--------------------------------------------------------------------------
                                                            
                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549

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

                                      FORM 10-K

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

    For the fiscal year ended December 31, 1996  Commission File Number 33-60134

                              INITIAL ACQUISITION CORP.
                              -------------------------
                (Exact name of Registrant as specified in its charter)

                  DELAWARE                                      13-3197002      
     ----------------------------------                   ----------------------
     (State or other jurisdiction                          (I.R.S. Employer     
     of incorporation or organization)                    Identification No.)   

        810 SEVENTH AVENUE
        NEW YORK, NEW YORK                                      10019           
     ------------------------------                    -------------------------
     (Address of principal executive offices)                (Zip Code)

         REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (212) 333-2620

             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
                        Class A Common Stock Purchase Warrants
                      Redeemable Class B Unit Purchase Warrants
                                        Units

        Indicate by check mark whether the Registrant (1) has filed all reports
     required to be filed by Section 13 or 15(d) of the Securities Exchange Act
     of 1934 during the preceding 12 months (or for such shorter period that the
     Registrant was required to file such reports), and (2) has been subject to
     such filing 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. 
               YES  X    NO 
                   ---      ---

        The aggregate market value of the voting stock held by nonaffiliates of
     the Registrant as of January 29, 1997 was $7,296,218.70

        As of January 30, 1997, there were 833,250 shares of the Registrant's
     Common Stock, $.01 par value per share, outstanding.

                         DOCUMENTS INCORPORATED BY REFERENCE

     The definitive proxy statement for the Registrant's 1997 Annual and Special
     Meeting of Stockholders, which has been filed with the Securities and
     Exchange Commission, is incorporated by reference into Part III of this
     Annual Report on Form 10-K.
     --------------------------------------------------------------------------

     <PAGE>

                                        PART I
                                        ------

     ITEM 1.   BUSINESS
               --------

     GENERAL

          Initial Acquisition Corp. ("IAC" or the "Company") is a "blank check"
     or "blind pool" company, formed on November 18, 1992, to serve as a vehicle
     to effect a merger, exchange of capital stock, asset acquisition or other
     business combination (a "Business Combination") with an operating business
     (a "Target Business").

          The Company is seeking to acquire a Target Business primarily located
     in the United States, but its efforts will not be limited to a particular
     industry.  In seeking a Target Business, the Company will consider without
     limitation, businesses which (i) offer or provide services or develop,
     manufacture or distribute goods in the United States or abroad, including,
     without limitation, in the following areas:  health care and health
     products, educational services, environmental services, consumer related
     products and services (including amusement and/or recreational services),
     personal care services, voice and data information processing and
     transmission and related technology development or (ii) are engaged in
     wholesale or retail distribution.  The Company will not acquire a Target
     Business unless the fair market of such business, as determined by the
     Company based upon standards generally accepted by the financial community,
     including revenues, earnings, cash flow and book value (the "Fair Market
     Value"), is at least 80% of the net assets of the Company at the time of
     the consummation of a Business Combination (the "Fair Market Value Test"). 
     If the Company determines that the financial statements of a proposed
     Target Business do not clearly indicate that the Fair Market Value Test has
     been satisfied, the Company will obtain an opinion from an investment
     banking firm which is a member of the National Association of Securities
     Dealers, Inc. (the "NASD") with respect to the satisfaction of such
     criteria.  While the Company may, under certain circumstances, seek to
     effect Business Combinations with more than one Target Business, in all
     likelihood, as a result of its limited resources, the Company will have the
     ability to effect only a single Business Combination.  To date, the Company
     has not entered into any agreements to effect a Business Combination.  On
     November 1, 1996, the Company entered into an Agreement and Plan of Merger
     to effect a Business Combination with Hollis-Eden, Inc., a Portland, Oregon
     based biopharmaceutical company.  See "-- Proposed Merger with Hollis-Eden,
     Inc."

          The Company has engaged Gruntal & Co., Incorporated, an investment
     banking firm and a member of the New York Stock Exchange, Inc. and the NASD
     ("Gruntal"), to aid in structuring and negotiating a Business Combination.

          On May 23, 1995 (the "Closing Date"), the Company consummated its
     initial public offering (the "Offering") of (a) 600,000 units (the
     "Units"), each Unit consisting of (i) one share of common stock, $.01 par
     value per share (the "Common Stock"), and (ii) one Class A Common Stock
     Purchase Warrant (the "Class A Warrants") entitling the holder thereof to
     purchase one share of Common Stock, and (b) 255,000 Redeemable Class B Unit
     Purchase Warrants (the "Class B Warrants"; the Class A Warrants and Class B
     Warrants are sometimes hereinafter collectively referred to as the
     "Warrants"), each such Class B Warrant entitling the holder thereof to
     purchase one Unit.  On the Closing Date, the Registrant received net
     proceeds of approximately $6,300,000 (the "Net Proceeds"), after giving
     effect to the payment of all underwriting discounts, the underwriters' non-
     accountable expense allowance and offering expenses.  Pursuant to the terms
     of the Offering, $6 million of the Net Proceeds, representing an amount
     equal to the gross proceeds from the sale of the Units, was placed in
     escrow with The Chase Manhattan Bank, N.A. (the "Proceeds Escrow Agent"),
     subject to release upon the earlier of written notification by the Company
     to the Proceeds Escrow Agent (i) of the Company's completion of a
     transaction or series of transactions in which at least 50% of the gross
     proceeds from the Offering are committed to a specific line of business as

                                  2
     <PAGE>

     a result of a consummation of a Business Combination (including any
     redemption payments), or (ii) to distribute the escrowed proceeds, in
     connection with a liquidation of the Company, to the holders of Common
     Stock purchased as part of the Units sold in the Offering or in the open
     market thereafter.  The Company will notify the NASD prior to the release
     of funds from the escrow account.  The escrowed Net Proceeds have been
     invested in United States treasury bills and commercial paper.

          The Company's executive office is located at 810 Seventh Avenue, 27th
     Floor, New York, New York 10019 and its telephone number is (212) 333-2620.

     PROPOSED MERGER WITH HOLLIS-EDEN, INC.

             On November 1, 1996, the Company entered into an Agreement and Plan
     of Merger (the "Merger Agreement") with Hollis-Eden, Inc. ("Hollis-Eden"),
     a Portland, Oregon based biopharmaceutical company engaged in developing
     therapeutic and preventative pharmaceutical agents for the treatment of a
     number of targeted disease states caused by viral, bacterial, parasitic or
     fungal infections, including HIV and AIDS.  The Merger Agreement calls for
     the merger (the "Proposed Merger") of Hollis-Eden with and into the
     Company, with the Company being the surviving corporation to the Proposed
     Merger (the "Surviving Corporation").  Upon consummation of the Proposed
     Merger, (i) each of the 4,911,004 outstanding shares of Hollis-Eden common
     stock, par value $.0001 per share, will cease to be outstanding and shall
     be converted into the right to receive one share of Common Stock of the
     Company, (ii) each of the 4,679,650 outstanding warrants and options to
     acquire shares of Hollis-Eden common stock will cease to be outstanding and
     shall be converted into the right to receive comparable warrants and
     options to acquire shares of common stock of the Company, (iii) the Company
     will change its name to Hollis-Eden, Inc. and (iv) the business of the
     Company will be that of Hollis-Eden.  The Proposed Merger is subject to
     numerous conditions, including without limitation, approval by the
     stockholders of each of the Company and Hollis-Eden.  See "-- Stockholder
     Approval of Business Combination."

     SELECTION OF A TARGET BUSINESS AND STRUCTURING OF A BUSINESS COMBINATION

          Management of the Company has substantial flexibility in identifying
     and selecting a prospective Target Business within the specified
     businesses.  However, the Company's flexibility is limited to the extent
     that it must satisfy the Fair Market Value Test.  If the Company determines
     that the financial statements of a proposed Target Business do not clearly
     indicate that the Fair Market Value Test has been satisfied, the Company
     will obtain an opinion from an investment banking firm (which is a member
     of the NASD) with respect to the satisfaction of such criteria.  In
     evaluating a prospective Target Business, management will consider, among
     other factors, the following:  (i) costs associated with effecting the
     Business Combination; (ii) equity interest in and opportunity for control
     of the Target Business; (iii) growth potential of the Target Business; (iv)
     experience and skill of management and availability of additional personnel
     of the Target Business; (v) capital requirements of the Target Business;
     (vi) competitive position of the Target Business; (vii) stage of
     development of the Target Business; (viii) degree of current or potential
     market acceptance of the Target Business; (ix) proprietary features and
     degree of intellectual property or other protection of the Target Business;
     and (x) the regulatory environment in which the Target Business operates.

          The foregoing criteria are not intended to be exhaustive and any
     evaluation relating to the merits of a particular Target Business will be
     based, to the extent relevant, on the above factors as well as other
     considerations deemed relevant by management in connection with effecting a
     Business Combination consistent with the Company's business objectives.  In
     connection with its evaluation of a prospective Target Business,
     management, with the assistance of Gruntal, anticipates that it will
     conduct a due diligence review which will encompass, among other things,

                                  3
     <PAGE>

     meeting with incumbent management and inspection of facilities, as well as
     a review of financial, legal and other information which will be made
     available to the Company.

          The time and costs required to select and evaluate a Target Business
     (including conducting a due diligence review) and to structure and
     consummate the Business Combination (including negotiating relevant
     agreements and preparing requisite documents for filing pursuant to
     applicable securities laws and state "blue sky" and corporation laws)
     cannot presently be ascertained with any degree of certainty.  The
     Company's current executive officer and its directors intend to devote only
     a small portion of their time to the affairs of the Company and,
     accordingly, consummation of a Business Combination may require a greater
     period of time than if the Company's management devoted their full time to
     the Company's affairs.  However, each officer and director of the Company
     will devote such time as they deem reasonably necessary to carry out the
     business and affairs of the Company, including the evaluation of potential
     Target Businesses and the negotiation of a Business Combination and, as a
     result, the amount of time devoted to the business and affairs of the
     Company may vary significantly depending upon, among other things, whether
     the Company has identified a Target Business or is engaged in active
     negotiation of a Business Combination.  Any costs incurred in connection
     with the identification and evaluation of a prospective Target Business
     with which a Business Combination is not ultimately consummated will result
     in a loss to the Company and reduce the amount of capital available to
     otherwise complete a Business Combination or for the resulting entity to
     utilize.

          The Company anticipates that various prospective Target Businesses
     will be brought to its attention from various non-affiliated sources,
     including securities broker-dealers, investment bankers, venture
     capitalists, bankers, other members of the financial community and
     affiliated sources, including, possibly, the Company's executive officer,
     directors and their affiliates.  While the Company has not engaged the
     services of professional firms that specialize in finding business
     acquisitions on any formal basis (other than Gruntal), the Company may
     engage such firms in the future, in which event the Company may pay a
     finder's fee or other compensation.  In no event, however, will the Company
     pay a finder's fee or commission to officers or directors of the Company or
     any entity with which they are affiliated for such service.  Moreover, in
     no event shall the Company issue any of its securities to any officer,
     director or promoter of the Company, or any of their respective affiliates
     or associates, in connection with activities designed to locate a Target
     Business.

          As a general rule, Federal and state tax laws and regulations have a
     significant impact upon the structuring of Business Combinations.  The
     Company will evaluate the possible tax consequences of any prospective
     Business Combination and will endeavor to structure a Business Combination
     so as to achieve the most favorable tax treatment to the Company, the
     Target Business and their respective stockholders.  There can be no
     assurance that the Internal Revenue Service or any relevant state tax
     authorities will ultimately assent to the Company's tax treatment of a
     particular consummated Business Combination.  To the extent the Internal
     Revenue Service or any relevant state tax authorities ultimately prevail in
     recharacterizing the tax treatment of a Business Combination, there may be
     adverse tax consequences to the Company, the Target Business and their
     respective stockholders.  Tax considerations as well as other relevant
     factors will be evaluated in determining the precise structure of a
     particular Business Combination, which could be effected through various
     forms of a merger, consolidation or stock or asset acquisition.

          The Company may utilize cash derived from the Net Proceeds of the
     Offering, equity securities, debt securities or bank borrowings or a
     combination thereof as consideration in effecting a Business Combination. 
     Although the Company's Board of Directors will have the power to issue any
     or all of the authorized but unissued shares of Common Stock following the
     consummation of the Offering, the Company has agreed that until May 15,
     1997 it will not issue any securities or grant options or warrants to
     purchase any securities of the Company without the consent of the

                                  4
    <PAGE>

     representatives in the Offering, except in connection with effecting a
     Business Combination.  Other than the Proposed Merger, which is subject to
     numerous conditions, the Company has no commitments to date to issue any
     shares of Common Stock or options or warrants.  To the extent that such
     additional shares are issued, dilution to the interests of the Company's
     stockholders will occur.  Additionally, if a substantial number of shares
     of Common Stock are issued in connection with the consummation of the
     Proposed Merger or a Business Combination, a change in control of the
     Company may occur which may affect, among other things, the Company's
     ability to utilize net operating loss carryforwards, if any.

          There currently are no limitations on the Company's ability to borrow
     funds to effect a Business Combination.  However, the Company's limited
     resources and lack of operating history may make it difficult to borrow
     funds.  The amount and nature of any borrowings by the Company will depend
     on numerous considerations, including the Company's capital requirements,
     potential lenders' evaluation of the Company's ability to meet debt service
     on borrowings and the then prevailing conditions in the financial markets,
     as well as general economic conditions.  The Company does not have any
     arrangements with any bank or financial institution to secure additional
     financing and there can be no assurance that such arrangements if required
     or otherwise sought, would be available on terms commercially acceptable or
     otherwise in the best interests of the Company.  The inability of the
     Company to borrow funds required to effect or facilitate a Business
     Combination, or to provide funds for an additional infusion of capital into
     a Target Business, may have a material adverse effect on the Company's
     financial condition and future prospects, including the ability to effect a
     Business Combination.  To the extent that debt financing ultimately proves
     to be available, any borrowings may subject the Company to various risks
     traditionally associated with indebtedness, including the risks of interest
     rate fluctuations and insufficiency of cash flow to pay principal and
     interest.  Furthermore, a Target Business may have already incurred debt
     financing and, therefore, all the risks inherent thereto.

     STOCKHOLDER APPROVAL OF BUSINESS COMBINATIONS

          The Company, prior to the consummation of any Business Combination,
     will submit such transaction to the Company's stockholders for their
     approval, even if the nature of the Business Combination is such as would
     not ordinarily require stockholder approval under applicable state law.  In
     connection with such approval, the Company intends to provide stockholders
     with complete disclosure documentation, including audited financial
     statements, concerning a Target Business.  All of the Company's
     stockholders immediately prior to the Closing Date of the Offering,
     including all directors and the Company's executive officer, have agreed to
     vote their respective shares of Common Stock in accordance with the vote of
     the majority of the shares voted by all other stockholders of the Company
     ("non-affiliated public stockholders") with respect to any such Business
     Combination.  A Business Combination will not be consummated unless
     approved by a vote of two-thirds of the shares of Common Stock voted by the
     stockholders (in person or by proxy).  In addition, the Delaware General
     Corporation Law requires approval of certain mergers and consolidations by
     the holders of a majority of the outstanding stock entitled to vote
     thereon.  Holders of Warrants who otherwise do not own any shares of Common
     Stock will not be entitled to vote on any Business Combination.     

     REDEMPTION RIGHTS

          At the time the Company seeks stockholder approval of any potential
     Business Combination, the Company will offer (the "Redemption Offer") each
     of the non-affiliated public stockholders of the Company the right, for a
     specified period of time of not less than 20 calendar days, to redeem his
     shares of Common Stock at a price equal to the Liquidation Value (as
     defined below) of such shares as of the record date established for
     determining the stockholders entitled to vote with respect to the approval
     of a Business Combination (the "Record Date").  The Redemption Offer will

                                  5    
     <PAGE>                             
     
     be described in the disclosure documentation relating to the proposed
     Business Combination.  The "Liquidation Value" for each share of Common
     Stock will be determined as of the Record Date by dividing (A) the greater
     of (i) the Company's net worth as reflected in the Company's then current
     financial statements as audited by the Company's independent accountants,
     or (ii) the amount of the proceeds of the Company in the escrow account
     (including interest earned thereon) by (B) the number of shares held by
     non-affiliated public stockholders.  In connection with the Redemption
     Offer, if non-affiliated public stockholders holding less than 15% of the
     shares of Common Stock elect to redeem their shares, the Company may, but
     will not be required to, proceed with such Business Combination and, if the
     Company elects to so proceed, will redeem such shares at their Liquidation
     Value as of the Record Date.  In any case, if non-affiliated public
     stockholders holding 15% or more of the Common Stock elect to redeem their
     shares, the Company will not proceed with such potential Business
     Combination and will not redeem such shares.  Purchasers of 30,000 shares
     of Common Stock in a private placement by the Company in February 1993 (the
     "Placement Shares") and holders of Warrants will only be allowed to
     participate in a Redemption Offer if they otherwise own shares of Common
     Stock and, in that instance, only with respect to those shares of Common
     Stock.

     ESCROW OF OUTSTANDING SHARES

          Pursuant to the terms of the Offering, all of the shares of Common
     Stock of the Company outstanding immediately prior to the Closing Date of
     the Offering were placed in escrow with the Proceeds Escrow Agent, until
     the earlier of (i) the occurrence of the consummation of the first Business
     Combination, (ii) November 15, 1996, or (iii) May 15, 1997 if, prior to
     November 15, 1996, the Company has become a party to a letter of intent or
     a definitive agreement to effect a Business Combination (the "Extension
     Criteria").  The Merger Agreement to effectuate the Proposed Merger was
     entered into on November 1, 1996, and, as such, the Extension Criteria has
     been satisfied.  During the escrow period, the holders of escrowed shares
     of Common Stock will not be able to sell or otherwise transfer their
     respective shares of Common Stock (with the exceptions described below),
     but will retain all other rights as stockholders of the Company, including,
     without limitation, the right to vote escrowed shares of Common Stock,
     subject to their agreement to vote their shares in accordance with a vote
     of a majority of the non-affiliated public stockholders with respect to a
     consummation of a Business Combination or liquidation proposal, but
     excluding the right to request the redemption of escrowed shares pursuant
     to a Redemption Offer.  Subject to compliance with applicable securities
     laws, any such holder may transfer his or her Common Stock held in escrow
     to a family member (with the consent of the Representative which will not
     be unreasonably withheld) or in the event of the holder's death by will or
     operation of law, provided that any such transferee must agree as a
     condition to such transfer to be bound by the restrictions on transfer
     applicable to the original holder and, in the case of present stockholders
     other than the holders of the Placement Shares, that the transferor (except
     in the case of death) will continue to be deemed the beneficial owner (as
     defined in Regulation 13d-3 promulgated under the Securities Exchange Act
     of 1934, as amended (the "Exchange Act")) of such transferred shares.

          Each of the executive officer and the other directors of the Company
     has agreed to surrender his shares to the Company at the purchase price at
     which such shares were acquired ($.10 per share) if he resigns prior to the
     occurrence of the consummation of the first Business Combination.

     POSSIBLE LIQUIDATION OF THE COMPANY IF NO BUSINESS COMBINATION

          If the Company does not effect a Business Combination by May 15, 1997,
     the Company will submit for stockholder consideration a proposal to
     liquidate the Company and distribute to the then holders of Common Stock
     acquired as part of the Units sold in the Offering or in the open market
     thereafter, the amounts in the interest bearing escrow account maintained
     by the Proceeds Escrow Agent.  Thereafter, all remaining assets available

                                  6 
     <PAGE>                             
     
     for distribution will be distributed to all holders of the Company's Common
     Stock after payment of liabilities and after appropriate provision has been
     made for the payment of liquidating distributions upon each class of stock,
     if any, having preference over the Common Stock.  Since the proceeds to the
     Company from the sale of the Class B Warrants in the Offering were, and
     will continue to be used to cover all the expenses incurred by the Company
     in the Offering, including the underwriters' discounts and the
     representatives' non-accountable expense allowance, and to fund the
     Company's operating expenses, including investment banking fees and the
     costs of business, legal and accounting due diligence on prospective Target
     Businesses, until the consummation of a Business Combination, the amount
     per share remaining for distribution, in the event of a liquidation of the
     Company, to the holders of Common Stock acquired as part of the Units sold
     in the Offering or in the open market thereafter, and exclusive of any
     income earned on the proceeds held in the escrow account maintained by the
     Proceeds Escrow Agent, will be approximately equal to the $10.00 initial
     public offering price per Unit in the Offering (assuming no value is
     attributed to the Warrants included in the Units offered thereby).  All of
     the Company's stockholders immediately prior to the Closing Date of the
     Offering, including the Company's executive officer and other directors,
     will be required to vote their shares of Common Stock in accordance with
     the vote of the majority of all non-affiliated public stockholders of the
     Company with respect to any liquidation proposal.  Holders of Warrants,
     however, will only be entitled to vote on any liquidation proposal, and
     allowed to participate in any liquidation distribution, if they purchased
     shares of Common Stock in the Offering or on the open market thereafter,
     but only as to any shares of Common Stock so purchased.  In addition,
     stockholders of the Company immediately prior to the Closing Date of the
     Offering, including officers and directors, will not participate in any
     liquidation distribution with respect to the shares of Common Stock owned
     by them immediately prior to the Closing Date of the Offering.

     COMPETITION

          The Company encounters intense competition from other entities having
     business objectives similar to those of the Company.  Many of these
     entities, including venture capital partnerships and corporations, other
     blind pool companies, large industrial and financial institutions, small
     business investment companies and wealthy individuals, are well-established
     and have extensive experience in connection with identifying and effecting
     Business Combinations directly or through affiliates.  Many of these
     competitors possess greater financial, technical, human and other resources
     than the Company and there can be no assurance that the Company will have
     the ability to compete successfully.  The Company's financial resources
     will be limited in comparison to those of many of its competitors.  This
     inherent competitive limitation may compel the Company to select certain
     less attractive Business Combination prospects.

          In the event that the Company succeeds in effecting a Business
     Combination, the Company will, in all likelihood, become subject to intense
     competition from competitors of the Target Business.  In particular,
     certain industries which experience rapid growth frequently attract an
     increasingly larger number of competitors, including competitors with
     greater financial, marketing, technical, human and other resources than the
     initial competitors in the industry.  The degree of competition
     characterizing the industry of any prospective Target Business cannot
     presently be ascertained.  There can be no assurance that, subsequent to a
     consummation of a Business Combination, the Company will have the resources
     to compete in the industry of the Target Business effectively, especially
     to the extent that the Target Business is in a high-growth industry.    

     EMPLOYEES

          The Company, at December 31, 1996, employed only one person, Mr.
     Salvatore J. Zizza, the Company's Chairman, President and Treasurer, on a
     part-time basis. 

                                  7
    <PAGE>

     ITEM 2.   DESCRIPTION OF PROPERTIES
               -------------------------

          The Company's principal office is located in New York, New York, where
     it occupies the offices of Zizza & Company ("Zizza Corporation"),  a
     corporation controlled by Salvatore J. Zizza, the Company's Chairman of the
     Board, President and Treasurer. The Company leases this space pursuant to
     an oral agreement.  The Company intends to occupy this space until it
     effects a Business Combination. The Company pays Zizza Corporation a
     monthly payment of $2,500 for rent, office and secretarial services.  

          The Company believes that this facility is well maintained and
     adequate to meet its needs in the foreseeable future pending the
     consummation of a Business Combination.


     ITEM 3.   LEGAL PROCEEDINGS
               -----------------

          At this time, the Company is not involved in any pending or threatened
     legal proceedings involving it or any of its assets.


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

          No matters were submitted to a vote of the Company's security holders
     through the solicitation of proxies or otherwise during the fourth quarter
     of fiscal 1996.


                                       PART II
                                       -------


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

          Since May and June 1995, the Company's Common Stock, Class A Warrants,
     Class B Warrants and Units have been quoted and traded on the OTC
     Electronic Bulletin Board under the symbols "IACQ", "IACQW", "IACQZ" and
     "IACQU", respectively.

          The following table sets forth the quarterly high and low bid
     quotations on the OTC Electronic Bulletin Board for the securities of the
     Company set forth above for the periods indicated below.  These quotations
     represent prices between dealers and do not include retail mark-up, mark-
     down or commissions or necessarily represent actual transactions.

     COMMON STOCK                        HIGH        LOW
     ------------                        ----        ---

     1995
     ----
     June 28 through June 30            $8.875     $8.750
     July 1 through September 30         9.000      8.500
     October 1 through December 31       8.875      8.625

                                  8
     <PAGE>

     1996
     ----
     January 1 through March 31        $10.125     $8.875
     April 1 through June 30            10.625      9.250
     July 1 through September 30         9.875      9.250
     October 1 through December 31      11.250      8.875

     CLASS A WARRANTS                    HIGH        LOW
     ----------------                    ----        ---

     1995
     ----
     June 29 through June 30            $0.625     $0.500
     July 1 through September 30         0.750      0.500
     October 1 through December 31       0.750      0.375

     1996
     ----
     January 1 through March 31         $0.750     $0.500
     April 1 through June 30             1.125      0.625
     July 1 through September 30         1.000      0.625
     October 1 through December 31       1.000      0.625
                                                    
     CLASS B WARRANTS                    HIGH        LOW
     ----------------                    ----        ---

     1995
     ----
     May 16 through June 30             $5.500     $4.500
     July 1 through September 30         5.250      4.500
     October 1 through December 31       5.000      1.000

     1996
     ----
     January 1 through March 31         $5.250     $3.750
     April 1 through June 30             6.000      4.500
     July 1 through September 30         6.000      4.250
     October 1 through December 31       6.000      3.250

     UNITS                               HIGH        LOW
     -----                               ----        ---

     1995
     ----
     May 16 through June 30             $10.000    $8.875
     July 1 through September 30         10.000     9.500
     October 1 through December 31       10.000     9.375

     1996
     ----
     January 1 through March 31         $10.000    $9.000
     April 1 through June 30             10.000     9.625
     July 1 through September 30         10.125     9.625
     October 1 through December 31       11.125     9.500

        As of January 29, 1997, there were 38 holders of record of the Company's
     Common Stock, two holders of record of Class A Warrants and seven holders
     of record of Class B Warrants.  Since certain of the shares of the

                                  9
     <PAGE>

     Company's Common Stock and Class A and B Warrants and Units are held in
     street name, it is believed that there are substantial additional
     beneficial holders of IAC Common Stock and Class A and B Warrants.

        The Company has never declared any cash dividends with respect to its
     shares of Common Stock and does not anticipate that dividends will be
     declared in the foreseeable future as all available cash will be utilized
     for use in the Company's business.

     ITEM 6.   SELECTED FINANCIAL DATA
               -----------------------

        The selected historical financial information of the Company set forth
     below should be read in conjunction with the audited financial statements
     of the Company and notes thereto contained elsewhere in this Annual Report
     on Form 10-K.

        The statement of operations data for the year ended December 31, 1996,
     1995 and 1994, and the balance sheet data as of December 31, 1996 and 1995,
     are derived from, and are qualified by reference to the audited financial
     statements of the Company which are included elsewhere in this Annual
     Report on Form 10-K.  The statement of operations data for the year ended
     December 31, 1993 and the balance sheet data as of December 31, 1994 and
     1993 are derived from audited financial statements of the Company not
     included herein.  No cash dividends have ever been declared or paid on
     shares of the Company's Common Stock.

                                        YEAR ENDED DECEMBER 31,
                           --------------------------------------------------
     STATEMENT OF             1996          1995          1994         1993
     OPERATIONS DATA:         ----          ----          ----         ----
     Interest income . .    $345,484      $224,305     $   -0-      $    -0-

     General and
       administrative       $160,309      $ 71,782     $ 7,000      $  7,186
       expenses  . . . .

     Net income (loss) .    $114,175      $100,523     $(7,000)     $ (7,186)

     Net income (loss)
     per common share. .    $   0.14      $   0.16     $  (.03)    $    (.03)
      
     Weighted average
      shares                 833,250       608,250     233,250       233,250
      outstanding  . . .

     BALANCE SHEET
      DATA:
     Total assets  . . .  $6,830,530    $6,518,759     $74,139       $81,139

     Redeemable common      $981,349      $932,316     $   -0-       $   -0-
     stock . . . . . . .

     Stockholders'        $5,561,945    $5,496,803     $68,139       $75,139
     equity  . . . . . .

     ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
               ----------------------------------------------------------------
               RESULTS OF OPERATIONS
               ---------------------
          The Company is a development stage company, and to date its efforts
     have been limited to organizational activities, consummating the Offering
     and seeking a Business Combination.  The Company has not yet consummated a
     Business Combination.  Accordingly, the Company will not achieve any
     operating revenues (other than investment income) until, at the earliest,
     the consummation of a Business Combination.

          The Company has used, and will continue to use the Net Proceeds of the
     Offering, together with the income and interest earned thereon, principally
     in connection with effecting a Business Combination, including selecting
     and evaluating potential Target Businesses and structuring and consummating

                                  10
     <PAGE>

     a Business Combination (including possible payment of finder's fees or
     other compensation to persons or entities which provide assistance or
     services to the Company).  The Company does not have discretionary access
     to the income on the monies in the escrow account and stockholders of the
     Company will not receive any distribution of the income (except in
     connection with a liquidation of the Company) or have any ability to direct
     the use or distribution of such income.  Thus, such income will cause the
     amount in escrow to increase.  The Company cannot use the escrowed amounts
     to pay the costs of evaluating potential Business Combinations and used and
     will continue to use the proceeds from the sale of the Class B Warrants in
     the Offering to cover all the expenses incurred by the Company in the
     Offering, to pay Proceeds Escrow Agent, and to pay the costs of evaluating
     potential Business Combinations, including investment banking fees and the
     costs of business, legal and accounting due diligence on prospective Target
     Businesses.  In addition, such funds will be used for the general and
     administrative expenses of the Company, including legal and accounting fees
     and administrative support expenses in connection with the Company's
     reporting obligations to the Securities & Exchange Commission.  The Company
     does not anticipate such fees and administrative expenses will exceed
     $100,000 per year.

          The Company also has retained Gruntal, for the 18 month period
     commencing as of May 15, 1995 (the "Engagement Period"), to aid in
     structuring and negotiating Business Combinations.  Gruntal has been and
     will continue to be paid an engagement fee of $3,500 per month during the
     Engagement Period, with maximum compensation payable thereunder to Gruntal
     limited to $63,000 for such 18-month period, or $84,000 if the Extension
     Criteria are satisfied and the agreement with Gruntal is extended for the
     full six months.  Gruntal was issued 15,000 shares of Common Stock at a
     price of $.10 per share as additional compensation for its agreement to act
     as the Company's investment banker.

          If requested by the Company, and assuming no conflict of interest,
     Gruntal also will be retained by the Company to render a fairness opinion
     in connection with the consummation of a Business Combination in
     consideration of a fee of $50,000, reduced by the monthly retainer fees
     previously paid to Gruntal.  If Gruntal identifies the Target Business with
     which the Company effects a Business Combination and the transaction is
     consummated, it will receive additional compensation from the Company, the
     amount and form of which will be subject to good faith negotiations between
     management of the Company and Gruntal at the time of the introduction of
     the Target Business to the Company.  Management has not yet determined the
     criteria to be used in determining the amount of the additional
     compensation to be payable to Gruntal or whether a maximum dollar amount
     will be set.  The Company will not issue its shares in lieu of cash.

          As a result of the Offering, the Company has sufficient available
     funds, assuming that a Business Combination is not consummated, to operate
     until at least May 15, 1997.  To the extent that Common Stock is used as
     consideration to effect a Business Combination, the balance of the Net
     Proceeds of the Offering not theretofore expended will be used to finance
     the operations of the Target Business.  The Company has not incurred any
     debt in connection with its organizational activities.  No cash
     compensation will be paid to any officer or director until after the
     consummation of the first Business Combination.  Since the role of present
     management after a Business Combination is uncertain, the Company has no
     ability to determine what remuneration, if any, will be paid to such
     persons after a Business Combination.

          The net proceeds from the sale of the Class B Warrants in the Offering
     not immediately required for the purposes set forth above have been
     invested in general debt obligations of the United States Government or
     other high-quality, short-term interest-bearing investments.  The Company
     believes that, in the event a Business Combination is not effected in the
     time allowed and to the extent that a significant portion of the Net
     Proceeds of the Offering is not used in evaluating various prospective
     Target Businesses, the interest income derived from investment of such Net
     Proceeds during such period may be sufficient to defray continuing general

                                  11
     <PAGE>

     and administrative expenses, as well as costs relating to compliance with
     securities laws and regulations (including associated professional fees).

          In the event that the Company does not effect a Business Combination
     by May 15, 1997, the Company will submit for stockholder consideration a
     proposal to liquidate the Company and distribute to the then holders of
     Common Stock acquired as part of the Units sold in the Offering or in the
     open market thereafter, the amount held in the escrow account maintained by
     the Proceeds Escrow Agent.  Thereafter, all remaining assets available for
     distribution will be distributed to all holders of the Company's Common
     Stock after payment of liabilities and after appropriate provision has been
     made for the payment of liquidation distributions upon each class of stock,
     if any, having preference over the Common Stock.  To the extent that a
     Business Combination is not effected in the time allowed and the Company's
     stockholders determine not to liquidate the Company, the Company believes
     that income from the escrow account, together with a small portion of the
     net proceeds from the sale of the Class B Warrants in the Offering, may be
     sufficient to defray continuing expenses for a period of several additional
     years until the Company consummates a Business Combination.  Since all
     stockholders of the Company immediately prior to the Closing Date of the
     Offering have agreed to waive their respective rights to participate in a
     liquidation distribution occurring prior to the first Business Combination,
     all of the assets of the Company, including any income and interest earned
     on the proceeds of the Offering, which may be distributed upon such
     liquidation would be distributed to the owners of the Common Stock issued
     as part of the Units in the Offering or in the open market thereafter.


     ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
               -------------------------------------------

          The financial statements and supplementary data listed in Item
     14(a)(1) and (2) are included in this report beginning on page F-1.


     ITEM 9.   DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
               ----------------------------------------------------

          None.


                                       PART III
                                       --------

          Incorporated by reference to the Company's definitive proxy statement
     for its 1997 Annual and Special Meeting of Stockholders, which definitive
     proxy statement has been filed with the Securities and Exchange Commission.


                                       PART IV
                                       -------

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

          (a)  The following are filed as a part of this report.

          (1)  Financial Statements
               --------------------

                                  12               
     <PAGE>                             

                                                               Page
                                                               -----

      Report of Independent Certified Public Accountants  .     F-2

      Statements of Operations for the years ended December
        31, 1996, 1995 and 1994 and for the period January 1, 
        1993 to December 31, 1996 . . . . . . . . . . . . .     F-3

      Balance Sheets - December 31, 1996 and 1995 . . . . .     F-4

      Statements of Common Stock, Common Stock Subject to
        Possible Redemption, Preferred Stock, Additional 
        Paid-In Capital and Earnings Accumulated During 
        the Development Stage for the period January 1, 
        1993 to December 31, 1996 . . . . . . . . . . . . .     F-5

      Statements of Cash Flows for the Years Ended December
        31, 1996, 1995 and 1994 and for the period January 1, 
        1993 to December 31, 1996 . . . . . . . . . . . . .     F-6

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

          (2)  Financial Statement Schedules
               -----------------------------

               None.

          (3)  Exhibits
               --------


      Exhibit
      -------                                                  
       No.                           Description
      -----                          -----------

      2.1        Agreement  and  Plan  of  Merger  by and  among  the
                 Registrant,  Hollis-Eden,  Inc.,  Mr.  Salvatore  J.
                 Zizza  and  Mr.  Richard  B.  Hollis,  dated  as  of
                 November  1,  1996  [incorporated  by  reference  to
                 Exhibit 2 to the Registrant's Registration Statement
                 on Form S-4 (Commission  File No. 33-18725) filed on
                 December 24, 1996].

      3.1        Certificate  of  Incorporation   of  the  Registrant
                 [incorporated  by reference  to Exhibit  3.1  to the
                 Registrant's  Registration  Statement  on  Form  S-1
                 (Commission File  No. 33-60134)  filed on  April 13,
                 1995].

      3.2        By-laws of the Registrant [incorporated by reference
                 to Exhibit  3.2  to  the  Registrant's  Registration
                 Statement on Form S-1 (Commission File No. 33-60134)
                 filed on April 13, 1995].

      4.1        Form of  Common Stock Certificate  of the Registrant
                 [incorporated by  reference  to Exhibit  4.1 to  the
                 Registration  Statement on Form S-1 (Commission File
                 No. 33-60134) filed on April 13, 1995].

                                  13
     <PAGE>

     Exhibit
     -------
       No.                             Description
      -----                            -----------

      4.2        Warrant  Agency  Agreement  between  American  Stock
                 Transfer & Company and the Registrant, [incorporated
                 by reference  to  Exhibit  4.2 to  the  Registrant's
                 Registration Statement on  Form S-1 (Commission File
                 No. 33-60134) filed on April 13, 1995].

      4.3        Form of Class A Common Stock Purchase Warrant of the
                 Registrant [incorporated by reference to Exhibit 4.3
                 to the  Registrant's Registration  Statement on Form
                 S-1 (Commission  File No. 33-60134)  filed on  April
                 13, 1995].

      4.4        Form  of  Class  B  Unit  Purchase  Warrant  of  the
                 Registrant [incorporated by reference to Exhibit 4.4
                 to the Registrant's Registration  Statement on  Form
                 S-1  (Commission File  No. 33-60134) filed  on April
                 13, 1995].

      4.5        Representative's    Warrant   of    the   Registrant
                 [incorporated by  reference  to Exhibit  4.5 to  the
                 Registrant's  Registration  Statement  on  Form  S-1
                 (Commission File  No. 33-60134)  filed on April  13,
                 1995].
    
      4.6        Representative's Warrant  Agreement [incorporated by
                 reference  to   Exhibit  4.6  to  the   Registrant's
                 Registration Statement on  Form S-1 (Commission File
                 No. 33-60134) filed on April 13, 1995].

      10.1       Form of  Escrow  Agreement  for  outstanding  Common
                 Stock of  the Registrant [incorporated by  reference
                 to  Exhibit 10.2  to  the  Registrant's Registration
                 Statement on Form S-1 (Commission File No. 33-60134)
                 filed on April 13, 1995].

      10.2       Engagement  Letter,  dated  March 23,  1993, between
                 Gruntal &  Co. and the  Registrant, [incorporated by
                 reference  to  Exhibit  10.3  to   the  Registrant's
                 Registration  Statement on Form S-1 (Commission File
                 No. 33-60134) filed on April 13, 1995].

      10.3       Employment Agreement between  Lehigh Group, Inc. and
                 Mr. Salvatore Zizza, [incorporated  by reference  to
                 Exhibit  10.6  to   the  Registrant's   Registration
                 Statement on Form S-1 (Commission File No. 33-60134)
                 filed on April 13, 1995].

          (b)  Reports on Form 8-K
               ------------------

               None.

                                  14
     <PAGE>

                            INDEX TO FINANCIAL STATEMENTS


                                                                           Page
                                                                           ----

     Report of Independent Certified Public Accountants  . . . . . . . .   F-2 
      
     Statements of Operations for the years ended December 31, 1996,
     1995 and 1994 and for the period January 1, 1993 to 
     December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . .   F-3 

     Balance Sheets - December 31, 1996 and 1995 . . . . . . . . . . . .   F-4 

     Statements of Common Stock, Common Stock Subject to Possible 
     Redemption, Preferred Stock, Additional Paid-In Capital and 
     Earnings Accumulated During the Development Stage for the 
     period January 1, 1993 to December 31, 1996 . . . . . . . . . . . .   F-5 

     Statements of Cash Flows for the years ended December 31, 1996, 
     1995 and 1994 and for the period January 1, 1993 to 
     December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . .   F-6 

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


                                  F-1
     <PAGE>

                  REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


     Board of Directors and Stockholders of
         Initial Acquisition Corp.
         (a corporation in the development stage)
     New York, New York

     We have audited the accompanying balance sheets of Initial Acquisition
     Corp. (a corporation in the development stage), as of December 31, 1996 and
     1995, and the related statements of operations and cash flows for each of
     the years in the three year period ended December 31, 1996 and the period
     January 1, 1993 (inception) to December 31, 1996, and common stock, common
     stock subject to possible redemption, preferred stock, additional paid-in
     capital and earnings accumulated during the development stage for the
     period January 1, 1993 (inception) to December 31, 1996.  These financial
     statements are the responsibility of the Company's management.  Our
     responsibility is to express an opinion on these financial statements based
     on our audits.

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

     In our opinion, the financial statements present fairly, in all material
     respects, the financial position of Initial Acquisition Corp. as of
     December 31, 1996 and 1995, and the results of its operations and its cash
     flows for each of the years in the three year period ended December 31,
     1996 and the period January 1, 1993 (inception) to December 31, 1996 in
     conformity with generally accepted accounting principles.


     /s/ BDO Seidman, LLP                           
     --------------------------------
     BDO Seidman, LLP



     New York, New York

     January 10, 1997

                                  F-2

     <PAGE>
                              INITIAL ACQUISITION CORP.
                       (A CORPORATION IN THE DEVELOPMENT STAGE)

                               STATEMENTS OF OPERATIONS
                               ------------------------



                                       
                                       YEAR ENDED                 PERIOD  
                                       DECEMBER 31,             JANUARY 1,      
                           ----------------------------------    1993 TO
                                                               DECEMBER 31,
                              1996       1995        1994          1996
                           ---------  ---------   ----------   ------------

     INTEREST INCOME . .   $345,484   $224,305     $     --      $569,789

     GENERAL AND
     ADMINISTRATIVE
        EXPENSES . . . .   (160,309)   (71,782)      (7,000)     (246,277)

     PROVISION FOR TAXES    (71,000)   (52,000)          --      (123,000)
                           --------   --------     --------      --------


                           $114,175   $100,523     $ (7,000)     $200,512
     NET INCOME (LOSS) .   ========   ========     ========      ========

     EARNINGS (LOSS) PER   $    .14   $    .16     $   (.03)
     SHARE . . . . . . .   ========   ========     ========

     WEIGHTED AVERAGE
     COMMON SHARES          833,250    608,250      233,250
     OUTSTANDING . . . .   ========    =======     ========


               See accompanying notes to financial statements.

                                  F-3
     <PAGE>
                              INITIAL ACQUISITION CORP.
                       (A CORPORATION IN THE DEVELOPMENT STAGE)

                                    BALANCE SHEETS
                                    --------------



                                                      DECEMBER 31,
                     ASSETS                        1996            1995     
                     ------                   ----------        ---------
     CURRENT ASSETS:
        Cash and cash equivalents  . . . .    $  146,863       $  305,171
        Investment in U.S. Treasury Bills      6,546,693        6,213,588
                                              ----------        ---------

              Total current assets . . . .     6,693,556        6,518,759

                                                 136,974               --
        Deferred acquisition costs . . . .    ----------        ---------

              Total  . . . . . . . . . . .    $6,830,530       $6,518,759
                                              ==========       ==========


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

     LIABILITIES AND STOCKHOLDERS'
      EQUITY:
        Accrued expenses . . . . . . . . .      $164,236          $37,640
        Income taxes payable . . . . . . .       123,000           52,000
        Common stock, subject to possible
         redemption, 89,940 shares at
         conversion value  . . . . . . . .       981,349          932,316
        Preferred stock, $.01 par value -
         shares authorized 5,000; none
         issued  . . . . . . . . . . . . .            --               --
        Common stock, $.01 par value -
         shares authorized 10,000,000;
         issued and outstanding 833,250 
         (which includes 89,940 shares
         subject to possible conversion) .         7,434            7,434
        Additional paid-in capital . . . .     5,436,065        5,436,065
        Earnings accumulated during              118,446           53,304
           development stage . . . . . . .     ---------      -----------

     COMMITMENTS . . . . . . . . . . . . .
                                              $6,830,530       $6,518,759
              Total  . . . . . . . . . . .    ==========       ==========


                See accompanying notes to financial statements.

                                  F-4
     <PAGE>


                              INITIAL ACQUISITION CORP.
                       (A CORPORATION IN THE DEVELOPMENT STAGE)

                 STATEMENTS OF COMMON STOCK, COMMON STOCK SUBJECT TO
                        POSSIBLE REDEMPTION, PREFERRED STOCK,
                 ADDITIONAL PAID-IN CAPITAL AND EARNINGS ACCUMULATED
                             DURING THE DEVELOPMENT STAGE
                     PERIOD JANUARY 1, 1993 TO DECEMBER 31, 1996
                     -------------------------------------------

                                                    COMMON STOCK
                                                   --------------
                                                SHARES        AMOUNT
                                                ------        -----

      BALANCE AT JANUARY 1, 1993  . . . .          --        $    --

         Issuance of founder's shares . .     188,250          1,883

         Sale of common stock . . . . . .      45,000            450

         Net loss . . . . . . . . . . . .          --             --
                                              -------         ------

      BALANCE AT DECEMBER 31, 1993  . . .     233,250          2,333

         Net loss . . . . . . . . . . . .          --             --
                                              -------         ------

      BALANCE AT DECEMBER 31, 1994  . . .     233,250          2,333

         Sale of 600,000 shares, net of
           underwriting discounts and
           offering costs . . . . . . . .     510,060          5,101

         Net income . . . . . . . . . . .          --             --

         Accretion to redemption value             --             --
           of common stock  . . . . . . .     -------         ------

      BALANCE AT DECEMBER 31, 1995  . . .     743,310          7,434
                                              -------         ------

         Net income . . . . . . . . . . .          --             --

         Accretion to redemption value of          --             --
           common stock . . . . . . . . .     -------         ------

      BALANCE AT DECEMBER 31, 1996  . . .     743,310         $7,434
                                              =======         ======

                                                        
                                  COMMON STOCK SUBJECT              
                                          TO                          EARNINGS
                                  POSSIBLE REDEMPTION               ACCUMULATED
                                  --------------------   ADDITIONAL  DURING THE
                                                          PAID-IN   DEVELOPMENT
                                    SHARES     AMOUNT      CAPITAL      STAGE
                                    ------     ------     ---------  ----------


      BALANCE AT JANUARY 1, 1993        --   $     --   $       --   $     --

         Issuance of founder's
          shares  . . . . . . .         --         --       16,942         --

         Sale of common stock .         --         --       63,050         --

         Net loss . . . . . . .         --         --           --     (7,186)
                                   -------   --------   ----------   --------

      BALANCE AT DECEMBER 31, 1993      --         --       79,992     (7,186)

         Net loss . . . . . . .         --         --           --     (7,000)
                                   -------   --------   ----------   --------

      BALANCE AT DECEMBER 31, 1994      --         --       79,992    (14,186)

         Sale of 600,000 shares,
          net of underwriting 
          discounts and offering
          costs . . . . . . . .     89,940    899,283    5,356,073         --

         Net income . . . . . .         --         --           --    100,523

         Accretion to redemption        --     33,033           --    (33,033)
           value of common stock    ------   --------   ----------   --------

      BALANCE AT DECEMBER 31, 1995  89,940    932,316    5,436,065     53,304
                                    ------   --------   ----------   --------

         Net income . . . . . .         --         --           --    114,175

         Accretion to redemption        --     49,033           --    (49,033)
          value of common stock     ------   --------   ----------   --------

      BALANCE AT DECEMBER 31, 1996  89,940   $981,349   $5,436,065   $118,446
                                    ======   ========   ==========   ========

              See accompanying notes to financial statements.

                                  F-5
     <PAGE>
                              INITIAL ACQUISITION CORP.
                       (A CORPORATION IN THE DEVELOPMENT STAGE)

                               STATEMENTS OF CASH FLOWS
                               ------------------------

                                        YEAR ENDED                   PERIOD
                                       DECEMBER 31,                JANUARY 1,
                             --------------------------------       1993 TO
                                                                  DECEMBER 31,
                              1996          1995         1994         1996
                              ----          ----         ----     ------------
      CASH FLOWS FROM OPERATING
       ACTIVITIES: 

       Net income
         (loss) . . . .      $114,175      $100,523     $(7,000)      $200,512

       Adjustments to  
         reconcile net 
         income (loss) to 
         net cash used in 
         operating activities:

          Accrued interest
            income  . .      (333,105)     (214,370)         --       (547,475)

          Change in assets
            and liabilities:

             Accrued 
              expenses.       126,596        31,640          --        164,236

             Income 
              taxes            71,000        52,000          --        123,000
              payable .     ---------     ---------    --------     ----------

                Net cash 
                 used in
                 operating    (21,334)      (30,207)     (7,000)       (59,727)
                 activities ---------     ---------    --------     ----------

      CASH FLOWS FROM INVESTING
       ACTIVITIES:

        Purchase of 
         U.S. Treasury 
         Bills            (25,859,849)   (5,999,218)         --    (31,859,067)

       Proceeds from
         U.S. 
         Treasury          25,859,849            --          --     25,859,849
         Bills  . . . . .  ----------    ----------   ---------     ----------

                Net cash 
                 used in
                 investing         --    (5,999,218)         --     (5,999,218)
                 activities  --------   -----------    --------     ----------

      CASH FLOWS FROM FINANCING
       ACTIVITIES:

       Deferred 
         acquisition 
         costs               (136,974)           --          --       (136,974)

       Proceeds from
         sale of common
         stock  . . . . .          --            --          --         82,325

       Net proceeds from
         public offering           --     6,260,457          --      6,260,457

       Deferred         
         registration              --        63,043     (10,821)            --
         costs              ---------     ---------    ---------      ---------

                Net cash 
                 provided
                 by (used 
                 in)
                 financing   (136,974)    6,323,500     (10,821)     6,205,808
                 activities ---------    ----------    --------      ---------

      NET INCREASE (DECREASE) 
       IN CASH AND CASH
       EQUIVALENTS  . .      (158,308)      294,075     (17,821)       146,863

      CASH AND CASH
       EQUIVALENTS,           305,171        11,096      28,917             --
       beginning of year     --------      --------     -------       --------

      CASH AND CASH
       EQUIVALENTS, end      $146,863      $305,171     $11,096       $146,863
       of year  . . . .      ========      ========     =======       ========


                     See accompanying notes to financial statements.

                                  F-6
     <PAGE>

                              INITIAL ACQUISITION CORP.
                       (A CORPORATION IN THE DEVELOPMENT STAGE)

                            NOTES TO FINANCIAL STATEMENTS
                            -----------------------------



     NOTE 1 - ORGANIZATION AND BUSINESS OPERATIONS
     ----------------------------------------------


         Initial Acquisition Corp. (the "Company") is a "blank check" or "blind
     pool" company which was formed on November 18, 1992 to serve as a vehicle
     to effect a merger, exchange of capital stock, asset acquisition or other
     business combination (a "Business Combination") with an operating business
     (a "Target Business").  Operations and cash transactions did not occur
     until 1993; accordingly, financial statements have been presented
     commencing on January 1, 1993.  The business objective of the Company is to
     effect a Business Combination with a Target Business which the Company
     believes has significant growth potential.  To date, the Company has not
     effected a Business Combination.

         On May 23, 1995 (the "Closing Date" or "Effective Date"), the Company
     consummated its initial public offering (the "Offering") of (a) 600,000
     units (the "Units"), each Unit consisting of (i) one share of common stock,
     $.01 par value per share (the "Common Stock"), and (ii) one Class A Common
     Stock Purchase Warrant (the "Class A Warrants") entitling the holder
     thereof to purchase one share of Common Stock, and (b) 255,000 Redeemable
     Class B Unit Purchase Warrants (the "Class B Warrants"), each such Class B
     Warrant entitling the holder thereof to purchase one Unit.  On the Closing
     Date, the Registrant received net proceeds of approximately $6,300,000 (the
     "Net Proceeds"), after giving effect to the payment of all underwriting
     discounts, the underwriters' non-accountable expense allowance and Offering
     expenses.  Pursuant to the terms of the Offering, approximately $6 million
     of Net Proceeds, representing an amount equal to the gross proceeds from
     the sale of the Units, was placed in escrow (the "Trust Fund") with The
     Chase Manhattan Bank, N.A., subject to release in accordance with the terms
     of the Offering.  These Net Proceeds have been invested in United States
     Treasury Bills and Commercial Paper.

         On November 1, 1996, the Company signed a definitive agreement for 
     the acquisition of a Target Business and will submit such transaction for
     stockholder approval (see Note 7).  All of the Company's stockholders prior
     to the Offering, including all of the officers and directors of the Company
     (the "Initial Stockholders") have agreed to vote the shares of common stock
     owned by them immediately prior to the effective date of the Offering in
     accordance with the vote of the majority of all other shares of common
     stock (the "Public Shares") voted on in any Business Combination.  The
     holders of the Public Shares are referred to herein as the "Public
     Stockholders".  After consummation of the Company's first Business
     Combination, this voting safeguard will no longer be applicable.

         With respect to the Business Combination, any Public Stockholder who 
     votes against the Business Combination may demand that the Company convert 
     his shares into cash.  The per share conversion price will equal the amount
     in the Trust Fund as of the record date for determination of stockholders
     entitled to vote on the Business Combination divided by the number of
     shares held by Public Stockholders.  The Company will not consummate a
     Business Combination if 15% or more in interest of the Public Stockholders
     exercise their conversion rights.  Accordingly, Public Stockholders holding
     14.99% of the aggregate number of shares owned by all Public Stockholders
     may have their shares converted to cash in the event of a Business
     Combination.  Such Public Stockholders are entitled to receive their per
     share interest in the Trust Fund computed without regard to shares held by
     Initial Stockholders.  Accordingly, a portion of the net proceeds from the
     Offering (14.99% of the amount held in the Trust Fund) has been classified
     as common stock subject to possible redemption in the accompanying balance
     sheet at the redemption value.

         The Company's Certificate of Incorporation provides for mandatory
     liquidation of the Company in the event that the Company does not
     consummate a Business Combination within 18 months from the date of 

                                  F-7
     <PAGE>

                              INITIAL ACQUISITION CORP.
                       (A CORPORATION IN THE DEVELOPMENT STAGE)

                            NOTES TO FINANCIAL STATEMENTS
                                     (CONTINUED)
                          ----------------------------------

     consummation of the Offering, or 24 months from the consummation of the
     Offering if certain extension criteria have been satisfied.  Upon the
     signing of the definitive merger agreement (see Note 7), such extension
     criteria were satisfied.  In the event of liquidation, it is likely that
     the per share value of the residual assets remaining available for
     distribution (including Trust Fund assets) will be less than the initial
     public offering price per share in the Offering (assuming no value is
     attributed to the Warrants contained in the Units offered in the Offering.)



     NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ---------------------------------------------------

       Deferred Acquisition Costs


         The Company has deferred acquisition costs relating to a proposed 
     merger (Note 7).  The deferred acquisition costs will be charged to equity 
     upon completion of the proposed merger.  Should the proposed merger prove 
     to be unsuccessful, the deferred costs, as well as additional expenses to 
     be incurred, will be charged to operations.

       Supplemental Cash Flow Information

         The Company considers all short-term, highly liquid instruments 
     purchased with an original maturity of three months or less to be cash 
     equivalents.

         The Company's cash and cash equivalents are carried at cost, which
     approximates market value, and consist of commercial paper.  Cash
     equivalents as of December 31, 1996 are $125,000.

       Net Earnings Per Common Share

         Net earnings per common share for the years ended December 31, 1996, 
     1995 and 1994 are computed by dividing net earnings by the weighted average
     common shares outstanding during the year.  The assumed exercise of common
     stock equivalents was not utilized since the effect was anti-dilutive.

       Income Taxes

         The Company follows the Financial Accounting Standards Board ("FASB")
     Statement No. 109.  This statement requires that deferred income taxes be
     recorded following the liability method of accounting and be adjusted
     periodically when income tax rates change.  Deferred taxes are not
     material.

       Use of Estimates

         In preparing financial statements in conformity with generally accepted
     accounting principles, management is required to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     the disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amount of revenues and expenses
     during the reporting period.  Actual results could differ from these
     estimates.

                                  F-8
     <PAGE>


                              INITIAL ACQUISITION CORP.
                       (A CORPORATION IN THE DEVELOPMENT STAGE)

                            NOTES TO FINANCIAL STATEMENTS
                                     (CONTINUED)
                       ----------------------------------------


     NOTE 3 - INVESTMENTS
     --------------------

         The Company had invested the majority of the proceeds from the Offering
     in United States Treasury Bills.  These Treasury Bills, which were 
     purchased at a discount, are presented at their accreted cost, which 
     approximates market.  The Treasury Bills mature in January 1997.

     NOTE 4 - INCOME TAXES
     ---------------------

         Income taxes are provided based on the liability method of accounting
     pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109,
     "Accounting for Income Taxes".  Deferred income taxes are recorded to
     reflect the tax consequences on future years' differences between the tax
     basis of assets and liabilities and their financial reporting amounts at
     each year-end.  Valuation allowances are established for those income tax
     benefits where reliability is uncertain.

         Provision for income taxes consist of the following: 


                                   1996        1995         1994  
                                 --------    --------     --------
      Current:
           Federal               $45,000     $40,000      $    --
           
           State                  26,000      12,000           --
                                 -------     -------      -------

      Current tax expense        $71,000     $52,000      $    --
                                 =======     =======      =======

     NOTE 5 - COMMITMENT
     -------------------

        (a) The Company presently occupies office space provided by a 
     stockholder.  Such stockholder has agreed that, until the acquisition of 
     a Target Business by the Company, he will make such office space, as well 
     as certain office and secretarial service, available to the Company, as 
     may be required by the Company from time to time at the rate of $500 per 
     month.  Upon completion of the Offering, in May 1995, the monthly payment 
     increased to $2,500.  Such costs reflected in the financial statements 
     amount to $30,000, $20,000 and $6,000 for the years ended December 31, 
     1996, 1995 and 1994, respectively.

        (b) The Company has retained an investment banker, for the 18-month 
     period commencing as of May 15, 1995 (the "Engagement Period"), to aid in
     structuring and negotiating Business Combinations.  The investment banker
     has been and will continue to be paid an engagement fee of $3,500 per month
     during the Engagement Period, with maximum compensation payable thereunder
     limited to $63,000 for such 18-month period, or $84,000 if the extension
     criteria are satisfied and the agreement with the investment banker is
     extended for the 

                                  F-9
     <PAGE>

                              INITIAL ACQUISITION CORP.
                       (A CORPORATION IN THE DEVELOPMENT STAGE)

                            NOTES TO FINANCIAL STATEMENTS
                                     (CONTINUED)
                       ----------------------------------------


     full six months.  In addition, in 1993, the Company issued 15,000 shares of
     common stock at a price $.10 per share for its agreement to act as the
     Company's  investment banker.

     NOTE 6 - WARRANTS
     -----------------

         In April 1994, the Company issued warrants to purchase 160,000 units 
     at $10.00 per unit, each unit to be identical to the Units issued in the
     Offering, exercisable until the fifth anniversary of the date of the
     Prospectus.

         In April 1994, the Company issued warrants to purchase up to 50,000 
     shares of Common Stock, at an exercisable price of $.10 per share, to an 
     executive of the Company.  These warrants are exercisable for the one-year 
     period following the consummation of a Business Combination.  At the time
     of a Business Combination, a compensation charge will be incurred for the
     difference between the exercise price and the fair market value of the
     shares purchased.


     NOTE 6 - WARRANTS (continued)
     -----------------------------

         In connection with the Offering, the Company issued warrants to the
     underwriters for 60,000 units at an exercise price of $11.00 per unit and
     24,000 Class B warrants at an exercise price of $5.775 per unit.  These
     warrants are exercisable for a period of four years commencing one year
     from the date of the Prospectus.


     NOTE 7 - PROPOSED MERGER
     ------------------------

         On November 1, 1996, the Company entered into a definitive merger 
     agreement with Hollis-Eden, Inc., a development stage pharmaceutical 
     company engaged in developing therapeutic and/or preventive pharmaceutical 
     agents for the treatment of a number of diseases.

         The merger will be treated as a recapitalization of Hollis-Eden by an
     exchange of Hollis-Eden common stock for the net assets of the Company
     since the Hollis - Eden stockholders will receive new Company shares of
     stock representing approximately 85% of the Company's total outstanding
     shares.

         The merger is subject to a number of conditions, including approval by 
     the stockholders of the Company.

                                  F-10
     <PAGE>
                                     SIGNATURES
                                     ----------

          Pursuant to the requirements of the Section 13 or 15(d) of the
     Securities Exchange Act of 1934, the registrant has duly caused this report
     to be signed on its behalf by the undersigned, thereunto duly authorized on
     the 19th day of February, 1997.

                                   INITIAL ACQUISITION CORP.


                                   By: /s/ Salvatore J. Zizza                   
                                      ------------------------------------
                                        Salvatore J. Zizza, President

          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/Salvatore J. Zizza    President, Chairman of the     February 19, 1997
      ---------------------    Board of Directors, Treasurer            
       Salvatore J. Zizza      and Director (Principal 
                               Executive, Financial and 
                               Accounting Officer)

      ---------------------    Director                       February 19, 1997
      Sidney Dworkin                                                


      ---------------------    Director                       February 19, 1997
      Herbert M. Paul                                             


      /s/Richard L. Bready     Director                       February 19, 1997
      ---------------------                                         
      Richard L. Bready


      /s/Alan P. Donenfeld     Director                       February 19, 1997
      ---------------------                                        
      Alan P. Donenfeld

                                  F-11
     <PAGE>


                            EXHIBIT INDEX

         Exhibit                 Description
         -------                 -----------

           27              Financial Data Schedule