OTHER TAXES

Distributions may also be subject to state, local and foreign taxes
and/or the alternative minimum tax depending on each Shareholder's particular
situation. Shareholders should consult their own tax advisers with respect to
their particular situation.

ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT,
DIVIDEND DISBURSING AGENT AND REGISTRAR

The Trust's securities and cash are held under a custodian contract
with State Street Bank and Trust Company (the "Custodian"), whose principal
business address is 225 Franklin Street, Boston, Massachusetts 02110. Rules
adopted under the Investment Company Act permit the Trust to maintain its
securities and cash in the custody of certain eligible banks and securities
depositories. Pursuant to those Rules, the Trust's portfolio of securities and
cash, when invested in Foreign Securities, will be held by sub-custodians who
have been approved by the Board in accordance with the rules and regulations of
the Securities and Exchange Commission following consideration of a number of
factors, including, but not limited to, the relationship of the institution with
the Custodian, the reliability and financial stability of the institution, the
ability of the institution to perform capably custodial services for the Trust,
the reputation of the institution in its national market, the political and
economic stability of the countries in which the sub-custodians will be located
and the risks of potential nationalization or expropriation of Trust assets. The
Custodian also performs certain accounting related functions for the Trust,
including calculation of NAV and net income.

State Street Bank and Trust Company (the "Administrator") also serves
as administrator to the Trust pursuant to an Administration Agreement. Under the
Administration Agreement the Trust's assets are combined with assets of H&Q
Healthcare Investors, another closed-end mutual fund managed by the Investment
Adviser. The combined assets are charged a fee computed and payable monthly at
an annual rate of (i).034% of the first $150 million; (ii) .024% of the next
$150 million; (iii) .014% on assets in excess of $300 million, subject to annual
minimum fee of $77,500. The Administrative Agreement covers administrative
costs, including out-of-pocket expenses incurred in the ordinary course of
providing services under the Administration Agreement.

Computershare Shareholder Services, Inc. serves as Dividend Disbursing
Agent, and as Transfer Agent and Registrar for Shares of the Trust.
Computershare Shareholder Services, Inc. has its principal business at 150 Royal
Street, Canton, MA 02021.

FINANCIAL STATEMENTS

The audited financial statements of the Trust included in the
Prospectus have been audited by Deloitte and Touche LLP, independent registered
public accounting firm, whose report dated November 18, 2005 expresses and
unqualified opinion. The financial highlights for the years ended September 30,
2003, 2002 and 2001 were audited by PricewaterhouseCoopers LLP, whose report
dated November 25, 2003 expresses and unqualified opinion. Certain information
appearing under the caption "Financial Highlights" for the fiscal years ended
September 30, 2000, 1999, 1998, 1997 and 1996 was audited by Arthur Andersen
LLP. Arthur Andersen LLP ceased operations in 2002. Deloitte & Touche LLP has
been selected as the independent registered public accounting firm of the Trust
for the fiscal year ending September 30, 2006. Deloitte & Touche LLP will
provide financial statement audit services to the Trust. Deloitte & Touche LLP's
offices are located at 200 Berkeley Street, Boston, MA 02116-5022.

Any statement contained in the Trust's annual report that is included
in the Prospectus shall be deemed modified or superseded for purposes of the
Prospectus and this SAI to the extent a statement contained in the Prospectus or
this SAI varies from such statement. Any such statement so modified or
superseded shall not, except as modified or superseded, be deemed to constitute
a part of the Prospectus or this SAI.

The unaudited financial statements included in the Trust's Semi-Annual
Report to Shareholders for the six months ended March 31, 2006 were mailed to
Shareholders on or about May 25, 2006 and are available on the Trust's website
(www.hqcm.com).

38
APPENDIX A
TRUSTEE AND INVESTMENT ADVISER
PROXY VOTING POLICIES AND PROCEDURES
FEBRUARY 2006

The following are the policies and procedures adopted and implemented
by Hambrecht & Quist Capital Management LLC (the "Investment Adviser") for
voting proxies with respect to portfolio securities held by H&Q Healthcare
Investors and H&Q Life Sciences Investors (each a "Fund" and collectively the
"Funds"). The policies and procedures are reasonably designed to ensure that
proxies are voted in the best interest of the Funds and the Funds' shareholders,
in accordance with the Investment Adviser's fiduciary duties and Rule 206(4)-6
under the Investment Advisers Act of 1940 (the "Investment Advisers Act"). The
Investment Adviser considers the "best interests" of the Funds and their
shareholders to mean their best long-term economic interests.

The Investment Adviser shall vote proxies for the exclusive benefit,
and in the best economic interest, of the Funds and their shareholders. Such
exercise of voting rights shall be subject to the same standard of care as is
generally applicable to the Investment Adviser's performance of its duties, as
set forth in the advisory agreements with the Funds. The policies and procedures
contained herein are designed to be guidelines, however each vote is ultimately
cast on a case-by-case basis, taking into consideration the relevant facts and
circumstances at the time of the vote. Any material conflicts that may arise
will be resolved in the best interests of the Funds and their shareholders.

A proxy committee has been designated and is responsible for
administering and overseeing the proxy voting process. The committee consists of
the President of the Investment Adviser, the Investment Adviser's Chief
Compliance Officer ("CCO"), and the analyst responsible for oversight of the
company that is the subject of the proxy. The committee considers proxy
questions and determines the vote on behalf of the Funds.

PROCEDURES

LOGISTICS

The Investment Adviser's CCO shall be responsible for maintaining the
proxy log, monitoring corporate actions and confirming the timely voting of
proxies. The proxy log shall contain the following information, in accordance
with Form N-PX:

o the name of the issuer;

o the exchange ticker symbol, if available;

o the CUSIP number, if available;

o the shareholder meeting date;

o a brief identification of the matter voted on;

o whether the matter was proposed by the issuer or a security holder;

o whether the Investment Adviser cast its vote on the matter;

o how the Investment Adviser cast its vote on the matter
(for, against, abstain; for or withhold
regarding the election of directors); and

o whether the Investment Adviser cast its vote for or against management;

The Investment Adviser's CCO shall also record whether any conflicts of
interest have been identified and, if so, what action was taken to resolve the
conflict with respect to each vote cast and each abstention.

SUBSTANTIVE VOTING DECISIONS

The Investment Adviser's substantive voting decisions turn on the
particular facts and circumstances of each proxy vote. The following is a list
of common proxy vote issues and the Investment Adviser's standard considerations
when determining how to vote such proxies.

Routine Matters/Corporate Administrative Items. After an initial
review, the Investment Adviser generally votes with management on routine
matters related to the operation of the issuer that are not expected to have a
significant economic impact on the issuer and/or its shareholders.

Potential for Major Economic Impact. The Investment Adviser reviews and
analyzes on a case-by-case basis, non-routine proposals that are more likely to
affect the structure and operation of the issuer and to have a greater impact on
the value of the investment.

Corporate Governance. The Investment Adviser reviews and considers
corporate governance issues related to proxy matters and generally supports
proposals that foster good corporate governance practices.

Special Interest Issues. The Investment Adviser considers: (i) the
long-term benefit to shareholders of promoting corporate accountability and
responsibility on social issues; (ii) management's responsibility with respect
to special interest issues; (iii) any economic costs and restrictions on
management; and (iv) the responsibility of the Investment Adviser to vote
proxies for the greatest long-term shareholder value.

Limitations on Director Tenure and Retirement. The Investment Adviser
considers: (i) a reasonable retirement age for directors, E.G. 70 or 72; (ii)
the introduction of new perspectives on the board; and (iii) the arbitrary
nature of such limitations and the possibility of detracting from the board's
stability and continuity.

Directors' Minimum Stock Ownership. The Investment Adviser considers: (i)
the benefits of additional vested interest; (ii) the ability of a director to
serve a company well regardless of the extent of his or her share ownership; and
(iii) the impact of limiting the number of persons qualified to be directors.

D&O Indemnification and Liability Protection. The Investment Adviser
considers: (i) indemnifying directors for acts conducted in the normal course of
business; (ii) limiting liability for monetary damages for violating the duty of
care; (iii) expanding coverage beyond legal expenses to acts that represent more
serious violations of fiduciary obligation than carelessness (E.G. negligence);
and (iv) providing expanded coverage in cases when a director's legal defense
was unsuccessful if the director was found to have acted in good faith and in a
manner that he or she reasonably believed was in the best interests of the
issuer.

Director Nominations in Contested Elections. The Investment Adviser
considers: (i) long-term financial performance of the issuer relative to its
industry; (ii) management's track record; (iii) background to proxy contest;
(iv) qualifications of both slates of nominees; (v) evaluations of what each
side is offering shareholders as well as the likelihood that the proposed
objectives and goals can be met; and (vi) stock ownership positions.

Cumulative Voting. The Investment Adviser considers: (i) the ability of
significant stockholders to elect a director of their choosing; (ii) the ability
of minority shareholders to concentrate their support in favor of a director or
directors of their choosing; and (iii) the potential to limit the ability of
directors to work for all shareholders.

Classified Boards. The Investment Adviser considers: (i) providing
continuity; (ii) promoting long-term planning; and (iii) guarding against
unwanted takeovers.

Poison Pills. The Investment Adviser considers: (i) the Investment
Adviser's position on supporting proposals to require a shareholder vote on
other shareholder rights plans; (ii) ratifying or redeeming a poison pill in the
interest of protecting the value of the issuer; and (iii) other alternatives to
prevent a takeover at a price demonstrably below the true value of the issuer.

Fair Price Provisions. The Investment Adviser considers: (i) the vote
required to approve the proposed acquisition; (ii) the vote required to repeal
the fair price provision; (iii) the mechanism for determining fair price; and
(iv) whether these provisions are bundled with other anti-takeover measures
(e.g., supermajority voting requirements) that may entrench management and
discourage attractive tender offers.

Equal Access. The Investment Adviser considers: (i) the opportunity for
significant shareholders of the issuer to evaluate and propose voting
recommendations on proxy proposals and director nominees, and to nominate
candidates to the board; and (ii) the added complexity and burden.

Charitable Contributions. The Investment Adviser considers: (i) the
potential benefits to shareholders; (ii) the potential to detract the issuer's
resources from more direct uses of increasing shareholder value; and (iii) the
responsibility of shareholders to make individual contributions.

Stock Authorizations: The Investment Adviser considers: (i) the need for
the increase; (ii) the percentage increase with respect to the existing
authorization; (iii) voting rights of the stock; and (iv) overall capitalization
structures.

Preferred Stock. The Investment Adviser considers: (i) whether the new
class of preferred stock has unspecified voting, conversion, dividend
distribution, and other rights; (ii) whether the issuer expressly states that
the stock will not be used as a takeover defense or carry superior voting
rights; (iii) whether the issuer specifies the voting, dividend, conversion, and
other rights of such stock and the terms of the preferred stock appear
reasonable; and (iv) whether the stated purpose is to raise capital or make
acquisitions in the normal course of business.

Director Compensation. The Investment Adviser considers: (i) whether
director shares are at the same market risk as those of the shareholders; and
(ii) how option programs for outside directors compare with the standards of
internal programs.

Golden and Tin Parachutes. The Investment Adviser considers: (i) whether
they will be submitted for shareholder approval; and (ii) the employees covered
by the plan and the quality of management.

LIMITATIONS

The Investment Adviser may abstain from voting a proxy if it concludes
that the effect on shareholders' economic interests or the value of the
portfolio holding is indeterminable or insignificant. The Investment Adviser may
abstain from voting a proxy if it concludes that the cost of voting is
disproportionate to the economic impact the vote would have on the portfolio
holdings.

CONFLICTS OF INTEREST

The Proxy Committee identifies any potential conflicts of interest.
Each potential conflict must be addressed in a manner which will be in the best
interest of the Funds and their shareholders. If any potential conflict is
identified the Proxy Committee consults with the Investment Adviser's CCO. Where
conflicts of interest arise between clients and the Investment Adviser, the
Investment Adviser may convene an ad-hoc committee to debate the conflict and to
give a ruling on a preferred course of action. If the ad-hoc committee
determines that the Investment Adviser has a conflict of interest in any
instance, the Investment Adviser's CCO shall disclose the conflict to the Board
and seek voting instructions.

The Investment Adviser may cause the proxies to be voted in accordance
with the recommendations of an independent third party service provider that the
Investment Adviser may use to assist in voting proxies.

DISCLOSURE

The following disclosure shall be provided in connection with these
policies and procedures:

o The Investment Adviser shall provide a description or a copy
of these policies and procedures to the Boards of Trustees of
the Funds annually and upon request.

o The Investment Adviser shall make available to the Funds its
proxy voting records, for inclusion on the Funds' Form N-PX.

o The Investment Adviser shall include its proxy voting policies
and procedures in its annual filing on Form N-CSR.

o The Investment Adviser shall cause the Funds' shareholder
reports to include a statement that a copy of these policies
and procedures is available upon request (i) by calling a
toll-free number; (ii) on the Funds' website, (if the Funds
choose); and (iii) on the SEC's website.

o The Investment Adviser shall cause the Funds' annual and
semi-annual reports to include a statement that information is
available regarding how the Funds voted proxies during the
most recent twelve-month period (i) without charge, upon
request, either by calling a toll-free number or on or through
the Funds' website, or both; and (ii) on the SEC's website.

RECORDKEEPING

The Investment Adviser shall maintain records of proxies voted in
accordance with Section 204-2 of the Investment Advisers Act, including proxy
statements, a record of each vote cast, and a copy of any document created by
the Investment Adviser that was material to making a decision of how to vote the
proxy, or that memorializes the basis for the Investment Adviser's decision on
how to vote the proxy. The Investment Adviser shall also maintain a copy of its
policies and procedures and each written request from a client for proxy voting
records and the Investment Adviser's written response to any client request,
either written or oral, for such records. Proxy statements that are filed on
EDGAR shall be considered maintained by the Investment Adviser. All such records
shall be maintained for a period of five years in an easily accessible place,
the first two year in the offices of the Investment Adviser.