<PAGE>

                      U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C.  20549
                                          
                                    FORM 10-KSB

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

             For the fiscal year ended:  December 31, 1998
                                        --------------------------

     [ ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE 
             SECURITIES EXCHANGE ACT OF 1934

                               Commission File Number: 0-22247
                                                       -------

                                 NM HOLDINGS, INC.
            -----------------------------------------------------------
                   (Name of small business issuer in its charter)

          Minnesota                                         41-1756256
  -----------------------------------------------------------------------------
  (State or other jurisdiction                              (I.R.S. Employer
  of incorporation or organization)                         Identification No.)

             9850 51st Avenue North, Suite 110, Minneapolis, MN  55442
            ------------------------------------------------------------
            (Address of principal executive offices)          (Zip Code)

                     Issuer's telephone number:  (612) 551-9595
                                                ----------------

Securities registered under Section 12(b) of the Exchange Act:

                                        None
                  ------------------------------------------------
                                  (Title of class)

Securities registered under Section 12(g) of the Exchange Act:

                            Common Stock, $.04 par value
                 -------------------------------------------------
                                  (Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.  Yes  X    No 
                                                              -----    -----

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [  ]


<PAGE>

State issuer's revenues for its most recent fiscal year:  $4,926,765
                                                          -----------

On March 22, 1999, and based on the average bid and asked prices as of that
date, the aggregate market value of the voting stock held by non-affiliates of
the issuer was $4,216,694.

The number of shares outstanding of the registrant's common stock, $.04 par
value, as of March 22, 1999 was 1,150,251 shares.

Transitional Small Business Disclosure Format:  Yes      No   X 


                               Page 2 of 19

<PAGE>
                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

     NM Holdings, Inc. (the "Company" or "Registrant") was incorporated under
the laws of the State of Minnesota in July 1993, under the name "Nutrition
Medical, Inc." On December 22, 1998, the Company's shareholders approved a
proposal to change the Company's name from Nutrition Medical, Inc. to NM
Holdings, Inc. The Company's executive offices are located at 9850 51st Avenue
North, Suite 110, Minneapolis, Minnesota 55442.

     Prior to December 23, 1998, the Company developed and sold generic critical
care formulas and related delivery equipment and accessories (i.e., feeding
pumps and plastic disposables) for the hospital, nursing home and home health
care markets, as well as a line of retail private label adult nutrition products
for sale through retail chains. On December 23, 1998, the Company completed a
series of transactions resulting in the sale of substantially all its product
lines and assets used in connection with the critical care business and adult
nutrition product business. The Company does not currently conduct any active
business operations. The Company intends to use its existing cash resources,
together with debt or equity financing that may be available, to pursue a
business combination with another entity engaged in other lines of business.

DISCONTINUED OPERATIONS

     The Company's original core business consisted of developing and marketing
a line of clinical nutrition products to hospitals and other healthcare
facilities as a cost-effective alternative to brand-name products. In late 1995,
the Company diversified its core business through the development and marketing
of a private label adult nutrition supplement product line for sale to retail
chains, using the retailers' proprietary store-brand labels. In addition, in
1996 the Company commenced development of a generic infant formula product for
distribution through these retail chains. In January 1997, the Company attempted
to augment its clinical nutrition product line by acquiring from Elan Pharma,
Inc. ("Elan"), a United States subsidiary of Ireland-based Elan Corporation
PLC., a line of enteral (feeding tube) pumps, related plastic disposables and
nutrition formula products (the "Elan Product Line"). In exchange for the Elan
Product Line, the Company issued to Elan a $3 million subordinated promissory
note and 213,750 shares of the Company's common stock.

     During 1996 and 1997, the Company incurred significant expenses related 
to the development of the generic infant formula product. In January 1998, 
unable to successfully complete a marketable product, the Company announced 
its decision to suspend further development efforts of its generic infant 
formula product. Also in January 1998, the Company announced its intention to 
discontinue its private label adult nutrition product business. Although the 
revenues generated from these products continued to grow, the development and 
maintenance of a retail distribution network for these products required a 
disproportionate amount of working capital. As a result, the Company did not 
maintain competitive profit margins. On May 1, 1998, the Company transferred 
to Agrilink Foods, Inc. ("Agrilink"), a New York corporation, its private 
label adult nutrition business in return for (i) cash in an amount equal to 
the Company's cost for the inventory and labels used in such business, (ii) 
cash in the amount of $18,000 for the Company's label development costs, and 
(iii) royalty payments on private label adult nutrition products sold by 
Agrilink for the two-year period commencing May 1, 1998.

     Since its inception, the Company also incurred losses in its core 
critical care nutrition business. Although the gross margins from its 
critical care nutrition business were competitive, the Company had to 
increase sales to cover its fixed operating expenses. In an attempt to 
broaden its market presence, the Company developed several new critical care 
products and acquired the Elan Product Line, as described above. Company 
management concluded that although revenues increased, the Elan Product Line 
lacked the desired synergy with the Company's critical care formulas. 
Management also concluded that the Company's inability to successfully 
integrate the Elan Product Line rendered the Company's financial performance 
objectives unattainable. Additionally, the Company experienced increased 
competition from larger organizations and faced the risk of product 
obsolescence due to the limited amount of available research and development 
funding. The patent infringement lawsuit described in "Item 3. Legal 
Proceedings" also adversely affected the Company's ability to market its 
product lines effectively.

     In addition, Company management believed that the Company had insufficient
cash to adequately exploit new product development opportunities and
aggressively pursue marketing strategies required to achieve growth in the

                               Page 3 of 19 pages
<PAGE>

applicable markets. Furthermore, the Company had accumulated net losses in
excess of $6 million since inception. Company management did not foresee an end
to these continued losses if the Company continued in its current direction and
businesses. In light of the foregoing, the Board of Directors determined that it
was in the best interest of the Company and its shareholders to discontinue the
Company's critical care nutrition business operations. The Board of Directors
believed that the Company would maximize shareholder value by selling the assets
comprising the Company's current businesses and using the proceeds to settle
outstanding debt incurred from the Elan Product Line purchase and to pursue an
acquisition transaction with another entity engaged in other lines of business.

     In July 1998, the Company entered into an agreement to sell its pumps and
plastic disposables assets to ZEVEX, Inc. ("ZEVEX"). In September 1998, the
Company entered into an agreement to sell its critical care nutrition product
assets to GalaGen Inc. ("GalaGen"). Both transactions closed on December 23,
1998, subsequent to shareholder approval received at the Company's annual
meeting of shareholders on December 22, 1998. In conjunction with the ZEVEX
sale, the Company entered into an agreement with Elan whereby, in exchange for
substantially all of the proceeds from the ZEVEX sale and a warrant to acquire
50,000 shares of the Company's common stock for $3.50 per share, Elan canceled
the outstanding balance of the subordinated promissory note, and the Company
redeemed the 213,750 shares of Company common stock issued to Elan in January
1997.

     As a result of the ZEVEX and GalaGen transactions and the settlement with
Novartis, described in "Item 3. Legal Proceedings," whereby the Company agreed
to discontinue its L-Emental-TM- Plus product, the Company currently has no
products or product-related patents or trademarks.

STRATEGIC REPOSITIONING OF THE COMPANY

     The following discussion of the Company's proposed business activities is
purposefully general and is not meant to limit the Company's discretion to
search for and consummate potential business opportunities.

     The Company believes that the sale of substantially all its assets and
product lines, its reduction in liabilities through the cancelation of the Elan
subordinated promissory note, and the reduction in the number of shares
outstanding through the reacquisition of Company common stock issued to Elan
will position the Company as an attractive business partner for an entity
seeking a strategic combination with a publicly traded corporation. Company
management and the Board of Directors believe that such a combination will serve
the interests of the Company's shareholders better than a liquidation of the
Company and distribution of its assets to shareholders. It is the Board of
Directors' intention to pursue business combinations with entities engaged in
other lines of business, using the Company's cash resources (approximately $2
million as of December 31, 1998) together with other resources. The acquisition
of a business may require additional debt or equity financing. However, the
Company has no current plan to obtain additional financing and no assurance can
be given that such financing will be available to acquire a particular business.

     Since December 23, 1998, the Company's principal activity has been the
investigation of potential acquisitions and the finalization of the discontinued
operations. Day-to-day operations are administered on an as-needed basis by
Richard J. Hegstrand, a consultant and the Company's acting Chief Operating
Officer. The Company's Chief Executive Officer, George E. Kline, along with the
Board of Directors, are overseeing the business acquisition process.

     As a result of the strategic repositioning of the Company, under the rules
of The Nasdaq Stock Market the Company is deemed to be a "shell" corporation,
whose sole purpose is to locate and consummate one or more acquisition
transactions with other entities. Consequently, The Nasdaq Stock Market has
notified the Company that it may no longer qualify for inclusion in The Nasdaq
Stock Market (see "Item 5. Market for Common Equity and Related Stockholder
Matters"). Pending a business acquisition by the Company, the net proceeds of
the ZEVEX and GalaGen transactions, after deduction of the expenses incurred by
the Company in connection therewith, will be invested in U.S. government
securities.

     On March 17, 1999, the Company issued a press release announcing it had 
commenced negotiations with Miller, Johnson & Kuehn, Incorporated, a 
brokerage/clearing firm located in Minneapolis, Minnesota ("MJK") regarding 
an acquisition transaction.  On March 25, 1999, the Company entered into an 
agreement with MJK Holdings, Inc., the parent company of MJK, pursuant to 
which MJK will merge with and into a newly formed, wholly owned subsidiary of 
the Company.  The agreement provides that each share of capital stock of MJK 
Holdings, Inc. will be exchanged for 3.76378 shares of Company common stock.  
The closing of the transaction is subject to various closing conditions, 
including, but not limited to, the approval of the Company's shareholders.

RESIGNATION OF WILLIAM L. RUSH AS CHIEF EXECUTIVE OFFICER, PRESIDENT AND 
CHAIRMAN OF THE BOARD

                               Page 4 of 19 pages

<PAGE>

     Effective August 31, 1998, William L. Rush resigned as a director, 
Chairman of the Board, Chief Executive Officer and President of the Company. 
Since September 1, 1998, George E. Kline has served as Chairman of the Board. 
On December 23, 1998, the Board of Directors appointed George E. Kline 
as Chief Executive Officer and President, effective January 1, 1999.

EMPLOYEES

     As of December 31, 1998, the Company had two full-time employees engaged in
general corporate and administrative functions. The Company currently has no
full-time employees. The Company expects to retain employees, as needed, upon
the Company's acquisition of a business.

ITEM 2.  DESCRIPTION OF PROPERTY.

     The Company's corporate headquarters are located at 9850 51st Avenue 
North, Suite 110, Minneapolis, Minnesota, 55442, in an office/warehouse 
facility consisting of approximately 9,500 square feet. The Company's lease 
expires on November 30, 2001. Monthly rent, which includes the Company's pro 
rata share of taxes, utilities and common area charges, is $8,800. As a 
result of the Company's product line sales in 1998, the space in the facility 
exceeds the Company's current needs. In March 1999, the Company entered into 
an agreement with Sentinel Real Estate Corporation ("Sentinel"), the lessor of 
the facility, that allows the Company to sublet substantially all of its 
leased space effective April 1, 1999. Additionally, the Company established a 
reserve in the year ended December 31, 1998, to cover the expected costs of 
operating the facility and any losses the Company may incur by subletting the 
property. In March 1999, the Company entered into a sublease agreement with 
U-Ship, Inc., whereby U-Ship, Inc. will assume the Company's remaining 
liability under the lease with Sentinel, including taxes and common area 
maintenance costs.

ITEM 3.  LEGAL PROCEEDINGS.

     In August 1995, the Company was named as a defendant in a patent 
infringement lawsuit brought by Novartis Nutrition ("Novartis"), formerly 
Sandoz Nutrition Corporation, in the United States District Court for the 
District of Minnesota. The complaint asserted that one of the Company's 
products, L-Emental-TM- Plus, infringed on two patents held by Novartis, and 
Novartis asked for relief in the form of an injunction preventing the Company 
from selling the product, as well as damages of an unspecified amount. The 
Company responded with a counterclaim seeking a declaration of invalidity, 
unenforceability, non-infringement and inventorship of the subject patents. 
On December 15, 1998, the Company entered into a Settlement and Mutual 
Release with Novartis whereby Novartis agreed to release all claims against 
the Company, and the Company paid Novartis $450,000 and agreed to discontinue 
production of its L-Emental-TM- Plus product. The Company recognized a charge 
to discontinued operations in December 1998 of $513,816 relating to the 
settlement payment and the write-off of the related product inventory.

     In November 1997, the Company was named as a defendant in a patent
infringement lawsuit brought by Nestle in the United States District Court for
the Northern District of Illinois. The suit asserted that one of the Company's
products, Pro-Peptide-TM- For Kids, infringes on a patent held by Nestle.
Additional litigation against the Company was filed but not served by Nestle.
Through a settlement agreement effective October 6, 1998, the parties resolved
all outstanding claims between the parties. In connection with the settlement,
the Company agreed to reformulate its product Pro-Peptide-TM- For Kids and to
change its marketing for its product Pro-Peptide-TM- VHN.

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

     The annual meeting of shareholders of the Company was held on December 22,
1998, at which time the following matters were approved:

1.   The election of three nominees to the Board of Directors for one-year 
     terms.

2.   The Asset Purchase Agreement dated as of July 27, 1998, by and between the
     Company and ZEVEX, a Delaware corporation, pursuant to which the Company
     agreed to sell and transfer, and ZEVEX agreed to purchase and assume,
     certain of the assets and liabilities of the Company in connection with the
     Company's enteral feeding pump and plastic disposables business.

3.   The Asset Purchase Agreement dated as of September 1, 1998, as amended 
     pursuant to an Amendment Agreement dated October 28, 1998, by and between 
     the Company and GalaGen, a Delaware corporation,


                               Page 5 of 19 pages

<PAGE>

     pursuant to which the Company agreed to sell and transfer, and GalaGen 
     agreed to purchase and assume, certain of the assets and liabilities of the
     Company in connection with the Company's critical care business.

4.   An amendment to the Company's Second Restated Articles of Incorporation, 
     as amended, changing the name of the Company to NM Holdings, Inc.

5.   The appointment of Ernst & Young LLP as the independent auditors of
     the Company for the fiscal year ending December 31, 1998.

Proxies for the annual meeting were solicited by the Company pursuant to Section
14(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and there was no solicitation in opposition to management's nominees to the
Board of Directors or to management's voting recommendations on the other
matters submitted to a shareholder vote at the annual meeting. All nominees for
directors as listed in the proxy statement were elected. The voting results were
as follows:

1.   Election of Directors:

<TABLE>
<CAPTION>
                                       For                Withhold Authority
                                       ---                ------------------
     <S>                             <C>                  <C>
     George E. Kline                 822,107                    1,450
     Lawrence A. Lehmkuhl            823,342                     125
     Hilding C. Nelson               823,342                     125
</TABLE>

2.   Proposal to approve the Asset Purchase Agreement between the Company and
     ZEVEX dated as of July 27, 1998:

     For:  822,892      Against:  75       Abstain:  500      Broker Non-vote: 0
     
3.   Proposal to approve the Asset Purchase Agreement between the Company and
     GalaGen dated as of September 1, 1998, as amended:

     For:  823,217      Against:  0        Abstain:  250      Broker Non-vote: 0
     
4.   Proposal to amend Article I of the Company's Second Restated Articles of
     Incorporation, as amended, changing the name of the Company to NM Holdings,
     Inc.:

     For:  821,942      Against:  1,420    Abstain:  75       Broker Non-vote: 0

5.   Proposal to appoint Ernst & Young LLP as independent auditors of the 
     Company for the fiscal year ending December 31, 1998:
                                          
     For:  822,017      Against:  1,420    Abstain:  0        Broker Non-vote: 0

                                      PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
     
     The Company's common stock has traded on The Nasdaq SmallCap Market system
under the symbol NMED since September 26, 1996. As of March 22, 1999, there were
approximately 45 holders of record of the Company's common stock.

     On June 10, 1998, in response to a listing requirement for The Nasdaq
SmallCap Market that the common stock maintain a minimum bid price of $1.00 per
share, the Company effected a one-for-four reverse stock split (the "Reverse
Stock Split"). Unless otherwise noted, all share numbers and per-share prices
contained in this Form 10-KSB reflect the Reverse Stock Split.


                               Page 6 of 19 pages

<PAGE>

     On November 6, 1998, the Company received notice from The Nasdaq Stock
Market that the Company's common stock was not in compliance with the minimum
bid price requirement of $1.00 per share, pursuant to NASD Marketplace Rule
4310(c)(4). On November 19, 1998, the Company received notice from The Nasdaq
Stock Market that the Company did not maintain net tangible assets of at least
$2 million as required pursuant to NASD Marketplace Rule 4310(c)(2). On December
15, 1998, the Company received notice from The Nasdaq Stock Market that it did
not maintain the required minimum $1 million market value of its public float
pursuant to NASD Marketplace Rule 4310(c)(7). The Company believes that
subsequent to the closing of the transactions with ZEVEX and GalaGen on December
23, 1998, and as a  result of certain changed market conditions related to the
Company's Common Stock minimum bid price and related market capitalization, the
Company is currently in compliance with these requirements for listing on The
Nasdaq SmallCap Market. On January 13, 1999, the Company also received notice
from The Nasdaq Stock Market that subsequent to the closing of the transactions
with ZEVEX and GalaGen, the Company's status as a "shell" corporation
disqualifies it for inclusion in The Nasdaq SmallCap Market pursuant to NASD
Marketplace Rules 4300 and 4330. A hearing with representatives of
The Nasdaq Stock Market was held on March 26, 1999, regarding this delisting 
action.  At the hearing the Company requested a listing extension in light of 
its agreement with MJK Holdings, Inc.  Nasdaq officials have indicated that a 
final determination will be made in approximately three to four weeks. 

     The quotations shown below represent inter-dealer sale prices as 
reported by The Nasdaq SmallCap Market, without retail mark-up, mark-down or 
commission, and may not represent actual transactions.

<TABLE>
<CAPTION>
           1998            High             Low
     -------------         -----            ---
     <S>                   <C>              <C>
     First Quarter         5 1/2            2
     Second Quarter        3 3/8            1
     Third Quarter         1 7/8            7/8
     Fourth Quarter        1 1/4            5/8
<CAPTION>
           1997            High             Low
     -------------         ----             ---
     <S>                   <C>              <C>
     First Quarter         16               13 1/2
     Second Quarter        15                8
     Third Quarter         13 1/2            8
     Fourth Quarter        10 1/2            4
</TABLE>

     The Company has never paid or declared any cash dividends on its common 
stock and does not intend to declare any dividends on its common stock in the 
foreseeable future. The Company currently intends to retain any earnings for 
use to pursue a business combination with another entity as discussed in 
"Item 1. Description of Business" above.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

CAUTIONARY STATEMENT

     Certain information contained in this Form 10-KSB that does not relate to
historical financial information may be deemed to constitute forward-looking
statements. When used in this Form 10-KSB and in future filings by the Company
with the Securities and Exchange Commission (the "Commission"), in the Company's
press releases and in oral statements made with the approval of an authorized
executive officer, the words or phrases "believes," "anticipates," "intends,"
"will likely result," "estimates," "projects" or similar expressions identify
such forward-looking statements within the meaning of Section 21E of the
Exchange Act, but are not the exclusive means of identifying such statements.
These forward-looking statements involve risks and uncertainties that may cause
the Company's actual results to differ materially from the results discussed in
the forward-looking statements. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made. The Company undertakes no obligation to revise any
forward-looking statements in order to reflect events or circumstances after the
date of such statements. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Commission that attempt to advise interested
parties of the risks and factors that may affect the Company's business. Such
forward-looking statements are qualified in their entirety by the cautions and
risk factors set forth under the "Cautionary Statement" filed as Exhibit 99.1 to
this Form 10-KSB.


                               Page 7 of 19 pages

<PAGE>

GENERAL

     Prior to December 23, 1998, the Company developed and sold generic 
critical care nutrition formula products and related delivery equipment and 
accessories for the hospital, nursing home and home health care markets, as 
well as private label adult nutrition products for sale through retail 
chains. In January 1999, the Company announced its intention to discontinue 
its private label adult nutrition business due to continued losses.  Since 
its inception, the Company also incurred losses in its critical care 
nutrition business.  Company management believed that the continued operation 
of the Company's critical care nutrition business was not viable due to the 
lack of synergy between its critical care products and the Elan-acquired 
feeding pump and plastic disposables business. Furthermore, the Company was 
experiencing increased competition from larger organizations and faced the 
risk of product obsolescence due to the limited amount of available research 
and development funding. The patent infringement lawsuit described in "Item 
3. Legal Proceedings" also adversely affected the Company's ability to market 
its product lines effectively.

     In light of the foregoing, the Board of Directors determined that it was 
in the best interest of the Company and its shareholders to discontinue the 
Company's critical care nutrition business operations. The Board of Directors 
believed that the Company would maximize shareholder value by selling the 
assets comprising the Company's current businesses and using the proceeds to 
settle outstanding debt incurred from the purchase of the pump and plastic 
disposables business from Elan, and pursue the acquisition of other 
businesses. On December 23, 1998, the Company closed a sale transaction with 
ZEVEX pursuant to which the Company sold all of its assets used in its pump 
and plastic disposables business, and a sale transaction with GalaGen 
pursuant to which the Company sold all of its assets used in its critical 
care business. The Company does not currently conduct any active business 
operations. The Company intends to use its existing cash resources to pursue 
a business combination with another entity engaged in other lines of business.

     The Company believes that the sale of its product lines, its reduction in
liabilities through the cancelation of the Elan subordinated promissory note,
and the reduction in the number of shares outstanding through the reacquisition
of the Company common stock issued to Elan will position the Company as an
attractive business partner for an entity seeking a strategic combination with a
publicly traded corporation. Company management and the Board of Directors
believe that such a combination will serve the interests of the Company's
shareholders better than a liquidation of the Company and distribution of its
assets to shareholders. It is the Board of Directors' intention to pursue
business combinations with entities engaged in other lines of business, using
the Company's cash resources (approximately $2 million as of December 31, 1998)
together with other resources. The acquisition of a business may require
additional debt or equity financing. However, the Company has no current plan to
obtain additional financing and no assurance can be given that such financing
will be available to acquire a particular business.

     On March 25, 1999, the Company entered into an agreement with MJK Holdings,
Inc., the parent company of MJK, pursuant to which MJK will merge with and 
into a newly formed, wholly owned acquisition subsidiary of the Company.  The 
agreement provides that each share of capital stock of MJK Holdings, Inc. 
will be exchanged for 3.76378 shares of Company common stock.  The closing of 
the transaction is subject to various closing conditions, including, but not 
limited to, the approval of the Company's shareholders.

RESULTS OF OPERATIONS

TWELVE MONTHS ENDED DECEMBER 31, 1998 AND 1997

     CONTINUING OPERATIONS.

     The loss from continuing operations totaled $6,658 as of December 31, 
1998, and consists of recurring administrative expenses incurred in the 
period after the December 23, 1998 sale of the Company's product lines, 
offset by interest income earned in the same period. The Company expects that 
the loss from continuing operations will total less than $150,000 in the year 
ended December 31, 1999, with a disproportionate amount of the loss occurring 
in the first quarter of 1999.

     DISCONTINUED OPERATIONS.


                               Page 8 of 19 pages

<PAGE>

     The Company discontinued all operations in 1998. All pre-disposal activity
associated with these operations has been segregated and reported in a single
line item "Loss from discontinued operations" in the Company's Statements of
Operations. Also reported as a separate line item is the "Gain on disposal of
discontinued operations" in the 1998 period, representing the net realized gain
on the sale and disposal of these operations.

     LOSS FROM DISCONTINUED OPERATIONS.  The following discussion compares major
components that comprise the loss from discontinued operations in each period
presented (see footnote 4 in the audited financial statements).

     SALES.  Sales included in discontinued operations for the year ended 
December 31, 1998, totaled $4,926,765 compared to $6,317,722 for the same 
period of 1997, a decrease of $1,390,957 or 22%. The decrease is the result 
of the discontinuance of the Company's private label adult nutrition business 
in May 1998. The Company's critical care product lines, disposed of in late 
December 1998, generated comparable sales in 1998 when compared to the prior 
year.

     GROSS PROFIT.  The overall gross profit in the year ended December 31, 
1998, decreased slightly from $1,387,694 in the year ended December 31, 1997, 
to $1,303,147, while increasing as a percentage of sales from 22% in 1997 to 
26.4% in 1998. The majority of the $84,547 decrease in gross profit is 
attributable to the decrease in sales of the lower margin private label adult 
nutrition business. The decrease in sales of the lower margin private label 
adult nutrition business in the 1998 period resulted in the increase of the 
gross profit, as a percentage of sales, when compared to the 1997 period.

     OPERATING EXPENSES.  Selling, general and administrative expenses 
decreased $1,185,444 in the year ended December 31, 1998, from the comparable 
period in 1997. The decrease is the result of the Company's cost reductions 
(principally payroll related) associated with the discontinued operations and 
lower legal costs in the 1998 period. Research costs decreased $561,623 from 
$642,020 in 1997 to $80,397 in 1998 as a result of the Company's decision in 
January 1998 to discontinue the development of a generic infant formula. In 
December 1998, the Company settled a patent infringement lawsuit with 
Novartis whereby the Company agreed to pay Novartis $450,000 and discontinue 
production and sale of the L-Emental-TM- Plus critical care product, 
resulting in a write-off of $63,816 in inventory. The Company incurred total 
goodwill amortization of $1.8 million in the year ended December 31, 1997, 
which included a $1.6 million write-off of the remaining goodwill associated 
with the January 1997 acquisition of the Elan pump and plastic disposables 
product line. As a result of this write-off there were no goodwill 
amortization charges in the comparable 1998 period.

     GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS.  The Company reported a net
gain on the disposal of discontinued operations of $1,320,053 in the year ended
December 31, 1998. Included in the gain are the sales of the Company's product
lines offset by losses incurred on the disposal of other assets and the
write-downs of other assets to net realizable value.

TWELVE MONTHS ENDED DECEMBER 31, 1997 AND 1996
     
     DISCONTINUED OPERATIONS

     The Company discontinued all operations in 1998. As a result, all 
previous pre-disposal activity associated with Company operations for the 
applicable reporting periods has been segregated and reported in a single 
line item "Loss from discontinued operations" in the Company's Statements of 
Operations.

     LOSS FROM DISCONTINUED OPERATIONS.  The following discussion compares major
components that comprise the loss from discontinued operations in each period
presented (see footnote 4 in the audited financial statements).

     NET SALES.  Net sales from continuing operations for the year ended 
December 31, 1997, totaled $6,317,722 compared to $1,224,871 for the same 
period of 1996, an increase of 416%. The growth is the result of increases in 
sales of products offered in both periods, new products developed by the 
Company plus those feeding pump and plastic disposables products introduced 
in January 1997 as a result of the acquisition of the feeding pump and 
plastic disposables products from Elan, and the addition of new customers and 
growth in orders from existing customers.


                               Page 9 of 19 pages

<PAGE>

     GROSS PROFIT.  Gross profit from continuing operations for the year ended
December 31, 1997, increased to $1,387,694, compared to $685,431 in the same
period of 1996. As a percentage of sales, however, gross profit decreased from
56% in 1996 to 22% in 1997. The decrease in gross profit as a percentage of
sales is primarily the result of the addition of pump and plastic disposables
sales and sales of private label adult nutrition products, all which have a
lower profit margin than the critical care formulas. In addition, profit margins
decreased in early 1997 due to costs related to the integration of the pump and
plastic disposables product line into the Company's existing operations.

     OPERATING EXPENSES.  Selling, general and administrative expenses for the
year ended December 31, 1997, increased 171% to $2.98 million, from $1.1 million
in the same period of 1996. The expense increase relates to the overall staffing
and related expenditures required to support the growth in sales by the Company
and the addition of new products including expenses of $300,000 in 1997 for
sales and marketing efforts related to the Company's private label infant
formula development project. Research and development costs for the year ended
December 31, 1997, increased 162% to $642,000 from $245,000 incurred in the same
period of 1996. The increase is attributable to costs associated with new
products under development in 1997, particularly costs related to the
development of a generic, national brand equivalent infant formula product.
Goodwill amortization totaled $1.8 million in the year ended December 31, 1997,
$1.6 million of which was written off in the fourth quarter. The write-off was
based on the Company's assessment of impaired value of the goodwill recorded at
the time of the acquisition of the pump and plastic disposables product line. 

YEAR 2000 ISSUE

     The Company is addressing the issues associated with computing difficulties
that may affect existing computer systems as a result of programming code
malfunctions in distinguishing 21st century dates from 20th century dates (the
"Year 2000" issue). The Year 2000 issue is a pervasive problem affecting many
information technology systems and embedded technologies in all industries. The
Company has reviewed its internal financial and other process control systems in
order to assess and remediate Year 2000 concerns.

     The Company's information technology ("IT") systems consist of computer
hardware systems and software supplied by third parties. The Company utilizes
current generation off-the-shelf software for its contact management and
accounting systems. As a result, the Company expects its exposure to be minimal
since such software has been determined by the Company to be Year 2000
compliant.

     The Company's assessment of internal systems includes a review of 
non-information technology ("non-IT" systems) (systems that contain embedded 
technology in process control equipment containing microprocessors or other 
similar circuitry). This assessment includes a review of the Company's 
internal equipment and facilities (including building maintenance, security, 
electrical, lighting, fire protection, telephone, heating and cooling 
systems). Based on this review, the Company believes that its non-IT systems 
and equipment are Year 2000 compliant.

     The Company's current plans, as previously discussed, involve the
discontinuation of its core business and the pursuit of new investment
opportunities. A fundamental aspect of due diligence with any potential
acquisition candidate will include a comprehensive review of any Year 2000
exposure.

     The Company incurred less than $1000 in incremental costs to address the 
Year 2000 issue during 1998. Since the Company has not yet consummated a 
business acquisition, the Company is unable to estimate Year 2000 compliance 
costs that may arise from such business acquisition opportunities.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, the Company has incurred losses and negative cumulative 
cash flows from operations. On September 26, 1996, the Company's initial 
public offering was declared effective and, in a transaction that closed on 
October 1, 1996, the Company sold 359,375 shares of the Company's common 
stock at $14.00 per share, including an over-allotment of 49,375 shares. 
After deducting all offering costs, net proceeds to the Company totaled $4.24 
million. Prior to the initial public offering, the Company's principal source 
of cash and working capital had been from the private placement of the 
Company's common stock, through which the Company received approximately $2.8 
million in net proceeds. In connection with activities and results of 
discontinued operations described above, the Company's net cash provided by 
operations in the year ended December 31, 1998, totaled $25,602, compared 
with cash used in operations totaling $2.2 million in 1997. Net cash provided 
by investing activities consisting of the sale of business 

                               Page 10 of 19 pages

<PAGE>

operations totaled $262,293. Cash and cash equivalents as of December 31, 
1998, totaled $1,935,368. All unused funds are invested in U.S. 
Treasury-backed funds with maturities generally ranging under three months.

     Management is unable to assess the Company's future liquidity and 
capital requirements due to the Company's stated desire to enter into 
different business opportunities that have not yet been identified. There can 
be no assurance that the Company will not be required to raise additional 
capital before the end of 1999, or any time thereafter, or that such capital 
will be available on acceptable terms, or at all.

ITEM 7.  FINANCIAL STATEMENTS.

     The following financial statements are included as a separate section
following the signature page to this Form 10-KSB:

     Report of Independent Auditors
     Balance Sheets as of December 31, 1998 and 1997
     Statements of Operations for the years ended December 31, 1998 and 1997
     Statement of Changes in Shareholders' Equity for the years ended December
     31, 1998 and 1997
     Statements of Cash Flows for the years ended December 31, 1998 and 1997
     Notes to Financial Statements

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

     No changes in accountants or disagreements between the Company and its
accountants regarding accounting principles or financial statement disclosures
have occurred within the twenty-four months prior to date of the Registrant's
most recent financial statements.

                                      PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

     Certain biographical information regarding the Company's directors,
including each director's name, age, principal occupation, business experience
and period of service as a director of the Company, is set forth below.

     GEORGE E. KLINE, age 62, has been a director of the Company since May 
1995. Since 1966, Mr. Kline has been President of Venture Management, a 
financial consulting services firm. Since 1985, Mr. Kline also has served as 
an officer of Brightstone Capital, Ltd. LLC, a venture capital partnership. 
Mr. Kline is also a director of CyberOptics Corporation and Rimage 
Corporation. Mr. Kline became Chairman of the Board of the Company on 
September 1, 1999, and was elected Chief Executive Officer and President of 
the Company effective January 1, 1999.

     LAWRENCE A. LEHMKUHL, age 61, has been a director of the Company since
January 1995. From 1985 to March 1993, Mr. Lehmkuhl was President and Chief
Executive Officer of St. Jude Medical, Inc., a medical device manufacturer, and
from April 1993 to February 1995, Mr. Lehmkuhl was Chairman of St. Jude's board
of directors. From 1966 to 1985, Mr. Lehmkuhl was employed by American Hospital
Supply Corporation in various management capacities. Mr. Lehmkuhl is also a
director of Kera Vision, Inc., which was founded in 1986 to develop and
commercialize proprietary medical products for the treatment of common vision
problems, including myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Mr. Lehmkuhl previously served as a director of Fischer Imaging
Corporation, which designs, manufactures and markets specialty and general
purpose medical imaging systems for the diagnosis and treatment of disease. 

     HILDING C. NELSON, age 60, was appointed as a director of the Company in 
November 1998 to fill the vacancy created by the resignation of William L. 
Rush. From October 1979 until his resignation in May 1998, Mr. Nelson was 
director of Kinnard Investments, Inc., a publicly held holding company that 
provides financial products and services.  Mr. Nelson was Chairman of 
Kinnard's board of directors from October 1995 until his resignation from 
Kinnard. From April 1995 to October 1995, Mr. Nelson was President and Chief 
Executive Officer of and consultant to Pet Food 

                               Page 11 of 19 pages

<PAGE>

Warehouse, Inc., a retailer of pet food and supplies. Mr. Nelson also serves 
as a director of Image Systems Corporation, which designs, develops, 
manufactures and markets large high bright high resolution monitors. Since 
January 1, 1990, Mr. Nelson has been a private investor and has also 
previously served as President of Lund International Holdings, Inc., a 
leading designer, manufacturer and marketer of a broad line of appearance 
accessories for new and used light trucks, including pickup trucks, sport 
utility vehicles, minivans and other vans, and a leading manufacturer of 
aftermarket and original equipment manufacturer accessories for the heavy 
truck market.

     Certain biographical information regarding each executive officer of the
Company, including name, age and position held with the Company, is set forth
below.

     GEORGE E. KLINE, age 62, became Chairman of the Board of Directors on 
September 1, 1999, and was appointed Chief Executive Officer and President 
effective January 1, 1999. His biography is set forth above.

     RICHARD J. HEGSTRAND, age 45, was appointed acting Chief Operating 
Officer of the Company in August 1998. Mr. Hegstrand had been Chief Financial 
Officer and Secretary of the Company from November 1995 and December 1996, 
respectively, until his resignation in October 1997. Mr. Hegstrand currently 
also is an accounting and financial consultant to CARA Collision and Glass, 
Inc., an automobile maintenance company. From December 1992 until September 
1995, Mr. Hegstrand was employed by PDS Financial Corporation, an equipment 
finance company, most recently as its Vice President and Chief Financial 
Officer. From January 1987 to December 1992, Mr. Hegstrand served in various 
management capacities with Magnetic Data, Inc., a computer disk-drive 
refurbisher, most recently as its Chief Financial Officer.

     HILDING C. NELSON, age 60, was appointed Secretary of the Company 
effective January 1, 1999. His biography is set forth above.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities to file with the Commission initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company.

     Based solely on a review of copies of such forms furnished to the 
Company during the fiscal year ended December 31, 1998, the Company believes 
that all Section 16(a) filing requirements applicable to its executive 
officers, directors and greater-than-10% shareholders were satisfied, except 
that George E. Kline, Chairman of the Board, Chief Executive Officer, 
President and a director of the Company, did not timely file a Form 4 
disclosing the sale of 6,250 and 21,250 shares of Company common stock on 
April 17, 1998 and May 13, 1998, respectively, by Brightstone Fund IV, of 
which Mr. Kline serves as general partner with James A. Bernards. By virtue 
of this position, Mr. Kline may be deemed to be the benficial owner of these 
shares. However, under an agreement with Mr. Bernards, Mr. Kline had no 
voting or investment control over these shares. The sale of such shares was 
reported on a Form 5 filed by Mr. Kline with the Commission on February 16, 
1999. Hilding C. Nelson, Secretary and a director of the Company, failed to 
timely file a Form 3 reflecting a stock option grant of 3,750 shares granted 
upon his election to the Company's Board of Directors. Mr. Nelson's option 
grant was reported on a Form 3 filed with the Commission on March 4, 1999.

ITEM 10.  EXECUTIVE COMPENSATION.

DIRECTOR COMPENSATION

     Directors of the Company receive no compensation other than authorized
expense reimbursement and stock options granted under the 1995 Long-Term
Incentive Stock Option Plan (the "1995 Stock Option Plan") or the 1996
Non-Employee Director Stock Option Plan (the "1996 Director Plan") described
below.


                               Page 12 of 19 pages

<PAGE>

     1996 DIRECTOR PLAN

     The shareholders of the Company adopted the 1996 Director Plan in August 
1996. The 1996 Director Plan provides for an automatic grant of non-qualified 
stock options to purchase 3,750 shares of Company common stock to 
non-employee directors on the date such individuals are first appointed 
directors of the Company, and an automatic grant of options to purchase an 
additional 1,875 shares of Company common stock on the day after each 
subsequent annual meeting of the Company's shareholders. The exercise price 
for such shares of common stock is equal to the fair market value of the 
common stock on the date of grant. The options granted upon appointment to 
the Board of Directors vest and become exercisable as to 50% of the shares on 
the date of grant, and an additional 25% vest on each of the first and second 
anniversary dates of such grant, if the holder remains a director of the 
Company on these respective dates. The options granted in connection with 
subsequent annual meetings vest and become exercisable as to 100% of the 
shares six months after the date of such grant if the holder remains a 
director of the Company on such date. The Company has reserved 25,000 shares 
of its common stock for issuance under the 1996 Director Plan. As of the date 
of filing of this Form 10-KSB, Messrs. Kline, Lehmkuhl and Nelson have each 
received options to purchase 3,750 shares of Company common stock pursuant to 
the 1996 Director Plan.

     1995 STOCK OPTION PLAN

     The Company adopted the 1995 Stock Option Plan in March 1995. The plan 
provides for the grant of stock option awards to the Company's executive 
officers, other employees, directors and consultants. The plan provides for 
the grant of both incentive stock options intended to qualify for 
preferential tax treatment under Section 422 of the Internal Revenue Code of 
1986, as amended (the "Code"), and for nonqualified stock options that do not 
qualify for such treatment. The exercise price of incentive stock options 
(which only employees are eligible to receive) must equal or exceed the fair 
market value of the Company's common stock on the date of grant; the exercise 
price of nonqualified stock options must equal or exceed 85% of the fair 
market value of the Company's common stock on the date of grant. The 1995 
Stock Option Plan also provides for restricted stock awards and grants of 
stock appreciation rights (SARs), but no restricted stock awards or SARs have 
been granted to date. The Company has reserved 200,000 shares of its common 
stock for issuance under the 1995 Stock Option Plan. As of December 31, 1998, 
options to purchase 194,063 shares of common stock had been granted under the 
plan, at a weighted average exercise price of $3.85. On December 23, 1998, 
the Board of Directors approved option grants of 60,000, 15,000 and 7,500 to 
Messrs. Kline, Lehmkuhl and Nelson, respectively, under the 1995 Stock Option 
Plan.

     EXECUTIVE COMPENSATION

     The following table sets forth certain information for 1998, 1997 and 1996
concerning the compensation of the Company's former President and Chief
Executive Officer (the "Named Executive Officer") for services rendered during
those years. No other executive officer of the Company received aggregate annual
salary and bonus compensation of more than $100,000 during 1998.

                             SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                             ANNUAL                    LONG-TERM
                                           COMPENSATION           COMPENSATION AWARDS
                                    -----------------------     ----------------------
    NAME AND                                                     SECURITIES UNDERLYING       ALL OTHER
  PRINCIPAL POSITION        YEAR    SALARY ($)    BONUS ($)           OPTIONS (#)         COMPENSATION ($)
-----------------------    ------   ----------    ---------     ----------------------    ----------------
<S>                        <C>      <C>           <C>           <C>                       <C>
William L. Rush             1998     63,577(1)      --                   --                   122,799(2)
President and               1997     95,000         --                   --                     2,118(3)
Chief Executive Officer     1996     95,000       20,000               25,000                     451(4)
</TABLE>
________________________

(1)  Mr. Rush resigned as a director, Chairman of the Board, Chief Executive
     Officer and President of the Company effective August 31, 1998.


                               Page 13 of 19 pages 

<PAGE>

(2)  Includes (a) imputed income in the amount of $2,686 arising from premiums
     paid by the Company with respect to disability insurance for Mr. Rush and
     the term life insurance portion of a split dollar value life insurance
     policy, the proceeds of which are payable to a beneficiary designated by
     Mr. Rush; and (b) $120,113 paid to Mr. Rush pursuant to the Separation
     Agreement and General Release dated October 9, 1998, entered into by Mr.
     Rush and the Company in connection with Mr. Rush's resignation from the
     Company effective August 31, 1998.

(3)  Consists of imputed income arising from premiums paid by the Company with
     respect to disability insurance for Mr. Rush and the term life insurance
     portion of a split dollar value life insurance policy, the proceeds of
     which are payable to a beneficiary designated by Mr. Rush.

(4)  Consists of imputed income arising from premiums paid by the Company with
     respect to disability insurance for Mr. Rush.

     SEVERANCE AGREEMENT

     In connection with Mr. Rush's resignation on August 31, 1998, the Company
and Mr. Rush entered into a Separation Agreement and General Release dated
October 9, 1998 (the "Severance Agreement"). Pursuant to the terms of the
Severance Agreement, (i) Mr. Rush received a cash payment of $95,000 in lieu of
the payments to which Mr. Rush previously was entitled under the terms of his
employment agreement dated as of October 1, 1996, with the Company (the
"Employment Agreement"); (ii) Mr. Rush retained an option to purchase 25,000
shares of Company common stock at an exercise price of $14.00 per share, which
option was initially granted pursuant to the Employment Agreement, 12,500 shares
of which vested on April 1, 1998, and 12,500 shares of which vested upon
execution of the Severance Agreement, and which will expire on August 31, 2000,
with respect to any shares for which the option has not been exercised on or
prior to such date; (iii) the Company transferred its beneficiary rights under
the keyman life insurance policy procured by the Company in Mr. Rush's name to a
designee of Mr. Rush's choice; (iv) the Company granted Mr. Rush the right to
collect $4,000 of the cash surrender value of the split dollar value life
insurance policy procured by the Company in Mr. Rush's name; (v) the Company
agreed to pay Mr. Rush a lump sum payment of $17,642 in lieu of any and all
other benefits to which Mr. Rush was entitled under the terms of the Employment
Agreement; and (vi) the Company paid Mr. Rush $3,471.16 for his accrued and
unpaid vacation.

     CURRENT COMPENSATION

     Upon his resignation as President and Chief Executive Officer of the
Company, Mr. Rush entered into a consulting agreement with the Company pursuant
to which he will provide, for a fee of $200 per hour, consulting services in the
manner and at such times as requested by the Company. Pursuant to the terms of
his consulting agreement, Mr. Rush is required to report to the Chief Operating
Officer of the Company. Payments to Mr Rush under the consulting agreement for
services through December 31, 1998, totaled $7,050.

STOCK OPTIONS

     No stock option grants were made to the Named Executive Officer during the
fiscal year ended December 31, 1998.

     To date, the Named Executive Officer has not exercised any options to
purchase shares of the Company's common stock. The following table sets forth
the number and aggregate dollar value of all unexercised options held by the
Named Executive Officer on December 31, 1998, at which time the closing 
per-share sale price of the Company's common stock as reported on The Nasdaq
SmallCap Market was $1.1875.


                               Page 14 of 19 pages

<PAGE>

                                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                                       AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
                       NUMBER OF SHARES UNDERLYING UNEXERCISED      VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS
                            OPTIONS AT DECEMBER 31, 1998                      AT DECEMBER 31, 1998
                       ---------------------------------------      -----------------------------------------
        NAME             EXERCISABLE        NONEXERCISABLE                EXERCISABLE        NONEXERCISABLE
  ------------------   ---------------    --------------------      --------------------   ------------------
   <S>                 <C>                <C>                       <C>                    <C>
   William L. Rush         25,000                 0                          (1)                   --
</TABLE>
________________________

(1)  None of the Named Executive Officer's stock options were in the money as 
     of December 31, 1998. The exercise price per share of all of the Named 
     Executive Officer's stock options is $14.00.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets forth certain information regarding the beneficial
ownership of the Company's common stock as of March 12, 1999, by (i) each person
known by the Company to be the beneficial owner of more than 5% of the Company's
outstanding common stock, (ii) each director and nominee for director, (iii) the
Named Executive Officer, and (iv) all executive officers and directors as a
group. In addition, shares of Company common stock subject to options or
warrants currently exercisable or exercisable within 60 days from the date
hereof (the "Currently Exercisable Options") are deemed outstanding for
computing the percentage of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person. Unless otherwise
indicated, each of the following persons has sole voting and investment power
with respect to the shares of Company common stock set forth opposite their
respective names:

                             BENEFICIAL OWNERSHIP TABLE
<TABLE>
<CAPTION>
                                              Shares Beneficially          Percent
                                                    Owned                  of Class
                                              -------------------      --------------
<S>                                           <C>                      <C>
William L. Rush (1). . . . . . . . . . . . .       117,500                  10.0%
11730 50th Place North
Plymouth, MN 55442

Lawrence A. Lehmkuhl (2) . . . . . . . . . .        35,510                  3.02%
134 Dellwood Avenue
Dellwood, MN 55110

George E. Kline (3). . . . . . . . . . . . .       182,000                 14.75%
Brightstone Capital
4750 IDS Center
Minneapolis, MN 55402

Hilding C. Nelson (4). . . . . . . . . . . .         9,375                    *
920 Second Avenue South
Minneapolis, MN 55402

Brightstone Funds (5). . . . . . . . . . . .       100,000                  8.60%
Venture Management
4750 IDS Center
Minneapolis, MN 55402

Betty L. Johnson . . . . . . . . . . . . . .        86,050                  7.48%
Miller, Johnson & Kuehn, Inc.
5500 Wayzata Boulevard, Suite 800
Minneapolis, MN 55416

All directors and officers as a
group (5 persons) (6). . . . . . . . . . . .       366,885                 27.85%
</TABLE>
________________________

*    Less than 1%.


                               Page 15 of 19 pages

<PAGE>

(1)  Includes 25,000 shares issuable pursuant to Currently Exercisable Options.

(2)  Includes 26,250 shares issuable pursuant to Currently Exercisable Options.

(3)  Includes 22,500 shares owned by Brightstone Fund IV; 37,500 shares owned 
     by Brightstone Fund VI; 27,500 shares owned and 7,500 shares issuable 
     pursuant to warrants held by Brightstone Fund VII; and 5,000 shares 
     issuable pursuant to a warrant held by Brightstone Capital. George E. 
     Kline, Chairman of the Board, Chief Executive Officer, President and a 
     director of the Company, and James A. Bernards serve as general partners 
     of all of the Brightstone entities referenced above. By virtue of this 
     position, Messrs. Kline and Bernards may be deemed to have voting and 
     investment control over the shares owned by such Brightstone entities, 
     and thus beneficial ownership of those shares. Messrs. Kline and 
     Bernards disclaim any beneficial ownership of such shares, and under an 
     agreement with Mr. Bernards, Mr. Kline has no voting or investment 
     control over such shares. Also includes 10,750 shares held by Venture 
     Management Profit Plan & Trust, of which Mr. Kline is the sole trustee 
     and beneficiary, and 71,250 shares issuable pursuant to Currently 
     Exercisable Options.

(4)  Includes 9,375 shares exercisable pursuant to Currently Exercisable
     Options.

(5)  These shares are also included in beneficial ownership of Mr. Kline.
     See footnote 3 above.

(6)  Includes 166,875 shares issuable pursuant to Currently Exercisable Options.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     None

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

a)   EXHIBITS  

     The following exhibits are included with this Annual Report on Form 10-KSB
as required by Item 601 of Regulation S-B:

<TABLE>
<CAPTION>
      EXHIBIT NO.    DESCRIPTION
      <C>            <S>
      2.1(a)         Asset Purchase Agreement dated January 13, 1997, by and between
                     the Company and Elan Pharma, Inc.
      2.2(b)         Asset Purchase Agreement effective May 1, 1998, by and between
                     the Company and Agrilink Foods, Inc.*
      2.3(c)         Asset Purchase Agreement dated July 27, 1998, between the Company
                     and ZEVEX, Inc.
      2.4(d)         First and Second Amendments to Asset Purchase Agreement between
                     the Company and ZEVEX, Inc.
      2.5(e)         Asset Purchase Agreement dated September 1, 1998, as amended
                     through October 28, 1998, between the Company and GalaGen Inc.
      2.6(f)         Second Amendment to Asset Purchase Agreement between the Company
                     and GalaGen Inc.
      3.1(f)         Second Restated Articles of Incorporation of the Company, as
                     amended
      4.1(g)         Promissory Note dated January 13, 1997, by the Company in favor of
                     Elan Pharma, Inc.
      10.1(h)        1995 Long-Term Incentive and Stock Option Plan, as amended
      10.2(i)        1996 Non-Employee Director Stock Option Plan
      10.3(j)        Executive Employment Agreement dated October 1, 1996, between the
                     Company and William L. Rush
      10.4           Separation Agreement and General Release dated August 31, 1998,
                     between the Company and William L. Rush
      10.5(i)        Office Lease dated October 15, 1993, between the Company and the
                     308 Corporation
      23             Consent of independent auditors
      24             Powers of Attorney (set forth on the Signature Page hereof)
      27             Financial Data Schedule (EDGAR only)
      99.1           Cautionary Statement
</TABLE>


                               Page 16 of 19 pages

<PAGE>
<TABLE>
      <C>            <S>
      99.2           Press Release dated March 17, 1999, announcing negotiations with
                     Miller, Johnson & Kuehn, Incorporated
</TABLE>
________________________

(a)  Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed
     on January 23, 1997.

(b)  Incorporated by reference to Exhibit 2.2 to the Registrant's Form 10-KSB
     filed on March 31, 1998.
     
(c)  Incorporated by reference to Exhibit 2.1 to the Registrant's Quarterly
     Report on Form 10-QSB for the quarter ended June 30, 1998.

(d)  Incorporated by reference to Exhibits 2.2 and 2.3 to the Registrant's Form
     8-K filed on January 7, 1999.

(e)  Incorporated by reference to Exhibit B to the Registrant's Definitive Proxy
     Statement on Schedule 14A filed on December 9, 1998.

(f)  Incorporated by reference to the exhibit of the same number to the
     Registrant's Form 8-K filed on January 7, 1999.

(g)  Incorporated by reference to Schedule 2.01(b) to the Registrant's Form 8-K
     filed on January 23, 1997.

(h)  Incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report
     on Form 10-KSB filed on March 31, 1997.

(i)  Incorporated by reference to Exhibit 10.2 to the Registrant's previously
     filed Form SB-2 Registration Statement effective September 26, 1996.

*    Confidential information has been omitted from such Exhibit and filed
     separately with the Commission pursuant to a confidential treatment request
     under Rule 24b-2.
     
b)   REPORTS ON FORM 8-K.

     The Company did not file any reports on Form 8-K for the quarter ended 
December 31, 1998. The Company filed  a Form 8-K on January 7, 1999, to 
announce the closing of the transactions with ZEVEX and GalaGen, the 
Company's corporate name change from Nutrition Medical, Inc. to NM Holdings, 
Inc., and the settlement of the litigation with Novartis. The Company filed a 
Form 8-K/A on March 3, 1999, setting forth pro forma financial information of 
the Company.

                               Page 17 of 19 pages

<PAGE>

                                    SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                   NM Holdings, Inc.


                                   /S/ RICHARD J. HEGSTRAND
                                   -------------------------
                                   Richard J. Hegstrand
                                   Chief Operating Officer

                                   Date:  March 30, 1999

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated. Each person whose signature to this report on Form 10-KSB
appears below hereby constitutes and appoints Richard J. Hegstrand as his true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his behalf individually and in the capacity stated below and to perform any
acts necessary to be done in order to file all amendments to this report on Form
10-KSB, and any and all instruments or documents filed as part of or in
connection with this report on Form 10-KSB or the amendments thereto and each of
the undersigned does hereby ratify and confirm all that said attorney-in-fact
and agent, or his substitutes, shall do or cause to be done by virtue hereof.

<TABLE>
<S>                             <C>                               <C>
By: /S/ GEORGE E. KLINE         Chairman of the Board,            Date: March 30, 1999
    -------------------         Chief Executive Officer,
     George E. Kline            President, and Director
                                (Principal Executive Officer)


By: /S/ RICHARD J. HEGSTRAND    Acting Chief Operating Officer    Date: March 30, 1999
    ------------------------    (Principal Financial Officer)
     Richard  J. Hegstrand


By: /S/ HILDING C. NELSON       Secretary and Director            Date: March 30, 1999
    ---------------------
     Hilding C. Nelson


By: /S/ Lawrence A. Lehmkuhl    Director                          Date: March 30, 1999
    ------------------------
     Lawrence A. Lehmkuhl
</TABLE>


                               Page 18 of 19 pages


<PAGE>





                              FINANCIAL STATEMENTS

                                NM HOLDINGS, INC.
                   (FORMERLY KNOWN AS NUTRITION MEDICAL, INC.)

                     YEARS ENDED DECEMBER 31, 1998 AND 1997





<PAGE>


                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                              Financial Statements


                     Years ended December 31, 1998 and 1997




                                    CONTENTS
<TABLE>

<S>                                                                       <C>
Report of Independent Auditors.............................................1

Financial Statements

Balance Sheets.............................................................2
Statements of Operations...................................................3
Statement of Shareholders' Equity..........................................4
Statements of Cash Flows...................................................5
Notes to Financial Statements..............................................6
</TABLE>


<PAGE>


                         Report of Independent Auditors


Board of Directors and Shareholders
NM Holdings, Inc.

We have audited the accompanying balance sheets of NM Holdings, Inc., formerly
known as Nutrition Medical, Inc., as of December 31, 1998 and 1997 and the
related statements of operations, shareholders' equity and cash flows for each
of the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NM Holdings, Inc., formerly
known as Nutrition Medical, Inc., at December 31, 1998 and 1997 and the results
of its operations and its cash flows for each of the years then ended in
conformity with generally accepted accounting principles.

                                                  /s/ Ernst & Young LLP

Minneapolis, Minnesota
March 1, 1999


<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                     1998               1997
                                                                 -----------------------------
<S>                                                                  <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents                                      $ 1,935,368      $ 1,647,482
   Accounts receivable, less allowance of $-0- in 1998 and 
     $31,500 in 1997                                                        -        1,140,020
   Inventories                                                              -        1,615,165
   Prepaid expenses                                                     6,547           51,401
                                                                 -----------------------------
Total current assets                                                1,941,915        4,454,068
Investment in GalaGen Inc.                                            498,125                -
Equipment and office furniture, net                                     6,102        1,179,200
                                                                 -----------------------------
Total assets                                                      $ 2,446,142      $ 5,633,268
                                                                 -----------------------------
                                                                 -----------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY 
Current liabilities:
   Accounts payable                                               $         -      $   827,007
   Accrued lease costs                                                      -           66,600
   Accrued payroll                                                      4,690          158,298
   Accrued expenses                                                         -          482,044
   Net liabilities of discontinued operations                          58,658                -
                                                                 -----------------------------
Total current liabilities                                              63,348        1,533,949

Subordinated note payable, including accrued interest                       -        1,788,934

Shareholders' equity:
   Undesignated Preferred Stock, $.04 par value:
     Authorized shares - 1,250,000
     Issued and outstanding shares - none                                   -                -
   Common Stock, $.04 par value:
     Authorized shares - 5,000,000 shares
     Issued and outstanding shares - 1,150,251--1998; 
       1,364,006--1997
                                                                       46,010           54,560
   Paid-in capital                                                  8,706,435        8,706,444
   Accumulated deficit                                             (6,369,651)      (6,450,619)
                                                                 -----------------------------
Total shareholders' equity                                          2,382,794        2,310,385
                                                                 -----------------------------
Total liabilities and shareholders' equity                        $ 2,446,142      $ 5,633,268
                                                                 -----------------------------
                                                                 -----------------------------
</TABLE>


        SEE ACCOMPANYING NOTES. 


                                                                              2

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                            Statements of Operations

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                                         1998              1997
                                                                   ---------------------------------
<S>                                                                <C>                   <C>
Investment income                                                  $     1,437           $         -
Administrative expenses                                                 (8,095)                    -
                                                                   ---------------------------------
   Loss from continuing operations                                      (6,658)                    -

Loss from discontinued operations associated with product 
   lines disposed of in 1998                                        (1,232,427)           (4,160,638)

Gain on disposal of discontinued operations                          1,320,053                     -
                                                                   ---------------------------------

Gain (loss) from discontinued operations                                87,626            (4,160,638)
                                                                   ---------------------------------
Net income (loss)                                                  $    80,968           $(4,160,638)
                                                                   ---------------------------------
                                                                   ---------------------------------

Net income (loss) per common share - basic and diluted             $       .06           $     (3.07)
                                                                   ---------------------------------
                                                                   ---------------------------------

Weighted average number of shares outstanding                        1,359,320             1,355,631
                                                                   ---------------------------------
                                                                   ---------------------------------
</TABLE>

SEE ACCOMPANYING NOTES. 


                                                                              3

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                            Statement of Shareholders' Equity

<TABLE>
<CAPTION>
                                              COMMON STOCK               PAID-IN         ACCUMULATED
                                         SHARES          AMOUNT          CAPITAL           DEFICIT               TOTAL
                                      -------------------------------------------------------------------------------------
<S>                                   <C>            <C>               <C>               <C>                   <C>
Balance at December 31, 1996           1,148,256     $    45,930       $ 6,943,287       $(2,289,981)          $ 4,699,236
   Issuance of Common Stock to 
     purchase Elan product line          213,750           8,550         1,754,887                 -             1,763,437
   Stock options exercised                 2,000              80             8,270                 -                 8,350
   Net loss                                    -               -                 -        (4,160,638)           (4,160,638)
                                      -------------------------------------------------------------------------------------
Balance at December 31, 1997           1,364,006          54,560         8,706,444        (6,450,619)            2,310,385
   Repurchase of fractional shares
      in conjunction with reverse             (5)              -                (9)                -                    (9)
      stock split 
   Common stock acquired in 
     connection with debt               (213,750)         (8,550)                -                 -                (8,550)
     extinguishment 
   Net income                                  -               -                 -            80,968                80,968
                                      -------------------------------------------------------------------------------------
Balance at December 31, 1998           1,150,251     $    46,010       $ 8,706,435       $(6,369,651)          $ 2,382,794
                                      -------------------------------------------------------------------------------------
                                      -------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES.


                                                                              4

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                         1998                1997
                                                                                    ----------------------------------
<S>                                                                                 <C>                   <C>
OPERATING ACTIVITIES
Net income (loss)                                                                   $    80,968           $(4,160,638)
Adjustments to reconcile net income (loss) to net cash provided by
   (used in) operating activities:
     Amortization (and goodwill write-off)                                                    -             1,853,936
     Depreciation                                                                         2,885               331,854
     Reserve for bad debts                                                                    -               (49,500)
     Gain from discontinued operations                                                  (87,626)                    -
     Changes in operating assets and liabilities exclusive of discontinued
       operations:
        Accounts receivable                                                                   -              (734,280)
        Inventories                                                                           -              (655,050)
        Prepaid expenses                                                                 24,685               (17,362)
        Accounts payable                                                                      -               557,970
        Accrued interest                                                                      -               195,184
        Accrued liabilities                                                               4,690               466,901
                                                                                    ----------------------------------
Net cash provided by (used in) operating activities                                      25,602            (2,210,985)

INVESTING ACTIVITIES
Sale of short-term investments                                                                -             1,671,596
Sale (purchase) of business operations                                                  262,293               (71,749)
Purchase of equipment and office furniture                                                    -              (303,685)
                                                                                    ----------------------------------
Net cash provided by investing activities                                               262,293             1,296,162

FINANCING ACTIVITIES
(Repurchase of) proceeds from issuance of Common Stock                                       (9)                8,350
                                                                                    ----------------------------------
Net cash (used in) provided by financing activities                                          (9)                8,350
                                                                                    ----------------------------------

Increase (decrease) in cash                                                             287,886              (906,473)
Cash at beginning of year                                                             1,647,482             2,553,955
                                                                                    ----------------------------------
Cash at end of year                                                                 $ 1,935,368           $ 1,647,482
                                                                                    ----------------------------------
                                                                                    ----------------------------------

SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES 
Purchase of a business:
   Issuance of subordinated debt                                                    $         -           $ 1,593,750
   Issuance of stock                                                                          -             1,763,437

ZEVEX shares exchanged in extinguishment of
   subordinated debt                                                                  2,016,609                     -
</TABLE>

SEE ACCOMPANYING NOTES. 


                                                                              5

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                            Notes to Financial Statements

                                  December 31, 1998


1. NATURE OF OPERATIONS

NM Holdings, Inc., as a result of the disposition of its nutrition business
operations in December 1998 (see Note 4), has no meaningful operations. The
Company intends to use its existing cash resources, together with debt or equity
financing that may be available, to pursue the potential acquisition of other
business opportunities. Prior to the December 1998 disposition, the Company,
operating under the name Nutrition Medical, Inc., focused on the development and
marketing of a line of branded generic critical care nutrition products for the
hospital/nursing home market, as well as private label nutrition products for
sale through retail chains.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
are available-for-sale, are carried at cost which approximates market and
consist of money market funds.

INVENTORIES

Inventories are valued at the lower of cost or market by the first-in, first-out
(FIFO) method.

EQUIPMENT AND OFFICE FURNITURE

Equipment and office furniture are stated at cost. Depreciation is provided 
using the straight-line method over the estimated useful lives of the assets 
ranging from three to seven years.

INCOME TAXES

Income taxes are accounted for under the liability method. Deferred income 
taxes are provided for temporary differences between the financial reporting 
and tax bases of assets and liabilities.

                                                                              6

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

The Company recognizes revenue at the time of shipment of the product.
Provisions for estimated returns and allowances are accrued at the time of sale.

RESEARCH AND DEVELOPMENT COSTS

All research and development costs are charged to operations as incurred.

RECLASSIFICATIONS

Certain 1997 amounts have been reclassified to conform with the 1998
presentation.

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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

STOCK-BASED COMPENSATION

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, but
applies Accounting Principles Board Opinion No. 25 ("APB 25") and related
interpretations in accounting for its plans. Under APB 25, when the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.

                                                                              
7

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME (LOSS) PER SHARE

Basic earnings per share is based on the weighted average shares outstanding 
and excludes any dilutive effects of options, warrants and convertible 
securities. Diluted earnings per share for the Company is the same as basic 
earnings per share because the effect of options and warrants is 
anti-dilutive.

3. REVERSE STOCK SPLIT

The Board of Directors of the Company authorized a one-for-four reverse stock 
split effective June 10, 1998. As a result of the reverse split, the par 
value of the Company's stock increased to $.04 per share, and the total 
number of authorized and outstanding shares were proportionately reduced. 
Because cash was paid in lieu of the issuance of fractional shares that 
resulted from the reverse stock split, the total number of shares of the 
Company's Common Stock outstanding decreased by five shares. All share, per 
share and weighted average information have been restated to reflect the 
reverse stock split.

4. DISCONTINUED OPERATIONS

In January 1998, the Company announced its intention to discontinue its 
private label adult nutrition supplement business. Due to continuing losses 
sustained by the Company's remaining product lives, the Board of Directors 
approved a strategy to pursue the sale of the remaining business operations. 
In a series of transactions, approved by the shareholders in December 1998, 
the Company sold substantially all of the assets and product know-how 
associated with its critical care nutrition business operations, including 
those assets and products acquired from Elan Pharma, Inc. ("Elan") in January 
1997. As part of these transactions, Elan also agreed to cancel the 
subordinated note payable and return the Common Stock issued by the Company 
as consideration in

                                                                              8

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)

4. DISCONTINUED OPERATIONS (CONTINUED)

that acquisition, in exchange for a portion of the proceeds obtained in the 1998
transactions. The following is a summary of the individual transactions involved
in the divestiture of the Company's business operations:

   ZEVEX, INC. TRANSACTION

   On July 27, 1998, the Company entered into an agreement with ZEVEX, Inc. (the
   "ZEVEX Transaction") whereby ZEVEX agreed to acquire and assume certain of
   the assets and liabilities of the Company which were used in the critical
   care enteral feeding pump and plastic disposables business. The Company
   received a total purchase price equal to $500,000 in cash, the Company's
   actual costs of the related inventory and 115,000 shares of ZEVEX common
   stock (the "ZEVEX Shares").

   USE OF PROCEEDS

   Certain of the assets sold in the ZEVEX Transaction were acquired from Elan
   in January 1997 and were pledged as security on a note payable issued by the
   Company in connection with the assets purchased (see Note 7). In conjunction
   with the ZEVEX Transaction, the Company entered into an agreement with Elan
   whereby the Company transferred to Elan the ZEVEX Shares and $450,000 of
   cash. In addition, the Company issued a warrant to purchase 50,000 shares of
   Common Stock of the Company at $3.50 per share. Elan canceled the note
   payable and accrued interest and returned the 213,750 shares of Common Stock
   issued by the Company to Elan at the time of the original purchase.

   The Company recognized a gain on the above transactions of $1,163,098.

                                                                              9

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)


4. DISCONTINUED OPERATIONS (CONTINUED)

   GALAGEN INC. TRANSACTION

   The Company and GalaGen Inc. ("GalaGen") entered into an agreement on
   September 1, 1998 for the sale of the Company's critical care nutrition
   formula business. Under the terms of the agreement, GalaGen paid the Company
   $71,516 and issued 318,800 shares of GalaGen common stock in exchange for the
   Company's right, title and interest to the acquired critical care formulas,
   related inventories and certain fixed assets. The Company recognized a gain
   on this transaction of $355,373.

   AGRILINK FOODS, INC. TRANSACTION

   In March 1998, the Company entered into an agreement with Agrilink Foods,
   Inc. under which the Company transferred its private label adult nutrition
   supplement business to Agrilink effective May 1, 1998. As part of the
   agreement, the Company will be receiving cash for various marketing,
   inventory and supply related items and royalty payments for two years on the
   sale of these products. The Company expects the ultimate gain or loss on the
   disposal of this operation, dependent upon expected future royalty income, to
   be insignificant given the underlying sales levels at the time of the sale.

As a result of the above transactions, the Company plans to liquidate the
remaining assets, consisting of office and production equipment and will seek to
sublet its warehouse/office facility. The Company established a reserve in 1998
of $198,000 to adjust the carrying value of these assets to their estimated net
realizable value.

                                                                             10

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)


4. DISCONTINUED OPERATIONS (CONTINUED)

The following schedule provides the underlying sales and expense data relating
to the discontinued operations of the Company for the periods presented:

<TABLE>
<CAPTION>
                                                              DECEMBER 31
                                                          1998              1997
                                                       ----------------------------
<S>                                                    <C>              <C>

Sales                                                  $ 4,926,765      $ 6,317,722
Cost of goods                                            3,623,618        4,930,028
                                                       ----------------------------
Gross profit                                             1,303,147        1,387,694

Selling, general and administrative                      1,797,717        2,983,161
Research and development                                    80,397          642,020
Lawsuit settlement                                         513,816                -
Goodwill amortization (and write-off)                            -        1,853,936
Interest expense, net                                      143,644           69,215
                                                       ----------------------------
                                                         2,535,574        5,548,332
                                                       ----------------------------

Loss from discontinued operations                      $(1,232,427)     $(4,160,638)
                                                       ----------------------------
                                                       ----------------------------
</TABLE>

                                                                             11

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)


4. DISCONTINUED OPERATIONS (CONTINUED)

The following schedule summarizes the impact of the above described transactions
on the Company's assets, liabilities and shareholders' equity:

<TABLE>

<S>                                                                                  <C> 
   Cash received                                                                      $  712,293

   Other proceeds:
      Common stock of acquiring companies, at market                                   1,037,188
      Funds held in escrow, net                                                           86,514
      Subordinated note payable reduction                                              2,016,609
      Reacquired stock                                                                     8,550
                                                                                      ----------
                                                                                       3,148,860

   Assets sold:
      Equipment, net                                                                     790,398
      Inventory                                                                          446,794
      Other assets                                                                         6,846
                                                                                      ----------
                                                                                       1,244,038

   Other costs of the transactions:
      Consideration in exchange for subordinated debt reduction:
        Cash                                                                             450,000
        Common stock of acquiring company, at market                                     539,063
      Transaction and other settlement expenses                                          110,000
      Reduction to net realizable value of equipment                                     158,000
      Accrual for estimated loss for leased facility                                      40,000
                                                                                      ----------
                                                                                       1,297,063
                                                                                      ----------
                                                                                      $1,320,053
                                                                                      ----------
                                                                                      ----------
</TABLE>

                                                                             12

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)


4. DISCONTINUED OPERATIONS (CONTINUED)

Net liabilities of discontinued operations at December 31, 1998 consist of the
following:

<TABLE>
<S>                                                                                 <C>
   Accounts receivable, net (including amounts held in escrow in 
     association with product line sales)                                            $ 282,480

   Other current assets                                                                 85,406

   Equipment, net                                                                       18,475

   Accounts payable, accrued transaction costs, and lease reserves                    (445,019)
                                                                                    -----------
                                                                                     $ (58,658)
                                                                                    -----------
                                                                                    -----------
</TABLE>

5. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                             1998              1997
                                                                            -------------------------
<S>                                                                         <C>           <C>
   Raw materials                                                            $  -          $   292,032
   Work in progress                                                            -               63,313
   Finished goods                                                              -            1,259,820
                                                                            -------------------------
                                                                            $  -           $1,615,165
                                                                            -------------------------
                                                                            -------------------------
</TABLE>

                                                                             13

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)


6. EQUIPMENT AND OFFICE FURNITURE

Equipment and office furniture consist of the following:

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                           1998              1997
                                                                         --------------------------
  <S>                                                                    <C>           <C>
   Equipment and office furniture:
     Computer equipment                                                   $76,269      $   153,855
     Office furniture                                                           -          104,443
     Equipment, including pumps at customer sites                               -        1,303,268
                                                                         --------------------------
                                                                           76,269        1,561,566
   Less accumulated depreciation                                           70,167          382,366
                                                                         --------------------------
                                                                         $  6,102       $1,179,200
                                                                         --------------------------
                                                                         --------------------------
</TABLE>

7. NOTES PAYABLE

Notes payable consist of the following:


<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                             1998          1997
                                                                         --------------------------
  <S>                                                                    <C>         <C>
   Subordinated note payable, with a stated interest rate of 3% and
     interest imputed at 12%, due January 2004                           $  -          $1,593,750
   Accrued interest at the imputed 12% rate                                 -             195,184
                                                                         --------------------------
                                                                         $  -          $1,788,934
                                                                         --------------------------
                                                                         --------------------------
</TABLE>

In January 1997, the Company entered into a subordinated promissory note with
Elan as a result of the acquisition of certain assets of Elan. Principal and
interest associated with this note were due January 2004.
This note was secured by the assets of the Company.



                                                                             14

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)

8. LEASES

The Company leases its office and warehouse facility under a five year operating
lease. The lease terminates on November 30, 2001, and requires the Company to
pay its proportionate share of real estate taxes and operating expenses. The
Company intends on subleasing its facility in May 1999 for the remaining portion
of the lease. The Company has reserved $40,000 related to the first four months
of 1999.

Future minimum lease commitments under the lease as of December 31, 1998 are as
follows:

<TABLE>

   <S>                                                 <C>
   1999                                                 $ 69,545
   2000                                                   69,360
   2001                                                   65,664
                                                       ---------
                                                        $204,569
                                                       ---------
                                                       ---------
</TABLE>

Total rent expense  under the  operating  lease for the years ended  December 
31, 1998 and 1997 was $126,900 and $90,383, respectively.

9. INCOME TAXES

At December 31, 1998 and 1997, the Company had net operating loss carryforwards
for tax purposes of approximately $4,346,000 and $3,601,000, respectively. These
net operating loss carryforwards are available to offset future taxable income
through 2018 subject to limitations under Section 382 of the Internal Revenue
Code due to changes in the equity ownership of the Company.



                                                                             15

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)

9. INCOME TAXES (CONTINUED)

Significant components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                             1998                1997
                                                                           -----------------------------
<S>                                                                        <C>               <C>
   Deferred tax assets:
     Net operating loss carryforwards                                       $ 2,351,000      $ 1,440,000
     Goodwill write-off                                                               -          692,000
     Depreciation                                                                80,000           32,000
     Inventory reserve                                                                -          258,000
     Accounts receivable allowance                                                5,000           13,000
     Accrued professional fees                                                        -           80,000
     Other accrued expenses                                                      52,000           22,000
                                                                           -----------------------------
   Net deferred income tax assets                                             2,488,000        2,537,000
   Valuation allowance                                                       (2,488,000)      (2,537,000)
                                                                           -----------------------------
   Net deferred income taxes                                                $         -      $        -
                                                                           -----------------------------
                                                                           -----------------------------
</TABLE>

10. STOCK OPTIONS AND WARRANTS

STOCK OPTIONS

The Company has two stock option plans that include both incentive stock options
and non-qualified stock options to be granted (the "Plans") to directors,
officers, employees, consultants and others. As of December 31, 1998, the
maximum number of shares of common stock reserved under the Plans is 225,000
shares. The Board of Directors establishes the terms and conditions of all stock
option grants, subject to the Plans and applicable provisions of the Internal
Revenue Code.



                                                                             16

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)


10. STOCK OPTIONS AND WARRANTS (CONTINUED)

The following table summarizes activity under the Plans:

<TABLE>
<CAPTION>
                                                                                                WEIGHTED
                                                 SHARES         PLAN OPTIONS OUTSTANDING        AVERAGE
                                               AVAILABLE        --------------------------   EXERCISE PRICE
                                               FOR GRANT       INCENTIVE     NON-QUALIFIED     PER SHARE
                                               ------------------------------------------------------------
<S>                                            <C>             <C>           <C>             <C>
   Balance at December 31, 1996                    61,562          65,125          98,313         $7.88
     Exercised                                          -            (250)         (1,750)         4.16
     Granted                                      (34,750)         29,125           5,625         11.88
     Canceled                                      30,125         (28,875)         (1,250)         9.36
                                               --------------------------------------------
   Balance at December 31, 1997                    56,937          65,125         100,938          8.52
     Granted                                     (125,000)              -         125,000          1.18
     Canceled                                      83,875         (64,500)        (19,375)         8.98
                                               --------------------------------------------
   Balance at December 31, 1998                    15,812             625         206,563         $3.80
                                               --------------------------------------------
                                               --------------------------------------------
</TABLE>

The following table summarizes information about the stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                     ---------------------------------------------------   -------------------------------
                                          WEIGHTED          WEIGHTED                          WEIGHTED
      RANGE OF           NUMBER       AVERAGE REMAINING      AVERAGE           NUMBER         AVERAGE
  EXERCISE PRICES     OUTSTANDING     CONTRACTUAL LIFE   EXERCISE PRICE     EXERCISABLE    EXERCISE PRICE
------------------------------------------------------------------------   -------------------------------
<S>                   <C>             <C>                <C>               <C>             <C>
    $ .62 - $ 1.20       125,000          10 years           $  1.18           119,375       $  1.19
     4.00 -   6.00        49,938           2 years              4.70            49,313          4.71
     8.00 -  17.00        32,250           3 years             13.19            32,250         13.19
                       ---------                                             ---------              
                         207,188           7 years           $  3.80           200,938       $  3.80
                       ---------                                             ---------              
                       ---------                                             ---------              
</TABLE>

Options outstanding under the Plans expire at various dates during the period
from March 1999 through December 2008. The number of options exercisable as of
December 31, 1998 and 1997 were 200,938 and 104,762, respectively, and are
exercisable at a weighted average price of $3.80 and $6.56 per share,
respectively. The weighted average fair value of options granted during the
years ended December 31, 1998 and 1997 was $.51 and $1.29 per share,
respectively.




                                                                             17

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)


10. STOCK OPTIONS AND WARRANTS (CONTINUED)

The Company has elected to following Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of
option valuation models that were not developed for use in valuing employee
stock options.

Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997: risk-free interest rate of 5.0% and 6.0%,
respectively; dividend yield of 0% for both years; volatility factor of the
expected market price of the Company's common stock of .61 and .71,
respectively; and a weighted average expected life of the option of five years
for both years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because change in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:

<TABLE>
<CAPTION>

                                                                             1998              1997
                                                                    -----------------------------------
<S>                                                                 <C>                  <C>
   Pro forma net loss                                               $  (10,569)          $  (4,248,128)
   Pro forma net loss per common share - basic and diluted          $     (.01)          $        (.78)
</TABLE>



                                                                             18

<PAGE>

                                NM Holdings, Inc.
                   (Formerly known as Nutrition Medical, Inc.)

                    Notes to Financial Statements (continued)


10. STOCK OPTIONS AND WARRANTS (CONTINUED)

The pro forma effect on net loss of 1998 and 1997 is not representative of the
pro forma effect on net loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.

WARRANTS

In conjunction with various debt and equity financing activities, the Company
has granted warrants to acquire up to 131,777 shares of the Company's Common
Stock at exercise prices ranging from $3.50 - $16.80 (weighted average exercise
price of $7.36). The total includes 50,000 shares issued in December 1998 in
conjunction with the debt settlement arrangement with Elan Pharma, Inc. (see
Note 4).

11. LITIGATION SETTLEMENT

In August 1995, the Company was named as a defendant in a patent infringement
lawsuit brought by Novartis, formerly Sandoz Nutrition. The complaint asserted
that one of the Company's products, L-Emental-TM- Plus, infringed on two patents
held by Novartis and asked for relief in the form of an injunction preventing
the Company from selling the product, as well as damages of an unspecified
amount.

On December 15, 1998, the Company entered into a Settlement and Mutual Release
with Novartis whereby Novartis agreed to release all claims against the Company,
and the Company paid Novartis $450,000 and agreed to discontinue production of
its L-Emental-TM- Plus product. The Company recognized a charge to discontinued
operations in December 1998 of $513,816 relating to the settlement payment and
the write-off of the related product inventory.

12. SUBSEQUENT EVENT

In March 1999, the Company announced that they are actively engaged in
negotiations with MJK Holdings, Inc. to merge the two companies. The execution
of a definitive agreement is subject to the negotiation of terms and due
diligence and is also subject to approval by the respective boards of directors
and shareholders.



<PAGE>
                                 INDEX TO EXHIBITS

<TABLE>
<CAPTION>
      EXHIBIT NO.    DESCRIPTION
      -----------    -----------
      <C>            <S>
      2.1(a)         Asset Purchase Agreement dated January 13, 1997, by and
                     between the Company and Elan Pharma, Inc.
      2.2(b)         Asset Purchase Agreement effective May 1, 1998, by and between
                     the Company and Agrilink Foods, Inc.*
      2.3(c)         Asset Purchase Agreement dated July 27, 1998, between the Company
                     and ZEVEX, Inc.
      2.4(d)         First and Second Amendments to Asset Purchase Agreement between
                     the Company and ZEVEX, Inc.
      2.5(e)         Asset Purchase Agreement dated September 1, 1998, as amended
                     through October 28, 1998, between the Company and GalaGen Inc.
      2.6(f)         Second Amendment to Asset Purchase Agreement between the Company
                     and GalaGen Inc.
      3.1(f)         Second Restated Articles of Incorporation of the Company, as
                     amended
      4.1(g)         Promissory Note dated January 13, 1997, by the Company in favor of
                     Elan Pharma Inc.
      10.1(h)        1995 Long-Term Incentive and Stock Option Plan, as amended
      10.2(i)        1996 Non-Employee Director Stock Option Plan
      10.3(h)        Executive Employment Agreement dated October 1, 1996, between the
                     Company and William L. Rush
      10.4           Separation Agreement and General Release dated August 31, 1998,
                     between the Company and William L. Rush
      10.5(i)        Office Lease dated October 15, 1993, between the Company and the
                     308 Corporation
      23             Consent of independent auditors
      24             Powers of Attorney (set forth on the Signature Page hereof)
      27             Financial Data Schedule (EDGAR only)
      99.1           Cautionary Statement
      99.2           Press Release dated March 17, 1999, announcing negotiations with
                     Miller, Johnson & Kuehn, Incorporated
</TABLE>
________________________

(a)  Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K filed
     on January 23, 1997.

(b)  Incorporated by reference to Exhibit 2.2 to the Registrant's Form 10-KSB
     filed on March 31, 1998.
     
(c)  Incorporated by reference to Exhibit 2.1 to the Registrant's Quarterly
     Report on Form 10-QSB for the quarter ended June 30, 1998.

(d)  Incorporated by reference to Exhibits 2.2 and 2.3 to the Registrant's Form
     8-K filed on January 7, 1999.

(e)  Incorporated by reference to Exhibit B to the Registrant's Definitive Proxy
     Statement on Schedule 14A filed on December 9, 1998.

(f)  Incorporated by reference to the exhibit of the same number to the
     Registrant's Form 8-K filed on January 7, 1999.

(g)  Incorporated by reference to Schedule 2.01(b) to the Registrant's Form 8-K
     filed on January 23, 1997.

(h)  Incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report
     on Form 10-KSB filed on March 31, 1997.

(i)  Incorporated by reference to Exhibit 10.2 to the Registrant's previously
     filed Form SB-2 Registration Statement effective September 26, 1996.

*    Confidential information has been omitted from such Exhibit and filed
     separately with the Commission pursuant to a confidential treatment request
     under Rule 24b-2.


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