Cover:           [PHOTOGRAPH OF ZEVEX BUILDING CORNER AGAINST BLUE SKY]
Inside:    [PHOTOGRAPH OF THE MANUFACTURING FLOOR, WITH INSET OF SECOND PHOTO]
                        [PHOTOGRAPH OF ENGINEERING LAB]
                       [PHOTOGRAPH OF ENGINEERING DESIGN]
                        [PHOTOGRAPH OF DOCUMENT CONTROL]

CAPTION: WORLD CLASS OEM ELECTRONICS DESIGN AND MANUFACTURING

"ZEVEX operations are located in a modern 51,000 square foot manufacturing
facility in Salt Lake City, Utah.  The computer-based assembly instruction
system is state-of-the-art and one of many production capabilities available
to technicians and assembly personnel.

Products are designed by ZEVEX to meet specific customer requirements by
integrating core technologies of acoustics, ultrasound, sensor design,
transducer modeling and electro-mechanical systems development.

The engineering and design staff work closely with each client to turn
specifications into validated product solutions.

Designers utilize a variety of software packages including the industry-standard
Pro/ENGINEER[R]CAD system for mechanical design and Cadence[R] software for
electronic design.

ZEVEX has been evaluated by the National Standards Authority of Ireland and
awarded the ISO-9001 and EN-46001 certifications.  ZEVEX specializes in
developing and manufacturing products for the medical marketplace and is an FDA-
registered device manufacturer."





                    1997 ANNUAL REPORT LETTER TO STOCKHOLDERS




Dear Stockholders

It is with great  satisfaction that we issue the following 1997 Annual Report to
the stockholders of ZEVEX International,  Inc. ZEVEX had an exceptional 1997, as
the Company experienced  tremendous growth, change and achievement.  Some of the
most  significant  developments of 1997 included the following:  record revenues
and  profitability;  relocation  into  the  Company's  new  51,000  square  foot
headquarters  and  manufacturing  facility;  completion of a successful  private
placement and secondary  offering of common stock that raised $14.25 million for
future  growth and  development;  listing of ZEVEX  common stock on the American
Stock Exchange; and changing the Company's state of incorporation from Nevada to
Delaware.  As we enter 1998,  ZEVEX is a stronger,  more  mature  company,  with
increased momentum for growth.

In 1997, the Company achieved record revenues totaling almost $9.0 million, or a
58%  increase  over $5.7  million in 1996.  Net income  also  increased  108% to
$718,242 in 1997,  compared  to net income of  $345,577 in 1996.  Net income per
share rose 36% to $.34 compared to earnings per share of $.25 in 1996.

In June,  1997, we moved into our new 51,000 square foot world  headquarters and
manufacturing  facility.  The timely construction of this facility was expedited
by securing a $2 million  industrial  development bond (the Company's only debt)
with an average  interest rate of  approximately  3.7%.  This facility more than
doubled the Company's available manufacturing and administrative space.

In February,  1997,  the Company  successfully  completed a private  offering of
500,000  Units  (each  Unit  consisting  of one  common  share and a warrant  to
purchase one common share),  which provided $1.25 million in net proceeds to the
Company. In November, 1997, the Company commenced a secondary public offering of
its common stock that  provided $13 million in net proceeds to the Company.  The
additional  capital raised through these offerings has provided the Company with
the necessary funding to stimulate future growth and development.

In May,  1997,  the  Company  became  listed  on the  American  Stock  Exchange.
Previously,  ZEVEX  common  stock was listed on the OTC market and traded in the
pink sheets. The move to Amex increased the Company's visibility and interest in
its  common  stock,  and  contributed  to a sharp  increase  in the price of the
Company's common stock during 1997.

In November, 1997, the Company changed its state of incorporation from Nevada to
Delaware.  We expect that the move to Delaware corporate law will strengthen the
Company's profile with institutional investors and industry analysts.

The achievement of these  milestones in 1997 has positioned the Company well for
future  growth.  As to the  future,  we  believe  that  the OEM  market  for the
manufacture  of medical  devices  will  continue to grow,  and ZEVEX is now well
positioned to take advantage of that growth. Our goal is to become recognized as
one of the  dominant  providers  of  manufacturing  services  to medical  device
companies.


<PAGE>




Also, we will pursue the development of additional proprietary products. We have
achieved success with the introduction of our EnteraLite(R)  Ambulatory  Enteral
Feeding  Pump,  and we plan to follow  that with other  proprietary  products to
provide diversity to our revenue mix.

We are grateful to all of our stakeholders for their commitment in helping ZEVEX
grow to this point, and we look forward to an even brighter future.

Sincerely,



Dean G.  Constantine       David J.  McNally         Phillip L.  McStotts
President and CEO          Vice President and        Secretary/Treasurer and CFO
                           Marketing Director



<PAGE>




BUSINESS

ZEVEX International, Inc., is the issuer of the following Annual Report to
Stockholders for fiscal year ended December 31, 1997.  Throughout this report,
ZEVEX International, Inc., and its wholly-owned subsidiary, ZEVEX,Inc., are
collectively referred to for convenience as "ZEVEX," or the "Company."
     General

ZEVEX  International,  Inc.,  (hereafter  "ZEVEX," or the "Company") designs and
manufactures  advanced  medical  devices,  including  surgical  systems,  device
components,  and sensors  for medical  technology  companies.  The Company  also
designs, manufactures, and markets its own medical devices using its proprietary
technologies.  ZEVEX's design and  manufacturing  service  customers are medical
technology companies,  who sell ZEVEX's systems and devices under private labels
or  incorporate  the Company's  devices into their  products.  ZEVEX designs and
manufactures over 100 different surgical systems,  device components and sensors
for  more  than  50  different   established  and  emerging  medical  technology
companies,  such as Alaris  Medical  Systems,  Inc.,  Allergan,  Inc.,  Paradigm
Medical  Industries,  Inc., various divisions of Baxter Healthcare  Corporation,
Mentor Corporation,  SIMS Deltec,  Inc., Staar Surgical Company,  and 3M Company
Healthcare. ZEVEX uses extensive engineering and regulatory expertise to deliver
integrated design and manufacturing solutions to its medical device customers.

ZEVEX offers its manufacturing service customers the following advantages:

      Broad Experience and Expertise with Numerous Medical Devices.
Over its 11-year history, the Company has manufactured numerous advanced medical
devices,  including surgical systems, device components and sensors. The Company
has   developed   considerable   expertise  in  product   design,   engineering,
manufacturing  and regulatory  compliance  associated  with a variety of medical
devices.

      Generally Lower Cost and Higher Quality.
ZEVEX  provides a wide range of  engineering  services  for  complete  device or
system design, including engineering, component analysis, testing and regulatory
compliance.  The Company  strives to increase  the quality and lower the overall
cost of the devices or systems  manufactured  for its  customers by  integrating
design   and   engineering   work  with   manufacturing   processes,   materials
acquisitions, quality assurance and regulatory considerations.

      Rapid Product Development.
With its extensive engineering and manufacturing capabilities, the Company often
can develop and  commercialize  new products  faster than its competitors or its
customers, who otherwise must expend significant time and financial resources to
develop internal engineering expertise and qualified manufacturing facilities.

      Regulatory Compliance
ZEVEX is ISO 9001 and EN 46001  certified,  and has developed  internal  systems
intended to maintain  compliance  with the FDA's GMP  requirements.  The Company
devotes  significant  management time and financial  resources to GMP compliance
and ISO certification.  By using the Company's manufacturing services, customers
can  take   advantage  of  ZEVEX's   investment  in   regulatory   and  industry
certifications.

      Production Flexibility
A broad  customer  base and  cross-trained  work force  allow ZEVEX to offer its
customers   production   flexibility,   enabling  customers  to  effect  product
enhancements   and  to  adjust   production   volumes  in   response  to  demand
fluctuations.

ZEVEX's strategy is to augment continuing growth in its design and manufacturing
service  business with the  development  and  commercialization  of  proprietary
products that use the Company's technologies or engineering  expertise,  or that
complement  the  Company's  existing  proprietary  products.   The  Company  has
successfully   applied  its   engineering   and  regulatory   expertise  to  the
development,   commercialization   and  marketing  of   EnteraLite(R),   ZEVEX's
proprietary  Ambulatory  Enteral  Feeding Pump for  patients who require  direct
gastrointestinal  nutritional  therapy. The EnteraLite(R) pump provides patients
with maximum mobility,  while delivering  enteral  solutions with  unprecedented
accuracy.



<PAGE>




DEVICES THAT ZEVEX MANUFACTURES FOR OTHERS AND THEIR MARKETS

     Surgical Devices -- Ophthalmic.
The Company designs and manufactures ultrasonic  phacoemulsification  handpieces
and systems for the  surgical  removal of  cataracts.  Phacoemulsification  is a
method  of  cataract  extraction,  which  uses  ultrasound  waves to  break  the
cataract-obstructed  lens of the eye into  small  fragments  that can be removed
through  a  hollow  needle.  Phacoemulsification  requires  only a three to four
millimeter  incision,  compared to incisions of up to 12  millimeters  for other
techniques.  Phacoemulsification  is  currently  used in more than 80 percent of
cataract  procedures  in the United  States.  ZEVEX  manufactures  handpieces of
several designs for Allergan,  Inc., who is a major customer and a market leader
in   ophthalmology.    The   Company   currently   manufactures   two   complete
phacoemulsification  systems for one customer, Paradigm Medical Industries, Inc.
These two systems include a basic  ultrasonic  system and a high-end system that
embodies both laser and ultrasonic energy sources.  Allergan, Inc., and Paradigm
Medical   Industries,   Inc.,  are  the  Company's  two  largest  customers  for
phacoemulsification  products.  However,  ZEVEX provides handpieces to many more
customers worldwide.

     Surgical Devices -- Liposuction.
The Company  designs and  manufactures  ultrasonic  handpieces for  liposuction.
Liposuction,  the  removal  of body  fat,  is one of the most  popular  cosmetic
procedures performed today. Current liposuction  procedures involve the use of a
metal cannula to sheer fat from a patient.  The current  procedure  requires the
physician  to  exert  a  large  amount  of  force.  In  ultrasonically  assisted
liposuction, a generator sends ultrasonic waves through a probe that is inserted
under the skin.  The  ultrasonic  energy  emulsifies  the fat, which can then be
easily aspirated away.  Ultrasonic  liposuction surgery can significantly reduce
patient trauma.

      Medical Sensors.
The  Company  designs  and  manufactures  a variety of  non-invasive  ultrasonic
sensors for the detection of air bubbles and the  monitoring of liquid levels in
medical devices.  The Company's air bubble detectors  monitor  intravenous fluid
lines in a variety  of devices  and  systems,  including  drug  infusion  pumps,
hemodialysis  machines,  blood collection systems,  and  cardiopulmonary  bypass
systems.  The  Company's  liquid level  detectors  are used to monitor  critical
levels of liquids in various reservoirs used in surgery,  such as those employed
in cardiopulmonary bypass systems.

ZEVEX'S PROPRIETARY PRODUCTS

     EnteraLite(R) Ambulatory Enteral Feeding Pump.
In  September  1996,  the Company  began  selling the  EnteraLite(R)  Ambulatory
Enteral   Feeding  Pump  for  patients  who  require   direct   gastrointestinal
nutritional  therapy.  Enteral  feeding  is a means of  providing  nutrition  to
patients  who have  experienced  head or neck trauma,  or have  gastrointestinal
disorders,   such   as   short   bowel   syndrome,    Crohn's   Disease,   bowel
pseudo-obstruction, and other serious digestive disorders that prevent them from
digesting  food  normally.  Many enteral  feeding  patients  require  continuous
administration of nutritional  solutions  throughout the day, which requires the
patient  to  carry  an  enteral  feeding  pump.  The  EnteraLite(R)  pump is the
lightest,   most  compact  enteral  feeding  pump  on  the  market,   possessing
unprecedented   safety  and   accuracy  in  liquid   nutrition   delivery.   The
EnteraLite(R)  has a 24-hour battery,  one-third longer than the battery life of
its closest  competitor.  The  EnteraLite(R)  pump carries a two-year  warranty,
twice the industry  average.  The  EnteraLite(R)  requires the use of disposable
feeding bags and tube sets,  both of which are sold by the Company.  The Company
has been awarded five US patents for  EnteraLite(R)  technology.  ZEVEX has also
received  Notices of Allowance  from the US Patent and Trademark  Office ("PTO")
for one additional  patents that relate to various aspects of the  EnteraLite(R)
pump.

<PAGE>




DESIGN AND ENGINEERING CAPABILITIES

The  Company  has  extensive  design  and  engineering  capabilities.   In  most
instances,  ZEVEX's manufacturing service customers rely on the Company from the
outset of their project for complete design,  engineering,  component  analysis,
testing and regulatory  compliance for their medical device or system.  Over its
11-year history, the Company's engineering staff has performed substantially all
of the design and engineering work for such medical devices or systems. In other
instances,  customers  have come to the Company with final  drawings for devices
that they believe are ready for  manufacturing.  In such cases,  the Company has
revised and tested the customer's  existing design prior to manufacturing.  Many
times, ZEVEX's engineers have identified and offered design alternatives,  which
have improved performance or produced manufacturing efficiencies.

      Team Approach.
The Company  puts  together a project  team of engineers  and  technicians  from
various disciplines for each engineering project.

      Close Cooperation with the Customer.
The Company's  engineers work closely with the customer during all phases of the
design,  engineering,  and  testing  of the  customer's  device or  system.  The
cooperative  approach is used to assure that customers'  expectations are met or
exceeded in the final product.

      Integration of Engineering Staff.
ZEVEX's  engineers assist sales and marketing  personnel in evaluating  requests
for proposals and developing specific solutions, bids, cost estimates, and plans
for each product.  The  Company's  project  engineers  act as customer  contacts
throughout  the design and  engineering  phase and have  responsibility  for all
aspects of a customer's project.

      State-of-the-Art Engineering Technologies.
The Company has made significant  investments in  state-of-the-art  equipment to
support its design and engineering staff, including product performance modeling
software,  custom testing stations and  three-dimensional  computer aided design
("CAD")  software.  Using  its own  software  design,  ZEVEX  has  created  what
management  believes is the most sophisticated  modeling software for ultrasonic
device development.  The Company's modeling and design capacities hasten product
development for ultrasonic devices and improve the quality of the final device.

MANUFACTURING CAPABILITIES

The Company's products are assembled and tested at its manufacturing facility in
Salt Lake City,  Utah.  In most cases,  the  manufacturing  process  begins with
technical drawings and specifications derived through the engineering and design
process.  Once  the  preliminary  design  has  been  completed,  prototypes  are
manufactured  and further design  refinements  and adjustments are made based on
the  performance  of  the  prototypes.  Following  completion  of  final  design
specifications,   the  Company  orders  the  required   electronic   components,
piezoelectric  ceramic,  molded plastic and stainless steel housings,  and other
items from  qualified  suppliers  of such  items.  A  state-of-the-art  software
program and data base are used to manage  inventory  and  control  the  ordering
process  for the  more  than  30,000  parts  used in  ZEVEX's  products.  As the
evolution of a device or system reaches production,  members of the project team
with  direct   responsibility   for  manufacturing,   quality  assurance,   test
engineering,  and materials  assume a greater role. The project team develops an
assembly process,  product testing and quality  assurance  procedures to produce
high-quality devices or systems that satisfy customer  specifications as well as
the FDA's GMP, and ISO 9001/EN 46001  quality  standards.  Often,  manufacturing
begins with a relatively small number of  pre-production  units that are used by
the customer for clinical trials.  The Company and the customer  frequently work
closely together to make engineering and manufacturing  refinements  during this
pre-production phase.


<PAGE>




     Suppliers.
ZEVEX  purchases its component  parts and raw materials from various  suppliers.
The Company is not dependent on any single  supplier for any item,  and believes
that it can acquire materials from various sources on a timely basis.

MARKETING AND SALES

      Marketing and Sales of ZEVEX's Design and Manufacturing Services.
The Company generates new design and manufacturing projects from customers using
direct sales  personnel who are trained in the Company's  engineering  expertise
and manufacturing  capabilities.  Project engineers also participate extensively
in sales and marketing activities.  In addition, the Company promotes its design
and  manufacturing  capabilities  at industry  trade shows,  by  advertising  in
leading industry publications, and by obtaining referrals from customers, former
employees of  customers,  and other  persons who are familiar with the Company's
services.

     Marketing and Sales of ZEVEX's  EnteraLite(R)  Ambulatory  Enteral  Feeding
Pump.  The  Company  has  a  network  of  over  50  independent   manufacturer's
representatives  who sell the EnteraLite(R) pump and related disposable delivery
sets.  These  representatives  are selected based upon their experience with the
home health care market served by EnteraLite(R),  and they sell directly to home
health care service  providers,  including  hospitals with such  divisions.  The
manufacturer's  representatives  are regionally  supported by  specialists  with
clinical  credentials  (registered  dietitians  or  nurses),  who are  full-time
employees of the Company.

SIGNIFICANT CUSTOMERS

During  1997,  ZEVEX  provided  design and  manufacturing  services for over 100
devices  to  more  than  50  customers.   Four  of  the  Company's   design  and
manufacturing  customers,  Alaris Medical Systems, Inc., Allergan,  Inc., Mentor
Corporation and Paradigm Medical,  Inc.,  accounted for approximately 65% of the
Company's total revenues in 1997. Three of these customers  accounted for 66% of
the Company's total revenues in 1996, and two of these  customers  accounted for
approximately  50% of the Company's total revenues in 1995.  Sales of its design
and manufacturing  services to foreign customers  accounted for approximately 7%
of revenues during 1997,  1996 and 1995. The Company's  customers for its design
and manufacturing  services are medical technology  companies,  who sell ZEVEX's
systems and devices under private  labels or incorporate  the Company's  devices
into their products.  Generally,  ZEVEX seeks to obtain design and manufacturing
arrangements from its customers for a specified period of time.  Typically,  the
Company secures manufacturing rights for three to five years initially, followed
by annual renewal. The Company rarely undertakes design work if it does not also
obtain a contract for the accompanying manufacturing work.

BACKLOG

At December 31, 1997, the Company had a backlog of approximately  $6,265,007, on
orders  for  medical  devices  to be  manufactured  by ZEVEX for  other  medical
technology companies,  as compared to backlogs at December 31, 1996 and 1995, of
$3,091,000 and $2,359,000, respectively. As of March 24, 1998, the Company had a
backlog of $7,418,088.  For purposes of the above figures,  backlog includes all
orders  received by the Company  pursuant to purchase  orders that have not been
completed and shipped by the Company.  This does not include any backlog for the
Company's proprietary  products,  because the Company manufactures these devices
and holds  appropriate  levels in inventory for sale to  customers.  Some of the
orders included in the backlog may be canceled or modified by customers  without
significant penalty. In addition,  since customers may place orders for delivery
at various times throughout the year, and because of the possibility of customer
changes in delivery  schedules or cancellation of orders,  the Company's backlog
as of any particular date may not necessarily be a reliable  indicator of future
sales.



<PAGE>




COMPETITION

     Competition for ZEVEX's Design and Manufacturing Services.
The Company's primary  competitors in design and manufacturing  services include
other contract manufacturers and potential customers that operate in the medical
technology  industry.  The  primary  competitive  factors in medical  instrument
design and manufacturing  include quality,  regulatory  compliance,  engineering
competence,  cost of non-recurring engineering design, price of the manufactured
product, experience, customer service, and ability to meet design and production
schedules.  Competition  is primarily  limited to those  companies that meet the
minimum  applicable  regulatory   requirements  of  the  FDA  and  international
standards for manufacturing and design. In the future,  the Company is likely to
compete  against  new  entrants  into the  industry as  out-sourcing  expands in
medical technology  products.  For example,  medical  technology  companies with
design and  manufacturing  capabilities  (especially those with excess capacity)
and large electronic contract  manufacturers and defense department  contractors
with extensive engineering expertise may undertake the design and/or manufacture
of medical devices.

     Competition for ZEVEX's EnteraLite(R) Ambulatory Enteral Feeding Pump.
Two  competitors  exist in the US market for ambulatory  enteral  feeding pumps.
Ross Laboratories,  a division of Abbott  Laboratories,  offers the Companion(R)
pump,  which was  originally  introduced  to the market in the late 1980's.  The
Company  estimates  that Ross  holds a market  share of 45% for  ambulatory  and
non-ambulatory  enteral feeding applications.  Also, Sherwood Medical offers the
kangaroo(R)  PET enteral  feeding pump,  which is limited because it can only be
operated in an upright position.  It is estimated that Sherwood  presently holds
greater than 35% of the total market for enteral  pumps and  disposable  sets in
both ambulatory and non-ambulatory applications.

RESEARCH AND DEVELOPMENT FOR ZEVEX'S PROPRIETARY PRODUCTS

As of December 31,  1997,  ZEVEX had three  full-time  engineers in research and
development,  and had several  other  designers and  engineers  contributing  to
additional research and development  projects.  ZEVEX's research and development
projects are  primarily  focused on new  proprietary  products.  During the last
three fiscal years, the Company continued  independent  research and development
activities  with  respect  to the  design and  development  of new and  improved
devices,  spending  $702,563 in 1997,  $527,562 in 1996 and $502,255 in 1995. In
1997, 1996 and 1995 research and development costs represented approximately 8%,
10%, and 10% of the Company's  revenues  respectively.  The most notable product
from the Company's research and development  efforts during the past three years
is the EnteraLite(R) Ambulatory Enteral Feeding Pump.

PATENTS, TRADEMARKS, AND OTHER PROPRIETARY RIGHTS

     Patents.
The Company  currently  holds seven United States  patents.  The Company's first
patent relates to a non-invasive ultrasonic liquid level indicator.  The Company
also holds five  patents  that relate to its  EnteraLite(R)  Ambulatory  Enteral
Feeding Pump.  Two patents  relate to the use of pressure  monitoring to improve
the accuracy of fluid delivery by the pump.  This  monitoring is key to accuracy
of  delivery  and  the  ability  of the  EnteraLite(R)  Pump to  operate  in any
orientation.  Another is related to a novel  mechanism for monitoring pump rotor
movement.  Two additional patents relate to the pinch clip occluder for infusion
sets, a crucial  safety device that protects the patient from  over-infusion  of
solutions.  In addition,  the Company has recently  received notice of allowance
from the United  States  Patent and  Trademark  Office  (PTO) on a patent for an
electromagnetic fluid-level sensor device, currently under development.

     Trademarks.
The Company has registered the trademarks  EnteraLite(R) and BottleWatch(R) with
PTO and has pending registrations for ZEVEX(TM).  Additionally,  the Company has
procured  registrations  for  EnteraLite(R)  and  BottleWatch(R)  in  Australia,
Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, and
the United Kingdom.  The Company intends to file  appropriate  applications  for
additional trademarks in the United States and foreign countries.

GOVERNMENTAL REGULATION

ZEVEX's  manufacturing  facilities,  its  customers'  medical  devices,  and the
Company's  own medical  devices are subject to extensive  regulation  by the FDA
under the Food Drug and  Cosmetics  Act ("FDC  Act").  Manufacturers  of medical
devices must comply with  applicable  provisions of the FDC Act, and  associated
regulations  governing  the  development,   testing,  manufacturing,   labeling,
marketing, and distribution of medical devices,  record-keeping requirements and
the reporting of certain  information  regarding their safety. In addition,  the
Company's facilities are subject to periodic inspections by the FDA (and certain
state agencies) for compliance with the FDA's Good  Manufacturing  Process (GMP)
requirements.  The FDA has  recently  amended the GMP  regulations.  Among other
things,  the new  regulations  will require design  controls and  maintenance of
service  records.  The  Company  believes  that  the new  regulations  will  not
substantially increase the Company's costs of complying with GMP requirements.

Besides the FDA  regulations  described  above,  the Company is also  subject to
various  state and  federal  regulations  with  respect to such  matters as safe
working conditions,  manufacturing  practices,  environmental  protection,  fire
hazard  control,  and  the  disposal  of  hazardous  or  potentially   hazardous
materials.

Beginning in 1998, all medical device manufacturers selling their product on the
European  Common  Market  will be  required  to  obtain  the "CE  Mark" on their
products sold. The CE Mark is a quality  designation given to products that meet
certain policy  directives of the European  Economic Area (an  association of 15
European nations). A product designated with the CE Mark can be freely traded in
all European  Economic Area  countries.  In 1996,  the Company  received and has
maintained  ISO 9001  certification,  and in 1997 the Company  also  received EN
46001 certification.  These certifications will allow the Company to CE Mark and
distribute its proprietary products  internationally,  greatly reducing the time
necessary to acquire a CE Mark from an outside  body.  ZEVEX's ISO 9001/EN 46001
certification subjects it to periodic inspection and audit by the NSAI (National
Standards Association of Ireland),  the European notified body through which the
Company is certified.

EMPLOYEES

As of  March  24,  1998,  the  Company  employed  a total of 109  people  in the
following areas: in Design and Engineering,  26; in Manufacturing  and Test, 42;
in Quality Assurance,  11; and in Marketing and Administration,  30. The Company
also  retains 4  consulting  and  contract  personnel  in the areas of  finance,
engineering, and regulation.

The Company  considers its labor relations to be good, and none of its employees
are covered by a collective bargaining agreement.  Currently,  the local economy
is growing and the unemployment  rate is low in the Salt Lake City  metropolitan
area,  which  means that the  Company  faces  competition  to attract and retain
qualified personnel.  At the same time, however, the Salt Lake City metropolitan
area has a  well-educated  work force and is considered  an attractive  place to
live.  Accordingly,  the  Company  does  not  anticipate  having  difficulty  in
attracting and retaining qualified personnel to meet its projected growth.

PROPERTIES AND FACILITIES

The Company's executive offices and manufacturing  facilities are located in its
new 51,000 square foot  headquarters in Salt Lake City, Utah, which was financed
by a $2  million  industrial  development  bond from a local  municipality.  The
building is situated on nearly four acres of land a few miles from the  downtown
area.  It allows quick access to two major  interstate  freeways and to the Salt
Lake  International  Airport.  The  Company  believes  that its  facilities  are
adequate for its current needs and does not anticipate  any difficulty  locating
additional facilities, if necessary.

The  Company  has  exercised  its first right of refusal to purchase a parcel of
land,  approximately  3.47 acres, to the north of its facility.  The transaction
was completed on March 4, 1998,  for a purchase price of $580,000 based upon MAI
appraisal.

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On  October  23,  1997,  holders of a  majority  of the shares of the  Company's
outstanding common stock approved by written consent, in lieu of a stockholders'
meeting, the Merger of ZEVEX International, Inc., a Nevada corporation, with and
into ZEVEX  International,  Inc., a Delaware  corporation  (the  "Merger").  The
purpose of the Merger was to change the Company's  state of  incorporation  from
Nevada to Delaware.  A total of 1,141,565  shares out of 2,063,826 shares issued
and  outstanding  were voted in favor of the Merger,  which became  effective on
November  20,  1997.  The  Company  filed  an  information  statement  with  the
Securities and Exchange  Commission in connection with the Merger on October 31,
1997, pursuant to section 14(c) of the Securities Exchange Act of 1934.



<PAGE>




                   SELECTED FINANCIAL DATA -- FIVE-YEAR REVIEW

The following selected statement of operations data for the years ended December
31, 1997,  1996 and 1995, and the balance sheet data as of December 31, 1997 and
1996 are derived from the audited consolidated  financial statements included in
this report and should be read in conjunction with those consolidated  financial
statements and notes thereto.  The selected statement of operations data for the
years ended December 31, 1995 and 1994 and the balance sheet data as of December
31,  1995,  1994 and 1993 are derived  from the audited  consolidated  financial
statements  of the Company,  which are not included  herein and are qualified by
reference to such financial statements and the notes thereto.


<PAGE>



                          Fiscal Year Ended December 31

<TABLE>


                                                      1997          1996         1995          1994         1993
                                                 --------------------------------------------------------------------
<S>                                                  <C>          <C>           <C>          <C>           <C>
Statement of Operations Data
  Revenues                                           $8,968,425   $5,663,733    $5,295,762   $3,332,437    $3,115,878
  Gross profit                                        4,211,368    2,727,678     2,230,209    1,315,767     1,515,806
  Selling, general and administrative expenses        2,481,090    1,892,317     1,324,928    1,023,988       775,760
  Research and development  expenses                    702,563      527,562       502,255      419,278       198,804
  Other (income)/expenses                              (47,136)    (243,947)      (40,829)     (36,127)      (37,096)
  Provisions (benefit) for taxes                        356,609      206,169       127,055     (66,709)       196,940
  Net income (loss)                                     718,242      345,577       316,800     (24,662)       381,398
  Net income (loss) per share basic                         .34          .25           .24        (.02)           .36
  Weighted average shares outstanding                 2,097,831    1,388,511     1,305,812    1,130,609     1,060,430
  Net Income (loss) per share diluted                       .29          .24            24        (.02)            35
  Weighted average shares outstanding - assuming
  dilution                                            2,443,482    1,411,687     1,333,768    1,151.991     1,086,480
</TABLE>

<TABLE>


                                                      1997          1996          1995          1994           1993
                                                  -----------------------------------------------------------------------

<S>                                                 <C>            <C>           <C>           <C>            <C>
Balance Sheet Data
  Total assets                                      $22,582,543    $6,368,670    $3,247,375    $2,824,029     $2,912,071
  Total current liabilities                           1,290,466       588,009       346,504       273,708        337,087
  Long-term debt                                      2,026,380     2,000,000            --            --             --
  Stockholders' equity                               19,265,697     3,701,449     2,900,871     2,550,321      2,574,984
</TABLE>



<PAGE>


19

11



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

General

ZEVEX designs and  manufactures  advanced medical  devices,  including  surgical
systems,  device components,  and sensors for medial technology  companies.  The
Company also designs,  manufactures,  and markets its own medical  devices using
its proprietary technologies.

ZEVEX's  sales  results for 1997 were the  strongest in the  Company's  history.
Revenues  were  $8,968,425,  a 58% increase over revenues of $5,663,733 in 1996,
and a 69%  increase  over  revenues of  $5,295,762  in 1995.  Revenues  for 1997
increased due to demand for the Company's products, and the award of significant
engineering and manufacturing service contracts.  The Company is well positioned
to accommodate rapid growth in revenues over the next several years.

Results of Operations

In each of the three preceding years, a small number of customers  accounted for
a significant percentage of total revenues.  Fluctuations in the timing and size
of orders  from such  major  customers  resulted  in  changes  in the  Company's
revenues and product mix, which in turn affected gross margins. As a result, the
Company experiences variations in operating results from quarter to quarter, and
the  results of  operations  for a  specific  quarter  should not be  considered
indicative of the results that may be achieved for longer periods.

Manufacturing revenue growth depends upon growth in demand for systems,  devices
and instruments manufactured by ZEVEX, and ZEVEX's ability to acquire additional
manufacturing  service  contracts  from medical  technology  companies.  ZEVEX's
contract  manufacturing  customers have complete  control over the marketing and
sales of products that we manufacture for them. ZEVEX has no ability to increase
demand  for  instruments  that it  manufactures  for its  contract-manufacturing
customers.

ZEVEX markets its  manufacturing  capabilities and rarely undertakes design work
without   securing   exclusive    manufacturing   rights   (See   "Manufacturing
Capabilities").  The volume and timing of future manufacturing  revenues related
to any specific  engineering  project are highly variable.  Certain  engineering
projects may not lead to future manufacturing  revenues. The manufacturing gross
margin  percentage  from year to year  depends  primarily on the product mix, as
gross  margins  vary  by  instrument,  and  as a  result  of  negotiated  volume
discounts.  Management  may  negotiate  volume  discounts  if the larger  volume
results in smaller per unit  overhead,  improving  operating  margin.  The gross
margin percentage for  manufacturing  revenues from instruments not yet approved
for commercial  use is generally  lower because a smaller number of units limits
opportunities  to  achieve  economies  of  scale,  and  the  instrument  and its
manufacturing process are being refined.


<PAGE>




The  following  table  sets  forth,  for the  periods  indicated,  the  relative
percentages that certain items in the income statement bear to revenues.

   Year Ended December 31, Income Statement Data -- Percentage of Gross Sales
<TABLE>

                                          1997          1996          1995          1994          1993
                                    ------------- ------------- ------------- ------------- -------------
<S>                                         <C>           <C>           <C>           <C>           <C>
Revenues                                    100%          100%          100%          100%          100%
Gross profit                                 47%           48%           42%           40%           49%
Selling, general and                         27%           33%           25%           31%           25%
administrative expenses
Research and development  expenses            8%           10%            9%           12%            6%
Operating income/(loss)                      12%            5%            8%          (3)%           18%
Other income                                  --            4%            1%            1%            1%
Income (loss) before taxes                   12%            9%            9%          (2)%           19%
Provisions (benefit) for taxes                4%            3%            3%          (1)%            7%
Net income (loss)                             8%            6%            6%          (1)%           12%

</TABLE>


During 1997, 65% of total revenues resulted from sales to four customers,  three
of whom were major customers in 1996. During 1996 and 1995, 67% and 56% of total
revenues resulted from sales to three customers and two customers  respectively,
two of which were major customers in both years.

The Company's gross profit as a percentage of sales was 47% in 1997, as compared
to 48% in 1996 and 42% in 1995.  Management  attributes  the decrease in 1997 to
the change in product mix delivered  during the year, and the increase from 1995
mainly to  engineering  contracts  completed  toward  the end of 1996,  and to a
decrease of  non-recurring  engineering  tooling expenses billed to customers at
cost for 1995.

Selling,   general  and   administrative   expenses  increased  during  1997  to
$2,481,090,  27% of gross sales, as opposed to $1,892,317, 33% of gross sales in
1996, or $1,324,749,  25% of gross sales in 1995.  Increased  expenses  resulted
from the  Company's  continuing  expansion.  The Company also had an increase in
legal costs  associated  with  patent and  trademark  implementation.  Marketing
expenses  increased  following the  introduction  of the  Company's  proprietary
product.  Expenses in insurance,  taxes and pension benefits also increased. The
Company believes that general and administrative  expenses in 1998 as related to
sales will continue at approximately the same percentage rate as last year.

The Company  invested  $702,563 in 1997,  $527,562 in 1996, and $502,255 in 1995
for new research and continued development of new applications for the Company's
ultrasound technology, and proprietary products. Management expects research and
development expenses to continue at the same percentage rate in 1998.

Operating  income  increased  to  $1,027,715,  12% of gross  sales in 1997  from
$307,799,  5% of gross sales in 1996,  or  $403,026,  8% of gross sales in 1995.
Similarly,  the Company had a net income of $718,242, 8% of gross sales in 1997,
compared to $345,577,  6% of gross sales in 1996, or $316,800, 6% of gross sales
in 1995.  These changes during 1997 as compared to 1996 and 1995 are principally
due to the  costs  addressed  previously  as well as  changes  in the  Company's
product mix delivered during the year.



<PAGE>




Liquidity and Capital Resources

The  Company's  increased  working  capital  requirements  during  1997 and 1996
stemmed from increasing accounts receivable and inventory levels associated with
growth in  revenues.  To date,  working  capital has been funded  primarily by a
combination  of  increased  accounts  payable,  borrowings  under the  Company's
revolving  line of credit,  a $1.25 million  private  placement of the Company's
securities in February,  1997, and a secondary  public offering of the Company's
Common Stock in November,  1997, from which the Company  received  approximately
$13 million in net proceeds.

During 1997,  the Company  produced  $718,242 in net income.  Cash  increased by
$175,371  for  1997,  as  the  Company's  expenses  related  to  gross  revenues
decreased.  During  1996,  the  Company  had net  income of  $345,577,  and cash
decreased  from  operating  activities  by  $175,141,  as the Company  funded an
increase in accounts receivable and inventories.  During 1995, the Company had a
net  income  of  $316,800,   and  cash  increased  by  $248,111  from  operating
activities, while the Company funded an increase in accounts receivable.

In 1997,  the  Company  completed  construction  of its new 51,000  square  foot
headquarters  and  manufacturing  facility.  The  cost of this  undertaking  was
approximately  $2,591,177.  In  1996,  the  company  negotiated  a $2.0  million
Industrial  Development Bond to finance this construction.  On October 29, 1996,
the Company  completed a  transaction  in the amount of $50,000 cash and 130,000
shares  of  unregistered  Common  Stock  of the  Company  for  the  purchase  of
approximately  3.7 acres of land in Salt Lake City,  Salt Lake County,  Utah, as
the site for this facility. The Company's purchases of land and facilities,  and
new research,  production, testing equipment and tooling increased to $3,004,926
in 1997,  as compared to $619,188 in 1996,  and  $242,110 in 1995.  The increase
during 1997 is attributed to the  Company's  completion of its new  headquarters
and  manufacturing  facility in June,  as well as to continued  upgrading of the
Company's   production   fixturing,   tooling  and  research   and   engineering
capabilities.  The  increase in  equipment  purchases  between  1995 and 1996 is
primarily  due to upgrading  the  Company's  production  fixturing,  tooling and
research and engineering capabilities in 1995.

The Company's working capital at December 31, 1997, was $17,235,516, compared to
$4,520,781  at December  31, 1996,  and  $2,528,418  at December  31, 1995.  The
portion of working  capital  represented by cash and  short-term  investments at
such dates was $12,663,535, $2,228,164 and 870,333 respectively. The increase in
working  capital  during 1997 is primarily  attributed  to (i)  completion  of a
secondary offering of the Company's common stock in November, 1997, which netted
approximately $13 million to the Company,  (ii) increased income from operations
during the year,  and (iii) a private  placement that was completed in February,
1997.  In  1996,  the  Company  used  net  cash  flow  of  $175,141in  operating
activities,  as the  Company  funded an  increase  in  accounts  receivable  and
inventories.  During 1995,  the Company  generated a positive net cash flow from
operating  activities  of  $247,132,  while  funding  an  increase  in  accounts
receivable and inventories.

On February 12, 1997, the Company completed a private placement of $1,250,000 of
its  securities,  which consisted of 500,000 units at a price of $2.50 per unit.
Each unit  consisted  of one share of Common Stock and a warrant to purchase one
share of Common Stock at a price of $3.50 per share.

The Company has agreed to register on demand 350,000  shares of the  outstanding
warrants issued in connection  with the private  placement of February 12, 1997.
The demand  registration rights have been granted for a period of two years from
February 1, 1998.

On December 11, 1996,  the Company  entered into a $500,000  open line of credit
arrangement  with a financial  institution.  The line of credit was increased to
$1,000,000 on September 10, 1997, and increased  again to $5,000,000 on December
31, 1997. The line is due May 31, 1998. The line of credit is  collateralized by
accounts  receivable  and  inventories,  and bears  interest at prime rate.  The
Company  owed  zero on the line of credit  at  December  31,  1997,  $60,108  at
December 31, 1996, and zero at December 31, 1995.



Inflation and Changing Prices

The Company has not been, and in the near term is not expected to be, materially
affected by inflation or changing prices.

Year 2000 Compliance

The Company  has  developed a plan to modify its  information  technology  to be
ready for the year  2000,  and has begun  converting  critical  data  processing
systems. Although no funds were expensed in this regard during 1997, the Company
currently expects the project to be substantially complete by early 1999, and to
cost between $50,000 and $60,000. This estimate includes internal costs, and may
include  costs to upgrade and replace  systems in the normal course of business,
as  ZEVEX  anticipates  that it  will  implement  year  2000  compliance  almost
exclusively through system upgrades. The Company does not expect this project to
have a significant effect on operations.  The Company will continue to implement
systems with strategic value though some projects may be delayed due to resource
constraints.

Other Matters

Summary of Quarterly Data
<TABLE>
<S>                       <C>          <C>           <C>          <C>          <C>          <C>          <C>          <C>
                           12/97        9/97          6/97         3/97         12/96        9/96         6/96         3/96
Revenue                   2,656,935    2,437,734     1,603,260    2,221,105    1,785,478    1,333,030    1,277,618    1,267,607
Gross profit              1,375,032      962,760       835,146    1,038,430      971,163      600,945      601,269      554,301
Net income                  307,479      128,238        56,987      225,538      202,867       53,163        6,221       83,326
EPS basic                       .13          .06           .02          .13          .15          .04          .00          .06
EPS diluted                     .11          .04           .02          .13          .14          .04          .00          .06

</TABLE>



<PAGE>





                            ZEVEX International, Inc.

                           Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                             1997              1996
<S>                                                                       <C>              <C>
Current assets:
   Cash and cash equivalents                                              $   2,260,426    $  2,085,055
   Cash restricted for sinking fund payment on industrial
     development bond                                                            76,164               -
   Accounts receivable, net of allowance for doubtful
     accounts of $33,000 in 1997 and none in 1996                             2,095,455       1,429,521
   Inventories                                                                3,540,591       1,344,297
   Marketable securities                                                     10,403,109         203,109
   Deferred income taxes                                                         82,930               -
   Prepaid expenses                                                              67,307          46,808
                                                                       ------------------------------------
                                                                       ------------------------------------
Total current assets                                                         18,525,982       5,108,790

Property and equipment, net                                                   3,933,804       1,207,034
Patents and trademarks, net of amortization of $7,718 and
   $1,700                                                                       122,002          49,357
Other assets                                                                        755           3,489
                                                                       ====================================
                                                                          $  22,582,543    $  6,368,670
                                                                       ====================================

Liabilities and stockholders' equity Current liabilities:
   Accounts payable                                                       $     640,579    $    339,023
   Accrued liabilities                                                          264,484         188,878
   Income taxes payable                                                         285,403               -
   Bank line of credit                                                                -          60,108
   Current portion of industrial development bond                               100,000               -
                                                                       ------------------------------------
Total current liabilities                                                     1,290,466         588,009

Deferred income taxes                                                           126,380          79,212
Industrial development bond                                                   1,900,000       2,000,000

Stockholders' equity:
   Common stock, $.001 par value: 10,000,000 shares
     authorized; 3,264,326 and 1,495,716 shares issued
     and outstanding in 1997 and 1996                                             3,265           1,496
   Additional paid in capital                                                16,697,203       1,852,966
   Retained earnings                                                          2,565,229       1,846,987
                                                                       ------------------------------------
Total stockholders' equity                                                   19,265,697       3,701,449
                                                                       ====================================
                                                                          $  22,582,543    $  6,368,670
                                                                       ====================================

See accompanying notes.
</TABLE>


<PAGE>





                                             ZEVEX International, Inc.

                                       Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                                           Year ended
                                                                          December 31,
                                                       ----------------------------------------------------
                                                             1997             1996             1995
<S>                                                    <C>              <C>              <C>
                                                       ----------------------------------------------------
Revenues:
   Product sales                                       $      8,176,155 $      4,891,272 $      4,968,108
   Engineering services                                        792,270          772,461          327,654
                                                       ----------------------------------------------------
                                                             8,968,425        5,663,733        5,295,762

   Cost of sales                                             4,757,057        2,936,055        3,065,553
                                                       ----------------------------------------------------
Gross profit                                                 4,211,368        2,727,678        2,230,209

Operating expenses
   General and administrative                                1,738,375        1,363,900        1,060,275
   Selling and marketing                                       742,715          528,417          264,653
   Research and development                                    702,563          527,562          502,255
                                                       ----------------------------------------------------
                                                             3,183,653        2,419,879        1,827,183
                                                       ----------------------------------------------------

Operating income                                             1,027,715          307,799          403,026

Other income (expense):
   Interest income                                             125,315           53,819           40,829
   Interest expense                                            (78,179)         (12,981)               -
   Unrealized gain on marketable securities                          -          203,109                -
                                                       ----------------------------------------------------
Income before provision for income taxes                     1,074,851          551,746          443,855

Provision for income taxes                                    (356,609)        (206,169)        (127,055)
                                                       ----------------------------------------------------

Net income                                                     718,242    $     345,577    $     316,800
                                                       ====================================================

Basic net income per common share                        $         .34    $         .25    $         .24
                                                       ====================================================

Diluted net income per common share                      $         .29    $         .25    $         .24
                                                       ====================================================

  See accompanying notes.
</TABLE>


<PAGE>



                                             ZEVEX International, Inc.

                                Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>



                                   Additional
                                  Common    Stock Amount    Paid-in      Retained     Treasury
                                  Shares                    Capital      Earnings       Stock        Total
                               -------------------------------------------------------------------------------
<S>                             <C>           <C>         <C>          <C>          <C>          <C>

Balances at December 31, 1994   1,138,109     $45,525     $  1,344,833 $1,193,714   $ (33,750)   $  2,550,322
   Restatement of par value
     from $.04 to $.001 in
     conjunction with
     reincorporation in
     Delaware                           -     (44,387)          44,387          -           -               -
   Contribution of treasury
     stock to employee stock
     ownership plan                     -           -                -          -      33,750          33,750
   Common stock dividend          227,607         228            8,876     (9,104)          -               -
   Net income                           -           -                -    316,800           -         316,800
                               -------------------------------------------------------------------------------
Balances at December 31, 1995   1,365,716       1,366        1,398,096  1,501,410           -       2,900,872
   Issuance of common stock
     for acquisition of land      130,000         130          454,870          -           -         455,000
   Net income                           -           -                -    345,577           -         345,577
                               -------------------------------------------------------------------------------
Balances at December 31, 1996   1,495,716       1,496        1,852,966  1,846,987           -       3,701,449
   Issuance of common stock
     for cash                   1,700,000       1,700       14,592,681          -           -      14,594,381
   Exercise of stock options
     for cash                      44,610          45           70,580          -           -          70,625
   Exercise of warrants for        24,000          24          179,976          -           -         180,000
     cash
   Issuance of warrants to
     purchase 100,000 shares
     of common stock for cash           -           -            1,000          -           -           1,000
   Net income                           -           -                -    718,242           -         718,242
                               ===============================================================================
Balances at December 31, 1997   3,264,326     $ 3,265      $16,697,203 $2,565,229    $      -     $19,265,697
                               ===============================================================================



See accompanying notes.
</TABLE>



<PAGE>


                            ZEVEX International, Inc.

                      Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>

                                                                     Year ended December 31,
                                                          -----------------------------------------------
                                                               1997            1996           1995


                                                          -----------------------------------------------
 <S>                                                        <C>            <C>             <C>
 Cash flows from operating activities
 Net income                                                 $   718,242    $   345,577     $   316,800
 Adjustments to reconcile net income to net cash provided
   by (used in) operating activities:
      Depreciation and amortization expense                     284,174        232,625         153,523
      Provision (benefit) for deferred income taxes             (35,762)        79,212               -
      Contribution of treasury stock to ESOP                          -              -          33,750
      Unrealized gain on marketable securities                        -       (203,109)              -
      Changes in operating assets and liabilities:
        Increase in restricted cash for sinking fund
          payment on industrial development bond                (76,164)             -               -
        (Increase) in accounts receivable                      (665,934)      (219,727)       (357,915)
        Increase in inventories                              (2,196,294)      (552,337)       (100,895)
        (Increase) decrease in deposits and prepaid             (20,499)       (43,973)        133,540
          expenses
        (Increase) decrease in other assets                       2,734          5,193          (4,467)
        Increase (decrease) in accounts payable                 301,556        147,461            (660)
        Increase in accrued liabilities                          75,606         92,672          14,721
        Increase (decrease) in income taxes payable             285,403        (58,735)         58,735
        Purchase of marketable securities                   (10,200,000)             -               -
                                                          -----------------------------------------------
 Net cash flows provided by (used in) operating activities  (11,526,938)      (175,141)        247,132

 Cash flows from investing activities
 Purchase of property and equipment                          (3,004,926)      (619,188)       (241,131)
 Addition of patents and trademarks                             (78,663)       (51,057)              -
                                                          -----------------------------------------------
 Net cash flows used in investing activities                 (3,083,589)      (670,245)       (241,131)

 Cash flows from financing activities
 Proceeds from issuance of common stock                      14,594,381              -               -
 Proceeds from exercise of warrants                             180,000              -               -
 Proceeds from exercise of stock options                         70,625              -               -
 Proceeds from sale of 100,000 warrants                           1,000              -               -
 Proceeds from bank line of credit                              639,892         60,108               -
 Repayments of bank line of credit                             (700,000)             -               -
 Proceeds from industrial development bonds                           -      2,000,000               -
                                                          -----------------------------------------------
 Net cash flows provided by financing activities             14,785,898      2,060,108               -
                                                          -----------------------------------------------
 Net increase in cash                                           175,371      1,214,722           6,001
 Cash and cash equivalents at beginning of year               2,085,055        870,333         864,332
                                                          -----------------------------------------------
 Cash and cash equivalents at end of year                   $ 2,260,426     $2,085,055     $   870,333
                                                          ===============================================



 See accompanying notes.
</TABLE>


<PAGE>




                   Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Description of Business

The Company was  incorporated  under the laws of the State of Nevada on December
30, 1987. The Company was originally incorporated as Downey Industries, Inc. and
changed its name to ZEVEX  International,  Inc. on August 15, 1988.  In November
1997  the  Company   reincorporated  into  Delaware.  The  Company  designs  and
manufactures  advanced  medical  devices,  including  surgical  systems,  device
components,  and sensors  for medical  technology  companies.  The Company  also
designs, manufactures, and markets its own medical devices using its proprietary
technologies.  The  Company's  design and  manufacturing  service  customers are
medical technology companies, which sell the Company's systems and devices under
private labels or incorporate the Company's devices into their products.

Principles of Consolidation

The   consolidated   financial   statements   include  the   accounts  of  ZEVEX
International,  Inc.  (Company) and its wholly-owned  subsidiary ZEVEX, Inc. All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
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  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

Cash and Cash Equivalents

The  Company  considers  all  certificates  of deposit  and highly  liquid  debt
instruments  purchased  with a  maturity  of  three  months  or  less to be cash
equivalents.

Concentration of Credit Risk

The Company's financial instruments consist primarily of cash, cash equivalents,
marketable  securities and trade accounts receivable.  Cash and cash equivalents
are held in federally insured  financial  institutions or invested in high-grade
short-term commercial paper issued by major United States corporations.




1. Summary of Significant Accounting Policies (continued)

Marketable  securities  consist  principally of high-grade  municipal bonds. The
Company  sells  its  products  primarily  to,  and has  trade  receivables  with
independent  durable medical  equipment  manufacturers and dealers in the United
States and abroad. During the period presented,  four of the Company's customers
accounted for more than 10% of net product sales. Less than 10% of product sales
are to foreign customers.

As a  general  policy,  collateral  is not  required  for  accounts  receivable;
however,  the  Company  periodically  monitors  the  need for an  allowance  for
doubtful  accounts based upon expected  collections  of accounts  receivable and
specific  identification  of uncollectible  accounts.  Additionally,  customers'
financial  condition and credit worthiness are regularly  evaluated.  Historical
losses have not been material.

Inventories

Inventories are stated at the lower of cost or market;  cost is determined using
the first-in, first-out method.

Marketable Securities

The  Company's   short-term   investments  are  comprised  of  debt  and  equity
securities,  all  classified as trading  securities,  which are carried at their
fair value based upon quoted market prices of those  investments at December 31,
1997 and 1996. Accordingly,  net unrealized holding gains for the periods ending
December 31, 1997 and 1996 of none and $203,109,  respectively,  are included in
net income.

Property and Equipment

Property  and  equipment  are  stated  at cost  less  accumulated  depreciation.
Depreciation  is provided  over  expected  useful lives of three to  twenty-five
years using the straight-line method.  Leasehold improvements are amortized on a
straight-line  basis  over  the  lesser  of the  remaining  lease  term or their
estimated useful lives.

Major replacements,  which extend the useful lives of equipment, are capitalized
and depreciated  over the remaining useful life.  Normal  maintenance and repair
items are charged to costs and expenses as incurred.

Impairment of Long-Lived Assets

In 1996,  the  Company  adopted  Statement  of  Financial  Accounting  Standards
("SFAS") No. 121  "Accounting  for the  Impairment  of  Long-Lived  Assets to be
Disposed  Of." The  standard  requires  the  Company  to review  long-lived  and
intangible assets for impairment whenever events or circumstances  indicate that
the carrying value of an asset may not be  recoverable.  Adoption did not have a
material  effect on the  results of  operations  or  financial  position  of the
Company.

Patents and Trademarks

The costs of  acquired  and  internally  developed  patents and  trademarks  are
amortized  over the lesser of fifteen years or the estimated  useful life of the
intangible asset on the straight-line  basis. The Company  periodically  reviews
the


<PAGE>


1. Summary of Significant Accounting Policies (continued)

recoverability  of patents and trademarks as well as other long-term assets and,
where impairment in value has occurred, such intangibles are written down to net
realizable value.

Income Taxes

The Company  provides  for income  taxes based on the  liability  method,  which
requires recognition of deferred tax assets and liabilities based on differences
between  financial  reporting and tax bases of assets and  liabilities  measured
using  enacted  tax rates and laws that are  expected  to be in effect  when the
differences are expected to reverse.

Stock Options

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee  stock options rather than adopting the  alternative
fair value  accounting  provided for under  Statement  of  Financial  Accounting
Standards (SFAS) No. 123, Accounting for Stock-based Compensation. Under APB 25,
because the exercise  price of the  Company's  stock  options  equals the market
price of the underlying  stock on the date of grant, no compensation  expense is
recognized.

Revenue Recognition

The  Company  records  revenue  from  the  sale of  manufactured  products  upon
shipment.  Revenue  from  contracts  to perform  engineering  design and product
development  services are generally  recognized  as milestones  are achieved and
costs are expensed as incurred.

Advertising Costs

Advertising  costs are  expensed  during  the year in which  they are  incurred.
Advertising  expenses were $82,530,  $113,566 and $39,237,  respectively for the
years ended December 31, 1997, 1996 and 1995.

Net Income Per Common Share

Basic net income per common share is  calculated  by dividing net income for the
period  by  the   weighted-average   number  of  the  Company's   common  shares
outstanding.

Diluted net income per common share includes the dilutive  effect of options and
warrants  in  the  weighted-average   number  of  the  Company's  common  shares
outstanding as calculated using the treasury stock method.



<PAGE>




Net Income Per Common Share (continued)

Net income as presented on the statement of operations  represents the numerator
used in calculating basic and diluted net income per common share. The following
table sets forth the  computation  of the shares used in  determining  basic and
diluted net income per common share:
<TABLE>
<CAPTION>

(in thousands)                                                     1997            1996            1995
                                                                ------------    -----------     -----------

<S>                                                                <C>             <C>             <C>
Denominator for basic net income per common share -
   weighted average shares                                         2,098           1,389           1,306
Dilutive securities: warrants and stock options                      345              23              28
                                                                ============    ===========     ===========
Denominator for diluted net income per common share -
   adjusted weighted average shares                                2,443           1,412           1,334
                                                                ============    ===========     ===========
</TABLE>

Options and warrants to purchase 312,000 shares of common stock were outstanding
at  December  31,  1997,  but were not  included in the  computation  of diluted
earnings per share because they were anti-dilutive.

All shares  held in the  Company's  Employee  Stock  Ownership  Plan  (ESOP) are
considered   outstanding   for  both  basic  and  diluted   earnings  per  share
calculations.  All share and per share data is  restated  to reflect a 20% stock
dividend declared by the Board of Directors in March 1995.

Impact of Recently Issued Accounting Pronouncements

During  1997,  the  Financial  Accounting  Standards  Board issued SFAS No. 129,
"Disclosure of Information  about Capital  Structure," SFAS No. 130,  "Reporting
Comprehensive  Income,"  and SFAS No.  131,  "Disclosure  About  Segments  of an
Enterprise and Related  Information."  These Standards will become effective for
the  Company's  1998 fiscal  year.  SFAS No. 129  requires  disclosure  about an
entity's capital structure and contains no change in disclosure requirements for
entities that were subject to the previously existing requirements. SFAS No. 130
establishes  standards for reporting and display of comprehensive income and its
components in a full set of general-purpose  financial statements.  SFAS No. 131
changes current practice under SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise", by establishing a new framework on which to base segment
reporting  (referred to as the "management"  approach) and also requires interim
reporting of segment  information.  Management is currently assessing the impact
of implementation of these Standards on the consolidated financial statements of
the Company and does not believe  that the  implementation  will have a material
impact on the Company's financial statements.



<PAGE>




1. Summary of Significant Accounting Policies (continued)

Supplemental Cash Flow Information

 Supplemental disclosures of cash flow information were as follows:
<TABLE>
<CAPTION>

                                                               1997            1996           1995
                                                          -----------------------------------------------
 <S>                                                        <C>             <C>            <C>
 Cash paid during the year for:
    Interest                                                $    77,641     $    6,530     $       438
    Income taxes                                                 71,206        170,839          19,200

 Schedule of non cash financing activities
    Issuance of common stock dividend, 227,607 shares       $         -     $        -     $     9,104
    Issuance of common stock for acquisition of land,
    130,000 shares                                                    -        455,000               -
</TABLE>

2. Inventories

Inventories consist of the following at December 31, 1997 and 1996
<TABLE>
<CAPTION>
                                   1997                 1996
                           -----------------------------------------

<S>                           <C>                   <C>
Materials                     $    2,306,818        $     936,938
Work in Progress                   1,044,331              292,423
Finished goods, including
  completed subassemblies            189,442              114,936
                           =========================================
                              $    3,540,591           $1,344,297
                           =========================================

</TABLE>


<PAGE>




3. Property and Equipment

At December 31, 1997 and 1996, property and equipment consists of the following:
<TABLE>
<CAPTION>
                                           1997              1996
                                     ----------------- -----------------

<S>                                   <C>                <C>
Machinery and equipment               $      497,540     $   433,171
Furniture and fixtures                       592,889         365,797
Vehicles                                       4,500           4,500
Tooling costs                                495,986         406,219
Leasehold improvements                             -          54,464
Building                                   2,717,962         129,023
Land                                         505,000         505,000
                                     ----------------- -----------------
                                           4,813,877       1,898,174

Less accumulated depreciation and            880,073         691,140
amortization
                                     ----------------- -----------------
                                      $    3,933,804   $   1,207,034
                                     ================= =================
</TABLE>

Depreciation  expense  for the years  ended  December  31,  1997,  1996 and 1995
amounted to $278,156, $230,925 and $153,523, respectively.

4. Accrued Liabilities

Accrued liabilities consist of the following:
<TABLE>
<CAPTION>

                                           1997              1996
                                     ----------------- -----------------

<S>                                         <C>             <C>
Accrued payroll and related taxes
   and benefits                             $212,495        $182,427
Professional fees                             20,000               -
Warranty reserve                              25,000               -
Accrued interest                               6,989           6,451
                                     ================= =================
                                            $264,484        $188,878
                                     ================= =================
</TABLE>

5. Income Taxes

The provision for income taxes is made,  at Federal and State  statutory  rates,
based on earnings reported in the financial  statements for the amount of income
taxes payable currently.

Deferred  taxes are  classified  as current  or  non-current,  depending  on the
classification  of the assets and  liabilities  to which they  relate.  Deferred
taxes  arising from  temporary  differences  that are not related to an asset or
liability are classified as current or  non-current  depending on the periods in
which the temporary differences are expected to reverse.


Significant components of the Company's net deferred income taxes as of December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>

                                                           1997              1996
                                                      ---------------- -----------------
<S>                                                   <C>            <C>
Deferred tax assets:
   Non-deductible accruals and expenses ..........     $  82,930     $
                                                                      ---------

   Deferred tax liabilities:
      Accelerated depreciation ...................       (49,932)        (3,452)
      Unrealized gains on trading securities .....       (75,760)       (75,760)
                                                       ---------      ---------
Total deferred tax liabilities ...................      (118,692)       (79,212)
                                                       ---------      ---------
                                                       $ (35,762)     $ (79,212)
                                                       =========      =========
</TABLE>


The provision for income taxes consists of the following:
<TABLE>
<CAPTION>

                                                               1997             1996              1995
                                                         ----------------- ---------------- ----------------
<S>                                                          <C>                <C>              <C>
Current taxes:
Federal                                                      $(333,620)         $(137,196)       $(153,228)
State                                                          (56,792)           (17,936)        (22,440)
R&D credit                                                      69,565             28,175          48,613

Deferred taxes:
Federal                                                        (31,176)           (69,057)              -
State                                                           (4,586)           (10,155)              -
                                                         ----------------- ---------------- ----------------

Provision for income taxes                                   $(356,609)         $(206,169)      $(127,055)
                                                         ================= ================ ================

The actual tax expense differs from the 34% Federal statutory rate as follows:

                                                               1997             1996             1995
                                                         ----------------- ---------------- ----------------

Expected tax (expense) at federal rate                       $(365,449)        $(187,594)       $(153,461)
State income tax expense, net of federal benefit
                                                               (35,470)          (18,208)         (16,064)
Research and development credit                                 69,565            28,175           48,613
Non-deductible expenses                                         (1,401)           (6,164)          (5,366)
Other                                                          (23,854)          (22,378)            (777)
                                                         ----------------- ---------------- ----------------
Total provision for income taxes                             $(356,609)        $(206,169)       $(127,055)
                                                         ================= ================ ================
</TABLE>

6.  Bank Line of Credit
On December 31, 1997, the Company renewed its line of credit  arrangement with a
financial institution for $5 million. The line matures on May 31, 1998. The line
of credit is  collateralized  by accounts  receivable  and  inventory  and bears
interest at the prime rate (8.5%) at December 31, 1997 and prime plus 1% (9.25%)
at December 31, 1996.  The  Company's  balance on its line of credit was zero at
December  31, 1997 and $60,108 at December  31,  1996.  Under the line of credit
agreement,  the Company is restricted from declaring cash dividends. The renewal
of the Company's  line of credit  resulted in the addition of certain  financial
covenants.  As of December 31, 1997,  the Company was in  compliance  with these
financial covenants.

7. Industrial Development Bond

On October 30,  1996,  the Company  completed a  transaction  defined as "Murray
City, Utah,  Adjustable Rate Industrial  Development  Revenue Bonds, Series 1996
(ZEVEX, Inc. Project)" in the amount of $2,000,000.  The bonds are secured by an
irrevocable Letter of Credit issued by a bank, which is subject to expiration no
later than April 15, 2002.  The bonds bear interest at an adjustable  rate based
on the weekly  tax-exempt  floater rate as determined by the remarketing  agent.
The bonds mature on October 1, 2016. Principal reductions occur in the amount of
$100,000  per year at a rate of $8,333 per month  starting  April 1,  1997.  The
outstanding balance was $2,000,000 at December 31, 1997.

8. Employee Benefit Plans

401(k) Profit Sharing Plan

During 1991,  the Company  established a qualified  401(k)  profit  sharing plan
covering substantially all employees.  Eligible employees may defer a portion of
their salary. At the discretion of the Board of Directors,  the Company may make
a  contribution  of an  additional  amount  of up to  four  percent  (4%) of the
eligible employees' salary and a discretionary amount to be determined each year
by the  Board of  Directors.  Employees  are fully  vested  after  seven  years.
Contributions  to the plan for the year ended  December 31, 1997,  1996 and 1995
were  $60,274,  $86,035 and  $77,037,  respectively.  The  Company has  recorded
payables  to the plan of $25,410  and  $38,000 at  December  31,  1997 and 1996,
respectively, which are included in accrued liabilities.

Employees' Stock Ownership Plan

Effective October 14, 1993, the Company adopted an Employee Stock Ownership Plan
that covers all  employees who are over the age of 21, have been employed for at
least 90 days and who provide at least 1,000 hours of service.

Full vesting  will occur after seven years of service or upon normal  retirement
at 65 years of age. Contributions to the plan are at the discretion of the Board
of Directors with no minimum annual funding  requirements.  Contributions to the
plan will be primarily made with common stock of the Company.

The Company had previously  made a  contribution  to the plan for the year ended
December 31, 1995 of 9,500 shares with a cost of $33,750.  No  contribution  was
made for the years ended December 31, 1997 and 1996.



<PAGE>




9. Stockholders' Equity

Stock Dividend

On March 8, 1995, the Company  declared a 20% stock dividend payable on April 3,
1995 to all stockholders of record on March 23, 1995.

Change in Authorized Shares and Par Value

In connection with the 1997 reincorporation  into Delaware,  the Company adopted
an Amended and Restated  Certificate of  Incorporation,  which provides that the
Company is authorized  to issue  2,000,000  shares of $.001 par value  preferred
stock and 10,000,000 shares of $.001 par value common stock.

Issuance of Common Stock

On November 29, 1996, the Company paid cash of $50,000 and issued 130,000 shares
of the  Company's  common stock for the purchase of 3.7 acres of land in Murray,
Utah for the purpose of constructing a manufacturing facility.

On February 12, 1997,  the Company  completed a private  placement  offering for
$1,250,000 of its securities, which consist of 500,000 units at a price of $2.50
per unit.  Each unit  consists  of one  share of common  stock and a warrant  to
purchase  one share of common  stock at a price of $3.50 per  share.  The issued
shares and shares  underlying the warrants are entitled to  registration  rights
for a period of five years from completion of the offering.

In November 1997 the Company  completed a secondary public offering of 1,200,000
shares  of  its  common  stock.  Total  net  proceeds  from  the  offering  were
$13,344,381.

Repurchase of Common Stock Units

The Company previously repurchased 13,440 shares of outstanding common stock for
$50,400.  The  Company  subsequently   contributed  all  13,440  shares  to  the
Employees' Stock Ownership Plan.

Warrants

The Company issued a warrant to purchase  24,000 shares of common stock at $7.50
per share pursuant to a public  offering of the Company's  common stock in 1993.
The warrant expires May 7, 1998. The shares underlying this warrant are entitled
to registration rights. On September 30, 1997, the warrant was exercised and the
warrant holders waived their registration rights.

In February  1997,  the Company  issued  500,000  warrants in connection  with a
$1,250,000 private placement offering, as discussed above.

In connection  with the secondary  public offering in November 1997, the Company
issued the  underwriters  warrants to purchase 100,000 shares of common stock at
$15 per share. The underwriters paid a price of $.01 per warrant. These warrants
expire 5 years from the date of the  offering.  The  underwriters'  warrants are
restricted  from  exercise, sale,  transfer,  assignment or hypothecation for a
period  of one year  commencing  from the  offering  date.  These  warrants  are
entitled to certain registration rights.

Common Stock Reserved for Future Issuance

At December 31, 1997, the Company had reserved  1,155,390 shares of common stock
for future issuance,  including 600,000 shares reserved for exercise of warrants
and 555,390 shares reserved under the Company's stock option plan.

Stock Option Plan

In September 1997, the Board of Directors  consolidated its previous three stock
option  plans into one plan and  established  the Amended 1993 Stock Option Plan
(the "Stock Option  Plan").  There are currently  600,000 shares of common stock
authorized for issuance  under the Stock Option Plan,  subject to adjustment for
such matters as stock splits and stock dividends.

The Stock Option Plan provides for the grant of incentive  stock options,  stock
appreciation  rights  and  stock  awards  to  eligible  participants  and may be
administered by the Board of Directors or by the Compensation Committee.

On September 30, 1997,  the Company  granted a total of 210,000  options with an
exercise price of $16.44 to three  officers/directors.  The options vest ratably
over a four-year period from the grant date.

All options granted under the Stock Option Plan expire after five to seven years
from the grant  date and  become  exercisable  no later than four years from the
grant date.

A summary of stock option activity,  and related information for the years ended
December 31, 1995, 1996 and 1997 follows:
<TABLE>
<CAPTION>

                                       Shares            Outstanding Stock Options           Weighted-
                                                    ------------------------------------
                                      Available         Number of           Price             Average
                                      for Grant          shares           Per Share       Exercise Price
                                  ------------------------------------ ----------------- ------------------

<S>                                     <C>               <C>             <C>                 <C>
Balance at December 31, 1994            219,300           80,700          $.79-5.00           $  2.73
   Options canceled                       3,540           (3,540)         $2.50-5.00          $  3.35
                                  ------------------------------------ ----------------- ------------------

Balance at December 31, 1995            222,840           77,160          $.79-5.00           $  2.70
   Additional authorization             100,000                -              -                     -
   Options granted                      (12,000)          12,000            $4.50             $  4.50
   Options canceled                       3,060           (3,060)         $2.50-5.00          $  3.24
                                  ------------------------------------ ----------------- ------------------

Balance at December 31, 1996            313,900           86,100          $.79-5.00           $  2.93
   Additional authorization             200,000                -              -                     -
   Options granted                     (275,050)         275,050         $3.50-17.50           $13.51
   Options exercised                          -          (44,610)         $.79-$5.00          $  1.58
   Options canceled                       2,850           (2,850)        $3.50-$5.00          $  3.97
                                  ------------------------------------ ----------------- ------------------

Balance at December 31, 1997            241,700          313,690         $2.50-17.50           $12.39
                                  ==================================== ================= ==================

</TABLE>


<PAGE>




The weighted  average fair value of options  granted in the years ended December
31, 1997 and 1996 were $9.98 and $1.33, respectively.

Pro forma information regarding net income and earnings per share is required by
SFAS 123,  and has been  determined  as if the  Company  had  accounted  for its
employee  stock  options  under the fair value  method.  The fair value of these
options was estimated at the date of grant using a Black-Scholes  option pricing
model  with the  following  weighted  average  assumptions  for  1997 and  1996,
respectively:  risk-free  interest rate of 5.9% and 6.1%,  dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
 .90 and .40; and a weighted-average expected life of the option of 4 years and 3
years.

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

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized over the options'  vesting  period.  Because the effect of SFAS No.
123 is  prospective,  the  initial  impact on pro forma  net  income  may not be
representative  of  compensation  expense  in future  years.  The  effect on the
Company's  pro forma  results for each of the fiscal years 1996 and 1995 was not
material (less than $.01 per share).

For the year ended  December  31,  1997,  pro forma net income and pro forma net
income per common share were approximately $554,000 and $.23, respectively.

Additionally,  SFAS No. 123 requires that companies with wide ranges between the
high and low exercise prices of its stock options  segregate the exercise prices
into  ranges  that are  meaningful  for  assessing  the  timing  and  number  of
additional  shares  that may be issued  and the cash that may be  received  as a
result of the option  exercises.  Below are the  segregated  ranges of  exercise
prices as of December 31, 1997:
<TABLE>
<CAPTION>

                         Options Outstanding                                   Options Exercisable
----------------------------------------------------------------------    -------------------------------
                                       Weighted
                                        Average          Weighted                            Weighted
    Range of                           Remaining         Average                             Average
    Exercise           Number         Contractual        Exercise             Number         Exercise
     Prices         Outstanding          Life             Price            Exercisable        Price
----------------- ----------------- ---------------- -----------------    --------------- ---------------

  <S>                  <C>            <C>                  <C>                <C>               <C>
   $2.50-3.50           44,940        3.48 years           $ 3.24             44,940            $ 3.24
   $3.85-5.00           56,750        2.20 years           $ 4.46             56,750            $ 4.46
  $16.44-17.50         212,000        4.74 years           $16.45             2,000             $17.50
----------------- ----------------- ---------------- -----------------    --------------- ---------------
                                                     -----------------

  $2.50-$17.50         313,690        4.10 years           $12.39            103,690            $ 4.18
================= ================= ================ =================    =============== ===============

</TABLE>


<PAGE>




10. Lease Commitments

In  1996  the  Company  and  its  subsidiary   occupied  an  administrative  and
manufacturing facility under the terms of an operating lease agreement.  In June
1997 the Company  moved into a new  facility  owned by and  constructed  for the
Company.

Lease  expense of $55,695,  $109,505 and $74,551 has been charged to  operations
for the years ended December 31, 1997,  1996 and 1995,  respectively.  The lease
expired in April 1997.

11. Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

     Cash and cash  equivalents:  The  carrying  amount  reported in the balance
     sheet for cash and cash equivalents approximates its fair value.

     Marketable  securities:  The Company determines fair values based on quoted
market prices.

     Industrial  development  bond:  The fair values of the Company's  long-term
     debt are  estimated  using  discounted  cash  flow  analyses,  based on the
     Company's  current  incremental   borrowing  rates  for  similar  types  of
     borrowing  arrangements.  Due  to the  recent  issuance  of the  Industrial
     Development  Revenue  Bond,  the  estimated  fair  value  approximates  the
     carrying amount.

The carrying amounts and fair values of the Company's financial  instruments are
as follows:
<TABLE>

                                              1997                                1996
                                ---------------------------------- -----------------------------------
                                Carrying Amount        Fair        Carrying Amount         Fair
                                                       Value                              Value
                                ----------------- ---------------- ----------------- -----------------

<S>                             <C>                 <C>                <C>               <C>
Cash and cash equivalents       $    2,260,426      $   2,260,426      $2,085,055        $2,085,055
Marketable securities               10,200,000         10,403,109               -           203,109
Industrial development bond          2,000,000          2,000,000       2,000,000         2,000,000

</TABLE>


<PAGE>




12. Major Customers

Sales to major  customers for the years ended December 31, 1997,  1996 and 1995,
are summarized as follows (percent of product sales):
<TABLE>

                                              Year ended December 31,
                                ----------------------------------------------------
                                      1997             1996              1995
                                ----------------- ---------------- -----------------

<S>                                      <C>               <C>              <C>
Customer A                               18%               33%              32%
Customer B                               17%                *%               *%
Customer C                               15%               23%              24%
Customer D                               15%               10%               *%
                                ----------------- ---------------- -----------------

                                         65%               66%              56%
                                ================= ================ =================
-----------------
* Less than 10% of sales.
</TABLE>

13. Related Party Transactions

On April 15 1997, the Company  entered into a consulting  agreement with another
company owned by certain  stockholders to provide  services related to strategic
planning, public relations,  financing and potential acquisition of new products
or companies. Under the consulting agreement, the Company paid an initial fee of
$50,000 and must pay $10,000 per month for two years. In addition, these certain
stockholders  have the right to appoint one director to the  Company's  Board of
Directors

In connection  with the secondary  public  offering  completed in November 1997,
certain  stockholders waived their registration  rights on 350,000 warrants.  In
exchange,  the  Company  and the  stockholders  executed a  registration  rights
agreement,  entitling the stockholders to certain demand registration rights for
a period of two years from the agreement's effective date.



<PAGE>






                          Independent Auditors' Report


To the Board of Directors and Stockholders
of ZEVEX International, Inc.


We  have  audited  the  accompanying   consolidated   balance  sheets  of  ZEVEX
International,  Inc. and  Subsidiary  as of December 31, 1995 and 1994,  and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for the year then ended. These consolidated  financial  statements are the
responsibility of our company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of ZEVEX
International,  Inc. and  Subsidiary  as of December 31, 1995 and 1994,  and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.


                              /s/ Nielsen, Grimmett & Company

Salt Lake City, Utah
February 12, 1996


<PAGE>







                          Independent Auditors' Report



To the Board of Directors and Stockholders of
ZEVEX International, Inc.


We  have  audited  the   accompanying   consolidated   balance  sheet  of  ZEVEX
International,  Inc. and  Subsidiary  as of December  31, 1996,  and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

The  consolidated   financial  statements  of  ZEVEX  International,   Inc.  and
Subsidiary as of December 31 1995 and 1994 were audited by other  auditors whose
report  dated  February  12, 1996,  expressed  an  unqualified  opinion on those
statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance  about  whether  the  consolidated  financial  statements  are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable  basis
for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of ZEVEX
International,  Inc. and  Subsidiary as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.


                                               /s/ Daines and Rasmussen, P.C.

Salt Lake City, Utah
February 13, 1997

<PAGE>







                          Independent Auditors' Report

Board of Directors and Stockholders
ZEVEX International, Inc.

We  have  audited  the   accompanying   consolidated   balance  sheet  of  ZEVEX
International,  Inc.  and  Subsidiary  as of  December  31, 1997 and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance  about  whether  the  consolidated  financial  statements  are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable  basis
for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of ZEVEX
International,  Inc. and  Subsidiary as of December 31, 1997, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

                                                           |s| Ernst & Young LLP

Salt Lake City, Utah
March 10, 1998


<PAGE>



                              CORPORATE INFORMATION



<PAGE>



Board of Directors

Dean G.  Constantine
President and CEO
ZEVEX, Inc.

David J.  McNally
Vice President and Marketing Director
ZEVEX, Inc.

Phillip L. McStotts, CPA Secretary/Treasurer and CFO ZEVEX, Inc.

Darla R.  Gill
President
Momentum Medical Corp.

Bradly A.  Oldroyd
President
Pinnacle Management Group

Officers

Dean G.  Constantine
President and CEO

David J.  McNally
Vice President and Marketing Director

Phillip L.  McStotts, CPA
Secretary/Treasurer and CFO

Investor Information

CORPORATE HEADQUARTERS
4314 ZEVEX Park Lane
Salt Lake City, Utah 84123
Telephone: (801) 264-1001
FAX: (801) 264-1051

TRANSFER AGENTS
Colonial Stock Transfer
455 East 400 South,
Suite 100
Salt Lake City, Utah 84111

Chase Mellon
Shareholder Service
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660

INDEPENDENT AUDITORS
Ernst & Young, LLP
Suite 800
60 East South Temple
Salt Lake City, Utah 84111
(801) 350-3300

CORPORATE COUNSEL
Jones, Waldo, Holbrook & McDonough
1500 Wells Fargo Plaza
Salt Lake City, UT 84101
(801) 521-3200

<PAGE>



Annual Report on Form 10-K
A copy of the Company's Annual Report to the Securities and Exchange  Commission
on Form 10-K will be provided to any stockholder  free of charge,  upon request.
Inquiries should be addressed to Investor  Relations,  at the corporate  address
above.

      MARKET OF REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock has been trading on the American Stock Exchange since
May 19, 1997,  under the symbol ZVX. Prior to that time, the stock traded on the
OTC Bulletin  Boards under the symbols ZVXI and ZVXIU.  In November,  1997,  the
Company  commenced a secondary public offering of its Common Stock at $12.50 per
share. The Company  received $13 million in net proceeds from this offering.  As
of March 24,  1998,  there were 480  holders of record of the  Company's  common
stock.  Because many of the Company's shares of common stock are held by brokers
and other  institutions  on behalf of  stockholders,  the  Company  is unable to
estimate the total number of  stockholders  represented by these record holders.
The Company has never  declared or paid any cash  dividends on its common stock.
Since the  Company  intends  to retain  all future  earnings  to finance  future
growth,  it does not  anticipate  paying any cash  dividends in the  foreseeable
future.
<TABLE>

                                    -------------------------------------- -------------------------------------
                                                    1997                                   1996
                                           High                Low               High                Low
                                    ------------------- ------------------ ------------------ -------------------
<S>                                       <C>                 <C>                <C>                <C>
1st Quarter                               $8.00               $3.25              $4.25              $3.75
2nd Quarter                               $11.25              $7.13              $4.00              $2.75
3rd Quarter                               $20.75             $13.50              $3.25              $2.50
4th Quarter                               $16.25              $8.50              $3.31              $2.75

</TABLE>

Inside Back Cover:      [PHOTOGRAPH OF AIR BUBBLE DETECTORS]
Caption:                AIR BUBBLE DETECTION
"ZEVEX's non-invasive ultrasonic air bubble detectors are utilized worldwide
in a variety of medical applications, including: infusion pumps, dialysis
machines, cardiopulmonary bypass systems and blood analyzers.  for any
application where fluid moves through tubing, ZEVEX air bubble detectors
accurately and reliably detect the presence of air without the use of coupling
gels.  ZEVEX's electronic interface circuit was evaluated by the TUV Product
Service and awarded the Bauart Gepruft Stamp as a stand alone fail-safe device."

                      [PHOTOGRAPH OF LIQUID LEVEL SENSORS]
Caption:              LIQUID LEVEL MEASUREMENT
"Precise, non-invasive liquid leve measurment devices employ pulse-echo ultra-
sonic transmission technology.  ZEVEX's patented design enables the sensor to be
acoustically coupled to the outside of a rigid vessel wall without the use of
coupling gels.  Point level detectors, mounted on the side of the vessel, can
determine the presence of liquid or air at specific levels, while volumetric
systems determine liquid column height from the bottom of the container."

                 [PHOTOGRAPH OF PHACOEMULSIFICATION HANDPIECES]
Caption:         SURGICAL HANDPIECES
"ZEVEX surgical handpiece products utilize ultrasonic energy to fragment tissue
in a variety of medical applications such as cataract surgery and ultrasonically
assisted liposuction.  These precision surgical instruments are designed to
continue to operate reliably after repeated steam sterilization cycles."

            [PHOTOGRAPH OF PHOTON LASER PHACOEMULSIFICATION SYSTEM]
Caption:    SPECIALIZED MEDICAL SYSTEMS
"ZEVEX designs and manufactures customer medical systems for original equipment
manufacturers worldwide."

Back Cover:
   [PHOTOGRAPH OF PHILLIP L. MCSTOTTS, DEAN G. CONSTANTINE, DAVID J. MCNALLY]
Caption: EXECUTIVE MANAGEMENT TEAM

                          [PHOTOGRAPH OF ZEVEX LOBBY]
"Over the past decade, ZEVEX has established itself as one of the premier, high-
tech growth companies of the '90's.  ZEVEX has demonstrated a unique capability
of combining innovative engineering, production and quality control, managed
under stringent international standards.  The company has the capability to
design and produce electronic instruments recognized throughout the world for
precision, value and quality.

The ZEVEX executive management team is professionally trained and has worked
successfully together since founding the company in 1986.

ZEVEX is publicly traded on the American Stock Exchange under the symbol ZVX."

                         [PHOTOGRAPH OF ZEVEX BUILDING]
"ZEVEX International, 4314 ZEVEX PARK LANE/SALT LAKE CITY, UTAH 84123, USA
                      TELEPHONE 801-264-1001/FAX 801-264-1051
                      TOLL-FREE IN USA 1-800-970-2337"

LOGO: National Standards Association of Ireland