10-K405

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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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                                   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, 2000
                        Commission File Number 33-60134

                       HOLLIS-EDEN PHARMACEUTICALS, INC.
            (Exact name of Registrant as specified in its charter)

                                            
                  Delaware                                      13-3697002
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        (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)



      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 15, 2001 totaled approximately $32,990,916 based on the
closing stock price as reported by the Nasdaq National Market.

   As of March 15, 2001, there were 11,605,803 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, 2000, 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 2001 Annual Meeting of Stockholders to be held during June
2001, 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, 2000

                                     INDEX



                                                                           Page
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 PART I

 Item 1     Business....................................................     3
 Item 2     Properties..................................................    21
 Item 3     Legal Proceedings...........................................    21
 Item 4     Submission of Matters to a Vote of Security Holders.........    22

 PART II

 Item 5     Market For Registrant's Common Stock And Related Stockholder
            Matters.....................................................    22
 Item 6     Selected Financial Data.....................................    23
 Item 7     Management's Discussion and Analysis of Results of
            Operations and Financial Condition..........................    23
 Item 7A    Quantitative and Qualitative Disclosures About Market Risk..    25
 Item 8     Financial Statements and Supplementary Data.................    25
 Item 9     Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosures...................................    25

 PART III

 Item 10    Directors and Executive Officers of the Registrant..........    26
 Item 11    Executive Compensation......................................    26
            Security Ownership of Certain Beneficial Owners and
 Item 12    Management..................................................    26
 Item 13    Certain Relationships and Related Transactions..............    26

 PART IV

 Item 14    Exhibits, Financial Statements, Schedules and Reports on
            Form 8-K....................................................    27
            Signatures..................................................    28



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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 B and C and malaria.

   We are focusing our initial development efforts on a potent series of
immune regulating hormones and hormone analogs. Our lead compound in this
series, HE2000, is currently in Phase II clinical studies in HIV. HE2000
appears from early clinical studies to help reestablish immunological 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 are conducting an aggressive
research program and licensing effort designed to expand both the number of
compounds in development from this class and the breadth of potential
therapeutic applications. Several compounds resulting from these activities
have shown promising activity in preclinical models. We recently filed an
investigational new drug application (an "IND") with the U.S. FDA to commence
clinical trials with one of these promising compounds, HE2200.

   In addition, through our relationship with Aeson Theraputics, Inc.
("Aeson"), we have a right to acquire significant additional intellectual
property in this field, including the rights to a compound in this class that
is in Phase II clinical trials for the treatment of cardiovascular disease and
actinic keratosis, a precursor to squamous cell cancer.

   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 expenditures 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, 2000, had
an accumulated deficit of approximately $48 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.

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   We have not been profitable since our inception and we expect to incur
substantial additional operating losses for at least the next several years as
we increase expenditures on research and development and allocate significant
and increasing resources to our clinical testing and other activities. In
addition, during the next few years, we may 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.

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 a hormonal replacement therapy intended to
reestablish 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 immunity is largely
ineffective against bacteria and humoral immunity is similarly ineffective
against viruses.

   Normally, immune system homeostasis is maintained by a complex interplay of
cytokines. Cytokines are protein 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 B and
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. In the setting of HIV,
this generally results in an immune system that progressively losses its
ability to combat infections.

   Hollis-Eden's technology approach is based on the observation that this
complicated balance of cytokines is regulated by competing levels of certain
adrenal hormones. In young, healthy adults, the balance between
corticosteroids such as cortisol, which have immunosuppressive properties, and
other adrenal 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 and chronic infections, 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 through natural selection. For example, in HIV, most patients'
cortisol levels rise (and counter-regulatory adrenal hormones fall) as the
disease progresses from HIV to AIDS. This 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 HIV 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

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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
predominant Th2 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. Thus, a drug that
effectively corrects immune dysregulation could have the potential to address
a wide variety of human ailments.

   Our 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 hormones, offering a hormone replacement therapy that
potentially will lead to stimulation of the immune system in conditions of
immunosuppression.

   We are employing the latest tools of the genomics revolution to further our
expertise in adrenal hormone 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 that
avoid androgenic and other side effects. Our lead compound in this series is
HE2000, which is currently being explored in clinical trials for HIV/AIDS.
Clinical trials with HE2000 in malaria, hepatitis B and C are in the process
of being initialized. In addition, we have filed an IND with the FDA to begin
clinical trials with HE2200, another immune regulating hormone drug candidate.
This compound also has the potential to be useful in a number of conditions
associated with immune dysregulation. Through our relationship with Aeson we
also have access to an additional compound in this class, which is currently
in Phase II clinical trials for the treatment of cardiovascular disease and
actinic keratosis.

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 cessation of therapy. HIV mutates 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 experts believe that drug resistance
will increase in the future.

   In addition, the dosing regimen for HIV drug cocktail therapy is very
complicated, with a large number of pills 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 many of these patients to be unable or unwilling to tolerate the drug
regimen.

   As a result of these side effects and resistance issues, the National
Institutes of Health have recently altered recommendations for when to start
patients on the antiviral cocktail, recommending that treatment be delayed
until patients have significantly progressed towards AIDS.

   In the developing world, the antiviral cocktail has to date been largely
impractical as a result of cost, lack of required training and infrastructure
necessary to safely and effectively administer these agents, and the
difficulty in complying with the dosing regimen. While significant attention
has been focused on the need to treat the millions suffering from the disease
in these nations, an approach which is safe, inexpensive and practical to
administer has yet to be introduced.

   We believe 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

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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 for whom other drug therapies have
failed and whose immune systems have generally been ravaged by HIV.

   In the developing world, HE2000 may be particularly attractive because we
believe the drug will be administered on an intermittent (rather than daily)
basis, and will have a lower manufacturing cost than existing therapies. Given
its probable endocrine mechanism of action, it should also 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 in turn, what effect this
may have on immune function. The U.S. trials involve a single course of HE2000
injections to salvage patients.

   The Phase I/II clinical trial in South Africa is a dose escalation study
evaluating the effect of HE2000 in three dosing groups. Patients initially
receive a single intramuscular injection followed one to two weeks later by a
daily injection for five consecutive days. After a six-week observation
period, patients demonstrating benefit are allowed to receive additional
courses of therapy (five consecutive daily injections followed by a six-week
observation period). The study is now fully enrolled and interim data were
recently presented at a medical meeting. Reported results were through three
treatment courses over a five-month period. At the discretion of the
investigator, patients may continue receiving treatment beyond this period and
some patients have now been on study for over 18 months.

   The primary endpoint of the study is safety, and to date HE2000 has been
generally well tolerated, with injection site irritation in three patients
being the only drug-related serious adverse event reported in this study.

   While the studies are focused on collecting safety data, we have also
observed significant increases relative to baseline in a wide variety of
immune cell subsets associated with cell-mediated immunity during the study in
South Africa. The data relating to this study presented at the medical meeting
referenced above highlighted a number of these cell subsets that were
statistically significantly elevated relative to baseline in an area-under-
the-curve (AUC) analysis for all patients for the five-month treatment period.
Included were statistically significant increases in total dendritic cells,
CD11c+ dendritic cells, CD123+ dendritic cells and activated cytotoxic T-
cells. These increases appeared to be long lasting despite the fact that
HE2000 was only administered in intermittent treatment courses.

   Dendritic cells are specialized antigen processing and presenting cells
that are critical in regulating immune responses. The CD11c+ dendritic cell
subset that was increased in this study is a primary driver in initiating
adaptive cell-mediated immunity. The adaptive portion of cell-mediated
immunity is important for controlling HIV replication and combating
opportunistic infections to which the immune system has previously been
exposed. Medical literature indicates that the CD11c+ dendritic cell subset is
dramatically depleted in HIV-infected patients and that this dysregulation
persists even in patients on successful Highly Active Antiretroviral Therapy
(HAART). It also has been reported in the medical literature that CD123+
dendritic cells can drive cell-mediated immunity. These cells are now believed
to be a key source of stimulation of the innate portion of the immune system.
This part of the immune system is particularly effective against pathogens
which are newly exposed to the immune system, including a variety of
opportunistic infections seen in HIV/AIDS patients. In 1999, the CD123+ cell
was identified as the immune system's primary source of the cytokine
interferon alpha. It has also been reported in the literature that those
patients with high levels of interferon alpha tend to remain clinically stable
and avoid opportunistic infections irrespective of levels of the traditional
markers of viral load and CD4.

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   Activated CD8 T-cells are part of the adaptive portion of Thl immunity and
are primed to recognize and destroy cells infected with a particular virus or
opportunistic infection.

   While not an antiviral, patients in South Africa receiving HE2000 as an
intermittent monotherapy overall did not experience a progression in viral
load during the five months on study, and a number of these patients
experienced a significant transient drop in viral load that in some cases
exceeded 1 log. Further improvements in viral load for a greater duration may
be obtainable with improved formulation, dosing schedule and route of
administration. Additional clinical studies have now been initiated in South
Africa to test these possibilities.

   HE2000 also had a significant effect on the hematopoetic system in the
Phase I/II study in South Africa. Administration of HE2000 led to increases
(versus baseline) in a number of cell types that were quite pronounced
immediately after dosing. These increases were durable enough to be
statistically significant in an area-under-the-curve analysis during the
entire five-month treatment period. Included in these cell types are
neutrophils, basophils, monocytes and platelets. This finding has potential
applications for cancer therapy and is currently being explored more fully in
preclinical studies.

   We are currently optimizing the dosing regimen of HE2000 and have initiated
a Phase II clinical trial with the compound in South African AIDS patients who
are experiencing, or are at a high risk for opportunistic infections. We are
also considering additional 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. We cannot be certain that we will have sufficient
funds to complete this development, or that the results of these clinical
activities will be successful and support the approval of any drug candidate.

HE2000 in Other Indications

   The potential ability of HE2000 to shift patients from a Th2 immune status
back to a Th1 status could have applications well beyond HIV/AIDS. As
mentioned previously, in hepatitis C, a small percentage of patients are able
to clear 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 for the
treatment of hepatitis C as well as hepatitis B.

   Existing therapies for hepatitis 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, therapies 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 in the process of initiating
clinical trials in this area.

Other Immune Regulating 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 that may be more

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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 researchers. A number of the compounds covered by these
patents have demonstrated potent activity in preclinical testing in a variety
of indications including applications in oncology, inflammation and certain
central nervous system and metabolic disorders.

   In March 2001, we announced we had submitted an IND with the FDA to begin
human clinical trials with HE2200, another immune regulating hormone drug
candidate. HE2200 has been shown to provide significant benefit in a number of
animal models of immune dysregulation. The compound was licensed to Hollis-
Eden from Roger Loria Ph.D., a leading researcher in the field of immune
regulating hormones and a Professor of Microbiology and Immunology at Virginia
Commonwealth University.

   The IND seeks clearance to test HE2200 in a Phase I clinical trial in
healthy adults and healthy elderly volunteers, with the primary endpoint of
the trial being safety and tolerance of two dosage levels of HE2200. Other
objectives of the trial will be to evaluate changes in a number of key immune
markers and pharmacokinetic data in both groups of volunteers. The Phase I
study is randomized, double blinded, and placebo-controlled. If results of the
Phase I study are successful, we expect to commence Phase II studies with the
compound in several conditions of immune dysregulation, including reversing
immune deficiencies seen in the elderly.

   Preclinical studies with HE2200 and initial clinical results with HE2000,
our lead immune regulating hormone in development, indicate that this class of
compounds may improve defects in cell-mediated (Th1) immunity and may also
improve hematopoiesis (restoring neutrophils and platelets). Deficiency of
cell-mediated immunity has been strongly correlated with an immune system's
inability to effectively fight a number of infectious diseases and cancer
types. The loss of ability to mount a strong cell-mediated immune response
seen in the elderly is believed to be a primary reason patients in this age
group have difficulty recovering from infectious diseases such as the flu and
pneumonia and also why vaccines in this population tend to be less effective.

   Laboratory tests with HE2200 have shown that the compound can reverse the
loss of cell-mediated immunity seen in aged animals and that correcting this
dysregulation with HE2200 treatment allows these animals to respond better to
vaccination. A recently published study with the compound has also shown
dramatic survival improvements in HE2200-treated animals versus controls in a
model of radiation-induced immune suppression. The authors of the study
concluded that HE2200 was providing this benefit by accelerating hematopoietic
recovery. As discussed above, our lead immune regulating hormone, HE2000, has
demonstrated an ability to improve hematopoiesis in initial clinical studies
in HIV patients. This finding, combined with the potential ability to improve
cell-mediated immunity, also makes HE2200 an attractive potential candidate
for use in improving immunity and hematopoiesis in cancer patients.

   HE2200 may also provide benefit in a number of autoimmune conditions.
Studies with the compound in a preclinical model of ulcerative colitis showed
that the compound compared favorably with sulfasalazine, a current standard of
care in the treatment of the disease. If further preclinical work in
autoimmune models is successful, this area may also be explored in clinical
studies with the compound.

   Through our collaboration with Humanetics, Inc., we also have human
pharmaceuticals rights to an additional series of compounds in this series
that are the subject of patents filed by Dr. Henry Lardy, a professor at the
University of Wisconsin. Several of these compounds are being screened in
preclinical models, and if these results are successful, these compounds could
become candidates for clinical trials.

Relationship with Aeson Therapeutics, Inc.

   During 2000 we obtained an exclusive worldwide sublicense to three
additional issued patents in the area of adrenal hormones and hormone analogs
from Aeson Therapeutics, Inc. In addition, we acquired a 21% equity stake in
Aeson, which is developing molecules that are analogs with similar biological
properties to HE2000. Aeson's lead compound, fluasterone (HE2500), is in Phase
II clinical studies for the treatment of cardiovascular disease and actinic
keratosis, a precursor to squamous cell cancer, as well as in preclinical
studies for other indications.

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   We exchanged $2 million in cash and 208,681 shares of Hollis-Eden common
stock for our equity interest in Aeson. The cash portion of the investment is
being used by Aeson to fund specific studies with fluasterone as well as other
compounds in its pipeline. As part of the transaction, Aeson and its
shareholders have granted us an exclusive option to acquire the remainder of
Aeson at a pre-determined price at any time through April 11, 2003.

   Aeson is a privately held company that was formed to commercialize the
discoveries of Dr. Arthur Schwarz, a professor at Temple University and a
world leader in the field of adrenal hormones. Dr. Schwarz has identified and
patented numerous compounds in this series and has shown preclinical activity
with these compounds in a broad array of infectious disease, autoimmune and
oncology models. Phase I human clinical studies indicate fluasterone is
generally well tolerated. Aeson is conducting a pilot Phase II clinical study
for the treatment of actinic keratosis, a dermatologic condition, using
fluasterone in a topical form. Aeson has also inititated a Phase II study
using an oral form of fluasterone for the treatment of cardiovascular patients
with a particular lipid profile. Aeson is also conducting preclinical studies
using fluasterone in a number of other potential indications, including a
collaboration with the National Cancer Institute to explore the use of
fluasterone in cancer.

Market Opportunities

   The potential market opportunities for the compounds we are developing may
be quite significant. As an example, approximately 1 billion people are
estimated to be infected with HIV, malaria or hepatitis B or C, the first four
indications we are targeting for HE2000, our lead drug candidate.

   Despite considerable progress with antiviral drug cocktail therapy, today
AIDS is the number one killer of Americans between the ages of 25 and 44. It
is estimated by the Centers for Disease Control ("CDC") 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 2000, approximately 36.1 million adults and children
are living with HIV/AIDS, an 8% increase since 1998 and a 50% increase from
1991. It is also estimated that there were 5.3 million newly infected people
and 3 million deaths related to HIV/AIDS in 2000.

   In October 2000, WHO reported that 3% of the world's populations, an
estimated 170 million people, are chronic carriers of hepatitis C, including
an estimated 4 million in the U.S. Of those afflicted with hepatitis C, 10% to
20% are at risk of developing cirrhosis of the liver and 1% to 5% may develop
liver cancer.

   WHO also reported during October 2000 that more than 350 million people
have chronic hepatitis B infection and more than 1 million die from the
disease each year. The CDC estimates that more than 1 million people in the
United States are chronically infected with the disease. As with hepatitis C,
hepatitis B can lead to liver abnormalities, and the disease is believed to be
the leading cause of liver cancer.

   Market research also indicates that 300-500 million people per year suffer
from malaria. This parasite is responsible for more than 1 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.

   The market for HE2200 may also be quite significant, including the
potential for correcting immune dysregulation in the elderly. This is a large
and rapidly growing segment of the population.

   Our immune regulating hormones have a number of attributes that make them
potentially useful globally. Included in these attributes are the potential
broad-spectrum activity, affordable cost, the attractive safety profile to
date, the low likelihood of resistance and the relative ease of manufacture
and dosing. Increasing focus on the

                                       9


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.

Government Regulation

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, 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 many years
and generally involves the expenditure of substantial resources. 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. IND status allows initiation of
clinical investigation within 30 days of filing if the FDA does not respond
with questions during the 30-day period.

   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

                                      10


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. 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 successful completion of Phase III, the
drug sponsor files an NDA for approval containing all information that has
been gathered. The NDA 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.

   Post Approval. If 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 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, we 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.

Manufacturing

   We do not have, and do not intend to establish, manufacturing facilities to
produce our product candidates or any future 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 in some
cases established relationships to fulfill our near-term production needs for
both clinical and commercial use.

   The manufacture of our product candidates or any future 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

   We are engaged in an aggressive program to expand our intellectual property
portfolio. As a result, as of the date of this Annual Report, we own or have
obtained a license to approximately 30 issued U.S. patents, 37 issued foreign
patents, 30 pending U.S patent applications and more than 80 pending foreign
patent applications. In addition, based on the preclinical and clinical data
that we are generating, a significant number of U.S. and foreign patent
applications are in the process of being filed.

                                      11


   We consider the protection of our technology, 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.

   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. We cannot guarantee that any patents issued or licensed to us
will provide us with competitive advantages or will not be challenged by
others. Furthermore, we cannot be certain 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
biotechnology companies, including our own, 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 our product candidates or future 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 we cannot
guarantee that licenses would be made available on terms acceptable to us. If
we do not obtain such licenses, we 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, we cannot guarantee 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 us 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. If any such licenses are required, we cannot be certain
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, our business may be materially adversely affected by competitors
who develop substantially equivalent technology.

Technology Agreements

   During January 2000, we entered into two new technology agreements with
Patrick T. Prendergast, Colthurst Ltd. and Edenland, Inc. The first agreement,
the Technology Assignment Agreement, replaced the Colthurst License Agreement
dated May 18, 1994 among Hollis-Eden, Mr. Prendergast and Colthurst. This
agreement assigned to us ownership of all patents, patent applications and
current or future improvements of the technology under the Colthurst License
Agreement, including HE2000, our lead clinical compound. The annual license
fee of $500,000 and the royalty obligations under the Colthurst License
Agreement were eliminated. In consideration for the foregoing, we 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. The
agreement provided that only 132,000 of such shares of Common Stock were to 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 and, in
particular, satisfaction of the Conditions (as defined below). In addition,
the agreements provided that all of the shares under

                                      12


the warrant were to vest over the next four years conditioned on continued
compliance with the agreement and satisfaction of the Conditions.

   As stated above, the issuance of the additional shares of Common Stock and
the vesting of the warrant is dependent upon the satisfaction of certain
conditions (the "Conditions"), including (i) support of the our actions by
Mr. Prendergast and Colthurst, by voting their shares of our stock in favor of
management and (ii) Mr. Prendergast and his affiliated companies not
conducting research and development activities relating to the transferred
technology. Because all of the Conditions have not been satisfied, we believe
that we have no obligation to issue to Colthurst any additional shares and
that the warrant will not vest as to any shares of Common Stock. Due to this
fact, and after conducting further accounting analysis, we have recorded a
research and development charge of $1.9 million representing the fair value of
the 132,000 shares issued under the agreement. While we are confident in our
analysis, if any dispute should arise in this matter, we cannot guarantee
that, as a result of such dispute, additional equity will not be issued or
that an additional accounting charge will not be made.

   The second agreement, the Sponsored Research and License Agreement,
replaced 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 us a number of compounds, together
with all related patents and patent applications, and we agreed to fund
additional preclinical research projects conducted by Edenland. We 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.

   We recently also entered into license agreements with Dr. Roger Loria, Dr.
Henry Lardy and Humanetics Corporation, and made an equity investment in Aeson
Therapeutics, Inc (described above). Through these relationships 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 15, 2001, we had 35 full-time employees. We believe that our
relations with our employees are good.

Executive Officers and Senior Management

   Our executive officers and senior management and their ages as of March 15,
2001 are as follows:



Name                      Age                           Position
- - ----                      ---                           --------
                        
Richard B. Hollis.......  48  Chairman of the Board, President and Chief Executive Officer
Daniel D. Burgess.......  39  Chief Operating Officer and Chief Financial Officer
James M. Frincke,
 Ph.D. .................  50  Executive Vice President, Research and Development
Eric J. Loumeau.........  38  Vice President, Corporate General Counsel
Robert L. Marsella......  48  Vice President, Business Development and Marketing
Thomas C. Merigan, Jr.,
 M.D. ..................  67  Scientific Advisor and Director
Chris Reading, Ph.D. ...  53  Vice President, Scientific Development
Dwight Stickney, M.D. ..  58  Medical Director, Oncology
Robert W. Weber.........  50  Chief Accounting Officer and Vice President - Controller


   Richard B. Hollis founded Hollis-Eden in August 1994. Mr. Hollis currently
serves as Chairman, President and Chief Executive Officer. Mr. Hollis has over
25 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

                                      13


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, 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 from 1998 to 1999. 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. Dr. Frincke joined Hollis-Eden from Prolinx, Inc., where he served
as Vice President, Therapeutics Research and Development from 1995 to 1997.
During his 20 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 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.

   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 20 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 to 1987 Mr. Marsella marketed intravenous
infusion pumps for Imed Corporation. Mr. Marsella began his healthcare 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.

                                      14


   Thomas C. Merigan, Jr., M.D. became Scientific Advisor and a director of
Hollis-Eden in March 1996 and acts as our Medical Director for Infectious
Diseases. 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 infectious
diseases, including 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 ten 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 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.

   Christopher L. Reading, Ph.D. became Vice President of Scientific
Development in December 1998. Prior to joining Hollis-Eden, Dr. Reading was
Vice President of Product and Process Development at SyStemix Inc., a
subsidiary of Novartis, Inc. During this time, he successfully filed three
investigational new drug applications (INDs) in the areas of stem cell therapy
technology for cancer and stem cell gene therapy for HIV/AIDS. Prior to
joining SyStemix in 1993, Dr. Reading served on the faculty of the M.D.
Anderson Cancer Center in Houston for 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 Cell 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.

   Dwight Stickney, MD, was appointed Medical Director, Oncology in May 2000.
Dr. Stickney joined Hollis-Eden from the Radiation Oncology Division of
Radiological Associates of Sacramento Medical Group, Inc., in Sacramento,
California where he served as an oncologist from 1993. While at Radiological
Associates, he served as Chairman of the Radiation Oncology Division from 1997
to 1999 and was a member of the Radiation Study section of the National
Institute of Health's Division of Research Grants from 1993 to 1997. He also
served as the Director of Radiation Research for Scripps Clinic and Research
Foundation in La Jolla, California from 1992 to 1993. Dr. Stickney has taught
in medical academia as Associate Professor of Radiation Medicine at Loma Linda
University School of Medicine and has served on the Board of Directors of the
American Cancer Society. Earlier in his career Dr. Stickney held positions
with Burroughs Wellcome and the Centers for Disease Control. He has also
served as a consultant for a number of biotechnology companies on the design
and conduct of clinical trials. Dr. Stickney holds a Bachelor of Science in
Microbiology, a Masters of Science in Immunology, and a M.D. from Ohio State
University. In addition, he is certified as a Diplomate of the American Board
of Internal Medicine and Hematology, and a Diplomate of the American Board of
Radiation Oncology.

   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

                                      15


has been employed at executive levels by multiple start-up companies and
contributed to the success of several turnaround situations. He previously
served as Vice President of Finance at Prometheus Products, a subsidiary of
Sierra Semiconductor from 1994 to 1996, and Vice President Finance and Chief
Financial Officer for Amercom, (a personal computer telecommunications
software publishing company) from 1993 to 1994. From 1988 to 1993, Mr. Weber
served as Vice President Finance and Chief Financial Officer of Instromedix, a
company that 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.

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. This annual report also contains
forward-looking statements that involve risks and uncertainties.

If we do not obtain FDA regulatory approval for our products, we cannot sell
our products and we will not generate revenues.

   Our principal development efforts are currently centered around immune
regulating hormones, a class of drug candidates which we believe shows promise
for the treatment of a variety of infectious diseases and immune system
disorders. However, all drug candidates require U.S. FDA and foreign
government approvals before they can be commercialized. Neither HE2000, our
lead drug candidate, 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 approximately
$48 million through December 31, 2000. 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. If we become profitable, we may not remain
profitable.

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

                                      16


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
permit us to generate profits.

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 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.

Litigation or other disputes regarding patents and other proprietary rights
may be expensive, cause delays in bringing products to market and harm our
ability to operate.

   The manufacture, use or sale of our drug candidates may infringe on the
patent rights of others. If we are unable to avoid infringement of the patent
rights of others, we may be required to seek a license, defend an infringement
action or challenge the validity of the patents in court. Patent litigation is
costly and time consuming. We may not have sufficient resources to bring these
actions to a successful conclusion. In addition, if we do not obtain a
license, develop or obtain non-infringing technology, and fail to successfully
defend an infringement action or to have infringing patents declared invalid,
we may:

  . Incur substantial money damages;

  . Encounter significant delays in bringing our drug candidates to market;
    and/or

  . Be precluded from participating in the manufacture, use or sale of our
    drug candidates or methods of threatment without first obtaining licenses
    to do so.

We cannot guarantee that we will be able to obtain any required license on
favorable terms, if at all.

   In addition, 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 financial results.

                                      17


Confidentiality agreements with employees and others may not adequately
prevent disclosure of trade secrets and other proprietary information.

   In order to protect our proprietary technology and processes, we also rely
in part on confidentiality agreements with our corporate partners, employees,
consultants, outside scientific collaborators and sponsored researchers and
other advisors. These agreements may not effectively prevent disclosure of
confidential information and may not provide an adequate remedy in the event
of unauthorized disclosure of confidential information. In addition, others
may independently discover trade secrets and proprietary information. Costly
and time-consuming litigation could be necessary to enforce and determine the
scope of our proprietary rights, and failure to obtain or maintain trade
secret protection could adversely affect our competitive business position.

Existing pricing regulations and reimbursement limitations may reduce our
potential profits from the sale of our products.

   The requirements governing product licensing, pricing and reimbursement
vary widely from country to country. Some countries require approval of the
sale price of a drug before it can be marketed. In many countries, the pricing
review period begins after product licensing approval is granted. As a result,
we may obtain regulatory approval for a product in a particular country, but
then be subject to price regulations that reduce our profits from the sale of
the product. In some foreign markets pricing of prescription pharmaceuticals
is subject to continuing government control even after initial marketing
approval. In addition, certain governments may grant third-parties a license
to manufacture our products without our permission. Such compulsory licenses
typically would be on terms that are less favorable to us and would have the
effect of reducing our profits.

   Varying price regulation between countries can lead to inconsistent prices
and some re-selling by third parties of our products from markets where our
products are sold at lower prices to markets where our products are sold at
higher prices. This practice of exploiting price differences between countries
can undermine our sales in markets with higher prices and reduce our potential
sales.

   Our ability to commercialize our products successfully also will depend in
part on the extent to which reimbursement for the cost of our products and
related treatments will be available from government health administration
authorities, private health insurers and other organizations. Third-party
payors are increasingly challenging the prices charged for medical products
and services. If we succeed in bringing HE2000 and/or our other potential
products to the market, we cannot assure you that such products will be
considered cost effective and that reimbursement will be available or will be
sufficient to allow us to sell such products on a competitive basis.

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, 2000 our cash and cash equivalents totaled approximately
$34 million. We believe these financial resources will fund our current
operations well into 2002. 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 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. You should be aware that in the future:

  . we may not obtain additional financial resources when necessary or on
    terms favorable to us, if at all; and

  . any available additional financing may not be adequate.

   If we cannot raise additional funds when needed or on acceptable terms, we
would not be able to continue to develop HE2000 or any of our other product
candidates.

                                      18


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.

We may not be able to keep up with the rapid technological change in the
biotechnology and pharmaceutical industries, which could make our products
obsolete and reduce our revenues.

   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.

Delays in the conduct or completion of our clinical trials or the analysis of
the data from our clinical trials may result in delays in our planned filings
for regulatory approvals, or adversely affect our ability to enter into
collaborative arrangements.

   We cannot predict whether we will encounter problems with any of our
completed or ongoing clinical studies that will cause us or regulatory
authorities to delay or suspend our ongoing clinical studies or delay the
analysis of data from our completed or ongoing clinical studies. If the
results of our ongoing and planned clinical studies for HE2000 and HE2200 are
not available when we expect or if we encounter any delay in the analysis of
our clinical studies for HE2000 and HE2200:

  . we may not have the financial resources to continue research and
    development of any of our product candidates; and

  . we may not be able to enter into collaborative arrangements relating to
    any product subject to delay in regulatory filing.

   Any of the following reasons could delay or suspend the completion of our
ongoing and future clinical studies:

  . delays in enrolling volunteers;

  . lower than anticipated retention rate of volunteers in a trial;

  . unfavorable efficacy results; or

  . serious side effects experienced by study participants relating to the
    product candidate.

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.

   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.

                                      19


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 may 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 commercialize our product candidates and
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 we were to lose the services of Richard B. Hollis, or fail to attract or
retain 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'
services could impede the achievement of our 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 that
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;

  . public concern about the safety of our product candidates;

  . unfavorable results from clinical trials;

  . unfavorable developments concerning patents or other proprietary rights;
    or

  . unfavorable domestic or foreign regulatory developments;

                                      20


may have the effect of temporarily or permanently driving down the price of
our common stock. For example, our stock price has ranged from $3.62 to $19.25
between January 1, 2000 and March 15, 2001. In addition, the stock market from
time to time experiences 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. In
addition, in the past, following periods of volatility in the market price of
a company's securities, securities class-action litigation has often been
instituted against those companies. This type of litigation, if instituted,
could result in substantial costs and a diversion of management's attention
and resources, which could materially adversely affect our business, financial
condition and results of operations.

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 24% 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.

Item 2. Properties

   Our corporate headquarters are located at 9333 Genesee Avenue, Suites 110
and 200, San Diego, California 92121, where we lease approximately 17,000
square feet. The leases expire in August 2002. We believe that our facilities
are adequate for our current operations.

Item 3. Legal Proceedings

   From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this Annual Report on Form 10-K, we are not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on our business, financial condition or operating
results.

                                      21


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 2000.

                                    PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

   Our 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 our securities during the last two fiscal years.



   Common Stock                                                   High     Low
   ------------                                                  ------- -------
                                                                   
   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

   2000
     First Quarter.............................................. $19.250 $10.125
     Second Quarter.............................................  17.438   7.750
     Third Quarter..............................................  13.375   7.719
     Fourth Quarter.............................................   9.188   4.000


   On March 15, 2001, the closing price of our Common Stock as reported by the
Nasdaq National Market System was $3.81 per share. There were approximately
5,000 shareholders of record plus beneficial stockholders of our Common Stock
as of such date. We have not paid cash dividends on our common stock and do not
intend to do so in the foreseeable future.

   On October 11, 2000, we issued 208,681 shares of Common Stock to Aeson
Therapeutics, Inc. in connection with our purchase of a 21% equity stake in
Aeson. These shares were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder.

                                       22


Item 6. Selected Financial Data

   The following data summarizes certain selected financial data for each of
the five years ended December 31, 2000 and the period from inception (August
15, 1994) to December 31, 2000. The information presented should be read in
conjunction with the financial statements and related notes included elsewhere
in this report (In thousands, except per share amounts).



                                                                               Period from
                                                                                Inception
                         As of or for the Year Ended December 31,            (Aug. 15, 1994)
                         --------------------------------------------------  to December 31,
                           2000         1999        1998     1997     1996        2000
                         --------     --------     -------  -------  ------  ---------------
                                                           
Statement of Operations
 Data:
 Research and
  development........... $ 17,933 (1) $  5,731     $ 2,777  $ 3,488  $  184     $ 31,770
 General and
  administrative........    4,157       11,940 (2)   3,577    2,044     511       22,476
                         --------     --------     -------  -------  ------     --------
 Total operating
  expenses..............   22,090       17,671       6,354    5,532     695       54,246
 Other income
  (expense).............    2,575        2,351         927      280       3        6,090
                         --------     --------     -------  -------  ------     --------
 Net loss............... $(19,515)    $(15,320)    $(5,427) $(5,253) $ (692)    $(48,156)
                         ========     ========     =======  =======  ======     ========
 Net loss per share,
  basic and diluted..... $  (1.74)    $  (1.41)    $ (0.69) $ (0.85) $(0.15)
 Weighted average number
  of common shares
  outstanding...........   11,240       10,861       7,851    6,193   4,658
Balance Sheet Data:
 Cash and equivalents... $ 34,298     $ 47,486     $24,190  $ 7,103  $   18
 Total assets...........   35,099       48,265      24,524    7,400     241
 Accounts payable and
  accrued expenses......    2,636        1,640         222      467     807
 Stockholders' equity
  (deficit)............. $ 32,463     $ 46,625     $24,303  $ 6,933  $ (566)

- - --------
(1) 2000 Research and Development expenses include $4.5 million for non-cash
    charges for the purchase of technology and in-process R&D.
(2) 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. Our 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 presently engaged in the discovery and development of products for
the treatment of infectious diseases and immune system disorders, including
HIV/AIDS, hepatitis B and C, and malaria.

   We are focusing our initial development efforts on a potent series of
immune regulating hormones and hormone analogs. Our lead compound in this
series, HE2000, is currently in Phase II clinical studies. By altering
cytokine production HE2000 appears from early clinical studies to help
reestablish immune system balance in

                                      23


situations such as HIV where the immune system is dysregulated. In the case 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.

   We have been unprofitable since our inception and we expect to incur
substantial additional operating losses for at least the next few years as we
increase 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 may 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 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 us, then known as Initial Acquisition Corp. ("IAC"), a Delaware
corporation. 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, 2000. We have devoted
substantially all of our resources to the payment of licensing fees and
research and development expenses plus expenses related to the startup of our
business. From inception until December 31, 2000, we have incurred expenses of
approximately $31.8 million in research and development and $22.5 million in
general and administrative expenses, which have been partially offset by $6.1
million in net interest income resulting in a loss of $48.2 million for the
period.

   Research and development expenses were $17.9 million, $5.7 million and $2.8
million in 2000, 1999 and 1998, respectively. The research and development
expenses relate primarily to the ongoing development, preclinical testing, and
clinical trials for our first drug candidate, HE2000. $4.5 million of the
increase in research and development in 2000 was non-cash charges related to
the acquisition of technology and in-process R&D. The balance of the increase
was due to increased staffing, preclinical activity, and clinical trials. 1999
research and development expenses increased compared to 1998 due to increased
staffing, preclinical activity, and the initiation of clinical trials.

   General and administrative expenses remained flat in 2000 compared to 1999
excluding the non-cash charges in 1999 of $7.7 million. The $7.7 million of
non-cash charges was due to the acceleration of vesting of stock options for a
former officer of Hollis-Eden, the issuance of warrants for services
(described below), and the issuance of stock options to non-employees. During
1999, general and administrative expenses increased $0.6 million from 1998 due
to increased staffing and increased operating expenses for salaries, benefits,
recruiting, legal, and travel.

   During 1999, we announced the resignation of an executive officer and
accelerated the vesting of 300,000 stock options previously granted to him.
This acceleration was 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 additional general and administrative non-cash, non-
recurring charges of $956,000. A total of $716,000 was amortized during 1998
for services in lieu of cash and for non-cash compensation. In addition,
$240,000 was expensed for options granted to certain directors and
consultants.

                                      24


Liquidity and Capital Resources

   We have financed our operations since inception through the sale of shares
of Common Stock. 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 $13 million from the exercise of warrants and stock
options.

   Our 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 2002.
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.

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.

                                      25


                                   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 2001
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.

                                      26


                                    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, 2000, 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 October 20, 2000, we filed a report on Form 8-K dated October 11, 2000
with the SEC announcing that we acquired a 21% equity stake in Aeson
Therapeutics and an exclusive worldwide sublicense to three issued patents in
the area of adrenal steroids in exchange for $2 million in cash and 208,681
shares of Common Stock.

                                      27


                                  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 28, 2001

                                          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.




             Signature                           Title                    Date
             ---------                           -----                    ----

                                                             
/s/ Richard B. Hollis                Chairman of the Board of        March 28, 2001
____________________________________ Directors, President and
Richard B. Hollis                    Chief Executive Officer

/s/ Daniel D. Burgess                Chief Operating                 March 28, 2001
____________________________________ Officer/Chief Financial
Daniel D. Burgess                    Officer (Principal Financial
                                     Officer)

/s/ Robert W. Weber                  Chief Accounting Officer and    March 28, 2001
____________________________________ Vice President - Controller
Robert W. Weber                      (Principal Accounting
                                     Officer)

/s/ Paul Bagley                      Director                        March 28, 2001
____________________________________
Paul Bagley

/s/ Leonard Makowka                  Director                        March 28, 2001
____________________________________
Leonard Makowka


                                      28




             Signature                           Title                    Date
             ---------                           -----                    ----

                                                             
/s/ Brendan R. McDonnell             Director                        March 28, 2001
____________________________________
Brendan R. McDonnell

/s/ Thomas C. Merigan, Jr. M.D.      Scientific Advisor and          March 28, 2001
____________________________________ Director
Thomas C. Merigan, Jr. M.D.

/s/ William H. Tilley                Director                        March 28, 2001
____________________________________
William H. Tilley

/s/ Salvatore J. Zizza               Director                        March 28, 2001
____________________________________
Salvatore J. Zizza


                                       29


                                                                      APPENDIX E

                       HOLLIS-EDEN PHARMACEUTICALS, INC.

                           ANNUAL REPORT ON FORM 10-K

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

                                 EXHIBIT INDEX



 Exhibit
 Number  Description of Document
 ------- ----------------------------------------------------------------------
      
   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 (incorporated
         by reference to Exhibit 10.5 to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 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).



                                      E-1




 Exhibit
 Number  Description of Document
 ------- ----------------------------------------------------------------------
      
 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).

 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).

 10.14   Indemnification Agreement among Registrant and Executive Offices and
         Directors.

 23.1    Consent of BDO Seidman, LLP.

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

- - --------
*  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


                                                                      APPENDIX F

                       HOLLIS-EDEN PHARMACEUTICALS, INC.

                         Index To Financial Statements



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

Balance Sheets as of December 31, 2000 and 1999...........................  F-3

Statements of Operations for the Fiscal Years Ended December 31, 2000,
 December 31, 1999, December 31, 1998 and the Period From Inception
 (August 15, 1994) to December 31, 2000...................................  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, December 31, 2000 and the Period from Inception (August 15,
 1994) to December 31, 1994...............................................  F-5

Statements of Cash Flow for the Fiscal Years Ended December 31, 2000,
 December 31 1999, December 31, 1998 and the Period from Inception (August
 15, 1994) to December 31, 2000...........................................  F-7

Notes to Financial Statements.............................................  F-8


                                      F-1


              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, 2000
and 1999 and the related statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000
and for the period from inception (August 15, 1994) to December 31, 2000.
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 auditing standards generally
accepted in the United States. 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, 2000 and 1999 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 and for the period from inception (August 15, 1994) to
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

                                          BDO Seidman, LLP

New York, NY
January 19, 2001

                                      F-2


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                                 BALANCE SHEETS



                                                              December 31,
                                                            ------------------
                                                              2000      1999
                                                            --------  --------
                                                             (In thousands)
                                                                
                          ASSETS:

Current assets:
Cash and cash equivalents.................................. $ 34,298  $ 47,486
Prepaid expenses...........................................       96       115
Deposits...................................................       27        27
                                                            --------  --------
Total current assets.......................................   34,421    47,628
Property and equipment, net of accumulated depreciation of
 $204 and $97..............................................      422       392
Receivable from related party (Note 5).....................      256       245
                                                            --------  --------
Total assets............................................... $ 35,099  $ 48,265
                                                            ========  ========

           LIABILITIES AND STOCKHOLDERS' EQUITY:

Current liabilities:
Accounts payable and accrued expenses...................... $  2,636  $  1,640
                                                            --------  --------
Total current liabilities..................................    2,636     1,640

Commitments and contingencies (Notes 8, 13, 14)

Stockholders' equity: (Notes 3, 4, 7, 9, 10, 11, 12)
  Preferred stock, no par value, 10,000 shares authorized;
   no shares outstanding...................................      --        --
  Common stock, $.01 par value, 30,000 shares authorized;
   11,590 and 11,071 shares issued and outstanding,
   respectively............................................      116       111
  Paid-in capital..........................................   80,503    75,155
  Deficit accumulated during development stage.............  (48,156)  (28,641)
                                                            --------  --------
    Total stockholders' equity.............................   32,463    46,625
                                                            --------  --------
    Total liabilities and stockholders' equity............. $ 35,099  $ 48,265
                                                            ========  ========



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

                                      F-3


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                            STATEMENTS OF OPERATIONS


                                                                  Period from
                                                                   Inception
                                      For the year ended        (Aug. 15, 1994)
                                         December 31,           to December 31,
                                   ---------------------------  ---------------
                                     2000      1999     1998         2000
                                   --------  --------  -------  ---------------
                                   (In thousands, except per share amounts)
                                                    
Operating expenses:
 Research and development
  R&D operating expenses.......... $ 13,407  $  5,731  $ 2,777     $ 26,590
  R&D costs related to common
   stock and stock option grants
   for collaborations and
   technology purchase............    4,526       --       --         5,180
                                   --------  --------  -------     --------
    Total research and
     development..................   17,933     5,731    2,777       31,770
 General and administrative
  G&A operating expenses..........    4,157     4,279    2,621       12,986
  G&A costs related to
   options/warrants granted.......      --      7,661      956        9,490
                                   --------  --------  -------     --------
    Total general and
     administrative...............    4,157    11,940    3,577       22,476
                                   --------  --------  -------     --------
    Total operating expenses......   22,090    17,671    6,354       54,246
Other income (expense):
Interest income...................    2,575     2,351      929        6,140
Interest expense..................      --        --        (2)         (50)
                                   --------  --------  -------     --------
Total other income................    2,575     2,351      927        6,090
                                   --------  --------  -------     --------
Net loss.......................... $(19,515) $(15,320) $(5,427)    $(48,156)
                                   ========  ========  =======     ========
Net loss per share, basic and
 diluted.......................... $  (1.74) $  (1.41) $ (0.69)
Weighted average number of common
 shares outstanding...............   11,240    10,861    7,851



   The accompanying notes are an integral part of these financial statements

                                      F-4


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                      STATEMENTS OF STOCKHOLDERS' EQUITY



                            Preferred                                           Deficit
                          stock at par  Common stock                          accumulated
                              value     at par value  Capital in                during
                          ------------- ------------- excess of    Deferred   development
(In thousands)            shares amount shares amount par value  compensation    stage     Total
- - --------------            ------ ------ ------ ------ ---------- ------------ ----------- -------
                                                                  
Contribution by
 stockholder............   --    $ --     --   $ --    $   103     $   --      $    --    $   103
Common stock issued for
 cash...................   --      --   2,853    --         25         --           --         25
Common stock issued as
 consideration for the
 license agreements
 (Note 8)...............   --      --     543    --          5         --           --          5
Net loss................   --      --     --     --        --          --        (1,277)   (1,277)
                           ---   -----  -----  -----   -------     -------     --------   -------
Balance at December 31,
 1994...................   --      --   3,396    --        133         --        (1,277)   (1,144)
Common stock issued for
 cash...................   --      --     679    --        250         --           --        250
Common stock issued as
 consideration for
 amendments to the
 license agreements
 (Note 8)...............   --      --      76    --         28         --           --         28
Net loss................   --      --     --     --        --          --          (672)     (672)
                           ---   -----  -----  -----   -------     -------     --------   -------
Balance at December 31,
 1995...................   --      --   4,151    --        411         --        (1,949)   (1,538)
Common stock issued in
 conversion of debt
 (Note 10)..............   --      --     165    --        371         --           --        371
Common stock issued for
 cash, net of expenses
 (Note 10)..............   --      --     580    --      1,234         --           --      1,234
Common stock issued as
 consideration for
 termination of a
 finance agreement......   --      --      15    --         34         --           --         34
Warrants issued to
 consultants for
 services rendered......   --      --     --     --         24         --           --         24
Net loss................   --      --     --     --        --          --          (692)     (692)
                           ---   -----  -----  -----   -------     -------     --------   -------
Balance at December 31,
 1996...................   --      --   4,911    --      2,074         --        (2,641)     (567)
Recapitalization of
 Company upon the merger
 with Initial
 Acquisition Corp. (Note
 3).....................   --      --     883     58     6,213         --           --      6,271
Warrants issued to a
 certain director upon
 the successful closure
 of the merger..........   --      --     --     --        570         --           --        570
Exercise of warrants,
 net of expenses........   --      --     978     10     5,619         --           --      5,629
Deferred compensation--
 stock options (Note
 12)....................   --      --     --     --      1,848      (1,848)         --        --
Amortization of deferred
 compensation...........   --      --     --     --        --          282          --        282
Exercise of stock
 options................   --      --     --     --          1         --           --          1
Net loss................   --      --     --     --        --          --        (5,253)   (5,253)
                           ---   -----  -----  -----   -------     -------     --------   -------
Balance at December 31,
 1997...................   --      --   6,772     68    16,325      (1,566)      (7,894)    6,933
Exercise of warrants....   --      --     399      4     1,196         --           --      1,200
Exercise of stock
 options................   --      --      53      1       155         --           --        156
Private Placement, net
 of expenses (Note 10)..     4     --   1,329     13    19,877         --           --     19,890
Warrants issued for
 services in lieu of
 cash (Note 9)..........   --      --     --     --        408         --           --        408
Stock issued for license
 fee (Note 8)...........   --      --      33    --        500         --           --        500
Stock issued for
 services in lieu of
 cash...................   --      --       6    --         95         --           --         95
Options issued for
 services in lieu of
 cash (Note 12).........   --      --     --     --        240         --           --        240
Amortization of deferred
 compensation...........   --      --     --     --        --          308          --        308
Net loss................   --      --     --     --        --          --        (5,427)   (5,427)
                           ---   -----  -----  -----   -------     -------     --------   -------
Balance at December 31,
 1998...................     4   $ --   8,592  $  86   $38,796     $(1,258)    $(13,321)  $24,303
                           ---   -----  -----  -----   -------     -------     --------   -------



                                      F-5


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                   STATEMENTS OF STOCKHOLDERS' EQUITY--Cont.



                            Preferred                                           Deficit
                          stock at par  Common stock                          accumulated
                              value     at par value  Capital in                during
                          ------------- ------------- excess of    Deferred   development
(In thousands)            shares amount shares amount par value  compensation    stage     Total
- - --------------            ------ ------ ------ ------ ---------- ------------ ----------- --------
                                                                  
Exercise of warrants....   --      --      755    8       5,136       --             --      5,144
Exercise of stock
options.................   --      --       10  --           75       --             --         75
Private Placement, net
of expenses (Note 4)....   --      --    1,368   14      24,759       --             --     24,773
Preferred Stock
Conversion (Note
10,11)..................    (4)    --      346    3          (3)      --             --        --
Deferred compensation-
Options forfeited (Note
12).....................   --      --      --   --       (1,207)    1,258            --         51
Amortization of non-
employee options........   --      --      --   --          559       --             --        559
Warrants issued for
services in lieu of cash
(Note 9)................   --      --      --   --        2,140       --             --      2,140
Options accelerated
vesting (Note 12).......   --      --      --   --        4,900       --             --      4,900
Net loss................   --      --      --   --          --        --         (15,320)  (15,320)
                           ---   -----  ------  ---    --------     -----      ---------  --------
Balance at December 31,
1999....................   --      --   11,071  111      75,155       --         (28,641)   46,625
Exercise of warrants....   --      --      133    2         758       --             --        760
Exercise of stock
options.................   --      --        1  --            5       --             --          5
Common Stock issued for
401k/401m plan..........   --      --        6  --           63       --             --         63
Common Stock issued for
R&D In-Process (Note
8)......................   --      --      209    2       1,998       --             --      2,000
Options granted for
license fee.............   --      --       38  --          598       --             --        598
Amortization of non-
employee options........   --      --      --   --           79       --             --         79
Common Stock issued for
purchase of technology..   --      --      132    1       1,847       --             --      1,848
Net loss................   --      --      --   --          --        --         (19,515)  (19,515)
                           ---   -----  ------  ---    --------     -----      ---------  --------
Balance at December 31,
2000....................   --    $ --   11,590  116    $ 80,503     $ --       $ (48,156) $ 32,463
                           ===   =====  ======  ===    ========     =====      =========  ========


   The accompanying notes are an integral part of these financial statements

                                      F-6


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                            STATEMENTS OF CASH FLOWS



                                                                   Period from
                                                                    Inception
                                                                 (Aug. 15, 1994)
                              For the year ended December 31,    to December 31,
                              ---------------------------------- ---------------
                                 2000        1999       1998          2000
                              ----------  ----------  ---------- ---------------
                                              (In thousands)
                                                     
Cash flows from operating
 activities:
  Net loss..................  $  (19,515) $  (15,320) $  (5,427)    $ (48,156)
Adjustments to reconcile net
 loss to net cash used in
 operating activities:
  Depreciation..............         107          68         21           204
  Common stock issued for
   401k/401m plan...........          63         --         --             63
  Common stock issued as
   consideration for
   amendments to the license
   agreements...............         --          --         --             33
  Common stock issued as
   consideration for
   termination of a finance
   agreement................         --          --         --             34
  Common stock and options
   issued as consideration
   for license fees and
   services.................         677         --       1,003         1,694
  Expense related to
   warrants issued as
   consideration to
   consultants..............         --        2,140        --          2,140
  Expense related to
   warrants issued to a
   director for successful
   closure of merger........         --          --         --            570
  Expense related to stock
   options issued...........         --        4,900        240         5,140
  Expense related to common
   stock issued for the
   purchase of technology...       1,848         --         --          1,848
  Common stock issued as
   consideration for In-
   Process R&D..............       2,000         --         --          2,000
  Deferred compensation
   expense related to
   options issued...........         --          620        308         1,210
Changes in assets and
 liabilities:
  Prepaid expenses..........          19         (89)        17           (96)
  Deposits..................         --          (18)       --            (27)
  Receivable--tax refund....         --          --         105           --
  Loan receivable from
   related party............         (12)        (38)      (160)         (256)
  Accounts payable and
   accrued expenses.........         916         909        103         2,055
  Wages payable.............          81         500        --            581
  License fees payable to
   related party............         --          --         --            --
  R & D fees payable to
   related party............         --          --        (338)          --
  Disposal of assets........         --            7        --              7
                              ----------  ----------  ---------     ---------
   Net cash used in
    operating activities....     (13,816)     (6,321)    (4,128)      (30,956)
Cash flows provided by
 investing activities:
  Purchase of property and
   equipment................        (137)       (375)       (31)         (632)
                              ----------  ----------  ---------     ---------
   Net cash used in
    investing activities....        (137)       (375)       (31)         (632)
Cash flows from financing
 activities:
  Contributions from
   stockholder..............         --          --         --            104
  Net proceeds from sale of
   preferred stock..........         --          --       4,000         4,000
  Net proceeds from sale of
   common stock.............         --       24,773     15,890        42,172
  Proceeds from issuance of
   debt.....................         --          --         --            371
  Net proceeds from
   recapitalization.........         --          --         --          6,271
  Net proceeds from
   warrants/options
   exercised................         765       5,219      1,356        12,968
                              ----------  ----------  ---------     ---------
   Net cash from financing
    activities..............         765      29,992     21,246        65,886
Net increase in cash and
 equivalents................     (13,188)     23,296     17,087        34,298
Cash and equivalents at
 beginning of period........      47,486      24,190      7,103           --
                              ----------  ----------  ---------     ---------
Cash and equivalents at end
 of period..................  $   34,298  $   47,486  $  24,190     $  34,298
                              ==========  ==========  =========     =========
Supplemental disclosure of
 cash flow information:
Interest paid...............  $      --   $      --   $       2     $      46
Conversion of debt to
 equity.....................         --          --         --            371
Options issued to
 consultants in lieu of
 cash, no vesting...........         --          --         --             24
Warrants issued in lieu of
 cash, commissions on
 private placement..........         --          600        --            733


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

                                      F-7


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                         NOTES TO FINANCIAL STATEMENTS

1. The Company

   Hollis-Eden Pharmaceuticals Inc. ("Hollis Eden" or the "Company"), 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 B and C
and malaria. Since its inception (August 15, 1994) through March 1997, the
Company's efforts were directed toward organizing, licensing technology 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 immune regulating hormones and hormone analogs. The lead
compound in this series, HE2000, is currently in Phase II clinical studies. To
date, the Company has not developed commercial products or generated sales for
the period from August 15, 1994 through December 31, 2000.

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, 2000, the Company's cash equivalents totaling
$34.3 million were deposited primarily 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, preclinical and clinical trial expenses, as well as
research and development expenses with related parties. Such amounts paid or
payable to related parties aggregated zero in 2000, and $0.5 million and $1.3
million for the years ended December 31, 1999 and 1998, respectively, and $6.3
million for the period from inception (August 15, 1994) to December 31, 2000.
Such expenses are recognized as incurred.

   During October 2000, the Company incurred an expense of $4.0 million
comprised of $2.0 million in cash and 208,681 shares of Hollis Eden Common
Stock for a 21% equity stake and an exclusive worldwide sublicense to three
issued patents (see Note 8, "Aeson Therapeutics").

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 and accounts payable. These financial instruments are stated at
their respective carrying values, which approximate their fair values.

                                      F-8


                       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 is 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 did not have a material effect on
the financial statements.

3. Recapitalization

   On March 26, 1997, Hollis-Eden Inc. was merged (the "Merger") with and into
the Company (then known as Initial Acquisition Corp. (IAC)). 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., 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 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.

   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 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.

   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.

                                      F-9


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


   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 2,750,000 shares of Company Common Stock have been authorized for
issuance under the plan (see Note 12).

4. 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.

5. 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, 2003.

6. Income Taxes

   The Company has available a net operating loss carryforward of
approximately $35 million at December 31, 2000 which may be carried forward as
an offset to taxable income, if any, in future years through its expiration in
2012 to 2020. The Company has a net deferred tax asset of approximately $13
million at December 31, 2000 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 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.

7. 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.

8. Related Party Licenses and other Agreements and Commitments and
Contingencies

Colthurst, Edenland and Mr. Prendergast

   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
Mr. 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.

                                     F-10


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


   On August 25, 1994, the Company entered into a license agreement ("Edenland
License Agreement") with a related party, Edenland Inc., a company controlled
by Mr. 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 balances of these fees were 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 in 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 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 $3.0 million 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 $3.0 million payment for HE317 or other product
development costs was to be made. A payment of $1.5 million was payable upon
the closing of the Merger with IAC and the balance was contingent upon future
funding events. $2.7 million of the $3.0 million was paid in 1997, with the
remaining $300,000 accrued as an expense in 1997 and paid in April 1998.

   During November 1999, the Company filed two separate requests for
arbitration with Mr. Prendergast, Colthurst and Edenland. The first
arbitration sought clarification of certain operational issues with respect to
roles and responsibilities set forth in the license agreement covering HE2000.
The second arbitration sought to rescind both of the agreements with Edenland
covering future potential drug candidates other than HE2000.

   On January 20, 2000, Hollis-Eden reached a settlement on its pending
arbitrations with Mr. Prendergast, Colthurst and Edenland. The Settlement and
Mutual Release Agreement completely disposed of all of the matters that were
at issue in the pending arbitrations. 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. 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 were issued in
2000, with the remaining 528,000 shares to be issued over the next four years
conditioned

                                     F-11


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

on continued compliance with the agreement and, in particular, satisfaction of
the Conditions (as defined below). In addition, all of the shares under the
warrant vest over four years conditioned on continued compliance with the
agreement and, in particular, satisfaction of the Conditions (as defined
below). The Sponsored Research and License Agreement replaces the Edenland
License Agreement and the Research, Development and Option Agreement. 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 preclinical
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.

   As stated above, the issuance of the additional shares of Common Stock and
the vesting of the warrant is dependent upon the satisfaction of certain
conditions (the "Conditions"), including (i) support of Hollis-Eden's actions
by Mr. Prendergast and Colthurst, by voting their shares of Hollis-Eden stock
in favor of management and (ii) Mr. Prendergast and his affiliated companies
not conducting research and development activities relating to the transferred
technology. In accordance with Emerging Issues Task Force No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, these future
events could not be determined at the date of the agreements (January 2000).
Accordingly, the shares and warrants will be accounted for as they vest or are
issued. During 2000, we recorded a research and development charge for $1.9
million representing the fair value of the 132,000 shares issued under the
agreement.

   Because all of the Conditions have not been satisfied, Hollis-Eden believes
it has no obligation to issue to Colthurst any additional shares and that the
warrant will not vest as to any shares of Common Stock. While Hollis-Eden is
confident in its analysis, if any dispute should arise in this matter, Hollis-
Eden cannot guarantee that, as a result of such dispute, additional equity
will not be issued or that an additional accounting charge will not be made.

Aeson Therapeutics

   In October 2000, the Company acquired a 21% equity stake in Aeson
Therapeutics Inc. ("Aeson") for approximately $4 million and an exclusive
worldwide sublicense to three issued patents in the area of adrenal steroids
in exchange for $2.0 million in cash and 208,672 shares of Common Stock valued
at $2 million. The cash and shares were expensed as in-process R&D during the
fourth quarter of 2000. As part of the transaction, Aeson and its shareholders
have granted the Company an exclusive option to acquire the remainder of Aeson
at a predetermined price. If the Company elects to not exercise the option by
April 11, 2002, the Company, at its option, can fund an additional $2.0
million to Aeson for development work and extend the purchase option date
until April 11, 2003. Regardless of whether the Company elects to exercise
this option, the Company will retain its exclusive sublicense to the three
patents.

9. 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. The warrants are
exercisable until January 7, 2002, except for one warrant for 393,250 shares
which expires January 7, 2006.

                                     F-12


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


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 were exercisable until February 5, 2000, to purchase
the same number of shares of common stock at a price of $15.90 per share.
These warrants have expired.

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 10), 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 was 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. These warrants have
expired.

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. The warrants were exercisable until May 15, 2000 except for one
warrant to purchase 50,000 units which expires May 15, 2002. 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. The unexercised warrants with an
expiration date of May 15, 2000 have expired.

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 Class B Warrants at an exercise price of $5.775 per
warrant and were exercisable until May 15, 2000. Each Class B Warrant entitled
the holder to purchase one Unit (i.e. one share of common stock and one Class
A Warrant). The unexercised warrants have expired.

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. These warrants have been
exercised.

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.

                                     F-13


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


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.

   The following table summarizes stock warrant activity for 1998 through 2000
(in thousands, except per share amounts):



                                                             Price Per Share
                                                         -----------------------
                                                                        Weighted
                                                  Shares     Range      Average
                                                  ------ -------------- --------
                                                               
Outstanding, December 31, 1997................... 2,373  $ 2.48 - 15.90  $ 7.79

1998
Issued........................................... 1,587   14.75 - 17.00   16.79
Exercised........................................   398    2.48 - 10.00    3.01

Outstanding, December 31, 1998................... 3,562    2.48 - 17.00   12.33
1999
Issued...........................................   590   18.25 - 20.50   20.16
Exercised........................................   755    2.48 - 14.75    6.88
Canceled.........................................     7           11.02   11.02

Outstanding, December 31, 1999................... 3,390    2.48 - 20.50   14.91
2000
Issued...........................................   400           25.00   25.00
Exercised........................................   133    2.48 -  9.50    5.71
Canceled.........................................   123    6.03 - 15.90   11.51

Outstanding, December 31, 2000................... 3,534  $ 9.00 - 25.00  $16.52


   For various price ranges, the following table summarizes the weighted
average prices of outstanding warrants as of December 31, 2000 (in thousands,
except per share amounts):



                             Outstanding Warrants                Exercisable Warrants
                             ------------------------------      ------------------------------
                                              Weighted                            Weighted
         Range of                             average                             average
      Exercise Prices        Shares            price             Shares            price
      ---------------        ------           --------           ------           --------
                                                                      
      $ 5.01 - $10.00          100             $ 9.50              100             $ 9.50
      $10.01 - $15.00        1,007              11.02            1,007              11.02
      $15.01 - $20.00        1,527              17.07            1,527              17.07
      $20.01 - $25.00          900              22.50              500              20.50


10. Common Stock

   On January 21, 1996, the Company completed a $367,522 round of debt
financing with a group of private investors. These notes, with an 8% interest
rate, were due on or before the earlier of (i) January 21, 1997 or (ii) the
closing of a private or public offering of securities. 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

                                     F-14


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

payable to a 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.

   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 were 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 could 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 11).

11. Preferred Stock

   During May 1998, as part of the private placement, the Company issued 4,000
shares of Convertible Preferred Stock for proceeds of $4.0 million.

   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 10. Upon conversion, all outstanding
Preferred shares and Adjustable Common shares were eliminated.

   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-15


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)


12. Stock Options

   The 1997 Stock Option Plan (the "Plan") was approved by the shareholders in
1997. Under the Plan, 2,750,000 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 or four
year period beginning one year from the date of the grant. The following table
summarizes stock option activity under the Plan for 1997 through 2000 (in
thousands, except per share amounts):



                                                             Price Per Share
                                                         -----------------------
                                                                        Weighted
                                                  Shares     Range      Average
                                                  ------ -------------- --------
                                                               
1997
Granted..........................................   518  $  6.25 - 8.70  $ 7.13

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

1998
Granted..........................................   341   13.25 - 16.75   14.52
Canceled.........................................   100            8.70    8.70

Outstanding, December 31, 1998...................   759    6.75 - 16.75   10.24

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

Outstanding, December 31, 1999................... 1,474    6.75 - 16.75   11.36

2000
Granted..........................................   774    6.50 - 15.06    8.18
Exercised........................................     1            6.75    6.75
Canceled.........................................    24    6.75 - 15.13   14.22

Outstanding, December 31, 2000................... 2,223  $ 6.50 - 16.75  $10.22


   The Company entered into stock option 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, 1999 and 2000, the Company granted options to certain consultants
and directors, and will recognize $540,000, $380,000 and $166,000 in expense
related to these options ratably over the three-year vesting period. $240,000,
$559,000 and $79,000 were expensed in 1998, 1999 and 2000 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-16


                       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 2000 (in thousands, except per share amounts):



                                                             Price Per Share
                                                          ----------------------
                                                                        Weighted
                                                   Shares     Range     Average
                                                   ------ ------------- --------
                                                               
1995
Granted...........................................    38  $ 2.65 - 7.95  $ 4.64

Outstanding, December 31, 1995....................    38    2.65 - 7.95    4.64

1996
Granted...........................................   570           2.25    2.25

Outstanding, December 31, 1996....................   608    2.25 - 7.95    2.40

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

Outstanding, December 31, 1997.................... 2,958    2.25 - 7.95    4.51

1998
Exercised.........................................    53    2.25 - 5.30    2.93
Canceled..........................................    50           2.25    2.25

Outstanding, December 31, 1998.................... 2,855    2.25 - 7.95    4.58

1999
Granted...........................................   300          16.63   16.63
Exercised.........................................    10           7.95    7.95
Canceled.......................................... 1,220    2.25 - 5.00    4.95

Outstanding, December 31, 1999.................... 1,925   2.25 - 16.63    6.16

Outstanding, December 31, 2000.................... 1,925  $2.25 - 16.63  $ 6.16


   For various price ranges, weighted average characteristics of outstanding
stock options at December 31, 2000 were as follows:



                                                            Exercisable options
                             Outstanding options            ---------------------
                      ------------------------------------
                                                 Weighted               Weighted
      Range of                     Remaining     average                average
   Exercise Prices     Shares     life (years)    price      Shares      price
   ---------------    ---------   ------------   --------   ---------   --------
                                                         
   $ 2.25 - $ 4.99      425,000       5.3         $ 2.25      425,000    $ 2.25
   $ 5.00 - $ 8.99    2,158,366       8.3           5.72    1,183,667      5.62
   $ 9.00 - $12.99      570,165       9.0          10.78      150,564     10.56
   $13.00 - $16.99      994,800       8.1          15.31      622,325     15.32


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-17


                       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 1998 through
2000, using the Black-Scholes option pricing model with the following weighted
average assumptions:



                                                       2000     1999     1998
                                                      -------  -------  -------
                                                               
   Risk free interest rate...........................    5.45%    5.31%    5.55%
   Expected dividend yield...........................       0%       0%       0%
   Expected lives.................................... 5 years  5 years  5 years
   Expected volatility...............................     137%    46.5%    46.5%


   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 (in thousands):

                                                                   
   Year ended December 31, 1998......................................... $1,436
   Year ended December 31, 1999......................................... $6,662
   Year ended December 31, 2000......................................... $5,104

   

   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 (in thousands):

 Net loss



                                                           Year ended December
                                                                   31,
                                                          ----------------------
                                                           2000    1999    1998
                                                          ------- ------- ------
                                                                 
   As reported........................................... $19,515 $15,320 $5,427
   Pro forma............................................. $24,619 $21,982 $6,863


   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 2000, 1999 and 1998 were $6.59, $8.59 and $4.21 per
share, respectively.

13. 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, future salary increases and equity compensation as
determined by the Hollis-Eden Pharmaceuticals Board of Directors. On January
1, 2000, Mr. Hollis' base salary was increased from $330,000 to $363,000. 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 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.

                                     F-18


                       HOLLIS-EDEN PHARMACEUTICALS, INC.
                         (A Development Stage Company)

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

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.

14. Leases

   Rental expenses for principally leased facilities under operating leases
were approximately $431,000, $315,000 and $115,000 for 2000, 1999 and 1998,
respectively. Future minimum payments for operating leases are as follows (in
thousands):



                                                                       Operating
                                                                        Leases
                                                                       ---------
                                                                    
      2001............................................................   $456
      2002............................................................    320
      2003............................................................     24
      2004............................................................     10
      2005............................................................      0
                                                                         ----
      Total minimum lease payments....................................   $810
                                                                         ====


15. Selected Quarterly Financial Information (Unaudited)

   A summary of quarterly financial information for each of the last two years
follows:



                                              Quarter
                                 ------------------------------------   Total
                                  March    June    September December   Year
                                 -------  -------  --------- --------  -------
                                      (In thousands, except per share)
                                                        
YEAR ENDED DECEMBER 31, 2000
R&D expenses.................... $ 4,198  $ 2,617   $ 2,147  $ 4,445   $13,407
G&A expenses....................   1,077    1,025       771    1,284     4,157
Non-cash charges (1)............   2,454       24        24    2,024     4,526
Net loss........................   7,085    2,993     2,279    7,158    19,515
Net loss per share..............   (0.63)   (0.27)    (0.20)   (0.64)    (1.74)
Cash and cash equivalents.......  45,044   41,140    38,776   34,298    34,298

YEAR ENDED DECEMBER 31, 1999
R&D expenses.................... $   759  $ 1,601   $ 1,406  $ 1,965   $ 5,731
G&A expenses....................     966    1,127       791    1,395     4,279
Non-cash charges (2)............   7,166      148       165      182     7,661
Net loss........................   8,393    2,277     1,754    2,896    15,320
Net loss per share..............   (0.92)   (0.21)    (0.16)   (0.26)    (1.41)
Cash and cash equivalents.......  52,870   50,592    49,086   47,486    47,486

- - --------
(1) Non-cash charges during 2000 was for the purchase of technology and the
    licensing of technology during the first quarter and the purchase of in-
    process research and development during the fourth quarter.
(2) Non-cash charged during the first quarter of 1999 was for the acceleration
    of vesting of options for a former officer of Hollis-Eden and for warrants
    issued with a financial consulting organization affiliated with a director
    of Hollis-Eden.

                                     F-19

EX-10.14

                                                                   Exhibit 10.14



                       HOLLIS-EDEN PHARMACEUTICALS, INC.

                           INDEMNIFICATION AGREEMENT


     This Indemnification Agreement ("Agreement") is effective as of
_______________, by and between Hollis-Eden Pharmaceuticals, Inc., a Delaware
corporation (the "Company"), and _____________________________ ("Indemnitee").

     WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and its related
entities;

     WHEREAS, in order to induce Indemnitee to continue to provide services to
the Company, the Company wishes to provide for the indemnification of, and the
advancement of expenses to, Indemnitee to the maximum extent permitted by law;

     WHEREAS, the Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for the Company's directors, officers, employees,
agents and fiduciaries, the significant increases in the cost of such insurance
and the general reductions in the coverage of such insurance;

     WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and

     WHEREAS, in view of the considerations set forth above, the Company desires
that Indemnitee shall be indemnified and advanced expenses by the Company as set
forth herein;

     NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below.

     1.   Certain Definitions.
          -------------------

          (a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportions as their ownership of stock of the Company, becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing more than 50% of the total
voting power represented by the Company's then outstanding Voting Securities,
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Company and
any new director whose election by the Board of Directors or nomination for
election by the


Company's stockholders was approved by a vote of at least two thirds (2/3) of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof, or (iii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation other than a merger or consolidation which would
result in the Voting Securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into Voting Securities of the surviving entity) at least 80% of the
total voting power represented by the Voting Securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation, or
the stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of related transactions) all or substantially all of the
Company's assets.

          (b) "Claim" shall mean with respect to a Covered Event: any
threatened, pending or completed action, suit, proceeding or alternative dispute
resolution mechanism, or any hearing, inquiry or investigation that Indemnitee
in good faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other.

          (c) References to the "Company" shall include, in addition to Hollis-
Eden Pharmaceuticals, Inc., any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger to which
Hollis-Eden Pharmaceuticals, Inc. (or any of its wholly owned subsidiaries) is a
party which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.

          (d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.

          (e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld), actually and reasonably incurred,
of any Claim and any federal, state, local or foreign taxes imposed on the
Indemnitee as a result of the actual or deemed receipt of any payments under
this Agreement.

                                                                               2


          (f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgment in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim.

          (g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements).

          (h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.

          (i) "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
applicable law to review the Company's obligations hereunder and under
applicable law, which may include a member or members of the Company's Board of
Directors, Independent Legal Counsel or any other person or body not a party to
the particular Claim for which Indemnitee is seeking indemnification.

          (j) "Section" refers to a section of this Agreement unless otherwise
indicated.

          (k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.

     2.   Indemnification.
          ---------------

          (a) Indemnification of Expenses.  Subject to the provisions of Section
              ---------------------------
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by law if Indemnitee was or is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness or
other participant in, any Claim (whether by reason of or arising in part out of
a Covered Event), including all interest, assessments and other charges paid or
payable in connection with or in respect of such Expenses.

          (b) Review of Indemnification Obligations. Notwithstanding the
              -------------------------------------
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which Independent Legal Counsel is the Reviewing Party)
that Indemnitee is not entitled to be indemnified hereunder under applicable
law, (i) the Company shall have no further obligation under Section 2(a) to make
any payments to Indemnitee not made prior to such determination by such
Reviewing Party, and (ii) the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all Expenses
theretofore paid in indemnifying

                                                                               3


Indemnitee; provided, however, that if Indemnitee has commenced or thereafter
commences legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee is entitled to be indemnified hereunder under
applicable law, any determination made by any Reviewing Party that Indemnitee is
not entitled to be indemnified hereunder under applicable law shall not be
binding and Indemnitee shall not be required to reimburse the Company for any
Expenses theretofore paid in indemnifying Indemnitee until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse
the Company for any Expenses shall be unsecured and no interest shall be charged
thereon.

          (c) Indemnitee Rights on Unfavorable Determination: Binding Effect.
              --------------------------------------------------------------
If any Reviewing Party determines that Indemnitee substantively is not entitled
to be indemnified hereunder in whole or in part under applicable law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding.  Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.

          (d) Selection of Reviewing Party: Change in Control.  If there has not
              -----------------------------------------------
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Certificate of Incorporation or Bylaws as
now or hereafter in effect, or under any other applicable law, if desired by
Indemnitee, shall be, Independent Legal Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under applicable law and the Company agrees
to abide by such opinion.  The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.  Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the Company otherwise determines or (ii) any
Indemnitee shall provide a written statement setting forth in detail a
reasonable objection to such Independent Legal Counsel representing other
Indemnitees.

          (e) Mandatory Payment of Expenses.  Notwithstanding any other
              -----------------------------
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim, Indemnitee shall be indemnified against all Expenses incurred by
Indemnitee in connection therewith.

     3.   Expense Advances.
          ----------------

                                                                               4


          (a) Obligation to Make Expense Advances.  Upon receipt of a written
              -----------------------------------
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefor by the Company, the Company shall make Expense Advances to Indemnitee.

          (b) Form of Undertaking.  Any written undertaking by the Indemnitee to
              -------------------
repay any Expense Advances hereunder shall be unsecured and no interest shall be
charged thereon.

          (c) Determination of Reasonable Expense Advances.  The parties agree
              --------------------------------------------
that for the purposes of any Expense Advance for which Indemnitee has made
written demand to the Company in accordance with this Agreement, all Expenses
included in such Expense Advance that are certified by affidavit of Indemnitee's
counsel as being reasonable shall be presumed conclusively to be reasonable.

     4.   Procedures for Indemnification and Expense Advances.
          ---------------------------------------------------

          (a) Timing of Payments.  All payments of Expenses (including without
              ------------------
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by law as soon as
practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than forty-five (45) business days after such
written demand by Indemnitee is presented to the Company, except in the case of
Expense Advances, which shall be made no later than twenty (20) business days
after such written demand by Indemnitee is presented to the Company.

          (b) Notice/Cooperation by Indemnitee.  Indemnitee shall, as a
              --------------------------------
condition precedent to Indemnitee's right to be indemnified or Indemnitee's
right to receive Expense Advances under this Agreement, give the Company notice
in writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee).  In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.

          (c) No Presumptions: Burden of Proof.  For purposes of this Agreement,
              --------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contenders, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or applicable
law.  In addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement or applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief.  In connection with any
determination by any Reviewing Party or

                                                                               5


otherwise as to whether the Indemnitee is entitled to be indemnified hereunder,
the burden of proof shall be on the Company to establish that Indemnitee is not
so entitled.

          (d) Notice to Insurers.  If, at the time of the receipt by the Company
              ------------------
of a notice of a Claim pursuant to Section 4(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies.  The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.

          (e) Selection of Counsel.  In the event the Company shall be obligated
              --------------------
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so.  After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of separate counsel subsequently employed by
or on behalf of Indemnitee with respect to the same Claim; provided that, (i)
Indemnitee shall have the right to employ Indemnitee's separate counsel in any
such Claim at Indemnitee's expense and (ii) if (A) the employment of separate
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
Claim, then the fees and expenses of Indemnitee's separate counsel shall be
Expenses for which Indemnitee may receive indemnification or Expense Advances
hereunder.

     5.   Additional Indemnification Rights: Nonexclusivity.
          -------------------------------------------------

          (a) Scope.  The Company hereby agrees to indemnify the Indemnitee to
              -----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute.  In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change.  In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof.

          (b) Nonexclusive.  The indemnification and the payment of Expense
              ------------
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this

                                                                               6


Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.

     6.   No Duplication of Payments.  The Company shall not be liable under
          --------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.

     7.   Partial Indemnification.  If Indemnitee is entitled under any
          -----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.

     8.   Mutual Acknowledgement.  Both the Company and Indemnitee acknowledge
          ----------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise.  Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.

     9.   Liability Insurance.  To the extent the Company maintains liability
          -------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.

     10.  Exceptions.  Notwithstanding any other provision of this Agreement,
          ----------
the Company shall not be obligated pursuant to the terms of this Agreement:

          (a) Excluded Action or Omissions.  To indemnify Indemnitee for
              ----------------------------
Expenses resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or applicable
law; provided, however, that notwithstanding any limitation set forth in this
Section 10(a) regarding the Company's obligation to provide indemnification,
Indemnitee shall be entitled under Section 3 to receive Expense Advances
hereunder with respect to-any such Claim unless and until a court having
jurisdiction over the Claim shall have made a final judicial determination (as
to which all rights of appeal therefrom have been exhausted or lapsed) that
indemnitee has engaged in acts, omissions or transactions for which Indemnitee
is prohibited from receiving indemnification under this Agreement or applicable
law.

          (b) Claims Initiated by Indemnitee.  To indemnify or make Expense
              ------------------------------
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or cross-claim, except (i)
with respect to actions or proceedings

                                                                               7


brought to establish or enforce a right to indemnification under this Agreement
or any other agreement or insurance policy or under the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Covered Events, (ii) in specific cases if the Board of Directors has approved
the initiation or bringing of such Claim, or (iii) as otherwise required under
Section 145 of the Delaware General Corporation Law, regardless of whether
Indemnitee ultimately is determined to be entitled to such indemnification or
insurance recovery, as the case may be.

          (c) Lack of Good Faith.  To indemnify Indemnitee for any Expenses
              ------------------
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous.

          (d) Claims Under Section 16(b).  To indemnify Indemnitee for expenses
              --------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute; provided, however, that
notwithstanding any limitation set forth in this Section 10(d) regarding the
Company's obligation to provide indemnification, Indemnitee shall be entitled
under Section 3 to receive Expense Advances hereunder with respect to any such
Claim unless and until a court having jurisdiction over the Claim shall have
made a final judicial determination (as to which all rights of appeal therefrom
have been exhausted or lapsed) that Indemnitee has violated said statute.

     11.  Counterparts.  This Agreement may be executed in one or more
          ------------
counterparts, each of which shall constitute an original.

     12.  Binding Effect: Successors and Assigns.  This Agreement shall be
          --------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives.  The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place.  This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.

     13.  Expenses Incurred in Action Relating to Enforcement or Interpretation.
          ---------------------------------------------------------------------
In the event that any action is instituted by Indemnitee under this Agreement or
under any liability insurance policies maintained by the Company to enforce or
interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee with respect to such action
(including without limitation attorneys' fees), regardless of whether Indemnitee
is ultimately successful in such action, unless as a part of such action a court
having

                                                                               8


jurisdiction over such action makes a final judicial determination (as to which
all rights of appeal therefrom have been exhausted or lapsed) that each of the
material assertions made by Indemnitee as a basis for such action was not made
in good faith or was frivolous; provided, however, that until such final
judicial determination is made, Indemnitee shall be entitled under Section 3 to
receive payment of Expense Advances hereunder with respect to such action. In
the event of an action instituted by or in the name of the Company under this
Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee in
defense of such action (including without limitation costs and expenses incurred
with respect to Indemnitee's counterclaims and cross-claims made in such
action), unless as a part of such action a court having jurisdiction over such
action makes a final judicial determination (as to which all rights of appeal
therefrom have been exhausted or lapsed) that each of the material defenses
asserted by Indemnitee in such action was made in bad faith or was frivolous;
provided, however, that until such final judicial determination is made,
Indemnitee shall be entitled under Section 3 to receive payment of Expense
Advances hereunder with respect to such action.

     14.  Notice.  All notices, requests, demands and other communications under
          ------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked.  Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.

     15.  Consent to Jurisdiction.  The Company and Indemnitee each hereby
          -----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.

     16.  Severability.  The provisions of this Agreement shall be severable in
          ------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.

     17.  Choice of Law.  This Agreement, and all rights, remedies, liabilities,
          -------------
powers and duties of the parties to this Agreement, shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
principles of conflicts of laws.

     18.  Subrogation.  In the event of payment under this Agreement, the
          -----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.

                                                                               9


     19.  Amendment and Termination.  No amendment, modification, termination or
          -------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto.  No waiver of any of the provisions of this
Agreement shall be deemed to be or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.

     20.  Integration and Entire Agreement.  This Agreement sets forth the
          --------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.

     21.  No Construction as Employment Agreement.  Nothing contained in this
          ---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.


IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.

HOLLIS-EDEN PHARMACEUTICALS, INC.



By:___________________________________________

Name:     Richard B. Hollis

Title:    Chairman and CEO



Address:  Hollis-Eden Pharmaceuticals, Inc.
          9333 Genesee Avenue, Suite 200
          San Diego, CA 92121



                              AGREED TO AND ACCEPTED

                              INDEMNITEE:


                              _____________________________________
                              (signature)

                                                                              10

EX-23.1

                                                                   EXHIBIT 23.1

              CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Hollis-Eden Pharmaceuticals, Inc.
San Diego, CA

   We hereby consent to the incorporation by reference of our report dated
January 19, 2001 relating to the financial statements of Hollis-Eden
Pharmaceuticals, Inc., incorporated by reference into the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, into the
prospectuses constituting a part of the following registration statements: No.
333-18725 on Form S-8 to Form S-4, No. 333-18725 on Form S-3 to Form S-4, No.
333-56155 on Form S-3, No. 333-56157 on Form S-3, No. 333-69725 on Form S-3,
No. 333-69727 on Form S-3, No. 333-72853 on Form S-3, No. 333-92179 on Form S-
3, No. 333-92185 on Form S-8, No. 333-96181 on Form S-3, 333-96181 on Form S-
3, 333-34180 on Form S-3, 333-51284 on Form S-3 and 333-51286 on Form S-8.

                                          BDO Seidman, LLP
New York, NY
March 28, 2001