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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
(MARK ONE)
 
[X]
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
  ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
  OR
 
[_]
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
  EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM        TO       .
 
                        COMMISSION FILE NUMBER: 1-11885
 
                            ALLEGIANCE CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                              36-4095179
    (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
 
          1430 WAUKEGAN ROAD                            60085
         MCGAW PARK, ILLINOIS                        (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
 
Registrant's telephone number, including area code: (847) 689-8410
 
Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<CAPTION>
              TITLE OF EACH CLASS                  NAME OF EACH EXCHANGE ON WHICH REGISTERED
              -------------------                  -----------------------------------------
 <S>                                             <C>
         Common Stock, $1.00 par value                      New York Stock Exchange
                                                             Chicago Stock Exchange
 Series A Junior Participating Preferred Stock              New York Stock Exchange
 Purchase Rights (currently traded with Common               Chicago Stock Exchange
                     Stock)
</TABLE>
 
Securities registered pursuant to Section 12(g) of the Act: NONE
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
 
  The registrant estimates that the aggregate market value of the registrant's
Common Stock held by non-affiliates of the registrant (based on the per share
closing sale price of $34.875 on February 28, 1998, and for the purpose of
this computation only, the assumption that all registrant's directors and
executive officers are affiliates) was approximately $2.0 billion.
Determination of stock ownership by non-affiliates was made solely for the
purpose of responding to this requirement and registrant is not bound by this
determination for any other purpose.
 
  As of February 28, 1998, 57,440,974 shares of the registrant's Common Stock
were outstanding.
 
  The following documents are incorporated into this Form 10-K by reference:
 
    Annual Report to Stockholders for fiscal year ended December 31, 1997
  (Part II).
 
    Proxy Statement for Annual Meeting of Stockholders to be held on May 7,
  1998 (Part III).
 
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                                    PART I
 
ITEM 1. BUSINESS
 
  Allegiance Corporation ("Allegiance" or the "Company") was incorporated in
Delaware in June 1996. On September 30, 1996 (the "Distribution Date"), Baxter
International Inc. ("Baxter") and its subsidiaries transferred to Allegiance
and its subsidiaries their U.S. health-care distribution business, surgical
and respiratory therapy business and health-care cost-saving business, as well
as certain foreign operations (the "Allegiance Business") in connection with a
spin-off of the Allegiance Business by Baxter. The spin-off occurred on the
Distribution Date through a distribution of Allegiance common stock to Baxter
stockholders (the "Distribution"). Unless the context indicates otherwise, as
used in this report, the terms "Allegiance" and the "Company" mean the
Allegiance Business of Baxter for periods prior to the Distribution Date and
Allegiance Corporation and its consolidated subsidiaries for the periods
following the Distribution Date. All references to "Baxter" include Baxter
International Inc. and its consolidated subsidiaries as of the relevant date.
 
OVERVIEW
 
  Allegiance is America's largest provider of health-care products and cost-
saving services for hospitals and other health-care providers. These
integrated businesses recorded total sales of approximately $4.4 billion in
1997.
 
  The economics of health care are changing rapidly, particularly in the
United States, which is Allegiance's largest current market. In the past,
doctors and nurses were paid for their services with few cost constraints.
Today, large employers, insurance companies and HMOs are negotiating set fees
for patient care. For U.S. hospitals and health systems, Allegiance's main
customers, the pressure to reduce costs has never been greater. At the same
time, demand for health services continues to climb with the growth of aging
populations in the United States and throughout much of the industrialized
world. This environment offers opportunities for Allegiance, which has
invested in integrated product and service programs that help medical
professionals cope with health care's economic and demographic trends.
 
  The health-care distribution market in the United States has experienced
intense competition and a resultant erosion in margins in recent years in
response to the growth of managed care and increased consolidation among
health-care providers. Allegiance has responded and stabilized its margins by
integrating its market-leading distribution capabilities with a broad product
offering, including an increasing amount of self-manufactured products; high
levels of customer service; and innovative cost-saving services.
 
PRODUCT OFFERING
 
  Allegiance has differentiated itself by integrating its product offering
with its distribution and cost-saving services. Allegiance offers the
industry's broadest range of medical and laboratory products, representing
more than 2,800 suppliers in addition to its own line of surgical and
respiratory therapy products.
 
  Allegiance works with health professionals to reduce the variety and number
of products they buy under agreements that provide incentives for Allegiance
to help customers save money. In return, customers purchase a greater portion
of their supplies from Allegiance.
 
  Allegiance operates 22 domestic and international manufacturing plants,
producing products used in surgery and other medical procedures. All
Allegiance plants are required to be ISO 9000 certified.
 
  Allegiance has several major product lines, most of which hold leading sales
positions:
 
 Custom-Sterile(TM) Products and PBDS(TM) Pathways
 
  Allegiance's leading Custom-Sterile(TM) products and PBDS(TM) Pathways
service help health-care providers save time and money by assembling customer-
designated supplies into packages for specific procedures. Custom-Sterile(TM)
packs contain sterile, disposable supplies made by Allegiance and other
manufacturers. They are used to perform dozens of procedures, from open-heart
surgery and childbirth to treating minor wound closure. Customers can select
items for these packs from a database of approximately 30,000 products from
nearly 800 manufacturers. PBDS(TM) modules contain Custom-Sterile(TM) packs
along with non-sterile supplies.
 
                                       1
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 Convertors(R) Products
 
  The Convertors(R) product line is a leading brand of single-use surgical
drapes, gowns, and apparel. These products provide barrier protection for
patients, doctors, and clinical staff during surgery, childbirth, and other
procedures. Many of Allegiance's Convertors(R) products are included in Custom
Sterile(TM) packs. Convertors(R) also provides clean-room apparel and
equipment covers for industrial manufacturers.
 
 Gloves
 
  Allegiance is the world's largest manufacturer and marketer of medical
gloves. Allegiance produces surgical and exam gloves made from natural rubber
latex and synthetic materials such as neoprene and vinyl.
 
 Medi-Vac(R) Products
 
  Allegiance is the world's leading producer of fluid suction and collection
systems. The Medi-Vac(R) line consists of disposable suction canisters and
liners, suction tubing, and supporting hardware and accessories. These
products are used in the operating room to remove fluids and debris from the
body during surgery. Outside the operating room, the products are used when
fluid must be removed from a patient. The Medi-Vac(R) product line also
includes wound-drainage tubing and reservoirs used to remove fluid from closed
wounds to prevent infection and promote healing. Medi-Vac(R) autotransfusion
systems collect blood for reinfusion to the patient after filtration, allowing
patients to receive their own blood instead of transfusions from donors. In
1997, Allegiance acquired a line of surgical devices from Surgin Surgical
Instrumentation, Inc. The acquisition broadens Allegiance's line of Medi-
Vac(R) fluid suction and collection products for the growing area of
laparoscopic, or less-invasive, surgery.
 
 Respiratory Therapy Products
 
  Allegiance is a leading manufacturer and marketer of respiratory therapy
products, which are used primarily to deliver oxygen and medication to
patients with breathing disorders. This product line includes ventilator
circuits (tubing used to connect patients to ventilator machines), oxygen
masks, cannulae, and suction catheters used to clear the trachea. In 1997,
Allegiance acquired a line of respiratory-care devices and supplies from
Kendall Healthcare Products Company. This acquisition extends Allegiance's
leadership in respiratory care with new products that are used widely in
patients' homes, nursing homes and hospitals to treat asthma, pneumonia,
emphysema, bronchitis and other respiratory conditions.
 
 V. Mueller
 
  Allegiance's V. Mueller product portfolio comprises a broad range of
specialty surgical instruments, instrument reprocessing products, and
sterilization packaging, including the Genesis(TM) Container System. V.
Mueller is rapidly expanding its Capital Asset Service's programs that assist
customers in reducing their overall equipment costs. The V. Mueller business
was established in 1895 and is known worldwide for the quality of its products
and services. V. Mueller has two dedicated manufacturing facilities and an
extensive global finished-product sourcing network.
 
 Special Procedure Products
 
  Allegiance provides specialty biopsy needles for extracting samples of bone
marrow and soft tissue, and a variety of specialty procedure trays. These
include lumbar puncture trays, for measuring pressure and taking samples of
cerebrospinal fluid; thoracentesis trays, for withdrawing fluid from chest or
abdominal cavities, or from joints or cysts; amniocentesis trays, for
obtaining amniotic fluid to assess the condition of fetuses; and other
diagnostic trays and products used by obstetricians and gynecologists.
 
 Other Products
 
  Allegiance manufactures and markets a range of other leading products. It is
the world's largest producer of urinary drainage catheters, and it
manufactures endotracheal tubes for respiration, anesthesia, and other
therapies. The Company produces a broad line of hot and cold packs used to
provide localized temperature therapy for orthopedic injuries and for patients
recovering from childbirth and surgical procedures. Allegiance also
manufactures and markets a broad line of patient-preparation, hair-removal,
and skin-care products such as clippers and razors, as well as special soaps,
sponges and scrub brushes for surgeons and other operating room personnel.
 
                                       2
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DISTRIBUTION SERVICES
 
  Allegiance is a leading distributor of medical, surgical, and laboratory
products in the United States. Allegiance can supply any of more than 300,000
different products to its customers. Most items are available for shipment the
same day the customer requests them. Allegiance has 49 U.S. distribution
centers that deliver products throughout the United States. Allegiance has
made substantial investments in information systems to enhance its operations
and improve customer service. In addition to its own surgical and respiratory
therapy products, Allegiance distributes an array of products from more than
2,800 manufacturers to a wide variety of health-care settings. Products range
from full lines of laboratory equipment and operating room supplies to
children's gift packs with coloring books and crayons.
 
  In late 1997, one of Allegiance's international subsidiaries combined
distribution operations with MDS Inc. of Toronto to create a new company,
Source Medical Corporation, which is now Canada's largest supplier of medical
products. Through Source Medical Corporation, Allegiance owns or leases 14
distribution centers throughout Canada. Also in 1997, Allegiance, through an
international subsidiary, purchased the production and distribution companies
of SOHO Holding B.V., a leading supplier of medical and surgical products in
the Netherlands.
 
  Allegiance divides its distributed products into two categories: medical-
surgical products ("med-surg") and laboratory products. Allegiance is the
industry leader in both product categories. Allegiance's med-surg portfolio
comprises a broad array of products, including sutures, endoscopy instruments,
needles and syringes, wound-care products, electrodes, face masks, bed pans,
wash basins, blood-pressure cuffs, stethoscopes, waste-disposal bags, and many
others. Increasingly, these products are delivered just-in-time in ready-to-
use quantities. In some cases, Allegiance delivers the products directly to
patient floors. Allegiance distributes products to hospitals, surgery centers,
physician clinics, other distributors, long-term and sub-acute care
facilities, home-care companies, and other health-care providers. Laboratory
products -- used primarily to perform diagnostic tests -- are sold principally
to hospitals, independent laboratories and other health-care providers. These
products include test tubes, pipettes, slides, and equipment such as
microscopes, automated diagnostic centrifuges and scales.
 
 The ValueLink(R) Service
 
  Allegiance's ValueLink(R) "stockless" inventory service provides just-in-
time deliveries of products in small, ready-to-use quantities to hospitals and
health-care networks, primarily in metropolitan areas. Allegiance was the
first to bring just-in-time distribution to the health-care industry and it
remains the leader.
 
  The ValueLink(R) service helps hospitals reduce inventory levels and
operating expenses. Orders from hospitals are transmitted electronically and
products are delivered several times a day, sometimes directly to patient
floors. In some ValueLink(R) accounts, Allegiance personnel work at the
hospital 24 hours a day, stocking shelves as needed.
 
  Through the ValueLink(R) service, Allegiance also provides its Custom-
Sterile(TM) Products and its PBDS(TM) Pathways Service, which delivers labor-
saving, made-to-order packages containing virtually every sterile and non-
sterile product needed to perform dozens of medical procedures, from open-
heart bypass surgery to a hernia repair.
 
 Strategic Supplier Relationships
 
  Since 1995, Allegiance has been consolidating its distribution service
around a carefully selected group of preferred suppliers in order to reduce
the number of suppliers that furnish identical items. This "Best Value
Products" strategy is strengthening Allegiance's relationships with suppliers,
resulting in savings to Allegiance and better service for its customers.
Allegiance also is continuing to streamline its distribution network to reduce
costs, improve service, and strengthen its growing number of cost-saving
relationships with health-care providers.
 
 
                                       3
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 Supply-Chain Management
 
  Supply-chain management requires precise knowledge and planning of customer
demand. Given Allegiance's size and scope, advanced information systems, and
balance of self-manufactured and externally supplied products, Allegiance is
well-positioned to maximize service to customers and minimize inventory levels
and variability. To accelerate this process, Allegiance is making major
investments in information technology that uses EDI, or electronic data
interchange, to exchange purchasing and inventory data with its suppliers and
customers. Management believes this integrated distribution and product
offering strengthens Allegiance's financial and competitive position. In 1995,
Allegiance opened a National Drop Ship Center in McGaw Park, Illinois, from
which it distributes less frequently ordered items. By consolidating such
products in one facility, the amount of regional inventory variability has
decreased and Allegiance has achieved lower system-wide inventory levels.
 
 Serving Health Care Outside Hospitals
 
  Health care increasingly is being delivered outside hospitals as health-care
providers integrate into regional networks and managed care pushes patients
into lower-cost settings for treatment. Many procedures previously performed
in hospital operating rooms are now performed in surgery centers, and some
procedures that had been performed in surgery centers are now taking place in
physician clinics. To reach these and other non-hospital customers, Allegiance
has developed the capability to deliver smaller orders more frequently.
Allegiance also enters into relationships with dealers that specialize in
serving these markets. For some small or geographically remote customers,
Allegiance provides service through its Network Sales organization. This sales
and customer-service unit conducts business via the telephone, distributing in
some cases by commercial carrier. In 1997, Allegiance formed the Care
Continuum business, an organization focused on growing the Company's direct
sales outside the hospital.
 
COST-SAVING SERVICES
 
  Reducing costs while improving quality of care is the most significant
challenge facing health-care providers today. Through its cost-savings
programs, Allegiance aligns its goals with those of its customers. Under many
of these agreements, which Allegiance introduced to the health-care industry
in late 1994, Allegiance and its customers agree to share the savings if
supply and related costs fall below an agreed upon target, or share the
overage if these costs exceed the target. In mid 1997, Allegiance also began
offering cost-saving consulting on a fee-for-service basis. As of December 31,
1997, Allegiance had 46 cost-savings agreements with hospitals or hospital
systems. Alternatively, these agreements covered 126 250-bed equivalent
facilities in 1997. In these accounts, Allegiance assigns a clinical project
manager to work with a hospital's clinical staff to identify supply usage
patterns, reduce variation by standardizing procedures and products, and
eliminate unnecessary supplies. Product standardization involves the selection
and use of one preferred brand from many options. Savings are realized from
selecting among Allegiance's Best Value Products, cost efficiencies from
increased volume for the selected brand and dealing with fewer vendors.
Procedure standardization involves helping clinical staff reach consensus on
what supplies should be used in a given procedure, then packaging and
distributing the products. A typical assignment for a clinical project manager
lasts 24 months. Hospitals ultimately buy fewer supplies, but a greater total
portion of their supplies come from Allegiance. Sales of Allegiance's surgical
products, for example, have grown in these accounts, while the hospitals'
total supply costs have decreased. To the extent that savings do not
materialize from these efforts, Allegiance is obligated to reimburse the
customer for a portion of the shortfall.
 
  Much of the savings generated in these cost-savings accounts come from the
implementation of PBDS(TM) Pathways modules, which contain Allegiance's self-
manufactured products, Best Value Products from preferred suppliers, and other
third-party distributed products. These modules reduce hospital labor,
purchasing, and other product and product-management costs. Rather than
ordering products separately for a procedure, customers can order a single
catalog number. Rather than nurses having to locate and assemble individual
products for a procedure, the products arrive in one package. Additional
savings are achieved when PBDS(TM) Pathways modules are delivered just-in-
time, direct to the point of use through Allegiance's ValueLink(R) service.
 
                                       4
<PAGE>
 
  In addition, Allegiance offers customers a range of professional consulting
services. The Company's proprietary database of best demonstrated practices
helps hospitals improve their clinical operations, reduce lengths of stay and
improve clinical outcomes. Consistent with its strategic direction of
providing cost-saving services, Allegiance acquired West Hudson & Co. Inc., a
privately-owned health-care consulting firm in January 1997. Each of
Allegiance's manufacturing units also offers programs to help customers
control costs. There are programs to help health-care providers standardize
and select the most cost-effective drapes, gowns, gloves, and other products
for various procedures; identify the most cost-effective mix of products to
include in custom procedure kits; sterilize, repair, and refurbish surgical
instruments; and process reusable laundry, linen, and textiles. Allegiance's
glove-management program, for example, helps health-care providers select the
most cost-effective glove for various procedures while ensuring appropriate
patient care and worker safety.
 
CONTRACTUAL ARRANGEMENTS; BUYING GROUPS
 
  A substantial portion of Allegiance's products are sold through contracts
with group purchasing organizations. Some of these contracts have terms of
more than one year and include limits on price increases. In the case of
hospitals, clinical laboratories, and other facilities, these contracts may
provide the customer with incentives to purchase particular products or
categories of products. Some of these contracts are entered into with hospital
buying groups seeking to achieve economies of scale in consolidating multiple
hospitals' purchases from Allegiance.
 
  For the last three years, sales to customers that are members of two large
hospital buying groups, Premier, Inc. ("Premier") and VHA Inc. ("VHA"), as a
percentage of total sales, were 28 percent and 20 percent, respectively, in
1997, 27 percent and 20 percent, respectively, in 1996, and 27 percent and 16
percent, respectively, in 1995. Premier and VHA each comprise a group of
health-care organizations that benefit from the pricing and other benefits
available to members of the group. Certain members of each group are free to
purchase from vendors of their choice. Although the loss of the relationship
with either group could have a significant impact on sales to members of the
group, the loss of such group would not necessarily mean the loss of sales
from all members of the group. No other buying group or single customer
currently accounts for more than 10 percent of Allegiance's revenue.
 
SALES AND MARKETING
 
  Allegiance conducts its selling efforts through its subsidiaries. These
subsidiaries have their own sales forces and direct their own sales efforts.
In the United States, Allegiance uses a "team selling" approach with many of
its hospitals, health systems, and multi-hospital group customers. This
approach relies on a Strategic Account Executive to coordinate the various
Allegiance Businesses' sales efforts. The Strategic Account Executive is
responsible for all sales and service contacts with a given customer, acting
as a focal point, and assembling cross-functional teams as needed to meet that
customer's needs. Allegiance manages its field sales and service organization
on a regional basis. The regional sales organizations are designed to develop
strong relationships with customers. In addition, sales are made to
independent distributors, dealers, and sales agents. Outside of the United
States, Allegiance products are primarily distributed through Baxter. To
support future business opportunities overseas, the Company also formed new
subsidiaries in Belgium, Spain, Italy and Switzerland in late 1997.
 
RAW MATERIALS SUPPLIERS
 
  Raw materials essential to Allegiance's business are purchased worldwide in
the ordinary course of business from numerous suppliers. The vast majority of
these materials are generally available, and no serious shortages or delays
have been encountered. Certain raw materials used in producing some of
Allegiance's products, including its natural rubber latex products, are
available only from a small number of suppliers. In some of these situations,
Allegiance has long-term supply contracts with its suppliers, although it does
not consider its obligations under such contracts to be material. Allegiance
does not always recover cost increases through customer pricing due to
contractual limits and market pressure on such price increases.
 
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PATENTS AND TRADEMARKS
 
  Allegiance does not consider any one or more of the patents and trademarks
it holds or the licenses granted to or by it with respect to any patent or
trademark to be essential to its businesses.
 
COMPETITION
 
  Allegiance has substantial competition in all of its markets. The changing
health-care environment in recent years has led to consolidation and increased
competition among health-care manufacturers and suppliers. Competition is
focused on price, service, and product performance. Pressure in these areas is
expected to continue.
 
  The future financial success of health-care product and service companies,
such as Allegiance, will depend on their ability to work with customers to
help them provide quality care while enhancing their competitiveness through
cost-saving initiatives. Management believes it can help its customers achieve
savings by automating supply-ordering procedures; optimizing distribution
networks; improving utilization, materials management and labor productivity;
achieving economies through product and procedure standardization; and
performing certain non-clinical services on an outsourced basis. Allegiance
further believes its objective of providing superior service to customers and
achieving the best overall cost in the delivery of health-care products and
services is compatible with any anticipated realignment of the U.S. health-
care system.
 
QUALITY CONTROL
 
  Allegiance places great emphasis on providing quality products and services
to its customers. An integrated network of quality systems, including control
procedures that are developed and implemented by technically trained
professionals, results in rigid specifications for raw materials, packaging
materials, labels, sterilization procedures, and overall process control. The
quality systems integrate the efforts of raw material and finished goods
suppliers to provide the highest value to customers. On a statistical sampling
basis, a quality assurance organization tests components and finished goods at
different stages in the manufacturing process to assure that exacting
standards are met. All Allegiance plants are required to be ISO 9000
certified.
 
GOVERNMENT REGULATION
 
  Most of the products manufactured or sold by Allegiance in the United States
are subject to regulation by the U.S. Food and Drug Administration ("FDA"), as
well as by other federal and state agencies. The FDA regulates the
introduction and advertising of new medical products and related manufacturing
procedures, labeling, and record-keeping. The FDA has the power to seize
adulterated or misbranded medical products, to require the manufacturer to
remove them from the market, and to publicize relevant facts. From time to
time, Allegiance has removed products from the market that were found not to
meet acceptable standards. This may occur with respect to Allegiance in the
future. Product regulatory laws also exist in most other countries where
Allegiance does or will do business.
 
  Allegiance's environmental policies mandate compliance with all applicable
regulatory requirements concerning environmental quality and contemplate,
among other things, appropriate capital expenditures for environmental
protection. Various immaterial expenditures for environmental protection
related to the Allegiance Business were made during 1996 and 1997. See "Item
3--Legal Proceedings."
 
RELATIONSHIP WITH BAXTER
 
  Allegiance has significant continuing relationships with Baxter as an agent,
distributor, customer, and supplier for a wide array of health-care products
and services, and for certain administrative support services. Allegiance is
Baxter's primary agent in distributing Baxter's intravenous solutions and
other products in the United States and provides Baxter with certain
administrative services including credit, collection and cash application,
accounts payable, information technology, and telecommunications. Baxter
distributes Allegiance's products in many countries around the world and
provides various administrative services to Allegiance. Baxter does not have
any ownership interest in Allegiance.
 
                                       6
<PAGE>
 
  Allegiance and Baxter entered into various agreements to govern certain of
the ongoing relationships between Baxter and Allegiance after the
Distribution, which provided mechanisms for an orderly transfer of the
Allegiance Business from Baxter to Allegiance, and facilitated an orderly
transition to the status of two separate, publicly traded companies.
 
 Reorganization Agreement
 
  Baxter and Allegiance entered into a reorganization agreement (the
"Reorganization Agreement") in 1996 as part of the spin-off of the Allegiance
Business. Subject to certain exceptions, the Reorganization Agreement provides
for certain cross-indemnities (including an indemnity of Baxter by Allegiance
with respect to certain guarantees by Baxter in connection with certain
Allegiance agreements and certain financial guarantees) designed principally
to place financial responsibility for the obligations and liabilities of the
Allegiance Business with Allegiance and financial responsibility for the
obligations and liabilities of Baxter's retained businesses and its other
subsidiaries with Baxter. Specifically, Allegiance has agreed to assume
liability for, and to indemnify Baxter against, any and all liabilities
associated with the Allegiance Business, including any litigation, proceedings
or claims relating to Allegiance products and operations whether the
underlying basis for such litigation, proceedings or claims arose prior to or
after the Distribution Date. Baxter has agreed to indemnify Allegiance against
any and all liabilities associated with Baxter's retained businesses.
Specifically, Baxter has retained liability for, and agreed to indemnify
Allegiance against, proceedings or claims relating to allegations of disease
transmission through blood products and silicon-gel mammary implants.
 
  Pursuant to the Reorganization Agreement, Allegiance assumed all
environmental liabilities that arise from or are attributable to the
operations of the Allegiance Business, including, but not limited to, off-site
waste-disposal liabilities. Allegiance also has agreed to indemnify Baxter
against any and all such environmental liabilities relating to the Allegiance
Business. Baxter has agreed to indemnify Allegiance against any and all
environmental liabilities associated with the retained Baxter businesses. In
addition, the Reorganization Agreement provides that Baxter and Allegiance
will indemnify each other in the event certain liabilities arise under the
Securities Exchange Act of 1934.
 
  The Reorganization Agreement also provides, among other things, that in
order to avoid potentially adverse tax consequences relating to the
Distribution, for a period of two years after the Distribution, Allegiance
will not: (i) cease to engage in an active trade or business within the
meaning of the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
issue or redeem any share of stock of Allegiance, except for certain issuances
and redemptions for the benefit of Allegiance's employees or to effect
acquisitions by Allegiance in the ordinary course of business or in connection
with the issuance of any convertible debt by Allegiance or in accordance with
the requirements for permitted purchases of Allegiance stock as set forth in
Section 4.05(l)(b) of Revenue Procedure 96-30 issued by the Internal Revenue
Service (the "IRS"); or (iii) liquidate or merge with any other corporation,
unless, with respect to (i), (ii) or (iii) above, either (a) an opinion is
obtained from counsel to Baxter, or (b) a ruling is obtained from the IRS, in
either case to the effect that such act or event will not adversely affect the
federal income tax consequences of the Distribution to Baxter, its
stockholders who received Allegiance common stock or Allegiance. Allegiance
does not expect these limitations to significantly constrain its activities or
its ability to respond to unanticipated developments.
 
  The Reorganization Agreement provides that if, as a result of certain
transactions occurring after the Distribution Date involving either the stock
or assets of either Allegiance or any of its subsidiaries, or any combination
thereof, the Distribution fails to qualify as tax-free under the provisions of
Section 355 of the Code, then Allegiance shall indemnify Baxter for all taxes,
liabilities, and associated expenses, including penalties and interest,
incurred as a result of such failure of the Distribution to qualify under
Section 355 of the Code. The Reorganization Agreement further provides that if
the Distribution fails to qualify as tax-free under the provisions of Section
355 of the Code, other than as a result of a transaction occurring after the
Distribution Date involving either the stock or assets of Allegiance or any of
its subsidiaries, or any combination thereof, then Allegiance shall not be
liable for such taxes, liabilities, or expenses.
 
                                       7
<PAGE>
 
  The Reorganization Agreement also provides for the allocation of benefits
between Baxter and Allegiance under existing insurance policies after the
Distribution Date for claims made or occurrences prior to the Distribution
Date and sets forth procedures for the administration of insured claims. In
addition, the Reorganization Agreement provides that Baxter will use its
reasonable efforts to maintain directors' and officers' insurance at
substantially the level of Baxter's current directors' and officers' insurance
policy for a period of six years with respect to the former directors and
officers of Baxter who are directors and officers of Allegiance for acts
relating to periods prior to the Distribution Date.
 
  In addition, the Reorganization Agreement addresses the treatment of
employee benefit matters and other compensation arrangements for certain
former and current Allegiance employees and their beneficiaries and
dependents, as well as certain former employees of certain former Allegiance
businesses and their beneficiaries and dependents (collectively, the
"Allegiance Participants"). As required by the Reorganization Agreement, the
account balances (including outstanding loans) of all Allegiance Participants
in the Baxter International Inc. and Subsidiaries Incentive Investment Plan
(the "IIP"), and the plan assets related to such liabilities were transferred
to Allegiance's new retirement savings plan. The Reorganization Agreement also
generally provides that Allegiance assumes all liabilities for benefits under
any welfare plans related to Allegiance Participants, other than certain
claims incurred on or before the Distribution Date. Moreover, the
Reorganization Agreement provides that, effective as of the Distribution Date,
Allegiance is responsible for all other liabilities to Allegiance Participants
(including unfunded supplemental retirement benefits), other than certain
accruals under the Baxter Defined Benefit Excess Plan.
 
 Tax Sharing Agreement
 
  Baxter and Allegiance entered into a tax sharing agreement (the "Tax Sharing
Agreement") which allocates tax liabilities and responsibility for tax audits
for periods prior to, and subsequent to the Distribution Date. The Tax Sharing
Agreement also allocates consolidated alternative minimum tax and other tax
credit carry-forwards as of the Distribution Date between Baxter and
Allegiance.
 
 Agency, Services and Distribution Agreements
 
  In 1996, Baxter's principal domestic operating subsidiary, Baxter Healthcare
Corporation ("BHC"), and an Allegiance subsidiary entered into an Agency,
Services and Distribution Agreement (the "Domestic Distribution Agreements")
for each of Baxter's four primary domestic business units, I.V. Systems,
Renal, Cardiovascular, and Biotechnology, pursuant to which Baxter supplies
products to Allegiance, and Allegiance, as agent or distributor for Baxter,
provides physical distribution and various sales and sales support services to
Baxter. The Domestic Distribution Agreements cover substantially all of the
existing products of each of Baxter's foregoing business units.
 
  In most instances, Allegiance acts as Baxter's agent for the physical
distribution of Baxter's products in return for a fee. In such situations,
Baxter maintains the contractual relationship with the customer, manages
sales, order-taking, billing and collections, and retains title to the
products until shipment to the customer. In certain situations, Allegiance
acts as a full-service distributor for Baxter products with a direct
contractual relationship with the ultimate customer. In these situations,
Allegiance provides additional sales, sales support, and other customer and
product-related services to the customer and purchases the products from
Baxter at specified prices. Such additional services may include aggregating
Baxter's products with others to be sold as "kits" for a given medical
procedure or other cost-saving services that assist the customer in reducing
product consumption, improving utilization of assets, improving logistics, and
reducing or eliminating costs.
 
  The initial terms of the Domestic Distribution Agreements, which began in
1996, range from three years (Renal and Biotechnology) to five years (I.V.
Systems and Cardiovascular). The agreements may be renewed by mutual agreement
of the parties. In the event of a Change In Control of one of the parties to
the Domestic Distribution Agreements or certain of their affiliates, the other
party to such agreement has the right, subject to certain notice periods and
other restrictions, to terminate all, or in certain cases only the affected
portion, of such agreement prior to its normal expiration. In the case of a
Change In Control involving a competitor of the non-affected party, the notice
period required for termination may be shorter. For purposes of these
agreements, a "Change In Control" includes the acquisition of more than 30
percent of the stock of either party or one of its
 
                                       8
<PAGE>
 
affiliates, certain mergers or consolidations involving either party or one of
its affiliates, the acquisition by either party of certain significant
subsidiaries, and, in the case of an affiliate of either of the parties, the
disposition of substantially all of its business and assets.
 
  Under the Domestic Distribution Agreements, Baxter is required within the
Territory to distribute all covered I.V. Systems and Cardiovascular products
(including any line extensions of such products) through Allegiance, subject
to certain exceptions. In addition, Allegiance may not market, promote or
solicit orders for any product that competes with any covered I.V. Systems or
Cardiovascular product. Allegiance may however take orders for stock and sell
competing products in response to customer requests. For purposes of the
Domestic Distribution Agreements, the "Territory" is defined as the 50 states
of the United States and the District of Columbia. Allegiance's right to
distribute the covered products is limited to the Territory.
 
  The compensation received by Allegiance under the Domestic Distribution
Agreements generally approximates or is based upon the internal business unit
revenue and expense allocations that were in effect between the Baxter
business units and the Allegiance Business prior to the Distribution.
Similarly, the service levels and performance standards remain as they were
prior to the Distribution.
 
  In addition to the Domestic Distribution Agreements, Baxter and Allegiance
entered into agreements under which Baxter has agreed to distribute
Allegiance's surgical and other products outside of the United States and to
distribute certain surgical products to the long-term, sub-acute, and home-
care markets within the United States.
 
 Services Agreements
 
  Baxter and Allegiance also entered into several services agreements,
effective from and after the Distribution Date, under which Baxter provides to
Allegiance, and Allegiance provides to Baxter, certain administrative services
necessary for the conduct of Baxter's and Allegiance's businesses. Services
provided to Baxter by Allegiance include credit, collection and cash
application, accounts payable, telecommunications, and information technology
services. Services provided to Allegiance by Baxter include payroll, human
resources (including international expatriate services), travel, property
management and other services. These agreements have varying terms and,
subject to certain exceptions, are generally terminable by either party on 12
months notice or less. Under certain circumstances involving a Change In
Control, the agreements may be terminated earlier. The agreements may be
renewed by mutual agreement of the parties. The prices at which such services
are provided generally are equal to or based on the actual cost of rendering
such services.
 
  In addition, Baxter leased from Allegiance, for a term of 10 years,
beginning in 1996, a 217,000-square-foot office building at Allegiance's McGaw
Park, Illinois, headquarters site. The leased building is occupied by Baxter's
Renal Division. Allegiance subleases from Baxter all or a substantial part of
an 85,000-square-foot office building in Deerfield, Illinois. This building is
part of a three-building complex leased by Baxter, and Allegiance's sublease
is for the remainder of the current term of Baxter's lease. Baxter and
Allegiance may also lease or sublease to each other miscellaneous office or
other space for use in connection with various services performed for one
another pursuant to the agreements described above.
 
EMPLOYEES
 
  As of December 31, 1997, Allegiance employed approximately 19,800 people.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Following are the names and ages, as of March 2, 1998, of the executive
officers of the Company, or one or both of its two principal direct
subsidiaries, Allegiance Healthcare Corporation and Allegiance Healthcare
International Inc., their positions and summaries of their backgrounds and
business experience.
 
  LESTER B. KNIGHT, age 39, has been chairman of the board and chief executive
officer of Allegiance since June 1996. From 1992 to September 1996, he was an
executive vice president of Baxter. He was elected a corporate vice president
of Baxter in 1990. Mr. Knight joined Baxter in 1981. Tenure with the Company:
16 years.
 
                                       9
<PAGE>
 
  JOSEPH F. DAMICO, age 44, has been president and chief operating officer of
Allegiance since June 1996. From 1992 to September 1996, he was a corporate
vice president of Baxter. From 1979 to 1992, he held various positions at
Baxter, including vice president and general manager of the Custom Sterile
unit and president of the Convertors/Custom Sterile business. Tenure with the
Company: 18 years.
 
  WILLIAM L. FEATHER, age 51, has been senior vice president, general counsel
and secretary of Allegiance since June 1996. From January 1996 to September
1996, he was associate general counsel for Baxter Healthcare Corporation's
U.S. Healthcare business. Between 1986 and 1996, he held various positions at
Baxter, including corporate counsel, senior counsel, and assistant general
counsel. Tenure with the Company: 12 years.
 
  PETER B. MCKEE, age 59, has been senior vice president and chief financial
officer of Allegiance since June 1996. From 1993 until he joined Baxter
Healthcare Corporation in May 1996, Mr. McKee was a senior vice president and
chief financial officer at FoxMeyer Health Corporation, a pharmaceutical
distributor, subsidiaries of which filed a petition under Chapter 11 of the
United States Bankruptcy Code in August 1996. Prior to that, he was a partner
and principal owner of InterSolve Group Corporation, a managerial consulting
firm. Tenure with the Company: 2 years.
 
  KATHY BRITTAIN WHITE, age 48, has been senior vice president and chief
information officer of Allegiance since June 1996. She joined Baxter as its
chief information officer in 1995. From 1993 to 1995, she was vice president,
information systems and services for AlliedSignal Corporation. Prior to that,
she was vice president, corporate services, for Guilford Mills, Inc. Tenure
with the Company: 3 years.
 
  RICHARD C. ADLOFF, age 40, has been corporate vice president and controller
of Allegiance since June 1996. From 1994 to September 1996, he was vice
president of finance for Baxter Healthcare Corporation's U.S. Healthcare
business. From 1980 to 1994, he held various positions in accounting and
finance at Baxter and American Hospital Supply Corporation. Tenure with the
Company: 17 years.
 
  ROBERT B. DEBAUN, age 47, has been corporate vice president human resources
of Allegiance since June 1996. From 1991 to September 1996, he was vice
president of human resources for Baxter Healthcare Corporation's U.S.
Distribution business. From 1981 to 1991, he held various positions, including
director of corporate staffing for American Hospital Supply Corporation;
director of corporate staffing and relocation; and vice president, human
resources, for Baxter's I.V. Systems business. Tenure with the Company: 16
years.
 
  MARK J. EHLERT, age 44, has been corporate vice president quality and
regulatory affairs of Allegiance since June 1996. From 1994 to September 1996,
he was vice president, quality and regulatory affairs for the U.S. Sales and
Distribution business of Baxter Healthcare Corporation. From 1975 to 1994, he
held various positions at Baxter, including quality-control manager, director
of quality management, director of manufacturing for northern Illinois I.V.
Systems operations and general manager of the Singapore manufacturing
operations. Tenure with the Company: 22 years.
 
  LEONARD G. KUHR, age 39, has been corporate vice president and treasurer of
Allegiance since June 1996. From 1995 to September 1996, he was vice
president, capital markets at Baxter. From 1979 to 1995, he held various
positions at Baxter and American Hospital Supply Corporation, including vice
president and controller of the Specialty Business group, vice president
finance for the Surgical Business, and various tax management positions for
the corporate tax function. Tenure with the Company: 19 years.
 
  ROGER L. SISTERMAN, age 54, has been corporate vice president manufacturing
of Allegiance's operating subsidiaries since June 1996. From 1994 to September
1996, he was vice president of manufacturing and operations for Baxter
Healthcare Corporation. From 1977 to 1994, he held various positions at
Baxter, including director of materials management for Baxter's Pharmaseal
division, vice president of manufacturing for Baxter Custom Sterile and vice
president for Convertors/Custom Sterile. Tenure with the Company: 20 years.
 
                                      10
<PAGE>
 
ITEM 2. PROPERTIES
 
  Allegiance owns or has long-term leases on substantially all of its major
manufacturing facilities. Allegiance maintains 22 manufacturing facilities in
the United States, France, Malaysia, Malta, the Netherlands and Mexico.
Allegiance owns or leases 49 distribution centers in the United States and 14
distribution centers in Canada through its interest in Source Medical
Corporation.
 
  Allegiance maintains a continuing program for improving its properties,
including the retirement or improvement of older facilities and the
construction of new facilities. This program includes improvement of
manufacturing facilities to enable production and quality control programs to
conform with the current state of technology and government regulations.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The information required by this Item is set forth in registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1997, under the
caption "Legal Proceedings" in "Notes to Consolidated Financial Statements,"
which information is incorporated herein by reference.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The information required by this Item is set forth in registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1997, under the
caption "Quarterly Financial Results and Market for the Company's Stock" in
"Notes to Consolidated Financial Statements," which information is
incorporated herein by reference.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The information required by this Item is set forth in registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1997, under the
caption "Five-Year Summary of Selected Financial Data," which information is
incorporated herein by reference.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS
 
  The information required by this Item is set forth in registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1997 under the
caption "Management's Discussion and Analysis," which information is
incorporated herein by reference.
 
                               ----------------
 
               INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
 
  Certain statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere in this Report
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Statements indicating the Company
"plans," "expects," "estimates" or "believes" are forward-looking statements
that involve known and unknown risks, including, but not limited to, general
economic and business conditions, changing trends in the health-care industry
and customer profiles, demand and market acceptance risks for new and existing
products, the impact of competitive products and pricing, product development
and liability risks, the Company's limited history as an operating company,
unforeseen changes in its existing agency and distribution arrangements,
changes in governmental regulations, and unfavorable foreign-currency
fluctuations. Although Allegiance believes its expectations with respect to
the forward-looking statements are based upon reasonable assumptions within
the bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of Allegiance will
not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statement
whether as a result of new information, future events or otherwise.
 
                                      11
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The information required by this Item is set forth in registrant's Annual
Report to Stockholders for the fiscal year ended December 31, 1997, under the
captions "Report of Independent Accountants," "Consolidated Balance Sheets,"
"Consolidated Statements of Operations," "Consolidated Statements of Cash
Flows," "Consolidated Statements of Equity," and "Notes to Consolidated
Financial Statements," which information is incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
       FINANCIAL DISCLOSURE
 
  Not applicable.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
(a) Directors of the Company
 
  The information required by this Item will be set forth in registrant's
  Proxy Statement for the Annual Meeting of Stockholders to be held on May 7,
  1998, under the caption "Election of Directors," which information is
  incorporated herein by reference. This Proxy Statement will be filed with
  the SEC on or about March 23, 1998.
 
(b) Executive officers of the Company
 
  Reference is made to "Executive Officers of the Registrant" in Part I.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this Item will be set forth in registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 7,
1998, under the caption "Compensation of Directors and Executive Officers,"
which information is incorporated herein by reference. This Proxy Statement
will be filed with the SEC on or about March 23, 1998.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this Item will be set forth in registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 7,
1998, under the caption "Ownership of the Capital Stock of the Company," which
information is incorporated herein by reference. This Proxy Statement will be
filed with the SEC on or about March 23, 1998.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Not applicable.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) (1) Financial Statements
 
  The following financial statements of Allegiance Corporation, are included
in Part II, Item 8:
 
    (i)Report of Independent Accountants from Price Waterhouse LLP;
 
    (ii)Consolidated Balance Sheets--as of December 31, 1997 and 1996;
 
                                      12
<PAGE>
 
    (iii)Consolidated Statements of Operations--years ended December 31,
    1997, 1996 and 1995;
 
    (iv)Consolidated Statements of Cash Flows--years ended December 31,
    1997, 1996 and 1995;
 
    (v)Consolidated Statements of Equity--years ended December 31, 1997,
    1996 and 1995; and
 
    (vi)Notes to Consolidated Financial Statements.
 
  (2) Financial Statement Schedules
 
    (i) Report of Independent Accountants from Price Waterhouse LLP; and
 
    (ii) Schedule II--Valuation and Qualifying Accounts.
 
  (3) Exhibits
 
    Exhibits required by Item 601 of Regulation S-K are listed in the
    Exhibit Index herein, which information is incorporated by reference.
(b) Reports on Form 8-K
 
  Not applicable.
 
(c) Exhibits
 
  The exhibits filed as part of this Annual Report on Form 10-K are as
  specified in Item 14(a)(3) herein.
 
(d) Financial Statement Schedules
 
  The financial statement schedule filed as part of this Annual Report on
  Form 10-K is as specified in Item 14(a)(2) herein.
 
                                      13
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON MARCH 16, 1998.
 
                                          Allegiance Corporation
 
                                                   /s/ Lester B. Knight
                                          By: _________________________________
                                            Lester B. Knight, Chairman of the
                                                        Board and
                                                 Chief Executive Officer
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT ON MARCH 16, 1998 IN THE CAPACITIES INDICATED:
 
<TABLE>
<CAPTION>
                 SIGNATURE                                     TITLE
                 ---------                                     -----
 
 
<S>                                         <C>
           /s/ Lester B. Knight             Chairman of the Board, Chief Executive
___________________________________________   Officer and Director (Principal Executive
             Lester B. Knight                 Officer)
 
           /s/ Joseph F. Damico             President, Chief Operating Officer and
___________________________________________   Director
             Joseph F. Damico
 
            /s/ Peter B. McKee              Senior Vice President and Chief Financial
___________________________________________   Officer (Principal Financial Officer)
              Peter B. McKee
 
           /s/ Richard C. Adloff            Corporate Vice President and Controller
___________________________________________   (Principal Accounting Officer)
             Richard C. Adloff
 
           /s/ Kenneth D. Bloem             Director
___________________________________________
             Kenneth D. Bloem
 
           /s/ Silas S. Cathcart            Director
___________________________________________
             Silas S. Cathcart
 
           /s/ Connie R. Curran             Director
___________________________________________
             Connie R. Curran
 
           /s/ Arthur F. Golden             Director
___________________________________________
             Arthur F. Golden
 
           /s/ David W. Grainger            Director
___________________________________________
             David W. Grainger
 
         /s/ Michael D. O'Halleran          Director
___________________________________________
           Michael D. O'Halleran
 
</TABLE>
 
 
                                      14
<PAGE>
 
                     REPORT OF INDEPENDENT ACCOUNTANTS ON
                         FINANCIAL STATEMENT SCHEDULE
 
To the Board of Directors of
Allegiance Corporation
 
Our audits of the consolidated financial statements referred to in our report
dated January 26, 1998 appearing in the 1997 Annual Report to Stockholders of
Allegiance Corporation (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
 
Price Waterhouse LLP
 
Chicago, Illinois
January 26, 1998
 
                                      S-1
<PAGE>
 
                                                                     SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
                            (IN MILLIONS OF DOLLARS)
 
<TABLE>
<CAPTION>
                                                 ADDITIONS
                                      BALANCE AT CHARGED TO DEDUCTIONS  BALANCE
                                      BEGINNING  COSTS AND     FROM    AT END OF
DESCRIPTION                           OF PERIOD   EXPENSES   RESERVES   PERIOD
-----------                           ---------- ---------- ---------- ---------
<S>                                   <C>        <C>        <C>        <C>
Year ended December 31, 1997
 Accounts receivable.................   $26.4      $ 1.4      $(3.7)     $24.1
Year ended December 31, 1996
 Accounts receivable.................   $18.2      $10.3      $(2.1)     $26.4
Year ended December 31, 1995
 Accounts receivable.................   $17.4      $ 2.6      $(1.8)     $18.2
</TABLE>
 
                                      S-2
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                  DESCRIPTION
    -------                                 -----------
<S>          <C>
     2.1     Reorganization Agreement between Baxter International Inc. and Allegiance
             Corporation(1)
     3.1     Certificate of Incorporation of Allegiance Corporation, including
             Certificate of Designation relating to Series A Junior Participating
             Preferred Stock of Allegiance Corporation(2)
     3.2     Bylaws of Allegiance Corporation(1)
     4.1     Indenture dated as of October 1, 1996 between Allegiance Corporation and
             PNC Bank, Kentucky, Inc.(2)
     4.2     Board Resolutions creating the 7.30% Notes due October 15, 2006, the 7.80%
             Debentures due October 15, 2016 and the 7.00% Debentures due October 15,
             2026(2)
    10.1*    Allegiance Corporation 1996 Outside Director Incentive Compensation
             Plan(1)
    10.2*    Allegiance Corporation 1996 Incentive Compensation Plan(1)
    10.3*    Allegiance Corporation Change in Control Plan(1)
    10.5     Intentionally left blank.
    10.6     Agency Services and Distribution Agreement dated as of September 30, 1996
             between Allegiance Healthcare Corporation and Baxter Healthcare
             Corporation(3)
    10.7     $1.2 Billion Credit Agreement dated as of September 23, 1996 among
             Allegiance Corporation and the financial institutions named therein(1), as
             amended by the First Amendment to the Credit Agreement dated January 30,
             1997 among Allegiance Corporation and the financial institutions named
             therein(4)
    10.8     Amendment dated October 16, 1996 to the $1.2 Billion Credit Agreement
             dated as of September 23, 1996 among Allegiance Corporation and the
             financial institutions named therein(5)
    10.9     Rights Agreement, by and between Allegiance Corporation and the rights
             agent named therein(1)
    12.1     Statement regarding Computation of Actual and Pro Forma Ratio of Earnings
             to Fixed Charges
    13.1     Excerpts from 1997 Annual Report to Stockholders incorporated herein by
             reference
    21.1     Subsidiaries of Allegiance Corporation(1)
    23.1     Consent of Price Waterhouse LLP
    27.1     Financial Data Schedule
</TABLE>
--------
(1) Incorporated herein by reference to the Exhibit of equivalent number to
    the Company's Registration Statement on Form S-1, as amended, Registration
    No. 333-12525.
(2) Incorporated herein by reference to the Exhibit of equivalent number to
    the Company's quarterly report on Form 10-Q for the quarterly period ended
    September 30, 1996.
(3) Incorporated herein by reference to Exhibit 10.1 to the Company's
    quarterly report on Form 10-Q for the quarterly period ended September 30,
    1996.
(4) Incorporated herein by reference to Exhibit 10.7 to the Company's fiscal
    year end report on Form 10-K for the fiscal year ended December 31, 1996.
(5) Incorporated herein by reference to Exhibit 10.8 to the Company's fiscal
    year end report on Form 10-K for the fiscal year ended December 31, 1996.
*  Denotes each management contract or compensatory plan or arrangement
   required to be filed as an exhibit to this report.