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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended: DECEMBER 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from: ________________ to ________________

Commission file number: 0-22769

LEUKOSITE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 04-3173859
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

215 FIRST STREET, CAMBRIDGE, MA 02142
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

(617) 621-9350
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the registrant's common stock, $.01 par value
per share ("Common Stock"), held by non-affiliates of the registrant as of March
18, 1998 was approximately $54,681,722 based on 5,832,717 shares held by such
non-affiliates at the closing price of a share of Common Stock of $9.375 as
reported on the Nasdaq National Market on such date. Affiliates of the Company
(defined as officers, directors and owners of 10 percent or more of the
outstanding share of Common Stock) owned 4,052,143 shares of Common Stock
outstanding on such date. The number of outstanding shares of Common Stock of
the Company on March 18, 1998 was 9,884,860.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held on
May 4, 1998 are incorporated by reference into Part III hereof. With the
exception of the portions of such Proxy Statement expressly incorporated into
this Annual Report on Form 10-K by reference, such Proxy Statement shall not be
deemed filed as part of this Annual Report on Form 10-K.

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LEUKOSITE, INC.
ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

ITEM PAGE
- ---- ----

PART I
1 Business.................................................... 3
2 Properties.................................................. 24
3 Legal Proceedings........................................... 24
4 Submission of Matters to a Vote of Security Holders......... 24

PART II
5 Market For Registrant's Common Stock and Related Stockholder
Matters..................................................... 24
6 Selected Financial Data..................................... 26
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
7A Quantitative and Qualitative Disclosure of Market Risks..... 30
8 Financial Statements and Supplementary Data................. 31
9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 56

PART III
10 Directors and Executive Officers of the Registrant.......... 56
11 Executive Compensation...................................... 56
12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 56
13 Certain Relationships and Related Transactions.............. 56

PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 57
Signatures.................................................. 60

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Except for the historical information contained herein, this Annual Report
on Form 10-K may contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, but not limited to, (i) statements about the
adequacy of the Company's cash, cash equivalents, other capital resources,
interest income and future revenues due under the Company's collaborative
agreements to fund its operating expenses and capital requirements as currently
planned through early 2001; (ii) statements about the Company's plans to conduct
clinical trials of or receive regulatory approvals for its product candidates
and (iii) certain statements identified or qualified by words such as "likely",
"will", "suggests", "may", "would", "could", "should", "expects", "anticipates",
"estimates", "plans", "projects", "believes", or similar expressions (and
variants of such words or expressions). Investors are cautioned that
forward-looking statements are inherently uncertain. Actual performance and
results of operations may differ materially from those projected or suggested in
the forward-looking statements due to certain risks and uncertainties,
including, but not limited to, the risks and uncertainties described or
discussed in the section "Risk Factors" in this Annual Report on Form 10-K. The
forward-looking statements contained herein represent the Company's judgment as
of the date of this Annual Report on Form 10-K, and the Company cautions readers
not to place undue reliance on such statements.

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PART I

ITEM 1. BUSINESS

THE COMPANY

LeukoSite is a leader in the discovery and development of therapeutics
based upon the biology of leukocytes. Therapeutics developed using LeukoSite
technology may be used to treat cancer and inflammatory, autoimmune and viral
diseases. The Company's technologies and expertise in leukocyte biology
facilitate the discovery and development of novel and proprietary drugs that
destroy or block the disease-promoting actions of leukocytes. The Company has
one product candidate that, subject to receipt of regulatory approvals, is
expected to enter into a pivotal clinical trial in early 1998. In addition, the
Company has two product candidates that have commenced human clinical trials in
the United Kingdom, and seven small molecule drug discovery programs.

BACKGROUND

Overview of Leukocyte and Immune System Biology

The human immune system protects the body against infection by bacteria,
viruses and parasites. Leukocytes are formed in the bone marrow, mature in
lymphatic tissue and are transported throughout the body by the bloodstream.
Endothelial cells, which comprise the inner lining of blood vessels, act as
gatekeepers allowing circulating leukocytes to enter surrounding tissue when
needed. Leukocytes, in a healthy immune response, eliminate pathogens without
damaging host cells.

Leukocyte Maturation. Hematopoietic (blood-forming) stem cells in the bone
marrow produce precursor cells that mature into circulating leukocytes.
Neutrophils, eosinophils and basophils, which are types of mature leukocytes,
are normally formed only in the bone marrow and are stored there until they are
needed. The other types of leukocytes (lymphocytes and monocytes) mature in
other organs, including the lymph nodes, spleen, thymus, tonsils and gut. During
the process of maturation and storage, leukocytes differentiate into more
defined functional subtypes, after which they are released into the circulatory
system. As they mature, leukocytes undergo complex changes including the
appearance and disappearance of molecules or receptors on their outer membrane.
Proteins and other biomolecules produced in the body bind to these receptors
which in turn signal the leukocytes to respond in specific ways. If the
leukocyte maturation process does not occur normally, uncontrolled and rapid
proliferation of certain types of leukocytes may lead to malignant diseases such
as leukemias and lymphomas.

Leukocyte Recruitment. Circulating leukocytes leave the bloodstream and
migrate into tissues via a complex set of pathways and molecular interactions.
This process is a fundamental part of the human immune system and provides a way
for leukocytes to be recruited to areas of infection or damaged tissue. The
sequential steps that lead to the recruitment of leukocytes from the blood
vessel into tissues begin when selectins, expressed by endothelial cells,
momentarily tether passing leukocytes causing them to roll along the vessel
wall. If the leukocytes encounter chemokines, a type of chemical signal
emanating from an inflammation site, receptors on the surface of the tethered
leukocytes will then bind to the chemokines, initiating a series of changes
within the leukocytes. Among the changes is the enhanced activity of adhesion
receptors called integrins. In the final step, the integrins on the surface of
the leukocytes bind to complementary structures called adhesion molecules
located on the vessel wall. Once attached, the leukocytes change shape, squeeze
through the vessel wall and migrate to the area of increased chemokine
concentration at the site of inflammation.

The process of leukocyte recruitment requires precise regulation. It is
essential that the body has exact signals as to when, where and with which type
of leukocyte to respond. In many inflammatory and autoimmune diseases, these
signals operate at the wrong place or time, leading to improper recruitment and
resulting in tissue damage from the release of inflammatory substances, such as
cytokines, growth factors and oxygen radicals.

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Chemokines and Chemokine Receptors. Chemokines are a family of proteins
produced in many different tissues. The expression of chemokines is increased in
response to infection or very early stages of inflammation. Chemokine receptors
are members of the G protein-coupled family of receptors located on the outer
membrane of the cell and translate a variety of signals from the outside to the
inside of the cell. Chemokines bind to these chemokine receptors and activate
leukocytes, causing them to migrate toward the source of the chemokine molecule
(that is, movement out of the bloodstream and into tissues). Each subset of
leukocytes (for example, eosinophils, monocytes, lymphocytes and neutrophils)
has distinct types of chemokine receptors that respond to only certain
chemokines. Through this discriminating mechanism, the body can control and
selectively recruit certain types of leukocytes to mediate an inflammatory
process. In addition, certain viruses, such as HIV-1, may use chemokine
receptors as a homing mechanism to bind to and infect leukocytes.

Integrins and Adhesion Molecules. Integrins and adhesion molecules provide
another degree of control over leukocyte recruitment pathways. Integrins are a
family of proteins comprised of a series of alpha and beta chains that bind to
distinct receptors, called adhesion molecules, found on endothelial and other
types of cells. Adhesion molecules attract only those leukocytes that have
matching integrin molecules and allow for the selective transfer of these
leukocytes through the endothelial layer into tissues. A subset of adhesion
molecules called addressins is expressed only on certain tissues in response to
infection or damage.

THE LEUKOSITE APPROACH: LEUKOCYTE SPECIFIC DRUGS

LeukoSite is researching and developing drugs to destroy or block the
disease-promoting actions of leukocytes. The Company's technology and expertise
provide the platform for the identification of novel and proprietary
anti-cancer, anti-inflammatory and anti-viral drugs.

LeukoSite's goal is to discover and develop effective and safe therapeutic
drugs that target specific types of leukocyte pathways. Most available drugs
that regulate the immune response lack specificity for disease. For example,
steroids not only block inflammation but also suppress a variety of necessary
immunologic functions. Such non-specific drugs may produce profound universal
immunosuppression and can have other side effects. The targets for the Company's
discovery and development programs include chemokines, leukocyte cell surface
molecules (including chemokine receptors and integrins) and adhesion molecules.
This technology provides the basis for the discovery of drugs that work by
destroying specific types of leukocytes or blocking the recruitment of specific
types of leukocytes into diseased tissues.

Selective Depletion of Leukocytes. Therapeutic drugs that can selectively
eliminate certain leukocytes while sparing hematopoietic stem cells may be
useful for the treatment of certain blood cancers and as therapies to reduce
rejection of transplanted bone marrow and organs. For example, LDP-03, a
humanized lymphocyte-depleting monoclonal antibody, is directed against the CD52
surface antigen expressed on lymphocytes but not on hematopoietic stem cells.
Unlike fludarabine and other traditional cytotoxic chemotherapies used to treat
lymphomas and leukemias, LDP-03 does not deplete leukocyte-generating
hematopoietic stem cells.

Selective Blockade of Leukocyte Receptor and Recruitment Pathways. Many
inflammatory and autoimmune diseases may be caused by dysfunctional
chemokine/receptor and integrin/adhesion molecule pathways. LeukoSite has
identified a number of these pathways that appear to cause specific inflammatory
diseases. The technology platform developed at LeukoSite allows it to discover,
clone and characterize novel chemokines, chemokine receptors, integrins and
adhesion molecules for the discovery of disease-specific therapeutics.

LEUKOSITE'S DRUG DEVELOPMENT PROGRAMS

LeukoSite currently has three drugs in human clinical development. These
monoclonal antibody programs are based on leukocyte selectivity and tissue
specificity.

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LDP-03 (CAMPATH-IH)

LeukoSite's lead product candidate, LDP-03, is a humanized monoclonal
antibody to the leukocyte antigen CAMPATH, which the Company is developing
jointly with Ilex Oncology, Inc. ("Ilex") for the treatment of chronic
lymphocytic leukemia ("CLL"). The Company licensed LDP-03 from the British
Technology Group ("BTG") after reviewing data from Phase I and II clinical
trials conducted by Burroughs Wellcome ("BW") showing activity in the treatment
of patients with CLL. LDP-03 combats CLL by selectively depleting lymphocytes
while sparing hematopoietic stem cells. This selective depletion permits the
body to retain needed hematopoietic stem cells that are the precursors to, and
repopulate the blood with, leukocytes and preserve normal immune function.
LDP-03 binds to the antigen CD52, which is expressed almost exclusively on
lymphocytes and which is not expressed on hematopoietic stem cells, and destroys
the lymphocytes. By attacking the antigen CD52 and its lymphocytes, LDP-03 is
more selective than currently approved drugs for lymphomas and leukemias which
indiscriminately deplete rapidly-dividing cells, including both lymphocytes and
hematopoietic stem cells.

CLL patients are presently treated with chlorambucil and fludarabine as
first-line or second-line therapy. Despite this course of treatment, all
patients not dying of other causes eventually relapse. No approved therapy is
available to treat patients who fail therapy with fludarabine. Based on the data
from the clinical trials, the Company believes that LDP-03 may be effective for
symptomatic CLL patients who have failed the current standard of care and second
line therapies.

LeukoSite entered into a joint venture with Ilex, a drug development
company with expertise in the clinical development and registration of oncology
drugs, for the clinical development and commercialization of LDP-03. The joint
venture has entered into an agreement with Karl Thomae, a contract drug
manufacturing company and a subsidiary of Boehringer Ingleheim, for the
manufacture of material to be used for clinical trials and commercialization.
See "Collaboration Agreements -- Ilex."

Based on the BW Phase I and II clinical trial data from approximately 75
patients with relapsing or refractory CLL treated with LDP-03, and following
discussions with U.S. and European regulatory agencies, the Company and Ilex
have decided to file the required IND amendment and European dossiers to begin a
single, noncomparative, multi-center pivotal clinical trial in 1998 in 50 to 100
previously treated CLL patients who have failed treatment with fludarabine to
support a BLA filing with the FDA. Patient responses will be evaluated based on
the National Cancer Institute criteria and other parameters defined by the
Company. There can be no assurance that this late-stage clinical trial will be
sufficient or provide adequate confirmatory results to support licensure of the
LDP-03.

LDP-01 (anti-beta2 mAb)

LeukoSite is developing LDP-01, a humanized monoclonal antibody to the
beta2 integrin on leukocytes for the prevention of post-ischemic reperfusion
injury such as that resulting from organ transplantation, stroke and myocardial
infarction. The Company believes that LDP-01 blocks the attachment of beta2
integrins to their adhesion molecules and limits the recruitment of leukocytes
involved in the inflammatory process at multiple tissue sites. The beta2
integrin receptor on the surface of leukocytes interacts with specific adhesion
molecules on the surface of endothelial cells lining blood vessels. This
interaction is essential for leukocytes to migrate into tissues and organs.

Preclinical trials demonstrate that LDP-01 can block attachment of
leukocytes to endothelial cells and inhibit their inflammatory activities. In
two models of inflammation in chimpanzees, LDP-01 blocked the recruitment of
neutrophils, monocytes and lymphocytes and prevented inflammation. LDP-01 has
been administered to three patients in clinical studies sponsored by the
Therapeutic Antibody Centre ("TAC"): two for the treatment of vasculitis, an
inflammation of blood vessels, and one for the treatment of polymyositis, a
severe muscle disease resulting in the weakening of limb and trunk muscles. The
results in these patients provided clinical data that LDP-01 inhibited the
further recruitment of leukocytes into inflamed tissue.

Upon the reestablishment of blood flow following transplantation of organs
from cadaver donors, leukocytes are recruited to the transplanted organ
resulting in tissue injury, organ dysfunction and potentially

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graft loss. Methods that inhibit leukocyte recruitment following ischemic
injury, such as the blockade of beta2 integrins, could be therapeutically
beneficial to patients with ischemic disease and to patients receiving organ
transplants from cadavers. The use of LDP-01 in the treatment of kidney
transplant patients may result in a reduction in the time for the transplanted
graft to function and may enhance graft survival. The Company initiated a Phase
I/IIa clinical trial in October 1997 in the United Kingdom to determine the
safety, efficacy and pharmacokinetics of LDP-01 for the reduction of
post-ischemic reperfusion injury and delayed graft function in patients
receiving cadaver kidney transplants.

Stroke is the irreversible loss of brain cells following ischemia, the
interruption of blood flow depriving the brain of blood and oxygen. Further
damage to brain cells occurs as the result of reperfusion injury by leukocytes
when blood flow is reestablished. By inhibiting the recruitment of leukocytes,
LDP-01 may decrease the degree of reperfusion tissue damage and the extent of
the disability, and could significantly reduce the inpatient and rehabilitation
costs associated with this condition. The Company intends, subject to obtaining
regulatory approvals, to initiate a Phase I/IIa clinical trial in 1998 in the
United Kingdom to determine the safety, efficacy and pharmacokinetics of LDP-01
for the reduction of reperfusion tissue damage associated with ischemic stroke.

LDP-02 (anti-beta7 mAb)

LeukoSite is developing LDP-02, a humanized monoclonal antibody to the
alpha4beta7 integrin receptor on leukocytes. LDP-02 is being evaluated for the
treatment of inflammatory bowel disease, which includes ulcerative colitis and
Crohn's disease, chronic disorders characterized by inflammation and ulceration
of the intestines. Ulcerative colitis causes bleeding and inflammation of the
mucosal lining of the colon and rectum, while Crohn's disease is an inflammation
that extends deeper into all layers of the intestinal wall, and frequently
involves both the small and large intestine. Preclinical studies in rodents and
non-human primates have implicated the alpha4beta7 integrin subset of leukocytes
as major contributors to the process of inflammatory bowel disease. The Company
initiated a Phase I study of LDP-02 in the United Kingdom in January 1998 and,
subject to regulatory approval, plans to begin a Phase I/IIa study in 1998.

The Company evaluated the murine homologue of LDP-02 before it was
humanized and demonstrated pharmacologic activity in three non-human primate
models of inflammatory bowel disease, including the colitic cotton-top tamarin
monkey. The Company believes that this model represents the most clinically
useful model of ulcerative colitis. In this model, when systematically
administered, the murine homologue of
LDP-02 was found to be efficacious in rapidly resolving diarrhea and in
inhibiting the localization of leukocytes to the colonic mucosa.

Current therapy for inflammatory bowel disease includes the administration
of steroids which can broadly suppress the immune system. LeukoSite will seek to
develop intravenous and subcutaneous formulations of LDP-02 for the treatment
and management of severe exacerbations of inflammatory bowel disease.

In December 1997, LeukoSite entered into a collaboration agreement with
Genentech, Inc. ("Genentech") to develop and commercialize LDP-02 for the
treatment of inflammatory bowel disease. Under the terms of the collaboration
agreement, LeukoSite is to develop LDP-02 through Phase II human clinical
trials, after which, if successful, Genentech will complete development of the
product. See "Collaboration Agreements -- Genentech."

LEUKOSITE RESEARCH AND DRUG DISCOVERY PROGRAMS

LeukoSite currently has seven research and discovery programs. These
chemokine and integrin targeted programs are based on the selective blockade of
specific chemokine, chemokine receptor or integrin controlled leukocyte pathways
or functions.

CCR3 Receptor Antagonist

LeukoSite is engaged in the discovery and development of an orally
available, small molecule antagonist to block eosinophil recruitment and
function for the treatment of asthma and allergies. Data in animal models

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and in humans suggest that eosinophils, and their recruitment to the lung and
other tissues and organs, play a significant role in the pathogenesis of asthma
and other allergies. The Company, in connection with several of its academic
collaborators, has identified the principal eosinophil chemokine receptor, CCR3,
filed a patent application on the gene that encodes for the receptor and the
therapeutic applications of it and has developed a program to discover an
antagonist to block the CCR3 receptor and the recruitment of eosinophils to
respiratory tract tissue. The Company believes that a drug which blocks the
detrimental effects of eosinophil recruitment will reduce the inflammation that
contributes to asthma and allergies.

In July 1996, LeukoSite entered into an agreement with Roche Bioscience for
the Company's CCR3 antagonist program. Roche Bioscience is currently screening
its compound library against the Company's targets. See "Collaboration
Agreements -- Roche Bioscience."

MCP-1 Receptor Antagonist

LeukoSite is engaged in the discovery and development of an orally
available, small molecule antagonist to the MCP-1 receptor for the treatment of
chronic inflammatory and autoimmune diseases. The chemokine MCP-1 recruits
monocytes and T cells from the bloodstream to tissues. MCP-1 activates monocytes
and T cells by binding to its receptor on the leukocyte cell membranes, often
resulting in damage to surrounding tissues and irretrievable loss of normal
function. The blockade of the MCP-1 interaction with its receptor may be an
effective approach for the treatment of chronic inflammatory and autoimmune
diseases in which monocytes and T cells play key roles. In preclinical studies,
LeukoSite and others have shown that MCP-1 is associated with the inflammatory
processes exhibited in rheumatoid arthritis and atherosclerosis.

LeukoSite entered into a collaboration agreement with Warner-Lambert
Company ("Warner-Lambert") in September 1994 to discover and develop small
molecule antagonists to MCP-1 and its receptor. This collaborative effort has
identified inhibitors to the MCP-1 receptor which have demonstrated
pharmacological activity in animal models of inflammatory disease. This
collaboration entered into a second contractual stage in April 1996 with the
objective of optimizing the pharmacological profile of these inhibitors and
identifying a clinical development candidate. In October 1997, Kyowa Hakko
Kogyo, Ltd. ("Kyowa") joined the collaboration on MCP-1. See "Collaboration
Agreements -- Warner-Lambert/Kyowa."

IL-8 Receptor Antagonist

LeukoSite is engaged in the discovery and development of an orally
available, small molecule antagonist to the IL-8 chemokine receptor for the
treatment of diseases involving tissue injury that result from post-ischemic
reperfusion injury. Myocardial infarction results when blood flow to a region of
the heart is blocked as a result of a coronary artery becoming occluded. This
blockage results in injury to and death of heart tissue in the affected region.
A significant portion of the tissue injury and death is thought to be caused by
neutrophil-mediated inflammatory damage. IL-8 is a potent and selective
chemokine protein that causes the recruitment and activation of neutrophils,
which are responsible for subsequent inflammation and post-ischemic reperfusion
injury. The Company's program is directed at the discovery and development of
drugs which inhibit the binding of IL-8 to its receptor in order to block the
recruitment of neutrophils and to prevent the resulting inflammation and
reperfusion injury. LeukoSite currently intends to pursue an IL-8 receptor
antagonist for post-ischemic reperfusion tissue injury resulting from myocardial
infarction.

In July 1995, LeukoSite entered into a collaboration agreement with
Warner-Lambert to discover and optimize lead candidates using LeukoSite's IL-8
receptor-based technology by screening Warner-Lambert's compound library. In
October 1997, Kyowa joined the collaboration on IL-8. See "Collaboration
Agreements -- Warner-Lambert/Kyowa."

CXCR3 Receptor Antagonist and CCR1 Receptor Antagonist

LeukoSite is engaged in the discovery and development of orally available,
small molecule antagonists and monoclonal antibodies to block the leukocyte
recruitment pathways controlled by chemokine receptors CXCR3 and CCR1. Ligands
for the receptors, specifically the chemokines IP-10 and RANTES, play key roles
in recruiting T cells and monocytes to sites of inflammation. LeukoSite is
studying the role these
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receptors play in inflammation with a combination of tools including monoclonal
antibodies. Based upon knowledge of the cells which express these receptors,
small molecule antagonists may be of therapeutic value in the treatment of
chronic inflammatory and autoimmune disease.

In April 1997, LeukoSite entered into a collaboration agreement with Kyowa
to discover small molecule antagonists and monoclonal antibody drugs that block
these chemokine receptors. In October 1997, Warner-Lambert joined the
collaboration on CXCR3 and CCR1. See "Collaboration Agreements -- Warner-
Lambert/Kyowa."

CCR5/CXCR4 Receptor Antagonist

LeukoSite is engaged in the discovery and development of a small molecule
antagonist to the chemokine receptors CCR5 and CXCR4. Such a drug may be useful
in the treatment of patients infected with HIV and as a therapy for certain
inflammatory and autoimmune diseases. The CCR5 receptor is found on lymphocytes
and macrophages. Reports of people who are resistant to HIV link a deletion in
the CCR5 gene and a lack of CCR5 expression to their resistance to the disease.
LeukoSite and its collaborators have reported on the molecular mechanism by
which the virus binds to the CCR5 receptor and facilitates the entry of HIV-1
into leukocytes.

In November 1996, LeukoSite entered into a collaboration agreement with
Warner-Lambert to discover and optimize small molecule lead candidates using
LeukoSite's CCR5 receptor-based technology by screening Warner-Lambert's
compound library. In January 1998, LeukoSite and Warner-Lambert announced the
extension of the collaboration and its expansion to include the CXCR4 chemokine
receptor. See "Collaboration Agreements -- Warner-Lambert."

Outside its collaboration with Warner-Lambert, the Company has generated
monoclonal antibodies to the CCR5 receptor. These antibodies block strains of
HIV from binding to and infecting human leukocytes. The Company is currently
evaluating these antibodies in preclinical studies to determine future clinical
plans.

beta7 Integrin Receptor Small Molecule Antagonist

LeukoSite is engaged in the discovery and development of a small molecule
antagonist to the alpha4beta7 integrin receptor present on gut-homing T
lymphocytes. The goal of this program is to identify a potent orally-active
agent for patients with inflammatory bowel disease. In contrast to LDP-02, which
is intended to treat acute flares of inflammatory bowel disease, daily
administration of the oral beta7 integrin receptor antagonist is intended for
patients with mild to moderate inflammatory bowel disease in need of chronic
therapy. LeukoSite retains all rights to this program.

LeukoSite believes that it has a strong rationale for the discovery and
development of small molecule beta7 integrin receptor antagonists as a result of
observations that monoclonal antibodies to the alpha4beta7 integrin and its
receptor, mucosal addressin cell adhesion molecule ("MAdCAM"), produced
significant improvements in animal models of inflammatory bowel disease.
LeukoSite has made a significant advance in its program by cloning the human
gene for MAdCAM, which was disclosed in a U.S. patent application filed on
September 1, 1995. As a result of this advance, LeukoSite has obtained important
structural information in the design of active beta7 antagonists. The Company
screens its own library as well as libraries from the combinatorial chemistry
company, Oxford Asymmetry, Ltd., in connection with this program. Under the
terms of this agreement, LeukoSite retains all rights under the agreement to
commercialize drugs which result from the program between LeukoSite and Oxford
Asymmetry, Ltd. The Company has developed a high throughput beta7:MAdCAM
cell-based adhesion assay. Using this assay to screen compounds, LeukoSite has
identified several active compounds and is investigating the design of optimal
drug candidates.

COLLABORATION AGREEMENTS

LeukoSite has existing collaboration agreements with several pharmaceutical
companies, contract manufacturers and medical research institutions, and intends
to continue to seek collaboration agreements with additional third parties. The
Company structures its collaborations around specified targets, such as

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chemokines and chemokine receptors or integrins and adhesion molecules, or
around targeted objectives, such as the manufacture of a certain monoclonal
antibody or small molecule. This approach enables LeukoSite to exploit its drug
discovery technologies while retaining flexibility to pursue additional
collaborations. As of December 31, 1997, LeukoSite had received $10.2 million
under these collaborations for research funding and license fees and will be
entitled to receive $12.9 million of additional funding that is not subject to
the achievement of milestones (assuming each collaboration remains in effect for
its full term). As of December 31, 1997, Warner-Lambert had invested $9.0
million, Roche Finance Ltd had invested $3.0 million and Genentech had invested
$4.0 million in equity of the Company.

LeukoSite's principal existing collaborations are as follows:

Warner-Lambert/Kyowa

In October 1997, LeukoSite amended its collaboration agreements with
Warner-Lambert and Kyowa to combine the research and development efforts of the
three companies around the targets MCP-1, IL-8, CCR1 and CXCR3. Under the terms
of the joint research and development agreements, Kyowa becomes the primary
marketer of products developed during the collaboration in Asia, and
Warner-Lambert is to be the primary marketer of these products in the rest of
the world. LeukoSite will receive royalties on product sales, in addition to
licensing fees, research funding and milestone payments.

During the term of the collaboration, Warner-Lambert and Kyowa may become
obligated to make milestone payments to the Company. The collaboration
agreements with Warner-Lambert are terminable by either party at any time and
for any reason upon six months' written notice. In the event of termination,
each party would retain a non-exclusive license to use all technology arising
from the respective collaboration, and an exclusive royalty-free license to make
and sell products incorporating such technology. Warner-Lambert will receive a
credit against royalties payable to LeukoSite of approximately $3.9 million.
Under the collaboration agreement with Kyowa, Kyowa is obligated to provide the
Company with research funding payments and an additional payment if Kyowa elects
to extend the term of the agreement beyond its initial two year term. After
April 1998, Kyowa may terminate its obligation upon 60 days' notice, upon which
Kyowa's funding obligation to the Company would also terminate.

Warner-Lambert

In November 1996, LeukoSite and Warner-Lambert entered into a one-year
exclusive drug discovery collaboration to screen and characterize antagonists to
the CCR5 chemokine receptor (the "CCR5 Agreement"). The CCR5 Agreement
contemplates two phases: the initial research phase, and a second phase which
would involve the negotiation of a new collaboration agreement similar to the
MCP-1 and IL-8 Agreements described above. In January 1998, LeukoSite and
Warner-Lambert announced the extension of their collaboration and its expansion
to include the CXCR4 chemokine receptor. Warner-Lambert has the worldwide,
exclusive right under the collaboration agreement to develop and commercialize
products derived from the collaboration. LeukoSite will be entitled to receive
payments upon the achievement of milestones. LeukoSite has retained the option
to co-promote products in North America and share a portion of the profits from
such sales, based on LeukoSite's level of participation and financial support of
the development of the product in North America. In the event that LeukoSite
declines to exercise its option to co-promote, LeukoSite would be entitled to
receive royalties on product sales.

Roche Bioscience

In April 1996, LeukoSite entered into a two-year collaboration agreement
with Roche Bioscience to research and discover small molecule antagonists and/or
monoclonal antibodies to the CCR3 receptor and other eosinophil recruitment
mechanisms (the "CCR3 Agreement"). Roche Bioscience is obligated under the CCR3
Agreement to provide funding to the Company to support (i) a team of
scientist-employees of the Company, (ii) humanization of monoclonal antibodies
to CCR3 and (iii) additional research if the parties mutually agree to extend
the CCR3 Agreement to a third year. In conjunction with the CCR3 Agreement, the
parties also entered into a license agreement (the "CCR3 License Agreement"),
whereby Roche Bioscience is

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granted the exclusive right to make and sell products developed under the
collaboration in exchange for a noncreditable license fee. The CCR3 License
Agreement also provides that milestone payments shall be made by Roche to
LeukoSite and that LeukoSite is entitled to receive royalties on product sales.

Ilex

In May 1997, LeukoSite and Ilex entered into a joint venture whereby the
parties formed a limited partnership to develop LDP-03 for the treatment of
chronic lymphocytic leukemia, pursuant to an agreement of limited partnership
and a license agreement between the LeukoSite/Ilex partnership and LeukoSite.
The partners are required to make contributions each time the partnership
requires working capital. The development and commercialization activities of
the joint venture will be managed with equal control by each party. LeukoSite
and Ilex will generally share equally in profits from the sales of LDP-03 and in
all research, development, clinical and commercialization costs. LeukoSite and
Ilex estimate that research, development and clinical costs will be
approximately $5 million over the next year. The joint venture expires in 2017,
but provides for either partner, after the earlier of a change in control (as
defined therein) of the other partner or October 2, 2000, to purchase the other
partner's ownership of the joint venture in the event of an unresolved deadlock.
In addition, in the event that one party is unable or unwilling to fulfill its
funding obligations to the joint venture, then, in certain circumstances, the
party that funds the joint venture shall gain control of the management of the
joint venture, subject to certain catch-up rights of the other party.

Genentech

In December 1997, LeukoSite entered into a collaboration agreement with
Genentech to develop and commercialize LDP-02 for the treatment of inflammatory
bowel disease (the "LDP-02 Agreement"). Under the terms of the LDP-02 Agreement,
LeukoSite is to develop LDP-02 through Phase II clinical trials. If the Phase II
clinical trials are successful, Genentech will complete the development of the
product and will receive exclusive worldwide rights to market LDP-02. If a
product is successfully developed, LeukoSite is entitled to receive milestone
payments and royalties on product sales. In addition, Genentech has agreed to
provide two credit facilities. The first credit facility will be for
approximately $15 million and will fund development through the completion of
Phase II. The second credit facility will be available to LeukoSite if it agrees
to fund 25% of the Phase III development costs in return for a share of profits
on U.S. sales. If LeukoSite elects to share in the funding of the Phase III
development costs, it will receive a share of the profits of LDP-02 rather than
receiving royalties on sales.

The two credit facilities can be either repaid by the Company or converted
into shares of Common Stock at the then market value of the Common Stock. The
credit facilities are repayable at the earlier of 7 years or upon the approval
of a BLA for LDP-02. If the size of the loan exceeds 50% of LeukoSite's market
capitalization, Genentech has the right to convert all of the loan or the
portion of the outstanding loan that is in excess of 50% of LeukoSite's market
capitalization into shares of Common Stock at the then current market price. In
addition, in the event that any such conversion would require LeukoSite and
Genentech to file notification pursuant to the Hart-Scott-Rodino Act, Genentech
may require LeukoSite to convert part or all of the loan into shares of Series A
Convertible Preferred Stock instead of into Common Stock. The Series A
Convertible Preferred Stock will have a liquidation preference of $.01 per share
and no voting rights, and will be junior to any other class of Preferred Stock.
In addition, the Series A Convertible Preferred Stock will be convertible into
shares of Common Stock on a one-for-one basis, subject to adjustment for stock
splits, stock dividends and recapitalization.

The LDP-02 Agreement may be terminated by Genentech at any time after one
year upon nine months prior written notice. Upon termination by Genentech, all
rights to LDP-02 shall revert to LeukoSite, and LeukoSite shall receive a
non-exclusive license to certain Genentech technology. In addition, upon
optional termination of the LDP-02 Agreement by Genentech, the credit facilities
shall continue to be repaid in accordance with their terms, and the warrant
issued to Genentech, to the extent not previously exercised, shall terminate.

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Therapeutic Antibody Centre

In October 1994, LeukoSite, the University of Oxford and the U.K. Medical
Research Council ("MRC") entered into a collaboration agreement to jointly
construct and operate the TAC, a pharmaceutical discovery, testing and
manufacturing center. Under the terms of the collaboration, MRC and LeukoSite
contribute toward funding the cost of staffing, equipment, facility construction
and other operating expenses of the TAC. The Company retains an exclusive
worldwide right to license technology discovered at the TAC in exchange for
royalties payable to the University of Oxford and MRC. The collaboration expires
five years after the TAC is fully operational.

Other Collaboration Agreements

In addition, the Company has collaboration agreements in effect with The
Imperial College of Science, Technology and Medicine; Lynxvale, Ltd.; Oxford
Asymmetry, Ltd.; the National Heart and Lung Institute; the Theodor Kocher
Institute and the University of Oxford.

PATENTS AND PROPRIETARY RIGHTS

The Company's strategy is to protect its intellectual property related to
processes and compositions of matter by, among other things, filing patent
applications in the United States and other key markets. LeukoSite has 19
pending U.S. patent applications, 14 foreign patent applications and nine
international patent applications under the Patent Cooperation Treaty ("PCT").
In addition, LeukoSite has in-licensed seven U.S. patents, 12 U.S. patent
applications, seven foreign patents and 13 foreign patent applications.

In addition, LeukoSite has an exclusive license from BTG under United
States and foreign patents and patent applications, variously covering certain
humanized antibodies against the CAMPATH antigen, pharmaceutical compositions,
host cells useful in the production of such antibodies, processes of producing
such antibodies and medical uses of such antibodies. The Company also has a
non-exclusive sublicense from BTG under additional U.S. and foreign patents and
patent applications, including U.S. patents which cover a method of treating a
human suffering from a disease or disorder, such as a cancer or a T
cell-mediated disorder.

The Company's product candidates LDP-01, LDP-02 and LDP-03 are recombinant
humanized, complementarity determining region ("CDR")-grafted, monoclonal
antibodies. The Company is aware that patents have been issued in the United
States to third parties which relate to processes for producing recombinant
antibodies, compositions such as vectors and host cells useful in the production
of recombinant antibodies, CDR-grafted humanized antibodies, processes for
producing CDR-grafted humanized antibodies and compositions such as vectors and
host cells useful in the production of CDR-grafted humanized antibodies. Patents
have also been granted to these parties in Europe, but the European patents have
been opposed by third parties. The Company may be required to seek licenses
under these patents for its humanized antibody products.

The Company is also aware of patents which have been issued to a third
party in the United States and Europe variously relating to "chimeric"
immunoglobulins and immunoglobulin chains, processes for production of such
chimeric molecules and compositions such as vectors and host cells useful in the
production of chimeric molecules. The European patent has been opposed by third
parties and a decision by the Opposition Division revoking this patent has been
appealed, which reinstates the patent during the appeal process. The Company,
based on the analysis of Hamilton, Brook, Smith & Reynolds, P.C., the Company's
patent counsel, believes that, properly construed, the United States claims do
not cover the Company's LDP-01, LDP-02 or LDP-03 product candidates. It is
uncertain whether any claims in the European patent will survive, or if they do,
whether such claims will cover the Company's product candidates.

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methods of using of modified humanized immunoglobulins. The European patents in
these areas have also been opposed by third parties. The Company, based on the
analysis of Hamilton, Brook, Smith & Reynolds, P.C., the Company's patent
counsel, believes that, properly construed, the U.S. patent claims do not cover
the Company's LDP-01 and LDP-03 product candidates. The Company is uncertain
about the validity and scope of claims which have issued in the United States.
If it is finally determined that one or more valid claims do encompass LDP-02,
the Company will be required to seek a license or cease development, manufacture
and sale of such product. It is uncertain whether any claims in the European
patents will survive the opposition proceedings, or if they do, whether such
claims will cover the Company's product candidates.

The Company is also aware of other third party published applications
relating to altered antibodies, methods of use of altered antibodies and methods
of production of altered antibodies. To the Company's knowledge, neither these
applications nor possible unpublished counterpart applications have proceeded to
grant in Europe or have issued as U.S. patents. There can be no assurance that
the Company will not be required to seek a license to some or all of the patents
which might issue from these patent applications.

The Company may be required to seek or choose to seek licenses to some or
all of these or other patents in order to develop and commercialize certain
product candidates or potential products incorporating the Company's technology
in the United States, Europe and other markets. There can be no assurance that
such licenses, if required, will be available to the Company, or if available,
will be obtainable on commercially acceptable terms, and the failure to obtain
such licenses could have a material adverse effect on the Company. In the
absence of required licenses, the patent owners may obtain an injunction, which
could prevent the manufacture, sale and use of the Company's products, with
material adverse effects on the Company. In addition, assuming such patents are
valid and enforceable, the Company can provide no assurances that, if
enforcement actions are brought by the patent owners against the Company, such
actions would be resolved in the Company's favor. The Company may also choose to
challenge the validity of one or more patents or patent claims. Any such action
or challenge could result in substantial costs to the Company and diversion of
Company resources and could have a material adverse effect on the Company.
Moreover, there can be no assurance that the Company would be successful in
defending against an infringement action or in challenging any such patents or
patent claims, and the failure to do so could have a material adverse effect on
the Company. If the Company does not obtain any required license, it could
encounter delays in product development while it attempts to design around the
patents, or it could find that the development, manufacture or sale of products
requiring such licenses could be foreclosed.

Patent law, as it relates to inventions in the pharmaceutical and
biotechnology fields, is still evolving and involves complex legal and factual
questions for which legal principles are not firmly established. Moreover,
because (i) patent applications in the United States are maintained in secrecy
until patents issue, (ii) patent applications in certain other countries
generally are not published until more than eighteen months after the earliest
priority date claimed, (iii) publication of technological developments in the
scientific or patent literature often lags behind the date of such developments
and (iv) searches of prior art may not reveal all relevant prior inventions, the
Company cannot be certain that it was the first to invent the subject matter
covered by its patent applications or that it was the first to file patent
applications for such inventions. Accordingly, there can be no assurance that
patents will be granted with respect to any of the Company's pending patent
applications or with respect to any patent applications filed by the Company in
the future. Similarly, the Company cannot be certain that the inventors of the
subject matter covered by applications which the Company has licensed were the
first to invent, or that the applicants of applications licensed by the Company
were the first to file. Accordingly, there can be no assurance that patents will
be granted with respect to any of the Company's pending licensed patent
applications or with respect to any future applications subject to a license.

The commercial success of the Company will depend in part on not infringing
patents or proprietary rights of others. There can be no assurance that the
Company will be able to obtain a license to any third party technology it may
require to conduct its business or that, if obtainable, such technology can be
licensed at a reasonable cost. Failure by the Company to obtain a license to
technology that it may require to utilize its technologies or commercialize its
products may have a material adverse effect on the Company's business, operating
results and financial condition. In some cases, litigation or other proceedings
may be necessary to
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defend against or assert claims of infringement, to enforce patents issued to
the Company, to protect trade secrets, know-how or other intellectual property
rights owned by the Company, or to determine the scope and validity of the
proprietary rights of third parties. Any potential litigation could result in
substantial costs to and diversion of resources by the Company and could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that any of the Company's issued
or licensed patents would ultimately be held valid or that efforts to assert or
defend any of its patents, trade secrets, know-how or other intellectual
property rights would be successful. An adverse outcome in any such litigation
or proceeding could subject the Company to significant liabilities, require the
Company to cease using the subject technology or require the Company to license
the subject technology from the third party, all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Much of the Company's technology and many of its processes are dependent
upon the knowledge, experience and skills, which are not patentable, of key
scientific and technical personnel. To protect its rights to and to maintain the
confidentiality of trade secrets and proprietary information, the Company
requires employees, consultants and Scientific Advisory Board and Clinical
Advisory Board members to execute confidentiality and invention assignment
agreements upon commencement of a relationship with the Company. These
agreements prohibit the disclosure of confidential information outside the
Company and require disclosure and assignment to the Company of certain ideas,
developments, discoveries and inventions made by employees, advisors and
consultants. There can be no assurance, however, that these agreements will not
be breached or that the Company's trade secrets or proprietary information will
not otherwise become known or developed independently by others.

GOVERNMENT REGULATION

Overview of FDA Regulations. Non-biological drugs and biological drugs,
including the Company's products under development, are subject to extensive and
rigorous regulation by the federal government, principally the Food and Drug
Administration (the "FDA"), and by state and local governments. If these
products are marketed abroad, they also are subject to export requirements and
to regulation by foreign governments. The applicable regulatory clearance
process, which must be completed prior to the commercialization of a product, is
lengthy and expensive. There can be no assurance that the Company will be able
to obtain the necessary regulatory approvals on a timely basis, if at all, for
any of its products under development, and delays in receipt of or failure to
receive such approvals, the loss of previously received approvals, or failure to
comply with existing or future regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.

FDA requirements for the Company's products under development vary
depending upon whether the product is a non-biological drug or biological drug.
The Company believes that its monoclonal antibody products currently in human
clinical or late preclinical development (i.e., LDP-03, LDP-01 and LDP-02) will
be regulated by the FDA as biological drugs. Because of the early research and
development stages of its small molecule antagonist program, the Company is
uncertain as to whether products under development in its small molecule
antagonist program will be regulated as non-biological drugs or biological
drugs.

Regulation of Non-biological Drugs and Biological Drugs. Non-biological
drugs and biological drugs are subject to some of the same laws and regulations.
Ultimately, however, they are approved under different regulatory frameworks.
Product development and approval within either regulatory framework takes a
number of years, involves the expenditure of substantial resources and is
uncertain. Many non-biological drugs and biological drugs that initially appear
promising ultimately do not reach the market because they are not found to be
safe or effective or cannot meet the FDA's other regulatory requirements. In
addition, there can be no assurance that the current regulatory framework will
not change or that additional regulations will not arise at any stage of the
Company's product development that may affect approval, delay the submission or
review of an application or require additional expenditures by the Company.

The activities required before a new non-biological drug or biological drug
can be marketed in the United States primarily begin with preclinical testing.
Preclinical tests include laboratory evaluation of product

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chemistry and other characteristics and animal studies to assess the potential
safety and efficacy of the product as formulated. Many preclinical studies are
regulated by the FDA under the current Good Laboratory Practice ("GLP")
regulations. Violations of these regulations can, in some cases, lead to
invalidation of the studies, requiring such studies to be replicated if the data
are to be submitted to the FDA in support of a marketing application.

The entire body of preclinical development work necessary to administer
investigational non-biological drugs and biological drugs to human volunteers or
patients is summarized in an investigational new drug ("IND") application
submitted to the FDA. FDA regulations provide that human clinical trials may
begin 30 days following submission of an IND application, unless the FDA advises
otherwise or requests additional information, clarification or additional time
to review the application. There is no assurance that the submission of an IND
will eventually allow a company to commence clinical trials. Once trials have
commenced, the FDA may stop the trials, or particular types of trials, by
placing a "clinical hold" on such trials because of concerns about, for example,
the safety of the product being tested. Such holds can cause substantial delay
and in some cases may require abandonment of a product.

Clinical testing involves the administration of the investigational
non-biological drug or biological drug to healthy human volunteers or to
patients under the supervision of a qualified principal investigator, usually a
physician, pursuant to an FDA reviewed protocol. Each clinical study is
conducted under the auspices of an Institutional Review Board ("IRB") at each of
the institutions at which the study will be conducted. An IRB will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution. Human clinical trials typically are
conducted in three sequential phases, but the phases may overlap. Phase I trials
consist of testing the product in a small number of patients or normal
volunteers, primarily for safety, in one or more dosages, as well as
characterization of a drug's pharmacokinetic and/or pharmacodynamic profile. In
Phase II, in addition to safety, the efficacy of the product is evaluated in a
patient population. Phase III trials typically involve additional testing for
safety and clinical efficacy in an expanded population at geographically
dispersed sites. A clinical plan, or "protocol," accompanied by the approval of
an IRB, must be submitted to the FDA prior to commencement of each clinical
trial. All patients involved in the clinical trial must provide informed consent
prior to their participation. The FDA may order the temporary or permanent
discontinuance of a clinical trial at any time for a variety of reasons,
particularly if safety concerns exist. These clinical studies must be conducted
in conformance with the FDA's bioresearch monitoring regulations.

A company seeking FDA approval to market a new non-biological drug (in
contrast to biological drug) must file a new drug application ("NDA") with the
FDA. In addition to reports of the preclinical and clinical trials conducted
under the FDA-approved IND application, the NDA includes information pertaining
to the preparation of the drug substance, analytical methods, drug product
formulation, detail on the manufacture of finished products and proposed product
packaging and labeling. In addition to reports of the preclinical and clinical
trials conducted under the FDA-authorized IND application, the marketing
application includes evidence of the product's safety, purity, potency, and
efficacy.

The FDA has established procedures designed to expedite the development,
evaluation and marketing of therapies intended to treat persons with cancer,
AIDS or other life-threatening and severely-debilitating illnesses, especially
when no satisfactory alternative therapy exists. Sponsors of such products may
request to meet with the FDA-reviewing officials early in the drug development
process to review and reach agreement on the design of necessary preclinical and
clinical studies. Treatment of patients with an experimental non-biological or
biological drug also may be allowed under a Treatment IND before general
marketing begins and pending FDA approval. Charging for an investigation product
also may be allowed under a Treatment IND to recover certain costs of
development if various requirements are met. There can be no assurance that any
of the Company's products under development will qualify for expedited review or
for treatment use.

Traditionally, a company seeking FDA approval to market a biological drug
(in contrast to a non-biological drug) was required to file a product license
application ("PLA"), and an establishment license application ("ELA") with the
FDA before commercial marketing of a biological drug. As part of its reinventing
government materials, the FDA amended the biological drug regulations to
eliminate the ELA

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requirements for specified biotechnology and synthetic biological drugs,
including, but not limited to, monoclonal antibody products for in vivo use. For
these specified products, in place of the ELA a company is required to prepare
and submit additional information for inclusion in a single biologics license
application ("BLA").

Submission of a NDA, PLA, ELA or BLA does not assure FDA approval for
marketing. The application review process generally takes one to three years to
complete, although reviews of non-biological drugs and biological drugs for
life-threatening diseases may be accelerated or expedited. However, the process
may take substantially longer if, among other things, the FDA has questions or
concerns about the safety and/or efficacy of a product.

In addition, the FDA may, in some circumstances, impose restrictions on the
use of the non-biological drug or biological product that may be difficult and
expensive to administer. Product approval may be withdrawn if compliance with
regulatory requirements are not maintained or if problems occur after the
product reaches the market. The FDA requires reporting of certain safety and
other information that becomes known to a manufacturer of an approved
non-biological drug or biological product.

The product testing and approval process is likely to take a substantial
number of years and involves expenditure of substantial resources. There can be
no assurance that any approval will be granted on a timely basis, or at all. The
FDA also may require postmarket testing and surveillance to monitor the record
of the product and continued compliance with regulatory requirements. Upon
approval, a prescription non-biological drug or biological product may only be
marketed for the approved indications in the approved dosage forms and at the
approved dosage. Adverse experiences with the product must be reported to the
FDA.

Under the Orphan Drug Act, a sponsor of a marketing application may seek to
obtain a seven-year period of marketing exclusivity for a non-biological or
biological drug intended to treat a rare disease or condition (i.e., a disease
or condition that occurs in fewer than 200,000 patients). Before a product can
receive marketing exclusivity associated with orphan product status, it must
receive orphan product designation. If a product is designated as an orphan drug
or biologic by the FDA and it is the first FDA approved application of the
specified indication, the sponsor receives seven years of marketing exclusivity.
The Company intends to seek FDA orphan product designation for LDP-03 for the
treatment of chronic lymphocytic leukemia. Even if such designation is sought,
the FDA may not grant it. Moreover, even if the Company does receive orphan
product designation for LDP-03 or any of its other products under development,
other companies also may receive orphan designation and obtain the FDA marketing
approval before the Company obtains such approval. If another company obtains
marketing approval first and receives seven-year marketing exclusivity, the
Company would not be permitted by the FDA to market the Company's product in the
United States during the exclusivity period. In addition, the Company could
incur substantial costs in asserting any rights to prevent such uses it may have
under the Orphan Drug Act. If the Company receives seven-year marketing
exclusivity, FDA may rescind the period of exclusivity under certain
circumstances, including failure of the Company to assure a sufficient quantity
of the drug.

Foreign requirements. In addition to the applicable FDA requirements, if
the Company attempts to sell its products overseas, the Company will be subject
to foreign regulatory authorities governing clinical trials, approvals and
product sales. Whether or not FDA approval has been obtained, approval of a
product by the comparable regulatory authorities of foreign countries must be
obtained prior to the commencement of marketing of the product in those
countries. Under certain conditions, however, an unapproved non-biological or
biological drug may be exported to any country if the product complies with the
laws of that country and has valid marketing authorization in Australia, Canada,
Israel, Japan, New Zealand, Switzerland, South Africa, or in any country in the
European Union ("EU") or the European Economic Area.

In Europe, the clinical trial approval process varies from country to
country, ranging from simple notification of intent to conduct a clinical trial
to a complete and lengthy approval process. The Company's success in obtaining
FDA approval of an IND application does not ensure clinical trial approval in
Europe, which must be pursued individually in each country in which the Company
intends to conduct clinical trials. The clinical trial approval process in the
United Kingdom where the Company conducted clinical trials in 1997, is a rigidly
time-limited process depending upon acceptance by the regulatory authority in
the United
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Kingdom of an information summary containing details regarding the chemistry,
pharmacy and toxicology of the drug compressed into a 50-60 page document.
Approval by the regulatory authority in the United Kingdom, which must be given
or refused within 35 days, gives the applicant broad freedom to conduct trials
in different centers within the pre-agreed conditions of a usage guideline.

Unlike the highly individual approach to approval of clinical trials which
varies in Europe from country to country, the product registration system in the
EU combined with those of other European nations have been harmonized. After
1998, all non-biological and biological products which are to be marketed in
more than one EU member state must be approved either through the centralized or
decentralized (mutual recognition) procedure. Use of the centralized process is
compulsory for biotechnology products, such as the Company's monoclonal antibody
products, and is available upon request for other innovative new products. The
centralized procedure involves the submission of an application to a central
authority, the European Agency for the Evaluation of Medicinal Products ("EMEA")
based in London, evaluation of the application by two of the member states
appointed as Rapporteurs and agreement by all other member states through the
decision of a delegate committee, the Committee on Proprietary Medicinal
Products ("CPMP"). In general, the total time required for product approval
ranges between one and two years. Product approval permits the applicant to
commercialize the product with a single set of indications and contraindications
throughout the European market.

Preconceived attitudes toward acceptable indications for a particular
non-biological or biological drugs may vary among member states and those
indications agreed upon by the CPMP may represent the compromise that could be
agreed upon by all members. Therefore, there can be no assurance that the
indications for use for which the Company initially seeks marketing approval
will be the same as those that are finally approved by the CPMP. In addition,
there can be no assurance that the CPMP will accept the same clinical end points
as the FDA in proving efficacy. There can be no assurance that any application
the Company submits to the EMEA will be approved on a timely basis, or at all,
and failure of the Company to obtain marketing authorization in Europe for any
of its products could have a significant adverse effect on the Company's
business, financial condition and results of operations.

Other Regulations. The Company is subject to numerous federal, state and
local laws and regulations relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control, the
experimental use of animals and the disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations in
the future or that such laws or regulations will not have a materially adverse
effect upon the Company's business, financial condition and results of
operations.

MANUFACTURING AND SUPPLY

The Company currently has no manufacturing facilities or staff for clinical
or commercial production of any monoclonal antibodies or small molecule
antagonists. The Company intends to rely initially on third parties to
manufacture certain of its product candidates for development, preclinical and
clinical trials and commercialization, if any. The monoclonal antibodies LDP-01
and LDP-02 will be manufactured for preclinical and early clinical trials in
collaboration with the TAC. The TAC has the capacity to produce these monoclonal
antibodies in sufficient quantity and of sufficient quality to support these
trials. The Company and Ilex have entered into an agreement with Karl Thomae, a
contract manufacturer and a subsidiary of Boehringer Ingleheim, for the
production of LDP-03 for some or all of the clinical trial production.

The Company expects that its collaborative partners will manufacture
products for clinical development and commercialization. Under the Company's
collaboration agreements with Warner-Lambert, Roche Bioscience, Kyowa and
Genentech, the collaborative partners have the exclusive right under the
collaboration agreements to manufacture products that result from their
programs.

COMPETITION

The biotechnology and pharmaceutical industries are intensely competitive
and subject to rapid and significant technological change. Competitors of the
Company in the United States and elsewhere are
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numerous and include, among others, major multinational pharmaceutical and
chemical companies, specialized biotechnology firms and universities and other
research institutions. While the Company believes that several of the drugs
which may result from its research and development efforts may be utilized in
combination with existing drugs to treat specific diseases (such as LDP-01 used
in conjunction with t-PA or heparin and LDP-03 used in conjunction with or
following fludarabine), there can be no assurance that patients, physicians or
manufacturers of such existing drugs will view any of the drugs that may be
developed by the Company as complementary rather than competitive. Many of the
Company's potential competitors have greater financial and other resources,
including larger research and development staffs and more effective marketing
and manufacturing organizations, than the Company or its collaborative partners.
Acquisitions of competing companies and potential competitors by large
pharmaceutical companies or others could enhance the financial, marketing and
other resources available to such competitors. As a result of academic and
government institutions becoming increasingly aware of the commercial value of
their research findings, such institutions are more likely to enter into
exclusive licensing agreements with commercial enterprises, including
competitors of the Company. There can be no assurance that the Company's
competitors will not succeed in developing technologies and drugs that are more
effective or less costly than any which are being developed by the Company or
which would render the Company's technology and future drugs obsolete or
noncompetitive.

In addition, some of the Company's competitors have greater experience than
the Company in conducting preclinical and clinical trials and obtaining FDA and
other regulatory approvals. Accordingly, the Company's competitors may succeed
in obtaining FDA or other regulatory approvals for drug candidates more rapidly
than the Company. Companies that complete clinical trials, obtain required
regulatory agency approvals and commence commercial sale of their drugs before
their competitors may achieve a significant competitive advantage. There can be
no assurance that drugs resulting from the Company's research and development
efforts, or from the joint efforts of the Company and its collaborative
partners, will be able to compete successfully with competitors' existing
products or products under development or that they will obtain regulatory
approval in the United States or elsewhere.

EMPLOYEES

As of March 6, 1998, the Company had 67 full-time employees, of whom 21
hold Ph.D. or M.D. degrees. Of the Company's total work force, 58 are engaged in
research and development activities and nine are engaged in business
development, finance and administration. None of the Company's employees is
represented by a collective bargaining agreement, nor has the Company
experienced work stoppages. The Company believes that relations with its
employees are good.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company, and their ages as of December 31,
1997, are as follows:

NAME AGE POSITION
---- --- --------

Christopher K. Mirabelli, Ph.D. ....... 42 Chairman of the Board of Directors,
President and Chief Executive Officer
Augustine Lawlor....................... 40 Vice President, Corporate Development
and Chief Financial Officer
Walter Newman, Ph.D. .................. 52 Vice President, Research and Discovery
Lee Brettman, MD. ..................... 50 Vice President, Pharmaceutical Develop-
ment: Clinical Development and Medical
Affairs
Douglas Ringler, V.M.D. ............... 40 Vice President, Pharmaceutical Develop-
ment: Preclinical Development and
Laboratory Operations
Jay Luly, Ph.D. ....................... 40 Vice President, Drug Discovery

Dr. Mirabelli has served as Chairman of the Board of Directors, President
and Chief Executive Officer since July 1993. Dr. Mirabelli was a founder of Isis
Pharmaceuticals, Inc., a biotechnology company, where he

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19

served as Executive Vice President from 1992 to 1993, Senior Vice President of
Research and Preclinical Development from 1991 to 1992, and Vice President of
Research from 1989 to 1991. From 1981 to 1989, Dr. Mirabelli served in various
positions at SmithKline & French Laboratories, most recently as Director of
Molecular Pharmacology. Dr. Mirabelli received his B.S. in Biology from the
State University of New York at Fredonia and his Ph.D. in Pharmacology from
Baylor College of Medicine.

Mr. Lawlor has served as Vice President, Corporate Development and Chief
Financial Officer since February 1997. From 1995 to 1997, he served as Chief
Financial Officer at Alpha-Beta Technology, Inc., a biotechnology company. From
1993 to 1995, Mr. Lawlor served as Chief Financial Officer at BioSurface
Technology, a biotechnology company. From 1989 to 1993, he served as Chief
Financial Officer at Armstrong Pharmaceuticals, Inc., a biotechnology company.
Mr. Lawlor received his B.A. from the University of New Hampshire and his
M.P.P.M. from the Yale School of Organizational Management.

Dr. Newman has served as Vice President, Research and Discovery since June
1996. Dr. Newman served the Company as Senior Director, Research from 1994 to
1996, and as a Director, Research from 1993 to 1994. From 1986 to 1993, he
served as Chief Scientist at Otsuka America Pharmaceuticals, a biotechnology
company, and leader of the Endothelial Cell Biology Group. Dr. Newman received
both his B.A. in Chemistry and his Ph.D. in Immunochemistry from Columbia
University.

Dr. Brettman has served as Vice President of Pharmaceutical Development:
Clinical Development and Medical Affairs since June 1996. From 1995 to 1996, he
served the Company as Senior Director, Clinical Development. From 1993 to 1995,
Dr. Brettman served as Head of Clinical Research at Vertex Pharmaceuticals,
Inc., a biotechnology company. From 1990 to 1993, he served first as Associate
Director of the Anti-Infectives Group at the Robert Wood Johnson Pharmaceutical
Research Institute and then as the Director of Anti-Infectives Research at
Schering Plough Company, a pharmaceutical company. Dr. Brettman received his
B.S. in Biology from the Massachusetts Institute of Technology and his M.D. from
Baylor College of Medicine.

Dr. Ringler has served as Vice President of Pharmaceutical Development:
Preclinical Development, Laboratory Operations and Experimental Therapies since
June 1996. Dr. Ringler served the Company as Senior Director, Preclinical
Development from 1994 to 1996, and Director of Experimental Therapeutics from
1993 to 1994. From 1985 to 1993, he served in various positions at Harvard
Medical School, including Associate Professor and Chairman of the Division of
Comparative Pathology. Dr. Ringler received both his B.A. in Biology and his
V.M.D. from the University of Pennsylvania.

Dr. Luly has served as Vice President, Drug Discovery since June 1997. From
1996 to 1997, Dr. Luly served as Director, Immunoregulation Research and
research fellow at Abbott Laboratories, a health care company. From 1993 to
1995, Dr. Luly served as senior project leader and research fellow at Abbott
Laboratories. From 1990 to 1993, he served as project leader and associate
research fellow at Abbott Laboratories. Dr. Luly received his B.S. from the
University of Illinois and his Ph.D. in Organic Chemistry from the University of
California, Berkeley.

RISK FACTORS

Stockholders and prospective purchasers of the Company's Common Stock
should carefully consider the following risk factors, in addition to the other
information appearing in this Annual Report on Form 10-K.

Early Stage of Product Development; Absence of Developed Products. The
Company's research and development programs are at an early stage of
development, and the Company does not expect that any drugs resulting from its
or its collaborative partners' research and development efforts will be
commercially available for several years, if at all. The Company has not
completed clinical development of any of its monoclonal antibody products and
has not optimized any small molecule lead compound or selected any small
molecule drug candidates. Any drug candidates developed by the Company will
require significant additional research and development efforts, including
extensive preclinical (animal and in vitro) and clinical testing as well as
regulatory approval to begin testing in humans. The Company has limited
experience in conducting preclinical and clinical trials. Furthermore, the
results obtained in preclinical trials are not necessarily indicative of results

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20

that will be obtained in later stages of preclinical development or in human
clinical testing. In addition, the Company's potential drug candidates will be
subject to the risks of failure inherent in the development of pharmaceutical
products. These risks include the possibilities that no drug candidate will be
found safe or effective, or will otherwise meet applicable regulatory standards
or receive the necessary regulatory clearances. There can be no assurance that
these drug candidates, if safe and effective, will be developed into
commercially viable drugs, will be economical to manufacture or produce on a
large scale, will be successfully marketed or will achieve customer acceptance.
Furthermore, the Company's potential drug candidates are subject to the risks
that the proprietary rights of third parties will preclude the Company from
marketing such drugs or that third parties will market superior or equivalent
drugs. The failure to develop safe, commercially viable drugs would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's potential drug candidates are also subject
to the risk of delays in development resulting from various factors, many of
which are beyond the control of the Company. The Company expects to incur
significant additional operating losses over the next several years and expects
cumulative losses to increase substantially due to expanded research and
development efforts, preclinical and clinical trials and other product
development activities. Furthermore, the Company is relying on its collaborative
partners to fund a substantial portion of its research operations and clinical
trials over the next several years. Failure by the Company to continue to fund
product development activities and clinical trials at anticipated levels would
result in delays in product development. The Company's product candidates are
subject to extensive and rigorous government regulation. Delays in receipt of
regulatory approvals or failure to receive such approvals at all would have a
material adverse effect on the Company's business, financial condition and
results of operations.

Dependence on Collaborative Partners. A key element of the Company's
strategy is to accelerate certain of its drug discovery and development programs
and to fund its capital requirements, in part, by entering into collaboration
agreements with major pharmaceutical companies. The Company has entered into
collaboration agreements with Warner-Lambert, Roche Bioscience, Kyowa and
Genentech. Under the Company's collaboration agreements with Warner-Lambert,
Roche Bioscience and Kyowa, the Company's collaborative partners have the right,
but are not obligated, to conduct preclinical and clinical trials of compounds
developed during their collaboration with the Company and to develop and
commercialize any drug candidates resulting from their collaboration. Under the
Genentech collaboration agreement, Genentech has the right, but not the
obligation, to conduct Phase III clinical trials of LDP-02. The collaboration
agreements allow the Company's collaborative partners significant discretion in
electing whether to pursue the development of any potential drug candidates. As
a result, the Company cannot control the amount and timing of resources
dedicated by the Company's collaborative partners to their respective
collaborations with the Company. The Company's receipt of revenues from drug
development milestones or royalties, co-promotion rights or profit-sharing on
sales under the collaboration agreements is dependent upon the activities and
the development, manufacturing and marketing resources of its collaborative
partners. There can be no assurance that such partners will pursue the
development and commercialization of compounds resulting from the collaboration,
that any such development or commercialization would be successful, or that the
Company would derive any revenue from such arrangements. Moreover, certain drug
candidates discovered by the Company may be competitive with its partners' drugs
or drug candidates. Accordingly, there can be no assurance that the Company's
collaborative partners will proceed with the development of LeukoSite's drug
candidates or that they will not pursue their existing or alternative
technologies in preference to LeukoSite's drug candidates. There can be no
assurance that the interests of the Company will continue to coincide with those
of its collaborative partners, that some of the Company's collaborative partners
will not develop independently or with third parties drugs that compete with
drugs of the types contemplated by the Company's collaboration agreements, or
that disagreements over rights or technology or other proprietary interests will
not occur. Disagreements between the Company and its collaborative partners
could lead to delays in research or in the development and commercialization of
certain product candidates, or could require or result in litigation or
arbitration, which could be time-consuming and expensive. Any of these factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company is relying on its collaborative partners to fund a substantial
portion of its research operations and clinical trials over the next several
years. Although each of the collaboration agreements may
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21

be extended past its current term, there can be no assurance that these
contracts will be extended or renewed, or that any renewal, if made, will be on
terms favorable to the Company. Each of the collaboration agreements is
terminable by either party upon breach by the other party. Moreover, each of the
collaboration agreements with Warner-Lambert may be terminated at any time and
for any reason upon six months written notice. The collaboration with Kyowa may
be terminated after April 1998 with 60 days notice. The collaboration with
Genentech may be terminated after December 1998 upon nine months notice.
Consequently, there can be no assurance that any of the collaboration agreements
will remain in effect for its expected term. If any of the collaborative
partners terminates or breaches its agreement with the Company, or otherwise
fails to conduct its collaborative activities in a timely manner, the
development or commercialization of any drug candidate or research program under
the collaboration agreement with such partner could be delayed or terminated, or
the Company may be required to undertake unforeseen additional responsibilities
or to devote unbudgeted additional resources to such development or
commercialization and could have a material adverse effect on the Company's
business, financial condition and results of operations.

History of Losses and Expectation of Future Losses; Uncertainty of Future
Profitability. The Company has incurred a net operating loss every year since
its inception in May 1992, and had an accumulated deficit of approximately $32.6
million through December 31, 1997. The Company expects to incur significant
additional operating losses over the next several years and expects cumulative
losses to increase substantially due to expanded research and development
efforts, preclinical and clinical trials and the funding of development
activities under the joint venture with Ilex. In the next few years, the
Company's revenues are expected to be limited to any research support and
milestone payments it may receive under the collaboration agreements and any
amounts received under other research or drug development collaborations that
the Company may establish. There can be no assurance, however, that the Company
will be able to establish any additional collaborative relationships on terms
acceptable to the Company or maintain in effect the current collaboration
agreements or achieve the milestones that are required for the Company to
receive funds from its current collaborative partners. The Company's ability to
generate revenue or achieve profitability is dependent in part on its or its
collaborative partners' ability to complete the development of drug candidates
successfully, to obtain regulatory approvals for drug candidates and to
manufacture and commercialize any resulting drugs. There can be no assurance
that the Company will ever successfully identify, develop, commercialize,
manufacture and market any products, obtain required regulatory approvals or
achieve profitability.

Substantial Additional Financing Requirements; Uncertainty of Available
Funding. The Company will require substantial additional funds in order to
finance its drug discovery and development programs, fund operating expenses,
pursue regulatory clearances, develop manufacturing, marketing and sales
capabilities and prosecute and defend its intellectual property rights. The
Company depends upon its collaborative partners for research and clinical trials
funding. There can be no assurance that the Company will continue to receive
funding under its existing collaboration agreements, or that existing and
potential collaboration agreements will be sufficient to fund the Company's
operating expenses.

The Company intends to seek such additional funding through public or
private financing or collaboration or other arrangements with collaborative
partners. If additional funds are raised by issuing equity securities, further
dilution to existing stockholders may result and future investors may be granted
rights superior to those of existing stockholders. There can be no assurance,
however, that additional financing will be available from any sources or, if
available, will be available on acceptable terms.

Impact of Extensive Government Regulation. The Company's products under
development are subject to extensive and rigorous regulation by the federal
government, principally the FDA, and by state and local governments. If these
products are marketed abroad, they will also be subject to export requirements
and to regulation by foreign governments. The applicable regulatory clearance
process, which must be completed prior to the commercialization of a product, is
lengthy and expensive. There can be no assurance that the Company will be able
to obtain necessary regulatory approvals on a timely basis, if at all, for any
of its products under development, and delays in receipt or failure to receive
such approvals, the loss of previously received approvals, or failure to comply
with existing or future regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.

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22

Product development and approval to meet FDA regulatory requirements takes
a number of years, involves the expenditure of substantial resources and is
uncertain. Many products that initially appear promising ultimately do not reach
the market because they are not found to be safe or effective or cannot meet the
FDA's other regulatory requirements. In addition, there can be no assurance that
the current regulatory framework will not change or that additional regulations
will not arise at any stage of the Company's product development that may affect
approval, delay the submission or review of an application or require additional
expenditures by the Company.

It is uncertain if and when the Company, independently or with its
collaborative partners, will submit any marketing applications for any of its
monoclonal antibodies or small molecule antagonists under development for any
indications. There can be no assurance that any studies will be completed or, if
completed, will demonstrate that the products are safe and effective for their
intended uses, or that required approval will be granted by FDA on a timely
basis, or at all, for any of these products for any studied indications.

All of the Company's product candidates will require FDA and foreign
government approvals for commercialization, none of which have been obtained.
The Company and Ilex are required to file an IND with the FDA before beginning
clinical trials of LDP-03 in the United States. The Company intends to commence
trials of its LDP-01 and LDP-02 product candidates in the United Kingdom and to
continue to perform preclinical and clinical trials abroad, subject to receipt
of required regulatory approvals. There can be no assurance that as a result of
a request from the FDA or otherwise, the Company would not be required to repeat
certain or all of such trials in the United States, which would increase the
time and expense required to obtain approval.

The effect of government regulation may be to delay marketing of the
Company's products under development for a considerable or indefinite time,
impose costly procedural requirements upon the Company's activities and furnish
a competitive advantage to larger companies or companies more experienced in
regulatory affairs. Delays in obtaining governmental regulatory approval could
adversely affect the Company's marketing strategy as well as the Company's
ability to generate revenue from commercial sales. Failure of the Company to
obtain marketing approval of any of its products on a timely basis, or at all,
would have a material adverse effect on the Company's business, financial
condition and results of operations.

Uncertainties Relating to Patents and Proprietary Rights. The Company's
success will depend in part on its ability to obtain United States and foreign
patent protection for its drug candidates and processes, preserve its trade
secrets and operate without infringing the proprietary rights of third parties.
Considerable importance is placed on obtaining patent and trade secret
protection for significant new technologies, products and processes. There can
be no assurance that any patents will issue from any of the patent applications
owned by, or licensed to, the Company. Further, there can be no assurance that
any rights the Company may have under issued patents will provide the Company
with sufficient protection against competitive products or otherwise cover
commercially valuable products or processes. Legal standards relating to the
validity of patents covering pharmaceutical and biotechnological inventions and
the scope of claims made under such patents are still developing. There is no
consistent policy regarding the breadth of claims allowed in biotechnology
patents. The patent position of the Company is highly uncertain and involves
complex legal and factual questions. There can be no assurance that any existing
or future patents issued to, or licensed by, the Company will not subsequently
be challenged, infringed upon, invalidated, found to be unenforceable or
circumvented by others. In addition, patents may have been granted, or may be
granted, covering products or processes that are necessary or useful to the
development of the Company's drug candidates. If the Company's drug candidates
or processes are found to infringe upon the patents, or otherwise impermissibly
utilize the intellectual property of others, the Company may be required to
obtain licenses from third parties to utilize the patents or proprietary rights
of others. There can be no assurance that the Company will be able to obtain
such licenses on acceptable terms, or at all. In such event, the Company's
development, manufacture and sale of such drug candidates could be severely
restricted or prohibited. There has been significant litigation in the
pharmaceutical and biotechnology industry regarding patents and other
proprietary rights. If the Company becomes involved in litigation regarding its
intellectual property rights or the intellectual property rights of others, the
potential cost of such litigation and the potential damages that the Company
could be required to pay could be substantial.
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23

The Company is also aware of patents which have been issued to third
parties in the United States and/or Europe variously relating to certain
humanized immunoglobulins, pharmaceutical compositions comprising such
immunoglobulins, methods of producing such humanized immunoglobulins,
compositions such as nucleic acids, vectors and host cells useful in the
production of such humanized immunoglobulins and methods of use of modified
humanized immunoglobulins. The European patents in these areas have also been
opposed by third parties. The Company, based on the analysis of Hamilton, Brook,
Smith & Reynolds, P.C., the Company's patent counsel, believes that, properly
construed, the U.S. patent claims do not cover the Company's LDP-01 and LDP-03
product candidates. The Company is uncertain about the validity and scope of
claims which have issued in the United States. If it is finally determined that
one or more valid claims encompass LDP-02, the Company will be required to seek
a license or cease development, manufacture and sale of such product. It is
uncertain whether any claims in the European patents will survive the opposition
proceedings, or if they do, whether such claims will cover the Company's product
candidates.

The Company is also aware of other third party published applications
relating to altered antibodies, methods of use of altered antibodies and methods
of production of altered antibodies. To the Company's knowledge, neither these
applications nor possible unpublished counterpart applications have proceeded to
grant in Europe or have issued as U.S. patents. There can be no assurance that
the Company may not be required to seek a license to some or all of the patents
which might issue from these patent applications.

The Company may be required to seek or choose to seek licenses to some or
all of these or other patents in order to develop and commercialize certain
product candidates or potential products incorporating the Company's technology
in the United States, Europe and other markets. There can be no assurance that
such licenses, if required, will be available to the Company, or that if they
are available, they can be obtained on commercially acceptable terms, and the
failure to do so could have a material adverse effect on the Company. In the
absence of required licenses, the patent owners may obtain an injunction, which
could prevent the manufacture, sale and use of the Company's products, with
material adverse effects on the Company. In addition, assuming such patents are
valid and enforceable, the Company can provide no assurances that if enforcement
actions were brought by the patent owners against the Company that such actions
would be resolved in the Company's favor. The Company may also choose to
challenge the validity of one or more patents or patent claims. Any such action
or challenge could result in substantial costs to the Company and diversion of
Company resources and could have a material adverse effect on the Company.
Moreover, there can be no assurance that the Company would be successful
defending against an infringement action or in challenging any such patents or
patent claims, and the failure to do so could have a material adverse effect on
the Company. If the Company does not obtain required licenses, it could
encounter delays in product

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development while it attempts to design around the patents, or it could find
that the development, manufacture or sale of products requiring such licenses
could be foreclosed.

Litigation, which could result in substantial costs to the Company, may be
necessary to enforce any patents issued or licensed to the Company or to
determine the scope and validity of third party proprietary rights.
Uncertainties resulting from the initiation and continuation of any patent or
related litigation could have a material adverse effect on the Company's
business, financial condition and results of operations. An adverse outcome in
connection with an infringement proceeding brought by a third party could
subject the Company to significant liabilities, require disputed rights to be
licensed from third parties or require the Company to cease using the disputed
technology, any of which could have a material adverse effect on the Company's
business, financial condition or results of operations. If another party or
parties file or have filed patent applications in the United States that claim
technology also claimed by the Company, the Company may have to participate in
interference proceedings declared by the Patent and Trademark Office to
determine priority of invention. Participation in such proceedings could result
in substantial costs to the Company. The Company could incur substantial costs
as a result of such proceedings, whether or not the eventual outcome is
favorable to the Company, or results in a determination that an opposing party
is entitled to the patent, or results in another unfavorable result.

In addition to patent protection, the Company relies on trade secrets,
proprietary know-how and technological advances which it seeks to protect, in
part, by confidentiality agreements with its collaborative partners, employees
and consultants. There can be no assurance that these confidentiality agreements
will not be breached, that the Company would have adequate remedies for any such
breach, or that the Company's trade secrets, proprietary know-how and
technological advances will not otherwise become known or be independently
discovered by others.

Intense Competition. The biotechnology and pharmaceutical industries are
intensely competitive. Competitors of the Company in the United States and
elsewhere are numerous and include, among others, major, multinational
pharmaceutical and chemical companies, specialized biotechnology firms and
universities and other research institutions. Many of these competitors have
greater financial and other resources, including larger research and development
staffs and more effective marketing and manufacturing organizations, than the
Company. There can be no assurance that the Company's competitors will not
succeed in developing or licensing on an exclusive basis technologies and drugs
that are more effective or less costly than any which are being developed by the
Company or which would render the Company's technology and future drugs obsolete
and noncompetitive. The Company's competitors may succeed in obtaining FDA or
other regulatory approvals for drug candidates before the Company. Companies
that commence commercial sale of their drugs before their competitors may
achieve a significant competitive advantage, including certain patent and FDA
marketing exclusivity rights that would delay the Company's ability to market
certain products. There can be no assurance that drugs resulting from the
Company's research and development efforts, or from the joint efforts of the
Company and its collaborative partners, if approved for sale, will be able to
compete successfully with competitors' existing products or products under
development.

Reliance on Contract Manufacturers; Lack of Manufacturing Experience. The
Company is dependent on third parties for the manufacture of its product
candidates and is aware of only a limited number of manufacturers which it
believes have the ability and capability to manufacture the Company's drug
candidates for preclinical and clinical trials. The Company and Ilex have
entered into an agreement with Karl Thomae, a contract manufacturer and a
subsidiary of Boehringer Ingleheim, for the production of LDP-03 for the
Company's clinical trials. The Company has been relying on the Therapeutic
Antibody Centre ("TAC") for the manufacture of LDP-01 and LDP-02 for preclinical
testing and intends to employ the manufacturing capability of the TAC through
early clinical trials. If the Company were required to transfer manufacturing
processes to other third-party manufacturers, it could experience significant
delays in supply. If, at any time, the Company is unable to maintain, develop or
contract for manufacturing capabilities on acceptable terms, the Company's
ability to conduct preclinical and clinical trials with the Company's drug
candidates will be adversely affected, resulting in delays in the submission of
drug candidates for regulatory approvals. The Company has no experience in
manufacturing and currently lacks the facilities and personnel to manufacture,

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products in accordance with GMP as prescribed by the FDA or to produce an
adequate supply of compounds to meet future requirements for preclinical and
clinical trials.

Risks Associated with Ilex Joint Venture. The Company has entered into a
joint venture with Ilex for the development and commercialization of LDP-03 for
the treatment of chronic lymphocytic leukemia. As part of the joint venture, the
Company is obligated to share fifty percent of the development costs of LDP-03.
There can be no assurance that the Company will have the cash available or will
desire to maintain its commitment to the joint venture. In the event that
LeukoSite fails for any reason to make a required capital contribution to the
joint venture, Ilex may gain control of the management of the joint venture and
become entitled to a greater share of the profits derived from product sales of
LDP-03. There can also be no assurance that Ilex will have the cash available or
will desire to maintain its commitment to the joint venture. In the event that
Ilex fails for any reason to make a required capital contribution to the joint
venture, the Company may be required to make additional capital contributions to
the joint venture to maintain the desired level of development activities by the
joint venture. There can be no assurance that the Company will be able to
compensate for any failure by Ilex to make any capital contribution or that the
joint venture would be able to continue operations with lesser funding. In
addition, after the earlier of a change in control (as defined therein) of Ilex
or the Company or October 2, 2000, either company has the right to purchase the
other company's ownership of the joint venture in the event of an unresolved
deadlock. As a result, there can be no assurance that the Company will ever be
able to recoup its investment in the joint venture.

ITEM 2. PROPERTIES

The Company's administrative and research and development facility is
located in Cambridge, Massachusetts. This 26,768 square foot facility is leased
for a term which expires in 1999.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 1997.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

Since August 15, 1997, the effective date of the Company's initial public
offering, the Company's common stock has traded on the Nasdaq National Market
under the symbol "LKST". Prior to such date, no established public trading
market existed for the Company's common stock. The following table sets forth,
for the period indicated, the high and low sale prices per share of the
Company's common stock as reported by the Nasdaq National Market.

HIGH LOW
------ -----

Third Quarter (commencing on August 15, 1997)............... $10.00 $6.00
Fourth Quarter.............................................. $11.75 $9.50

HOLDERS

As of March 18, 1998, the Company had approximately 1,018 stockholders of
record. This does not reflect persons or entitles who hold their stock in
nominee or "street" name through various brokerage firms.

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26

DIVIDENDS

The Company has not paid dividends on its Common Stock. The Company
anticipates it will continue to reinvest earnings to finance future growth, and
therefore does not intend to pay dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

Described below is information regarding all securities of the Company sold
by the Company during the fiscal year ended December 31, 1997, which were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
The share and per share amounts set forth below have been adjusted to reflect
the Company's one for 4.1 reverse stock split of its common stock effected on
August 8, 1997.

In March through June 1997, the Company sold an aggregate of 1,102,719
shares of Series G Convertible Preferred Stock (which converted into 705,127
shares of Common Stock) at a purchase price of $3.50 ($4.50 on an as-converted
basis) to a group of new and existing investors, including Schroder Ventures
International Life Sciences Fund L.P. 1, Schroder Ventures International Life
Sciences Fund L.P. 2, Schroder Ventures International Life Sciences Trust,
Schroders Incorporated, Schroder Ventures Managers Limited, as Investment
Manager for the Schroder Ventures International Life Sciences Fund Co-Investment
Scheme, S.R. One, Ltd., New Day Investment Partnership, L.P., WPG Life Sciences
Fund, L.P., WPG Institutional Life Sciences, L.P., Warner-Lambert Company, James
Cramer, Dr. Barbara Schildkrout, The Springer Family Trust and Daniel Kisner.
The issuance and sale of such shares of Series G Convertible Preferred Stock
were made in reliance on Rule 506 of Regulation D promulgated under the
Securities Act and Section 4(2) of the Securities Act.

In December 1997, the Company issued and sold 336,135 shares of Common
Stock at a purchase price of $11.90 per share to Genentech, Inc. and issued a
warrant exercisable for 250,000 shares of Common Stock at an exercise price of
$16.22 per share. The warrant will become exerciseable on December 18, 1999 and
expire on December 18, 2007. The issuance and sale of such Common Stock and the
warrant was made in reliance on Section 4(2) of the Securities Act.

In 1997, the Company granted stock options to certain employees and
officers of the Company exercisable for approximately 633,008 shares of Common
Stock. The grants were made under the Company's Amended and Restated 1993 Stock
Option Plan. The exercise prices of the stock options ranged from $6.12 per
share to $11.13 per share. These grants were made in reliance upon Rule 701
under the Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA

INCEPTION
YEARS ENDED DECEMBER 31, (MAY 1, 1992)
------------------------------------------------ THROUGH
1993 1994 1995 1996 1997 DECEMBER 31, 1997
------- ------- ------- ------- -------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Corporate collaborations..... $ -- $ -- $ 250 $ 3,591 $ 5,349 $ 9,189
Government grants............ -- -- 200 83 377 660
------- ------- ------- ------- -------- --------
-- -- 450 3,674 5,726 9,849
------- ------- ------- ------- -------- --------
Operating expenses:
Research and development..... 1,540 5,056 7,051 8,502 11,980 34,170
General and administrative... 504 726 866 1,371 1,758 5,312
------- ------- ------- ------- -------- --------
Net loss from
operations............ (2,044) (5,782) (7,467) (6,199) (8,012) (29,633)
Income (expense), net........ (19) 148 (10) 177 719 1,016
Equity in operations of joint
venture.................... -- -- -- -- (3,358) (3,358)
------- ------- ------- ------- -------- --------
Net loss..................... $(2,063) $(5,634) $(7,477) $(6,022) $(10,651) $(31,975)
======= ======= ======= ======= ======== ========
Net loss per common share:
Basic........................ $ (2.46) $ (6.06) $ (7.25) $ (5.65) $ (2.62)
======= ======= ======= ======= ========
Pro forma.................... $ (2.01) $ (1.88) $ (1.77) $ (1.17) $ (1.50)
======= ======= ======= ======= ========
Shares used in computing net
loss per common share(1):
Basic........................ 839 929 1,031 1,066 4,299
======= ======= ======= ======= ========
Pro forma.................... 1,026 2,990 4,230 5,137 7,525
======= ======= ======= ======= ========

AS OF DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities........ $ 3,002 $ 7,504 $ 1,734 $ 9,384 $ 25,157
Working capital................. 2,398 5,061 439 7,226 19,461
Total assets.................... 3,687 10,932 4,538 11,874 28,032
Long-term obligations, net of
current portion.............. 320 1,319 1,583 1,230 1,119
Redeemable convertible preferred
stock........................ 4,874 11,782 13,733 20,913 --
Deficit accumulated during the
development stage............ (2,192) (7,826) (15,303) (21,324) (32,585)
Stockholders' equity
(deficit).................... (2,151) (4,776) (12,161) (12,581) 20,808

- ---------------
(1) Computed as described in Note 2(f) of Notes to Consolidated Financial
Statements.

26
28

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements that
involve substantial risk and uncertainties. When used in this Annual Report, the
words "anticipate," "plan," "believe," "estimate," "expect" and similar
expressions as they relate to the Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in "Risk Factors."

OVERVIEW

The Company is a leader in the discovery and development of therapeutics
based upon the biology of leukocytes. Therapeutics developed using its
technology may be used to treat cancer and inflammatory, autoimmune and viral
diseases. The Company's technologies and expertise in leukocyte biology
facilitate the discovery and development of novel and proprietary drugs that
destroy or block the disease-promoting actions of leukocytes. The Company has
been funded to date primarily through proceeds from private placements and a
public offering of equity securities and receipts from collaboration agreements
and capital leases. To date, the Company has not received any revenue from the
sale of products and does not expect to generate material revenues for the next
several years. The Company has experienced operating losses since its inception
and expects that the activities required to develop and commercialize its
products will result in further operating losses for the next several years. As
of December 31, 1997, the Company had an accumulated deficit of approximately
$32.6 million.

In 1994, 1995 and 1996, the Company signed agreements with Warner-Lambert
for the discovery and development of drugs that are intended to antagonize the
MCP-1, IL-8 and CCR5 and CXCR4 receptors found on certain classes of leukocytes.
In January 1998 Warner-Lambert made a $1 million payment related to the
achievement of certain milestones. In July 1996, the Company signed an agreement
with Roche Bioscience for the discovery and development of therapeutics that are
intended to antagonize the CCR3 receptor found on a certain class of leukocytes.
In April 1997, the Company signed an agreement with Kyowa for the discovery and
development of therapeutics that are intended to antagonize the CXCR3 and CCR1
receptors found on certain classes of leukocytes. In December 1997, the Company
entered into a collaboration agreement with Genentech for the development of a
monoclonal antibody therapeutic intended to be used in the treatment of
inflammatory bowel disease.

As of December 31, 1997, the Company had received approximately $10.2
million in funding and license fee payments in connection with these agreements.
Under the terms of these existing agreements, the Company is entitled to receive
approximately $12.9 million in future funding and approximately $40.0 million
through lines of credit that bear interest and are convertible into the
Company's common stock (assuming each collaboration remains in effect for its
full term). Should products be successfully developed and commercialized under
these collaborations, LeukoSite would receive up to approximately $59.8 million
in development and commercialization milestone payments. In addition, following
successful commercialization of the products contemplated under these
agreements, the Company is entitled to royalties on sales. As of December
31,1997, Warner-Lambert had invested $9.0 million, Roche Finance Ltd had
invested $3.0 million and Genentech had invested $4.0 million in equity of the
Company. As of December 31, 1997, the Company had recorded $1.2 million of the
amounts relating to its collaboration agreements as deferred revenue.

RESULTS OF OPERATIONS

Years Ended December 31, 1997 and 1996

Revenues. Revenues were $5,726,000 in 1997 compared to $3,674,000 in 1996.
Revenues in 1997 resulted from the collaboration agreements with Warner-Lambert,
Roche Bioscience and Kyowa and from Small Business Innovation Research ("SBIR")
grants. Revenues in 1996 were the result of a license fee from Roche Bioscience
and funding from Warner-Lambert, Roche Bioscience and SBIR grants. The increase
in revenues in 1997 was principally due to the receipt of funding associated
with the Company's collaboration with Kyowa.

27
29

Research and development. Research and development expenses were
$11,980,000 in 1997 compared to $8,502,000 in 1996. The increase in expenses in
1997 was primarily due to development, preclinical and clinical activities
related to the Company's LDP-01 and LDP-02 programs. To a lesser extent, the
increase was the result of a larger research staff and the laboratory supplies
associated with the Company's small molecule drug discovery programs. The
Company expects that research and development expenses will increase over the
next several years as the Company further expands its discovery and development
programs and incurs expenses on behalf of the joint venture with Ilex.

General and administrative. General and administrative expenses were
$1,758,000 in 1997 compared to $1,371,000 in 1996. The increase was primarily
due to an increase in staffing and other expenses associated with becoming a
public company during the year. General and administrative expenses will likely
increase in future periods to support the projected growth of the Company.

Interest income (expense), net. Interest income, net was $719,000 in 1997
and $177,000 in 1996. The increase was primarily due to interest earned on
higher average cash balances during the year. These higher cash balances
resulted from the receipt of proceeds from the Company's sale of preferred stock
in late 1996 and early 1997, the Company's initial public offering of common
stock completed in August 1997, and the sale of common stock associated with a
collaboration with Genentech completed late in 1997.

Equity in Operations of Joint Venture. For 1997, a loss of $3,358,000 from
the joint venture with Ilex was recorded under equity in operations of joint
venture. As the joint venture was formed in May 1997, there was no loss for
1996. Joint venture expenses in 1997 were primarily related to the manufacture
of LDP-03 by a third party for use in future clinical trials and to a lesser
extent activities related to data analysis, regulatory submissions and
preparations related to upcoming clinical trials.

Net loss. The net loss was $10,651,000 for 1997 and $6,022,000 for 1996.
The increase in the net loss for 1997 was primarily due to greater research and
development expenses related to the Company's small molecule and monoclonal
antibody programs as well as its joint venture with Ilex for the development of
LDP-03. Increased expenses were partially offset by increases in revenues and
interest income.

Years Ended December 31, 1996 and 1995

Revenues. Revenues were $3,674,000 in 1996 compared to $450,000 in 1995.
Revenues in 1996 resulted from the collaboration agreements with Warner-Lambert
and Roche Bioscience and from SBIR grants. Revenues in 1995 were the result of a
license fee from Warner-Lambert and SBIR funding.

Research and development. Research and development expenses were
$8,502,000 in 1996 and $7,051,000 in 1995. The increase in research and
development expenses was primarily due to an increase in staffing and supplies
and preclinical development expenditures.

General and administrative. General and administrative expenses were
$1,371,000 in 1996 and $866,000 in 1995. The increase was primarily due to an
increase in financing activities as well as an increase in staffing and expenses
associated with corporate partnering activities.

Interest income (expense), net. Interest income (expense), net was
$177,000 in 1996 and an expense of $10,000 in 1995. This change was primarily
due to greater cash balances available for investment generating greater
interest income in 1996 combined with a comparable level of interest expense in
both years.

Net loss. The net loss was $6,022,000 for 1996 and $7,477,000 for 1995.
The net loss decreased in 1996 as revenues generated from corporate partners
increased in 1996.

Years Ended December 31, 1995 and 1994

Revenues. Revenues were $450,000 in 1995. The Company had no revenue in
1994. Revenues in 1995 resulted from the collaboration agreements with
Warner-Lambert and SBIR funding.

Research and development. Research and development expenses were
$7,051,000 in 1995 and $5,056,000 in 1994. The increase in research and
development expenses was primarily due to an increase in

28
30

staffing and expenses associated with the Company's expansion into new
facilities and to a lesser extent to increases in supplies and preclinical
development expenditures.

General and administrative. General and administrative expenses were
$866,000 in 1995 and $726,000 in 1994. The increase was primarily due to an
increase in staffing and expenses associated with the Company's expansion into
new facilities.

Interest income (expense), net. Interest income (expense), net was an
expense of $10,000 in 1995 and income of $148,000 in 1994. This change was
primarily due to greater interest expense incurred in 1995 as a result of
additional capital leases.

Net loss. The net loss was $7,477,000 for 1995 and $5,634,000 for 1994.
The increased net loss was a result of increased expenditures to support the
Company's internal research programs, offset in part by revenue from
collaborations in 1995.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company's operations have been funded primarily
through private placements of preferred and common stock, which have raised
approximately $37.3 million, license fees and sponsored research, which have
generated approximately $10.2 million, capital lease obligations, which have
raised approximately $3.8 million, and net proceeds of $15.3 million from the
Company's initial public offering in August 1997. The Company has used cash to
fund operating losses of approximately $32.0 million, the investment of
approximately $1.8 million in equipment and leasehold improvements and the
repayment of approximately $2.3 million of capital lease obligations. The
Company had no significant commitments as of December 31, 1997 for capital
expenditures. At December 31, 1997, the Company had on hand cash, cash
equivalents and marketable securities of approximately $25.2 million.

The Company has entered into sponsored research and consulting agreements
with certain hospitals, academic institutions and consultants, requiring
periodic payments by the Company. Aggregate minimum funding obligations under
these agreements, which include certain cancellation provisions, total
approximately $544,000, of which approximately $521,000 will be paid in 1998.
The Company has also entered into an agreement to contribute $3.0 million
towards funding the construction and equipping of a research center in the
United Kingdom. The Company has paid $2.0 million of the commitment as of
December 31, 1997. The additional commitment of $1.0 million will be funded in
semi-annual installments of $250,000 through the year 2000.

In May 1997, the Company and Ilex entered into a joint venture whereby the
parties formed a limited partnership to develop and commercialize LDP-03 for the
treatment of chronic lymphocytic leukemia and other diseases. The Company and
Ilex are required to make contributions each time the joint venture requires
working capital. LeukoSite and Ilex will generally share equally in profits from
the sales of LDP-03 and in research, development, clinical and commercialization
costs. The capital requirements of the joint venture consist of clinical
development and commercialization costs. LeukoSite and Ilex estimate that
research, development, and clinical costs for the joint venture will be
approximately $5.0 million over the next year.

The Company believes that its existing capital resources, interest income
and revenue from the collaboration agreements will be sufficient to fund its
planned operating expenses and capital requirements through early 2001. However,
there can be no assurance that such funds will be sufficient to meet the
Company's operating expenses and capital requirements during such period. The
Company's actual cash requirements may vary materially from those now planned
and will depend upon numerous factors, including the results of the Company's
research and development and collaboration programs, the timing and results of
preclinical and clinical trials, the timing and costs of obtaining regulatory
approvals, the progress of the milestone and royalty producing activities of the
Company's collaborative partners, the level of resources that the Company
commits to the development of manufacturing, marketing, and sales capabilities,
the cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, the ability of the Company to maintain existing
and establish new collaboration agreements with other companies, the
technological advances and activities of competitors and other factors.

29
31

The Company expects to incur substantial additional costs, including costs
related to ongoing research and development activities, expenditures for
preclinical and clinical trials and the expansion of its laboratory and
administrative activities. Therefore, the Company will need to raise substantial
additional capital. The Company intends to seek such additional funding through
public or private financing or collaboration or other arrangements with
collaborative partners. There can be no assurance, however, that additional
financing will be available from any sources or, if available, will be available
on acceptable terms.

YEAR 2000 ISSUES

The Company is evaluating Year 2000 issues and their potential impact on
its information systems and computer technologies. All evaluation costs will be
expensed as incurred. Year 2000 issues are not expected to have a significant
impact on the Company's ongoing results of operations.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

The statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical are
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
amended. These forward-looking statements represent the Company's present
expectations or beliefs concerning future events. The Company cautions that such
statements are qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements including those
factors identified in "Risk Factors." Results actually achieved thus may differ
materially from expected results included in these statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

None.

30
32

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

PAGE
----
LEUKOSITE, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY)

Report of Independent Public Accountants.................... 32
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... 33
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997, and for the Period from
Inception (May 1, 1992) through December 31, 1997......... 34
Consolidated Statements of Stockholders' Equity (Deficit)
for the Period from Inception (May 1, 1992) through
December 31, 1997......................................... 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997, and for the Period from
Inception (May 1, 1992) through December 31, 1997......... 36
Notes to Consolidated Financial Statements.................. 37
L & I PARTNERS, L.P.
Report of Independent Public Accountants.................... 48
Balance Sheet as of December 31, 1997....................... 49
Statement of Operations for the Period from Inception (May
2, 1997) through December 31, 1997........................ 50
Statement of Partners' Capital for the Period from Inception
(May 2, 1997) through December 31, 1997................... 51
Statement of Cash Flows for the Period from Inception (May
2, 1997) through December 31, 1997........................ 52
Notes to Financial Statements............................... 53

31
33

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To LeukoSite, Inc.:

We have audited the accompanying consolidated balance sheets of LeukoSite,
Inc. (a Delaware corporation in the development stage) and subsidiary as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period then ended and for the period from inception (May 1, 1992)
through December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LeukoSite,
Inc. and subsidiary as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 and for the period from inception (May 1, 1992) through
December 31, 1997, in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Boston, Massachusetts
January 16, 1998

32
34

LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,430,507 $ 10,587,873
Marketable securities..................................... 4,953,902 14,569,100
Other current assets...................................... 153,779 408,811
------------ ------------
Total current assets.............................. 9,538,188 25,565,784
------------ ------------
Property and equipment, at cost:
Laboratory furniture, fixtures and equipment.............. 2,209,222 2,703,706
Leasehold improvements.................................... 1,792,989 2,409,753
Office furniture, fixtures and equipment.................. 268,254 298,925
------------ ------------
4,270,465 5,412,384
Less -- Accumulated depreciation and amortization......... (1,962,009) (2,973,095)
------------ ------------
2,308,456 2,439,289
Other assets................................................ 27,526 27,090
------------ ------------
Total assets...................................... $ 11,874,170 $ 28,032,163
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 118,018 $ 196,987
Accrued expenses.......................................... 1,044,080 1,866,423
Obligation to fund joint venture.......................... -- 1,770,310
Deferred revenue.......................................... 261,250 1,161,250
Deferred rent............................................. 104,357 243,171
Current portion of capital lease obligations.............. 784,168 866,835
------------ ------------
Total current liabilities......................... 2,311,873 6,104,976
------------ ------------
Deferred rent, net of current portion....................... 466,078 222,907
------------ ------------
Capital lease obligations, net of current portion........... 763,621 896,578
------------ ------------
Commitments and contingencies (Notes 7, 13, 14 and 15)
Redeemable convertible preferred stock, $.01 par value --... 20,913,405 --
------------ ------------
Stockholders' equity (deficit):
Preferred stock $.01 par value --
Authorized -- 5,000,000 shares
Issued and outstanding -- no shares.................... -- --
Convertible preferred stock $.01 par value--
Authorized -- 2,250,000 shares at December 31, 1996
Issued and outstanding -- 2,250,000 shares at December
31, 1996 and no shares at December 31, 1997.......... 22,500 --
Common stock, $.01 par value --
Authorized -- 25,000,000 shares
Issued and outstanding -- 1,086,590 shares at December
31, 1996 and 9,875,741 shares at December 31, 1997... 10,866 98,758
Additional paid-in capital.................................. 8,710,149 53,294,367
Deficit accumulated during the development stage............ (21,324,322) (32,585,423)
------------ ------------
Total stockholders' equity (deficit).............. (12,580,807) 20,807,702
------------ ------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 11,874,170 $ 28,032,163
============ ============

The accompanying notes are an integral part of these consolidated financial
statements.
33
35

LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

INCEPTION
(MAY 1, 1992)
YEAR ENDED DECEMBER 31, THROUGH
---------------------------------------- DECEMBER 31,
1995 1996 1997 1997
----------- ----------- ------------ -------------

Revenues:
Corporate collaborations................ $ 250,000 $ 3,591,000 $ 5,348,451 $ 9,189,451
Government grants....................... 200,000 82,770 377,459 660,229
----------- ----------- ------------ ------------
Total revenues.................. 450,000 3,673,770 5,725,910 9,849,680
----------- ----------- ------------ ------------
Operating expenses:
Research and development................ 7,051,287 8,502,187 11,980,233 34,170,120
General and administrative.............. 865,311 1,370,538 1,757,802 5,312,082
----------- ----------- ------------ ------------
Total operating expenses........ 7,916,598 9,872,725 13,738,035 39,482,202
----------- ----------- ------------ ------------
Loss from operations............ (7,466,598) (6,198,955) (8,012,125) (29,632,522)
Other income (expense):
Equity in operations of joint venture... -- -- (3,357,916) (3,357,916)
Interest income......................... 219,510 378,924 865,840 1,670,009
Interest expense........................ (229,665) (201,659) (146,900) (654,994)
----------- ----------- ------------ ------------
Net loss........................ $(7,476,753) $(6,021,690) $(10,651,101) $(31,975,423)
=========== =========== ============ ============
Net loss per common share:
Basic................................... $ (7.25) $ (5.65) $ (2.62)
=========== =========== ============
Pro forma............................... $ (1.77) $ (1.17) $ (1.50)
=========== =========== ============
Shares used in computing net loss per
common share:
Basic................................... 1,031,480 1,065,522 4,298,828
=========== =========== ============
Pro forma............................... 4,229,807 5,137,047 7,525,448
=========== =========== ============

The accompanying notes are an integral part of these consolidated financial
statements.
34
36

LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)

CONVERTIBLE SERIES A
PREFERRED STOCK COMMON STOCK COMMON STOCK
---------------------- --------------------- --------------------- ADDITIONAL
NUMBER $.01 NUMBER $.01 NUMBER $.01 PAID-IN
OF SHARES PAR VALUE OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL
---------- --------- --------- --------- --------- --------- -----------

ISSUANCE OF COMMON STOCK........... -- $ -- -- $ -- 804,878 $ 8,049 $ (7,629)
Net loss......................... -- -- -- -- -- -- --
---------- -------- -------- ------- --------- ------- -----------
BALANCE, DECEMBER 31, 1992......... -- -- -- -- 804,878 8,049 (7,629)
Issuance of common stock......... -- -- -- -- 121,951 1,220 3,780
Conversion of common stock to
Series A common stock.......... -- -- 804,878 8,049 (804,878) (8,049) --
Preferred stock warrants issued
in connection with lease
obligations.................... -- -- -- -- -- -- 35,000
Net loss......................... -- -- -- -- -- -- --
---------- -------- -------- ------- --------- ------- -----------
BALANCE, DECEMBER 31, 1993......... -- -- 804,878 8,049 121,951 1,220 31,151
Issuance of Series C convertible
preferred stock, net of
issuance costs of $47,691...... 1,000,000 10,000 -- -- -- -- 2,942,309
Exercise of stock options........ -- -- -- -- 9,451 94 1,344
Preferred stock warrants issued
in connection with lease
obligations.................... -- -- -- -- -- -- 55,500
Net loss......................... -- -- -- -- -- -- --
---------- -------- -------- ------- --------- ------- -----------
BALANCE, DECEMBER 31, 1994......... 1,000,000 10,000 804,878 8,049 131,402 1,314 3,030,304
Conversion of Series A common
stock to common stock.......... -- -- (804,878) (8,049) 893,782 8,938 88,450
Exercise of stock options........ -- -- -- -- 15,915 159 2,513
Net loss......................... -- -- -- -- -- -- --
---------- -------- -------- ------- --------- ------- -----------
BALANCE, DECEMBER 31, 1995......... 1,000,000 10,000 -- -- 1,041,099 10,411 3,121,267
Issuance of Series E convertible
preferred stock, net of
issuance costs of $40,434...... 1,250,000 12,500 -- -- -- -- 4,947,066
Exercise of stock options........ -- -- -- -- 45,491 455 31,816
Value ascribed to guaranteed rate
of return on redeemable
convertible preferred stock.... -- -- -- -- -- -- 610,000
Net loss......................... -- -- -- -- -- -- --
---------- -------- -------- ------- --------- ------- -----------
BALANCE, DECEMBER 31, 1996......... 2,250,000 22,500 -- -- 1,086,590 10,866 8,710,149
Accretion of redeemable
convertible preferred stock
dividends...................... -- -- -- -- -- -- --
Proceeds from initial public
offering of common stock, net
of $745,480 of issuance
costs.......................... -- -- -- -- 2,875,000 28,750 15,268,270
Conversion of convertible
preferred stock................ (2,250,000) (22,500) -- -- 548,780 5,488 17,012
Conversion of redeemable
convertible preferred stock.... -- -- -- -- 4,986,827 49,869 25,293,042
Issuance of common stock, net of
$30,000 of issuance costs...... -- -- -- -- 336,135 3,361 3,966,639
Exercise of stock options........ -- -- -- -- 42,409 424 39,255
Net loss......................... -- -- -- -- -- -- --
---------- -------- -------- ------- --------- ------- -----------
BALANCE, DECEMBER 31, 1997......... -- $ -- -- $ -- 9,875,741 $98,758 $53,294,367
========== ======== ======== ======= ========= ======= ===========

DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE TOTAL
------------ ------------

ISSUANCE OF COMMON STOCK........... $ -- $ 420
Net loss......................... (128,634) (128,634)
------------ ------------
BALANCE, DECEMBER 31, 1992......... (128,634) (128,214)
Issuance of common stock......... -- 5,000
Conversion of common stock to
Series A common stock.......... -- --
Preferred stock warrants issued
in connection with lease
obligations.................... -- 35,000
Net loss......................... (2,063,234) (2,063,234)
------------ ------------
BALANCE, DECEMBER 31, 1993......... (2,191,868) (2,151,448)
Issuance of Series C convertible
preferred stock, net of
issuance costs of $47,691...... -- 2,952,309
Exercise of stock options........ -- 1,438
Preferred stock warrants issued
in connection with lease
obligations.................... -- 55,500
Net loss......................... (5,634,011) (5,634,011)
------------ ------------
BALANCE, DECEMBER 31, 1994......... (7,825,879) (4,776,212)
Conversion of Series A common
stock to common stock.......... -- 89,339
Exercise of stock options........ -- 2,672
Net loss......................... (7,476,753) (7,476,753)
------------ ------------
BALANCE, DECEMBER 31, 1995......... (15,302,632) (12,160,954)
Issuance of Series E convertible
preferred stock, net of
issuance costs of $40,434...... -- 4,959,566
Exercise of stock options........ -- 32,271
Value ascribed to guaranteed rate
of return on redeemable
convertible preferred stock.... -- 610,000
Net loss......................... (6,021,690) (6,021,690)
------------ ------------
BALANCE, DECEMBER 31, 1996......... (21,324,322) (12,580,807)
Accretion of redeemable
convertible preferred stock
dividends...................... (610,000) (610,000)
Proceeds from initial public
offering of common stock, net
of $745,480 of issuance
costs.......................... -- 15,297,020
Conversion of convertible
preferred stock................ -- --
Conversion of redeemable
convertible preferred stock.... -- 25,342,911
Issuance of common stock, net of
$30,000 of issuance costs...... -- 3,970,000
Exercise of stock options........ -- 39,679
Net loss......................... (10,651,101) (10,651,101)
------------ ------------
BALANCE, DECEMBER 31, 1997......... $(32,585,423) $ 20,807,702
============ ============

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

35
37

LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

INCEPTION
YEAR ENDED DECEMBER 31, (MAY 1, 1992)
------------------------------------------- THROUGH
1995 1996 1997 DECEMBER 31, 1997
----------- ------------ ------------ -----------------

Cash flows from operating activities:
Net loss.................................. $(7,476,753) $ (6,021,690) $(10,651,101) $(31,975,423)
Adjustments to reconcile net loss to net
cash used in operating activities --
Stock compensation expense............. 3,281 -- -- 89,339
Depreciation and amortization.......... 774,146 908,860 1,019,531 2,971,316
Equity in operations of joint
venture.............................. -- -- 3,357,916 3,357,916
Changes in operating assets and
liabilities --
Other current assets................. 76,530 (66,270) (255,032) (408,811)
Accounts payable and accrued
expenses.......................... (809,953) 431,198 901,312 2,630,112
Deferred revenue..................... -- 261,250 900,000 1,161,250
Deferred rent........................ 308,824 234,204 (104,357) 466,078
----------- ------------ ------------ ------------
Net cash used in operating
activities...................... (7,123,925) (4,252,448) (4,831,731) (21,708,223)
----------- ------------ ------------ ------------
Cash flows from investing activities:
Investment in marketable securities....... (1,458,329) (11,741,504) (21,066,603) (38,064,081)
Proceeds from maturities of marketable
securities............................. 3,458,500 6,787,602 11,442,960 23,486,536
Investment in joint venture............... -- -- (1,587,606) (1,587,606)
Purchases of property and equipment....... (40,283) (184,549) (48,228) (1,834,788)
Decrease (increase) in other assets....... (436) -- 436 (27,090)
----------- ------------ ------------ ------------
Net cash provided by (used in)
investing activities............ 1,959,452 (5,138,451) (11,259,041) (18,027,029)
----------- ------------ ------------ ------------
Cash flows from financing activities:
Principal payments on capital leases...... (558,280) (695,226) (878,067) (2,280,161)
Net proceeds from notes payable........... -- -- -- 2,086,312
Proceeds from redeemable convertible
preferred stock, net of issuance
costs.................................. 1,950,908 7,790,607 3,819,506 23,256,599
Proceeds from initial public offering, net
of issuance costs...................... -- -- 15,297,020 15,297,020
Issuance of common stock, net of issuance
costs.................................. -- -- 3,970,000 3,970,000
Exercise of stock options................... 2,672 32,271 39,679 81,480
Issuance of convertible preferred stock, net
of issuance costs......................... -- 4,959,566 -- 7,911,875
----------- ------------ ------------ ------------
Net cash provided by financing
activities...................... 1,395,300 12,087,218 22,248,138 50,323,125
----------- ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................... (3,769,173) 2,696,319 6,157,366 10,587,873
Cash and cash equivalents, beginning of
period.................................... 5,503,361 1,734,188 4,430,507 --
----------- ------------ ------------ ------------
Cash and cash equivalents, end of period.... $ 1,734,188 $ 4,430,507 $ 10,587,873 $ 10,587,873
=========== ============ ============ ============
Supplemental cash flow information:
Cash paid during the period for
interest............................... $ 193,197 $ 201,659 $ 146,900 $ 868,607
=========== ============ ============ ============
Supplemental disclosure of noncash investing
and financing activities:
Property and equipment acquired under
capital lease obligations.............. $ 435,301 $ 343,927 $ 1,093,691 $ 3,817,374
=========== ============ ============ ============

The accompanying notes are an integral part of these consolidated financial
statements.
36
38

LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) THE COMPANY

LeukoSite, Inc. (the "Company") was incorporated on May 1, 1992. The
Company is engaged in the development of a new class of proprietary
immunomodulatory therapeutics with potential applications in cancer and
inflammatory, autoimmune, and viral diseases.

The Company is in the development stage and is devoting substantially all
of its efforts toward product research and development and raising capital.
Management anticipates that all future revenues will be derived from products
under development or those developed in the future. Principal risks to the
Company include the successful development and marketing of products to obtain
profitable operations, dependence on collaborative partners, the ability to
obtain adequate financing to fund future operations, United States Food and Drug
Administration clearance and regulation, dependence on key individuals and
competition from substitute products and larger companies.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All material intercompany accounts
and transactions have been eliminated in consolidation.

(b) Depreciation and Amortization

The Company provides for depreciation and amortization using the
straight-line method by charges to operations in amounts estimated to allocate
the cost of property and equipment over their estimated useful lives as follows:

ESTIMATED
ASSET CLASSIFICATION USEFUL LIVES
-------------------- -------------

Laboratory furniture, fixtures and equipment................ 4 -- 5 Years
Leasehold improvements...................................... Life of lease
Office furniture, fixtures and equipment.................... 4 -- 5 Years

Substantially all of the Company's revenues are derived from corporate
collaborative research arrangements and government grants. Corporate
collaboration revenues and government grants, which are not subject to achieving
development milestones, are recognized on a straight-line basis over the period
of the contract, which approximates when work is performed and costs are
incurred. Revenues that are earned upon the achievement of development
milestones are recognized when the milestones are achieved and payment is due.
License fee revenue represents technology transfer fees received for rights to
certain technology of the Company. License fees are recognized as revenue as
earned. Deferred revenue represents payments received in advance of revenue
recognition.

37
39
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(d) Research and Development

All research and development costs are expensed as incurred. Research and
development expenses in the accompanying consolidated statements of operations
include funded and unfunded expenses.

(e) Disclosure of Fair Value of Financial Instruments

The Company's financial instruments consist mainly of cash and cash
equivalents, marketable securities, and accounts payable. The carrying amounts
of these financial instruments approximate fair value due to the short-term
nature of these instruments.

(f) Net Loss per Common Share

In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. The Company adopted SFAS No. 128 effective December 15,
1997. Basic net loss is based on the weighted average number of common shares
outstanding. Pro forma net loss per common share is based on the pro forma
weighted average number of common shares outstanding during the period, assuming
the automatic conversion of outstanding shares of redeemable convertible
preferred stock and convertible preferred stock into common stock using the
as-converted method, which occurred upon the closing of the Company's initial
public offering on August 15, 1997. In addition, the 1997 net loss available to
common stockholders has been adjusted to included $610,000 of dividends
attributable to redeemable convertible preferred stock. Diluted net loss per
share has not been presented as the inclusion of stock options and warrants
would be antidilutive.

(3) CASH EQUIVALENTS AND MARKETABLE SECURITIES

Cash equivalents are highly liquid investments with original maturities of
less than three months. Marketable securities consist of securities with
original maturities of greater than three months. The Company accounts for cash
equivalents and marketable securities in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. In accordance with SFAS No. 115, the Company has
classified its investments as held-to-maturity. These investments that the
Company has the positive intent and ability to hold to maturity are reported at
amortized cost, which approximates fair market value. As of December 31, 1997,
there were no material unrealized gains or losses on investments. Cash and cash
equivalents and marketable securities consisted of the following:

DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------

Cash and cash equivalents:
Cash.................................................... $ 754,473 $ 1,373,786
Money market funds...................................... 3,676,034 6,609,783
Taxable auction securities.............................. -- 2,604,304
---------- -----------
$4,430,507 $10,587,873
========== ===========
Marketable securities:
U.S. government agency obligations (average maturity of
5 months)............................................ $4,953,902 $ 6,094,401
Corporate bonds and notes (average maturity of 5
months).............................................. -- 8,474,699
---------- -----------
$4,953,902 $14,569,100
========== ===========

38
40
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) WARNER-LAMBERT AGREEMENTS

The Company and Warner-Lambert Company (Warner) have entered into research,
development and marketing agreements to share expertise in the discovery and
development of compounds that antagonize the MCP-1, IL-8, CCR5, and CXCR4
receptors and to market therapeutic drugs that result from the collaboration.

The Company and Warner signed an agreement related to MCP-1 in September
1994 which was amended in July 1995 and October 1997 (the MCP-1 Agreement).
Under the MCP-1 Agreement, the Company and Warner are working to screen and
select compounds for further development. In conjunction with the MCP-1
Agreement, Warner agreed to purchase preferred stock at a predetermined share
price and to fund a portion of the Company's research expenses for the next
three years. Warner purchased $3,000,000 of Series C convertible preferred stock
in 1995 and $5,000,000 of Series E convertible preferred stock in 1996.

The Company and Warner signed an agreement related to IL-8 in July 1995
which was amended in October 1997 (the IL-8 Agreement). Under the IL-8
Agreement, the Company and Warner are working to screen and select compounds for
further development. In connection with the IL-8 Agreement, Warner paid the
Company $250,000 for the grant of a license to the technology and made a
$1,000,000 equity investment in the Series G preferred stock in March 1997.

The Company and Warner signed an agreement related to CCR5 and CXCR4 in
October 1996 (the CCR5 and CXCR4 Agreement). Under the CCR5 and CXCR4 Agreement,
the Company and Warner are working to discover and develop small molecule
antagonists to AIDS chemokine co-receptors CCR5 and CXCR4 for the treatment of
HIV infection. This agreement was extended in January 1998, at which time Warner
made a $1 million payment related to the achievement of certain milestones.

Under the terms of the October 1997 amendment to the MCP-1 and IL-8
agreements, the Company, Warner and Kyowa Hakko Kogyo (Kyowa) have agreed to
jointly pursue research and development of antagonists that target MCP-1, IL-8,
CCR1 and CXCR3.

The Company received quarterly research funding under the MCP-1 and IL-8
Agreements. Through December 31, 1997, the Company had received $2,061,250 in
research support. Revenue recognized during the years ended 1995, 1996 and 1997
was $250,000, $690,000 and $1,035,000, respectively and as of December 31, 1997,
the Company has deferred recognizing $86,250 as revenue. The MCP-1, IL-8, CCR5
and CXCR4 Agreements (the Warner Agreements) also contain milestone payments
payable to the Company beginning upon the designation of a product candidate for
development. In addition, under the Warner Agreements, Warner will pay royalties
as a percentage of sales, as defined, for certain products developed under the
agreements. Warner waived its antidilution rights relating to the Series C, E
and G preferred stock which was converted into common stock in August 1997 in
exchange for a credit against future royalties, if any become payable, under the
MCP-1 and IL-8 Agreements and the Kyowa Agreement discussed in Note 6. The
approximate amount of such credit is $3,900,000. The Warner Agreements can be
terminated by either party with six months' written notice or for cause, as
defined.

(5) ROCHE BIOSCIENCE AGREEMENT

The Company signed an agreement with Roche Bioscience (Roche) for the
development of a drug to block the binding of eotoxin in July 1996. Under the
terms of this agreement, Roche will make payments to the Company in the form of
licensing fees, research support and milestone payments and royalties on
worldwide sales of products resulting from the collaboration. Through December
31, 1997, the Company had received $5,175,000 in licensing and research support
payments from Roche. Revenue recognized for the years ended 1996 and 1997 was
$2,900,000 and $2,100,000, respectively, and as of December 31, 1997, the

39
41
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company has deferred recognizing $175,000 as revenue. Roche is responsible for
preclinical and clinical development of products and has worldwide exclusive
rights to market products.

(6) KYOWA HAKKO KOGYO AGREEMENT

In April 1997, the Company signed an agreement with Kyowa to discover and
develop small molecule antagonists and monoclonal antibody drugs to CXCR3 and
CCR1. The agreement was amended in October 1997. Under the terms of the amended
agreement, Kyowa has primary rights to market products in Japan and Asia
resulting from the collaboration. Furthermore, the amended agreement calls for
the Company, together with Warner Lambert, and Kyowa to jointly develop
antagonists that target MCP-1, IL-8, CXCR3 and CCR1. The Company is entitled to
receive research support and milestone payments, as well as royalties based on
net sales, as defined. Through December 31, 1997, the Company had received
$3,000,000 of research funding, of which the Company has deferred recognizing
$900,000 as revenue.

(7) ILEX AGREEMENT

In May 1997, the Company and Ilex Oncology, Inc. (Ilex) entered into a
joint venture agreement that established a limited partnership for the purpose
of developing and commercializing LDP-03. Under the terms of the partnership,
the Company is required to fund 50% of the partnership's working capital
requirements. LeukoSite and Ilex estimate that research, development, and
clinical costs for the joint venture will be approximately $5,000,000 over the
next year. The joint venture expires in 2017, but provides for either partner
under certain circumstances to purchase the other partner's ownership position
of the joint venture after October 2000. Should either party fail to fulfill its
funding obligations, control of the joint venture may change.

The Company accounts for its investment in the joint venture under the
equity method of accounting and records its share of the income of loss in other
income (expense). The Company is reimbursed by the joint venture for certain
costs incurred on behalf of the joint venture. For the year ended December 31,
1997, the Company's share of the joint venture's recorded loss was $3,357,916
and the Company had a funding liability of $1,770,310 to the joint venture as of
December 31, 1997. The Company charged the joint venture $250,106 for costs
incurred on its behalf.

The joint venture has entered into a agreement with a third party to
manufacture LDP-03. In connection with this agreement, the Company and Ilex have
guaranteed the payment of the obligations of the joint venture due under the
manufacturing agreement. As of December 31, 1997, the obligation was
approximately $3.2 million.

(8) GENENTECH

The Company entered into an agreement with Genentech, Inc. (Genentech) in
December 1997 to develop and commercialize LDP-02, a humanized monoclonal
antibody for the treatment of inflammatory bowel disease (IBD). Under the terms
of the agreement Genentech will have exclusive worldwide rights to market
LDP-02. In connection with the agreement, Genentech made a $4,000,000 equity
investment in the Company and was issued warrants to purchase 250,000 shares of
common stock at an exercise price of $16.22. The agreement calls for payments to
be made to the Company for the achievement of certain milestones as well as
future royalty payments based upon the sale of products developed under the
collaboration. In addition, Genentech will provide two credit facilities. The
first facility will be for approximately $15 million and will fund development
of products through completion of Phase II clinical trials. The second facility
will be available to the Company if it agrees to fund 25% of the Phase III
clinical trial development costs in return for a specified share of profits on
U.S. sales of any products developed under the agreement, as defined. If the
Company elects this option, it will also receive royalties on products sold
outside of the U.S. The two credit facilities can be repaid by the Company or
converted into shares of common stock under certain circumstances
40
42
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

at the option of the Company or Genentech at the market value of the common
stock at the date of conversion.

(9) CAPITAL LEASE

In 1993, the Company entered into a master lease agreement for the sale and
leaseback or lease of up to $2,250,000 of laboratory and office equipment and
leasehold improvements. At December 31, 1997, the Company had acquired
approximately $2,130,000 of laboratory and office equipment and leasehold
improvements under the lease agreement. The Company also has an obligation to
purchase $750,000 of leasehold improvements at the expiration of the lease term
for 15% of its original cost. The Company issued warrants for the purchase of
210,000 shares of Series A redeemable convertible preferred stock at an exercise
price of $1.00 per share to the lessors under the master lease agreement (see
Note 12(b)).

In 1994, the Company entered into a second master equipment lease agreement
for the lease of up to $750,000 of laboratory and office equipment. At December
31, 1997, the Company had acquired approximately $730,000 of equipment under the
lease. The leased equipment reverts back to the lessor at the end of the lease
term or the Company may purchase all of the equipment for fair market value,
which will not be less than 10% or more than 20% of the cost of the equipment.
On January 18, 1996, this agreement was amended to provide an additional
$300,000 of lease availability.

On March 14, 1997, the Company entered into another lease agreement for the
lease of up to $1,200,000 of laboratory and office equipment, of which $450,000
may be utilized for leasehold improvements. As of December 31, 1997, $961,000 is
available under this lease commitment.

Future minimum lease payments under these lease agreements at December
31,1997 are as follows:

AMOUNT
----------

Year Ending December 31,
1998...................................................... $ 994,412
1999...................................................... 492,368
2000...................................................... 398,665
2001...................................................... 91,752
2002...................................................... 4,745
----------
Total............................................. 1,981,942
Less -- Amount representing interest...................... 218,529
----------
Present value of future lease payments............ 1,763,413
Less -- Amounts due within one year....................... 866,835
----------
Amounts due after one year........................ $ 896,578
==========

(10) CAPITAL STOCK

(a) Stock Split and Amendment to Charter

On August 8, 1997, the Company amended its Restated Certificate of
Incorporation, which included a 1-for-4.10 reverse stock split of the Company's
common stock and a change in the par value of the Company's common stock to $.01
per share. Accordingly, all share and per share amounts of common stock for all
periods presented have been retroactively adjusted to reflect the reverse stock
split and change in par value. The Company is authorized to issue 25,000,000
shares of common stock, $.01 par value, and 5,000,000 shares of preferred stock,
$.01 par value.

41
43
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(b) Initial Public Offering

On August 15, 1997, the Company completed the initial public offering of
2,875,000 shares of its common stock at $6 per share, for total net proceeds of
$15.3 million after underwriting discounts and expenses of the offering. In
connection with the public offering, all outstanding shares of redeemable
convertible preferred stock and convertible preferred stock were automatically
converted into 5,535,607 shares of common stock.

(11) PREFERRED STOCK

(a) Redeemable Convertible Preferred Stock

Redeemable convertible preferred stock activity since inception is as
follows:

SERIES A SERIES B SERIES D SERIES F
------------------------- ------------------------ ------------------------ ----------
NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING NUMBER
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES
----------- ----------- ---------- ----------- ---------- ----------- ----------

Issuance of Series A preferred
stock, net of issuance costs of
$125,970........................ 5,000,000 $ 4,874,030 -- $ -- -- $ -- --
----------- ----------- ---------- ----------- ---------- ----------- ----------
Balance, December 31, 1993....... 5,000,000 4,874,030 -- -- -- -- --
Issuance of Series A preferred
stock, net of issuance costs of
$18,769......................... 5,000,000 4,981,231 -- -- -- -- --
Issuance of Series B preferred
stock, net of issuance costs of
$73,371......................... -- -- 1,666,667 1,926,629 -- -- --
----------- ----------- ---------- ----------- ---------- ----------- ----------
Balance, December 31, 1994....... 10,000,000 9,855,261 1,666,667 1,926,629 -- -- --
Issuance of Series D preferred
stock, net of issuance costs of
$49,093......................... -- -- -- -- 1,481,482 1,950,908 --
----------- ----------- ---------- ----------- ---------- ----------- ----------
Balance, December 31, 1995....... 10,000,000 9,855,261 1,666,667 1,926,629 1,481,482 1,950,908 --
Issuance of Series F preferred
stock, net of issuance costs of
$34,838......................... -- -- -- -- -- -- 1,638,335
Issuance of Series G preferred
stock, net of issuance costs of
$90,000......................... -- -- -- -- -- -- --
Value ascribed to guaranteed rate
of return on redeemable
convertible preferred stock..... -- -- -- -- -- -- --
----------- ----------- ---------- ----------- ---------- ----------- ----------
Balance, December 31, 1996....... 10,000,000 9,855,261 1,666,667 1,926,629 1,481,482 1,950,908 1,638,335
Issuance of Series G preferred
stock, net of issuance costs of
$40,000......................... -- -- -- -- -- -- --
Accretion of redeemable
convertible preferred stock
dividend........................ -- -- -- -- -- -- --
Conversion of redeemable
convertible preferred stock..... (10,000,000) (9,855,261) (1,666,667) (1,926,629) (1,481,482) (1,950,908) (1,638,335)
----------- ----------- ---------- ----------- ---------- ----------- ----------
Balance, December 31, 1997....... -- $ -- -- $ -- -- $ -- --
=========== =========== ========== =========== ========== =========== ==========

SERIES F SERIES G
----------- -------------------------
CARRYING NUMBER CARRYING
VALUE OF SHARES VALUE
----------- ----------- -----------

Issuance of Series A preferred
stock, net of issuance costs of
$125,970........................ $ -- -- $ --
----------- ----------- -----------
Balance, December 31, 1993....... -- -- --
Issuance of Series A preferred
stock, net of issuance costs of
$18,769......................... -- -- --
Issuance of Series B preferred
stock, net of issuance costs of
$73,371......................... -- -- --
----------- ----------- -----------
Balance, December 31, 1994....... -- -- --
Issuance of Series D preferred
stock, net of issuance costs of
$49,093......................... -- -- --
----------- ----------- -----------
Balance, December 31, 1995....... -- -- --
Issuance of Series F preferred
stock, net of issuance costs of
$34,838......................... 4,880,607 -- --
Issuance of Series G preferred
stock, net of issuance costs of
$90,000......................... -- 857,143 2,910,000
Value ascribed to guaranteed rate
of return on redeemable
convertible preferred stock..... -- -- (610,000)
----------- ----------- -----------
Balance, December 31, 1996....... 4,880,607 857,143 2,300,000
Issuance of Series G preferred
stock, net of issuance costs of
$40,000......................... -- 1,102,719 3,819,506
Accretion of redeemable
convertible preferred stock
dividend........................ -- -- 610,000
Conversion of redeemable
convertible preferred stock..... (4,880,607) (1,959,862) (6,729,506)
----------- ----------- -----------
Balance, December 31, 1997....... $ -- -- $ --
=========== =========== ===========

As discussed in Note 10(b), upon completion of the Company's initial public
offering, all outstanding shares of redeemable convertible preferred stock were
automatically converted into 4,986,827 shares of common stock.

The Company also had a separate agreement with certain Series G
shareholders whereby their shares were converted into common stock based upon a
specific rate of return on their original investment, as defined. The Company
recorded the value attributed to the guaranteed rate of return (based on an
original investments of $3,000,000, an annual rate of return of 33% and an
estimated period of approximately 7.5 months before conversion into common
stock) as additional paid-in capital and accreted it as a preferred stock
dividend over the estimated period that the stock was outstanding. The Company
recorded $610,000 of such accretion through December 31, 1997.

42
44
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Convertible Preferred Stock

Convertible preferred stock activity since inception is as follows:

In November 1994, the Company sold 1,000,000 shares of Series C convertible
preferred stock, which resulted in proceeds of $3,000,000.

In January 1996, the Company issued 625,000 shares of Series E convertible
preferred stock, which resulted in proceeds of $2,500,000.

In April 1996, the Company sold 625,000 shares of Series E convertible
preferred stock, which resulted in proceeds of $2,500,000.

As discussed in Note 10(b), upon completion of the Company's initial public
offering, all outstanding shares of convertible preferred stock were
automatically converted into 548,780 shares of common stock.

(12) STOCK OPTIONS AND WARRANTS

(a) Stock Options

The Company has adopted the 1993 Stock Option Plan (the "Plan") under which
it may grant both incentive stock options and nonstatutory stock options. The
Plan provides for the granting of options to purchase up to 1,500,000 shares of
common stock. As of December 31, 1997, 112,215 shares are available for future
grant under the Plan.

During 1993, the Company granted a stock option to purchase 135,000 shares
of Series A redeemable convertible preferred stock at $1.00 per share pursuant
to a stock restriction agreement with a consultant. Upon conversion of the
Series A redeemable convertible preferred stock into common stock as discussed
in Note 10(b), the option holder is now entitled to purchase 32,927 shares of
common stock at an exercise price of $4.10 per share. This option expires on
August 15, 2002.

43
45
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company had the following common stock option activity from inception
(May 1, 1992) through December 31, 1997:

OPTION
NUMBER OF PRICE WEIGHTED AVERAGE
SHARES PER SHARE EXERCISE PRICE
--------- ------------ ----------------

Balance, December 31, 1992........ -- $ -- $ --
Granted...................... 256,707 .04 -- .62 .45
--------- ------------ -----
Balance, December 31, 1993........ 256,707 .04 -- .62 .45
Granted...................... 176,917 .04 -- .94 .90
Exercised.................... (9,451) .04 -- .62 .16
Canceled..................... (3,659) .04 -- .72 .21
--------- ------------ -----
Balance, December 31, 1994........ 420,514 .04 -- .94 .66
Granted...................... 74,756 1.00 -- 1.19 1.07
Exercised.................... (15,915) .04 -- .94 .16
Canceled..................... (10,579) .04 -- 1.00 .25
--------- ------------ -----
Balance, December 31, 1995........ 468,776 .04 -- 1.19 .74
Granted...................... 324,356 1.19 -- 6.15 5.37
Exercised.................... (45,491) .04 -- 1.19 .70
Canceled..................... (15,212) .82 -- 5.13 2.30
--------- ------------ -----
Balance, December 31, 1996........ 732,429 .04 -- 6.15 2.75
Granted...................... 633,008 6.12 --11.13 8.46
Exercised.................... (42,409) .04 -- 6.15 .93
Canceled..................... (48,509) .69 -- 7.17 4.45
--------- ------------ -----
Balance, December 31, 1997........ 1,274,519 $.04 --11.13 5.50
========= ============ =====
Exercisable December 31, 1997..... 336,805 $.04 -- 7.17 1.70
========= ============ =====

In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options or warrants to be included in the
statement of operations or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. The Company has
computed the pro forma disclosures required under SFAS No. 123 for options
granted in 1995, 1996 and 1997 using the Black-Scholes option pricing model
prescribed by SFAS No. 123. The assumptions used for the years ended December
31, 1995, 1996 and 1997 are as follows:

DECEMBER 31,
-----------------------------------------------
1995 1996 1997
------------- ------------- -------------

Risk-free interest rate.... 5.67% -- 7.79% 5.54% -- 6.83% 5.83% -- 6.86%
Expected dividend yield.... 0% 0% 0%
Expected life.............. 7 Years 7 Years 7 Years
Expected volatility........ 35% 33% 60%

The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's

44
46
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.

The total value of the options granted during the years ended 1995, 1996
and 1997 was computed as approximately $40,000, $867,000 and $3,561,000,
respectively. Of these amounts, approximately $4,000, $99,000 and $458,000 would
be charged to operations for the years ended December 31, 1995, 1996 and 1997,
respectively. The remaining amount would be amortized over the related vesting
periods. The resulting pro forma compensation expense may not be representative
of the amount to be expected in future years as pro forma compensation expense
may vary based upon the number of options granted and the assumptions used in
valuing these options.

The pro forma net loss and pro forma net loss per common share presented
below have been computed assuming no tax benefit. The effect of a tax benefit
has not been considered since a substantial portion of the stock options granted
are incentive stock options and the Company does not anticipate a future
deduction associated with the exercise of these stock options. The pro forma
effect of SFAS No. 123 for the years ended December 31, 1995, 1996 and 1997 is
as follows:

DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1996 1997
------------------------- ------------------------- ---------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- ----------- ------------ ------------

Net loss.................... $(7,476,753) (7,480,575) $(6,021,690) $(6,121,057) $(10,651,101) $(11,109,101)
=========== =========== =========== =========== ============ ============
Basic net loss per common
share..................... $ (7.25) (7.25) $ (5.65) $ (5.74) $ (2.62) $ (2.73)
=========== =========== =========== =========== ============ ============
Pro forma net loss per
common share.............. $ (1.77) (1.77) $ (1.17) $ (1.19) $ (1.50) $ (1.56)
=========== =========== =========== =========== ============ ============

(b) Warrants

In connection with the issuance of the Company's Series G redeemable
convertible preferred stock, the Company granted warrants to purchase shares of
common stock. The total number of shares issuable upon exercise of the warrants
and the exercise price will be determined once the Company completes its first
firm commitment underwritten public offering in which the net proceeds to the
Company are at least $17,500,000 (the "Designated Public Offering"). The
warrants shall become exercisable only if the Designated Public Offering occurs
after December 20, 2000. If the Designated Public Offering occurs on or prior to
December 20, 2000, the warrants shall become null and void. The warrants are
exercisable beginning on the later of (i) the date of the closing of the
Designated Public Offering after December 20, 2000, or (ii) the date of closing
in connection with, or expiration of, the underwriters' overallotment option in
connection with the Designated Public Offering. The warrants expire on the
earlier of (i) the date of closing of the Designated Public Offering provided
the closing occurs on or prior to December 20, 2000, or (ii) December 20, 2003.

In conjunction with the Company's master lease agreement (see Note 9), the
Company issued warrants for the purchase of 210,000 shares of Series A
redeemable convertible preferred stock at an exercise price of $1.00 per share.
Upon conversion of the Series A redeemable convertible preferred stock into
common stock as discussed in Note 10(b), the warrantholder became entitled to
purchase 51,220 shares of common stock at an exercise price of $4.10 per share.
The warrants are fully exercisable and expire on August 15, 2002. The value
assigned to the warrants, $90,500, is being accounted for as debt discount and
is being amortized over the lease period.

45
47
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In conjunction with the Company's agreement with Genentech (see Note 8),
the Company issued warrants to purchase 250,000 shares of common stock at an
exercise price of $16.22 per share. The warrants are exercisable on December 18,
1999 and expire on December 18, 2007.

(13) OPERATING LEASE

In December 1994, the Company entered into an operating lease for its
office and research facilities. The lease expires in December 1999 with an
option to renew for two additional five-year terms. The Company has received
certain rent concessions during the initial term of the lease. Rent expense is
being recognized ratably over the term of the lease. Deferred rent included in
the accompanying consolidated balance sheet represents the difference between
cash paid to date and rent expense recognized to date. Rent expense for 1995,
1996 and 1997 amounted to approximately $503,000, $459,000 and $459,000
respectively.

Future minimum rental payments at December 31, 1997 are as follows:

AMOUNT
----------

Year Ending December 31,
1998................................................... $ 803,000
1999................................................... 736,000
----------
$1,539,000
==========

(14) INCOME TAXES

The Company follows the provisions of SFAS No. 109, Accounting for Income
Taxes, whereby a deferred tax asset or liability is measured by the enacted tax
rates that would be in effect when any differences between the financial
statement and tax bases of assets or liabilities reverse. The Company has
elected to defer certain research and development costs as defined in the
Internal Revenue Code. As of December 31, 1997, the Company has available
deferred research and development costs of approximately $20,983,000, net
operating loss carryforwards of approximately $4,754,000 and research and
development credit carryforwards of approximately $900,000 to reduce future
federal income taxes, if any. The net operating loss and credit carryforwards
expire beginning in the year 2007 and are subject to review and possible
adjustment by the Internal Revenue Service. Due to the uncertainty related to
the realization of future tax return benefits of the deferred tax assets, a full
valuation allowance has been provided.

1996 1997
---------- -----------

Operating loss carryforwards....................... $ 973,000 $ 1,902,000
Tax credit carryforwards........................... 500,000 900,000
Start-up costs..................................... 465,000 160,000
Development costs.................................. 6,492,000 9,905,000
Nondeductible accruals............................. 191,000 84,000
Depreciation....................................... 94,000 189,000
---------- -----------
8,715,000 13,140,000
Less -- Valuation allowance........................ 8,715,000 13,140,000
---------- -----------
$ -- $ --
========== ===========

The United States Tax Reform Act of 1986 contains provisions that may limit
the Company's net operating loss and credit carryforwards available to be used
in any given year in the event of significant changes in the ownership interests
of significant stockholders. The Company has completed numerous

46
48
LEUKOSITE, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financings since its inception and has incurred ownership changes, as defined in
the Tax Reform Act of 1986. The Company believes that the ownership changes will
not significantly impact its ability to utilize its net operating loss and tax
credit carryforwards.

(15) COMMITMENTS

(a) Research, License and Consulting Agreements

The Company has entered into various research, license and consulting
agreements to support its research and development activities. These agreements
generally expire over several years. Certain of such agreements contain
provisions for future royalties to be paid on sales of products developed under
the agreements. The Company also has commitments to fund research and
development under arrangements discussed in Notes 7 and 15(b).

Future minimum commitments under research, license and consulting
agreements, excluding any funding related to the Ilex joint venture discussed in
Note 7, at December 31, 1997 are approximately as follows:

1998...................................................... $521,500
1999...................................................... 22,500

(b) LeukoSite (U.K.) Limited

The Company has a wholly owned subsidiary, LeukoSite (UK) Limited
("LeukoSite UK"). LeukoSite UK was incorporated for the purpose of entering into
a research agreement to fund research activity in the United Kingdom. An
agreement has been established whereby LeukoSite UK will contribute $3,000,000
toward funding the construction, equipping and the operations of a research
center in the UK. The Company has paid and charged to operations $2,000,000 of
such commitment as of December 31, 1997, and the balance will be paid in
six-month intervals of $250,000 each. It is expected that the Company will fund
most of the cash requirements of LeukoSite UK.

(16) ACCRUED EXPENSES

Accrued expenses in the accompanying consolidated balance sheets consist of
the following:

DECEMBER 31,
------------------------
1996 1997
---------- ----------

Payroll and payroll-related......................... $ 338,441 $ 608,724
Consulting and contract research.................... 314,595 263,300
Legal fees.......................................... 62,832 145,018
Other............................................... 328,212 849,381
---------- ----------
$1,044,080 $1,866,423
========== ==========

47
49

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the General Partners of L&I Partners, L.P.:

We have audited the accompanying balance sheet of L&I Partners, L.P. (a Delaware
Limited Partnership in the development stage) as of December 31, 1997, and the
related statements of operations, partners' capital and cash flows for the
period from inception (May 2, 1997) to December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of L&I Partners, L.P. as of
December 31, 1997, and the results of its operations and its cash flows for the
period from inception (May 2, 1997) to December 31, 1997, in conformity with
generally accepted accounting principles.

Arthur Andersen LLP

San Antonio, Texas
January 30, 1998

48
50

L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEET

DECEMBER 31, 1997
-----------------

ASSETS
Cash and cash equivalents................................... $ 353,258
-----------
Total assets...................................... $ 353,258
===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable to Related parties....................... $ 1,201,975
Accrued subcontractor costs............................... 3,210,115
-----------
Total liabilities................................. 4,412,090
-----------
Commitments and contingencies (note 4)
Partners' capital
Limited Partners' Capital................................. $ 2,643,300
General Partner's Capital................................. 26,700
Receivable from general partner........................... (13,000)
Deficit accumulated during the development stage.......... (6,715,832)
-----------
Total partners' capital........................... (4,058,832)
-----------
Total liabilities and partners' capital........... $ 353,258
===========

The accompanying notes are an integral part of these financial statements.
49
51

L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF OPERATIONS

FOR THE PERIOD FROM
INCEPTION
(MAY 2, 1997) THROUGH
DECEMBER 31, 1997
-----------------------------

Revenues:................................................... $ --
-----------
Operating expenses:
General and administrative................................ --
Costs of contract research services performed by related
parties................................................ 1,202,038
Subcontractor costs....................................... 5,519,921
-----------
Total operating expenses.......................... 6,721,959
-----------
Operating loss.................................... $(6,721,959)
-----------
Interest income............................................. 6,127
-----------
Net loss.......................................... $(6,715,832)
===========
Net loss to general partner....................... $ (67,158)
===========
Net loss to limited partners...................... $(6,648,674)
===========

The accompanying notes are an integral part of these financial statements.
50
52

L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF PARTNERS' CAPITAL

LIMITED GENERAL
PARTNERS' PARTNER'S
CAPITAL CAPITAL TOTAL
----------- --------- -----------

Balance -- Inception May 2, 1997...................... $ -- $ -- $ --
Contributions....................................... 2,643,300 26,700 2,670,000
Receivable from general partner..................... -- (13,000) (13,000)
Net Loss............................................ (6,648,674) (67,158) (6,715,832)
----------- -------- -----------
Balance -- December 31, 1997.......................... $(4,005,374) $(53,458) $(4,058,832)
=========== ======== ===========

The accompanying notes are an integral part of these financial statements.
51
53

L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CASH FLOWS

FOR THE PERIOD
FROM INCEPTION
(MAY 2, 1997)
THROUGH
DECEMBER 31, 1997
-----------------

Cash flows from operating activities:
Net loss.................................................. $(6,715,832)
Adjustments to reconcile net loss to net cash used in
operating activities -- Increase in liabilities
Accounts payable to partners........................... 1,201,975
Accrued subcontractor costs.......................... 3,210,115
-----------
Net cash used in operating activities..................... (2,303,742)
-----------
Cash flows from financing activities:
Capital Contributions..................................... 2,657,000
-----------
Net cash provided by financing activities.............. 2,657,000
-----------
Net increase in cash and cash equivalents................... 353,258
Cash and cash equivalents, beginning of period.............. --
-----------
Cash and cash equivalents, end of period.................... $ 353,258
===========

The accompanying notes are an integral part of these financial statements.
52
54

L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Organization and Control

L&I Partners, L.P. (L&I), was founded in May 1997 as a joint venture
between Ilex Oncology, Inc. (Ilex) and LeukoSite, Inc. (LeukoSite). L&I was
formed to develop and commercialize a monoclonal antibody for the treatment of
chronic lymphocytic leukemia, pursuant to an agreement of limited partnership
and a license agreement between LeukoSite, Ilex and L&I. The development and
commercialization activities of the joint venture will be managed with equal
control by each party. LeukoSite and Ilex will generally share equally in
profits from the sales of the compound and in all future research, development,
clinical and commercial costs. The joint venture expires in 2017, but provides
for either partner to purchase the other partner's ownership interest in the
joint venture in the event of an unresolved deadlock (relating to the activities
of the partnership) after the earlier of a change in control (as defined
therein) of the other party or October 1, 2000. In addition, in the event that
one party is unable or unwilling to fulfill its funding obligations to the joint
venture, then in certain circumstances, the party that funds the joint venture
shall gain control of the management of the joint venture, subject to certain
catch-up rights of the other party.

L&I is in the development stage and has not yet generated operating
revenues nor is there any assurance of future revenues. Since inception, L&I has
received significant support from LeukoSite and Ilex. Although its close
affiliation with LeukoSite and Ilex puts it in a preferred position to develop
and commercialize a product, L&I continues to be subject to the risks and
challenges associated with other companies in a comparable stage of development
including the ability to obtain adequate financing to fund operations and
development, dependence on key individuals and entities, competition from larger
companies and successful marketing of its services and products. Accordingly,
L&I's future success is uncertain.

During the period ended December 31, 1997, L&I incurred a net loss of
$6,715,832, had negative working capital of $4,058,832 and negative partners'
capital of $4,058,832. The ability of L&I to continue as a going concern is
dependent upon the ongoing support of its partners. The general and limited
partners have committed to making additional capital contributions in order to
fund the obligations and operations of L&I.

Under the partnership structure, Ilex and LeukoSite each hold a 49.5
percent limited partner interest and L&I LLC holds a 1 percent general partner
interest in L&I. Ilex and LeukoSite each hold a 50 percent limited partner
interest in L&I LLC.

(b) Basis of Presentation

The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles and are not the basis for reporting
taxable income to the partners. The financial statements include the accounts of
L&I only.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.

(d) Statement of Cash Flows

L&I considers all highly liquid investments with maturities of three months
or less at the date of purchase to be cash equivalents. Noncash financing
activities for the period ended December 31, 1997 include amounts receivable
from the general partner of $13,000.

53
55
L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(e) Income Taxes

Income and deductions of L&I for federal income tax purposes are includable
in the tax returns of the individual partners. Accordingly, no recognition has
been given to federal income taxes in the accompanying consolidated financial
statements of L&I.

(f) Price Risk Management Activities

L&I may enter into exchange traded futures and options contracts, forward
contracts, swaps and other financial instruments with third parties to hedge
foreign currency commitments. As of and for the period ended December 31, 1997,
L&I had not entered into any such agreements.

(g) Allocation of Net Income (Loss) and Cash Distributions

Net income (loss) is allocated to partners based on their effective
ownership interest in the operating results of L&I. L&I is not required to make
cash distributions.

(2) RELATED PARTY TRANSACTIONS

L&I Partners, L.P. extensively utilizes services from both limited
partners, Ilex Oncology, Inc. and LeukoSite, Inc. These services include
contract research, development, scientific expertise, business development
services and general management. The limited partners also provide certain
general management services free of charge to L&I. In 1997, L&I incurred the
following related party expenses for contract research services:

DECEMBER 31,
1997
------------

ILEX.................................................. $ 951,869
LeukoSite............................................. 250,106
----------
$1,201,975
==========

(3) LICENSING AGREEMENTS

L&I has sub-licensed the rights to Campath 1-H from LeukoSite. The
licensing agreement grants L&I the right to develop and market the product and
to license the rights to the compound to other third parties. Under terms of the
agreement, L&I is required to pay certain fees and royalties to LeukoSite as
defined in the agreement. No such payments were required for the period ended
December 31, 1997.

(4) COMMITMENTS AND CONTINGENCIES

L&I has entered into a development agreement with a third party for the
manufacture of clinical trial material and process development necessary to
support regulatory submission of the product. This contract calls for an
aggregate payment in Deutsche Marks (DM) of DM 13,302,000 (U.S. dollar
equivalent of $7,749,000 at December 31, 1997) during the period 1997 and 1998.
L&I paid a portion of this amount (31%) in 1997. Expenses under this agreement
are recognized on a percentage completion basis and as of December 31, 1997,
$5,519,921 had been expensed associated with this agreement.

54
56
L&I PARTNERS, L.P.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(5) SUBSEQUENT EVENTS

L&I entered into a series of foreign currency exchange swaps in January
1998 to limit its German DM exposure. The floor exchange rate of 1.78 DM to the
dollar will be used for the accrual of anticipated manufacturing costs.

55
57

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to Directors and compliance with Section 16(a) of
the Securities Exchange Act may be found in the sections captioned "Proposal No.
1 -- Election of Directors", "Executive Compensation" and "Section 16(a)
Beneficial Ownership Reporting Compliance" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on May 4, 1998. Such information is incorporated
herein by reference. Information with respect to Executive Officers may be found
under the section captioned "Executive Officers of the Registrant" in Part I of
this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required with respect to this item may be found in the
section captioned "Executive Compensation" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on May 4, 1998. Such information is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required with respect to this item may be found in the
sections captioned "Principal Stockholders" and "Proposal No. 1 -- Election of
Directors" appearing in the definitive Proxy Statement to be delivered to
Stockholders in connection with the Annual Meeting of Stockholders to be held on
May 4, 1998. Such information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Information required with respect to this item may be found in the
section captioned "Certain Transactions" appearing in the definitive Proxy
Statement to be delivered to Stockholders in connection with the Annual Meeting
of Stockholders to be held on May 4, 1998. Such information is incorporated
herein by reference.

56
58

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) DOCUMENTS FILED AS PART OF FORM 10-K

1. FINANCIAL STATEMENTS.

The following financial statements and supplementary data are included in
Part II Item 8 filed as part of this report:

- Balance Sheets as of December 31, 1996 and 1997

- Statements of Operations for the years ended December 31, 1995, 1996 and
1997

- Statements of Stockholders' Equity for the years ended December 31, 1995,
1996 and 1997

- Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997

- Notes to Financial Statements

- Report of Independent Auditors

2. FINANCIAL STATEMENT SCHEDULE.

None.

Schedules not listed above have been omitted because they are not
applicable, not required or the information required is shown in the financial
statements or the notes thereto.

3. LIST OF EXHIBITS.

EXHIBITS
- --------

3.1* Restated Certificate of Incorporation of the Registrant.
3.2* Amended and Restated By-Laws of the Registrant, as amended
to date.
4.1* Specimen certificate for shares of Common Stock.
4.2* Description of Capital Stock (contained in the Restated
Certificate of Incorporation of the Registrant, filed as
Exhibit 3.1).
10.1* Consulting Agreement, dated January 22, 1993, between the
Registrant and Timothy Springer.
10.2* License Agreement, dated June 15, 1993, between the
Registrant and the Center for Blood Research, Inc.
10.3* License Agreement, dated as of January 2, 1995, between the
Registrant and Stanford University.
10.4* (a) The Research, Development and Marketing Agreement, dated
September 30, 1994, between the Registrant and
Warner-Lambert Company, as amended by First Amendment to the
Research, Development and Marketing Agreement, dated as of
July 1, 1995.
(b) The Research, Development and Marketing Agreement, dated
July 1, 1995, between the Registrant and Warner-Lambert
Company.
10.5* License Agreement, dated March 15, 1995, between the
Registrant and Lynxvale Ltd.
10.6* Service Agreement, dated as of March 9, 1995, between the
Registrant and MRC Collaborative Centre.
10.7* License Agreement, dated March 25, 1996, between the
Registrant and Children's Medical Center Corporation.

57
59

EXHIBITS
- --------

10.8* (a) License Agreement, dated January 31, 1996, between the
Registrant and The Imperial College of Science, Technology &
Medicine, Imperial Exploitation Limited.
(b) Research Agreement, dated March 14, 1996, between the
Registrant and The Imperial College of Science, Technology &
Medicine, Imperial Exploitation Limited.
10.9* Research Collaboration and License Agreement, dated July 12,
1996, between the Registrant and Roche Bioscience.
10.10* Agreement for the construction and operation of a
Therapeutic Antibody Centre within the University of Oxford,
dated October 6, 1994, among the University of Oxford, The
Medical Research Council, the Registrant and LeukoSite
Limited.
10.11* License Agreement between the Registrant and British
Technology Group Limited.
10.12* Letter Agreement, dated September 30, 1996, between the
Registrant and The Wellcome Foundation Limited.
10.13* Material Release Agreement, dated September 30, 1996,
between the Registrant and The Wellcome Foundation Limited.
10.14* Letter Agreement, dated October 7, 1996, between the
Registrant and Warner-Lambert/Parke-Davis.
10.15* Research Collaboration and License Agreement, dated April
24, 1997, between the Registrant and Kyowa Hakko Kogyo Co.
Ltd.
10.16* Agreement, dated September 25, 1996, between the Registrant
and Oxford Asymmetry Limited.
10.17* (a) Agreement of Limited Partnership of L&I Partners, L.P.
(b) License Agreement, dated May 2, 1997, between L&I
Partners, L.P. and the Registrant.
10.18* Lease agreement for portion of 215 First Street, Cambridge,
MA, dated June 8, 1994, between the Registrant and Robert A.
Jones and K. George Najarian, as Trustees for Athenaeum
Realty Nominee Trust.
10.19* Master Lease Agreement, dated December 13, 1993, between the
Registrant and Comdisco, Inc.
10.20* (a) Warrant, dated December 13, 1993, between the Registrant
and Comdisco, Inc. (b) Warrant, dated December 13, 1993,
between the Registrant and Comdisco, Inc.
10.21* Master Equipment Lease, dated as of October 3, 1994, between
the Registrant and Phoenix Leasing Incorporated.
10.22* Senior Loan and Security Agreement, dated March 14, 1997,
between the Registrant and Phoenix Leasing Incorporated.
10.23 (a) Amended and Restated 1993 Stock Option Plan.
(b) First Amendment to Amended and Restated 1993 Stock
Option Plan.
(c) Second Amendment to Amended and Restated 1993 Stock
Option Plan.
(d) Third Amendment to Amended and Restated 1993 Stock
Option Plan.
10.24 1997 Employee Stock Purchase Plan.
10.25* (a) Series C Convertible Preferred Stock Purchase Agreement,
dated as of November 8, 1994, between the Registrant and
Warner-Lambert Company.
(b) Series E Convertible Preferred Stock Purchase Agreement,
dated as of January 3, 1996, between the Registrant and
Warner-Lambert Company.
(c) Amendment, Modification and Conversion Agreement, dated
June 26, 1997, between the Registrant and Warner-Lambert
Company.

58
60

EXHIBITS
- --------

10.26* Second Amended and Restated Stockholders' Agreement, dated
December 20, 1996, by and among the Registrant and parties
signatory thereto, as amended.
10.27* Deed of Assumption, dated June 16, 1997, among the
University of Oxford, the Medical Research Council,
LeukoSite, Inc. and LeukoSite (U.K.) Limited.
10.28* Letter Agreement, dated June 26, 1997, between the
Registrant and HealthCare Ventures III, L.P. and HealthCare
Ventures IV, L.P.
10.29** Amendment to the Research Collaboration and License
Agreement effective April 24, 1997 by and between Kyowa
Hakko Kogyo Co., Ltd. and the Registrant.
10.30** Global Amendment to MCP-1 and IL-8 Agreements between the
Registrant and Warner-Lambert Company.
10.31*** Development Collaboration and License Agreement, dated as of
December 18, 1997, between the Registrant and Genentech,
Inc.
10.32*** Securities Purchase Agreement, dated as of December 18, 1997
between the Registrant and Genentech, Inc.
10.33*** Loan Agreement, dated as of December 18, 1997, between the
Registrant and Genentech, Inc.
10.34*** Registration Rights Agreement, dated as of December 18, 1997
between the Registrant and Genentech, Inc.
10.35*** Letter Agreement, dated as of December 18, 1997, between the
Registrant and Genentech, Inc.
21.1* Subsidiary of the Registrant.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.

- ---------------
* Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 333-6795).

** Incorporated by reference from the Registrant's Quarterly Report or Form
10-Q for the quarter ended September 30, 1997.

*** Incorporated by reference from the Registrant's Current Report on Form 8-K
dated January 26, 1998.

59
61

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

LEUKOSITE, INC.

By: /s/ CHRISTOPHER K. MIRABELLI,
PH.D.
------------------------------------
CHRISTOPHER K. MIRABELLI, PH.D.
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT
AND CHIEF EXECUTIVE OFFICER

Date: March 24, 1998
-----------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on its behalf of the
registration and in the capacities on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ CHRISTOPHER K. MIRABELLI, PH.D. Chairman of the Board of Directors, March 24, 1998
- --------------------------------------------------- President and Chief Executive Officer
CHRISTOPHER K. MIRABELLI, PH.D. (Principal Executive Officer)

/s/ AUGUSTINE LAWLOR Vice President, Corporate Development March 24, 1998
- --------------------------------------------------- and Chief Financial Officer
AUGUSTINE LAWLOR (Principal Financial and Accounting
Officer)

/s/ KATE BINGHAM Director March 24, 1998
- ---------------------------------------------------
KATE BINGHAM

/s/ YASUNORI KANEKO, M.D. Director March 24, 1998
- ---------------------------------------------------
YASUNORI KANEKO, M.D.

/s/ JOHN W. LITTLECHILD Director March 24, 1998
- ---------------------------------------------------
JOHN W. LITTLECHILD

/s/ MARTIN PERETZ, PH.D. Director March 24, 1998
- ---------------------------------------------------
MARTIN PERETZ, PH.D.

/s/ MARK SKALETSKY Director March 24, 1998
- ---------------------------------------------------
MARK SKALETSKY

/s/ TIMOTHY A. SPRINGER, PH.D. Director March 24, 1998
- ---------------------------------------------------
TIMOTHY A. SPRINGER, PH.D.

/s/ CHRISTOPHER T. WALSH, PH.D. Director March 24, 1998
- ---------------------------------------------------
CHRISTOPHER T. WALSH, PH.D.