<Page> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-06565 H&Q LIFE SCIENCES INVESTORS (Exact name of registrant as specified in charter) 30 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328 (Address of principal executive offices)(Zip code) Daniel R. Omstead, 30 Rowes Wharf, Fourth Floor, Boston, MA 02110-3328 (Name and address of agent for service) Registrant's telephone number, including area code: 617-772-8500 Date of fiscal year end: September 30 Date of reporting period: October 1, 2003 to March 31, 2004 Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507. ITEM 1. REPORTS TO STOCKHOLDERS. <Page> H&Q LIFE SCIENCES INVESTORS [GRAPHIC] SEMIANNUAL REPORT MARCH 31, 2004 <Page> To our Shareholders: At quarter end on March 31, 2004, the net asset value per share of your Fund was $17.78. During the six month period ending March 31, 2004, total return at net asset value of your Fund was 11.1%, a change that was unfavorable to the comparative indices listed below. During the most recent quarter ending March 31, 2004, the total return at net asset value of your Fund was 7.0%, a change that was favorable to all but one of these same indices. The total return at market was 14.8% during the six month period ended March 31, 2004 and was 8.4% during the most recent quarter ended March 31, 2004. <Table> <Caption> FISCAL YEAR TO DATE QUARTER ENDED (6 MONTHS) 3/31/04 ------------------- ------------- Net Asset Value +11.1% +7.0% AMEX Biotech Index +16.1% +7.4% Dow Jones Industrial Average +11.7% -0.9% NASDAQ Industrials +19.3% +4.0% Russell 2000 +21.0% +6.0% </Table> In the first calendar quarter of 2004, there were several positive signs for the general economy. Overall economic growth was solid and consumer sales continued to be strong. Rebates, associated with recent tax reductions, are likely to make additional resources available to consumers (although we hope that some of this one time benefit will be allocated to savings). As of May 2004, the Federal Reserve continues to maintain interest rates at historically low levels. And after a relatively long period, it appears that there may be an upward trend in the creation of new jobs. Furthermore, business activity appears to be increasing. First quarter reports from a number of companies and sectors have been positive. All these trends are encouraging for the short term. On the other hand, there are also factors which give us concern. Energy prices are increasing. We believe there is general concern that interest rates, while low, will increase if and when the Federal Reserve reacts to the potential for economic inflation. And, most concerning to us, is the geopolitical situation in general and the conflict in Iraq, in particular. We are unclear about the exit strategy in Iraq and worry about the intermediate term impact on the economy. Overall, we think that the positives outlined above will dominate in the near term but that there will be some volatility in stock prices. In the intermediate term we are less certain. As for the healthcare sector, we continue to be generally upbeat, particularly in the long term. As we have said several times, 1 <Page> demographics favor this sector. The population is getting older and healthcare spending increases as people age. Having said this, the first calendar quarter of 2004 was not a good one for large pharmaceutical companies as they generally lagged the broader market. Apparently, there is concern among investors about product pipelines, pricing power and generic competition in the large pharma group. In our view there is some basis for these concerns. However, we have generally high regard for the management teams of companies in this group and think, on a select basis, that there is opportunity for upside appreciation. In contrast to the large pharma group, the biotechnology sector performed well in the first quarter. This was likely due to continued evidence of maturation of the group, as evidenced by product approvals and other positive developments. Two products in the cancer area, Genentech's Avastin and Imclone's Erbitux have been recently approved, and are of particular note. Many analysts believe these will be very successful drugs. We think such approvals are crucial to the general advancement of the group. The recent development of the initial public offering market for biotechnology stocks is also a good sign for the sector. More than a dozen companies have completed IPOs in recent months after a period of several years in which there was little or no market for such offerings. Furthermore, the stock price of a good number of these stocks has risen since their IPO. A number of other companies are in registration, with the intent to test the public market. We think that the demand for new public companies is good for the sector and encouraging for your Fund. During the first calendar quarter of 2004, your Fund established positions in Elan, Cyberonics, and Genta and increased its positions in Durect, Genzyme, United Therapeutics and Vivus. Your Fund also made follow on investments in TherOx and Zyomyx. In addition, one of the Fund's venture investments, Novacept, was acquired by Cytyc. The Fund sold out of its position in Vicuron Pharmaceuticals and EP MedSystems and decreased its ownership of deCODE Genetics, Endocardial Solutions, and Sontra Medical. As always, we encourage the Fund's shareholders to contact us with any questions or concerns you may have relating to the Fund. /s/ Daniel R. Omstead Daniel R. Omstead President 2 <Page> H&Q LIFE SCIENCES INVESTORS PRIVACY NOTICE If you are a registered shareholder of the Fund, the Fund and Hambrecht & Quist Capital Management LLC, the Fund's investment adviser, may receive nonpublic personal information about you from the information collected by the transfer agent from your transactions in Fund shares. Any nonpublic personal information is not disclosed to third parties, except as permitted or required by law. In connection with servicing your account and effecting transactions, the information received may be shared with the investment adviser and non-affiliates, including transfer agents, custodians or other service companies. Access to your nonpublic personal information is restricted to employees who need to know that information to provide products or services to you. To maintain the security of your nonpublic personal information, physical, electronic, and procedural safeguards are in place that comply with federal standards. The policies and practices described above apply to both current and former shareholders. If your Fund shares are held in "street name" at a bank or brokerage, we do not have access to your personal information and you should refer to your bank's or broker's privacy policies for a statement of the treatment of your personal information. CHANGE IN INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP ("PwC") had been selected as the independent accountants of the Fund for its fiscal year ending September 30, 2004. On May 7, 2004, PwC resigned as the Fund's independent accountants for its fiscal year ending September 30, 2004 effective upon the completion of services related to the Fund's semi-annual financial statements. The reports provided by PwC for the fiscal years ending September 30, 2002 and September 30, 2003 were unqualified and contained no adverse opinion or disclaimer of opinion, nor were the reports modified as to uncertainty, audit scope, or accounting principle. Further, in connection with its audits for the two previous fiscal years and through May 31, 2004, there have been no disagreements between PwC and the Fund on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to their satisfaction, would have caused PwC to reference the subject matter of the disagreements in its report on the financial statements for such years. The Fund is currently seeking to retain new independent auditors for its fiscal year ending September 30, 2004. 3 <Page> H&Q LIFE SCIENCES INVESTORS [CHART] PORTFOLIO AS OF MARCH 31, 2004 <Table> <Caption> RESTRICTED PUBLIC TOTAL ---------- ------ ----- BIOPHARMACEUTICALS 0.0% 29.0% 29.0% DRUG DELIVERY 0.0% 3.3% 3.3% DRUG DISCOVERY TECH. 4.3% 3.2% 7.5% EMERGING BIOPHARM. 5.1% 14.1% 19.2% GENERICS 0.0% 7.5% 7.5% HEALTHCARE SERVICES 3.6% 3.3% 6.9% DEVICES AND DIAGNOSTICS 5.8% 6.7% 12.5% LIQUID ASSETS 0.0% 14.1% 14.1% </Table> H&Q LIFE SCIENCES INVESTORS LARGEST HOLDINGS AS OF MARCH 31, 2004 <Table> <Caption> % OF NET ASSETS --------------- Impax Laboratories 3.89% Telik 3.82% Celgene 3.20% Pfizer 2.99% Cubist Pharmaceuticals 2.60% IVAX 2.38% Genzyme 2.28% WebMD 2.15% deCODE Genetics 2.14% DepoMed 2.09% </Table> 4 <Page> H&Q LIFE SCIENCES INVESTORS SIGNIFICANT PORTFOLIO TRANSACTIONS QUARTER ENDED MARCH 31, 2004 <Table> <Caption> UNITS HELD UNITS HELD 12/31/03 3/31/04 ---------- ---------- PURCHASES Cyberonics 0 76,840 Durect 492,320 612,320 Elan 0 165,000 Genta 0 85,000 Genzyme 78,000 101,000 TherOx (Restricted) Bridge Note $ 0 $ 133,515 United Therapeutics 41,400 90,000 Vivus 385,200 437,200 Zyomyx (Restricted) Series A New 0 199,800 Zyomyx (Restricted) Series B New 0 200 SALES deCODE Genetics 463,500 420,200 Endocardial Solutions 496,566 204,966 EP Medsystems 68,520 0 Sontra Medical 187,427 63,280 Vicuron Pharmaceuticals 67,776 0 </Table> 5 <Page> H&Q LIFE SCIENCES INVESTORS SCHEDULE OF INVESTMENTS March 31, 2004 (UNAUDITED) <Table> <Caption> SHARES VALUE - ------------- ------------- CONVERTIBLE SECURITIES - 18.9% OF NET ASSETS CONVERTIBLE PREFERRED (RESTRICTED) - 18.8% DRUG DISCOVERY TECHNOLOGIES - 4.4% 1,587,302 Agilix Series B* $ 380,952 566,958 Avalon Pharmaceuticals Series B* 1,332,351 250,000 Ceres Series C*# 1,500,000 18,296 Ceres Series C-1* 109,776 174,200 Ceres Series D*# 1,045,200 93,248 Galileo Laboratories Series F* 326,368 808,473 Idun Pharmaceuticals Series A-1* 2,000,001 689,679 Senomyx Series E* 2,000,000 1,150,000 Triad Therapeutics Series A* 1,150 350,000 Triad Therapeutics Series B* 350 800,000 Triad Therapeutics Series C* 120,000 199,800 Zyomyx Series A New* 199,800 200 Zyomyx Series B New* 200 EMERGING BIOPHARMACEUTICALS - 5.1% 302,552 ACADIA Pharmaceuticals Series E* 816,890 185,185 ACADIA Pharmaceuticals Series F* 500,000 634,921 Agensys Series C* 2,000,001 1,212,121 Raven biotechnologies Series B*^ 1,006,060 1,872,772 Raven biotechnologies Series C*^ 1,554,401 141,177 Theravance Series C* 1,270,593 133,334 Theravance Series D-1* 1,200,006 30,920 Therion Biologics Series A* 55,656 160,000 Therion Biologics Series B*# 288,000 271,808 Therion Biologics Series C*# 489,254 28,991 Therion Biologics Sinking Fund* 290 1,400,000 Xanthus Life Sciences Series B* 1,400,000 HEALTHCARE SERVICES - 3.5% 1,051,429 CardioNet Series C* 3,680,002 322,168 CytoLogix Series A*^ 265,789 151,420 CytoLogix Series B*#^ 124,922 3,589,744 PHT Series D*^ 2,800,000 604,174 PHT Series E*^ 471,256 MEDICAL DEVICES AND DIAGNOSTICS - 5.8% 3,235,293 Concentric Medical Series B*^ 2,070,588 1,162,790 Concentric Medical Series C*^ 744,186 1,333,333 Conor MedSystems Series D* 1,600,000 177,778 EPR Series A* 1,778 130,000 Masimo Series D* 1,430,000 1,088,436 OmniSonics Medical Technologies Series B* 1,454,150 1,031,992 OmniSonics Medical Technologies Series C* 1,200,000 426,439 Songbird Hearing Series D* 4,264 </Table> The accompanying notes are an integral part of these financial statements. 6 <Page> <Table> <Caption> SHARES VALUE - ------------- ------------- CONVERTIBLE PREFERRED (RESTRICTED) - CONTINUED 434,782 TherOx Series H* $ 643,477 546,875 VNUS Medical Technologies Series E* 2,800,000 ------------- $ 38,887,711 ------------- <Caption> PRINCIPAL AMOUNT - ------------- CONVERTIBLE BONDS AND NOTES (RESTRICTED) - 0.1% HEALTHCARE SERVICES - 0.0% $ 112,224 CytoLogix 6.75% Cvt. Note, due 2004*^ $ 112,224 MEDICAL DEVICES AND DIAGNOSTICS - 0.1% 133,515 TherOx 6% Bridge Note, due 2004# 133,515 ------------- $ 245,739 ------------- TOTAL CONVERTIBLE SECURITIES (Cost $55,031,367) $ 39,133,450 ------------- <Caption> SHARES - ------------- COMMON STOCKS - 67.4% BIOPHARMACEUTICALS - 29.1% 54,000 Amgen* $ 3,141,180 67,898 Biopure Class A* 107,279 139,900 Celgene* 6,666,235 275,126 Corixa* 1,761,577 22,109 Corixa Warrants (expire 8/14/07)* 4,179 588,182 Cubist Pharmaceuticals* 5,411,274 233,484 CV Therapeutics* 3,532,613 165,000 Elan* 3,402,300 205,600 Enzon Pharmaceuticals* 3,172,408 85,000 Genta* 892,500 101,000 Genzyme* 4,751,040 75,000 Gilead Sciences* 4,182,750 167,000 MedImmune* 3,854,360 72,200 Neurocrine Biosciences* 4,267,020 178,000 Pfizer 6,238,900 34,000 Pharmion* 769,760 193,600 Pozen* 2,675,552 90,000 United Therapeutics* 2,144,700 76,000 Vertex Pharmaceuticals* 715,920 437,200 Vivus* 2,653,804 ------------- 60,345,351 ------------- DRUG DELIVERY - 3.3% 125,000 Aradigm* 290,000 555,555 DepoMed* 4,349,996 612,320 Durect* 2,081,888 63,280 Sontra Medical* 125,294 ------------- 6,847,178 ------------- </Table> The accompanying notes are an integral part of these financial statements. 7 <Page> <Table> <Caption> SHARES VALUE - ------------- ------------- DRUG DISCOVERY TECHNOLOGIES - 3.2% 420,200 deCODE Genetics* $ 4,454,120 337,800 Lexicon Genetics* 2,118,006 257,600 Lynx Therapeutics Warrants (expire 4/29/07) 0 200,001 Zyomyx (Restricted) Common* 2,000 ------------- 6,574,126 ------------- EMERGING BIOPHARMACEUTICALS - 14.2% 206,800 Adolor* 3,108,204 3,297 BioTransplant (Restricted) Warrants (expire 8/12/04)* 0 13,500 BioTransplant (Restricted) Warrants (expire 10/31/04)* 0 925 BioTransplant (Restricted) Warrants (expire 8/15/05)* 0 306,463 Dyax* 3,153,504 210,400 Encysive Pharmaceuticals* 2,162,912 489,400 Exelixis* 4,184,370 380,700 Kosan Biosciences* 4,023,999 66,317 Rigel Pharmaceuticals* 1,467,595 296,428 Telik* 7,956,128 22,224 Therion Biologics (Restricted) C-2 Units*# 40,003 146,982 Therion Biologics (Restricted)* 1,470 135,135 Tularik* 3,317,564 ------------- 29,415,749 ------------- GENERIC PHARMACEUTICALS - 7.6% 362,131 Impax Laboratories* 8,100,871 217,800 IVAX* 4,959,306 41,400 Teva Pharmaceutical Industries ADR 2,625,174 ------------- 15,685,351 ------------- HEALTHCARE SERVICES - 3.3% 56,900 Charles River Labs* 2,438,165 503,000 WebMD* 4,471,670 204,139 Syntiro Healthcare Services (Restricted)* 2,041 101,283 Syntiro Healthcare Services (Restricted) Warrants (expire 10/15/04)* 0 ------------- 6,911,876 ------------- MEDICAL DEVICES AND DIAGNOSTICS - 6.7% 756,249 Biofield* 400,812 244,200 CTI Molecular Imaging* 3,562,878 76,840 Cyberonics* 1,841,086 204,966 Endocardial Solutions* 1,779,105 64,700 IDEXX Laboratories* 3,679,489 </Table> The accompanying notes are an integral part of these financial statements. 8 <Page> <Table> <Caption> SHARES VALUE - ------------- ------------- MEDICAL DEVICES AND DIAGNOSTICS - CONTINUED 130,000 Masimo Labs (Restricted)* $ 1,300 680,000 Orthovita* 2,733,600 ------------- 13,998,270 ------------- TOTAL COMMON STOCKS (Cost $88,494,460) $ 139,777,901 ------------- <Caption> PRINCIPAL AMOUNT - ------------- TEMPORARY CASH INVESTMENTS - 13.7% $ 10,700,000 American Express Credit Corp.; .97%, due 4/1/04 $ 10,700,000 9,100,000 General Electric Capital Corp.; .95%, due 4/7/04 9,098,559 8,611,000 State Street Bank Repurchase Agreement; .15%, dtd 3/31/04 due 4/1/04 Collateralized by US Treasury Note, 1.5% due 7/31/05 with a market value of $8,784,819, (repurchase proceeds of $8,611,036) 8,611,000 ------------- TOTAL TEMPORARY CASH INVESTMENTS (Cost $28,409,559) $ 28,409,559 ------------- TOTAL INVESTMENTS (Cost $171,935,386) $ 207,320,910 ============= </Table> - ---------- * Non income-producing security. # With warrants attached. ^ Affiliated issuers in which the Fund holds 5% or more of the voting securities (Total Market Value of $9,149,426). The accompanying notes are an integral part of these financial statements. 9 <Page> H&Q LIFE SCIENCES INVESTORS STATEMENT OF ASSETS AND LIABILITIES March 31, 2004 (UNAUDITED) <Table> ASSETS: Investments, at value (identified cost $171,935,386; see Schedule of Investments) $ 207,320,910 Cash 612,545 Interest receivable 11,538 Receivable for investments sold 1,239,884 Prepaid expenses 14,383 ------------- Total assets $ 209,199,260 ------------- LIABILITIES: Payable for investments purchased $ 432,234 Accrued advisory fee 218,900 Accrued other 200,479 ------------- Total liabilities $ 851,613 ------------- NET ASSETS $ 208,347,647 ============= SOURCES OF NET ASSETS: Shares of beneficial interest, par value $.01 per share, unlimited number of shares authorized, amount paid in on 11,719,044 shares issued and outstanding $ 163,451,121 Accumulated net investment loss (1,484,673) Accumulated net realized gain on investments 10,995,675 Net unrealized gain on investments 35,385,524 ------------- Total net assets (equivalent to $17.78 per share based on 11,719,044 shares outstanding) $ 208,347,647 ============= </Table> The accompanying notes are an integral part of these financial statements. 10 <Page> H&Q LIFE SCIENCES INVESTORS STATEMENT OF OPERATIONS For the Six Months Ended March 31, 2004 (UNAUDITED) <Table> INVESTMENT INCOME: Dividend income (net of foreign tax of $1,470) $ 62,623 Interest income 95,010 ----------- Total investment income $ 157,633 EXPENSES: Advisory fees $ 1,313,121 Trustees' fees and expenses 69,662 Legal fees 51,409 Custodian fees 41,808 Shareholder reporting 36,513 Accounting and auditing fees 32,101 Transfer agent fees 28,307 Stock exchange listing fee 17,543 Other 51,842 ----------- Total expenses 1,642,306 ------------ Net investment loss $ (1,484,673) ------------ NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments $ 16,063,649 Increase in net unrealized gain on investments 6,268,476 ------------ Net gain on investments $ 22,332,125 ------------ Net increase in net assets resulting from operations $ 20,847,452 ============ </Table> The accompanying notes are an integral part of these financial statements. 11 <Page> H&Q LIFE SCIENCES INVESTORS STATEMENTS OF CHANGES IN NET ASSETS <Table> <Caption> FOR THE SIX FOR THE MONTHS ENDED YEAR ENDED MARCH 31, 2004 SEPTEMBER 30, (UNAUDITED) 2003 -------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS: Net investment loss $ (1,484,673) $ (2,339,987) Net realized gain on investments 16,063,649 14,087,914 Increase in net unrealized gain on investments 6,268,476 26,876,120 -------------- ------------- Net increase (decrease) in net assets resulting from operations $ 20,847,452 $ 38,624,047 -------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net realized capital gains $ (7,813,099) $ (19,370,711) -------------- ------------- CAPITAL SHARE TRANSACTIONS: Value of shares issued in reinvestment of distributions (306,569 and 1,002,853 shares, respectively) $ 4,960,823 $ 13,513,685 -------------- ------------- Net increase (decrease) in net assets $ 17,995,176 $ 32,767,021 NET ASSETS: Beginning of period 190,352,471 157,585,450 -------------- ------------- End of period $ 208,347,647 $ 190,352,471 ============== ============= ACCUMULATED NET INVESTMENT LOSS INCLUDED IN NET ASSETS AT END OF PERIOD $ (1,484,673) $ 0 ============== ============= </Table> The accompanying notes are an integral part of these financial statements. 12 <Page> H&Q LIFE SCIENCES INVESTORS STATEMENT OF CASH FLOWS For the Six Months Ended March 31, 2004 (UNAUDITED) <Table> CASH FLOWS USED FOR OPERATING ACTIVITIES: Interest income received $ 119,972 Dividends received 62,623 Operating expenses paid (1,561,498) -------------- Net cash used for operating activities $ (1,378,903) -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of portfolio securities $ (25,926,323) Net purchases of temporary cash investments (3,520,477) Sales and maturities of portfolio securities 33,152,537 -------------- Net cash provided from investing activities $ 3,705,737 -------------- CASH FLOWS USED FOR FINANCING ACTIVITIES: Cash distributions paid, net $ (2,852,276) -------------- Net cash used for financing activities $ (2,852,276) -------------- NET DECREASE IN CASH $ (525,442) CASH AT BEGINNING OF PERIOD 1,137,987 -------------- CASH AT END OF PERIOD $ 612,545 ============== RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS TO NET CASH USED FOR OPERATING ACTIVITIES: Net increase in net assets resulting from operations $ 20,847,452 Net realized gain on investments (16,063,649) Increase in net unrealized gain on investments (6,268,476) Decrease in dividends and interest receivable 24,962 Increase in accrued expenses 56,751 Decrease in prepaid expenses 24,057 -------------- Net cash used for operating activities $ (1,378,903) ============== </Table> Noncash financing activities not included herein consist of stock distributions of $4,960,823. Noncash investing activities not included herein consist of the conversion of restricted preferred stock with a cost of $2,400,550 to restricted common stock of the same issuer. The accompanying notes are an integral part of these financial statements. 13 <Page> H&Q LIFE SCIENCES INVESTORS FINANCIAL HIGHLIGHTS (SELECTED DATA FOR EACH SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE PERIOD INDICATED) <Table> <Caption> FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED SEPTEMBER 30, MARCH 31, 2004 -------------------------------------- (UNAUDITED) 2003(1) 2002(1) ---------------- ---------------- ---------------- Net asset value per share: Beginning of period $ 16.680 $ 15.140 $ 23.090 ---------------- ---------------- ---------------- Net investment loss $ (0.129)(2) $ (0.213)(2) $ (0.255)(2) Net realized and unrealized gain (loss) on investments 1.909 3.553 (4.835) ---------------- ---------------- ---------------- Total increase (decrease) from investment operations $ 1.780 $ 3.340 $ (5.090) ---------------- ---------------- ---------------- Capital gains distributions to shareholders $ (0.680) $ (1.800) $ (2.860) ---------------- ---------------- ---------------- Net asset value per share: End of period $ 17.780 $ 16.680 $ 15.140 ================ ================ ================ Per share market value: End of period $ 16.82 $ 15.28 $ 11.79 Total investment return at market value 14.75% 47.65% (25.82%) RATIOS AND SUPPLEMENTAL DATA: Net assets at end of period $ 208,347,647 $ 190,352,471 $ 157,585,450 Ratio of operating expenses to average net assets 1.67%* 1.74% 1.71% Ratio of net investment loss to average net assets (1.51%)* (1.38%) (1.25%) Portfolio turnover rate 13.68% 32.36% 17.36% Number of shares outstanding at end of period 11,719,044 11,412,475 10,409,622 <Caption> FOR THE YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------- 2001 2000 1999 ---------------- ---------------- ---------------- Net asset value per share: Beginning of period $ 39.365 $ 17.804 $ 13.713 ---------------- ---------------- ---------------- Net investment loss $ (0.221)(2) $ (0.300) $ (0.205) Net realized and unrealized gain (loss) on investments (12.134) 24.756 4.576 ---------------- ---------------- ---------------- Total increase (decrease) from investment operations $ (12.355) $ 24.456 $ 4.371 ---------------- ---------------- ---------------- Capital gains distributions to shareholders $ (3.920) $ (2.895) $ (0.280) ---------------- ---------------- ---------------- Net asset value per share: End of period $ 23.090 $ 39.365 $ 17.804 ================ ================ ================ Per share market value: End of period $ 18.45 $ 31.31 $ 14.13 Total investment return at market value (29.07%) 155.36% 32.90% RATIOS AND SUPPLEMENTAL DATA: Net assets at end of period $ 215,162,600 $ 318,271,356 $ 131,562,804 Ratio of operating expenses to average net assets 1.58% 1.51% 1.60% Ratio of net investment loss to average net assets (0.83%) (1.06%) (1.30%) Portfolio turnover rate 16.49% 12.70% 23.49% Number of shares outstanding at end of period 9,318,998 8,085,152 7,389,487 </Table> (1) The Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting discounts and amortizing premiums on all debt securities. The effect of this change for the year ended September 30, 2002 was a decrease in net investment loss per share of $.006, an increase in net realized and unrealized loss on investments per share of $.006, and a decrease in the ratio of net investment loss to average net assets from (1.28%) to (1.25%). Per share data and ratios for the periods prior to October 1, 2001 have not been restated to reflect this change in presentation. (2) Net investment loss per share has been computed using average shares outstanding. * Annualized. The accompanying notes are an integral part of these financial statements. 14 <Page> H&Q LIFE SCIENCES INVESTORS NOTES TO FINANCIAL STATEMENTS March 31, 2004 (UNAUDITED) (1) ORGANIZATION H&Q Life Sciences Investors (the Fund) is a Massachusetts business trust registered under the Investment Company Act of 1940 as a diversified closed-end management investment company. The Fund's investment objective is long-term capital appreciation through investment in securities of companies in the healthcare industries. The Fund invests primarily in securities of public and private companies that are believed to have significant potential for above-average growth. The Fund was organized on February 20, 1992 and commenced operations on May 8, 1992. The preparation of these financial statements requires the use of certain estimates by management in determining the entity's assets, liabilities, revenues and expenses. Actual results could differ from these estimates. The following is a summary of significant accounting policies consistently followed by the Fund, which are in conformity with those generally accepted in the United States of America. INVESTMENT SECURITIES Investments traded on national securities exchanges or in the over-the-counter market that are National Market System securities are valued at the last sale price or, lacking any sales, at the mean between the last bid and asked prices. Other over-the-counter securities are valued at the most recent bid prices as obtained from one or more dealers that make markets in the securities. As indicated in Note 4, investments for which market quotations are not readily available are valued at fair value as determined in good faith by the Trustees of the Fund. Temporary cash investments with maturity of 60 days or less are valued at amortized cost. Investment transactions are recorded on a trade date basis. Gains and losses from sales of investments are recorded using the "identified cost" method. Interest income is recorded on the accrual basis, adjusted for amortization of premiums and accretion of discounts. Dividend income is recorded on the ex-dividend date. REPURCHASE AGREEMENTS In connection with transactions in repurchase agreements, the Fund's custodian takes possession of the underlying collateral securities, the market value of which is at least equal to the principal, including accrued interest, of the repurchase transaction at all times. In the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral by the Fund may be delayed or limited. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute to its shareholders substantially all of its taxable income and its net realized capital gains, if any. Therefore, no Federal income or excise tax provision is required. DISTRIBUTIONS The Fund records all distributions to shareholders from net investment income, if any, and realized gains on the ex-dividend date. Such distributions are determined in conformity with income tax regulations. Due to permanent book/tax differences in accounting for certain transactions, certain distributions may be treated as distributions from capital as opposed to distributions of net investment income or realized capital gains. DISTRIBUTION POLICY The current distribution policy is to declare distributions in stock. Stock distributions will automatically be paid in newly issued shares of the Fund unless otherwise instructed by the 15 <Page> shareholder. Pursuant to an SEC exemptive order, the Fund has implemented a fixed distribution policy that permits the Fund to make quarterly distributions at a rate of 2% of the Fund's net assets to shareholders of record. The Fund intends to use net realized capital gains when making quarterly distributions. This could result in a return of capital to shareholders if the amount of the distribution exceeds the Fund's net investment income and realized capital gains. It is anticipated that net realized capital gains in excess of the total distributed under this policy would be included in the December distribution. STATEMENT OF CASH FLOWS The cash amount shown in the Statement of Cash Flows is the amount included in the Fund's Statement of Assets and Liabilities and represents cash on hand at its custodian and does not include temporary cash investments at March 31, 2004. INDEMNIFICATIONS Under the Fund's organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The Fund's maximum exposure under these agreements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. (2) SECURITIES TRANSACTIONS The aggregate cost of purchases and proceeds from sales of investment securities (other than temporary cash investments) for the six months ended March 31, 2004 totaled $24,082,147 and $33,352,421, respectively. At March 31, 2004, the total cost of securities for Federal income tax purposes was $171,935,386. The net unrealized gain on securities held by the Fund was $35,385,524, including gross unrealized gain of $64,632,906 and gross unrealized loss of $29,247,382. (3) INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Fund has entered into an Investment Advisory Agreement (the Advisory Agreement) with Hambrecht & Quist Capital Management LLC (the Adviser). Pursuant to the terms of the Advisory Agreement, the Fund pays the Adviser a monthly fee at the rate when annualized of (i) 2.5% of the average net assets for the month of its venture capital and other restricted securities up to 25% of net assets and (ii) for the month, for all other assets, 1.0% of the average net assets up to $250 million, 0.9% of the average net assets for the next $250 million, 0.8% of the average net assets for the next $500 million and 0.7% of the average net assets thereafter. The aggregate fee may not exceed a rate when annualized of 1.375%. Certain officers and Trustees of the Fund are also officers of the Adviser. Trustees who are not affiliates of the Adviser receive an annual fee of $20,000 plus $500 for each Committee on which they serve and $1,000 for each meeting attended. (4) VENTURE CAPITAL AND OTHER RESTRICTED SECURITIES The Fund may invest in venture capital and other restricted securities if these securities would currently comprise 40% or less of net assets. The value of these securities represents 19% of the Fund's net assets at March 31, 2004. The value of the venture capital and other restricted securities is determined in good faith by the Trustees. However, because of the inherent uncertainty of valuations, these estimated 16 <Page> values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material. During the six-month period ended March 31, 2004, certain restricted securities were exchanged for cash in connection with a corporate action, a portion of which has been retained by the issuer in an escrow account pending resolution of certain contingencies and whose estimated value of $388,000 at March 31, 2004 has also been determined by the Trustees. At March 31, 2004, the Fund has a proportionate interest in a 5% interest bearing promissory note due October 31, 2004 from the sale of restricted securities, with a par value o f $80,800 and an estimated value of $80,000 as determined by the Trustees. The value of the escrow account and note are included in the Receivable for Investments Sold in the Statement of Assets and Liabilities. The following table details the acquisition date, cost, carrying value per unit, and value of the Fund's venture capital and other restricted securities at March 31, 2004, as determined by the Trustees of the Fund. <Table> <Caption> ACQUISITION CARRYING VALUE SECURITY DATE COST PER UNIT VALUE - ------------------------------------ ----------------- ------------- -------------- ------------- ACADIA Pharmaceuticals Series E Cvt. Pfd. 5/2/00-3/24/03 $ 2,000,208 $ 2.700 $ 816,890 Series F Cvt. Pfd. 3/19/03 500,241 2.700 500,000 Agensys Series C Cvt. Pfd. 2/14/02 2,003,383 3.150 2,000,001 Agilix Series B Cvt. Pfd. 11/8/01 2,009,507 0.240 380,952 Avalon Pharmaceuticals Series B Cvt. Pfd. 10/22/01 2,005,767 2.350 1,332,351 BioTransplant Common Warrants (expire 8/12/04) 8/12/94 0 0.000 0 Common Warrants (expire 10/31/04) 10/31/94 0 0.000 0 Common Warrants (expire 8/15/05) 8/18/95 0 0.000 0 CardioNet Series C Cvt. Pfd. 5/3/01-3/25/03 3,697,953 3.500 3,680,002 Ceres Series C Cvt. Pfd.* 12/23/98 1,000,875 6.000 1,500,000 Series C-1 Cvt. Pfd. 1/4/01 74,325 6.000 109,776 Series D Cvt. Pfd.* 3/14/01 1,046,778 6.000 1,045,200 Concentric Medical^ Series B Cvt. Pfd. 5/7/02-1/24/03 2,218,703 0.640 2,070,588 Series C Cvt. Pfd. 12/19/03 1,000,769 0.640 744,186 Conor MedSystems Series D Cvt. Pfd. * 10/23/03 1,602,441 1.200 1,600,000 CytoLogix^ Series A Cvt. Pfd. 1/13/98-7/21/99 1,552,564 0.825 265,789 Series B Cvt. Pfd.* 1/11/01 766,886 0.825 124,922 Cvt. Note 5/29/02 112,224 1.000 112,224 EPR Series A Cvt. Pfd. 3/9/94 800,331 0.010 1,778 Galileo Laboratories Series F Cvt. Pfd. 8/18/00 2,001,929 3.500 326,368 Idun Pharmaceuticals Series A-1 Cvt. Pfd. 11/26/02 2,001,311 2.474 2,000,001 </Table> 17 <Page> <Table> <Caption> ACQUISITION CARRYING VALUE SECURITY DATE COST PER UNIT VALUE - ------------------------------------ ----------------- ------------- -------------- ------------- Masimo Series D Cvt. Pfd. 8/14/96 $ 910,027 $ 11.000 $ 1,430,000 Masimo Labs Common 8/14/96 0 0.010 1,300 OmniSonics Medical Technologies Series B Cvt. Pfd. 5/24/01 1,603,266 1.336 1,454,150 Series C Cvt. Pfd. 10/1/03 1,203,046 1.163 1,200,000 PHT^ Series D Cvt. Pfd. 7/23/01 2,801,353 0.780 2,800,000 Series E Cvt. Pfd. 7/15/03-12/17/03 473,744 0.780 471,256 Raven biotechnologies^ Series B Cvt. Pfd. 12/12/00 2,001,150 0.830 1,006,060 Series C Cvt. Pfd. 11/26/02 1,554,400 0.830 1,554,401 Senomyx Series E Cvt. Pfd. 2/19/02 2,002,601 2.900 2,000,000 Songbird Hearing Series D Cvt. Pfd. 12/14/00 2,003,239 0.010 4,264 Syntiro Heathcare Services Common 2/5/97 800,325 0.010 2,041 Warrants (expire 10/15/04) 10/15/98 0 0.000 0 Theravance Series C Cvt. Pfd. 2/5/99 1,200,124 9.000 1,270,593 Series D-1 Cvt. Pfd. 8/28/00 1,200,892 9.000 1,200,006 Therion Biologics C-2 Units* 8/13/03 40,003 1.800 40,003 Common 6/30/93-10/16/96 251,642 0.010 1,470 Series A Cvt. Pfd. 8/20/96-10/16/96 289,847 1.800 55,656 Series B Cvt. Pfd.* 2/24/99-6/22/99 600,609 1.800 288,000 Series C Cvt. Pfd.* 9/26/01 1,019,568 1.800 489,254 Sinking Fund Cvt. Pfd 10/17/94-4/3/96 582,505 0.010 290 TherOx Series H Cvt. Pfd. 9/11/00 2,001,249 1.480 643,477 Bridge Note* 1/28/04 133,515 1.000 133,515 Triad Therapeutics Series A Cvt. Pfd. 6/8/99 1,151,067 0.001 1,150 Series B Cvt. Pfd. 12/20/00 702,090 0.001 350 Series C Cvt. Pfd. 11/25/02 800,000 0.150 120,000 VNUS Medical Technologies Series E Cvt. Pfd. 8/20/01 2,800,000 5.120 2,800,000 Xanthus Life Sciences Series B Cvt. Pfd. 12/5/03 1,400,880 1.000 1,400,000 Zyomyx Common 2/19/99-2/6/04 2,400,901 0.010 2,000 Series A New Cvt. Pfd. 1/12/04 199,800 1.000 199,800 Series B New Cvt. Pfd. 1/12/04 200 1.000 200 ------------- ------------- $ 58,524,238 $ 39,180,264 ============= ============= </Table> * With warrants attached. ^ Affiliated issuers. 18 <Page> H&Q LIFE SCIENCES INVESTORS New York Stock Exchange Symbol: HQL 30 Rowes Wharf, 4th Floor Boston, Massachusetts 02110-3328 (617) 772-8500 www.hqcm.com OFFICERS Daniel R. Omstead, ENGSCD, President Kimberley L. Carroll, Treasurer and Secretary TRUSTEES Lawrence S. Lewin Robert P. Mack, M.D. Eric Oddleifson Daniel R. Omstead, ENGSCD Oleg M. Pohotsky Uwe E. Reinhardt, Ph.D. Henri A. Termeer INVESTMENT ADVISER Hambrecht & Quist Capital Management LLC CUSTODIAN AND TRANSFER AGENT State Street Bank and Trust Company LEGAL COUNSEL Dechert LLP Shareholders with questions regarding share transfers may call 1-800-426-5523 Interim daily net asset value may be obtained from our website (www.hqcm.com) or by calling 1-800-451-2597 For copies of the Fund's DIVIDEND REINVESTMENT PLAN, please contact the Plan Agent State Street Bank and Trust Company P.O. Box 8200, Boston, MA 02266-8200 Telephone: 1-800-426-5523 HQHLS-SAR-04 <Page> ITEM 2. CODE OF ETHICS. Not applicable to this semi-annual filing. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable to this semi-annual filing. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable to this semi-annual filing. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to this semi-annual filing. ITEM 6. SCHEDULE OF INVESTMENTS. Not applicable to this semi-annual filing. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to this semi-annual filing. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable to this semi-annual filing. ITEM 9. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no material changes to the procedures by which shareholders may recommend nominees to the registrant's board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A, or this Item. <Page> ITEM 10. CONTROLS AND PROCEDURES. (a) The Chief Executive and Financial Officers concluded that the registrant's Disclosure Controls and Procedures are effective based on the evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report. (b) During the filing period of the report, management identified steps in the processing of the registrant's portfolio securities transactions and in the procedures for monitoring the percentage of voting securities of certain issuers held by the registrant that warranted enhancements to the internal control procedures. Management has instituted additional procedures, and is in the process of implementing them, to enhance its internal controls. ITEM 11. EXHIBITS. (a)(1) Not applicable to this semi-annual filing. (a)(2) Filed as an attachment to this filing. (a)(3) Not applicable. (b) Filed as an attachment to this filing. <Page> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. H&Q LIFE SCIENCES INVESTORS By: /s/ Daniel R. Omstead -------------------------------- Daniel R. Omstead President Date: June 7, 2004 --------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Daniel R. Omstead -------------------------------- Daniel R. Omstead President Date: June 7, 2004 --------------- By: /s/ Kimberly L. Carroll -------------------------------- Kimberly L. Carroll Treasurer Date: June 7, 2004 ---------------