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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 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, 1998

/ / 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

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LEUKOSITE, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 04-3173859
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)

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
26, 1999 was approximately $61,437,409 based on 7,335,810 shares held by such
non-affiliates at the closing price of a share of Common Stock of $8.375 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 4,621,117 shares of Common Stock
outstanding on such date. The number of outstanding shares of Common Stock of
the Company on March 26, 1999 was 11,956,927.

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 25, 1999 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.

In the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 31, 1999, approximately 15 pages were
inadvertently omitted from the filing due solely to a technical error with
the EDGAR filing. As such, the only amendment made herein is the inclusion of
the pages that were omitted.

LEUKOSITE, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

ITEM PAGE
- ----------- -----

PART I
1 Business............................................................................................ 4
2 Description of Property............................................................................. 25
3 Legal Proceedings................................................................................... 25
4 Submission of Matters to a Vote of Security Holders................................................. 26

PART II
5 Market For Registrant's Common Stock and Related Stockholder Matters................................ 26
6 Selected Financial Data............................................................................. 27
7 Management's Discussion and Analysis of Financial Condition and Results of Operations............... 28
8 Financial Statements and Supplementary Data......................................................... 32
9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................ 32

PART III
10 Directors and Executive Officers of the Registrant.................................................. 33
11 Executive Compensation.............................................................................. 33
12 Security Ownership of Certain Beneficial Owners and Management...................................... 33
13 Certain Relationships and Related Transactions...................................................... 33

PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 33

Signatures.......................................................................................... 37

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 2000 AND (II) 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.

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 selectively block the disease-promoting actions of leukocytes.
LeukoSite has completed enrollment and dosing in a pivotal clinical trial of
CAMPATH-Registered Trademark-. The Company has begun human clinical trials of
three monoclonal antibody product candidates. In addition, LeukoSite has nine
small molecule drug discovery programs underway with three corporate partners.

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 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.

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 chemokine receptors and cause leukocytes 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 preferentially to 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 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 migration 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.

LEUKOSITE'S DRUG DEVELOPMENT PROGRAMS

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

CAMPATH-REGISTERED TRADEMARK-

LeukoSite's lead product candidate, CAMPATH-Registered Trademark-, which was
referred to as LPD03 before LeukoSite was granted this registered trademark
("CAMPATH-Registered Trademark-"), is a humanized monoclonal antibody to the
leukocyte antigen CD52, which the Company is developing jointly with ILEX
Oncology, Inc. ("ILEX") for the treatment of chronic lymphocytic leukemia
("CLL"). The Company licensed CAMPATH-Registered Trademark- 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. CAMPATH-Registered Trademark- 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. CAMPATH-Registered Trademark- binds to the antigen CD52, which
is expressed almost exclusively on mature lymphocytes, not stem cells, and
destroys the lymphocytes. CAMPATH-Registered Trademark- is more selective than
currently approved drugs for lymphomas and leukemias which indiscriminately
deplete rapidly-dividing cells, including both lymphocytes and hematopoietic
stem cells. LeukoSite has received an orphan product designation from the Food
and Drug Administration (the "FDA") for CAMPATH-Registered Trademark- for CLL.
If CAMPATH-Registered Trademark- is the first FDA approved application for CLL,
LeukoSite would receive seven years of marketing exclusivity.

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. The median
survival time for fludarabine-resistant patients is six months. Based on the
data from the clinical trials, the Company believes that
CAMPATH-Registered Trademark- 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
CAMPATH-Registered Trademark-. The joint venture has entered into an agreement
with Boehringer Ingleheim for the manufacture of CAMPATH-Registered Trademark-
to be used for clinical trials and sales following approval by the FDA. See
"Collaboration Agreements--ILEX."

LeukoSite and ILEX, through the joint venture, have completed a single,
noncomparative, multi-center pivotal clinical trial in 94 previously treated CLL
patients who have failed treatment with fludarabine to support a BLA filing with
the FDA. Patient responses were evaluated based on the National

Cancer Institute criteria and other parameters defined by LeukoSite. LeukoSite
and ILEX believe that the data from the clinical trial is consistent with the
earlier BW clinical trials. LeukoSite and ILEX have held a pre-BLA meeting with
the FDA and intend to file a BLA with the FDA in mid-1999. However, there can be
no assurance that the FDA will approve the BLA for
CAMPATH-Registered Trademark-.

LDP-02 (ANTI-A4B7 MAB)

LeukoSite is developing LDP-02, a humanized monoclonal antibody to the A4B7
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
gastrointestinal tract.

Preclinical studies in non-human primates have implicated leukoctyes
expressing the A4B7 integrin as major contributors to the process of
inflammatory bowel disease. 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, the murine
homologue of LDP-02 was found to be effective in rapidly resolving diarrhea and
in inhibiting the localization of leukocytes to the colonic mucosa.

LeukoSite is developing intravenous and subcutaneous formulations of LDP-02
for the treatment and management of severe exacerbations of inflammatory bowel
disease. The Company completed a Phase I study in the United Kingdom in 1998 and
recently initiated two Phase I/IIa studies of LDP-02 in ulcerative colitis to
evaluate the appropriate therapeutic dose while also measuring LDP-02's ability
to block A4B7 thereby preventing inflammation. If Phase II studies in the United
Kingdom and Canada in ulcerative colitis are supportive, LeukoSite plans to
pursue further clinical studies.

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 successful Phase II human
clinical trials, after which, Genentech will conduct Phase III clinical studies
which may lead to registration for future product sales. See "Collaboration
Agreements--Genentech."

LDP-01 (ANTI-B2 MAB)

LeukoSite is developing LDP-01, a humanized monoclonal antibody to the B2
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 B2
integrins to their adhesion molecules and limits the recruitment of leukocytes
involved in the inflammatory process. The B2 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.

Methods that inhibit leukocyte recruitment following ischemic injury, such
as the blockade of B2 integrins, could be therapeutically beneficial to patients
injured by ischemic/reperfusion for example. 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.

In a similar fashion, 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 stroke. The Company filed an IND in January
1999 in the United States to initiate a Phase I/IIa study to determine the
safety, efficacy and pharmacokinetics of LDP-01 for the reduction of reperfusion
tissue damage associated with ischemic stroke.

LDP-977

LeukoSite is developing LDP-977, an orally active, small molecule compound
designed to selectively inhibit the production of leukotrienes, a class of
molecules that plays an important role in bronchial asthma. Asthma is a chronic,
inflammatory lung disease in which the airways of the lungs become either
narrowed or completely blocked, impeding normal breathing, due to constriction
of the muscles surrounding the airways, inflammation and swelling of the
airways, or increased mucus production which clogs the airways. Leukotrienes
have been shown to be produced by activated, inflammatory leukocytes
(eosinophils, basophils and mast cells) known to be present in the airways of
patients with asthma. LDP-977 is designed to block the production of
leukotrienes, and studies indicate that antileukotriene drugs may inhibit the
constriction of the airways of the lungs and have anti-inflammatory effects. A
Phase I trial has been completed for LDP-977, and the Company intends, subject
to the receipt of regulatory approvals, to begin a Phase IIa trial during 1999
to determine the safety, efficacy and pharmacokinetics of LDP-977.

LEUKOSITE RESEARCH AND DRUG DISCOVERY PROGRAMS

LeukoSite currently has nine partner-funded 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 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 and the Company, have
identified lead compounds and are in the process of optimizing these compounds.
See "Collaboration Agreements--Roche Bioscience."

CCR2 RECEPTOR ANTAGONIST (MCP-1)

LeukoSite is engaged in the discovery and development of an orally
available, small molecule antagonist to the CCR2 chemokine 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 the CCR2 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 the CCR2
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 the CCR2 receptor. This collaborative effort has
identified inhibitors to the CCR2 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."

CXCR-1,2 RECEPTOR ANTAGONIST (IL-8)

LeukoSite is engaged in the discovery and development of an orally
available, small molecule antagonist to the CXCR-1,2 chemokine receptors 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 receptors 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 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.

A4B7 INTEGRIN RECEPTOR SMALL MOLECULE ANTAGONIST

LeukoSite is engaged in the discovery and development of a small molecule
antagonist to the A4B7 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 A4B7 integrin receptor antagonist is intended for
patients with mild to moderate inflammatory bowel disease in need of chronic
therapy.

In December 1998, LeukoSite entered into a collaboration agreement with
Warner-Lambert to discover and optimize small molecule lead candidates using
LeukoSite's A4B7 integrin receptor-based technology by screening
Warner-Lambert's compound library. See "Collaboration Agreements--Warner-
Lambert."

AEB7 INTEGRIN RECEPTOR SMALL MOLECULE ANTAGONIST

LeukoSite is engaged in the discovery and development of a small molecule
antagonist to the AEB7 integrin receptor, which was a product of the AEB7
integrin receptor program. The goal of this program is to identify a potent
orally-active agent for patients with asthma or inflammatory bowel disease.

In December 1998, LeukoSite entered into a collaboration agreement with
Warner-Lambert to discover and optimize small molecule lead candidates using
LeukoSite's AEB7 integrin receptor-based technology by screening
Warner-Lambert's compound library. See "Collaboration Agreements--Warner-
Lambert."

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
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, 1998, LeukoSite had received $21.4 million
under these collaborations for research funding and license fees.

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 may be terminated 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. 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. In December 1998, LeukoSite and
Warner-Lambert entered into an exclusive drug discovery collaboration to screen
and characterize antagonists to the A4B7 Integrin Receptor and the AEB7 Integrin
Receptor. Warner-Lambert has the worldwide, exclusive right under the
collaboration agreements to develop and commercialize products derived from the
collaboration. LeukoSite will be entitled to receive payments upon the
achievement of milestones.

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 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 CAMPATH-Registered Trademark-
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 CAMPATH-Registered Trademark- and in all research,
development, clinical and commercialization costs. 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
Convertible Preferred Stock instead of into Common Stock. The 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 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 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.

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.

MORPHOSYS

In August 1998, LeukoSite and MorphoSys AG ("MorphoSys") entered into a two
year collaboration agreement to utilize MorphoSys' technology to generate human
therapeutic antibodies against three LeukoSite chemokine receptor and integrin
targets. LeukoSite has the right under the collaboration agreement to develop
and commercialize any products developed through this collaboration, and
MorphoSys will be entitled to milestone payments and royalties on product sales.

MEDAREX

In February 1999, LeukoSite and Medarex, Inc. ("Medarex") expanded their
collaboration and licensing agreement to utilize Medarex transgenic mice
technology to make human antibodies to LeukoSite targets. LeukoSite has the
right under the collaboration agreement to develop and commercialize any
products developed through this collaboration, and Medarex will be entitled to
milestone payments and royalties on product sales.

MERGER AGREEMENT

In January of 1999, LeukoSite and CytoMed, Inc. ("CytoMed") entered into an
Agreement and Plan of Merger and Reorganization (the "Merger Agreement"),
whereby LeukoSite agreed to purchase of all of the issued and outstanding
capital stock of CytoMed through the issuance of approximately 935,625 shares of
LeukoSite's Series A Convertible Preferred Stock, par value $0.01 per share, to
CytoMed shareholders. Under the terms of the Merger Agreement LeukoSite will
issue another approximately 631,313 shares to CytoMed shareholders upon receipt
of a $6 million payment due to CytoMed from UCB Pharma in October 1999. The
Series A Convertible Preferred Stock will convert into LeukoSite Common Stock
upon approval by LeukoSite shareholders at LeukoSite's upcoming annual meeting.
In addition, CytoMed shareholders may receive up to $23.5 million in cash and
84,000 shares of LeukoSite stock upon the achievement of milestones related to
the CytoMed product candidates.

In the above-described transaction, which closed in February of 1999,
LeukoSite acquired two CytoMed small molecule development programs, LDP-977 for
the treatment of asthma and LDP-392 for the treatment of chronic inflammatory
skin disorders.

LDP-977 is an orally active compound that selectively inhibits the
production of leukotrienes by blocking the 5-lipoxygenase enzyme, a class of
molecules that play an important role in triggering bronchial asthma. In 1999
LeukoSite plans to begin a Phase IIa clinical trial of LDP-977 in asthma to
assess its safety, tolerability and biological activity. LDP-392 is formulated
as a topical product designed to block two biochemical pathways involving
inflammation. In addition LeukoSite acquired CytoMed's complement inhibition
research program.

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 abroad in other key

markets. LeukoSite has pending U.S. and foreign patent applications and
international patent applications filed under the Patent Cooperation Treaty
("PCT"). The Company has also in-licensed U.S. and foreign patents and patent
applications. For example, LeukoSite has an exclusive license from British
Technology Group Limited ("BTG") under United States and foreign patents and
patent applications, variously covering certain humanized antibodies against the
CAMPATH-Registered Trademark- 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'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. The Company places considerable importance on obtaining
patent protection for significant new technologies, products and 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. The Company's patent position is highly uncertain and involves
complex legal and factual questions. The Company cannot be certain that the
applicants or inventors of subject matter covered by patent applications or
patents owned by or licensed to the Company were the first to invent or the
first to file patent applications for such inventions. There can be no assurance
that any patents will issue from any of the pending or future patent
applications we own or have licensed. Existing or future patents owned by or
licensed to us may be challenged, infringed upon, invalidated, found to be
unenforceable or circumvented by others. Further, there can be no assurance that
any rights the Company may have under any issued patents will provide sufficient
protection against competitive products or otherwise cover commercially valuable
products or processes.

If another party claims the same subject matter or subject matter
overlapping with subject matter that the Company has claimed in a United States
patent application or patent, the Company may decide or be required to
participate in interference proceedings in the United States Patent and
Trademark Office in order to determine priority of invention. Loss of such an
interference proceeding would deprive us of patent protection sought or
previously obtained. Participation in such proceedings could result in
substantial costs, whether or not the eventual outcome is favorable.

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. In addition to patent protection, the
Company relies on trade secrets, proprietary know-how, and confidentiality
provisions in agreements with its collaborative partners, employees and
consultants to protect its intellectual property. The Company also relies on
invention assignment provisions in agreements with employees and certain
consultants. There can be no assurance that these agreements will not be
breached or that the Company would have adequate remedies for any such breach.
There can be no assurance that the Company's trade secrets, proprietary know-how
and intellectual property will not become known or be independently discovered
by others.

The Company's product candidates LDP-01, LDP-02 and
CAMPATH-Registered Trademark- are humanized monoclonal antibodies. The Company
is aware that patents have been issued in the United States and abroad to third
parties which relate to certain humanized antibodies, products useful for making
humanized antibodies, and processes for making and using humanized antibodies.
The Company may choose to seek or be required to seek licenses under certain of
these patents.

The Company is also aware of other third party applications in the United
States and abroad relating to certain humanized monoclonal antibodies, products
useful for making humanized antibodies, and processes for making and using
humanized antibodies. The Company may choose to seek or be required to seek
licenses under some or all of the patents which might issue from these patent
applications.

know-how or other intellectual property rights owned by or licensed to the
Company, or to determine the scope or validity of proprietary rights of third
parties and defend against claims of infringement thereof. There can be no
assurance that any of the patents owned by or licensed to the Company will
ultimately be held valid or that efforts to assert or defend any patents, trade
secrets, know-how or other intellectual property rights would be successful.
Similarly, there can be no assurance that products or processes used by the
Company will not be held to infringe patents or other intellectual property
rights of others. 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. The expenses
of intellectual property litigation or other proceedings are likely to be
substantial, and could have a material adverse effect on the Company's business,
financial condition and results of operations. An adverse outcome in such
litigation or proceeding could subject the Company to significant liabilities or
require the Company to cease certain activities. If any of the Company's present
or future products or processes is alleged or determined to infringe upon the
patents or impermissibly use the intellectual property of others, the Company
may choose or be required to obtain licenses from third parties under their
patents or proprietary rights. There can be no assurance that we will be able to
obtain those licenses on acceptable terms, or at all. In such event, the
development, manufacture and sale of the Company's drug candidates or products
could be severely restricted or prohibited.

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.

GOVERNMENT REGULATION

OVERVIEW OF FDA REGULATIONS. Biological and non-biological drugs, including
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 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. 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., CAMPATH-Registered Trademark-,
LDP-01 and LDP-02) will be regulated by the FDA as biological drugs. Because of
the early research and development stages, 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 slightly 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 under the standards applied by FDA, or cannot meet the
FDA's other regulatory requirements for product manufacture and sale. 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 begin primarily with preclinical testing.
Preclinical tests include laboratory evaluation of product chemistry, toxicology
and other characteristics. Animal studies are used 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 application ("IND")
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, or that such trials
will be deemed adequate and well controlled by FDA. Once trials have commenced,
the FDA may stop the 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 in humans involves the administration of the
investigational non-biological drug or biological drug to healthy 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
academic center, hospital or other research facility at which the study will be
conducted. An IRB will consider, among other things, ethical factors, the safety
of human subjects, whether informed consent was properly obtained, 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 multiple
geographically dispersed sites. A clinical plan, or "protocol," accompanied by
the approval of an IRB, is submitted to the FDA prior to commencement of each
clinical trial. The FDA may order the temporary or permanent discontinuation of
a clinical trial at any time for a variety of reasons, particularly if safety
concerns exist. These clinical studies must be conducted in conformity 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 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 serious or life-threatening diseases, 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 outside of the clinical trials under a
treatment IND

before general marketing begins or the drug is approved by FDA. Charging for an
investigational 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 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") which is similar in content to the NDA.

Submission of a standard NDA, 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
serious or life-threatening diseases may be accelerated or prioritized for a six
month review. However, the process may take substantially longer if, among other
things, the information is not complete, or the FDA has questions or concerns
about the safety and/or efficacy of a product. Expedited or accelerated
approvals may require additional larger studies to be conducted following
approval.

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 adverse events are reported
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. Manufacturing and sale may also be
disrupted, or delayed, if the company fails to comply with all required current
good manufacturing practices as determined by FDA investigators in periodic
inspection of manufacturing facilities.

The product testing and approval process is likely to take a substantial
number of years and involve expenditure of substantial resources. There can be
no assurance that any approval will be granted on a timely basis, or at all. The
FDA may also 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.

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 has obtained orphan product designation for
CAMPATH-Registered Trademark- for the treatment of chronic lymphocytic leukemia.
It may seek such designation for other products as well. However, other
companies may also 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 for the same use 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 manufactured in the United States 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 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.

Finally, the health care environment is undergoing significant change as
third-party payers attempt to control the reimbursement of medical technology
including biologics. The Company cannot predict with any certainty whether its
products, once approved for marketing by FDA, will be reimbursed by government
and private health plans and other payers, or at what level of payment.

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 for clinical or
commercial production of any monoclonal antibodies or small molecule
therapeutics. The Company intends to rely initially on third parties to
manufacture certain of its product candidates for development, preclinical and
clinical trials and commercialization. The monoclonal antibodies LDP-01 and
LDP-02 will be manufactured for preclinical and early clinical trials in
collaboration with the TAC. The Company has also entered into agreements with
Cytogen and Abbott Laboratories for the clinical trial production of LDP-02 and
LDP-01. The Company and ILEX have entered into an agreement with Boehringer
Ingleheim, for the production of CAMPATH-Registered Trademark-.

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 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 CAMPATH-Registered Trademark- 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 8, 1999, the Company had 101 full-time employees, of whom 27
hold Ph.D. or M.D. degrees. Of the Company's total work force, 84 are engaged in
research and development activities and 17 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,
1998, are as follows:

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

Christopher K. Mirabelli, Ph.D....................... 44 Chairman of the Board of Directors, President and
Chief Executive Officer
Augustine Lawlor..................................... 42 Vice President, Corporate Development and Chief
Financial Officer
Walter Newman, Ph.D.................................. 53 Vice President, Research and Discovery
Lee Brettman, MD..................................... 51 Vice President, Clinical Development
Jay Luly, Ph.D....................................... 42 Vice President, Drug Discovery
Grace C. Yeh, Ph.D................................... 46 Vice President, Preclinical Development

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 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 1995, 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 Clinical Development 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. 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.

DR. YEH has served as Vice President, Preclinical Drug Development since
February 1999. From 1991 to 1999, she served as Chief Scientific Officer and
Vice President of Product Development, Vice President of Preclinical Development
and Project Management, Senior Director of Preclinical Projects, and Director of
Immunobiology at CytoMed, Inc., a biopharmaceutical company. From 1988 to 1991,
she served in various positions, most recently as Director of Pharmaceutical
Evaluation at T Cell Sciences, Inc., a biotechnology company. From 1979 to 1988,
she was a staff scientist at INSERM in France, and at Blond McIndoe Centre for
Transplantation Biology in England. Dr. Yeh received her B.S. in Biology from
Fu-Jen University in Taiwan and her Ph.D. in Immunology from the Medical
University of South Carolina.

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.

UNCERTAINTY OF CLINICAL TRIAL OUTCOMES. Three of the Company's monoclonal
antibody products are currently being tested in human clinical trials. Clinical
trials of drug candidates involve the testing of potential therapeutic agents in
humans to determine the safety and efficacy of the drug candidates. Many drugs
in human clinical trials fail to demonstrate the desired safety and efficacy
characteristics. Drugs in later stages of clinical development may fail despite
having progressed through initial human testing. There can be no assurance that
the clinical trials of any of the Company's drug candidates will be successful
or lead to the commercialization of the drug. If the Company were unable to
successfully complete the clinical trials of any of the Company's drug
candidates, it could have a material adverse effect on the Company's business,
financial condition and results of operations.

EARLY STAGE OF PRODUCT DEVELOPMENT; ABSENCE OF DEVELOPED PRODUCTS. Many of
the Company's research and development programs are at an early stage of
development. The Company has not received FDA approval of any of its product
candidates, and has not selected any small molecule drug candidates for clinical
development. Any small molecule 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
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 marketing approvals. 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, will be reimbursed by government
or private consumers 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 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 with 60 days
notice. The collaboration with Genentech may be terminated 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 $47
million through December 31, 1998. 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 and preclinical and clinical trials. In the next year, the Company's
revenues are expected to be limited to 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.

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 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. There can be no
assurance that any studies 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 a BLA with the FDA before beginning
commercialization of CAMPATH-Registered Trademark- in the United States. The
Company intends to continue trials of its LDP-01 and LDP-02 product candidates
in the United Kingdom and United States.

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.
The Company places considerable importance on obtaining patent protection for
significant new technologies, products and 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.
The Company's patent position is highly uncertain and involves complex legal and
factual questions. The Company cannot be certain that the applicants or
inventors of subject matter covered by patent applications or patents owned by
or licensed to the Company were the first to invent or the first to file patent
applications for such inventions. There can be no assurance that any patents
will issue from any of the pending or future patent applications the Company
owns or has licensed. Existing or future patents owned by or licensed to the
Company may be challenged, infringed upon, invalidated, found to be
unenforceable or circumvented by others. Further, there can be no assurance that
any rights the Company may have under any issued patents will provide sufficient
protection against competitive products or otherwise cover commercially valuable
products or processes.

If another party claims the same subject matter or subject matter
overlapping with subject matter that the Company has claimed in a United States
patent application or patent, the Company may decide or be required to
participate in interference proceedings in the United States Patent and
Trademark Office in order to determine priority of invention. Loss of such an
interference proceeding would deprive the Company of patent protection sought or
previously obtained. Participation in such proceedings could result in
substantial costs, whether or not the eventual outcome is favorable.

In addition to patent protection, the Company relies on trade secrets,
proprietary know-how, and confidentiality provisions in agreements with our
collaborative partners, employees and consultants to protect our intellectual
property. The Company also relies on invention assignment provisions in
agreements with employees and certain consultants. There can be no assurance
that these agreements will not be breached or that the Company would have
adequate remedies for any such breach. There can be no assurance that the
Company's trade secrets, proprietary know-how and intellectual property will not
become known or be independently discovered by others.

Litigation in the pharmaceutical and biotechnology industry regarding
patents and other proprietary rights has been significant and widespread.
Litigation or other proceedings may be necessary to assert claims of
infringement, to enforce patents owned by or licensed to the Company, to protect
trade secrets, know-how or other intellectual property rights owned by or
licensed to the Company, or to determine the scope or validity of proprietary
rights of third parties and defend against claims of infringement thereof. There
can be no assurance that any of the patents owned by or licensed to the Company
will ultimately be held valid or that efforts to assert or defend any patents,
trade secrets, know-how or other intellectual property rights would be
successful. Similarly, there can be no assurance that products or processes used
by the Company will not be held to infringe patents or other intellectual
property rights of others. 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.
The expenses of intellectual property litigation or other proceedings are likely
to be substantial, and could have a material adverse effect on the Company's
business, financial condition and results of operations. An adverse outcome in
such litigation or proceeding could subject the Company to significant
liabilities or require the Company to cease certain activities. If any of the
Company's present or future products or processes is alleged or determined to
infringe upon the patents or impermissibly use the intellectual property of
others, we may choose or be required to obtain licenses from third parties under
their patents or proprietary rights. There can be no assurance that the Company
will be able to obtain those licenses on acceptable terms, or at all. In such
event, the development, manufacture and sale of the Company's drug candidates or
products could be severely restricted or prohibited.

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 Boehringer Ingleheim for the production of
CAMPATH-Registered Trademark- for the Company's clinical trials and for any
commercial sales. The Company has been relying on the Therapeutic Antibody
Centre ("TAC") for the manufacture of LDP-01 and LDP-02 for preclinical testing
and early clinical trials. The Company has entered into agreements with Cytogen
and Abbott Laboratories for the manufacture of LDP-02 for the Company's 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, 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
CAMPATH-Registered Trademark- 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 CAMPATH-Registered Trademark-. 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
CAMPATH-Registered Trademark-. 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.

RAPID TECHNOLOGICAL CHANGE. Biotechnology and related pharmaceutical
technology have undergone and are subject to rapid and significant change. The
Company expects that the technologies associated with biotechnology research and
development will continue to develop rapidly. The Company's success will depend
in large part on its ability to maintain a competitive position with respect to
these technologies. Any compounds, products or processes that the Company may
develop may become obsolete prior to recovery of expenses incurred in connection
with developing those products. There can be no assurance that the Company will
be able to maintain its technological competitiveness.

RISK ASSOCIATED WITH FOREIGN CURRENCY FLUCTUATIONS AND CONVERSION TO
EURO. The Company has no foreign operations and is not subject to currency risk
or any risk associated with conversion to the euro currency.

ITEM 2. DESCRIPTION OF PROPERTY

The Company's administrative and research and development facility is
located in Cambridge, Massachusetts. This 43,291 square foot facility is leased
for a term which expires in 2004.

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, 1998.

PART II

ITEM 5.MARKET FOR REGISTRANTS' 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 1997......................................................... $ 11.75 $ 9.50
First Quarter 1998.......................................................... $ 11.00 $ 7.88
Second Quarter 1998......................................................... $ 10.00 $ 6.25
Third Quarter 1998.......................................................... $ 10.00 $ 6.25
Fourth Quarter 1998......................................................... $ 14.00 $ 7.13

HOLDERS

As of March 26, 1999, the Company had approximately 1,063 stockholders of
record. This does not reflect persons or entitles who hold their stock in
nominee or "street" name through various brokerage firms.

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, 1998, which were not
registered under the Securities Act of 1933, as amended (the "Securities Act").

In July 1998, the Company sold an aggregate of 1,967,169 shares of Common
Stock at a purchase price of $6.00 per share to a group of new and existing
investors, including HealthCare Ventures V, L.P., 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, Rho Management Trust II, Peretz Family Investment, Goldman, Sachs & Co.,
Four Partners, Perseus Capital, LLC, YK Capital L.P., and Todd Noonan. The
issuance and sale of such shares of Common Stock were made in reliance on Rule
506 of Regulation D promulgated under the Securities Act and Section 4(2) of the
Securities Act.

ITEM 6. SELECTED FINANCIAL DATA

YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1994 1995 1996 1997 1998
--------- ---------- ---------- ---------- ----------

(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Corporate collaborations........................... $ -- $ 250 $ 3,591 $ 5,099 $ 10,021
Joint venture revenue.............................. -- -- -- 250 1,260
Government grants.................................. -- 200 83 377 791
--------- ---------- ---------- ---------- ----------
-- 450 3,674 5,726 12,072
--------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development........................... 5,056 7,051 8,502 11,980 21,141
General and administrative......................... 726 866 1,371 1,758 2,625
--------- ---------- ---------- ---------- ----------
Net loss from Operations........................... (5,782) (7,467) (6,199) (8,012) (11,694)
Income (expense), net................................ 148 (10) 177 719 1,205
Equity in operations of joint venture................ -- -- -- (3,358) (3,858)
--------- ---------- ---------- ---------- ----------
Net loss............................................. $ (5,634) $ (7,477) $ (6,022) $ (10,651) $ (14,347)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Net loss per common share:
Basic and diluted.................................. $ (6.06) $ (7.25) $ (5.65) $ (2.62) $ (1.32)
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
Shares used in computing net loss per common share:
Basic and diluted.................................. 929 1,031 1,066 4,299 10,895
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------

AS OF DECEMBER 31,
---------------------------------------------------------
1994 1995 1996 1997 1998
--------- ---------- ---------- ---------- ----------

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..... $ 7,504 $ 1,734 $ 9,384 $ 25,157 $ 23,332
Working capital...................................... 5,061 439 7,226 19,461 13,989
Total assets......................................... 10,932 4,538 11,874 28,032 27,503
Long-term obligations, net of current portion........ 1,319 1,583 1,230 1,119 1,316
Redeemable convertible preferred stock............... 11,782 13,733 20,913 -- --
Deficit accumulated during the development stage..... (7,826) (15,303) (21,324) (32,585) (46,932)
Stockholders' equity (deficit)....................... (4,776) (12,161) (12,581) 20,808 18,467

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

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

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 within the
meaning of Section 27A of the securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934, including but not limited, (i) statements
about the adequacy of the Company's capital resources, interest income and
revenues from its collaboration agreements to fund its operating expenses and
capital requirements into 2000, (ii) statements about the amount of capital
expenditures that the Company expects to incur in 1999 and (iii) certain
statements identified or qualified by words such as "anticipate," "plan,"
"believe," "estimate," "expect" and similar expressions. Investors are cautioned
that forward-looking statements are inherently uncertain and that 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 under
the caption "Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.

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 has been funded to date primarily through proceeds from
the sale of equity securities and funding from collaboration agreements. To
date, the Company has not received any revenue from the sale of products. 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, 1998,
the Company had an accumulated deficit of approximately $47 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 December 1998 the Company and Warner-Lambert signed an agreement related to
the A4B7 and AEB7 integrin targets implicated in asthma and inflammatory bowel
disease. In July 1996 the Company signed an agreement with Roche Bioscience for
the discovery and development of monoclonal antibodies and small molecule
antagonists to 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 small molecule antagonists to the CXCR3 and CCR1 receptors found
on certain classes of leukocytes. In May 1997 the Company entered into a joint
venture with Ilex for the development of CAMPATH-Registered Trademark- for the
treatment of chronic lymphocyctic leukemia. In October 1997 the Company,
Warner-Lambert and Kyowa agreed to jointly pursue research and development of
antagonists that target MCP-1, IL-8, CCR1 and CXCR3. In December 1997 the
Company entered into a collaboration agreement with Genentech for the
development of a monoclonal antibody intended as therapy for inflammatory bowel
disease. In August 1998 the Company entered into a collaboration agreement with
MorphoSys AG for the discovery of therapeutic monoclonal antibodies for
inflammatory and autoimmune disorders. On February 11, 1999, the Company
acquired all of the issued and outstanding capital stock of CytoMed, Inc.
(CytoMed) through the issuance of the Company's Series A Convertible Preferred
Stock.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1998 AND 1997

REVENUES. Revenues were $12,072,000 in 1998 compared to $5,726,000 in 1997.
Revenues in 1998 resulted from research funding and a non-refundable technology
access fee from the collaboration agreements with Warner-Lambert, research
funding from the collaboration agreements with Kyowa and Roche Biosciences,
revenue from the joint venture with Ilex and government grants. Revenues in 1997

resulted from the collaboration agreements with Warner-Lambert, Roche Bioscience
and Kyowa and from government grants. The increase of $6,346,000 was primarily
due to the technology access fee payment and research funding from
Warner-Lambert, increased research funding from Kyowa, and billings to L&I
Partners, L.P. for the reimbursement of expenses incurred by the Company on
behalf of the joint venture to develop CAMPATH-Registered Trademark-.

RESEARCH AND DEVELOPMENT. Research and development expenses were
$21,141,000 in 1998 compared to $11,980,000 in 1997. The increase of $9,161,000
was primarily due to external costs associated with the manufacture of clinical
trial material and ongoing clinical trials for the Company's LDP-02 and LDP-01
programs and increased staffing and related costs associated with the Company's
drug discovery programs. The Company expects that research and development
expenses will increase in the future as the Company further expands its
discovery and development programs.

GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$2,625,000 in 1998 compared to $1,758,000 in 1997. The increase of $867,000 was
primarily due to an increase in expenses associated with operating as a public
company as well as costs associated with managing the growth of the Company.
General and administrative expenses will increase in future periods to support
the projected growth of the Company.

INTEREST INCOME (EXPENSE), NET. Interest income, net was $1,205,000 in 1998
and $719,000 in 1997. The increase was primarily due to interest earned on
higher average cash balances available for investment during 1998. These higher
cash balances resulted from the receipt of proceeds from 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 and
from the private placement in July 1998.

EQUITY IN OPERATIONS OF JOINT VENTURE. Equity in operations of joint
venture was a loss of $3,858,000 in 1998 compared to a loss of $3,358,000 in
1997. The increase of $500,000 was primarily due to increased joint venture
activity in 1998 including manufacturing, data analysis, regulatory submissions
and the conduct of a pivotal clinical study of CAMPATH-Registered Trademark-.

NET LOSS. The net loss was $14,347,000 for 1998 and $10,651,000 for 1997.
The increase of $3,696,000 in the net loss for 1998 was primarily due to the
manufacture of clinical trial material and clinical research related to the
Company's LDP-02 and LDP-01 programs and greater research and development
expenses related to the Company's drug discovery programs. Higher overall
expenses were offset in part by increased revenue generated from research
collaborations and interest income.

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 SBIR grants. Revenues in 1996 were the
result of a license fee from Roche Bioscience and funding from Warner-Lambert,
Roche Bioscience and Small Business Innovation Research ("SBIR") grants. The
increase of $2,052,000 was principally due to the receipt of funding associated
with the Company's collaboration with Kyowa.

RESEARCH AND DEVELOPMENT. Research and development expenses were
$11,980,000 in 1997 compared to $8,502,000 in 1996. The increase of $3,478,000
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 of $387,000 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 of $542,000 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 CAMPATH-Registered Trademark- 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 of $4,626,000 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 CAMPATH-Registered Trademark-. 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 of $1,451,000 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 of $505,000 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
decrease of $1,455,000 was primarily due to revenues generated from corporate
partners increased in 1996.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company's operations have been funded primarily
through proceeds from the sale of equity securities, which have raised
approximately $64.6 million, license fees and sponsored research, which have
generated approximately $20.4 million, and capital lease obligations, which have
raised approximately $5.1 million. The Company has used cash to fund operating
losses of approximately $46.3 million, the investment of approximately $3.0
million in equipment and leasehold improvements and the repayment of
approximately $3.3 million of capital lease obligations. The Company had no
significant

commitments as of December 31, 1998 for capital expenditures. At December 31,
1998, the Company had on hand cash, cash equivalents and marketable securities
of approximately $23.3 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 $2.1 million, of which approximately $1.8 million will be paid in
1999. The Company has also entered into an agreement to contribute $3.0 million
towards funding the Therapeutic Antibody Centre at the University of Oxford in
England. As of December 31, 1998 the Company has a remaining total commitment of
$500,000 to provide funding in semi-annual installments through 1999.

In May 1997, the Company and Ilex entered into a joint venture whereby the
parties formed a limited partnership to develop and commercialize
CAMPATH-Registered Trademark- 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
CAMPATH-Registered Trademark- and in research, development, and clinical
expenses. The capital requirements of the joint venture consist of clinical
development and commercialization expenses.

On February 11, 1999, the Company acquired all of the issued and outstanding
capital stock of CytoMed through the issuance of the Company's Series A
Convertible Preferred Stock. The total purchase price was approximately
$16,100,000 and the net assets acquired were approximately $14,500,000, of which
approximately $8,500,000 was cash and $6,000,000 was a receivable from UCB
Pharma, expected to be paid in October of 1999.

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 into 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.

The Company expects to incur substantial additional expenses, including
expenses 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 reviewing its information systems to assess what steps are
required to achieve full Year 2000 compliance. The Company relies upon
microprocessor-based personal computers and commercially available applications
software. The Company is currently discussing Year 2000 readiness with its
supply and service vendors. The Company intends to continue to assess its
exposure to Year 2000 noncompliance on the part of any of its vendors and there
can be no assurance that their systems will be Year 2000 compliant. The Company
does not anticipate that it will incur material expenses to make its internal
computer software and operating systems Year 2000 compliant. The Company
believes that the

Year 2000 issue will not pose significant problems for the Company's systems.
The Company currently does not have any contingency plan in the event Year 2000
compliance cannot be achieved in a timely manner.

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.

QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company owns financial instruments that are sensitive to market risks as
part of its investment portfolio. The investment portfolio is used to preserve
the Company's capital until it is required to fund operations, including the
Company's research and development activities. All of these market-risk
sensitive instruments are classified as held-to-maturity and are not held for
trading purposes. The Company does not own derivative financial instruments in
its investment portfolio. The investment portfolio contains instruments that are
subject to the risk of a decline in interest rates.

Interest Rate Risk--The Company's investment portfolio includes investment
grade debt instruments. These bonds are subject to interest rate risk, and could
decline in value if interest rates fluctuate. Due to the short duration and
conservative nature of these instruments, the Company does not believe that it
has a material exposure to interest rate risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See pages F-1 through F-28 attached to this report.

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 25, 1999. 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
sections 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 25, 1999. 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
section 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 25, 1999. 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 25, 1999. Such information is incorporated
herein by reference.

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:

LEUKOSITE, INC.

- Report of Independent Public Accountants

- Balance Sheets as of December 31, 1997 and 1998

- Statements of Operations for the years ended December 31, 1996, 1997 and
1998

- Statements of Stockholders' Equity for the years ended December 31, 1996,
1997 and 1998

- Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998

- Notes to Financial Statements

L&I PARTNERS, L.P.

- Report of Independent Public Accountants

- Balance Sheets as of December 31, 1997 and 1998

- Statements of Operations for the year ended December 31, 1998, the period
ended December 31, 1997 and the period from inception to December 31, 1998

- Statements of Partner's Capital from inception to December 31, 1998

- Statements of Cash Flows for the year ended December 31, 1998, the period
ended December 31, 1997 and the period from inception to December 31, 1998

- Notes to Financial Statements

2. FINANCIAL STATEMENT SCHEDULES.

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 3.3).

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.

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** 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.

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 LeukoSite, Inc.

10.30** Global Amendment to MCP-1 and IL-8 Agreements between LeukoSite, Inc. and Warner-Lambert Company.

+10.31*** Development Collaboration and License Agreement, dated as of December 18, 1997, between LeukoSite,
Inc. and Genentech, Inc.

+10.32*** Securities Purchase Agreement, dated as of December 18, 1997 between LeukoSite, Inc. and Genentech,
Inc.

10.33*** Loan Agreement, dated as of December 18, 1997, between LeukoSite, Inc. and Genentech, Inc.

10.34*** Registration Rights Agreement, dated as of December 18, 1997 between LeukoSite, Inc. and Genentech,
Inc.

10.35*** Letter Agreement, dated as of December 18, 1997, between LeukoSite, Inc. and Genentech, Inc.

10.36**** Stock Purchase Agreement, dated July 1, 1998, among LeukoSite, Inc., and the purchasers listed on
Exhibit A attached thereto

10.37**** Registration Rights Agreement, dated July 1, 1998 among LeukoSite, Inc., and the investors listed on
Exhibit A attached thereto

+10.38 Research and Development Agreement, dated as of December 22, 1998, between LeukoSite, Inc. and
Warner-Lambert Company

21.1* Subsidiary of the Registrant.

27.1 Financial Data Schedule.

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

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

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

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

****Incorporated by reference from the Company "s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.

+ Confidential Treatment requested as to certain portions.

(B) REPORTS ON FORM 8-K

No reports on Form 8-K were filed by the Company during the quarter for
which this report is filed.

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 31, 1999

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, Chairman of the Board of March 31, 1999
PH.D. Directors, President and
- ------------------------------ Chief Executive Officer
Christopher K. Mirabelli, (Principal Executive
Ph.D. Officer)

/s/ AUGUSTINE LAWLOR Vice President, Corporate March 31, 1999
- ------------------------------ Development and Chief
Augustine Lawlor Financial Officer
(Principal Financial and
Accounting Officer)

/s/ CATHERINE BINGHAM Director March 31, 1999
- ------------------------------
Catherine Bingham

/s/ YASUNORI KANEKO, M.D. Director March 31, 1999
- ------------------------------
Yasunori Kaneko, M.D.

/s/ JAMES H. CAVANAUGH Director March 31, 1999
- ------------------------------
James H. Cavanaugh

/s/ MARTIN PERETZ, PH.D. Director March 31, 1999
- ------------------------------
Martin Peretz, Ph.D.

/s/ MARK SKALETSKY Director March 31, 1999
- ------------------------------
Mark Skaletsky

/s/ TIMOTHY A. SPRINGER, Director March 31, 1999
PH.D.
- ------------------------------
Timothy A. Springer, Ph.D.

/s/ CHRISTOPHER T. WALSH, Director March 31, 1999
PH.D.
- ------------------------------
Christopher T. Walsh, Ph.D.

INDEX TO FINANCIAL STATEMENTS

PAGE
---------

LEUKOSITE, INC. AND SUBSIDIARY

Report of Independent Public Accountants................................................................... F-2

Consolidated Balance Sheets as of December 31, 1997 and 1998............................................... F-3

Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997
and 1998................................................................................................. F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1996, 1997 and 1998......................................................................... F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997
and 1998................................................................................................. F-6

Notes to Consolidated Financial Statements................................................................. F-7

L & I PARTNERS, L.P.

Report of Independent Public Accountants................................................................... F-22

Balance Sheets as of December 31, 1997 and 1998............................................................ F-23

Statements of Operations for the Period from Inception (May 2, 1997) through
December 31, 1997 and the Year Ended December 31, 1998 and for the Period from Inception (May 2, 1997)
through December 31, 1998................................................................................ F-24

Statements of Partners' Capital for the Period from Inception (May 2, 1997) through
December 31, 1998........................................................................................ F-25

Statement of Cash Flows for the Period from Inception (May 2, 1997) through December 31, 1997 and the Year
Ended December 31, 1998, and for the Period from Inception (May 2, 1997) through December 31, 1998....... F-26

Notes to Financial Statements.............................................................................. F-27

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To LeukoSite, Inc.:

We have audited the accompanying consolidated balance sheets of LeukoSite,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Boston, Massachusetts
January 29, 1999

F-2

LEUKOSITE, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, DECEMBER 31,
1997 1998
------------- -------------

ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 10,587,873 $ 5,361,339
Marketable securities............................................................ 14,569,100 15,802,376
Other current assets............................................................. 408,811 544,779
------------- -------------
Total current assets........................................................... 25,565,784 21,708,494
------------- -------------
Property and equipment, at cost:
Laboratory furniture, fixtures and equipment..................................... 2,703,706 3,761,263
Leasehold improvements........................................................... 2,409,753 3,561,757
Office furniture, fixtures and equipment......................................... 298,925 454,427
------------- -------------
5,412,384 7,777,447
Less--Accumulated depreciation and amortization.................................. (2,973,095) (4,383,574)
------------- -------------
2,439,289 3,393,873
Marketable securities.............................................................. -- 2,168,324
Other assets....................................................................... 27,090 231,930
------------- -------------
Total assets................................................................... $ 28,032,163 $ 27,502,621
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 196,987 $ 272,128
Accrued expenses................................................................. 1,866,423 4,115,301
Obligation to fund joint venture................................................. 1,770,310 203,445
Deferred revenue................................................................. 1,161,250 2,172,058
Deferred rent.................................................................... 243,171 222,907
Current portion of capital lease obligations..................................... 866,835 733,848
------------- -------------
Total current liabilities...................................................... 6,104,976 7,719,687
------------- -------------
Deferred rent, net of current portion.............................................. 222,907 --
------------- -------------
Capital lease obligations, net of current portion.................................. 896,578 1,315,813
------------- -------------
Commitments and contingencies (Notes 7, 13, 14 and 15)
Stockholders' equity:
Preferred stock $.01 par value--Authorized--5,000,000 shares Issued and
outstanding--no shares......................................................... -- --
Common stock, $.01 par value--Authorized--25,000,000 shares Issued and
outstanding--9,875,741 shares at December 31, 1997 and 11,916,339 shares at
December 31, 1998.............................................................. 98,758 119,164
Additional paid-in capital....................................................... 53,294,367 65,280,443
Deficit accumulated during the development stage................................. (32,585,423) (46,932,486)
------------- -------------
Total stockholders' equity....................................................... 20,807,702 18,467,121
------------- -------------
Total liabilities and stockholders' equity....................................... $ 28,032,163 $ 27,502,621
------------- -------------
------------- -------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-3

LEUKOSITE, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

YEAR ENDED DECEMBER 31,
---------------------------------------------

1996 1997 1998
------------- -------------- --------------
Revenues:
Corporate collaborations........................................ $ 3,591,000 $ 5,098,345 $ 10,020,468
Joint venture (Note 7).......................................... -- 250,106 1,260,185
Government grants............................................... 82,770 377,459 791,218
------------- -------------- --------------
Total revenues................................................ 3,673,770 5,725,910 12,071,871
------------- -------------- --------------
Operating expenses:
Research and development........................................ 8,502,187 11,980,233 21,141,587
General and administrative...................................... 1,370,538 1,757,802 2,624,773
------------- -------------- --------------
Total operating expenses...................................... 9,872,725 13,738,035 23,766,360
------------- -------------- --------------
Loss from operations.......................................... (6,198,955) (8,012,125) (11,694,489)
Other income (expense):
Equity in operations of joint venture........................... -- (3,357,916) (3,857,640)
Interest income................................................. 378,924 865,840 1,367,936
Interest expense................................................ (201,659) (146,900) (162,870)
------------- -------------- --------------
Net loss...................................................... $ (6,021,690) $ (10,651,101) $ (14,347,063)
------------- -------------- --------------
------------- -------------- --------------
Net loss per common share:
Basic and diluted............................................. $ (5.65) $ (2.62) $ (1.32)
------------- -------------- --------------
------------- -------------- --------------
Shares used in computing net loss per common share:
Basic and diluted............................................. 1,065,522 4,298,828 10,895,411
------------- -------------- --------------
------------- -------------- --------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-4

LEUKOSITE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------- ----------------------- ADDITIONAL
NUMBER $.01 NUMBER $.01 PAID-IN ACCUMULATED
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL DEFICIT TOTAL
---------- ----------- ---------- ----------- ---------- ------------ -----------

BALANCE, DECEMBER 31, 1995......... 1,000,000 $ 10,000 1,041,099 $ 10,411 $3,121,267 ($15,302,632) $(12,160,954)
Issuance of Series E convertible
preferred stock, net of issuance
costs of $40,434................. 1,250,000 12,500 -- -- 4,947,066 -- 4,959,566
Exercise of stock options.......... -- -- 45,491 455 31,816 -- 32,271
Value ascribed to guaranteed rate
of return on redeemable
convertible preferred stock...... -- -- -- -- 610,000 -- 610,000
Net loss........................... -- -- -- -- -- (6,021,690) (6,021,690)
---------- ----------- ---------- ----------- ---------- ------------ -----------
BALANCE, DECEMBER 31, 1996......... 2,250,000 22,500 1,086,590 10,866 8,710,149 (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....... -- -- 2,875,000 28,750 15,268,270 -- 15,297,020
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 -- 25,342,911
Issuance of common stock, net of
$30,000 of issuance costs........ -- -- 336,135 3,361 3,966,639 -- 3,970,000
Exercise of stock options.......... -- -- 42,409 424 39,255 -- 39,679
Net loss........................... -- -- -- -- -- (10,651,101) (10,651,101)
---------- ----------- ---------- ----------- ---------- ------------ -----------
BALANCE, DECEMBER 31, 1997......... -- -- 9,875,741 98,758 53,294,367 (32,585,423) 20,807,702
Issuance of common stock, net of
$68,651 of issuance costs........ -- -- 1, 967,169 19,672 11,714,691 -- 11,734,363
Issuance of common stock under
Employee Stock Purchase Plan..... -- -- 13,713 137 95,815 -- 95,952
Exercise of stock options.......... -- -- 59,716 597 175,570 -- 176,167
Net loss........................... -- -- -- -- -- (14,347,063) (14,347,063)
---------- ----------- ---------- ----------- ---------- ------------ -----------
BALANCE, DECEMBER 31, 1998......... -- $ -- 11,916,339 $ 119,164 $65,280,443 ($46,932,486) $18,467,121
---------- ----------- ---------- ----------- ---------- ------------ -----------
---------- ----------- ---------- ----------- ---------- ------------ -----------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-5

LEUKOSITE, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ----------- -----------

Cash flows used in operating activities:
Net loss................................................................ $(6,021,690) $(10,651,101) $(14,347,063)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization......................................... 908,860 1,019,531 1,466,420
Gain on sale of equipment............................................. -- -- (11,746)
Equity in operations of joint venture................................. -- 3,357,916 3,857,640
Changes in operating assets and Liabilities--
Other current assets................................................ (66,270) (255,032) (135,968)
Accounts payable and accrued expenses............................... 431,198 901,312 2,324,019
Deferred revenue.................................................... 261,250 900,000 1,010,808
Deferred rent....................................................... 234,204 (104,357) (243,171)
---------- ----------- -----------
Net cash used in operating activities............................. (4,252,448) (4,831,731) (6,079,061)
---------- ----------- -----------
Cash flows used in investing activities:
Investment in marketable securities..................................... (11,741,504) (21,066,603) (21,951,502)
Proceeds from maturities of marketable securities....................... 6,787,602 11,442,960 18,549,902
Investment in joint venture............................................. -- (1,587,606) (5,424,505)
Purchases of property and equipment..................................... (184,549) (48,228) (1,164,445)
Proceeds from sale of equipment......................................... -- -- 12,800
Decrease (increase) in other assets..................................... -- 436 (204,840)
---------- ----------- -----------
Net cash used in investing activities............................. (5,138,451) (11,259,041) (10,182,590)
---------- ----------- -----------
Cash flows from financing activities:
Principal payments on capital Leases.................................... (695,226) (878,067) (971,365)
Proceeds from redeemable convertible preferred stock, net of issuance
costs................................................................. 7,790,607 3,819,506 --
Proceeds from initial public offering, net of issuance costs............ -- 15,297,020 --
Issuance of common stock, net of issuance costs......................... -- 3,970,000 11,734,363
Issuance of common stock under the Employee Stock Purchase Plan......... -- -- 95,952
Exercise of stock options............................................... 32,271 39,679 176,167
Issuance of convertible preferred stock, net of issuance costs.......... 4,959,566 -- --
---------- ----------- -----------
Net cash provided by financing activities........................... 12,087,218 22,248,138 11,035,117
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents...................... 2,696,319 6,157,366 (5,226,534)
Cash and cash equivalents, beginning of period............................ 1,734,188 4,430,507 10,587,873
---------- ----------- -----------
Cash and cash equivalents, end of period.................................. $4,430,507 $10,587,873 $ 5,361,339
---------- ----------- -----------
---------- ----------- -----------
Supplemental cash flow information:
Cash paid during the period for interest................................ $ 201,659 $ 146,900 $ 162,870
---------- ----------- -----------
---------- ----------- -----------
Supplemental disclosure of noncash investing and financing activities:
Property and equipment acquired under capital lease obligations......... $ 343,927 $ 1,093,691 $ 1,257,613
---------- ----------- -----------
---------- ----------- -----------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

F-6

LEUKOSITE, INC. AND SUBSIDIARY

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 small molecule and monoclonal antibody
therapeutics with potential applications in inflammatory, autoimmune, and viral
diseases and cancer.

The Company was considered to be in the development stage for financial
reporting purposes until December 1998. During 1998, the Company experienced
significant revenue growth, including revenue from its joint venture with Ilex
(as discussed in Note 7), entered into several new collaboration agreements (see
Note 4 and Note 9) and subsequent to year-end acquired all of the issued and
outstanding capital stock of CytoMed, Inc. (see Note 21). As such, the Company
no longer reports cumulative results from inception as required for development
stage enterprises.

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
Laboratory and office computer equipment...................................... 3 years
Leasehold improvements........................................................ Life of lease
Office furniture, fixtures and equipment...................................... 4-5 years

All of the Company's revenues are non-refundable and are substantially
derived from corporate collaborative research arrangements, government grants
and amounts billed to the Company's joint venture with Ilex, as discussed in
Note 7. 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 when all obligations as defined in the

F-7

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
individual agreements are fulfilled by the Company and there is no risk of
refund. Deferred revenue represents payments received in advance of revenue
recognition.

(D) RESEARCH AND DEVELOPMENT

All research and development costs are expensed as incurred. Funding
commitments are recorded as a liability when they become contractually due.
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 (FASB) issued
Statement of Financial Accounting Standards (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. The 1997 net
loss available to common stockholders has been adjusted to include $610,000 of
dividends attributable to redeemable convertible preferred stock. Diluted net
loss per share is the same as basic net loss per share as the inclusion of stock
options and warrants would be antidilutive.

DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------- -------------- --------------

Net loss...................................... $ (6,021,690) $ (10,651,101) $ (14,347,063)
Accretion of preferred stock dividends........ -- (610,000) --
------------- -------------- --------------
Net loss applicable to common stockholders.... $ (6,021,690) $ (11,261,101) $ (14,347,063)
------------- -------------- --------------
------------- -------------- --------------
Net loss per common share--basic and
diluted..................................... $ (5.65) $ (2.62) $ (1.32)
------------- -------------- --------------
------------- -------------- --------------
Weighted average common shares
outstanding--basic and diluted.............. 1,065,522 4,298,828 10,895,411
------------- -------------- --------------
------------- -------------- --------------
Antidilutive securities that were not
included--common stock options and
warrants.................................... 429,087 467,698 560,004
------------- -------------- --------------
------------- -------------- --------------

(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 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. The
investments that the Company has the positive intent

F-8

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) CASH EQUIVALENTS AND MARKETABLE SECURITIES (CONTINUED)
and ability to hold to maturity are reported at amortized cost, which
approximates fair market value. As of December 31, 1998, there were no material
unrealized gains or losses on investments. Cash and cash equivalents and
marketable securities consisted of the following:

DECEMBER 31, 1997 DECEMBER 31, 1998
----------------- -----------------

Cash and cash equivalents:
Cash................................................. $ 1,373,786 $ 3,219,315
Money market funds................................... 6,609,783 1,341,651
Taxable auction securities........................... 2,604,304 800,373
----------------- -----------------
$ 10,587,873 $ 5,361,339
----------------- -----------------
----------------- -----------------
Marketable securities, short-term:
U.S. government agency obligations (average maturity
of 5 months)....................................... $ 6,094,401 $ --
Corporate bonds and notes (average Maturity of 5 and
6 months respectively)............................. 8,474,699 15,802,376
----------------- -----------------
$ 14,569,100 $ 15,802,376
----------------- -----------------
----------------- -----------------
Marketable securities, long-term:
Corporate bonds and notes (average Maturity of 15.5
months)............................................ $ -- $ 2,168,324
----------------- -----------------
----------------- -----------------

Taxable auction securities have maturities of either seven, twenty-eight, or
thirty-five days and the yields on these instruments are reset upon maturity by
utilizing the Dutch Auction or remarketing mechanisms. New and existing
investors reset the rates through a competitive bidding process that reflects
factors such as the current interest rate environment, comparable yields
available in alternative short-term cash instruments and the credit quality of
the issuer.

(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 A4B7 and AEB7 integrins and to market therapeutic drugs that
result from the collaboration.

The Company and Warner signed an agreement related to MCP-1 in September
1994 that 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. 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 that
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.

F-9

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) WARNER-LAMBERT AGREEMENTS (CONTINUED)
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 nonrefundable $1,000,000 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 and Warner signed an agreement related to A4B7 and AEB7 in
December 1998 (the A4B7 and AEB7 Agreement). Under the A4B7 and AEB7 Agreement,
the Company and Warner are working to discover and develop small molecule
atagonists to the A4B7 and AEB7 integrin targets implicated in asthma and
inflammatory bowel disease. In connection with the A4B7 and AEB7 Agreement,
Warner made a nonrefundable $2,500,000 payment for the grant of a license to the
technology and agreed to provide research funding.

The Company received quarterly research funding under the MCP-1 and IL-8
Agreements and the A4B7 and AEB7 Agreement. Through December 31, 1998, the
Company had received $3,831,250 in research support. Revenue recognized for
research support during the years ended December 31, 1996, 1997 and 1998 was
$690,000, $1,035,000 and $1,021,667, respectively, and as of December 31, 1998,
the Company has deferred recognizing $834,583 as revenue. The MCP-1, IL-8, CCR5
and CXCR4, and A4B7 and AEB7 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, 1998, the Company had received $7,062,500 in licensing and research support
payments from Roche. Revenue recognized for the years ended December 31, 1996,
1997 and 1998 was $2,900,000, $2,100,000 and $1,925,000, respectively, and as of
December 31, 1998, the Company has deferred recognizing $137,500 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

The Company signed an agreement with Kyowa to discover and develop small
molecule antagonists and monoclonal antibody drugs to CXCR3 and CCR1 in April
1997. The agreement was amended in October 1997. Under the terms of the amended
agreement, Kyowa has primary rights to market products

F-10

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6) KYOWA HAKKO KOGYO AGREEMENT (CONTINUED)
in Japan and Asia resulting from the collaboration. Furthermore, the amended
agreement calls for the Company, together with Warner 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, 1998, the Company
had received $7,000,000 of research funding from Kyowa. Revenue recognized for
the years ended December 31, 1997 and 1998 was $2,100,000 and $3,300,000,
respectively, and as of December 31, 1998, the Company has deferred recognizing
$1,200,000 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 CAMPATH-Registered Trademark-. Under the terms of the partnership,
the Company is required to fund 50% of the partnership's working capital
requirements. 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. The joint venture has sublicensed
the rights to CAMPATH-Registered Trademark- from the Company. For the years
ended December 31, 1997 and 1998, the Company's share of the joint venture's
recorded loss was $3,357,916 and $3,857,640, respectively, and the Company had a
funding liability of $203,445 to the joint venture as of December 31, 1998. The
Company charged the joint venture $1,235,185 and $250,106 for costs incurred by
the Company on behalf of the joint venture for the year ended December 31, 1998
and December 31, 1997, respectively, which has been recorded as revenue by the
Company. During 1998, the joint venture made a nonrefundable $25,000 payment to
the Company for the license to the rights of CAMPATH-Registered Trademark-,
which has been recorded as revenue by the Company.

(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 per share. 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, at the
option of the Company or Genentech, at the market value of the common stock at
the date of conversion. No funds have been drawn against the credit facilities
for the years ended December 31, 1997 and 1998.

F-11

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9) MORPHOSYS

The Company entered into a two-year collaboration agreement with MorphoSys
AG (MorphoSys) in August 1998 to discover and develop therapeutic monoclonal
antibodies for inflammatory and autoimmune disorders. Under the terms of the
agreement, the Company received exclusive worldwide rights to develop and
commercialize antibody therapeutics resulting from the collaboration. The
Company made a technology access fee payment in August 1998 of $750,000, which
has been included in research and development expense. The agreement calls for
payments to be made to MorphoSys for funded research, the achievement of certain
milestones as well as future royalties, based upon commercial sales of products
developed under the collaboration.

(10) 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, 1998, 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 13(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, 1998, 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. 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 May 7, 1998, this agreement was amended to
provide an additional $1,200,000 of lease availability. As of December 31, 1998,
$1,010,000 is available under this lease commitment.

On March 26, 1998, the Company entered into another lease agreement for the
lease of up to $500,000 of laboratory and office equipment. 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 15% of the cost of the equipment. As of December 31, 1998,
$500,000 is available under this lease commitment.

On June 12, 1998, the Company entered into another lease agreement for the
lease of up to $1,300,000 of laboratory and office equipment, of which $455,000
may be utilized for leasehold improvements. 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. As of December 31, 1998, $620,000 is available
under this lease commitment.

F-12

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(10) CAPITAL LEASE (CONTINUED)
Future minimum lease payments under these lease agreements at December 31,
1998 are as follows:

AMOUNT
------------

Year Ending December 31,
1999.......................................................................... $ 883,933
2000.......................................................................... 790,774
2001.......................................................................... 427,161
2002.......................................................................... 227,413
------------
Total....................................................................... 2,329,281
Less--Amount representing interest............................................ 279,620
------------
Present value of future lease payments...................................... 2,049,661
Less--Amounts due within one year............................................. 733,848
------------
Amounts due after one year.................................................. $ 1,315,813
------------
------------

(11) 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.

(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.

F-13

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12) PREFERRED STOCK

(A) REDEEMABLE CONVERTIBLE PREFERRED STOCK

Redeemable convertible preferred stock activity for the two years in the
period ended December 31, 1997 is as follows:

SERIES A SERIES B SERIES D SERIES F
---------------------- --------------------- --------------------- ---------------------

NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
---------- ---------- --------- ---------- --------- ---------- --------- ----------

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 4,880,607

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 4,880,607

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) (4,880,607)
---------- ---------- --------- ---------- --------- ---------- --------- ----------

Balance, December 31, 1997... -- $ -- -- $ -- -- $ -- -- $ --
---------- ---------- --------- ---------- --------- ---------- --------- ----------
---------- ---------- --------- ---------- --------- ---------- --------- ----------

SERIES G
---------------------

NUMBER CARRYING
OF SHARES VALUE
--------- ----------
Balance, December 31, 1995... -- $ --
Issuance of Series F
preferred stock, net of
issuance costs of
$34,838.................... -- --
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... 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...................... (1,959,862) (6,729,506)
--------- ----------
Balance, December 31, 1997... -- $ --
--------- ----------
--------- ----------

As discussed in Note 11(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.

(13) 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 2,125,000 shares of
common stock. As of December 31, 1998, 352,720 shares are available for future
grant under the Plan. To date, all options granted have been issued with an
exercise price equal to the fair market value at the time of issuance.

F-14

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(13) STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company's 1997 Employee Stock Purchase Plan authorizes a total of up to
150,000 shares of the Company's common stock to be sold to participating
employees. Participating employees may purchase shares of common stock at 85% of
its fair market value at the beginning or end of an offering period, whichever
is lower, through payroll deductions in an amount not to exceed 8% of an
employee's base compensation.

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 11(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.

The Company had the following common stock option activity for the three
years end December 31, 1998:

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

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
Granted....................................... 469,403 6.56-13.00 9.29
Exercised..................................... (59,716) .04-7.17 2.98
Canceled...................................... (84,908) .94-11.13 7.98
---------- ------------- ---
Balance, December 31, 1998...................... 1,599,298 $ .04-13.00 6.66
---------- ------------- ---
---------- ------------- ---
Exercisable December 31, 1996................... 197,767 $ .04-2.62 .66
---------- ------------- ---
---------- ------------- ---
Exercisable December 31, 1997................... 336,805 $ .04-7.17 1.70
---------- ------------- ---
---------- ------------- ---
Exercisable December 31, 1998................... 585,644 $ .04-11.13 3.71
---------- ------------- ---
---------- ------------- ---

F-15

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(13) STOCK OPTIONS AND WARRANTS (CONTINUED)

OUTSTANDING EXERCISABLE
------------------------------------------------------ ------------------------------------

WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE NUMBER OF SHARES CONTRACT LIFE EXERCISE PRICE NUMBER OF SHARES EXERCISE PRICE
- -------------- ----------------- ----------------- ---------------- ----------------- -----------------
$.04-.94 279,460 5.03 $ .65 279,460 $ .65
1.00-2.62 60,240 6.68 1.17 42,552 1.18
5.12-6.75 410,555 7.99 5.85 145,667 5.69
7.13-8.88 294,073 8.85 7.59 70,592 7.72
9.00-10.75 383,820 9.74 10.04 12,379 10.36
11.13-13.00 171,150 9.91 11.17 34,994 11.13
----------------- ----- ------- ------- -----
1,599,298 8.21 $ 6.66 585,644 $ 3.71
----------------- ----- ------- ------- -----
----------------- ----- ------- ------- -----

In October 1995, the 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 granted to employees 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 1996, 1997
and 1998 using the Black-Scholes option pricing model prescribed by SFAS No.
123. The assumptions used for the years ended December 31, 1996, 1997 and 1998
are as follows:

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

1996 1997 1998
---------------- ---------------- ----------------
Risk-free interest rate............... 5.54%-6.83% 5.83%-6.86% 4.46%-5.57%
Expected dividend yield............... 0% 0% 0%
Expected life......................... 7 years 7 years 7 years
Expected volatility................... 33% 60% 46%

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 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 1996, 1997 and
1998 was computed as approximately $867,000, $3,561,000 and $2,338,000,
respectively. Of these amounts, approximately $99,000, $458,000 and $1,179,000
would be charged to operations for the years ended December 31, 1996, 1997 and
1998, 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

F-16

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(13) STOCK OPTIONS AND WARRANTS (CONTINUED)
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, 1996, 1997 and 1998 is as follows:

DECEMBER 31,
---------------------------------------------------------------------------
1996 1997 1998
----------------------- ------------------------ ------------------------
PRO AS AS PRO
AS REPORTED FORMA REPORTED PRO FORMA REPORTED FORMA
----------- ---------- ----------- ----------- ----------- -----------

Net loss......................... ($6,021,690) $(6,121,057) $(10,651,101) $(11,109,101) $(14,347,063) $(15,525,781)
----------- ---------- ----------- ----------- ----------- -----------
----------- ---------- ----------- ----------- ----------- -----------
Basic and diluted net loss per
common share................... $ (5.65) $ (5.74) $ (2.62) $ (2.73) $ (1.32) $ (1.42)
----------- ---------- ----------- ----------- ----------- -----------
----------- ---------- ----------- ----------- ----------- -----------

(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 10), 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 11(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.

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.

F-17

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(14) 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. On September 1, 1998, the term of the
lease was extended for an additional period commencing as of December 1, 1999
and expiring as of November 30, 2004. 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 1996, 1997
and 1998 amounted to approximately $459,000, $459,000 and $741,000 respectively.

Future minimum rental payments at December 31, 1998 are as follows:

AMOUNT
------------

Year Ending December 31,
1999............................................................................ $ 1,724,281
2000............................................................................ 1,294,243
2001............................................................................ 1,294,243
2002............................................................................ 1,294,243
2003............................................................................ 1,294,243
2004............................................................................ 1,186,389
------------
$ 8,087,642
------------
------------

(15) 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 the deduction of certain research and development costs, as
defined in the Internal Revenue Code. As of December 31, 1998, the Company has
available deferred research and development costs of approximately $29,105,000,
net operating loss carryforwards of approximately $13,800,000 and research and
development credit carryforwards of approximately $1,300,000 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. Because of the uncertainty

F-18

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(15) INCOME TAXES (CONTINUED)
of the realization of future tax return benefits of the deferred tax assets, a
full valuation allowance has been provided.

1997 1998
-------------- --------------

Operating loss carryforwards.................................. $ 1,902,000 $ 5,502,000
Tax credit carryforwards...................................... 900,000 1,300,000
Start-up costs................................................ 160,000 180,000
Development costs............................................. 9,905,000 12,374,000
Nondeductible accruals........................................ 84,000 102,000
Depreciation.................................................. 189,000 375,000
-------------- --------------
13,140,000 19,833,000
Less--Valuation allowance..................................... (13,140,000) (19,833,000)
-------------- --------------
-------------- --------------
$ -- $ --
-------------- --------------
-------------- --------------

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 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.

(16) 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 16(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, 1998 are approximately as follows:

1999............................................................ $1,805,000
2000............................................................ 288,000
2001............................................................ 25,000
---------
Total........................................................... $2,118,000
---------
---------

(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

F-19

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(16) COMMITMENTS (CONTINUED)
toward funding the construction, equipping and the operations of a research
center in the UK. The Company has paid and charged to operations $2,500,000 of
such commitment as of December 31, 1998, 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.

(17) ACCRUED EXPENSES

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

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

1997 1998
------------ ------------
Payroll and payroll-related....................................... $ 608,724 $ 711,678
Consulting and contract research.................................. 263,300 249,010
Preclinical research and development.............................. 330,237 1,776,605
Clinical research and development................................. 174,592 559,672
Legal fees........................................................ 145,018 124,882
Other............................................................. 344,552 693,454
------------ ------------
$ 1,866,423 $ 4,115,301
------------ ------------
------------ ------------

(18) PROFIT SHARING PLAN

The Company maintains a profit sharing plan (the Plan) that provides for tax
deferred employee benefits under Section 401(k) of the Internal Revenue Code.
The Plan allows employees to make contributions, a portion of which will be
matched by the Company, up to 25% of the lesser of 6% of an employee's salary or
an employee's contributions. The Company's contributions are 100% vested. There
were no Company matching contributions during the years ended December 31, 1996
and 1997. The Company has made matching contributions to the Plan of
approximately $52,000 for the year ended December 31, 1998. The Company pays the
administrative costs of the Plan.

(19) COMPREHENSIVE INCOME

In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
The statement established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement is effective for fiscal
years beginning after December 15, 1997. The Company has adopted this statement
for the year ended December 31, 1998 with no material impact on the Company's
financial statements as there are no material differences between comprehensive
income and reported.

(20) SEGMENT REPORTING

In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. This statement established standards for the
way that public business enterprises report information about operating segments
in annual financial statements and require that enterprises report selected
information about operating segments in interim financial reports issued to
stockholders.

F-20

LEUKOSITE, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(20) SEGMENT REPORTING (CONTINUED)
The Company has adopted this statement for the fiscal year ending December
31, 1998. In accordance with SFAS No. 131, the Company has one operating
segment. Additional disclosure of revenue information about products and
services is, therefore, not required.

(21) SUBSEQUENT EVENT

On February 11, 1999, the Company acquired all of the issued and outstanding
capital stock of CytoMed Inc. (CytoMed) through the issuance of 935,625 shares
of the Company's Series A Convertible Preferred Stock, par value $.01 per share,
to CytoMed shareholders. The Series A Convertible Preferred Stock is convertible
into common stock on a one-to-one basis upon required approval by Company
shareholders. The Company will issue another 631,313 common shares to CytoMed
shareholders upon receipt of a $6,000,000 payment to CytoMed from UCB Pharma
which is required to be paid in October 1999. In addition, CytoMed shareholders
may receive up to $23,000,000 in cash and 84,000 shares of the Company's common
stock which is required upon the achievement of clinical development and
regulatory milestones related to CytoMed's product candidates. The total
purchase price, including shares issued, shares to be issued and transaction
costs, was approximately $16,100,000 and the net assets acquired were
approximately $14,500,000. The transaction will be accounted for as a purchase
in accordance with Accounting Principles Board Opinion No. 16, BUSINESS
COMBINATIONS.

F-21

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying balance sheets of L&I Partners, L.P. (a
Delaware Limited Partnership in the development stage), as of December 31, 1998
and 1997, and the related statements of operations, partners' capital and cash
flows for the year ended December 31, 1998, and for the period from inception
(May 2, 1997) through December 31, 1997, and cumulative from inception (May 2,
1997) through December 31, 1998. 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 audits.

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, 1998 and 1997, and the results of its operations and its cash flows
for the year ended December 31, 1998, and for the period from inception through
December 31, 1997, and cumulative from inception through December 31, 1998, in
conformity with generally accepted accounting principles.

Arthur Andersen LLP

San Antonio, Texas
January 29, 1999

F-22

L&I PARTNERS, L.P.

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

(IN THOUSANDS)

DECEMBER 31
--------------------

1998 1997
--------- ---------
ASSETS
CASH AND CASH EQUIVALENTS...................................................................... $ 60 $ 353
PREPAID EXPENSES............................................................................... 4 --
--------- ---------
Total assets............................................................................... $ 64 $ 353
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable to related parties.......................................................... $ 737 $ 1,202
Accrued subcontractor costs.................................................................. -- 3,210
--------- ---------
Total liabilities.......................................................................... 737 4,412
--------- ---------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Limited partners' capital.................................................................... (666) (4,006)
General partner's capital.................................................................... (7) (40)
Receivable from general partner.............................................................. -- (13)
--------- ---------
Total partners' capital.................................................................... (673) (4,059)
--------- ---------
Total liabilities and partners' capital.................................................... $ 64 $ 353
--------- ---------
--------- ---------

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

F-23

L&I PARTNERS, L.P.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

(IN THOUSANDS)

CUMULATIVE
FROM
INCEPTION INCEPTION
YEAR ENDED THROUGH THROUGH
DECEMBER 31 DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------ ------------ ------------

REVENUE................................................................ $ -- $ -- $ --
------------ ------------ ------------
OPERATING EXPENSES:
General and administrative........................................... 153 -- 153
------------ ------------ ------------
Costs of contract research services performed by related parties..... 4,876 1,202 6,078
Subcontractor costs.................................................. 2,755 5,520 8,275
------------ ------------ ------------
Total operating expenses......................................... 7,784 6,722 14,506
------------ ------------ ------------
OPERATING LOSS......................................................... (7,784) (6,722) (14,506)
------------ ------------ ------------
INTEREST INCOME........................................................ 68 6 74
------------ ------------ ------------
NET LOSS............................................................... $ (7,716) $ (6,716) $ (14,432)
------------ ------------ ------------
------------ ------------ ------------

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

F-24

L&I PARTNERS, L.P.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF PARTNERS' CAPITAL

(IN THOUSANDS)

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

BALANCE, inception, May 2, 1997.................................................. $ -- $ -- $ --
Contributions.................................................................. 2,643 27 2,670
Receivable from general partner................................................ -- (13) (13)
Net loss....................................................................... (6,649) (67) (6,716)
----------- ----- ---------
BALANCE, December 31, 1997....................................................... (4,006) (53) (4,059)
Contributions.................................................................. 10,979 123 11,102
Net loss....................................................................... (7,639) (77) (7,716)
----------- ----- ---------
BALANCE, December 31, 1998....................................................... $ (666) $ (7) $ (673)
----------- ----- ---------
----------- ----- ---------

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

F-25

L&I PARTNERS, L.P.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

CUMULATIVE
FROM
INCEPTION INCEPTION
YEAR ENDED THROUGH THROUGH
DECEMBER 31 DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------ ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $ (7,716) $ (6,716) $ (14,432)
Adjustments to reconcile net loss to net cash used in operating
activities-........................................................
Increase in assets-
Prepaid expenses................................................. (4) -- (4)
Increase (decrease) in liabilities-
Accounts payable to related parties.............................. 3,925 1,202 5,127
Accrued subcontractor costs...................................... (3,210) 3,210 --
------------ ------------ ------------
Net cash used in operating activities........................ (7,005) (2,304) (9,309)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions................................................ 6,712 2,657 9,369
------------ ------------ ------------
Net cash provided by financing activities.................... 6,712 2,657 9,369
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (293) 353 60
CASH AND CASH EQUIVALENTS, beginning of period......................... 353 -- --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period............................... $ 60 $ 353 $ 60
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Capital contributions made through settlement of accounts payable
to related parties............................................... $ 4,390 $ -- $ 4,390
------------ ------------ ------------
------------ ------------ ------------

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

F-26

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

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1998 AND 1997

(AMOUNTS IN THOUSANDS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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 (CAMPATH-Registered Trademark-)
initially 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 L&I are jointly
managed by Leukosite and Ilex who will generally share equally in profits and
losses. 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 31, 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 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 products. Accordingly, L&I's future success is uncertain.

During the period from inception (May 2, 1997) through December 31, 1998,
L&I incurred a net loss of approximately $14.5 million and, at December 31,
1998, had a negative working capital of approximately $.7 million and negative
partners' capital of approximately $.7 million. 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 through
fiscal 1999.

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 interest in L&I LLC.

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.

ESTIMATES IN FINANCIAL STATEMENTS

F-27

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

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1998 AND 1997

(AMOUNTS IN THOUSANDS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.

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.

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 financial statements of
L&I.

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.

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 and
has not made any cash distributions.

2. RELATED-PARTY TRANSACTIONS:

L&I utilizes services extensively from both its limited partners. 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, however, the fair
value of such services is immaterial to the results of operations of L&I for the
period from inception (May 2, 1997) through December 31, 1998. During the year
ended December 31, 1998 and for the period from May 2, 1997, through December
31, 1997, L&I incurred the following related party expenses for contract
research services (in thousands):

1998 1997
--------- ---------

ILEX....................................................................... $ 3,616 $ 952
Leukosite.................................................................. 1,260 250
--------- ---------
$ 4,876 $ 1,202
--------- ---------
--------- ---------

3. LICENSING AGREEMENTS:

L&I has sublicensed the rights to CAMPATH-Registered Trademark- 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 from inception through December 31, 1998.

F-28