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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                   FORM 10-K

               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
                        COMMISSION FILE NUMBER 33-60134

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S>                                            <C>
                  DELAWARE                                      13-3697002
                  --------                                      ----------
        (STATE OR OTHER JURISDICTION                         (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)
       9333 GENESEE AVENUE, SUITE 200
                SAN DIEGO, CA                                      92121
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  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>

      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 587-9333

          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 per share

   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 Act of 1934
during the preceding months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirement 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 the 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 voting stock held by nonaffiliates of the
Registrant as of March 14, 2000 totaled approximately $132,546,608 based on
the closing stock price as reported by the Nasdaq National Market.

   As of March 14, 2000, there were 11,201,786 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Certain portions of Registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1999, are incorporated by reference into Part
II of this report. Registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission, pursuant to regulation 14A in
connection with the 2000 Annual Meeting of Stockholders to be held on June 23,
2000, is incorporated by reference into Part III of this Report.

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                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                                   FORM 10-K

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                     INDEX

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 <C>      <S>                                                              <C>
 PART I
 Item 1   Business......................................................     3
 Item 2   Properties....................................................    18
 Item 3   Legal Proceedings.............................................    18
 Item 4   Submission Of Matters To A Vote Of Security Holders...........    18
 PART II
          Market For Registrant's Common Stock And Related Stockholder
 Item 5   Matters.......................................................    18
 Item 6   Selected Financial Data.......................................    19
 Item 7   Management's Discussion And Analysis Of Results Of Operations
           And Financial Condition......................................    19
 Item 7A  Quantitative and Qualitative Disclosures About Market Risk....    22
 Item 8   Financial Statements And Supplementary Data...................    22
 Item 9   Changes In And Disagreements With Accountants On Accounting
          And Financial Disclosures.....................................    22
 PART III
 Item 10  Directors And Executive Officers Of The Registrant............    23
 Item 11  Executive Compensation........................................    23
          Security Ownership Of Certain Beneficial Owners And
 Item 12  Management....................................................    23
 Item 13  Certain Relationships And Related Transactions................    23
 PART IV
          Exhibits, Financial Statements, Schedules And Reports On Form
 Item 14  8-K...........................................................    24
          Signatures....................................................    25
</TABLE>

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   This Annual Report on Form 10-K contains certain forward-looking statements
that involve risks and uncertainties. The actual future results for Hollis-
Eden Pharmaceuticals, Inc. may differ materially from those discussed here.
Additional information concerning factors that could cause or contribute to
such differences can be found in this Annual Report on Form 10-K in Part I,
Item 1 under the caption "Risk Factors," Part II, Item 7 entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and elsewhere throughout this Annual Report.

                                    PART I

ITEM 1. BUSINESS

GENERAL

   Hollis-Eden Pharmaceuticals, Inc., a development-stage pharmaceutical
company, is engaged in the discovery, development and commercialization of
products for the treatment of infectious diseases and immune system disorders,
including HIV/AIDS, hepatitis C and malaria.

   We are focusing our initial development efforts on a potent series of
adrenal steroid hormone analogs. Our lead compound in this series, HE2000, is
currently in Phase I/II clinical studies in the U.S. and South Africa. By
altering cytokine production, HE2000 appears from early clinical studies to
help reestablish immune system balance in situations such as HIV where the
immune system is dysregulated. In the setting of HIV we believe that, by
reestablishing this balance, the immune system may be able to better control
virus levels and potentially delay or prevent the progression to AIDS. In
addition, based on the mechanism of action, we believe this compound will have
an attractive safety profile and will avoid issues of resistance that plague
many existing antiviral drugs.

   The ability to restore immune system balance has the potential to have
broad applicability to a wide variety of infectious diseases and oncology-
related applications as well as a number of inflammatory conditions. To more
fully exploit this commercial opportunity we have begun an aggressive research
and licensing effort designed to expand both the number of compounds in
development and the breadth of potential therapeutic applications. Several
compounds resulting from these activities are in late stage preclinical
development and are candidates for clinical trials.

   We are pursuing a partially integrated approach to building our business.
As such, we intend to utilize third parties for many of our activities such as
clinical development and manufacturing. We believe by being involved in the
design and supervision of these activities, but not the day-to-day execution,
we can preserve our flexibility and limit our net losses during the
development phase. If we are able to successfully develop HE2000 or other
pharmaceutical products, we anticipate marketing them directly in the U.S. and
potentially elsewhere. For certain therapeutic indications or geographic
regions, we anticipate establishing strategic collaborations to commercialize
these opportunities.

   We have not yet generated any operating revenues. We have experienced
significant operating losses due to substantial expenses incurred to acquire
and fund development of our drug candidates and, as of December 31, 1999, had
an accumulated deficit of approximately $28.6 million. We cannot guarantee
that any of our drug candidates will be approved for commercial sale or that
any of the foregoing proposed arrangements will be implemented or prove to be
successful.

   Hollis-Eden has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next few years as we
increase expenditures on research and development and begin to allocate
significant and increasing resources to our clinical testing and other
activities. In addition, during the next few years, we will have to meet the
substantial new challenge of developing the capability to market products.
Accordingly, our activities to date are not as broad in depth or scope as the
activities we must undertake in the future, and our historical operations and
financial information are not indicative of future operating or financial
condition or our ability to operate profitably as a commercial enterprise when
and if we succeed in bringing any drug candidate to market.

                                       3
<PAGE>

TECHNOLOGY OVERVIEW

   Our initial technology development efforts are focused on a series of
potent hormones and hormone analogs that we believe are key components of the
body's natural regulatory system. The first application we are pursuing for
this class of compounds is in reestablishing balance to the immune system in
situations of dysregulation.

   In the immune system there are two types of immunity, cell-mediated and
humoral, that exist in a balance. Cell-mediated immunity is useful against
intracellular pathogens like viruses, certain parasites and also against some
tumor cells. Humoral immunity includes antibody responses to circulating
pathogens such as bacteria. As a result, cell-mediated parts are largely
ineffective against bacteria and humoral parts of the immune system are
similarly ineffective against viruses.

   Normally, immune system homeostasis is maintained by a complex interplay of
cytokines. Cytokines are chemical messengers that enable cells of the immune
system to communicate with one another. Certain cytokines such as interferon
(IFN) gamma are termed Th1 cytokines, as they lead to the production of Th1
cells that fight viruses through cell-mediated immunity. Other cytokines such
as interleukin 10 (IL-10) are classified as Th2 cytokines because they lead to
the production of Th2 cells that fight bacteria and other such pathogens as
part of humoral immunity.

   Unfortunately, a wide variety of viruses including HIV and hepatitis C,
certain parasites such as malaria, and a number of different tumor cells have
evolved ways of evading destruction by the immune system by causing the body
to overproduce Th2 cytokines and underproduce Th1 cytokines. This in turn
leads to a corresponding overproduction of cells unable to fight these
pathogens and an underproduction of cells that can.

   Hollis-Eden's technology approach is based on the observation that this
complicated balance of cytokines is changed by competing levels of certain
adrenal steroid hormones. In young, healthy adults, the balance between
corticosteroids such as cortisol, which have immunosuppressive properties, and
other adrenal steroid hormones is a key determinant in whether appropriate
levels of cytokines are produced to properly regulate immune responses. As we
age and under conditions of stress, levels of these hormones that counteract
the immunosuppressive effect of corticosteroids fall significantly, leading to
a decline in the ability to fight off infections that would otherwise be
contained by a well functioning immune system.

   As described above, certain pathogens have found ways to accelerate this
process as a means of survival. For example, in HIV, most patients' cortisol
levels rise and counter-regulatory adrenal hormones fall as the disease
progresses from HIV to AIDS. This then leads to a corresponding increase in
Th2 cytokines such as IL-10 relative to Th1 cytokines such as IFN gamma. As
this situation continues the immune system is dominated by Th2 cells unable to
fight viral and other infections rather than the necessary cell-mediated Th1
cells. In this state of immune system dysregulation, the patient becomes
highly susceptible to infection.

   Certain patients, however, maintain their ability to continue to produce
high levels of Th1 cytokines and, in this small percentage of patients, HIV
appears to take much longer to progress to AIDS. These patients are termed HIV
long-term non-progressors. Similarly, in hepatitis C, a small percentage of
patients are able to mount a strong Th1 response and in these patients the
immune system is able to successfully clear the virus. These observations have
led to the belief that if patients can be brought from a Th2 predominant
immune status back towards a Th1 dominant condition through drug therapy, the
immune system may be able to contain or eliminate a number of such infectious
pathogens that are plaguing millions of people around the world. This Th1/Th2
imbalance is seen not just with infectious disease, but also in cancer,
autoimmune and inflammatory diseases and holds the potential to be applicable
to address a wide variety of human ailments if safe and effective therapies
that restore this balance can be found.

   Our therapeutic approach is designed to interact at what is believed to be
the trigger point of this dysregulation, the hormonal balance between
corticosteroids and other adrenal steroids, offering a hormone replacement
therapy that potentially will lead to stimulation of the immune system in
conditions of immunosuppression.

   In addition to the immunoregulatory properties described above, these
compounds have also shown significant direct antiviral properties in in vitro
tests. The mechanism of action in these studies is believed to be

                                       4
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through the regulation of energy sources in the cell that viruses need to
replicate. These effects may contribute to potential benefits seen in early
clinical trials.

   We are employing the latest tools of the genomics revolution to further our
expertise in steroid biochemistry, signal transduction, receptor biology and
gene transcription for this important class of compounds. We are seeking to
identify and develop compounds that are highly potent and devoid of androgenic
and other side effects. Our lead compound in this series is HE2000, which is
currently being explored in clinical trials in HIV/AIDS. Clinical trials with
HE2000 in hepatitis C, malaria and potentially other indications are planned
for the near future. In addition, we are also developing a number of candidate
compounds in this class, that also have potential in areas outside of
infectious disease.

HE2000 IN HIV

   Significant strides have been made in recent years in treating HIV infected
individuals in the developed world. Through the use of a "cocktail" of potent
new antiviral drugs, including protease inhibitors and reverse transcriptase
inhibitors, death rates from AIDS have been reduced significantly in these
countries. These expensive new therapies, however, are not ideal for a number
of reasons. Despite being on successful therapy for several years, patients to
date have been unable to completely eradicate the virus, which bounces back
aggressively shortly after any cessation of therapy. HIV also multiplies
rapidly in the face of antiviral compounds that are designed to attack the
virus directly, leading to the development of resistance. Drug resistance is a
major concern of physicians, as a large portion of patients are already
resistant to at least one drug in their drug cocktail and these issues are
expected to increase.

   In addition, the dosing regimen for this cocktail therapy is very
complicated, with a large number of pills being required to be taken daily
according to a strict schedule. Failure to adhere to this regimen can lead to
increased resistance. Further, side effects of these therapies can be
significant, leading to a percentage of these patients being unable or
unwilling to tolerate the drug regimen.

   In the developing world, the cocktail has been impractical as a result of
the cost and the difficulty complying with the dosing regimen. Furthermore,
the failure to adhere to the complicated schedule could potentially lead to
massive resistance issues.

   Hollis-Eden believes HE2000 has the potential to play an important role in
treating HIV/AIDS in both the developed and developing world. In the developed
world we believe that, if we can demonstrate clinically that HE2000 restores
or improves immune system activity, there may be a number of significant
opportunities for use of the compound. It may be useful for long-term control
of viral replication as well as delaying or preventing the progression to AIDS
and preventing or clearing opportunistic infections. At a minimum, this could
prove very useful in treating patients who cannot tolerate other therapies and
in salvage patients who are resistant to antiviral drug cocktail therapy. In
addition, there is interest in the clinical community in exploring the
potential of HE2000 to upregulate the immune system during periods of
antiviral drug cocktail holidays.

   In the developing world, HE2000 may be particularly attractive because we
believe the drug will be administered on an intermittent basis rather than
everyday, will have a lower manufacturing cost than existing therapies, and,
given its probable endocrine mechanism of action, should avoid issues of
resistance.

   We began testing HE2000 in Phase I/II clinical trials in HIV/AIDS patients
in the U.S. and South Africa in 1999. Although primarily designed to assess
safety, these trials are also following a wide variety of immune markers that
will help determine whether or not the Th1/Th2 balance is being altered in
HIV-infected patients by HE2000 administration, and what effect this in turn
may have on immune function. The U.S. trials involve a single course of HE2000
injections to salvage patients, for whom other drug therapies have failed and
whose immune systems have generally been ravaged by HIV.

   Additional information may be gained in the trial underway in South Africa,
where multiple rounds of HE2000 are being given to subjects who have never
undergone antiviral therapy. The protocol for the South African subjects
includes a single intramuscular injection, followed by a 1- to 2-week
observation period to check

                                       5
<PAGE>

for adverse reactions. Afterwards, the subjects receive five daily injections
in a row, followed by a 4- to 6- week observation period--and, for those
patients who appear to be benefiting from treatment, up to six more cycles of
injections and observation.

   Preliminary data from a group of patients from the South African clinical
trial indicates that the drug to date appears to be safe with no drug-related
serious adverse events being reported. Given the mechanism of action we
believe to be important for HE2000, one of the goals of the trial was to
ascertain whether the compound could restore immune balance by shifting the
cytokine pattern back to a Th1 state. In this initial group of patients, those
that were producing an excess of Th2 cytokines appeared to convert back after
therapy to a state in which Th1 cytokines predominated.

   This in turn led to an activation of a number of cell types potentially
important for fighting infection such as T cells, LAK cells, natural killer
cells and dendritic cells. The degree of activation was significant and
prolonged, indicating an upregulation of the immune system. Normally these
cells decrease prior to onset of AIDS. We believe that these results are
encouraging regarding the ability of the compound to prevent or treat
opportunistic infections and potentially provide long term control of viral
load set point.

   We are currently optimizing the dosing regimen and preparing to initiate
pilot clinical studies with the compound in South African AIDS patients who
are experiencing, or are at risk of, opportunistic infections. We are also
considering several clinical trials in which HE2000 would be used in
combination with existing antiviral drug cocktail therapy.

   Significant additional clinical data will need to be generated
demonstrating the safety and efficacy of HE2000 before the compound can be
approved for marketing. There can be no assurance that we will have sufficient
funds to complete this development or that the results of these clinical
activities will be successful.

HE2000 IN OTHER INDICATIONS

   The potential ability of HE2000 to shift patients from a Th2 immune status
back to a Th1 status has applications well beyond HIV/AIDS. As mentioned
previously, in hepatitis C, a small percentage of patients are able to resolve
the virus by mounting a strong cell-mediated (Th1) response. Given the early
clinical data with HE2000, which demonstrates a strong Th1 response in HIV
patients, we are exploring the initiation of clinical studies in hepatitis C.

   Existing therapies for hepatitis C have proven to be effective in only a
portion of the patients treated. In addition, side effects of these existing
therapies can be significant and the regimen is very expensive. As with HIV,
resistance is a serious problem in treating the disease. Also as with HIV,
cost and other aspects of existing therapies make them largely impractical in
the developing world.

   Similarly, malarial parasites have found ways to subvert the immune system
by causing a shift from Th1 to Th2. Historically, therapy with quinalone-based
drugs such as chloroquine have been used to treat this condition. Recently,
however, strains have developed that are resistant to chloroquine and other
quinalones making these drugs ineffective in many parts of the world.

   We have shown in both in vitro and in vivo preclinical studies that HE2000
is effective in treating both chloroquine sensitive and chloroquine resistant
strains of malaria. We are working with the U.S. Navy to further test HE2000
preclinically in this indication and are also preparing to begin pilot
clinical trials in this area.

OTHER ADRENAL STEROID HORMONES IN DEVELOPMENT

   To expand the depth and breadth of our development pipeline, we have
entered into collaborative agreements with a number of leading researchers in
this field to develop additional compounds, which may be more potent and/or
target conditions outside of infectious disease. In addition, we have licensed
a large number of patents and patent applications filed on behalf of these
inventors. A number of the compounds covered by these patents have
demonstrated potent activity in a variety of indications including
applications in oncology, inflammation and certain central nervous system and
metabolic disorders.

                                       6
<PAGE>

EDENLAND COMPOUNDS

   We have recently restructured our agreement with Patrick Prendergast and
Edenland Inc. (See "Technology Agreements"). Under this agreement, we have
licensed rights to a series of patents and patent applications for compounds
outside of the adrenal hormone series and are sponsoring additional research
at Edenland related to these compounds.

   One of the compounds included in this license is HE317, which is being
developed in preclinical models to stimulate the immune system in situations
of immunosuppression. HE317 is also a candidate for clinical development
subject to the successful completion of further preclinical studies and scale
up of manufacturing.

MARKET OPPORTUNITIES

   The potential market opportunities for the compounds we are developing are
quite significant. Disease prevalence for the three initial indications we are
pursuing is described below.

   Despite considerable progress with antiviral drug cocktail therapy, AIDS
today is the number one killer of Americans between the ages of 25 and 44. It
is estimated by the Centers for Disease Control that approximately 1.1 million
Americans are infected with HIV. Globally, the World Health Organization
("WHO") and the Joint United Nations Programme on HIV/AIDS reported, as of
December 1998, that approximately 33.4 million adults and children are living
with HIV/AIDS, a 10% increase from 1997. It is also estimated that there were
5.8 million newly infected people and 2.5 million deaths related to HIV/AIDS
in 1998.

   WHO also reports that there are an estimated 170 million chronic carriers
of hepatitis C in the world, including an estimated 4 million in the U.S. Of
those afflicted with hepatitis C, 20% are at risk of developing cirrhosis of
the liver and 1% to 5% may develop liver cancer.

   Market research also indicates that 300-500 million people per year suffer
from malaria. The parasite is responsible for more than one million deaths
annually, most of them children. Most cases of malaria occur in the developing
world but, as a result of increased global travel and other factors, the
incidence of malaria in the developed world is increasing. Finding new
approaches to the treatment of malaria has become a major priority of the U.S.
military.

   HE2000 and other compounds in this class we are developing have a number of
attributes that make them potentially useful globally. Included in these
attributes are potential broad-spectrum activity, the attractive safety
profile to date, the low likelihood of resistance and the relative ease of
manufacture and dosing. Increasing focus on the crisis these diseases have
created in the developing world has led to a number of recent initiatives
designed to provide funding for effective approaches to these diseases. If we
are able to receive support from these initiatives, marketing HE2000 and our
other compounds in developing countries could become more commercially
feasible.

COMPETITION

   Given the large market opportunities we are pursuing, most major
pharmaceutical companies and a number of biotechnology companies have programs
directed toward finding drugs to treat indications we are exploring. Most of
these approaches in infectious disease are targeted at creating new antiviral
compounds rather than drugs that upregulate the immune system. As such, they
will be expected to have different profiles than our compounds and may be
complementary to our efforts.

   There can be no assurance, however, that other companies will not develop
drugs that make our development efforts obsolete. Many of these competitors
have substantially greater human and financial resources than we do and, even
if we are successful at developing our compounds, others with greater
resources may be able to market their products more successfully.

RESEARCH AND DEVELOPMENT EXPENSES

   In 1999, 1998 and 1997, our research and development expenses were $5.7
million, $2.8 million and $3.5 million respectively. For further information
about our research and development expenses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

                                       7
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FDA OVERVIEW

GENERAL

   The manufacturing and marketing of Hollis-Eden's proposed products and its
research and development activities are and will continue to be subject to
regulation by federal, state and local governmental authorities in the United
States and other countries. In the United States, pharmaceuticals are subject
to rigorous regulation by the FDA's Center for Drug Evaluation and Research,
which reviews and approves the marketing of drugs. The Federal Food, Drug and
Cosmetic Act, the regulations promulgated thereunder, and other federal and
state statutes and regulations govern, among other things, the testing,
manufacturing, labeling, storage, record keeping, advertising and promotion of
our potential products.

APPROVAL PROCESS

   The process of obtaining FDA approval for a new drug may take several years
and generally involves the expenditure of substantial resources. Hollis-Eden
will try to accelerate the drug approval process because of the priority
status of HIV/AIDS drugs. See "Accelerated Drug Approval". The steps required
before a new drug can be produced and marketed for human use include clinical
trials and the approval of a New Drug Application.

   Preclinical Testing. The promising compound is subjected to extensive
laboratory and animal testing to determine if the compound is biologically
active and safe.

   Investigational New Drug (IND). Before human tests can start, the drug
sponsor must file an IND application with the FDA, showing how the drug is
made and the results of animal testing. If the FDA does not reject the
application within 30 days, IND status allows initiation of clinical
investigation.

   Human Testing (Clinical). The human clinical testing program usually
involves three phases which generally are conducted sequentially, but which,
particularly in the case of anti-cancer and other life saving drugs, may
overlap or be combined. Clinical trials are conducted in accordance with
protocols that detail the objectives of the study, the parameters to be used
to monitor safety and the efficacy criteria to be evaluated. Each protocol is
submitted to the FDA as part of the IND filing. Each clinical study is
conducted under the auspices of an independent Institutional Review Board
("IRB") for each institution at which the study will be conducted. The IRB
will consider, among other things, all existing pharmacology and toxicology
information on the product, ethical factors, the risk to human subjects and
the potential benefits of therapy relative to risk.

   In Phase I clinical trials, studies usually are conducted on healthy
volunteers but, in the case of certain terminal illnesses such as AIDS, are
conducted on patients with disease that usually has failed to respond to other
treatment to determine the maximum tolerated dose, side effects and
pharmacokinetics of a product. Phase II studies are conducted on a small
number of patients having a specific disease to determine initial efficacy in
humans for that specific disease, the most effective doses and schedules of
administration, and possible adverse effects and safety risks. Phase II/III
differs from Phase II in that the trials involved may include more patients
and, at the sole discretion of the FDA, be considered the pivotal trial or
trials for FDA approval (see below). Phase III normally involves the pivotal
trials of a drug, consisting of wide-scale studies on patients with the same
disease, in order to evaluate the overall benefits and risks of the drug for
the treated disease compared with other available therapies. The FDA
continually reviews the clinical trial plans and results and may suggest
design changes or may discontinue the trials at any time if significant safety
or other issues arise.

   New Drug Application (NDA). Upon completion of Phase III, the drug sponsor
must file an NDA containing all information that has been gathered. The
information must include the chemical composition of the drug, scientific
rationale, purpose, animal and laboratory studies, results of human tests,
formation and production details, and proposed labeling.

   Approval. Once an NDA is approved, the drug sponsor is required to submit
reports periodically to the FDA containing adverse reactions, production,
quality control and distribution records. The FDA may also

                                       8
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require post-marketing testing to support the conclusion of efficacy and
safety of the product, which can involve significant expense. After FDA
approval is obtained for initial indications, further clinical trials may be
necessary to gain approval for the use of the product for additional
indications.

   The testing and approval process is likely to require substantial time and
effort, and there can be no assurance that any FDA approval will be granted on
a timely basis, if at all. The approval process is affected by a number of
factors, primarily the side effects of the drug (safety) and its therapeutic
benefits (efficacy). Additional preclinical or clinical trials may be required
during the FDA review period and may delay marketing approval. The FDA may
also deny an NDA if applicable regulatory criteria are not met.

   Outside the United States, Hollis-Eden will be subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for its products. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursements vary widely from country to
country.

ACCELERATED DRUG APPROVAL

   In December 1992, the FDA formalized procedures for accelerating the
approval of drugs to be marketed for the treatment of certain serious
diseases. To be eligible for this program, the products must treat serious or
life-threatening illnesses and provide meaningful therapeutic benefits beyond
existing treatments. Under these regulations, a significant new therapy could
be approved for marketing at the earliest possible point at which safety and
effectiveness are reasonably established under existing law. For example, the
approval of a drug could be accelerated by demonstrating a favorable effect on
a well-documented surrogate endpoint to predict clinical benefit, instead of
requiring that the drug demonstrate actual clinical benefit.

   An important and unique element of these regulations is that approval would
be granted only if the sponsor agrees to conduct additional post-marketing
studies to confirm the product's effectiveness and/or agrees to restrict
distribution of the product. In addition, if the further clinical trials do
not bear out the product's effectiveness or if restricted distribution is
inadequate to assure safe use, approval of the product would be withdrawn. We
cannot be certain that any of our drug candidates will receive accelerated
treatment.

MANUFACTURING

   Hollis-Eden does not have, and does not intend to establish, manufacturing
facilities to produce its products. We plan to control our capital
expenditures by using contract manufacturers to make our products. We believe
that there are a sufficient number of high quality FDA approved contract
manufacturers available, and we have had discussions and established
relationships with several of them, to fulfill our near-term production needs
for both clinical and commercial use.

   The manufacture of our products, whether done by outside contractors (as
planned) or in house by ourselves, will be subject to rigorous regulations,
including the need to comply with the FDA's current Good Manufacturing
Practice standards. As part of obtaining FDA approval for each product, each
of the manufacturing facilities must be inspected, approved by and registered
with the FDA. In addition to obtaining FDA approval of the prospective
manufacturer's quality control and manufacturing procedures, domestic and
foreign manufacturing facilities are subject to periodic inspection by the FDA
and/or foreign regulatory authorities.

PATENTS

   Hollis-Eden considers the protection of its products, whether owned or
licensed, to the exclusion of use by others, to be vital to its business.
While we intend to focus primarily on patented or patentable technology, we
may also rely on trade secrets, unpatented property, know-how, regulatory
exclusivity, patent extensions and continuing technological innovation to
develop our competitive position. In the United States and certain foreign
countries, the exclusivity period provided by patents covering pharmaceutical
products may be extended by a portion of the time required to obtain
regulatory approval for a product.

                                       9
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   In certain countries, pharmaceuticals are not patentable or only recently
have become patentable, and enforcement of intellectual property rights in
many countries has been limited or non-existent. Future enforcement of patents
and proprietary rights in many countries can be expected to be problematic or
unpredictable. There can be no assurance that any patents issued or licensed
to Hollis-Eden will provide us with competitive advantages or will not be
challenged by others. Furthermore, there can be no assurance that others will
not independently develop similar products or will not design around patents
issued or licensed to us.

   Patent applications in the United States are maintained in secrecy until
patents issue. Publication of discoveries in the scientific or patent
literature, if made, tends to lag behind actual discoveries by several months.
Consequently, we cannot be certain that a licensor of its intellectual
property was the first to invent certain technology or compounds covered by
pending patent applications or issued patents or that it was the first to file
patent applications for such inventions. In addition, the patent positions of
pharmaceutical companies, including those of Hollis-Eden, are generally
uncertain, partly because they involve complex legal and factual questions.

   In addition to the considerations discussed above, companies that obtain
patents claiming products, uses or processes that are necessary for or useful
to the development of Hollis-Eden's products could bring legal actions against
us claiming infringement. Patent litigation is typically costly and time-
consuming, and if such an action were brought against us, it could result in
significant cost and diversion of our time. We may be required to obtain
licenses to other patents or proprietary rights, and there can be no assurance
that licenses would be made available on terms acceptable to the Company. If
Hollis-Eden does not obtain such licenses, it could encounter delays in
product market introductions while we attempt to license technology designed
around such patents or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed.

   Further, there can be no assurance that patents that are issued will not be
challenged, invalidated or infringed upon or designed around by others, or
that the claims contained in such patents will not infringe the patent claims
of others, or provide Hollis-Eden with significant protection against
competitive products, or otherwise be commercially valuable. We may need to
acquire licenses under patents belonging to others for technology potentially
useful or necessary to us or, if any such licenses are required, that they
will be available on terms acceptable to us, if at all. To the extent that we
are unable to obtain patent protection for our products or technology, Hollis-
Eden's business may be adversely affected by competitors who develop
substantially equivalent technology.

TECHNOLOGY AGREEMENTS

   During January 2000, Hollis-Eden entered into two new technology agreements
with Patrick T. Prendergast, Colthurst Ltd. and Edenland, Inc. The first
agreement, the Technology Assignment Agreement, replaces the Colthurst License
Agreement dated May 18, 1994 among Hollis-Eden, Mr. Prendergast and Colthurst.
This agreement assigns to Hollis-Eden ownership of all patents, patent
applications and current or future improvements of the technology under the
Colthurst License Agreement, including HE2000, Hollis-Eden's lead clinical
compound. The annual license fee of $500,000 and the royalty obligations under
the Colthurst License Agreement have been eliminated. In consideration for the
foregoing, Hollis-Eden agreed to issue to Colthurst Ltd. 660,000 shares of
Common Stock and a warrant to purchase an aggregate of 400,000 shares of
Common Stock at $25 per share. Only 132,000 of such shares of Common Stock
will be issued in 2000, with the remaining 528,000 shares to be issued over
the next four years conditioned on continued compliance with the agreement. In
addition, all of the shares under the warrant will vest over the next four
years conditioned on continued compliance with the agreement.

   The second agreement, the Sponsored Research and License Agreement,
replaces both the Edenland License Agreement and the Research, Development and
Option Agreement, each dated August 25, 1994 among Hollis-Eden, Mr.
Prendergast and Edenland. Pursuant to the Sponsored Research and License
Agreement, Edenland exclusively licensed to Hollis-Eden a number of compounds,
together with all related patents and patent applications, and Hollis-Eden
agreed to fund additional pre-clinical research projects conducted by
Edenland. Hollis-Eden will also have exclusive license rights to all results
of such research and will have royalty obligations to Edenland on sales of new
products, if any, resulting from such research.

                                      10
<PAGE>

   We also recently entered into license agreements with Dr. Roger Loria, Dr.
Henry Lardy and Humanetics Corporation, in which we have licensed a series of
adrenal hormones and hormone analogs as well as related patents and patent
applications in the areas of infectious diseases, oncology, radiation therapy,
central nervous system disorders, metabolic conditions and inflammation
related areas.

EMPLOYEES

   As of March 1, 2000, the Company had 25 full-time employees. The Company
believes that its relations with its employees are good.

EXECUTIVE OFFICERS AND SENIOR MANAGEMENT

   The executive officers and senior management of the Company and their ages
as of March 15, 2000 are as follows:

<TABLE>
<CAPTION>
NAME                             AGE                           POSITION
----                             ---                           --------
<S>                              <C> <C>
Richard B. Hollis..............  47  Chairman of the Board, President and Chief Executive Officer
Daniel D. Burgess..............  38  Chief Operating Officer and Chief Financial Officer
James M. Frincke, Ph.D. .......  49  Executive Vice President, Research and Development
Candice Byrne..................  46  Vice President, Human Resources
Eric J. Loumeau................  37  Vice President, Corporate General Counsel
Robert L. Marsella.............  47  Vice President, Business Development and Marketing
Thomas C. Merigan, Jr., M.D. ..  66  Chairman of the Scientific Advisory Board
Chris Reading, Ph.D. ..........  52  Vice President, Scientific Department
Robert W. Weber................  49  Chief Accounting Officer and Vice President - Controller
</TABLE>

   RICHARD B. HOLLIS founded Hollis-Eden in August 1994. Mr. Hollis currently
serves as Chairman, President and Chief Executive Officer. Mr. Hollis has over
20 years experience in the health care industry in a variety of senior
management positions. Prior to founding Hollis-Eden Mr. Hollis served as Chief
Operating Officer of Bioject Medical from 1991 to 1994 and as Vice President
Marketing and Sales/General Manager for Instromedix from 1989 to 1991. From
1986 to 1989, Mr. Hollis served as a general manager of the Western business
unit of Genentech, Inc., a manufacturer of biopharmaceuticals. Prior to
joining Genentech, Inc., Mr. Hollis served as a divisional manager of Imed
Corporation, Inc., a manufacturer of drug delivery systems. Mr. Hollis began
his career in the health care industry with Baxter Travenol. Mr. Hollis
received his B.A. in Psychology from San Francisco State University.

   DANIEL D. BURGESS became Chief Operating Officer and Chief Financial
Officer of Hollis-Eden Pharmaceuticals, Inc. in August 1999. Mr. Burgess
joined Hollis-Eden from Nanogen Inc., where he served as Vice President and
Chief Financial Officer. Prior to joining Nanogen, Mr. Burgess spent ten years
with Gensia Sicor, Inc. (now Sicor, Inc.) and Gensia Automedics, Inc., a
partially owned subsidiary of Gensia Sicor. He served as President and a
director of Gensia Automedics, where he was responsible for all functional
areas of this medical products company. In addition, he was Vice President and
Chief Financial Officer of Gensia Sicor, where he was responsible for finance,
investor relations, business development and other administrative functions.
Mr. Burgess was instrumental in helping Gensia raise over $400 million in
various public and private financings and was a key figure in a number of
acquisitions and in-licensing and out-licensing transactions. Prior to joining
Gensia, Mr. Burgess held positions at Castle & Cooke, Inc. and Smith Barney,
Harris Upham and Company. He received a degree in Economics from Stanford
University and a MBA from Harvard Business School.

   JAMES M. FRINCKE, PH.D. joined Hollis-Eden as Vice President, Research and
Development in November 1997 and was promoted to Executive Vice President in
March 1999. During his 16 years in the biotechnology industry, Dr. Frincke has
managed major development programs including drugs, biologicals, and cellular
and gene therapy products aimed at the treatment of cancer, infectious
diseases and organ transplantation. Since

                                      11
<PAGE>

joining the biotechnology industry, Dr. Frincke has held vice president,
research and development positions in top tier biotechnology companies
including Hybritech/Eli Lilly and SyStemix (acquired by Novartis). In various
capacities, he has been responsible for all aspects of pharmaceutical
development including early stage research programs, product evaluation,
pharmacology, manufacturing, and the management of regulatory and clinical
matters of lead product opportunities. Dr. Frincke has authored or co-authored
more than 100 scientific articles, abstracts and regulatory filings. Dr.
Frincke received his B.S. in Chemistry and his Ph.D. in Chemistry, from the
University of California, Davis. Dr. Frincke completed his postdoctoral work
at the University of California, San Diego.

   CANDICE BYRNE became Vice President of Human Resources in March 1999. Ms.
Byrne brings extensive experience in business, manpower planning,
organizational development and process improvement to Hollis-Eden. Prior to
joining Hollis-Eden, she served as Vice President of Human Resources in Baxter
International Inc.'s Cardiovascular Surgery group. At Baxter, she provided
human resources leadership for business acquisitions and divestitures,
strategic evaluations of human resource potential and long-range development
opportunities. She was also instrumental in integrating acquired companies
into the parent company. Ms. Byrne has spent more than 20 years of her career
in human resources for medical and technology companies, including American
Hospital Supply Corporation and Partners National Health Plans. She earned her
B.A. in Fine Arts at the University of Arizona and Masters Degree in
Organizational Management at the University of Phoenix.

   ERIC J. LOUMEAU became Vice President/Corporate General Counsel in
September 1999. Mr. Loumeau came to Hollis-Eden from the law firm of Cooley
Godward LLP, where he had primary responsibility for the Hollis-Eden account
for four years. As a partner at Cooley Godward, Mr. Loumeau represented a
number of private and public companies in corporate and securities law
matters. Prior to joining Cooley Godward in 1995, Mr. Loumeau was an associate
for four years at the law firm of Skadden, Arps, Slate, Meagher and Flom.
Mr. Loumeau attended Harvard Law School and the University of California,
Berkeley Boalt Hall School of Law, where he received a J.D.degree. He holds a
B.S. degree in Business Administration with an emphasis in finance from
Brigham Young University.

   ROBERT L. MARSELLA joined Hollis-Eden in September 1997 as Vice President
of Business Development and Marketing. Mr. Marsella has over 19 years of
medical sales, marketing, and distribution experience. From 1994 until he
joined Hollis-Eden, Mr. Marsella was President of RLM Cardiac Products an
exclusive distributor in the southwestern United States of various cardiac
related hospital products. From 1990 until 1994 Mr. Marsella marketed and
distributed implantable pacemakers and defibrillators for Telectronics Pacing
Systems. From 1987 to 1990 Mr. Marsella served as Regional Manager for
Genentech and launched ACTIVASE t-PATM (a biopharmaceutical drug) in the
Western United States. From 1983-1987 Mr. Marsella marketed intravenous
infusion pumps for Imed Corporation. Mr. Marsella began his career in 1980, as
a field sales representative and later regional sales manager for U.S.
Surgical Corporation, auto suture division. Mr. Marsella received his B.A.
degree from San Diego State University in 1975

   THOMAS C. MERIGAN, JR., M.D. became Chairman of the Scientific Advisory
Board and a director of Hollis-Eden in March 1996 and acts as the Company's
Medical Director. Dr. Merigan has been George E. and Lucy Becker Professor of
Medicine at Stanford University School of Medicine from 1980 to the present.
Dr. Merigan has also been the Principal Investigator, NIAID Sponsored AIDS
Clinical Trials Unit, from 1986 to the present and has been Director of
Stanford University's Center For AIDS Research from 1988 to the present. Dr.
Merigan is a member of various medical and honorary societies, has lectured
extensively within and outside the United States, and authored numerous books
and articles and has chaired and edited symposia relating to viruses,
infectious diseases, anti-viral agents, HIV and other retroviruses and AIDS.
From 1990 to the present, Dr. Merigan has been Chairman, Editorial Board of
"HIV: Advances in Research and Therapy". He is also a member of the editorial
boards of " Aids Research and Human Retroviruses" (since 1983), "International
Journal of Anti-Microbial Agents" (since 1990), and "The Aids Reader" (since
1991), among others. He is a co-recipient of eight patents which, among other
things, relate to synthetic polynucleotides, modification of hepatitis B virus
infection, treatment of HIV infection, purified cytomegalovirus protein and
composition and treatment for herpes simplex. Dr. Merigan has been Chair,
Immunology Advisory Board, Bristol Myers Squibb

                                      12
<PAGE>

Corporation (1989-1995) and Chair, Scientific Advisory Board, Sequel Corp.
(1993-1996). In 1994, Stanford University School of Medicine honored him with
the establishment of the Annual Thomas C. Merigan Jr. Endowed Lectureship in
Infectious Diseases, and, in 1996, Dr. Merigan was elected Fellow, American
Association for the Advancement of Science. From 1966 to 1992, Dr. Merigan was
Head, Division of Infectious Diseases, at Stanford School of Medicine. Dr.
Merigan received his B.A. (with honors) from the University of California at
Berkeley and his M.D. from the University of California at San Francisco.

   CHRIS READING, PH.D. became Vice President of Scientific Development in
January 1999. Prior to joining Hollis-Eden, Dr. Reading was Vice President of
Product and Process Development at Novartis Inc.-owned, SyStemix Inc. During
this time, he successfully filed three investigational new drug applications
(INDs) in the areas of stem cell therapy technology and stem cell gene therapy
for HIV/AIDS. Prior to joining SyStemix, Dr. Reading served on the faculty of
the M.D. Anderson Cancer Center in Houston for nearly 13 years. His positions
there included Associate and Assistant Professor of Medicine in the
Departments of Hematology and Tumor Biology. During his career, Dr. Reading
has given more than 25 national and international scientific presentations,
published more than 50 peer-reviewed journal articles and 15 invited journal
articles as well as written nearly 20 book chapters, and has received numerous
grants and contracts which supported his research activities. Dr. Reading has
served on the National Science Foundation Advisory Committee for Small
Business Innovative Research Grants (SBIR) as well as on the editorial boards
of Journal of Biological Response Modifiers and Molecular Biotherapy. He holds
numerous patents for his work with monoclonal antibodies and devices. He
earned his B.A. in Biology at the University of California at San Diego. Dr.
Reading received his Ph.D. in Biochemistry at the University of California at
Berkeley and completed postdoctoral study in tumor biology at The University
of California at Irvine.

   ROBERT W. WEBER joined Hollis-Eden in March 1996 and currently serves as
Chief Accounting Officer and Vice President-Controller. Mr. Weber has over
twenty years of experience in financial management. Mr. Weber has been
employed at executive levels by multiple start-up companies and contributed to
the success of several turnaround situations. Most recently he served as Vice
President of Finance at Prometheus Products, a subsidiary of Sierra
Semiconductor, and Vice President Finance and Chief Financial Officer for
Amercom, (a personal computer telecommunications software publishing company).
From February 1988 to August 1993, Mr. Weber served as Vice President Finance
and Chief Financial Officer of Instromedix, a company which develops and
markets medical devices and software. Mr. Weber brings a broad and expert
knowledge of many aspects of financial management. In various capacities, he
has been responsible for all aspects of finance and accounting including cost
accounting, cash management, SEC filings, investor relations, private and
venture financing, corporate legal matters, acquisitions/divestitures as well
as information services and computer automation. Mr. Weber received a B.S.
from GMI Institute of Technology and a MBA from the Stanford Graduate School
of Business.

                                      13
<PAGE>

RISK FACTORS

   An investment in Hollis-Eden shares involves a high degree of risk. You
should consider the following discussion of risks, in addition to other
information contained in this Annual Report on Form 10-K.

IF WE DO NOT OBTAIN FDA REGULATORY APPROVAL FOR OUR PRODUCTS, WE CANNOT SELL
OUR PRODUCTS AND WE WILL NOT GENERATE REVENUES.

   Our principle development efforts are currently centered around HE2000, a
drug candidate which we believe shows promise for the treatment and prevention
of HIV/AIDS. However, all drug candidates require Food and Drug
Administration, FDA, and foreign government approvals before they can be
commercialized. Neither HE2000 nor any of our other drug candidates have been
approved for commercial sale. We expect to incur significant additional
operating losses over the next several years as we fund development, clinical
testing and other expenses while seeking regulatory approval. While limited
clinical trials of HE2000 have to date produced favorable results, significant
additional trials are required, and we may not be able to demonstrate that
this drug candidate is safe or effective. We cannot guarantee that any of our
product candidates will obtain required government approval. If we do not
receive FDA or foreign approvals for our products, we will not be able to sell
our products and will not generate revenues.

IF WE DO NOT SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE MAY NEVER ACHIEVE
PROFITABILITY.

   We have experienced significant operating losses to date because of the
substantial expenses we have incurred to acquire and fund development of our
drug candidates. We have never had operating revenues and have never
commercially introduced a product. Our accumulated deficit was $28.6 million
through December 31, 1999. Many of our research and development programs are
at an early stage. Potential drug candidates are subject to inherent risks of
failure. These risks include the possibilities that no drug candidate will be
found safe or effective, meet applicable regulatory standards or receive the
necessary regulatory clearances. Even safe and effective drug candidates may
never be developed into commercially successful drugs. If we are unable to
develop safe, commercially viable drugs, we may never achieve profitability.

AS A RESULT OF OUR INTENSELY COMPETITIVE INDUSTRY, WE MAY NOT GAIN ENOUGH
MARKET SHARE TO BE PROFITABLE.

   The biotechnology and pharmaceutical industries are intensely competitive.
We have numerous competitors in the United States and elsewhere. Our
competitors include 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, larger research and development staffs and more effective marketing
and manufacturing organizations than we do. In addition, academic and
government institutions have become increasingly aware of the commercial value
of their research findings. These institutions are now more likely to enter
into exclusive licensing agreements with commercial enterprises, including our
competitors, to market commercial products.

   Our competitors may succeed in developing or licensing technologies and
drugs that are more effective or less costly than any we are developing. Our
competitors may succeed in obtaining FDA or other regulatory approvals for
drug candidates before we do. We cannot guarantee that our drug candidates, if
approved for sale, will be able to compete successfully with our competitors'
existing products under development. If we are unable to compete successfully,
we may never be able to sell enough products at a sufficient price that would
generate profits.

OUR FAILURE TO PROTECT OUR PROPRIETARY TECHNOLOGY COULD IMPAIR OUR COMPETITIVE
POSITION.

   We have developed and licensed numerous issued patents and pending
applications in the U.S. and foreign counterparts. Our success will depend in
part on our ability to obtain additional United States and foreign patent
protection for our drug candidates and processes, preserve our trade secrets
and operate without infringing the proprietary rights of third parties. We
place considerable importance on obtaining patent protection for significant
new technologies, products and processes. Legal standards relating to the
validity of patents covering

                                      14
<PAGE>

pharmaceutical and biotechnology inventions and the scope of claims made under
such patents are still developing. Our patent position is highly uncertain and
involves complex legal and factual questions. We cannot be certain that the
applicant or inventors of subject matter covered by patent applications or
patents owned by or licensed to us were the first to invent or the first to
file patent applications for such inventions. We cannot guarantee 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, we cannot guarantee that any rights we may
have under any issued patents will provide us with 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 the subject matter that we have claimed in a United States
patent application or patent, we may decide or be required to participate in
interference proceedings in the United States Patent and Trademark Office in
order to determine the priority of invention. Loss of such an interference
proceeding would deprive us of patent protection sought or previously obtained
and could prevent us from commercializing our products. Participation in such
proceedings could result in substantial costs, whether or not the eventual
outcome is favorable. These additional costs could adversely affect our
ability to achieve profitability.

WE WILL NEED TO RAISE ADDITIONAL MONEY BEFORE WE EXPECT TO ACHIEVE
PROFITABILITY; IF WE FAIL TO RAISE ADDITIONAL MONEY, IT WOULD BE DIFFICULT TO
CONTINUE OUR BUSINESS.

   As of December 31, 1999 our cash and cash equivalents totaled approximately
$47 million. We believe these financial resources will fund our opportunities
well into 2001. Once these current financial resources run out, we will
require substantial additional funds in order to finance our drug discovery
and development programs, fund operating expenses, pursue regulatory
clearances, develop manufacturing, marketing and sales capabilities, and
prosecute and defend our intellectual property rights. We intend to seek
additional funding through public or private financing or through
collaboration arrangements with collaborative partners. If we can not raise
additional funds when needed, we may not be able to continue to develop our
products, which would prevent us from generating revenues.

IF WE RAISE ADDITIONAL MONEY BY ISSUING EQUITY SECURITIES, YOUR INVESTMENT
WILL BE DILUTED.

   If we raise additional funding by issuing more equity securities, the new
shares will dilute the voting power of your investment on a percentage basis.

THE TECHNOLOGY IN OUR SECTOR IS DEVELOPING RAPIDLY, AND OUR FUTURE DEPENDS ON
OUR ABILITY TO KEEP ABREAST OF TECHNOLOGICAL CHANGE.

   Biotechnology and related pharmaceutical technology have undergone rapid
and significant change. We expect that the technologies associated with
biotechnology research and development will continue to develop rapidly. Our
future will depend in large part on our ability to maintain a competitive
position with respect to these technologies. Any compounds, products or
processes that we develop may become obsolete before we recover any expenses
we have incurred in connection with developing these products. If we fail to
recover our expenses because our products become obsolete, we may not be able
to achieve profitability.

IF THE MANUFACTURERS OF OUR PRODUCTS DO NOT COMPLY WITH FDA REGULATIONS, OR
CANNOT PRODUCE THE AMOUNT OF PRODUCTS WE NEED TO CONTINUE OUR DEVELOPMENT, WE
WILL FALL BEHIND ON OUR BUSINESS OBJECTIVES.

   Outside manufacturers currently produce our drug candidates. Manufacturers
producing our products must follow current Good Manufacturing Practices
regulations enforced by the FDA through its facilities inspection program. If
a manufacturer of our products does not conform to the Good Manufacturing
Practices regulations and cannot be brought up to such a standard, we will be
required to find alternative manufacturers that do conform. This may be a long
and difficult process, and may delay our ability to receive FDA approval of
our products.

                                      15
<PAGE>

   We also rely on our manufacturers to supply us with a sufficient quantity
of our drug candidates to conduct clinical trials. If we have difficulty in
the future obtaining our required quantity and quality of supply, we could
experience significant delays in our development programs and regulatory
process.

IF WE DECIDE TO MANUFACTURE OUR PRODUCTS OURSELVES, WE FACE FURTHER FDA
REGULATION AND WILL REQUIRE ADDITIONAL CAPITAL.

   At this time, we do not intend to manufacture any pharmaceutical products
ourselves. If we decide to manufacture products ourselves in the future, we
would be subject to the same risks associated with the regulatory requirements
described above. We would also require substantial additional capital. We have
no experience manufacturing pharmaceutical products for commercial purposes,
so we cannot guarantee that we would be able to manufacture any products
successfully or in a cost-effective manner.

OUR ABILITY TO ACHIEVE ANY SIGNIFICANT REVENUE WILL DEPEND ON OUR ABILITY TO
ESTABLISH EFFECTIVE SALES AND MARKETING CAPABILITIES.

   Our efforts to date have focused on the development and evaluation of our
drug candidates. As we continue clinical studies and prepare for
commercialization of our drug candidates, we need to build a sales and
marketing infrastructure. We have no experience in the sales and marketing of
our drug candidates. If we fail to establish a sufficient marketing and sales
force, it will impair our ability to enter new or existing markets. Our
inability to effectively enter these markets would materially and adversely
affect our ability to generate significant revenues.

IF HOLLIS-EDEN WERE TO LOSE THE SERVICES OF RICHARD B. HOLLIS, OR FAIL TO
ATTRACT QUALIFIED PERSONNEL IN THE FUTURE, OUR BUSINESS OBJECTIVES WOULD BE
MORE DIFFICULT TO IMPLEMENT, ADVERSELY AFFECTING OUR OPERATIONS.

   Our ability to successfully implement our business strategy depends highly
upon our Chief Executive Officer, Richard B. Hollis. The loss of Mr. Hollis's
services could impede the achievement of our research and development
objectives. We also highly depend on our ability to hire and retain qualified
scientific and technical personnel. The competition for these employees is
intense. We cannot guarantee that we will continue to be able to hire and
retain the qualified personnel needed for our business. Loss of the services
of or the failure to recruit key scientific and technical personnel could
adversely affect our business, operating results and financial condition.

WE MAY FACE PRODUCT LIABILITY CLAIMS RELATED TO THE USE OR MISUSE OF OUR
PRODUCTS WHICH MAY CAUSE US TO INCUR SIGNIFICANT LOSSES.

   We face inherent business risk of product liability claims in the event
that the use or misuse of our products results in personal injury or death. We
have not experienced any such claims to date, but we cannot be certain, in
particular after commercial introduction of our products, that we will not
experience losses due to product liability claims. We currently maintain
liability insurance on a claims-made basis. We cannot be certain that the
insurance policies' coverage limits are adequate. The insurance is expensive,
difficult to obtain and may not be available in the future on acceptable
terms, or at all. Any claims against us, regardless of their merit, could
substantially increase our costs and cause us to incur significant losses.

TRADING IN OUR SHARES COULD BE SUBJECT TO EXTREME PRICE FLUCTUATIONS WHICH
COULD ADVERSELY AFFECT YOUR INVESTMENT.

   The market prices for securities of life sciences companies, particularly
those that are not profitable, have been highly volatile, especially recently.
Publicized events and announcements may have a significant impact on the
market price of our common stock. For example, biological or medical
discoveries by competitors, unfavorable results from clinical trials,
unfavorable developments concerning patents or other proprietary rights or
unfavorable domestic or foreign regulatory developments may have the effect of
temporarily or permanently driving down the price of our common stock
(example: Hollis-Eden's stock price has ranged from $8.63 to $25.50 from
January 1, 1999 to December 31, 1999.) In addition, the stock market from time
to time experiences

                                      16
<PAGE>

extreme price and volume fluctuations which particularly affect the market
prices for emerging and life sciences companies, such as ours, and which are
often unrelated to the operating performance of the affected companies. These
broad market fluctuations may adversely affect the ability of a stockholder to
dispose of his shares at a price equal to or above the price at which the
shares were purchased.

BECAUSE STOCK OWNERSHIP IS CONCENTRATED, YOU AND OTHER INVESTORS WILL HAVE
MINIMAL INFLUENCE ON STOCKHOLDERS DECISIONS.

   Assuming that outstanding warrants and options have not been exercised,
Richard B. Hollis, our Chief Executive Officer, owns approximately 26% of our
outstanding common stock. Assuming the exercise of our outstanding warrants
and options, Mr. Hollis would own approximately 20% of our outstanding common
stock. As a result, Mr. Hollis may be able to significantly influence the
management of Hollis-Eden and all matters requiring stockholder approval,
including the election of directors. Such concentration of ownership may also
have the effect of delaying or preventing a change in control of Hollis-Eden.

WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS, ANY OF WHICH MAY REDUCE THE
MARKET PRICE OF OUR COMMON STOCK.

   Provisions of our certificate of incorporation and bylaws could make it
more difficult for a third party to acquire us, even if the acquisition would
be beneficial to our stockholders.

   Our board of directors is authorized, without any further vote by
stockholders, to issue shares of preferred stock. The issuance of preferred
stock with special voting, liquidation and dividend privileges may have the
effect of delaying, deferring or preventing a change in control without any
further action by the stockholders. Any such issuance may materially and
adversely affect the price of the common stock.

   Our board of directors is a "classified board," with approximately one-
third of our directors elected each year. Two annual meetings would be
necessary to change a majority of the directors as a result of having a
classified board. The existence of a classified board may, in certain
circumstances, deter or delay mergers, tender offers, other possible takeover
attempts or changes in management of the board of directors which may be
favored by some or a majority of our stockholders.

   We have distributed a dividend of one right for each outstanding share of
common stock pursuant to the terms of our stockholder rights plan. These
rights will cause substantial dilution to the ownership of a person or group
that attempts to acquire us on terms not approved by our board of directors
and may have the effect of deterring hostile takeover attempts.

IF WE FAIL TO ADEQUATELY ADDRESS YEAR 2000 PROBLEMS, OUR BUSINESS AND
FINANCIAL CONDITION COULD EXPERIENCE LOSSES.

   Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields needed to accept four-digit entries to
distinguish the 21st century dates from 20th century dates. The effects of the
Year 2000 issue may be experienced after January 1, 2000, and if not
addressed, the impact on operations may affect an entity's ability to conduct
normal business operations. Three months into the year 2000, we have not
identified any Year 2000 problems internally and we have not experienced
problems with our suppliers relating to Year 2000 issues. However, it is
possible that such problems may occur or be discovered later. Accordingly, it
is not possible to be certain that all aspects of the Year 2000 issue
affecting Hollis-Eden, including those relating to our suppliers or other
third parties, are fully resolved. Should any adverse consequences occur, it
could affect our drug development process and clinical trials. We may also
incur certain unexpected costs in connection with the Year 2000 issue.

                                      17
<PAGE>

ITEM 2. PROPERTIES

   The Company's corporate headquarters are located at 9333 Genesee Avenue,
Suites 110 and 200, San Diego, California 92121, where the Company leases
approximately 17,000 square feet. The leases expire in August 2000 and August
2002, respectively. The Company believes that its facilities are adequate for
its current operations.

ITEM 3. LEGAL PROCEEDINGS

   On November 8, 1999, Hollis-Eden filed two separate requests for
arbitration with one of its licensors, Patrick T. Prendergast, together with
two entities he is affiliated with, Colthurst Ltd. and Edenland, Inc. The
first arbitration sought clarification of certain operational issues with
respect to roles and responsibilities set forth in the Colthurst License
Agreement covering HE2000. The second arbitration sought rescission of both
the Edenland License Agreement and the Research, Development and Option
Agreement with Edenland covering future potential drug candidates other than
HE2000 (the "Edenland Agreements"). In this arbitration, the Company alleged
that the Edenland Agreements should be rescinded based on, among other things,
non-performance on the part of Edenland.

   On January 20, 2000, Hollis-Eden reached a settlement on its pending
arbitration with Patrick T. Prendergast, Colthurst Ltd. and Edenland, Inc. The
Settlement and Mutual Release Agreement completely disposes of all of the
matters that were at issue in the pending arbitration. In addition, the
parties entered into two new technology agreements, the Technology Assignment
Agreement and the Sponsored Research and License Agreement (See Item 1--
Business-Technology Agreements).

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

   No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.

                                    PART II

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

   The Company's common stock is traded on the Nasdaq National Market System
under the symbol HEPH.

   The following table sets forth the quarterly high and low bid quotations
and/or selling prices for the securities of the Company during the last two
fiscal years.

<TABLE>
<CAPTION>
   COMMON STOCK                                                   HIGH     LOW
   ------------                                                  ------- -------
   <S>                                                           <C>     <C>
   1998
     First Quarter.............................................. $19.750 $ 6.125
     Second Quarter.............................................  18.000  14.000
     Third Quarter..............................................  16.938   7.875
     Fourth Quarter.............................................  18.500  10.094
   1999
     First Quarter.............................................. $25.500 $13.250
     Second Quarter.............................................  18.750  10.000
     Third Quarter..............................................  16.000  11.000
     Fourth Quarter.............................................  18.625   8.625
</TABLE>

   On March 14, 2000, the closing price of the Company's common stock as
reported by the Nasdaq National Market System was $16.00 per share. There were
approximately 5,000 shareholders of record plus beneficial stockholders of the
Company's common stock as of such date. The Company has not paid cash
dividends on its common stock and does not intend to do so in the foreseeable
future.

                                      18
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

   The following data summarizes certain selected financial data for each of
the five years ended December 31, 1999 and the period from inception (August
15, 1994) to December 31, 1999. The information presented should be read in
conjunction with the financial statements and related notes included elsewhere
in this report.

<TABLE>
<CAPTION>
                         AS OF OR FOR THE YEAR ENDED DECEMBER            PERIOD FROM
                                          31,                             INCEPTION
                              ($000'S), EXCEPT PER SHARE               (AUG. 15, 1994)
                         --------------------------------------------  TO DECEMBER 31,
                          1999        1998     1997    1996    1995         1999
                         -------     -------  ------  ------  -------  ---------------
<S>                      <C>         <C>      <C>     <C>     <C>      <C>
STATEMENT OF OPERATIONS
 DATA:
 Research and
  development........... $ 5,731     $ 2,777  $3,488  $  184  $   463      $13,811
 General and
  administrative........  11,940 (1)   3,577   2,044     511      171       18,346
                         -------     -------  ------  ------  -------      -------
 Total operating
  expenses..............  17,671       6,355   5,532     695      634       32,157
 Other income
  (expense).............   2,351         927     280       3      (38)       3,516
                         -------     -------  ------  ------  -------      -------
 Net loss............... $15,320     $ 5,427  $5,253  $  692  $   672      $28,641
                         =======     =======  ======  ======  =======      =======
 Net loss per share,
  basic and diluted..... $ (1.41)    $ (0.69) $(0.85) $(0.15) $ (0.17)
 Weighted average number
  of common shares
  outstanding...........  10,861       7,851   6,193   4,658    3,868

BALANCE SHEET DATA:
 Cash and equivalents... $47,486     $24,190  $7,103  $   18  $   --
 Total assets...........  48,265      24,524   7,400     241      --
 Accounts payable and
  accrued expenses......   1,640         222     467     807    1,296
 Stockholders' equity
  (deficit)............. $46,625     $24,303  $6,933  $ (566) $(1,538)
</TABLE>
--------
(1) 1999 General and Administrative expenses include $7.7 million for non-cash
    charges, due to the acceleration of vesting of stock options for a former
    officer, the issuance of warrants for services, and the issuance of stock
    options to non-employees.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION

   The forward-looking comments contained in the following discussion involve
risks and uncertainties. The Company's actual results may differ materially
from those discussed here. Factors that could cause or contribute to such
differences can be found in the following discussion and elsewhere throughout
this Annual Report on Form 10-K.

GENERAL

   Hollis-Eden Pharmaceuticals, Inc., a development-stage pharmaceutical
company is engaged in the discovery, development and commercialization of
products for the treatment of infectious diseases and immune system disorders,
including HIV/AIDS, hepatitis C, and malaria.

   We are focusing our initial development efforts on a potent series of
adrenal steroid hormone analogs. Our lead compound in this series, HE2000, is
currently in Phase I/II clinical studies in the U.S. and South Africa. By
altering cytokine production HE2000 appears from early clinical studies to
help reestablish immune system balance in situations such as HIV where the
immune system is dysregulated. In the setting of HIV we believe that by
reestablishing this balance the immune system may be able to better control
virus levels and potentially delay or prevent the progression to AIDS. In
addition, based on the mechanism of action, we believe these compounds will
have an attractive safety profile and will avoid issues of resistance that
plague many existing antiviral drugs.

                                      19
<PAGE>

   Hollis-Eden has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next few years as it
increases expenditures on research and development and begins to allocate
significant and increasing resources to clinical testing and other activities.
In addition, during the next few years, we will have to meet the substantial
new challenge of developing the capability to market products. Accordingly,
our activities to date are not as broad in depth or scope as the activities we
must undertake in the future, and Hollis-Eden's historical operations and
financial information are not indicative of the future operating results or
financial condition or ability to operate profitably as a commercial
enterprise when and if we succeed in bringing any drug candidates to market.

   On March 26, 1997, Hollis-Eden, Inc., a Delaware corporation, was merged
with and into the Company (then known as Initial Acquisition Corp. ("IAC")), a
Delaware corporation, pursuant to an Agreement and Plan of Merger, dated
November 1, 1996, (the "Merger Agreement"). Upon consummation of the merger of
Hollis-Eden, Inc. with IAC (the "Merger"), Hollis-Eden, Inc. ceased to exist,
and IAC changed its name to Hollis-Eden Pharmaceuticals, Inc.

RESULTS OF OPERATIONS

   We have not generated any revenues for the period from August 15, 1994
(inception of Hollis-Eden) through December 31, 1999. We have devoted
substantially all of our resources to the payment of licensing fees and
research and development fees plus expenses related to the startup of our
business. From inception until December 31, 1999, we have incurred expenses of
approximately $13.8 million in research and development fees and $18.3 million
in general and administrative expenses, which have been partially offset by
$3.5 million in net interest income resulting in a loss of $28.6 million for
the period.

   Research and development expenses were $5.7 million, $2.8 million and $3.5
million in 1999, 1998 and 1997, respectively. 1999 and 1998 research and
development expenses relate primarily to the ongoing development, preclinical
testing, and clinical trials for our first drug candidate, HE2000. The
increase in research and development expenses in 1999 as compared to 1998 was
due to increased staffing, preclinical activity, and the initiation of
clinical trials. A substantial portion of the 1997 research and development
expenses were incurred after the completion of the Merger during March 1997 as
described below.

   General and administrative expenses increased to $11.9 million in 1999 from
$3.6 million and $2.0 million in 1998 and 1997, respectively. The 1999 general
and administrative expenses included (i) $7.7 million for non-cash charges,
due to the acceleration of vesting of stock options for Hollis-Eden's former
officer, the issuance of warrants for services (described below), and the
issuance of stock options to non-employees, (ii) increased staffing, and (iii)
increased operating expenses for salaries, benefits, recruiting, legal, and
travel. The increases in 1998 as compared to 1997 are due primarily to (i) the
amortization of the unearned compensation charge of certain stock options
(described below), (ii) increased expenses as a public company such as legal
fees, filing fees, and directors and officers insurance, and (iii) increased
staffing.

   During 1999, we announced the resignation of our president and accelerated
the vesting of 300,000 stock options previously granted to him. This
acceleration is considered to be a new grant of options and therefore we
expensed a one time non-cash charge of $4.9 million. We also entered into a
three-year agreement with a financial consulting organization affiliated with
a director of Hollis-Eden. We agreed to issue, as compensation for services,
warrants to purchase 500,000 shares of Common Stock with an exercise price of
$20.50 per share. The warrants were estimated to have a value of approximately
$2.1 million, which was expensed as a non-cash charge.

   In 1998, we incurred significant general and administrative non-cash, non-
recurring charges. A total of $716,000 was amortized throughout 1998 for
services in lieu of cash and non-cash compensation. Additionally, $240,000 was
expensed for options granted to certain directors and consultants.

                                      20
<PAGE>

   Upon the completion of the Merger and the exercise of warrants, Hollis-Eden
incurred significant non-recurring charges to operations that have been
recorded as expenses during 1997. In particular, we incurred (i) a $1.5
million and a $1.2 million expense for research and development fees during
the first and second quarters, respectively, and (ii) a $570,000 non-cash
charge relating to the issuance of warrants to a certain director and former
officer during the first quarter.

LIQUIDITY AND CAPITAL RESOURCES

   We have financed our operations since inception through the sale of shares
of Common Stock and with loans from the Company's founder, Richard B. Hollis.
We repaid Mr. Hollis in January 1996.

   During the year ended December 31, 1995, we received cash proceeds of
$250,000 from the sale of securities. In May 1996, we completed a private
placement of shares of Common Stock, from which we received aggregate gross
proceeds of $1.3 million. In March 1997, the Merger of IAC and Hollis-Eden ,
Inc. provided us with $6.5 million in cash and other receivables. In May 1998,
we completed a private placement of shares and warrants, from which we
received gross proceeds of $20 million. During January 1999, we completed two
private placements raising approximately $25 million. In addition, Hollis-Eden
has received a total of $12.2 million from the exercise of warrants and stock
options.

   Under our previous license agreements with Patrick T. Prendergast,
Colthurst and Edenland, we were obligated to pay certain minimum license fees
to maintain our rights to the drug candidates. An annual renewable license fee
of $500,000 was due and paid in May 1999. As of December 31, 1999, we were
current on all license fee obligations under these agreements.

   Under our previous Research and Development Agreement with Edenland and
Patrick T. Prendergast, we committed to pay $3.0 million for certain
development costs. These development costs were accrued as an expense during
1997 and paid in full by April 1998.

   During January 2000, we were assigned all patents, patent applications and
current or future improvements to the technology under the Colthurst License
Agreement, including HE2000, in exchange for equity in Hollis-Eden. In
addition, we entered into a new license agreement with Edenland and terminated
the existing agreements with Mr. Prendergast, Colthurst and Edenland (see Item
1--Business-Technology Agreements).

   Hollis-Eden's operations to date have consumed substantial capital without
generating any revenues, and we will continue to require substantial and
increasing amounts of funds to conduct necessary research and development and
preclinical and clinical testing of our drug candidates, and to market any
drug candidates that receive regulatory approval. We do not expect to generate
revenue from operations for the foreseeable future, and our ability to meet
our cash obligations as they become due and payable is expected to depend for
at least the next several years on our ability to sell securities, borrow
funds or some combination thereof. Based upon our current plans, we believe
that our existing capital resources, together with interest thereon, will be
sufficient to meet our operating expenses and capital requirements well into
2001. However, changes in our research and development plans or other events
affecting our operating expenses may result in the expenditure of such cash
before that time. We may not be successful in raising necessary funds. Our
future capital requirements will depend upon many factors, including progress
with preclinical testing and clinical trials, the number and breadth of our
programs, the time and costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and other proprietary rights, the time
and costs involved in obtaining regulatory approvals, competing technological
and market developments, and our ability to establish collaborative
arrangements, effective commercialization, marketing activities and other
arrangements. We expect to continue to incur increasing negative cash flows
and net losses for the foreseeable future.

YEAR 2000

   Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields needed to accept four-digit entries to

                                      21
<PAGE>

distinguish the 21st century dates from 20th century dates. The effects of the
Year 2000 issue may be experienced after January 1, 2000, and if not
addressed, the impact on operations and affect an entity's ability to conduct
normal business operations. Three months into the year 2000, we have not
identified any Year 2000 problems internally and we have not experienced
problems with our suppliers relating to Year 2000 issues. However, it is
possible that such problems may occur or be discovered later. Accordingly, it
is not possible to be certain that all aspects of the Year 2000 issue
affecting Hollis-Eden, including those relating to our suppliers or other
third parties, are fully resolved. Should any adverse consequences occur, it
could affect our drug development process and clinical trials. We may also
incur certain unexpected costs in connection with the Year 2000 issue.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this item is provided in a separate section
  beginning on page F-1.

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

   Not applicable.

                                      22
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   See the section entitled "Executive Officers and Senior Management" in Part
I, Item 1 hereof for information regarding executive officers and senior
management.

   The information required by this item with respect to directors is
incorporated by reference from the information under the heading "Election of
Directors," contained in Hollis-Eden's definitive Proxy Statement to be filed
with the Commission pursuant to Regulation 14A in connection with the 2000
Annual Meeting (the "Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

   The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference.

                                      23
<PAGE>

                                    PART IV

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

   (a) List of documents filed as part of this Annual Report to Stockholders
on Form 10-K:

    1. Financial Statements: The financial statements of Hollis-Eden
       Pharmaceuticals are included as Appendix F of this report. See Index
       to Financial Statements on page F-1.

    2. Financial Statement Schedules: Financial statement schedules
       required under the related instructions are not applicable for the
       three years ended December 31, 1999, and have therefore been
       omitted.

    3. Exhibits: The exhibits which are filed with this Report or which are
       incorporated herein by reference are set forth in the Exhibit Index
       on page E-1.

   (b) Reports on Form 8-K

   On November 24, 1999, a report on Form 8-K dated November 15, 1999 was
filed with the SEC announcing the approval of a Share Purchase Rights Plan
effective November 29, 1999.

   On November 30, 1999, a report on Form 8-K dated November 8, 1999 was filed
with the SEC announcing that the Company had filed two separate requests for
arbitration with one of its licensors, Patrick T. Prendergast, together with
two entities he is affiliated with, Colthurst Ltd. and Edenland, Inc.

                                      24
<PAGE>

                                  SIGNATURES

   Pursuant to the requirements of the 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 on March 17, 2000

                                          HOLLIS-EDEN PHARMACEUTICALS, INC.

                                          By:/s/ Richard B. Hollis
                                             ----------------------------------
                                             RICHARD B. HOLLIS,
                                             CHAIRMAN OF THE BOARD OF DIRECTORS,
                                             AND CHIEF EXECUTIVE OFFICER

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints RICHARD B. HOLLIS, DANIEL D. BURGESS
and ROBERT W. WEBER, and each of them, as his true and lawful attorneys-in-
fact and agents, with full power of substitution and resubstitution, for him
and in his name, place, and stead, in any and all capacities, to sign any and
all amendments to this Report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming that all said attorneys-in-fact and agents, or any of them or
their or his substitute or substituted, may lawfully do or cause to be done by
virtue hereof.

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

<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----

<S>                                  <C>                           <C>
/s/ Richard B. Hollis                Chairman of the Board of        March 17, 2000
____________________________________ Directors, President and
RICHARD B. HOLLIS                    Chief Executive Officer

/s/ Daniel D. Burgess                Chief Operating                 March 17, 2000
____________________________________ Officer/Chief Financial
DANIEL D. BURGESS                    Officer (Principal Financial
                                     Officer)

/s/ Robert W. Weber                  Chief Accounting Officer and    March 17, 2000
____________________________________ Vice President - Controller
ROBERT W. WEBER                      (Principal Accounting
                                     Officer)

/s/ Paul Bagley                      Director                        March 13, 2000
____________________________________
PAUL BAGLEY

/s/ Leonard Makowka                  Director                        March 13, 2000
____________________________________
LEONARD MAKOWKA
</TABLE>

                                      25
<PAGE>

<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----

<S>                                  <C>                           <C>
/s/ Brendan R. McDonnell             Director                        March 13, 2000
____________________________________
BRENDAN R. MCDONNELL

/s/ Thomas C. Merigan, Jr. M.D.      Chairman of the Scientific      March 13, 2000
____________________________________ Advisory Board and Director
THOMAS C. MERIGAN, JR. M.D.

/s/ William H. Tilley                Director                        March 13, 2000
____________________________________
WILLIAM H. TILLEY

/s/ Salvatore J. Zizza               Director                        March 13, 2000
____________________________________
SALVATORE J. ZIZZA
</TABLE>

                                       26
<PAGE>

                                                                      APPENDIX E

                       HOLLIS-EDEN PHARMACEUTICALS, INC.

                           ANNUAL REPORT ON FORM 10-K

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

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER  DESCRIPTION OF THE DOCUMENT
 ------- ----------------------------------------------------------------------
 <C>     <S>
   3.1   Amended and Restated Certificate of Incorporation of the Registrant
         (incorporated by reference to Exhibit 4.1 to Registrant's Registration
         Statement on Form S-4 (No. 333-18725), as amended (the "Form S-4" )).

   3.2   Bylaws of Registrant (incorporated by reference to Exhibit 4.2 to the
         Form S-4).

   3.3   Certificate of Designation of Series B Junior Participating Preferred
         Stock (incorporated by reference to Exhibit 4.1 to Registrant's
         Current Report on Form 8-K dated November 15, 1999).

 *10.1   Registrant's 1997 Incentive Stock Option Plan (the "Option Plan")
         (incorporated by reference to Exhibit 10.3 to the Form S-4).

 *10.2   Forms of Incentive Stock Options and Nonstatutory Stock Options under
         the Option Plan. (incorporated by reference to Exhibit 10.5 to the
         Form S-4).

 *10.3   Employment Agreement by and between Registrant and Richard B. Hollis
         dated November 1, 1996 (incorporated by reference to Exhibit 10.6 to
         the Form S-4).

 *10.4   Employment Agreement by and between Registrant and Robert W. Weber
         dated March 16, 1996 (incorporated by reference to Exhibit 10.9 to the
         Registrant's Annual Report on Form 10-K for the year ended December
         31, 1998).

 *10.5   Consulting Agreement and Warrant by and between Registrant and William
         H. Tilley and Jacmar/Viking L.L.C. dated March 8, 1999.

 *10.6   Separation and Mutual Release Agreement by and between Registrant and
         Terren S. Peizer effective as of February 25, 1999 (incorporated by
         reference to Exhibit 10.10 to the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended March 31, 1999).

 *10.7   Employment Agreement by and between Registrant and Daniel D. Burgess
         dated July 9, 1999 (incorporated by reference to Exhibit 10.10 to
         Registrant's Quarterly Report on Form 10-Q for the quarter ended
         September 30, 1999).

 *10.8   Employment Agreement by and between Registrant and Eric J. Loumeau
         dated September 15, 1999 (incorporated by reference to Exhibit 10.10
         to Registrant's Quarterly Report on Form 10-Q for the quarter ended
         September 30, 1999).

  10.9   Settlement and Mutual Release Agreement, dated January 20, 2000, among
         Registrant, Colthurst Limited, Edenland, Inc. and Patrick T.
         Prendergast (incorporated by reference to Exhibit 99.2 to Registrant's
         Current Report on Form 8-K dated January 20, 2000).

  10.10  Technology Assignment Agreement, dated January 20, 2000, among
         Registrant, Colthurst Limited and Patrick T. Prendergast (incorporated
         by reference to Exhibit 99.3 to Registrant's Current Report on Form 8-
         K dated January 20, 2000).

  10.11  Common Stock and Warrant Agreement, dated January 20, 2000, among
         Registrant and Colthurst Limited (incorporated by reference to Exhibit
         99.4 to Registrant's Current Report on Form 8-K dated January 20,
         2000).
</TABLE>

                                      E-1
<PAGE>

<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER  DESCRIPTION OF THE DOCUMENT
 ------- ----------------------------------------------------------------------

 <C>     <S>
 10.12   Warrant, dated January 20, 2000, issued to Colthurst Limited
         (incorporated by reference to Exhibit 99.5 to Registrant's Current
         Report on Form 8-K dated January 20, 2000).

 10.13   Sponsored Research and License Agreement, dated January 20, 2000,
         among Registrant, Edenland, Inc., Colthurst Limited and Patrick T.
         Prendergast (incorporated by reference to Exhibit 99.6 to Registrant's
         Current Report on Form 8-K dated January 20, 2000).

 23.1    Consent of BDO Seidman, LLP.

 24.1    Power of Attorney. Reference is made to signature page.

 27      Financial Data Schedule (filed electronically only).
</TABLE>
--------
*  Management contract or compensatory plan, contract or arrangement to be
   filed as an Exhibit pursuant to Item 14(c) of Form 10-K.

                                      E-2
<PAGE>

                                                                      APPENDIX F

                       HOLLIS-EDEN PHARMACEUTICALS, INC.

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Report of Independent Certified Public Accountants....................... F-2

Balance Sheets as of December 31, 1999 and 1998.......................... F-3

Statements of Operations for the Fiscal Years Ended December 31,1999,
 December 31, 1998, December 31, 1997 and the Period From Inception
 (August 15, 1994) to December 31, 1999.................................. F-4

Statements of Stockholders' Equity for the Fiscal Years Ended December
 31, 1995, December 31, 1996, December 31, 1997, December 31 1998,
 December 31, 1999 and the Period from Inception (August 15, 1994) to
 December 31, 1994....................................................... F-5

Statements of Cash Flows for the Fiscal Years Ended December 31, 1999,
 December 31 1998, December 31, 1997 and the Period from Inception
 (August 15, 1994) to December 31, 1999.................................. F-6

Notes to Financial Statements............................................ F-7
</TABLE>

                                      F-1
<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Hollis-Eden Pharmaceuticals, Inc.
San Diego, CA

   We have audited the accompanying balance sheets of Hollis-Eden
Pharmaceuticals, Inc. (a development stage company) as of December 31, 1999
and 1998 and the related statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999
and for the period from inception (August 15, 1994) to December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

   In our opinion, the financial statements referred to above present fairly
in all material respects, the financial position of Hollis-Eden
Pharmaceuticals, Inc. as of December 31, 1999 and 1998 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 and for the period from inception (August 15, 1994) to
December 31, 1999, in conformity with generally accepted accounting
principles.

                                          BDO Seidman, LLP

New York, NY
January 21, 2000

                                      F-2
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                      ------------------------
                                                         1999         1998
                                                      -----------  -----------
<S>                                                   <C>          <C>
                       ASSETS
                       ------

Current assets:
Cash and cash equivalents............................ $47,486,163  $24,189,806
Prepaid expenses.....................................     114,987       26,250
Deposits.............................................      27,185        9,163
                                                      -----------  -----------
Total current assets.................................  47,628,335   24,225,219
Property and equipment, net of accumulated
 depreciation of $96,538 and $28,201.................     391,869       92,343
Receivable from related party (Note 6)...............     244,667      206,663
                                                      -----------  -----------
    Total assets..................................... $48,264,871  $24,524,225
                                                      ===========  ===========

        LIABILITIES AND STOCKHOLDERS' EQUITY
        ------------------------------------

Current liabilities:
Account payable and accrued expenses................. $ 1,640,226  $   221,670
                                                      -----------  -----------
Total current liabilities............................   1,640,226      221,670

Commitments and contingencies (see Note 9, 14, 15)

Stockholders' equity: (Notes 3, 4, 5, 8, 10, 11, 12,
 13)
  Preferred stock, convertible into common stock,
   $.01 par value, 10,000,000 shares authorized; 0
   and 4,000 shares issued or outstanding,
   respectively......................................         --            40
  Common stock, $.01 par value, 30,000,000 shares
   authorized; 11,071,054 and 8,592,202 shares issued
   and outstanding, respectively.....................     110,710       85,922
  Paid-in capital....................................  75,155,266   38,795,887
  Deferred compensation-stock options, net of
   accumulated amortization of $641,333 and $590,000,
   respectively......................................         --    (1,258,000)
  Deficit accumulated during development stage....... (28,641,331) (13,321,294)
                                                      -----------  -----------
    Total stockholders' equity.......................  46,624,645   24,302,555
                                                      -----------  -----------
    Total liabilities and stockholders' equity....... $48,264,871  $24,524,225
                                                      ===========  ===========
</TABLE>

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

                                      F-3
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                    PERIOD FROM
                                                                     INCEPTION
                                                                   (AUG.15,1994)
                                                                        TO
                               FOR THE YEAR ENDED DECEMBER 31,     DECEMBER 31,
                              -----------------------------------  -------------
                                 1999         1998        1997         1999
                              -----------  ----------  ----------  -------------
<S>                           <C>          <C>         <C>         <C>
Operating expenses:
 Research and development...  $ 5,730,833  $2,777,460  $3,488,358   $13,810,689
 General and administrative:
  General and administrative
   operating expenses.......    4,279,388   2,621,183   1,184,115     8,863,696
  G&A costs related to
   options/warrants
   granted..................    7,660,482     956,000     860,024     9,482,523
                              -----------  ----------  ----------   -----------
    Total general and
     administrative.........   11,939,870   3,577,183   2,044,139    18,346,219
    Total operating
     expenses...............   17,670,703   6,354,643   5,532,497    32,156,908

Other income (expense):
Interest income.............    2,350,666     928,916     279,812     3,565,126
Interest expense............          --       (1,726)       (199)      (49,549)
                              -----------  ----------  ----------   -----------
Total other income..........    2,350,666     927,190     279,613     3,515,577
                              -----------  ----------  ----------   -----------
Net loss....................  $15,320,037  $5,427,453  $5,252,884   $28,641,331
                              ===========  ==========  ==========   ===========
Net loss per share, basic
 and diluted................  $     (1.41) $    (0.69) $    (0.85)
Weighted average number of
 common shares outstanding..   10,860,666   7,850,854   6,192,764
</TABLE>


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

                                      F-4
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                      STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                            PREFERRED                                                    DEFICIT
                          STOCK AT PAR      COMMON STOCK                               ACCUMULATED
                              VALUE         AT PAR VALUE     CAPITAL IN                   DURING
                          -------------- -------------------  EXCESS OF     DEFERRED   DEVELOPMENT
                          SHARES  AMOUNT   SHARES    AMOUNT   PAR VALUE   COMPENSATION    STAGE         TOTAL
                          ------  ------ ---------- -------- -----------  ------------ ------------  -----------
<S>                       <C>     <C>    <C>        <C>      <C>          <C>          <C>           <C>
Contribution by
stockholder.............      --   $--          --  $    --  $   103,564   $      --   $        --   $   103,564
Common stock issued for
cash....................      --    --    2,852,830      285      24,715          --            --        25,000
Common stock issued as
consideration for the
license agreements (Note
9)......................      --    --      543,396       55       4,707          --            --         4,762
Net loss................      --    --          --       --          --           --     (1,277,046)  (1,277,046)
                          ------   ----  ---------- -------- -----------   ----------  ------------  -----------
Balance at December 31,
1994....................      --    --    3,396,226      340     132,986          --     (1,277,046)  (1,143,720)
Common stock issued for
cash....................      --    --      679,245       68     249,932          --            --       250,000
Common stock issued as
consideration for
amendments to the
license agreements (Note
9)......................      --    --       75,472        7      27,771          --            --        27,778
Net loss................      --    --          --       --          --           --       (671,691)    (671,691)
Balance at December 31,
1995....................      --    --    4,150,943      415     410,689          --     (1,948,737)  (1,537,633)
Common stock issued in
conversion of debt (Note
11).....................      --    --      164,962       16     371,148          --            --       371,164
Common stock issued for
cash, net of issuance
costs of $203,622 (Note
11).....................      --    --      580,005       58   1,234,441          --            --     1,234,499
Common stock issued as
consideration for
termination of a finance
agreement...............      --    --       15,094        2      33,960          --            --        33,962
Warrants issued to
consultants for services
rendered................      --    --          --       --       24,069          --            --        24,069
Net loss................      --    --          --       --          --           --       (692,220)    (692,220)
                          ------   ----  ---------- -------- -----------   ----------  ------------  -----------
Balance at December 31,
1996....................      --    --    4,911,004      491   2,074,307          --     (2,640,957)    (566,159)
Recapitalization of
Company upon the merger
with Initial Acquisition
Corp. (Note 3)..........      --    --      883,250   57,453   6,213,329          --            --     6,270,782
Warrants issued to a
certain director upon
the successful closure
of the merger...........      --    --          --       --      570,000          --            --       570,000
Exercise of warrants,
net of expenses (Note
4)......................      --    --      977,593    9,775   5,619,330          --            --     5,629,105
Deferred compensation--
stock options (Note
13).....................      --    --          --       --    1,848,000   (1,848,000)          --           --
Amortization of deferred
compensation............      --    --          --       --          --       282,000           --       282,000
Exercise of stock
options.................      --    --          166        1         372          --            --           373
Net loss................      --    --          --       --          --           --     (5,252,884)  (5,252,884)
                          ------   ----  ---------- -------- -----------   ----------  ------------  -----------
Balance at December 31,
1997....................      --    --    6,772,013   67,720  16,325,338   (1,566,000)   (7,893,841)   6,933,217
Exercise of warrants....      --    --      398,359    3,984   1,195,728          --            --     1,199,712
Exercise of stock
options.................      --    --       53,302      533     155,717          --            --       156,250
Private Placement, net
of expenses (Note 11)...   4,000     40   1,329,201   13,292  19,876,497          --            --    19,889,829
Warrants issued for
services in lieu of cash
(Note 10)...............      --    --          --       --      408,000          --            --       408,000
Stock issued for license
fee (Note 9)............      --    --       33,058      330     499,670          --            --       500,000
Stock issued for
services in lieu of
cash....................      --    --        6,269       63      94,937          --            --        95,000
Options issued for
services in lieu of cash
(Note 13)...............      --    --          --       --      240,000          --            --       240,000
Amortization of deferred
compensation............      --    --          --       --          --       308,000           --       308,000
Net loss................      --    --          --       --          --           --     (5,427,453)  (5,427,453)
                          ------   ----  ---------- -------- -----------   ----------  ------------  -----------
Balance at December 31,
1998....................   4,000     40   8,592,202   85,922  38,795,887   (1,258,000)  (13,321,294)  24,302,555
Exercise of warrants....      --    --      755,423    7,554   5,136,614          --            --     5,144,168
Exercise of stock
options.................      --    --        9,434       94      74,906          --            --        75,000
Private Placement, net
of expenses (Note 5)....      --    --    1,367,868   13,679  24,758,827          --            --    24,772,506
Preferred Stock
Conversion(Note 11,12)..  (4,000)   (40)    346,127    3,461      (3,421)         --            --           --
Deferred compensation-
Options forfeited(Note
13).....................      --    --          --       --   (1,206,667)   1,258,000           --        51,333
Amortization of non-
employee options........      --    --          --       --      559,120          --            --       559,120
Warrants issued for
services in lieu of
cash(Note 10)...........      --    --          --       --    2,140,000          --            --     2,140,000
Options accelerated
vesting(Note 13)........      --    --          --       --    4,900,000          --            --     4,900,000
Net loss................      --    --          --       --          --           --    (15,320,037) (15,320,037)
                          ------   ----  ---------- -------- -----------   ----------  ------------  -----------
Balance at December 31,
1999....................      --   $--   11,071,054 $110,710 $75,155,266   $      --   $(28,641,331) $46,624,645
                          ======   ====  ========== ======== ===========   ==========  ============  ===========
</TABLE>

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

                                      F-5
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   PERIOD FROM
                                                                 (AUG. 15, 1994)
                           FOR THE YEAR ENDED DECEMBER 31,       TO DECEMBER 31,
                         --------------------------------------  ---------------
                             1999         1998         1997           1999
                         ------------  -----------  -----------  ---------------
<S>                      <C>           <C>          <C>          <C>
Cash flows from
 operating activities:
 Net loss..............  $(15,320,037) $(5,427,453) $(5,252,884)  $(28,641,331)
Adjustments to
 reconcile net loss to
 net cash used in
 operating activities:
 Depreciation..........        68,337       21,599        6,008         96,538
 Common stock issued
  as consideration for
  amendments to the
  license agreements...           --           --           --          32,540
 Common stock issued
  as consideration for
  termination of a
  finance agreement....           --           --           --          33,962
 Common stock issued
  as consideration for
  license fees and
  services.............           --       595,000          --         595,000
 Expense related to
  warrants issued as
  consideration to
  consultants..........     2,140,000          --           --       2,140,000
 Expense related to
  options issued as
  consideration to
  consultants..........           --       408,000        8,024        422,041
 Expense related to
  warrants issued to a
  director for
  successful closure
  of merger............           --           --       570,000        570,000
 Expense related to
  stock options
  Issued...............     4,900,000      240,000          --       5,140,000
 Deferred compensation
  expense related to
  options issued.......       620,482      308,000      282,000      1,210,482
Changes in assets and
 liabilities:
 Prepaid expenses......       (88,737)      16,731       55,852       (114,987)
 Deposits..............       (18,022)         --        90,837        (27,185)
 Receivable--tax
  refund...............           --       105,436     (105,436)           --
 Receivable from
  related party........       (27,000)      46,679      (46,679)       (27,000)
 Loan receivable from
  related party........       (11,004)    (206,663)         --        (217,667)
 Accounts payable and
  accrued expenses.....       908,527      103,067      (82,263)     1,140,225
 Wages payable.........       500,000          --       (96,771)       500,000
 License fees payable
  to related party.....           --           --      (499,700)           --
 R & D fees payable to
  related party........           --      (338,000)     338,000            --
 Disposal of assets....         6,833          --           --           6,833
                         ------------  -----------  -----------   ------------
   Net cash used in
    operating
    activities.........    (6,320,621)  (4,127,604)  (4,733,012)   (17,140,549)
Cash flows provided by
 investing activities:
 Purchase of property
  and equipment........      (374,696)     (31,001)     (82,542)      (495,240)
                         ------------  -----------  -----------   ------------
   Net cash used in
    investing
    activities.........      (374,696)     (31,001)     (82,542)      (495,240)
Cash flows from
 financing activities:
 Borrowings from
  related party........           --           --        92,000        342,000
 Payments on note
  payable to related
  party................           --           --       (92,000)      (342,000)
 Contributions from
  stockholder..........           --           --           --         103,564
 Net proceeds from
  sale of preferred
  stock................           --     4,000,000          --       4,000,000
 Net proceeds from
  sale of common
  stock................    24,772,506   15,889,829          --      42,171,834
 Proceeds from
  issuance of debt.....           --           --           --         371,164
 Net proceeds from
  recapitalization.....           --           --     6,270,782      6,270,782
 Net proceeds from
  warrants/options
  exercised............     5,219,168    1,355,962    5,629,478     12,204,608
                         ------------  -----------  -----------   ------------
   Net cash from
    financing
    activities.........    29,991,674   21,245,791   11,900,260     65,121,952
Net increase in cash
 and equivalents.......    23,296,357   17,087,186    7,084,706     47,486,163
Cash and equivalents at
 beginning of period...    24,189,806    7,102,620       17,914            --
                         ------------  -----------  -----------   ------------
Cash and equivalents at
 end of period.........  $ 47,486,163  $24,189,806  $ 7,102,620   $ 47,486,163
                         ============  ===========  ===========   ============
Supplemental disclosure
 of cash flow
 information:
Interest paid..........  $        --   $     1,726  $       199   $     46,407
Conversion of debt to
 equity................           --           --           --         371,164
Options issued to
 consultants in lieu of
 cash, no vesting......           --           --           --          24,069
Options issued in lieu
 of cash, commissions
 on private placement..       600,000          --           --         733,110
</TABLE>

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

                                      F-6
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                         NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY

   Hollis-Eden Pharmaceuticals Inc., a development stage pharmaceutical
company, is engaged in the discovery, development and commercialization of
products for the treatment of infectious diseases and immune system disorders,
including HIV/AIDS, hepatitis C and malaria. Since its inception (August 15,
1994) through March 1997, the Company's efforts have been directed toward
organizing, research and development and preparing for offerings of shares of
its common stock. Since 1997, the Company has been expanding its intellectual
property, developing its lead drug candidates, performing preclinical tests
and has entered into several human clinical trials. The Company is focusing
its initial development efforts on a potent series of adrenal steroid hormone
analogs. The lead compound in this series, HE2000, is currently in Phase I/II
clinical studies in the U.S. and South Africa. To date, the Company has not
developed commercial products or generated sales for the period August 15,
1994 through December 31, 1999.

2. SUMMARY OF ACCOUNTING POLICIES

CASH EQUIVALENTS

   The Company considers any liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Because of the short
maturities of these investments, the carrying amount is a reasonable estimate
of fair value. At December 31, 1999, the Company's cash equivalents totaling
$47,313,465 are deposited in a money market mutual fund with a large financial
institution.

PROPERTY AND EQUIPMENT

   Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets (five and seven years) using the straight-line
method.

RESEARCH AND DEVELOPMENT

   Research and development costs consist of license fee expenses related to
license agreements as well as research and development expenses with related
parties and clinical trial expenses. Such amounts paid or payable to related
parties aggregated $500,000, $1,267,259, and $3,068,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, and $6,335,021 for the period
from inception (August 15, 1994) to December 31, 1999. Such expenses are
recognized as research and development, as incurred.

INCOME TAXES

   The Company provides for income taxes under the principles of Statement of
Financial Accounting Standards No. 109 (SFAS 109) which requires that
provision be made for taxes currently due and for the expected future tax
effects of temporary differences between book and tax bases of assets and
liabilities.

FINANCIAL INSTRUMENTS

   The Company's financial instruments consist primarily of cash, other
receivables, accounts payable, and accrued expenses. These financial
instruments are stated at their respective carrying values, which approximate
their fair values.

                                      F-7
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


USE OF ESTIMATES

   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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NET LOSS PER SHARE

   Net loss per share is presented as basic earnings based upon the weighted
average number of common shares. Diluted earnings per share have not been
presented as the common stock equivalents and their effect on earnings per
share is anti-dilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivative contracts at their fair values, as either assets or
liabilities on the balance sheet. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedged derivative with the
recognition of (1) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, or (2) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 if effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Historically the Company has not entered into
derivative contracts either to hedge existing risks or for speculative
purposes. The adoption of this new standard is not expected to have a material
effect on the financial statements.

3. RECAPITALIZATION

   On March 26, 1997, Hollis-Eden Inc. was merged with and into the Company
(then known as IAC), pursuant to an Agreement and Plan of Merger, dated
November 1, 1996, among IAC, Hollis-Eden Inc., Mr. Salvatore J. Zizza and Mr.
Richard B. Hollis (the "Merger"). Upon consummation of the Merger, Hollis-Eden
Inc. ceased to exist, and IAC changed its name to Hollis-Eden Pharmaceuticals,
Inc. IAC (now called Hollis-Eden Pharmaceuticals, Inc.) remains the continuing
legal entity and registrant for Securities and Exchange Commission reporting
purposes. The Merger was intended to be a tax-free reorganization for federal
income tax purposes and was accounted for as a recapitalization of Hollis-Eden
Inc. by an exchange of Common Stock of Hollis-Eden Inc., $.0001 par value
("Hollis-Eden Inc. Common Stock"), for the net assets of IAC, consisting
primarily of cash.

   Under the terms of the Merger agreement, each share of Hollis-Eden Inc.
Common Stock outstanding immediately prior to the closing of the Merger
converted into one share of Common Stock, $.01 par value, of Hollis-Eden
Pharmaceuticals, Inc. Common Stock ("Company Common Stock"), and all warrants
and options to purchase Hollis-Eden Inc. Common Stock outstanding immediately
prior to the Merger converted into the right to receive the same number of
shares of Company Common Stock. At the closing of the Merger, 4,911,004 shares
of Company Common Stock were issued, which represented approximately 85% of
the shares of Company Common Stock outstanding immediately after consummation
of the Merger.

   For accounting and financial reporting purposes, the Merger was treated as
a recapitalization of Hollis-Eden. Since IAC had no business operations other
than the search for a suitable target business, IAC's assets were recorded in
the balance sheet of the Company at book value. Upon the consummation of the
Merger, the

                                      F-8
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Company had $6.5 million in cash and other receivables, and incurred
transaction costs of approximately $230,000 associated with the Merger for net
proceeds totaling $6.3 million which was recorded as equity. Additional
transaction costs totaling $4.7 million represent a charge for (i) warrants to
purchase an aggregate of 452,830 shares of Company Common Stock at an exercise
price of $2.475 issued to the placement agent (Note 11) upon the closing of
the Merger pursuant to an agreement and (ii) an aggregate of 50,000 shares of
Company Common Stock issued for legal and consulting services upon the closing
of the Merger. An estimate of $11.50 per share was used to calculate the
charges which approximates fair market value on the date of the Merger. These
charges constitute transaction fees and accordingly have been recorded as a
charge and an offsetting credit to additional paid-in capital.

   Upon the consummation of the Merger, pursuant to an agreement, the Company
issued warrants to purchase an aggregate of 50,000 shares of Company Common
Stock at an exercise price of $0.10 per share to a director and former
officer. Additional paid-in capital was increased by $570,000 with an
offsetting $570,000 charge recorded to operations during the three months
ended March 31, 1997.

   The Company's 1997 Stock Incentive Stock Option Plan became effective on
February 5, 1997 and was approved by the stockholders on March 26, 1997. A
total of 2,250,000 shares of Company Common Stock have been authorized for
issuance under the plan (see Note 13).

4. NOTICE OF REDEMPTION AND EXERCISE OF WARRANTS

   On March 27, 1997, the Company sent a Notice of Redemption to holders of
its Class A Common Stock Purchase Warrants and Class B Unit Purchase Warrants,
stating that it would redeem all of such outstanding warrants on April 28,
1997 at a redemption price of $0.05. The right to exercise such Warrants
terminated on April 25, 1997. 603,415 of the Class A Common Stock Purchase
Warrants and 254,950 Class B Unit Purchase Warrants were exercised into an
aggregate of 858,365 shares of Company Common Stock. The gross proceeds to the
Company were $5.5 million. The Company incurred approximately $42,000 in
transaction costs associated with the exercise and redemption of the warrants
which was recorded against equity.

5. FINANCING

   During January 1999, the Company completed two private placements of an
aggregate of 1,367,868 shares of Common Stock at prices ranging from $18.00 to
$18.50 per share. In connection with the private placements, the Company
issued warrants to purchase an aggregate of 90,000 shares of the Company's
Common Stock, with an exercise price of $18.25 per share, as a finder's fee.
The Company raised approximately $25.0 million in gross proceeds.

6. NOTE RECEIVABLE FROM RELATED PARTY

   On May 22, 1998, the Company entered into a promissory note with a
stockholder/officer in the amount of $200,000. Interest is at 5.5% per annum.
The note is due and payable in full on May 22, 2001.

7. INCOME TAXES

   The Company has available a net operating loss carryforward of
approximately $20 million at December 31, 1999 which may be carried forward as
an offset to taxable income, if any, in future years through its expiration in
2012 to 2014. The Company has a net deferred tax asset of approximately $8
million at December 31, 1999 comprised of capitalized start-up costs, research
and development credits, and the net operating loss carryforward. The net
deferred tax asset has been fully reserved due to the uncertainty of the
Company being

                                      F-9
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

able to generate net operating income under the more likely than not criteria
of SFAS 109. If certain substantial changes in the Company's ownership should
occur, there would potentially be an annual limitation on the amount of the
carryforwards, which could be utilized in a tax year.

8. REVERSE STOCK SPLITS

   In March 1996, a 1 for 2.65 split of the Company's common stock was
effected. Also, on February 13, 1995 there was a 3 for 5 split of the
Company's common stock. All stock splits have been retroactively restated for
all periods presented.

9. RELATED PARTY LICENSES AND OTHER AGREEMENTS AND COMMITMENTS AND
CONTINGENCIES

   During 1994, the Company entered into two license agreements and one
research, development and option agreement as discussed in the following
paragraphs.

   Pursuant to a license agreement dated May 18, 1994 (Colthurst License
Agreement) with related parties Patrick T. Prendergast, a significant
stockholder at the time, and with Colthurst Limited, a company controlled by
Patrick T. Prendergast, the Company acquired the exclusive worldwide rights of
Mr. Prendergast's patent rights, know-how and background technology relating
to the treatment of human/animal immunodeficiency. The agreement was amended
on August 11, 1995 to change the license fee payment terms as discussed below
in paragraph four of this Note. Per, the license agreement, the Company agreed
to pay royalties on product revenues.

   On August 25, 1994, the Company entered into a license agreement (Edenland
License Agreement) with a related party, Edenland Inc., a company controlled
by Patrick T. Prendergast, for the exclusive worldwide rights of Mr.
Prendergast's patent rights, know-how and background technology related to the
substance tradenamed HE317 and to any other pharmaceutical product that became
subject to the license agreement under the research, development and option
agreement discussed below. The agreement was amended on August 11, 1995 to
change the license fee payment terms as discussed in the following paragraph.
Per the Edenland License Agreement, the Company agreed to pay royalties on
product revenues.

   Effective August 11, 1995, Edenland, Inc., Colthurst Limited and the
Company entered into amendments concerning the license fee payment terms to
the two agreements described above. Under this amendment, the Company agreed
to pay a license fee by April 28, 1996 plus additional license fees within 24
months of April 1996. The balance of these fees was paid in full by May 1997.
As consideration for entering into certain amendments, the Company issued
75,472 shares of the Company's common stock to Edenland, Inc. and Colthurst
Limited.

   Per the amended Colthurst License Agreement, a renewal annual license fee
was payable commencing May 1998. The Company paid this fee in 1998 by issuing
shares of its common stock and, in 1999, paid cash.

   In August 1994, the Company entered into a Research, Development and Option
Agreement, with Edenland, Inc. and Mr. Prendergast. The agreement provided for
the development of HE317 to a certain stage of

                                     F-10
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

development and granted the Company the right of first option on new products
developed by Edenland, Inc. The agreement committed the Company to pay for
certain development costs up to the amount of $3,000,000 with certain
contingencies for funding.

   In October 1996, the Company and Edenland, Inc. entered into an amendment
to the existing Research, Development and Option Agreement. This amendment
accelerated the date that the $3,000,000 payment for HE317 or other product
development costs was to be made. A payment of $1,500,000 was payable upon the
closing of the Merger with IAC and the balance was contingent upon future
funding events. $2,700,000 of the $3,000,000 was paid in 1997 with the
remaining $300,000 accrued as an expense in 1997 and paid in April 1998.

   In January 2000, the Colthurst License Agreement, the Edenland License
Agreement, and the Research, Development and Option Agreement were terminated
and replaced with new agreements (see Note 16).

10. COMMON STOCK PURCHASE WARRANTS

SERIES A WARRANTS

   During April 1996, in accordance with anti-dilution privileges triggered by
an offering in March 1995, the Company issued 1,018,866 Series A Warrants to
all stockholders of record as of March 1995 to purchase the same number of
shares of common stock at a price of $11.02 per share, exercisable until
January 7, 2002.

SERIES B WARRANTS

   During February 1995, the Company issued 37,736 Series B Warrants to
Edenland, Inc. in consideration for an amendment to the Edenland License
Agreement. The warrants are exercisable until February 5, 2000, to purchase
the same number of shares of common stock at a price of $15.90 per share.

PLACEMENT AGENT WARRANTS

   During May 1996, the Company issued to the placement agent, for the
completion of the private placement in April 1996 (see Note 11), a warrant to
purchase an aggregate of up to 445,000 shares of common stock, at an exercise
price of $2.475 per share. The fair value of the 445,000 options is deducted
from the net proceeds of the private placement as a cost of raising capital
and totaled approximately $133,000.

   Upon the successful closure of the Merger and Redemption of the Class A
Common Stock Purchase Warrants and Class B Unit Purchase Warrants, the Company
issued additional placement agent warrants to purchase 452,830 shares of
common stock at an exercise price of $2.475 per share.

IAC MANAGEMENT WARRANTS

   During April 1994, the Company issued warrants, to existing shareholders
and management, to purchase 160,000 units (the "Units") at $10.00 per Unit,
each unit to be identical to the Units issued as part of its initial public
offering, exercisable until May 15, 2000. Each Unit consists of (i) one share
of common stock, $.01 par value per share and (ii) one Class A Warrants
entitling the holder to purchase one share of common stock at a price of $9.00
per share.

                                     F-11
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


REPRESENTATIVES WARRANTS

   In connection with the Company's initial public offering, the Company
issued warrants to the underwriters for 60,000 Units at an exercise price of
$11.00 per Unit and 24,000 Class B Warrants at an exercise price of $5.775 per
warrant and exercisable until May 15, 2000. Each Class B Warrant entitles the
holder to purchase one Unit (i.e. one share of common stock and one Class A
Warrant).

INVESTOR RELATIONS WARRANTS

   During February 1998, as part of payment for investor relations, the
Company issued 150,000 warrants with an exercise price of $14.75 per share and
an expiration date of February 4, 1999. The warrants were estimated to have a
value of $408,000, which was expensed in 1998.

1998 PRIVATE PLACEMENT WARRANTS

   In connection with the May 1998 private placement, the Company issued
warrants to purchase 1,437,475 shares of common stock at an exercise price of
$17.00 per share. The warrants are exercisable until May 6, 2001. Of the
warrants issued, 157,000 were issued as finder fees, and 1,280,475 were issued
to the private placement investors.

1999 AGENT WARRANTS

   In connection with the January 1999, private placement, the Company issued
warrants to purchase 90,000 shares of common stock as a finders fee. The
warrants are exercisable until January 22, 2002 at an exercise price of $18.25
per share.

1999 CONSULTING WARRANTS

   During March 1999, the Company entered into a three-year agreement with a
financial consulting organization affiliated with a director of the Company.
The Company agreed to issue as compensation for services, warrants to purchase
500,000 shares of Common Stock with an exercise price of $20.50 per share and
an expiration date of March 2002. The warrants are not subject to any vesting
provisions. The warrants were estimated to have a value of approximately $2.1
million, which was expensed as a non-cash charge during the first quarter of
1999.

                                     F-12
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


   The following table summarizes stock warrant activity for 1997 through
1999:

<TABLE>
<CAPTION>
                                                             PRICE PER SHARE
                                                          ----------------------
                                                                        WEIGHTED
                                                 SHARES       RANGE     AVERAGE
                                                --------- ------------- --------
   <S>                                          <C>       <C>           <C>
   Outstanding, December 31, 1996.............. 3,099,602 $0.25 - 15.90  $ 8.16

   1997
   Issued......................................   502,830  0.10 -  2.48    2.24
   Exercised...................................   977,594  0.10 -  9.00    5.80
   Canceled....................................   251,635  0.25 -  9.00    9.00

   Outstanding, December 31, 1997.............. 2,373,203  2.48 - 15.90    7.79

   1998
   Issued...................................... 1,587,475 14.75 -  7.00   16.79
   Exercised...................................   398,359  2.48 - 10.00    3.01

   Outstanding, December 31, 1998.............. 3,562,319  2.48 - 17.00   12.33

   1999
   Issued......................................   590,000 18.25 - 20.50   20.16
   Exercised...................................   755,423  2.48 - 14.75    6.88
   Canceled....................................     6,918         11.02   11.02

   Outstanding, December 31, 1999.............. 3,389,978 $2.48 - 20.50  $14.91
</TABLE>

   For various price ranges, the following table summarizes the weighted
average prices of outstanding warrants as of December 31, 1999:

<TABLE>
<CAPTION>
                                                  OUTSTANDING OPTIONS
                                          ------------------------------------------------------
                                                                                        WEIGHTED
         RANGE OF                                                                       AVERAGE
      EXERCISE PRICES                      SHARES                                        PRICE
      ---------------                      ------                                       --------
      <S>                                 <C>                                           <C>
      $ 2.48 - $ 5.00                        68,849                                      $2.48
      $ 5.01 - $10.00                       224,380                                       9.27
      $10.01 - $15.00                     1,031,538                                      11.02
      $15.01 - $20.00                     1,565,211                                      17.05
      $20.01 - $25.00                       500,000                                      20.50
</TABLE>

11. COMMON STOCK

   On January 21, 1996, the Company completed a $367,522 round of debt
financing with a group of private investors. These notes were due on or before
the earlier of (i) January 21, 1997 or (ii) the closing of a private or public
offering of securities. These notes bear interest at 8% per annum. The Company
had the option to repay these notes with common stock of the Company. Proceeds
from this debt financing were used to repay the note and accounts payable to
related party, and accrued interest totaling $371,164. During April 1996, the
debt financing, plus accrued interest, were converted into 164,962 shares of
common stock at a price of $2.25 per share. During March and April of 1996,
the Company privately issued 580,005 shares of the Company's common stock at
an offering price of $2.25 per share. Total proceeds from this offering
aggregated $1,234,499.


                                     F-13
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


   During May 1998, the Company completed a private financing totaling $20.6
million in gross proceeds. The Company issued 1,329,201 shares of Common
Stock, (of which 192,061 shares are subject to adjustment based on future
average stock price ("Adjustable Common Stock")), 4,000 shares of 5% Series A
Convertible Preferred Stock and Warrants to purchase 1,437,475 shares of
Common Stock in the financing. The Warrants are exercisable for three years
and entitle the holders to purchase up to a total of 1,437,475 shares of
Common Stock at a price of $17.00 per share.

   The Convertible Preferred Stock had an initial conversion price of $20.30
for the first seven months, after which it can be adjusted, either up or down,
based on the future stock prices of the Company's Common Stock. The
Convertible Preferred Stock was converted to Common Stock in January 1999 (See
Note 12).

12. PREFERRED STOCK

   During May 1998, as part of the private placement, the Company issued 4,000
shares of convertible preferred stock for proceeds of $4,000,000.

   During January 1999, the Company issued 346,127 shares of common stock in
connection with the conversion of the Series A convertible preferred stock and
additional shares relating to the Adjustable Common Stock. The Adjustable
Common Stock was issued during the private placement of May 1998 and was
subject to adjustment based on the future average stock price of the Company's
Common Stock as described in Note 11.

   In November 1999, the Company adopted a Shareholders Rights Plan in which
Preferred Stock purchase rights ("Rights") were distributed as a dividend at
the rate of one Right for each share of common stock held as of the close of
business on November 29, 1999. Each right entitles stockholders to buy, upon
certain events, one one-hundredth of a share of a new Series B junior
participating preferred stock of the Company at an exercise price of $100.00.
The Rights are designed to guard against partial tender offers and other
abusive tactics that might be used in an attempt to gain control of the
Company or to deprive stockholders of their interest in the long-term value of
the Company. The Rights are exercisable only if a person or group acquires 15%
or more of the Company's common stock or announces a tender offer of which the
consummation would result in ownership by a person or group of 15% or more of
the Company's common stock. The Rights are redeemable for one cent per Right
at the option of the Board of Directors prior to this event occurring. The
Rights expire on November 14, 2009.

                                     F-14
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


13. STOCK OPTIONS

   The 1997 Stock Option Plan (the "Plan") was approved by the shareholders in
1997. Under the Plan, 2,250,000 shares of common stock have been reserved for
issuance to employees, officers, directors, and consultants of the Company and
provides for the grant of incentive and nonstatutory stock options. Terms of
the stock option agreements, including vesting requirements, are determined by
the Board of Directors. The exercise price of incentive stock options must
equal at least the fair market value on the date of grant. The options expire
not later than ten years from the date of the grant and become exercisable
immediately or generally are exercisable ratably over a three-year period
beginning one year from the date of the grant. The following table summarizes
stock option activity under the Plan for 1997 through 1999:

<TABLE>
<CAPTION>
                                                             PRICE PER SHARE
                                                          ----------------------
                                                                        WEIGHTED
                                                 SHARES       RANGE     AVERAGE
                                                --------- ------------- --------
   <S>                                          <C>       <C>           <C>
   1997
   Granted.....................................   518,500 $2.25 -  8.70  $ 7.12
   Exercised...................................       166          2.25    2.25
   Canceled....................................       334          2.25    2.25

   Outstanding, December 31, 1997..............   518,000  6.75 -  8.70    7.13

   1998
   Granted.....................................   340,800 13.25 - 16.75   14.52
   Canceled....................................   100,000          8.70    8.70

   Outstanding, December 31, 1998..............   758,800  6.75 - 16.75   10.24

   1999
   Granted.....................................   776,165 10.56 - 16.63   12.70
   Canceled....................................    61,000 14.06 - 14.63   14.63

   Outstanding, December 31, 1999.............. 1,473,965 $6.75 - 16.75  $11.36
</TABLE>

   The Company entered into stock options agreements outside of the Plan with
certain directors, officers and consultants. These options become exercisable
according to a schedule of vesting as determined by the Board of Directors.
During 1998 and 1999, the Company granted options to certain consultants and
directors, and will recognize $900,000 and $380,000 in expense related to
these options ratably over the three-year vesting period, $240,000 and
$559,120 was expensed in 1998 and 1999 respectively.

   In February 1997, as part of an employment agreement, the Company granted a
non-statutory stock option to an executive to purchase 2,400,000 shares of the
Company's common stock at a price of $5.00 per share, which option vested
ratably over a six-year period. The intrinsic value of the options was
$1,848,000. As a result, the Company recorded as deferred compensation a non-
cash charge of $1,848,000, which was being amortized ratably over the six-year
vesting period. Through February 28, 1999 the Company had amortized a total of
$641,333. On March 1, 1999, the Company announced the resignation of this
executive. Concurrent therewith, the Company accelerated the vesting of
300,000 stock options previously granted to the executive. This acceleration
is considered to be a new grant of options and, as such, the Company took a
one-time non-cash charge of $4.9 million during the first quarter of 1999.

                                     F-15
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


   The following table summarizes stock option activity not pursuant to the
Plan for 1995 through 1999:

<TABLE>
<CAPTION>
                                                             PRICE PER SHARE
                                                          ----------------------
                                                                        WEIGHTED
                                                 SHARES       RANGE     AVERAGE
                                                --------- ------------- --------
   <S>                                          <C>       <C>           <C>
   1995
   Granted.....................................    37,736 $ 2.65 - 7.95  $4.64

   Outstanding, December 31, 1995..............    37,736   2.65 - 7.95   4.64

   1996
   Granted.....................................   570,000          2.25   2.25

   Outstanding, December 31, 1996..............   607,736   2.25 - 7.95   2.40

   1997
   Granted..................................... 2,400,000          5.00   5.00
   Canceled....................................    50,000          2.25   2.25

   Outstanding, December 31, 1997.............. 2,957,736   2.25 - 7.95   4.51

   1998
   Exercised...................................    53,302   2.25 - 5.30   2.93
   Canceled....................................    50,000          2.25   2.25

   Outstanding, December 31, 1998.............. 2,854,434   2.25 - 7.95   4.58

   1999
   Granted.....................................   300,000         16.63  16.63
   Exercised...................................     9,434          7.95   7.95
   Canceled.................................... 1,200,000          5.00   5.00

   Outstanding, December 31, 1999.............. 1,945,000 $2.25 - 16.63  $6.16
</TABLE>

   For various price ranges, weighted average characteristics of outstanding
stock options at December 31, 1999 were as follows:

<TABLE>
<CAPTION>
                           OUTSTANDING OPTIONS           EXERCISABLE OPTIONS
                      ---------------------------------  ---------------------
                                  REMAINING   WEIGHTED               WEIGHTED
      RANGE OF                      LIFE      AVERAGE                AVERAGE
   EXERCISE PRICES     SHARES      (YEARS)     PRICE      SHARES      PRICE
   ---------------     ------     ---------   --------    ------     --------
   <S>                <C>         <C>         <C>        <C>         <C>
   $ 2.25 - $ 4.99      445,000      5.1       $2.25       445,000    $2.25
   $ 5.00 - $ 8.99    1,618,000      9.6        5.45     1,350,945     5.20
   $ 9.00 - $12.99      388,165      9.9       10.56           --       --
   $13.00 - $16.99      967,800      9.4       15.30       131,300    14.68
</TABLE>

STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 123")

   During 1995, the Financial Accounting Standards Board issued SFAS 123,
Accounting for Stock-Based Compensation, which defines a fair-value-based
method of accounting for stock compensation plans. However, it also allows an
entity to continue to measure compensation cost related to stock compensation
plans using the method of accounting prescribed by the Accounting Principles
Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees.
Entities electing to follow APB 25 must make pro forma disclosures of net
income, as if the fair-value-based method of accounting defined in SFAS had
been applied.

                                     F-16
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)


   The Company has elected to account for its stock-based compensation plans
under APB 25; however, for pro forma disclosure purposes, the Company has
computed the value of all options granted to employees during 1997 through
1999, using the Black-Scholes option pricing model with the following weighted
average assumptions:

<TABLE>
<CAPTION>
                                                       1999     1998     1997
                                                      -------  -------  -------
   <S>                                                <C>      <C>      <C>
   Risk free interest rate...........................    5.31%    5.55%    5.90%
   Expected dividend yield...........................       0%       0%       0%
   Expected lives.................................... 5 years  5 years  5 years
   Expected volatility...............................    46.5%    46.5%    46.5%
</TABLE>

   The warrants were assumed to be exercised at maturities of three to five
years, while the stock options were assumed to be exercised in five to seven
years. Adjustments are made for options forfeited prior to vesting. The total
value of warrants and options was computed to be the following approximate
amounts, which would be amortized on the straight-line basis over the vesting
period of the options:

<TABLE>
   <S>                                                               <C>
   Year ended December 31, 1997..................................... $1,777,270
   Year ended December 31, 1998..................................... $1,435,510
   Year ended December 31, 1999..................................... $6,662,315
</TABLE>

   If the Company had accounted for stock options issued to employees and
directors in accordance with SFAS 123, the Company's net loss would have been
reported as follows:

 Net loss

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                               ---------------------------------
                                                  1999        1998       1997
                                               ----------- ---------- ----------
   <S>                                         <C>         <C>        <C>
   As reported................................ $15,320,037 $5,427,453 $5,252,884
   Pro forma.................................. $21,982,352 $6,862,963 $7,030,154
</TABLE>

   The Black-Scholes option valuation 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 valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
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 the Company's options.

   The weighted average, estimated fair values of employee stock options
granted during fiscal 1999, 1998 and 1997 were $15.30, $14.52 and $5.38 per
share, respectively.

14. EMPLOYMENT AGREEMENT

   Pursuant to an employment agreement between Hollis-Eden and Mr. Richard B.
Hollis entered into in November 1996 (the "Hollis Employment Agreement"), Mr.
Hollis' annual base salary was increased to $225,000 upon the consummation of
the Merger, with bonuses and equity compensation as determined by the Hollis-
Eden Pharmaceuticals Board of Directors. On January 1, 1999, Mr. Hollis' base
salary was increased to $330,000. If Mr. Hollis' employment is terminated
"without cause," "for insufficient reason" or pursuant to a "change in
control" (as such terms are defined in the Hollis Employment Agreement), Mr.
Hollis will receive as

                                     F-17
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

severance (i) an amount equal to five times his then current annual base
salary plus five times the amount of the bonus awarded to him in the prior
calendar year, (ii) immediate vesting of all unvested stock options of
Hollis-Eden Pharmaceuticals (or the Surviving Corporation, if applicable) held
by him and (iii) continued benefits under all employee benefit plans and
programs for a period of three years. All of such payments are to be made in
one lump sum within 30 days of termination. If Mr. Hollis' employment is
terminated "with cause" or if Mr. Hollis resigns other than for "sufficient
reason," Mr. Hollis' compensation and benefits will cease immediately and Mr.
Hollis will not be entitled to severance benefits.

15. LEASES

   Rental expenses for principally leased facilities under operating leases
were $315,000, $115,000 and $69,000 for 1999, 1998 and 1997, respectively.
Future minimum payments for operating leases are as follows:

<TABLE>
<CAPTION>
                                                                       OPERATING
                                                                        LEASES
                                                                       ---------
      <S>                                                              <C>
      2000............................................................ $385,148
      2001............................................................  316,092
      2002............................................................  223,540
      2003............................................................   23,556
      2004............................................................    9,815
                                                                       --------
      Total minimum lease payments.................................... $958,151
                                                                       ========
</TABLE>

16. SUBSEQUENT EVENTS

   On January 20, 2000, Hollis-Eden reached a settlement on its pending
arbitration with Patrick T. Prendergast, Colthurst and Edenland. The
Settlement and Mutual Release Agreement completely disposes of all of the
matters that were at issue in the pending arbitration. In addition, the
parties entered into two new technology agreements, the Technology Assignment
Agreement and the Sponsored Research and License Agreement.

   The Technology Assignment Agreement replaces the Colthurst License
Agreement dated May 18, 1994 among Hollis-Eden, Mr. Prendergast and Colthurst.
Pursuant to the Technology Assignment Agreement, Mr. Prendergast and Colthurst
assigned to Hollis-Eden ownership of all patents, patent applications and
current or future improvements of the technology under the Colthurst License
Agreement, including HE2000, Hollis-Eden's lead clinical compound. The annual
license fee of $500,000 and the royalty obligations under the Colthurst
License Agreement have been eliminated. In consideration for the foregoing,
Hollis-Eden agreed to issue to Colthurst 660,000 shares of Common Stock and a
warrant to purchase an aggregate of 400,000 shares of Common Stock at $25 per
share. Only 132,000 of such shares of Common Stock will be issued in 2000,
with the remaining 528,000 shares to be issued over the next four years
conditioned on continued compliance with the agreement. In addition, all of
the shares under the warrant will vest over the next four years conditioned on
continued compliance with the agreement. Continued compliance with the
agreement is not dependent upon any substantive actions to be performed or
taken by Prendergast, Colthurst or Edenland. The compliance relates primarily
to (i) support of the Company's actions (as defined) and (ii) not conducting
any research and development activities relating to the transferred
technology. The Sponsored Research and License Agreement replaces both the
Edenland License Agreement and the Research, Development and Option Agreement,
each dated August 25, 1994 among Hollis-Eden, Mr. Prendergast and Edenland.
Pursuant to the Sponsored Research and License Agreement, Edenland exclusively
licensed to Hollis-Eden a number of compounds, together with all related
patents and patent applications, and Hollis-Eden agreed to fund additional
pre-clinical research projects

                                     F-18
<PAGE>

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

conducted by Edenland. Hollis-Eden will also have exclusive license rights to
all results of such research and will have royalty obligations to Edenland on
sales of new products, if any, resulting from such research.

   The settlement resulted in the Company acquiring the technology and
terminating future obligations under the License Agreements. Since the
technology is still in its early stages, Hollis-Eden expects to take a one-time
charge to research and development expenses of approximately $12.7 million
during the first quarter of 2000.

                                      F-19