ALLEGIANCE CORP, 424B4, 1996-10-10

ALLEGIANCE CORP
424B4, 1996-10-10
SPECIALTY OUTPATIENT FACILITIES, NEC

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<PAGE>
$550,000,000

[LOGO] ALLEGIANCE CORPORATION
$200,000,000 7.30% NOTES DUE OCTOBER 15, 2006
$150,000,000 7.80% DEBENTURES DUE OCTOBER 15, 2016
$200,000,000 7.00% DEBENTURES DUE OCTOBER 15, 2026
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Interest on 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 (the Notes and
the Debentures collectively, the "Securities") is payable on April 15 and
October 15 of each year, commencing April 15, 1997. The holder of each 2026
Debenture may elect to have that 2026 Debenture, or any portion of the principal
amount thereof that is a multiple of $1,000, repaid on October 15, 2003 at 100%
of the principal amount thereof, together with accrued interest to October 15,
2003. Such election, which is irrevocable when made, must be made within the
period commencing on August 15, 2003 and ending at the close of business on
September 15, 2003. The Securities are not redeemable at the option of the
Company prior to maturity and are not entitled to the benefit of any sinking
fund. The Securities are unsecured obligations of the Company and will rank PARI
PASSU with each other and with all other unsecured and unsubordinated
indebtedness of the Company.

Each series of the Securities will be represented by one or more global
Securities registered in the name of the nominee of The Depository Trust Company
("DTC"). Beneficial interests in the global Securities will be shown on, and
transfers thereof will be effected only through, records maintained by DTC and
its participants. Except as described herein, Securities in definitive form will
not be issued. The Securities will be issued only in registered form in
denominations of $1,000 and integral multiples thereof. See "Description of
Securities."

SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

<TABLE>
<CAPTION>
INITIAL PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE(1) DISCOUNT(2) COMPANY(1)(3)
---------------- ------------- ------------------
<S> <C> <C> <C>
Per 7.30% Note due 2006........................................... 99.789% 0.650% 99.139%
Total............................................................. $199,578,000 $1,300,000 $198,278,000
Per 7.80% Debenture due 2016...................................... 99.589% 0.875% 98.714%
Total............................................................. $149,383,500 $1,312,500 $148,071,000
Per 7.00% Debenture due 2026...................................... 99.929% 0.625% 99.304%
Total............................................................. $199,858,000 $1,250,000 $198,608,000
</TABLE>

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(1) Plus accrued interest, if any, from October 15, 1996.

(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.

(3) Before deducting estimated expenses of $650,000 payable by the Company.
--------------

The Securities offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the
Securities will be ready for delivery in book-entry form only through the
facilities of DTC in New York, New York, on or about October 15, 1996, against
payment therefor in immediately available funds.

GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
SMITH BARNEY INC.
BA SECURITIES, INC.
FIRST CHICAGO CAPITAL MARKETS, INC.
NATIONSBANC CAPITAL MARKETS, INC.

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

The date of this Prospectus is October 9, 1996.
<PAGE>
AVAILABLE INFORMATION

Allegiance has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "Registration Statement") under
the Securities Act of 1933, as amended and the rules promulgated thereunder (the
"Securities Act"), for the registration of the Securities offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information in the Registration Statement certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
Securities offered hereby, reference is made to the Registration Statement.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document are not necessarily complete; with respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the related exhibits
and schedules filed by Allegiance with the Commission may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the Regional
Offices of the Commission at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such information may be obtained by mail from the
Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. In addition, electronic copies of the
Registration Statement and all related exhibits and schedules may be accessed on
the world wide web via the Commission's EDGAR database at its website
(http://www.sec.gov). In addition, the common stock of Allegiance is listed on
the New York Stock Exchange and materials filed by Allegiance after September
30, 1996 can be inspected at the office of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.

Allegiance is subject to the informational and reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected at the public reference facilities and website maintained by the
Commission that are referenced in the above paragraph.

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF EACH SERIES OF THE
SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.

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<PAGE>
PROSPECTUS SUMMARY

REFERENCE IS MADE TO, AND THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY
BY, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
THE CONTEXT REQUIRES OTHERWISE, (I) "ALLEGIANCE" OR THE "COMPANY" REFERS TO THE
ALLEGIANCE BUSINESS (AS DEFINED BELOW) OF BAXTER INTERNATIONAL INC. ("BAXTER")
FOR PERIODS PRIOR TO SEPTEMBER 30, 1996 (THE "DISTRIBUTION DATE") AND ALLEGIANCE
CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES FOR THE PERIODS ON AND AFTER THE
DISTRIBUTION DATE, (II) ALL REFERENCES TO "BAXTER" INCLUDE BAXTER INTERNATIONAL
INC. AND ITS CONSOLIDATED SUBSIDIARIES AS OF THE RELEVANT DATE, AND (III)
"OFFERING" REFERS TO THE OFFERING OF $200,000,000 AGGREGATE PRINCIPAL AMOUNT OF
THE COMPANY'S 7.30% NOTES DUE OCTOBER 15, 2006 (THE "NOTES"), $150,000,000
AGGREGATE PRINCIPAL AMOUNT OF THE COMPANY'S 7.80% DEBENTURES DUE OCTOBER 15,
2016 (THE "2016 DEBENTURES") AND $200,000,000 AGGREGATE PRINCIPAL AMOUNT OF THE
COMPANY'S 7.00% DEBENTURES DUE OCTOBER 15, 2026 (THE "2026 DEBENTURES" AND
TOGETHER WITH THE NOTES AND THE 2016 DEBENTURES, THE "SECURITIES"). SEE "COMPANY
BACKGROUND."

THE COMPANY

Allegiance Corporation is America's largest provider of health-care products
and cost-management services for hospitals and other health-care providers, with
recorded total sales of approximately $4.5 billion in 1995. Allegiance offers
more than 200,000 products -- the broadest range of medical and laboratory
products in the industry. Allegiance's offering includes its own products as
well as products manufactured by more than 2,000 independent suppliers.
Allegiance operates more than 60 distribution centers across the country,
delivering products often on a just-in-time basis.

The economics of health care are undergoing rapid and fundamental change,
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 the care of patients. 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 is continuing to
climb with the dramatic growth of elderly populations in the United States and
abroad. This environment offers opportunities for Allegiance, which has invested
in integrated product and service programs that help medical professionals cope
with health care's new economics and demographic trends. Management believes
Allegiance, with its size, breadth of product line, customer relationships,
growing array of cost-management services and financial strength, is
well-positioned competitively for the increasingly cost-conscious health-care
marketplace.

The health-care distribution market in the United States has experienced
intense competition and a resultant erosion in its margins in recent years in
response to the growth of managed care and increased consolidation among
health-care providers. Allegiance has responded by integrating its
market-leading distribution capabilities with a broad product offering, high
levels of customer service and innovative cost-management services. Within a
larger Baxter organization, Allegiance's cost structure was higher than industry
standards. As an independent public company, Allegiance intends to realign its
cost structure, and improve returns from its distribution operations.

Allegiance's mission is to align its objectives with those of its customers
- -- to help hospitals and others throughout the health-care field fulfill their
mission of serving patients. Allegiance intends to achieve this goal by
providing high-quality products, excellent service and new ways of managing
costs. Allegiance's leading competitive position within the health-care
marketplace is a function of several key advantages, including its size and
breadth of products; an intense customer-service orientation; a growing
portfolio of cost-management services and financial strength. Allegiance is the
only health-care company that fully integrates distribution, products and
services to bring greater efficiency to health care. Management believes its key
competitive advantages and integrated product and service offerings provide a
solid platform for growth.

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<PAGE>
Allegiance's strategy is designed to continue to improve efficiency and
returns in its distribution operations, to increase market penetration for its
self-manufactured and "best value" preferred distributed products, and to expand
its ability to help health-care professionals manage costs.

Allegiance was formed in June 1996 as a wholly owned subsidiary of Baxter
consisting of Baxter's U.S. distribution, surgical and respiratory-therapy
products, and health-care cost-management services operations (the "Allegiance
Business"). These integrated businesses recorded total sales of approximately
$4.5 billion in 1995. On September 30, 1996 (the "Distribution Date"), Baxter
effected a spin-off of Allegiance through a distribution of all of the
outstanding shares of common stock of Allegiance ("Allegiance Stock") to Baxter
stockholders. Prior to the Distribution Date, Allegiance became the owner of all
of the assets, liabilities and operations of the Allegiance Business.

RISK FACTORS

Prospective purchasers of the Securities offered hereby should consider
carefully the information set forth under "Risk Factors," in addition to the
other information set forth in this Prospectus, before purchasing any of the
Securities.

THE OFFERING

<TABLE>
<CAPTION>
Securities Offered........................... $200,000,000 aggregate principal amount of
Notes, $150,000,000 aggregate principal
amount of 2016 Debentures and $200,000,000
aggregate principal amount 2026 Debentures.
<S> <C>
Interest..................................... Interest on the Notes, the 2016 Debentures
and the 2026 Debentures is payable
semiannually on April 15 and October 15 of
each year, commencing April 15, 1997, at an
annual rate of 7.30% for the Notes, 7.80%
for the 2016 Debentures and 7.00% for the
2026 Debentures.
Repayment.................................... The holder of each 2026 Debenture may elect
to have that 2026 Debenture, or any portion
of the principal amount thereof that is a
multiple of $1,000, repaid on October 15,
2003 at 100% of the principal amount
thereof, together with accrued interest to
October 15, 2003. Such election, which is
irrevocable when made, must be made within
the period commencing on August 15, 2003 and
ending at the close of business on September
15, 2003. The Notes and the 2016 Debentures
are not subject to repayment at the option
of their holders.
Redemption................................... The Securities are not subject to redemption
at the option of the Company prior to
maturity.
</TABLE>

4
<PAGE>

<TABLE>
<S> <C>
Ranking...................................... The Securities will be unsecured obligations
of the Company and will rank PARI PASSU with
each other and with all other unsecured and
unsubordinated debt of the Company. As of
September 30, 1996, the Company had no
outstanding indebtedness that would in
effect rank ahead of the Securities. See
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations -- Liquidity and Capital
Resources."
Certain Restrictive Covenants................ The Indenture under which each series of the
Securities is to be issued contains a
limited number of restrictive covenants
regarding, among other things, the creation
and existence of additional secured
indebtedness; sale and leaseback
transactions; subsidiary debt; and mergers,
consolidation and certain sales of assets.
See "Description of Securities."
Use of Proceeds.............................. All of the net proceeds from the sale of the
Securities will be used to reduce amounts
outstanding under the Company's $1.2 billion
credit facility. See "Use of Proceeds."
</TABLE>

5
<PAGE>
SUMMARY SELECTED HISTORICAL FINANCIAL DATA

The following table sets forth selected financial information with respect
to Allegiance. Selected unaudited historical financial information for the six
months ended June 30, 1996 and 1995 includes all adjustments, consisting only of
normal recurring accruals that are considered necessary for a fair presentation
of combined operating results for such interim periods. Results for the interim
periods are not necessarily indicative of results for the full year. Historical
financial information may not be indicative of Allegiance's performance as an
independent company. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the "Combined Financial Statements" and related
notes thereto found elsewhere in this Prospectus. Historical per share data for
net income and dividends, and the ratio of earnings to fixed charges have not
been presented because Allegiance was not incorporated until June 1996, and did
not have significant interest expense for the periods presented below. Pro forma
long term debt and net income per share data are presented elsewhere in this
Prospectus.

SUMMARY SELECTED HISTORICAL FINANCIAL DATA (A)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................ $ 2,201 $ 2,485 $ 4,922 $ 5,109 $ 5,019 $ 4,861 $ 4,402
Gross profit............................. 455 545 1,044 1,378 1,406 1,512 1,448
Restructuring charges (b)................ -- -- 76 -- 484 -- --
Income (loss) before income taxes........ 93 140 476 338 (154) 352 366
Net income (loss) (b) (c)................ $ 57 $ 85 $ 273 $ 215 $ (73) $ 243 $ 250
Ratio of earnings to fixed charges (d)

BALANCE SHEET DATA:
Total Assets............................. $ 3,293 $ 3,765 $ 3,444 $ 4,031 $ 4,590 $ 4,287 $ 4,089
</TABLE>

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(a) See Note 1 to "Notes to the Combined Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for discussions of the impact of certain divestitures on Allegiance's
revenues and expenses.

(b) See Note 4 to "Notes to the Combined Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for additional information related to the restructuring charges of $76
million and $484 million that were recorded in 1995 and 1993, respectively.

(c) Net loss for 1993 reflects the impact of a charge equal to $5 million, net
of tax, resulting from the adoption of Statement of Financial Accounting
Standards No. 112, "Employers Accounting for Postemployment Benefits."

(d) Historical computation of ratio of earnings to fixed charges is not
considered meaningful as no interest costs were allocated from Baxter to
Allegiance for the historical periods presented. Pro forma ratio of earnings
to fixed charges was 1.9, 2.1 and 2.0 for the periods June 30, 1996, June
30, 1995, and December 31, 1995, respectively. For the purpose of
calculating pro forma ratio of earnings to fixed charges, "earnings"
represents pro forma earnings before income taxes, plus fixed charges.
"Fixed charges" consist of pro forma interest on all indebtedness and
estimated interest on rentals. For further information, see the unaudited
pro forma combined statements of income included in "Pro Forma Financial
Information" in this Prospectus.

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<PAGE>
SUMMARY SUPPLEMENTARY FINANCIAL DATA

Allegiance's historical results of operations include revenues and expenses
related to certain divested businesses. The Industrial and Life Sciences
division was sold in September 1995 and the diagnostics manufacturing businesses
were sold in December 1994. See Notes 1 and 3 to "Notes to the Combined
Financial Statements" for additional information related to these divestitures.
The following table presents selected supplementary financial data for
Allegiance excluding the revenue and expenses associated with these divested
businesses.

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

(a) Income (loss) for 1993 excludes the impact of a charge equal to $5 million,
net of tax, resulting from the adoption of Statement of Financial Accounting
Standards No. 112, "Employers Accounting for Postemployment Benefits."

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<PAGE>
RISK FACTORS

Certain statements in this Prospectus constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward looking statements involve known and unknown risks,
including, but not limited to, general economic and business conditions,
competition, changing trends in customer profiles, changes in governmental
regulations, and unfavorable foreign currency fluctuations. Although Allegiance
believes that 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.

In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment in
the Securities offered hereby.

UNITED STATES HEALTH-CARE ENVIRONMENT

The United States health-care system continues to undergo fundamental
change. Competition for patients among health-care providers continues to
intensify. Increasingly, providers are looking for ways to better manage costs
in areas such as materials handling, supply utilization, product standardization
for specific procedures and capital expenditures.

Accelerating cost pressures on hospitals in the United States are resulting
in increased out-patient and alternate-site health-care service delivery and a
focus on cost-effectiveness and quality. These forces increasingly shape the
demand for, and supply of, medical care. Many private health-care payors are
providing incentives for consumers to seek lower cost care outside the hospital.
Many corporations' employee health plans have been restructured to provide
financial incentives for patients to utilize the most cost-effective forms of
treatment (managed care programs, such as health maintenance organizations, have
become more common), and physicians have been encouraged to provide more cost-
effective treatments. In the past, Allegiance's distribution network has been
focused on traditional distribution to hospitals.

The future financial success of health-care product and service companies,
such as Allegiance, will depend on their ability to work with health-care
providers to help them enhance their competitiveness and to distribute products
to alternate sites as treatment moves outside the hospital. Management believes
it can help its customers achieve savings in the total health-care system by
automating supply-ordering procedures, optimizing distribution networks,
improving utilization and materials management and achieving economies through
product and procedure standardization, and performing certain non-clinical
services on an outsourced basis. Management further believes that its strategy
of providing unmatched service to its health-care customers and achieving the
best overall cost in its delivery of health-care products and services is
compatible with any anticipated realignment of the United States health-care
system that may ultimately occur. If customers do not respond favorably to the
Allegiance strategy, these changes could have a material effect on Allegiance's
business, results of operations and financial condition.

UNITED STATES COMPETITION

The changing health-care environment in recent years has led to increasingly
intense competition among health-care suppliers. Competition is focused on
price, service and product performance. Pressure in these areas is expected to
continue. There has been substantial consolidation in Allegiance's customer base
and among its competitors. In recent years, Allegiance's overall price increases
have been lower than increases in the Consumer Price Index. Industry trends and
competition may inhibit Allegiance's ability to increase prices, and may
continue to depress Allegiance's margins in the future.

In part through its previously announced and ongoing restructuring program,
Allegiance plans to continue to increase its efforts to minimize costs and
better meet accelerating price competition. Allegiance believes that its cost
position will continue to benefit from improvements in manufacturing

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technology and increased economies of scale. Allegiance continues to improve the
quality of its products and services. If Allegiance is unsuccessful in
maintaining its service and quality levels while decreasing costs, the
competitive environment may have a material adverse effect on Allegiance's
business, results of operations and financial condition. See "Allegiance
Business -- Competition."

REVENUES FROM CUSTOMERS PURCHASING THROUGH BUYING GROUPS

For the last three years, as a percentage of total revenue, sales to
customers which are members of two large hospital buying groups, Premier and
VHA, comprised 27% and 16% respectively in 1995, 23% and 13% respectively in
1994 and 23% and 13% respectively in 1993. Loss of the contracts with either or
both of these buying groups, or renegotiation of these contracts on unfavorable
terms, could have a material adverse effect on the business, results of
operations and financial condition of Allegiance. However, some member hospitals
in each group are free to purchase from the vendors of their choice. Management
believes that its relationships with its larger customers are excellent. No
other buying group or single customer currently accounts for more than 10% of
Allegiance's revenue. See "Allegiance Business -- Contractual Arrangements;
Buying Groups."

FINANCIAL LEVERAGE

As of September 30, Allegiance had outstanding indebtedness in the amount of
approximately $1.2 billion. Such indebtedness may limit Allegiance's future
financial flexibility. See "Pro-Forma Financial Information" and "Management's
Discussion and Analysis of Financial Condition -- Liquidity and Capital
Resources."

MUTUAL DISTRIBUTION ARRANGEMENTS

Allegiance and Baxter are parties to various agency and distribution
arrangements pursuant to which Allegiance will distribute certain Baxter
products in the United States and Baxter will distribute certain Allegiance
products in the United States and internationally. The compensation received by
Allegiance under the domestic distribution arrangements generally 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 date
of the Distribution, which management believes will not be materially different
than those that could be negotiated with independent third parties. The initial
terms of these agreements range from three to five years. Although the present
intention of Allegiance and Baxter is that these distribution arrangements
continue as long as the relationship between the parties is mutually beneficial,
no assurance can be given that these arrangements will be extended beyond their
original expiration dates or will not be terminated prior to their original
terms. See "Relationship with Baxter."

DEPENDENCE ON ADMINISTRATIVE SERVICES

Allegiance and Baxter rely on each other for the provision of certain
administrative services. Such services are provided, pursuant to contractual
arrangements that can be terminated by either party upon no more than 12 months
notice, at rates intended to approximate the cost of providing such services. No
assurance can be given that such arrangements will continue in the future, that
the cost of arranging substitute service either internally or from a third party
would not increase the cost to the service recipient, or that a service provider
will not be forced to absorb a greater share of its fixed overhead costs in the
event of a termination of these arrangements. See "Relationship with Baxter."

NO OPERATING HISTORY AS AN INDEPENDENT COMPANY

Allegiance does not have an operating history as an independent public
company. While Allegiance has been profitable as part of Baxter, there is no
assurance that as a stand-alone company profits will continue at the same level.
See "Combined Financial Statements."

PRODUCTS LIABILITY

On the Distribution Date, Allegiance assumed the defense of litigation
involving claims related to the Allegiance Business, including certain claims of
alleged personal injuries as a result of exposure to natural rubber latex gloves
described below. Allegiance has not been named as a defendant in this

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<PAGE>
litigation but will be defending and indemnifying Baxter Healthcare Corporation
("BHC"), as contemplated by the Reorganization Agreement between Baxter and
Allegiance (the "Reorganization Agreement"), for all expenses and potential
liabilities associated with claims pertaining to this litigation. It is expected
that Allegiance will be named as a defendant in future litigation, and may be
added as a defendant in existing litigation.

Allegiance believes that a substantial portion of any liability and the
defense costs related to natural rubber latex gloves cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. BHC has notified
its insurance companies that it believes that these cases and claims are covered
by BHC's insurance. Most of BHC's insurers have reserved their rights (I.E.,
neither admitted nor denied coverage), and may attempt to reserve in the future,
the right to deny coverage, in whole or in part, due to differing theories
regarding, among other things, the applicability of coverage and when coverage
may attach. Management does not expect that the outcome of these matters will
have a material adverse effect on Allegiance's business, results of operations
or financial condition.

ENVIRONMENTAL CONTINGENCIES

Under the United States Superfund statute and many state laws, generators of
hazardous waste which is sent to a disposal or recycling site are liable for
cleanup of the site if contaminants from that property later leak into the
environment. The law provides that potentially responsible parties may be held
jointly and severally liable for the costs of investigating and remediating a
site. This liability applies to the generator even if the waste was handled by a
contractor in full compliance with the law.

As of June 30, 1996, BHC has been named as a potentially responsible party
for cleanup costs at ten hazardous waste sites for which Allegiance has assumed
responsibility. Allegiance's largest exposure is at the Thermo-Chem site in
Muskegon, Michigan. Allegiance expects that the total cleanup costs for this
site will be between $44 million and $65 million, of which Allegiance's share
will be approximately $5 million. This amount, net of payments of approximately
$1 million, has been accrued and is reflected in Allegiance's combined financial
statements. The estimated exposure for the remaining nine sites is approximately
$4 million, which has been accrued and reflected in Allegiance's combined
financial statements. Management does not expect that the outcome of these
matters will have a material adverse effect on Allegiance's business, results of
operations or financial condition.

GOVERNMENT REGULATION

Significant aspects of Allegiance's businesses are subject to state and
federal statutes and regulations governing, among other things, reimbursement
under federal and state medical assistance programs, medical waste disposal,
dispensing of controlled substances, and workplace health and safety. In
addition, most of the products manufactured or sold by Allegiance in the United
States are subject to regulation by the Food and Drug Administration ("FDA"), as
well as by other federal and state agencies. The FDA has the power to seize
adulterated or misbranded drugs and devices or to require the manufacturer to
remove them from the market and the power to publicize relevant facts. In the
past, Baxter has removed products from the United States market that were found
not to meet acceptable standards. This may occur with respect to Allegiance in
the future. Product regulatory laws exist in most other countries where
Allegiance will do business. There can be no assurance that federal or state
governments will not impose additional restrictions or adopt interpretations of
existing laws that could materially adversely affect Allegiance's business,
results of operations or financial condition. See "Allegiance Business --
Government Regulation."

INTERNATIONAL EXPANSION

Allegiance currently has international sales of self-manufactured surgical
products primarily in Canada, France and Germany. Allegiance management expects
to increase its sales efforts internationally, which could expose it to greater
risks associated with government regulations and fluctuations in foreign
currency. There can be no assurance that Allegiance will be successful in
expanding its sales efforts internationally or employ a risk management strategy
that will completely eliminate its exposure to adverse movements in foreign
currency rates. See "-- Government Regulation."

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<PAGE>
ABSENCE OF PUBLIC MARKET FOR THE SECURITIES

The Securities are new issues of securities for which there is currently no
market. If the Securities are traded after their initial issuance, they may
trade at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities and other factors. The
Underwriters have informed the Company that, subject to applicable laws and
regulations, they currently intend to make a market in the Securities. However,
the Underwriters are not obligated to do so, and any such market making may be
discontinued at any time without notice. Therefore, no assurance can be given as
to whether an active trading market will develop for the Securities or, if such
market develops, whether it will continue. The Company does not intend to apply
for listing of the Securities on any securities exchange or on the National
Association of Securities Dealers, Inc. automated quotation system. See
"Underwriting."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Securities offered
hereby are estimated to be approximately $544 million, after deducting
underwriting discounts and estimated expenses of the Offering payable by the
Company. All of the net proceeds of the Offering will be used to reduce the
amounts outstanding under the Company's $1.2 billion credit facility. At
September 30, 1996, approximately $1.1 billion was outstanding under the
Company's $1.2 billion credit facility bearing interest at a weighted average
rate of 5.8% per annum and maturing on various dates from October 7, 1996 to
November 29, 1996. Allegiance has borrowed under this credit facility to fund
distributions to Baxter and for working capital requirements.

Affiliates of certain of the Underwriters are lenders under the credit
facility and will receive a portion of the proceeds from the sale of the
Securities offered hereby. See "Underwriting."

COMPANY BACKGROUND

Allegiance Corporation ("Allegiance" or the "Company") was incorporated in
Delaware in June 1996. Prior to September 30, 1996 (the "Distribution Date"),
Allegiance acquired the United States health-care distribution, surgical and
respiratory therapy products and health-care cost management businesses (the
"Allegiance Business") of Baxter International Inc. ("Baxter") in connection
with a spin-off by Baxter of the Allegiance Business. The spin-off was effected
on the Distribution Date through a distribution of common stock of Allegiance
("Allegiance Stock") to Baxter stockholders (the "Distribution"). Unless the
context otherwise indicates, as used in this Prospectus 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, and all references
to "Baxter" include Baxter International Inc. and its consolidated subsidiaries
as of the relevant date.

Allegiance's principal executive offices are located at 1430 Waukegan Road,
MPA-1, McGaw Park, Illinois 60085 and its telephone number is (847) 689-8410.

11
<PAGE>
PRO FORMA CAPITALIZATION

The following table sets forth, as of June 30, 1996, the capitalization of
Allegiance and the pro forma capitalization after giving effect to the
Distribution and certain other transactions described in the Notes below, as
well as the application of the estimated net proceeds from the sale of the
Securities. This information should be read in conjunction with the historical
and pro forma combined financial statements and the related notes thereto of
Allegiance included elsewhere herein. The pro forma information set forth below
may not reflect the capitalization of Allegiance in the future or as it would
have been had Allegiance been a separate, independent company at June 30, 1996.

<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------- -----------
(IN MILLIONS, EXCEPT SHARES)
<S> <C> <C> <C>
Long-term debt............................................................ $ -- $ 1,200(a) $ 1,200
Equity
Divisional retained earnings............................................ 1,750 (350)(a) --
(1,400)(b)
Equity investment by parent............................................. 810 (810)(a) --
Stockholders' equity
Common stock, par value $1.00, authorized 200,000,000 shares,
outstanding 54,472,353 shares.......................................... -- 54(b) 54
Retained earnings....................................................... -- 1,346(b) 1,346
----------- ------------- -----------
Total capitalization.................................................. $ 2,560 $ 40 $ 2,600
----------- ------------- -----------
----------- ------------- -----------
</TABLE>

PRO FORMA ADJUSTMENTS

(a) To record the incurrence of approximately $1.2 billion of debt to fund
distributions to Baxter and initial working capital requirements.

(b) To reflect the Distribution of 54,472,353 shares of Allegiance Stock at
$1.00 par value per share (at a distribution ratio of one share of
Allegiance Stock for every five shares of Baxter Stock held on September 26,
1996) and the elimination of divisional retained earnings and Baxter's
equity investment effected by the distribution of all outstanding shares of
Allegiance Stock to Baxter stockholders.

12
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA

SELECTED HISTORICAL FINANCIAL DATA (A)

BALANCE SHEET DATA:
Total Assets............................. $ 3,293 $ 3,765 $ 3,444 $ 4,031 $ 4,590 $ 4,287 $ 4,089
</TABLE>

(d) Historical computation of ratio of earnings to fixed charges is not
considered meaningful as no interest costs were allocated from Baxter to
Allegiance for the historical periods presented. Pro forma ratio of earnings
to fixed charges was 1.9, 2.1 and 2.0 for the periods June 30, 1996, June
30, 1995, and December 31, 1995, respectively. For the purpose of
calculating pro forma ratio of earnings to fixed charges, "earnings"
represent pro forma earnings before income taxes, plus fixed charges. "Fixed
charges" consist of pro forma interest on all indebtedness and estimated
interest on rentals. For further information, see the unaudited pro forma
combined statements of income included in "Pro Forma Financial Information"
in this Prospectus.

13
<PAGE>
SUPPLEMENTARY FINANCIAL DATA

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

14
<PAGE>
PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma combined statements of income and
unaudited combined condensed balance sheet present the combined results of
Allegiance and its financial position assuming that the transactions
contemplated by the Distribution and certain significant divestitures described
below had been completed as of January 1, 1995.

The unaudited pro forma information has been prepared utilizing the
historical combined financial statements of Allegiance. This information should
be read in conjunction with the historical combined financial statements and
notes thereto, included elsewhere in this Prospectus. The unaudited pro forma
financial data has been included as required by the rules and regulations of the
Commission and is provided for comparative purposes only. The unaudited pro
forma financial data does not purport to be indicative of the results of
Allegiance in the future or what the financial position and results of
operations would have been had Allegiance been a separate, stand-alone entity
during the periods shown. See, for example, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Adoption of New
Accounting Standards and Policies."

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
----------------------------------------------------------------------
ADJUSTMENTS
FOR DIVESTED ADJUSTED PRO FORMA
HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA
----------- --------------- ----------- ------------ -------------
(IN MILLIONS, EXCEPT SHARES AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ 2,201 -- $ 2,201 $ 1(b) $2,202
Costs and expenses
Cost of goods sold....................... 1,746 -- 1,746 2(b) 1,748
Selling, general and administrative
expenses................................ 345 -- 345 4(b) 349
Interest, net............................ -- -- -- 45(d) 45
Goodwill amortization.................... 18 -- 18 -- 18
Other (income) expense................... (1) -- (1) -- (1)
----------- ------- ----------- ------------ -------------
Total costs and expenses............... 2,108 -- 2,108 51 2,159
----------- ------- ----------- ------------ -------------
Income before income taxes................. 93 -- 93 (50) 43
Income tax expense (benefit)............... 36 -- 36 (20)(f) 16
----------- ------- ----------- ------------ -------------
Net income............................. $ 57 -- $ 57 $ (30) $ 27
----------- ------- ----------- ------------ -------------
----------- ------- ----------- ------------ -------------
Share information
Shares to be issued (g).................. 54,472,353
-------------
-------------
Net income per share (g)................. $ 0.50
-------------
-------------
Ratio of earnings to fixed charges (h)..... 1.9
-------------
-------------
</TABLE>

15
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1995
------------------------------------------------------------------------
ADJUSTMENTS
FOR DIVESTED ADJUSTED PRO FORMA
HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA
----------- --------------- ----------- -------------- -------------
(IN MILLIONS, EXCEPT SHARES AND PER SHARE)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ 2,485 $(241) $ 2,244 $ (7)(b) $2,237
Costs and expenses
Cost of good sold........................ 1,940 (170) 1,770 (3)(b) 1,767
Selling, general and administrative
expenses................................ 384 (39) 345 2(b) 351
4(c)
Interest, net............................ -- -- -- 45(d) 45
Goodwill amortization.................... 19 -- 19 -- 19
Other (income) expense................... 2 -- 2 -- 2
----------- --------------- ----------- --- -------------
Total costs and expenses............... 2,345 (209) 2,136 48 2,184
----------- --------------- ----------- --- -------------
Income (loss) before income taxes.......... 140 (32) 108 (55) 53
Income tax expense (benefit)............... 55 (13) 42 (22)(f) 20
----------- --------------- ----------- --- -------------
Net income............................. $ 85 $ (19) $ 66 $ (33) $ 33
----------- --------------- ----------- --- -------------
----------- --------------- ----------- --- -------------
Share information
Shares to be issued (g).................. 54,472,353
-------------
-------------
Net income per share (g)................. $ 0.61
-------------
-------------
Ratio of earnings to fixed charges (h)..... 2.1
-------------
-------------
</TABLE>

16
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------
ADJUSTMENTS
FOR DIVESTED ADJUSTED PRO FORMA
HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA
----------- --------------- ----------- ------------ -------------
(IN MILLIONS, EXCEPT SHARES AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ 4,922 $(347) $ 4,575 $ (4)(b) $4,571
Costs and expenses
Cost of goods sold....................... 3,878 (253) 3,625 3,625
Selling, general and administrative
expenses................................ 756 (55) 701 3 (b) 714
10 (c)
Interest, net............................ -- -- -- 90 (d) 90
Restructuring............................ 76 (76) -- -- --
Goodwill amortization.................... 38 (1) 37 -- 37
Other (income) expense................... (302) 269 (33) 37 (e) 4
----------- --------------- ----------- ------------ -------------
Total costs and expenses............... 4,446 (116) 4,330 140 4,470
----------- --------------- ----------- ------------ -------------
Income before income taxes................. 476 (231) 245 (144) 101
Income tax expense (benefit)............... 203 (109) 94 (56)(f) 38
----------- --------------- ----------- ------------ -------------
Net income............................. $ 273 $(122) $ 151 $ (88) $ 63
----------- --------------- ----------- ------------ -------------
----------- --------------- ----------- ------------ -------------
Share information
Shares to be issued (g).................. 54,472,353
-------------
-------------
Net income per share (g)................. $ 1.16
-------------
-------------
Ratio of earnings to fixed charges (h)..... 2.0
-------------
-------------
</TABLE>

PRO FORMA ADJUSTMENTS

(a) To adjust the historical financial statements for the impact of the
divestitures of the diagnostics manufacturing business and the Industrial
and Life Sciences division for the periods presented, to reflect only those
ongoing business operations to be included in the Distribution. See Notes 1
and 3 to "Notes to the Combined Financial Statements" for additional
information related to these divestitures.

(b) To reflect the impact of various business arrangements between Allegiance
and Baxter effective on the Distribution Date for (i) product distribution
and distribution services under agency, services and distribution agreements
in the U.S. with terms from three to five years, (ii) contract manufacturing
agreements under which both Allegiance and Baxter agree to produce certain
products and components for each other for one to three years, and (iii)
agreements with terms of one to five years under which Baxter will
distribute Allegiance products in various countries around the world and
provide export services. See "Relationship with Baxter."

(c) To reflect (i) the estimated incremental costs associated with being an
independent, public company, including costs associated with corporate
administrative services such as tax, treasury, risk management and
insurance, legal, stockholder relations and human resources and (ii) the
estimated reduction in expenses related to changes in Allegiance's benefit
plans.

(d) To record the estimated interest expense which would have been incurred by
Allegiance based on the incurrence of approximately $1.2 billion of debt,
including the Securities offered hereby, at a weighted average interest rate
of 7.5%. An increase or decrease of 0.125% in the weighted average interest
rate would result in an increase or decrease in interest expense of $1.5
million.

(e) To adjust the historical financial statements for a non-recurring payment
related to the transfer of rights under various service agreements with
Alliant Foodservices, Inc., to reflect only those ongoing business
operations included in the Distribution.

(f) To reflect the estimated tax impact, at statutory rates, for pro forma
adjustments (b) through (e).

(g) Pro forma net income per share is computed as if the 54,472,353 shares of
Allegiance stock, issued in the Distribution, had been outstanding for the
periods presented.

(h) For the purposes of calculating the ratio of earnings to fixed charges,
"earnings" represent pro forma earnings before income taxes, plus fixed
charges. "Fixed charges" consist of pro forma interest on all indebtedness
and estimated interest on rentals.

17
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------------------------------
ADJUSTMENTS
FOR DIVESTED ADJUSTED PRO FORMA
HISTORICAL BUSINESSES (A) HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------------- ----------- ------------- -----------
(IN MILLIONS, EXCEPT SHARES)
<S> <C> <C> <C> <C> <C>
Current assets
Cash and equivalents.......................... $ 5 -- $ 5 $ 40 (a) $ 45
Accounts receivable, net...................... 450 -- 450 450
Notes and other current receivables........... 26 -- 26 -- 26
Inventories................................... 656 -- 656 656
Short-term deferred income taxes.............. 119 -- 119 -- 119
Prepaid expenses.............................. 16 -- 16 -- 16
----------- ------ ----------- ------------- -----------
Total current assets........................ 1,272 -- 1,272 40 1,312
----------- ------ ----------- ------------- -----------
Property, plant and equipment
Property, plant and equipment................. 1,523 -- 1,523 -- 1,523
Accumulated depreciation and amortization..... 663 -- 663 -- 663
----------- ------ ----------- ------------- -----------
Net property, plant and equipment........... 860 -- 860 -- 860
----------- ------ ----------- ------------- -----------
Other assets
Goodwill and other intangibles................ 1,096 -- 1,096 -- 1,096
Other......................................... 65 -- 65 -- 65
----------- ------ ----------- ------------- -----------
Total other assets.......................... 1,161 -- 1,161 -- 1,161
----------- ------ ----------- ------------- -----------
Total assets.............................. $ 3,293 -- $ 3,293 $ 40 $ 3,333
----------- ------ ----------- ------------- -----------
----------- ------ ----------- ------------- -----------
Current liabilities
Accounts payable and accrued liabilities...... $ 550 -- $ 550 $ 550
----------- ------ ----------- ------------- -----------
Long-term debt.................................. -- -- -- 1,200 (a) 1,200
----------- ------ ----------- ------------- -----------
Long-term deferred income taxes................. 115 -- 115 -- 115
----------- ------ ----------- ------------- -----------
Other non-current liabilities................... 68 -- 68 -- 68
----------- ------ ----------- ------------- -----------
Stockholders' equity
Divisional retained earnings.................. 1,750 -- 1,750 (350)(a) --
(1,400)(b)
Equity investment by parent................... 810 -- 810 (810)(a) --
Common stock, $1 par value, authorized
200,000,000 shares, outstanding 54,472,353
shares....................................... -- -- -- 54 (b) 54
Retained earnings............................. -- -- -- 1,346 (b) 1,346
----------- ------ ----------- ------------- -----------
Total liabilities and stockholders'
equity................................... $ 3,293 -- $ 3,293 $ 40 $ 3,333
----------- ------ ----------- ------------- -----------
----------- ------ ----------- ------------- -----------
</TABLE>

PRO FORMA ADJUSTMENTS

(a) To record the incurrence of approximately $1.2 billion of debt to fund
distributions to Baxter and initial working capital requirements.

(b) To reflect the distribution of 54,472,353 shares of common stock of
Allegiance to stockholders of Baxter and the elimination of divisional
retained earnings and Baxter's equity investment effected by the
Distribution.

18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis present the factors that had a
material effect on the results of operations of Allegiance during the three
years ended December 31, 1995, and for the six-month periods ended June 30, 1996
and 1995. Also discussed is Allegiance's financial position as of December 31,
1995 and 1994, and June 30, 1996. This discussion should be read in conjunction
with the historical and pro forma combined financial statements and related
notes thereto included elsewhere in this Prospectus.

OVERVIEW

Allegiance operates in a single industry segment as a leading provider of
health-care products and services that help its health-care customers manage and
reduce the total cost of providing patient care. Through its nationwide
distribution network, Allegiance distributes to hospital and alternate-care
customers a broad offering of medical, surgical and laboratory supplies,
including its own self-manufactured surgical and respiratory-therapy products.
Allegiance also provides cost management services to its health-care customers,
including inventory management programs, customized packaging, and procedure and
process consulting. The delivery of such a broad array of product and service
offerings requires focused investments in cost management services, information
systems and manufacturing efficiencies.

Accelerating cost pressures on U.S. hospitals are resulting in increased
out-patient and alternate-site health-care service delivery and an increased
focus on cost-effectiveness and quality. At the same time, the elderly segment
of the population in the U.S. and abroad is growing. These forces increasingly
shape the demand for, and supply of, medical care. Many private health-care
payors are providing incentives for consumers to seek lower cost care outside
the hospital. Many corporations' employee health plans have been restructured to
provide financial incentives for patients to utilize the most cost-effective
forms of treatment (managed care programs, such as health maintenance
organizations, have become more common), and physicians have been encouraged to
provide more cost-effective treatments. In response to these pressures, the U.S.
health-care system has undergone fundamental changes over the past several
years, and such changes and cost-containment efforts are expected to continue
throughout the foreseeable future.

While the high cost of health care is forcing hospitals and other providers
to increase their efficiency, reduce excess capacity and lower costs, management
believes that it is well-positioned to work with health-care providers to help
them enhance their competitiveness and to distribute products to alternate sites
as treatment moves outside the hospital. Management believes that it can help
its customers achieve savings in the total health-care system by automating
supply-ordering procedures, optimizing distribution networks, improving
utilization and materials management and achieving economies through product and
procedure standardization, and performing certain non-clinical services on an
outsourced basis. Management further believes that its strategy of providing
unmatched service to its health-care customers and its seeking to achieve the
lowest overall cost in its delivery of health-care products and services is
compatible with any anticipated realignment of the U.S. health-care system that
may ultimately occur.

RESULTS OF OPERATIONS

Allegiance's historical results of operations in 1995, 1994 and 1993 include
revenues and expenses related to certain divested businesses. The Industrial and
Life Sciences division of the Allegiance Business was sold in September 1995 and
the diagnostics manufacturing businesses were sold in

19
<PAGE>
December 1994. See Notes 1 and 3 to "Notes to Combined Financial Statements" for
additional information related to these divestitures. The following table
presents selected financial data for Allegiance excluding the revenue and
expenses associated with these divested businesses:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales........................................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249
Costs and expenses
Cost of goods sold................................ 1,746 1,770 3,625 3,311 3,245
Selling, general and administrative expenses...... 345 346 701 711 746
Restructuring charge.............................. -- -- -- -- 304
Goodwill amortization............................. 18 18 37 37 37
Other (income) expense............................ (1) 2 (33) (3) (44)
--------- --------- --------- --------- ---------
Total costs and expenses........................ 2,108 2,136 4,330 4,056 4,288
--------- --------- --------- --------- ---------
Pretax income (loss)................................ 93 108 245 258 (39)
Income tax expense (benefit)........................ 36 42 94 101 (13)
--------- --------- --------- --------- ---------
Income (loss)....................................... $ 57 $ 66 $ 151 $ 157 $ (26)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

SALES

The following table summarizes net sales, excluding the divested businesses
discussed previously, by major geographic region:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------------- -----------------------------------
1996 1995 1995 1994 1993
----------- --------- ----------- ----------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Geographic region
United States.............................. $ 2,052 $ 2,103 $ 4,284 $ 4,043 $ 4,001
Percent increase (decrease).............. (2)% 6% 1%
International.............................. 149 141 291 271 248
Percent increase......................... 6% 7% 9%
----------- --------- ----------- ----------- ---------
Total net sales.............................. $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249
Percent increase (decrease).............. (2)% 6% 2%
----------- --------- ----------- ----------- ---------
----------- --------- ----------- ----------- ---------
</TABLE>

The decline in Allegiance's domestic net sales for the six months ended June
30, 1996 as compared to the same period in the prior year, is the result of
planned attempts to reduce sales growth and improve profitability in lower
margin, distributed products in the U.S. Additionally, domestic sales of
self-manufactured surgical products continue to be unfavorably impacted by the
loss of a contract with Columbia/ HCA in February 1994. Columbia began shifting
to other vendors its purchases of surgical supplies for certain product lines in
early 1994 and for other product lines throughout 1995 and 1996. International
sales increased by 6% in the first half of 1996 as compared to 1995 as a result
of continued focus on the penetration of surgical products into international
markets.

Domestic net sales growth of 6% in 1995 is primarily due to increased sales
volume in lower margin, distributed products, resulting from an increase in
ValueLink-Registered Trademark- distribution agreements and the large supply and
service contract signed with the VHA in 1994. Domestic net sales in 1994 were
adversely affected by pricing pressures experienced in the domestic market place
and the loss of the Columbia/ HCA supply contract.

20
<PAGE>
Allegiance currently has international sales of self-manufactured surgical
products primarily in Canada, France and Germany. International sales growth of
7% in 1995 and 9% in 1994 was the result of continued focus on the penetration
of surgical products into these international markets. International sales
growth in local currency was approximately 5% in 1995 and 13% in 1994.
Allegiance expects to increase its sales efforts internationally.

COSTS AND EXPENSES

The following table summarizes Allegiance's gross margin and expense ratios,
excluding the divested businesses discussed previously:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Gross margin........................................... 20.7% 21.1% 20.8% 23.2% 23.6%
Selling, general and administrative expenses........... 15.7% 15.4% 15.3% 16.5% 17.6%
</TABLE>

The gross margin declined for the six-month period ended June 30, 1996 as
compared with the same period in 1995, due to pricing pressure in the U.S.
combined with lower sales in Allegiance's higher margin surgical products as a
result of the loss of the Columbia/HCA contract. Allegiance's gross margin
decline of 2.8% between 1993 and 1995 resulted from general market conditions,
growth in lower margin sales of third party products and the loss of the
Columbia/HCA surgical supply contract. Allegiance plans to stabilize its gross
margins by offsetting pricing pressures with manufacturing cost efficiencies,
managing its product mix more effectively, and instituting price increases.

Total selling, general and administrative expenses remained flat between the
first half of 1996 and 1995. However, such costs as a percent of sales for the
period ended June 30, 1996 increased .3% from the comparable period in 1995. The
increase in the ratio for the six months ended June 30, 1996 is the result of
the decline in sales discussed above, as the timing of expense reduction
initiatives lag the planned reduction in lower-margin product sales. Selling,
general and administrative expenses in 1993 were adversely affected by a
downsizing program. Excluding the impact of the downsizing program, selling,
general and administrative expenses as a percent of sales in 1993 would have
been approximately 16.7%. The remaining 1.4% decline in selling, general and
administrative expenses that occurred between 1993 and 1995 was the result of
initiatives taken in connection with the 1993 restructuring program and leverage
on the growth in distributed products that occurred in 1994. Management plans to
continue to leverage this ratio.

RESTRUCTURING PROGRAM

In November 1993, Baxter initiated a restructuring program to improve
shareholder value and reduce costs. The strategic actions of the program were
designed in part to make the Allegiance Business more efficient and responsive
in addressing the changes occurring in the U.S. health-care system. See Note 4
to "Notes to the Combined Financial Statements" for discussions related to the
initial charge for the program, components of the charge, any resulting changes
in estimates, and cash and non-cash utilization of the related reserves.

Since the announcement of the 1993 restructuring program, Allegiance
management has implemented, or is in the process of implementing, all of the
major strategic actions associated therewith and is satisfied that the program
is progressing on schedule and will meet established financial targets. During
the first half of 1996, Allegiance utilized $55 million of restructuring
reserves, including $34 million in cash payments. In 1995, Allegiance utilized
$171 million of restructuring reserves, including $105 million in cash payments.
Cash outflows pertain primarily to employee-related costs for severance,
outplacement assistance, relocation, implementation teams and facility
consolidation. As of June 30, 1996, Allegiance had eliminated approximately
1,920 positions of the approximately 2,860 positions that were originally
expected to be affected by the program. As process changes were implemented in
connection with the restructuring program, it became apparent that, as certain
management level positions were

21
<PAGE>
eliminated, other lower cost positions were added. While this has generated
savings levels consistent with expectations, management has revised its targeted
head count reduction to 2,230 net positions. The majority of the remaining
reductions will occur in 1996 and 1997, as facility closures and consolidations
are completed as planned. In addition to improvements in the effectiveness of
its sales force and the management of customer relations, Allegiance realized
direct savings in manufacturing and administrative costs from this program of
approximately $95 million in 1995 and $40 million in 1994. These savings have
mitigated the effect of declines in gross margin and have been invested in cost
management initiatives. Management is targeting direct savings of approximately
$125 million in 1996, $155 million in 1997 and in excess of $155 million in
1998. Management anticipates that these savings will continue to offset
potential future gross margin erosion and investments into cost-management
initiatives. Management further believes that its remaining restructuring
reserves are adequate to complete the actions contemplated by the restructuring
program and that future cash expenditures related to the program will be funded
from cash generated from operations.

OTHER INCOME AND EXPENSE

Other income and expense, excluding the divested businesses discussed
previously, is principally comprised of net gains associated with the disposal
or discontinuance of minor, non-strategic businesses.

PRETAX INCOME

The following table compares pretax income, excluding divested businesses
and restructuring charges discussed previously:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, YEARS ENDED DECEMBER 31,
---------------------- -----------------------------------
1996 1995 1995 1994 1993
----------- --------- ----------- ----------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Pretax income excluding divested businesses and
restructuring charges............................... $ 93 $ 108 $ 245 $ 258 $ 265
Percent decrease................................... (14)% (5)% (3)%
</TABLE>

Pretax income in the first six months of 1996 decreased primarily due to the
decline in net sales and gross margins discussed above. Pretax income decreased
in 1995 primarily as a result of gross margin declines, partially offset by a
higher level of net gains associated with the disposal or discontinuance of
minor, non-strategic businesses. Excluding net gains associated with the
disposal or discontinuance of minor, non-strategic businesses, 1995 pretax
income would have declined 16%. The decrease in 1994 is primarily the result of
gross margin declines, partially offset by net gains associated with the
disposal or discontinuance of minor, non-strategic businesses. Excluding these
net gains, 1994 pretax income would have declined 7%.

INCOME TAXES

Allegiance's effective tax rate, excluding divested businesses discussed
previously, was 39% for the six months ended June 30, 1996 and 1995.
Allegiance's effective tax rate, excluding divested businesses discussed
previously, was 38% in 1995, 39% in 1994 and 33% in 1993. The decline in the
effective tax rate in 1995 was a result of a larger proportion of earnings
generated in lower tax jurisdictions. The effective tax rate in 1993 was
impacted by the restructuring charge. Excluding this charge, the effective tax
rate in 1993 would have been 41%; the decrease in the 1994 effective tax rate
was the result of a larger proportion of earnings generated in lower tax
jurisdictions.

NET INCOME

Net income, excluding divested businesses discussed previously, decreased
14% for the six months ended June 30, 1996 as compared to the same period in
1995. This decrease is consistent with the decrease in pretax income discussed
above. Net income for 1995, excluding divested businesses and net gains
associated with the disposal or discontinuance of minor, non-strategic
businesses, decreased 14% as a result of gross margin declines, partially offset
by a decline in the effective tax rate.

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<PAGE>
After adjusting for the restructuring charge recorded in 1993 and net gains
associated with the disposal or discontinuance of minor, non-strategic
businesses, net income excluding divested businesses decreased by approximately
4% in 1994 as a result of gross margin declines, partially offset by the decline
in Allegiance's effective income tax rate discussed above.

ADOPTION OF NEW ACCOUNTING STANDARDS AND POLICIES

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which is effective for fiscal years
beginning after December 31, 1995. Adoption of FASB No. 121 in fiscal year 1996
did not have a material impact on Allegiance.

In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which is effective for fiscal years beginning after
December 15, 1995. The statement provides management with a choice of accounting
methods for stock-based transactions with employees. Management has decided to
adopt FASB No. 123 through disclosure only and, accordingly, the required pro
forma information on net income and earnings per share will be included in
Allegiance's fiscal year 1996 financial statements.

As a subsidiary of Baxter, Allegiance followed the accounting policies
established by Baxter for its consolidated group. Management believes that the
market value of Allegiance, as a stand-alone company, could be substantially
below its stockholders' equity. While Allegiance cannot forecast its market
value, management is currently evaluating the accounting policy for assessing
impairment of goodwill to ensure that its present policy remains appropriate for
Allegiance as a separate, publicly-traded company. As of June 30, 1996, actual
goodwill was approximately $1.1 billion and pro-forma stockholders' equity was
$1.4 billion. Management is considering a change from Baxter's current
undiscounted cash flow methodology to one based upon fair value. A change to a
fair value methodology could result in a material, noncash charge to
Allegiance's results of operations which would be approximately equal to the
excess of Allegiance's pro-forma stockholders' equity value over its market
value and could have a substantial effect on its financial position. If
Allegiance were to adopt such a change in accounting policy, the current annual
amortization expense pertaining to goodwill would be reduced in future periods
by 3.4% of any resulting reduction in the value of goodwill, and would produce a
potentially significant increase in net income. Such a change in accounting
policy would be subject to the review and approval by Allegiance's board of
directors.

IMPACT OF INFLATION

In recent years, Allegiance has experienced increases in its labor and
material cost base influenced, in part, by general inflationary trends. While
not directly related to inflationary trends, Allegiance's revenue base over
recent years has been adversely affected by lower average selling prices on
certain products as a result of changes in Medicare reimbursement regulations,
economic pressures in the U.S. hospital marketplace and increased competition in
certain product lines. There is little correlation between general inflation
rates directly affecting costs and expenses and Allegiance's pricing levels for
products sold to health-care customers. Management expects that these trends
will continue.

LIQUIDITY AND CAPITAL RESOURCES

Management assesses Allegiance's liquidity in terms of its overall ability
to mobilize cash to support ongoing business levels and to fund its growth.
Management believes that it has sufficient cash flow from operations and
financial flexibility to attract long-term capital to support normal operating
activities and fund short-term and long-term growth objectives.

Allegiance's current assets exceeded current liabilities by $722 million at
June 30, 1996 versus an excess of $680 million and $1,055 million at December
31, 1995 and 1994, respectively. Current assets at June 30, 1996 included
accounts and notes receivable of $476 million and inventories of $656 million.
These sources of liquidity are convertible into cash over a relatively short
period of time and thus, will help Allegiance satisfy normal operating cash
requirements.

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<PAGE>
DEBT AND FINANCIAL INSTRUMENTS

In connection with the Distribution, Allegiance entered into two revolving
unsecured credit facilities providing for up to $1.2 billion and $300 million
respectively (the "Credit Facilities"). The $1.2 billion credit facility expires
in September 2001 and the $300 million credit facility expires in September
1997. As of September 30, 1996, $1.1 billion was outstanding under the $1.2
billion credit facility, which bears interest at an average weighted rate of
5.8% and matures on various dates from October 7, 1996 to November 29, 1996, and
no amounts were outstanding under the $300 million credit facility. Allegiance
has borrowed under the $1.2 billion credit facility to fund distributions to
Baxter and for ongoing working capital requirements. In addition, $47 million
was outstanding under other uncommitted lines of credit. As of September 30,
1996, approximately $100 million was available for borrowing under the $1.2
billion credit facility and $300 million was available for borrowing under the
$300 million credit facility. See "Description of Credit Facilities."

Assuming a debt level of $1.2 billion, Allegiance's long-term debt as a
percent of its total capitalization (the sum of long-term debt plus
stockholder's equity) would have been 46.2% at June 30, 1996. Net-
debt-to-net-capital (after consideration of cash equivalents including working
capital) would have been 44.4% at June 30, 1996. Allegiance expects to maintain
a net-debt-to-net-capital ratio between 40% and 45% over the next several years.

Allegiance intends to fund its short-term and long-term obligations as they
mature through cash flow from operations or by issuing additional debt.
Allegiance believes it will have lines of credit adequate to support ongoing
operational, capital and restructuring requirements. Beyond that, Allegiance
believes it has sufficient financial flexibility to attract long-term capital on
acceptable terms as may be needed to support its growth objectives.

CASH FLOW FROM OPERATIONS

Cash flow provided by operations (which includes working capital components)
was $136 million and $139 million for the six months ended June 30, 1996 and
1995, respectively. Cash flow provided by operations for 1995, 1994 and 1993,
was $253 million, $422 million and $336 million, respectively. The decrease in
cash flow provided by operations for the first six months of 1996 was the result
of a decline in earnings (resulting principally from the divestiture of the
Industrial and Life Sciences division), partially offset by improved balance
sheet management. The decline in cash flow provided by operations in 1995 was
primarily the result of a decline in earnings, resulting principally from the
divestitures of the Industrial and Life Sciences division and the diagnostics
manufacturing businesses. The increase in 1994 was the result of lower cash flow
from operations in 1993. The lower cash flow provided by operations in 1993 was
the result of changes in working capital components (principally inventory and
accrued liabilities).

To facilitate an emphasis on cash flow provided by operations, management
monitors an internal performance measure called "operational cash flow."
"Operational cash flow" is defined as cash flow provided by operations per
Allegiance's combined statement of cash flows, less capital expenditures and
plus the tax effect of divestiture gains (losses). This measure evaluates each
operating unit on all aspects of cash flow under its direct control. In
addition, the incentive compensation programs for Allegiance's senior management
in each operating unit include significant emphasis on the attainment of both
"operational cash flow" as well as earnings objectives.

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<PAGE>
The following table reconciles cash flow provided by operations, as
determined by generally accepted accounting principles, to Allegiance's internal
measure of "operational cash flow" (brackets denote cash outflows):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cash flow provided by operations per Allegiance's
combined statements of cash flows................. $ 136 $ 139 $ 253 $ 422 $ 336
Capital expenditures............................... (33) (48) (112) (122) (273)
Other.............................................. -- (2) 41 3 15
--------- --------- --------- --------- ---------
Total "operational cash flow".................. $ 103 $ 89 $ 182 $ 303 $ 78
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

The increase in "operational cash flow" in the first six months of 1996 as
compared to the same period in 1995 is primarily the result of reduced capital
expenditures, partially offset by the decline in cash flow provided by
operations discussed above. The decline in "operational cash flow" in 1995 was
primarily the result of the decline in cash flow provided by operations
discussed above. The increase in 1994 was the result of lower "operational cash
flow" in 1993. The lower "operational cash flow" in 1993 was the result of cash
flow provided by operations as discussed above and higher capital expenditures
resulting from the diagnostics manufacturing businesses.

INVESTMENT TRANSACTIONS

Net investment transactions for Allegiance are comprised of the following:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31,
JUNE 30,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Capital expenditures........................................ $ (33) $ (48) $ (112) $ (122) $ (273)
Acquisitions................................................ (14) -- (5) (2) (14)
Proceeds from asset dispositions............................ (10) 178 626 107 68
--- --------- --------- --------- ---------
Total investment transactions, net...................... $ (57) $ 130 $ 509 $ (17) $ (219)
--- --------- --------- --------- ---------
--- --------- --------- --------- ---------
</TABLE>

The reductions in capital expenditures in 1995 and 1994 are primarily the
result of Allegiance's divestitures of the Industrial and Life Sciences division
and the diagnostics manufacturing businesses. Management expects to invest in
capital expenditures at levels consistent with 1995 and 1994, principally for
improvements of its existing facilities, construction of new facilities and
system upgrades.

The acquisitions summarized in the above table involved no significant
change to Allegiance's strategic direction, and were made for the purpose of
acquiring technologies, broadening product lines and service offerings, or
expanding market coverage.

Proceeds from asset dispositions in the first half of 1995 primarily related
to cash received from the collection of notes receivable related to Allegiance's
divestiture of the diagnostics manufacturing businesses in December 1994. The
proceeds received from asset dispositions for the year ended December 31, 1995,
primarily related to cash received in connection with Allegiance's divestiture
of its Industrial and Life Sciences division in September 1995 and the
collection of notes receivable related to the divestiture of Allegiance's
diagnostics manufacturing businesses. See Notes 1 and 3 to "Notes to Combined
Financial Statements" for additional information related to these divestitures.

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<PAGE>
LITIGATION

See Note 12 to "Notes to Combined Financial Statements" for a detailed
description of the status of Allegiance's litigation.

Under the U.S. Superfund statute and many state laws, generators of
hazardous waste which is sent to a disposal or recycling site are liable for
cleanup of the site if contaminants from that property later leak into the
environment. The law provides that potentially responsible parties may be held
jointly and severally liable for the costs of investigating and remediating a
site. This liability applies to the generator even if the waste was handled by a
contractor in full compliance with the law.

As of June 30, 1996, Baxter has been named as a potentially responsible
party for cleanup costs at ten hazardous waste sites, for which Allegiance has
assumed responsibility. The largest assumed exposure is at the Thermo-Chem site
in Muskegon, Michigan. Allegiance expects that the total cleanup costs for this
site will be between $44 million and $65 million, of which Allegiance's share
will be approximately $5 million. This amount, net of payments of approximately
$1 million, has been accrued and is reflected in Allegiance's combined financial
statements. The estimated exposure for the remaining nine sites is approximately
$4 million, which has been accrued and reflected in Allegiance's combined
financial statements.

Upon resolution of any of the uncertainties described in Note 12 to "Notes
to Combined Financial Statements," Allegiance may incur charges in excess of
available reserves. Management does not believe that such charges will have a
material impact on Allegiance's results of operations, cash flow or financial
position.

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<PAGE>
BUSINESS

OVERVIEW

Allegiance is America's largest provider of health-care products and
cost-management services for hospitals and other health-care providers.
Allegiance was formed in June 1996 as a wholly owned subsidiary of Baxter
consisting of Baxter's U.S. distribution, surgical and respiratory-therapy
products, and health-care cost-management services operations. These integrated
businesses recorded total sales of approximately $4.5 billion in 1995.

The economics of health care are undergoing rapid and fundamental change,
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 the care of patients. 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 is continuing to
climb with the dramatic growth of elderly populations in the United States and
abroad. This environment offers opportunities for Allegiance, which has invested
in integrated product and service programs that help medical professionals cope
with health care's new economics and demographic trends. Management believes
Allegiance, with its size, breadth of product line, customer relationships,
growing array of cost-management services, and financial strength, is
well-positioned competitively for the increasingly cost-conscious health-care
marketplace.

The health-care distribution market in the United States has experienced
intense competition and a resultant erosion in its margins in recent years in
response to the growth of managed care and increased consolidation among
health-care providers. Allegiance has responded by integrating its
market-leading distribution capabilities with a broad product offering, high
levels of customer service and innovative cost-management services. Within a
larger Baxter organization, Allegiance's cost structure was higher than industry
standards. As an independent public company, Allegiance intends to realign its
cost structure in order to improve returns from its distribution operations.

STRATEGIC PROFILE

Allegiance's leading competitive position within the health-care marketplace
is a function of several key advantages, including its size and breadth of
products; an intense customer-service orientation; a growing portfolio of
cost-management services, and financial strength. Allegiance is the only
health-care company that fully integrates distribution, products and services to
bring greater efficiency to health care. Management believes its key competitive
advantages and integrated product and service offerings provide a solid platform
for growth.

SIZE AND BREADTH

Allegiance is the largest provider of health-care products and
cost-management services in the United States. Total net sales in 1995 were
approximately $4.5 billion. Allegiance offers more than 200,000 products -- the
broadest range of medical and laboratory products in the industry. Allegiance's
offering includes its own products as well as products manufactured by more than
2,000 independent suppliers. Allegiance operates more than 60 distribution
centers across the country, delivering products often on a just-in-time basis.
Management believes the size and scope of the Company are key competitive
advantages in the evolving health-care environment.

CUSTOMER SERVICE

Allegiance is recognized throughout the industry for its service to
customers. Allegiance develops relationships based on collaboration, quality
management processes and common goals. Its sales and

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<PAGE>
service personnel are rewarded for achieving goals that are established jointly
with customers. Allegiance sets service standards in an industry where the time
from customer order to delivery can be critical. Management believes its focus
on customer service and satisfaction will continue to distinguish Allegiance
from competitors.

COST-MANAGEMENT SERVICES

Allegiance has pioneered a broad range of cost-management services, such as
shared-risk/shared-savings agreements that align Allegiance's goals with those
of its customers. Allegiance and its customers work together to reduce costs and
improve the quality of care. Allegiance assigns clinician consultants to these
cost-management customers. Allegiance's consultants use a proprietary "best
demonstrated practices" database of more than 500 procedures to help health-care
professionals use fewer supplies and improve outcomes. In addition to clinical
consulting, Allegiance offers a range of cost-management services, including
just-in-time delivery, procedure-based product packaging and outsourcing of
certain non-clinical functions. Management believes this portfolio of
cost-management services is a key competitive advantage in the increasingly
cost-conscious health-care market.

FINANCIAL STRENGTH

As America's leading provider of health-care products and cost-management
services, Allegiance has unparalleled opportunity to provide its services to
health-care providers. In 1995, on a pro forma basis, Allegiance achieved
approximately $4.5 billion of net sales, $950 million of gross profit and $350
million of earnings before interest, taxes, depreciation and amortization, or
EBITDA. Management believes that Allegiance's size and flexibility are important
competitive advantages in the rapidly changing health-care industry. In
addition, Allegiance has established an incentive compensation program for
senior managers that is linked to achieving certain cash-flow and earnings
objectives.

STRATEGIC PRIORITIES

Allegiance's strategy is to continue to improve the efficiency of and
returns from its distribution operations, to increase market penetration for its
self-manufactured and "best value" preferred distributed products, and to expand
its ability to help health-care professionals manage costs.

DISTRIBUTION SERVICES

Distribution services are the basis for Allegiance's relationships with
hospitals and laboratories and the starting point for strategic relationships
that align Allegiance's objectives with those of its customers. Strategic
priorities include improving the total economics of distribution; segmenting
customers based on their service needs; and increasing sales of "best value"
products, which result in better service for customers and higher returns for
Allegiance.

PRODUCT OFFERING

Allegiance's products -- from latex gloves to customized surgical-procedure
kits -- hold leadership positions in sales to U.S. hospitals. Allegiance's
strategic priorities include: (i) increasing sales through cost-management
agreements; (ii) increasing sales to non-hospital (alternate-site) health-care
providers in the United States and to customers in selected international
marketplaces; (iii) developing new integrated offerings of products and
cost-management services; (iv) selectively expanding the Allegiance product
portfolio; and (v) maintaining manufacturing operations at the highest levels of
quality and efficiency.

COST-MANAGEMENT SERVICES

Allegiance can bring to its customers more resources to control costs than
are offered by any competitor. Allegiance's strategy is to work in partnership
with hospitals and others in health care to help them become more efficient,
decrease costs and eliminate many of the logistical burdens that detract from
their primary business -- providing health care. Strategic priorities include
signing more shared-risk/shared-savings agreements and investing in new
cost-management services -- beyond supplies and logistics -- that help customers
reduce costs across a greater portion of their total operating budget.

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<PAGE>
DISTRIBUTION SERVICES

Allegiance is the leading distributor of medical and laboratory products in
the United States. Allegiance can supply any of more than 200,000 different
products to its customers. Most items are available for shipment the same day
the customer requests them. Allegiance has more than 60 U.S. distribution
centers that deliver products to locations across the United States every day.
Each order can be tracked electronically. Allegiance has made substantial
investments in information systems to enhance its operations and improve service
to customers. In addition to its own surgical and respiratory-therapy products,
Allegiance distributes an array of products from more than 2,000 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.

Allegiance divides its distributed products into two categories:
medical/surgical products ("med/ surg") and laboratory products. It 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 others.
Increasingly, these products are being delivered just-in-time in ready-to-use
quantities. In some cases, Allegiance delivers the products directly to patient
floors. Allegiance distributes products not only to hospitals, but increasingly
to surgery centers, physician clinics, 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 primarily to hospitals and
reference labs. These products include supplies such as test tubes, pipettes and
slides and equipment such as microscopes, centrifuges and scales.

THE VALUELINK-REGISTERED TRADEMARK- SERVICE

Allegiance's ValueLink-Registered Trademark- "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-Registered Trademark- 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-Registered Trademark- accounts,
Allegiance personnel work at the hospital 24 hours a day, stocking shelves as
needed. Demand for this service has been strong. Allegiance ended 1995 with 130
ValueLink-Registered Trademark- accounts, compared with 114 in 1994 and 53 at
the end of 1993.

The ValueLink-Registered Trademark- service also serves as a channel through
which Allegiance 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

In 1995, Allegiance began a process of consolidating its distribution
service around a carefully selected group of preferred suppliers, not
relinquishing product breadth, but seeking to reduce the number of suppliers
that furnish redundant items. This "best value" products strategy is designed to
strengthen Allegiance's relationships with fewer preferred suppliers, resulting
in savings to Allegiance and better service to its customers. At the same time,
Allegiance is continuing to streamline its distribution network to reduce costs,
improve service and strengthen the growing number of cost-management
relationships it is establishing with health-care providers and systems.

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 internally 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 has made major
investments in information technology that uses EDI, or electronic data
interchange, to exchange purchasing

29
<PAGE>
and inventory data with many of its suppliers and largest 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 aggregating 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 re-evaluate their cost position and integrate into regional networks.
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
alternate-site customers -- surgery centers, physician clinics, subacute and
long-term care facilities, and home-care providers -- Allegiance has developed a
capability to make more frequent deliveries of smaller orders. Allegiance also
is entering into relationships with dealers that specialize in serving these
fast-growing markets. For some very 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.

PRODUCT OFFERING

Allegiance has differentiated itself by integrating its product offering
with its distribution and cost-management services. Allegiance offers the
industry's broadest range of medical and laboratory products, representing more
than 2,000 suppliers in addition to its own line of surgical and respiratory-
therapy products.

Increasingly, Allegiance is working 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's manufacturing
units custom-assemble purchased products into procedure-based modules.
Allegiance's distribution system -- the largest and most technologically
advanced of the industry -- delivers the customized packages as they are needed.
No other single company provides such a comprehensive offering.

Allegiance operates 28 manufacturing plants, producing products used in
surgery and other medical procedures. All Allegiance plants are ISO 9000
certified. Most of Allegiance's self-manufactured products hold leading sales
positions, and investing further in these product lines is a strategic priority.

Allegiance has several major product lines, most of which enjoy leading
sales positions:

CUSTOM-STERILE-TM- PRODUCTS AND THE PBDS-TM- SERVICE

Allegiance's leading Custom-Sterile-TM- products and Procedure Based
Delivery System-TM- (PBDS-TM-) service help health-care providers save time and
money by assembling customer-designated supplies into single 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 cuts
and bruises. Customers also can select items for these packs from a data base of
approximately 30,000 products from nearly 800 manufacturers. PBDS-TM- modules
contain Custom-Sterile-TM- packs along with non-sterile supplies. PBDS-TM- is
one of Allegiance's fastest-growing product-based cost-management services.
Introduced in 1993, the service was in place in 175 hospitals by the end of 1995
and is expected to be in place in 400 hospitals by the end of 1996. PBDS-TM-
modules often are delivered to operating rooms and other hospital departments on
a just-in-time basis through Allegiance's ValueLink-Registered Trademark-
distribution service.

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<PAGE>
CONVERTORS-REGISTERED TRADEMARK- PRODUCTS

The Convertors-Registered Trademark- 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-Registered Trademark-
products are included in Custom Sterile-TM- packs.
Convertors-Registered Trademark- 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 latex surgical and exam gloves in Malaysia, the
world's biggest source of natural latex, as well as in the United States.
Allegiance also manufactures vinyl exam gloves in the United States.

MEDI-VAC-REGISTERED TRADEMARK- PRODUCTS

Allegiance is the world's leading producer of fluid suction and collection
systems. The Medi-Vac-Registered Trademark- 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-Registered Trademark- product
line also includes wound-drainage tubing and reservoirs used to remove fluid
from closed wounds, preventing infection and promoting healing.
Medi-Vac-Registered Trademark- autotransfusion systems collect blood for
reinfusion to the patient after filtration, allowing patients to receive their
own blood instead of transfusions from donors.

RESPIRATORY THERAPY PRODUCTS

Allegiance is a leading manufacturer of respiratory-therapy products, which
are used primarily to deliver oxygen to patients suffering from respiratory
distress. 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.

V. MUELLER

Allegiance's V. Mueller product line consists of a broad range of
stainless-steel surgical instruments and related products and services. The
business was established in 1895 and is known worldwide for the quality of its
instruments. Allegiance's V. Mueller division manufactures about a third of its
product line; other products are sourced from contract manufacturers. V. Mueller
products include clamps, needle-holders, retractors, specialty scissors and
forceps. The business unit also manufactures and markets the cost-saving
Genesis-TM- container system -- complete instrument sets, assembled to order,
sterilized and ready for use in reusable metal containers.

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 is a manufacturer and a marketer of a range of other leading
products. It is the world's largest producer of latex urinary drainage
catheters, and it manufactures endotracheal tubes for respiration, anesthesia
and other therapies. Allegiance 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. It also
manufactures and markets a broad line of patient-preparation, hair-removal and
skin-care products such as clippers, razors, and basins, as well as special
soaps, sponges and scrub brushes for surgeons and other operating-room
personnel.

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<PAGE>
COST-MANAGEMENT SERVICES

Reducing costs while improving quality of care is the most significant
challenge facing health-care providers today. Allegiance offers the broadest
range of cost-management services in the health-care industry and is investing
significantly to expand its offering further.

Through its shared-risk/shared-savings programs, Allegiance aligns its goals
with those of its customers. Under these agreements, which Allegiance introduced
to the health-care industry in late 1994, the Company 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. As of June 1, 1996,
Allegiance had shared-risk/shared-savings agreements covering 16 hospitals. In
shared-risk/shared-savings accounts, Allegiance assigns a clinical project
manager to work with a hospital's clinical staff to identify patterns of supply
usage, 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 the
best-value product, 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 from Allegiance. Sales
of Allegiance's surgical products, for example, have grown more than 40% in
these accounts, while the hospitals' total supply costs have decreased. To the
extent that savings do not materialize from these efforts, Allegiance will be
obligated to reimburse the customer for a portion of the shortfall.

Much of the savings generated in these cost-management accounts come from
the implementation of PBDS-TM- 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- modules are delivered just-in-time, direct to the point of use
through Allegiance's ValueLink-Registered Trademark- service. Only Allegiance
can offer such a unique combination of products and cost management services.

In addition, Allegiance offers customers professional consulting services,
including modules derived from Allegiance's proprietary database of
"best-demonstrated practices," to help hospitals improve their clinical
operations, reduce lengths of stay and improve clinical outcomes. Allegiance
also offers, through its ACCESS-TM- program, the expertise and services of
leaders in other industries such as waste management, food service and property
management.

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. The
Right Choice-TM- 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 purchasers. Some of these contracts are for 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
incentives to purchase particular products or categories of products. Some of
these contracts are entered into with hospital buying groups which seek to
achieve economies of scale in aggregating multiple hospitals' purchases from
Allegiance.

32
<PAGE>
For the last three years, as a percentage of Allegiance's total revenue,
sales to customers which are members of two of the largest hospital buying
groups, Premier Purchasing Partners, LP ("Premier," which is an affiliate of
Premier, Inc.) and VHA, Inc. ("VHA"), comprised 27% and 16% respectively in
1995, 23% and 13% respectively in 1994, and 23% and 13% respectively in 1993.
Some member hospitals in each group are free to purchase from the vendors of
their choice. The loss of the relationship with either group would not
necessarily mean the loss of sales attributable to all members of such group. In
addition, management of Allegiance believes that its relationships with its
larger customers are excellent. No other buying group or single customer
currently accounts for more than 10% 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 has implemented a "team selling" approach with
many of its hospitals, health systems and multi-hospital group customers. This
approach relies on an account manager to coordinate the various Allegiance
businesses' sales efforts. The account manager assumes responsibility for all
sales and service contacts with a given customer, acting as a focal point, and
assembles cross-functional teams as needed to meet that customer's requirements.
Allegiance manages its field sales and service organization on a regional basis.
The regional sales organization is designed to develop strong strategic
relationships with customers. In addition, sales are made to independent
distributors, dealers and sales agents. Outside of the U.S., Allegiance products
are distributed through Baxter. See "Relationship with Baxter."

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 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. See "-- Contractual Arrangements; Buying Groups" and
"Relationship with Baxter."

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 is faced with substantial competition in all of its markets. The
changing health-care environment in recent years has led to increasingly intense
competition among health-care suppliers. Competition is focused on price,
service and product performance. Pressure in these areas is expected to
continue. See "Risk Factors -- United States Competition."

The future financial success of health-care product and service companies,
such as Allegiance, will depend on their ability to work with health-care
customers to help them enhance their competitiveness through cost management
initiatives. Management believes it can help its customers achieve savings in
the total health-care system by automating supply-ordering procedures,
optimizing distribution networks, improving utilization and materials management
and achieving economies through product and procedure standardization, and
performing certain non-clinical services on an outsourced basis. Management
further believes that its strategy of providing high levels of service to its
health-care customers and achieving the best overall cost in its delivery of
health-care products and services is compatible with any anticipated realignment
of the U.S. health-care system that may ultimately occur.

33
<PAGE>
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, result 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.

GOVERNMENT REGULATION

Most of the products manufactured or sold by Allegiance in the United States
are subject to regulation by the Food and Drug Administration ("FDA"), as well
as by other federal and state agencies. The FDA regulates the introduction and
advertising of new drugs and devices as well as manufacturing procedures,
labeling and record keeping with respect to drugs and devices. The FDA has the
power to seize adulterated or misbranded drugs and devices or to require the
manufacturer to remove them from the market and the power to publicize relevant
facts. From time to time, Baxter 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 exist in most other countries
where Allegiance will do business.

Environmental policies of Allegiance mandate compliance with all applicable
regulatory requirements concerning environmental quality and contemplate, among
other things, appropriate capital expenditures for environmental protection.
Various non-material capital expenditures for environmental protection were made
by Baxter related to the Allegiance Business during 1995 and similar
expenditures are planned for 1996. See "-- Legal Proceedings."

EMPLOYEES

As of August 1, 1996, Allegiance employed approximately 22,000 people.

LEGAL PROCEEDINGS

As of the Distribution Date, Allegiance assumed the defense of litigation
involving claims related to the Allegiance Business, including certain claims of
alleged personal injuries as a result of exposure to natural rubber latex gloves
described below. Allegiance has not been named as a defendant in this litigation
but will be defending and indemnifying Baxter Healthcare Corporation ("BHC"), as
contemplated by the Reorganization Agreement, for all expenses and potential
liabilities associated with claims pertaining to this litigation. It is expected
that Allegiance will be named as a defendant in future litigation, and may be
added as a defendant in existing litigation.

BHC was one of ten defendants named in a purported class action filed in
August 1993, on behalf of all medical and dental personnel in the state of
California who allegedly suffered allergic reactions to natural rubber latex
gloves and other protective equipment or who allegedly have been exposed to
natural rubber latex products. (KENNEDY, ET AL., V. BAXTER HEALTHCARE
CORPORATION, ET AL., Sup. Ct., Sacramento Co., Cal., #535632). The case alleges
that users of various natural rubber latex products, including medical gloves
made and sold by BHC and other manufacturers, suffered allergic reactions to the
products ranging from skin irritation to systemic anaphylaxis. The Court granted
defendants' demurrer to the class action allegations. On February 29, 1996, the
California Appellate Court upheld the trial court's ruling. In April 1994, a
similar purported class action, GREEN, ET AL. V. BAXTER HEALTHCARE CORPORATION,
ET AL., (Cir. Ct., Milwaukee Co., WI, 94CV004977) was filed against Baxter and
three other defendants. The class action allegations have been withdrawn, but
additional plaintiffs added individual claims. On July 1, 1996, the Company was
served with a similar purported class action, WOLF V. BAXTER HEALTHCARE CORP. ET
AL., Circuit Court, Wayne County, MI, 96-617844NP. The Company is the only named
defendant in that suit. As of August 19, 1996, 36 additional lawsuits have been
served on BHC containing similar allegations of sensitization to natural rubber
latex products. Allegiance intends to vigorously defend against these actions.
Since none of these cases has proceeded to a hearing on the merits, Allegiance
is unable to evaluate the extent of any potential liability, and unable to
estimate any potential loss.

34
<PAGE>
Allegiance believes that a substantial portion of the liability and defense
costs related to natural rubber latex gloves cases and claims will be covered by
insurance, subject to self-insurance retentions, exclusions, conditions,
coverage gaps, policy limits and insurer solvency. BHC has notified its
insurance companies that it believes that these cases and claims are covered by
BHC's insurance. Most of BHC's insurers have reserved their rights (i.e.,
neither admitted nor denied coverage), and may attempt to reserve in the future,
the right to deny coverage, in whole or in part, due to differing theories
regarding, among other things, the applicability of coverage and when coverage
may attach. It is not expected that the outcome of these matters will have a
material adverse effect on Allegiance's business, results of operations or
financial condition.

As of June 30, 1996, BHC has been named as a potentially responsible party
for cleanup costs at ten hazardous waste sites for which Allegiance has assumed
responsibility. Allegiance's largest exposure is at the Thermo-Chem site in
Muskegon, Michigan. Allegiance expects that the total cleanup costs for this
site will be between $44 million and $65 million, of which Allegiance's share
will be approximately $5 million. This amount, net of payments of approximately
$1 million, has been accrued and is reflected in Allegiance's combined financial
statements. The estimated exposure for the remaining nine sites is approximately
$4 million, which has been accrued and reflected in Allegiance's combined
financial statements. It is not expected that the outcome of these matters will
have a material adverse effect on Allegiance's business, results of operations
or financial condition.

BHC is a defendant in a number of other claims, investigations and lawsuits
for which Allegiance has assumed responsibility. Based on the advice of counsel,
management does not believe that the other claims, investigations and lawsuits
individually or in the aggregate, will have a material adverse effect on
Allegiance's business, results of operations or financial condition.

PROPERTIES

Allegiance owns or has long-term leases on substantially all of its major
manufacturing facilities. Allegiance maintains 28 manufacturing facilities in
the United States, and also operates manufacturing facilities in France,
Malaysia, Malta and Mexico. Allegiance owns or leases 60 distribution centers in
the United States.

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.

35
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The Company's directors and executive officers and their ages as of June 30,
1996 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------------------------------

<S> <C> <C>
Lester B. Knight................ 38 Chairman of the Board and Chief Executive Officer

Joseph F. Damico................ 42 President and Chief Operating Officer

Peter B. McKee.................. 58 Senior Vice President and Chief Financial Officer

Kathy Brittain White............ 46 Senior Vice President and Chief Information Officer

Robert B. DeBaun................ 46 Corporate Vice President

Mark J. Ehlert.................. 42 Corporate Vice President

Gail Gaumer..................... 44 Corporate Vice President of Allegiance Healthcare Corporation

Robert J. Zollars............... 39 Group Vice President of Allegiance Healthcare Corporation

Richard C. Adloff............... 38 Corporate Vice President and Controller

William L. Feather.............. 49 Senior Vice President, General Counsel and Secretary

Leonard G. Kuhr................. 38 Corporate Vice President and Treasurer

Silas S. Cathcart............... 70 Director

David W. Grainger............... 68 Director

Arthur F. Golden................ 50 Director

Michael D. O'Halleran........... 46 Director

Kenneth D. Bloem................ 50 Director

Connie Curran, Ed.D............. 49 Director

Roger L. Sisterman.............. 52 Corporate Vice President of Allegiance Healthcare Corporation
</TABLE>

LESTER B. KNIGHT has been chairman of the board and chief executive officer
of Allegiance, since June 1996. From 1992 to June 1996, Mr. Knight was executive
vice president of Baxter, responsible for its U.S. Healthcare business. Mr.
Knight joined Baxter in 1981 and served in several manufacturing,
research-and-development and management positions before being named general
manager of Baxter's renal business in 1987. He was named president of the renal
business in 1988 and president of the I.V. Systems business the following year.
He was elected a corporate vice president of Baxter in 1990, and was named
executive vice president in 1992.

JOSEPH F. DAMICO has been president and chief operating officer of
Allegiance, since June 1996. From 1993 to June 1996, Mr. Damico was group vice
president, responsible for Baxter's Field Sales, Health Systems, and
Distribution organizations in the U.S. Healthcare business. Mr. Damico joined
Baxter in 1979 as a sales representative and served in a variety of management
positions before being

36
<PAGE>
named vice president and general manager of the company's Custom Sterile
division in 1987. He was named president of the Convertors/Custom Sterile
business in 1989 and also assumed responsibility for Baxter's Pharmaseal
division in 1992. He was elected a corporate vice president the same year.

PETER B. MCKEE has been senior vice president and chief financial officer of
Allegiance since September 1996. From May 1996 to June 1996, Mr. McKee worked at
Baxter. Prior to that date, he had been senior vice president and chief
financial officer at FoxMeyer Health Corporation, a leading pharmaceutical
distributor, since 1993. Mr. McKee's career as a financial executive spans more
than 35 years. Before joining Dallas-based FoxMeyer, he worked in financial
consulting and held CFO positions at Metro Airlines and Swift Independent
Packing. He also has held senior financial positions at Ford Motor Company and
Cooper Industries Inc.

KATHY BRITTAIN WHITE has been senior vice president and chief information
officer of Allegiance since September 1996. Prior to that date, Ms. White served
as corporate vice president and chief information officer of Baxter, since 1995.
She came to Baxter from AlliedSignal Corporation, where she had served as vice
president, information systems and services since 1993. Prior to that, she was
vice president, corporate services, for Guilford Mills, Inc.

ROBERT B. DEBAUN has been a corporate vice president of Allegiance,
responsible for human resources, since September 1996. Prior to that date, Mr.
DeBaun served as vice president of human resources for the U.S. Distribution
organization of Baxter, since 1991. Mr. DeBaun joined Baxter in 1981 as manager
of college relations. In 1986, after a series of increasingly responsible
positions, he was named vice president, human resources, for Baxter's I.V.
Systems group.

MARK J. EHLERT has been a corporate vice president of Allegiance,
responsible for quality assurance and regulatory affairs, since September 1996.
Prior to that date, Mr. Ehlert served as vice president, quality and regulatory
affairs, for Baxter's U.S. Sales and Distribution organization, since 1994. Mr.
Ehlert joined Baxter in 1975. In 1990, after a series of increasingly
responsible positions, he was promoted to general manager of Baxter's Singapore
manufacturing operations.

GAIL GAUMER has been a corporate vice president of a subsidiary of
Allegiance, responsible for strategy and business development as well as cost
management services, since September 1996. Prior to that date, Ms. Gaumer served
as president of marketing, strategy and business development for Baxter's U.S.
Healthcare business, since 1995. Ms. Gaumer joined Baxter in 1980 and held a
number of positions in its subsidiary's Renal business. Most recently, she was
president of Renal-Europe. Before that, she was vice president of global
marketing, planning and new business development, and then vice president and
general manager for the Renal business. Before joining Baxter, she worked for
ALZA Corporation, a drug-delivery company. Ms. Gaumer is a director of FemRx,
Inc.

ROBERT J. ZOLLARS has been a group vice president of a subsidiary of
Allegiance since September 1996. He leads the regional companies and health
systems organizations of Allegiance. Prior to that date Mr. Zollars served as
president of Baxter's U.S. Distribution, responsible for its Hospital Supply/
Scientific Products, Life Sciences, Hospitex, Dietary Products, and ValueLink
distribution businesses, since 1994. Mr. Zollars joined Baxter in 1979 as a
sales representative for the Scientific Products division and rose to vice
president and general manager of the division in 1983. In 1986, he was named
president of the Dietary Products division, and in 1990, became president of the
I.V. Therapy business. He was named president of the Hospital Supply division in
1992, and assumed additional responsibility for Scientific Products in 1993.

RICHARD C. ADLOFF has been a corporate vice president and controller of
Allegiance, since September 1996. Prior to that date, Mr. Adloff served as vice
president of finance for Baxter's U.S. Healthcare business, since 1994. Mr.
Adloff joined Baxter in 1980 with the Hospital Supply division. In 1990, after a
series of increasingly responsible positions in distribution and manufacturing,
he was promoted to vice president -- finance of IV Systems.

WILLIAM L. FEATHER has been senior vice president, general counsel and
secretary of Allegiance since June 1996 and will head its law function. Prior to
that date, Mr. Feather served as associate general

37
<PAGE>
counsel for Baxter's U.S. Healthcare business since January 1996. Mr. Feather
joined Baxter in 1986 as corporate counsel. He was promoted to senior counsel in
1990 and assistant general counsel in January 1994.

LEONARD G. KUHR has been a corporate vice president and treasurer of
Allegiance since September 1996. He will also supervise its tax function. Prior
to June 1996, Mr. Kuhr served as vice president, capital markets, in a Baxter
subsidiary's Treasury group since 1995. From 1992 to 1995, Mr. Kuhr was vice
president, finance, for Baxter's Surgical business. Mr. Kuhr joined Baxter in
1979 and served in a variety of management positions in the Corporate Tax
department, in both domestic and international functions. He was named vice
president and controller of the Specialty Business group in Baxter's U.S.
Distribution business in 1992.

SILAS S. CATHCART has been a director of Allegiance since September 1996.
Mr. Cathcart is a director of General Electric Company and The Quaker Oats
Company. Mr. Cathcart is also a trustee of Northern Funds Mutual Fund. From 1985
to 1987, and from 1990 to the present, Mr. Cathcart served as a director of
Baxter. From 1970 to 1985 he served as a director of American Hospital Supply
Corporation. Mr. Cathcart served as chairman of the board and chief executive
officer of Kidder, Peabody Group Inc., an investment banking firm, from 1988 to
1989, and as president and chief executive officer from 1987 to 1988. From 1972
to 1986, he was chairman of Illinois Tool Works, Inc.

DAVID W. GRAINGER has been a director of Allegiance since September 1996.
Since 1968, Mr. Grainger has been chairman of the board of W. W. Grainger, Inc.,
a nationwide distributor of equipment, components and supplies. He joined W. W.
Grainger, Inc. in 1952. From 1990 to the present, Mr. Grainger has served as a
director of Baxter.

ARTHUR F. GOLDEN has been a director of Allegiance since September 1996.
Since 1978, Mr. Golden has been a partner of Davis, Polk & Wardwell, a general
practice law firm. He is a director of Esco Electronics Corporation and Borg
Warner Security Corporation.

MICHAEL D. O'HALLERAN has been a director of Allegiance since September
1996. Since 1995, Mr. O'Halleran has been president of Aon Group, Inc., an
insurance holding company, and since 1988, he has been the chairman of the board
of Aon Risk Services, Inc., a subsidiary of that company.

KENNETH D. BLOEM has been a director of Allegiance since September 1996.
Since 1994, Mr. Bloem has been the chief executive officer of The Advisory Board
Company, a privately held research and publishing company. From 1989 to 1994, he
was the president of Stanford University Hospital.

CONNIE CURRAN has been a director of Allegiance since September 1996. Since
1995, Ms. Curran has been president of CurranCare, Inc., a nation-wide hospital
based home care management company. From 1990 to 1995, she was the vice
chairman/national director of patient services of APM, Inc.

ROGER L. SISTERMAN has been a corporate vice president of a subsidiary of
Allegiance, responsible for manufacturing worldwide, since September 1996. Prior
to that date, Mr. Sisterman served as vice president of manufacturing and
operations for the U.S. Healthcare business of Baxter since 1994. Mr. Sisterman
joined Baxter in 1977 and held a number of positions. In 1985, Mr. Sisterman
became director of materials management for Baxter's Pharmaseal division. In
1987, he was promoted to vice president of manufacturing for Baxter Custom
Sterile, and in 1991, for Baxter Convertors/Custom Sterile.

CLASSIFIED BOARD OF DIRECTORS

The Certificate of Incorporation of Allegiance provides that the Allegiance
directors (other than those who may be elected by the holders of any series of
Preferred Stock of Allegiance under specified circumstances), will be divided
into three classes of directors, with the classes to be as nearly equal in
number as possible. The Certificate of Incorporation provides that the term of
office of the first class will expire at the 1997 annual meeting of stockholders
("Class I"), the term of office of the second class will expire at the 1998
annual meeting of stockholders ("Class II") and the term of office of the third
class will

38
<PAGE>
expire at the 1999 annual meeting of stockholders ("Class III"). Messrs.
Cathcart and O'Halleran serve as Class I directors, Messrs. Damico and Golden
and Ms. Curran serve as Class II directors and Messrs. Knight, Grainger and
Bloem serve as Class III directors.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors of Allegiance has established two Committees, the
Audit and Public Policy Committee and the Compensation and Nominating Committee.

The Audit and Public Policy Committee reviews the scope of the audit by the
independent auditors, inquires into the effectiveness of Allegiance's accounting
and internal control functions, and recommends to the Allegiance Board any
changes in the appointment of independent auditors which the committee may deem
to be in the best interests of the corporation and its stockholders. The
committee also assists the Board in establishing and monitoring compliance with
the ethical standards of Allegiance. The Audit and Public Policy Committee also
reviews the policies of Allegiance to assure they are consistent with its social
responsibility to employees, customers and to society, including policies
relating to health and safety and ethics. The committee consists solely of
directors who are independent of management. Members of this committee consist
of Mr. O'Halleran (Chairman), Mr. Cathcart, Mr. Grainger, Mr. Golden, Mr. Bloem
and Ms. Curran.

The Compensation and Nominating Committee determines the compensation of
officers, other than the chairman of the board and chief executive officer,
exercises the authority of the Board concerning employee benefit plans,
administers Allegiance's stock option plans, and advises the Board on other
compensation and employee benefit matters. In addition, the committee makes
recommendations to the Board regarding candidates for election as directors of
Allegiance. The committee also advises the Board on board committee structure
and membership. The committee consists solely of directors who are independent
of management. Members of this committee consist of Mr. Cathcart (Chairman), Mr.
Golden, Mr. O'Halleran, Mr. Bloem and Ms. Curran.

COMPENSATION OF DIRECTORS

Cash compensation of non-employee directors consists of a $1,000 fee for
each board and each committee meeting attended. Chairpersons of committees
receive an additional annual retainer of $3,000. Employee directors are not
compensated separately for their board or committee activities.

In addition, to align the directors' interests more closely with the
interest of all of the Company's stockholders, each non-employee director
receives options to purchase (at fair market value on the date of grant) 10,000
shares of Allegiance common stock under the Allegiance Corporation 1996 Outside
Director Incentive Compensation Plan. Such options vest one year after date of
grant. An aggregate of 350,000 shares of common stock are reserved for issuance
under such plan.

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<PAGE>
EXECUTIVE COMPENSATION

The following table shows the 1995 compensation for services rendered by the
chairman of the board and chief executive officer of Allegiance and the
individuals who are expected to be the next four most highly compensated
executive officers of Allegiance (collectively, the "named executive officers")
based on their 1995 Baxter compensation. The compensation shown in this table
was paid by Baxter (or its subsidiaries) for all of their services to Baxter and
its subsidiaries. References to "restricted stock" and "stock options" mean
restricted shares of common stock of Baxter ('Baxter Stock') and options to
purchase Baxter Stock. Amounts shown are for each individual in their last
position with Baxter, and do not necessarily reflect the compensation which
these five individuals will earn in their new capacities as executive officers
of Allegiance.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------------
AWARDS
ANNUAL COMPENSATION --------------------------
------------------------------------------------ RESTRICTED SECURITIES PAYOUTS
OTHER ANNUAL STOCK UNDERLYING ------------- ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS LTIP PAYOUTS COMPENSATION
POSITION YEAR ($)(1) ($)(1) ($) ($)(2) (#) ($) ($)(3)
- ---------------------- --------- --------- --------- --------------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lester B. Knight 1995 $ 367,000 $ 350,000 $ 12,134 $ 23,139 44,800 -0- $ 23,241
Chairman of the Board
& Chief Executive
Officer
Joseph F. Damico 1995 $ 285,000 $ 170,000 $ 2,432 -0- 22,900 -0- $ 13,866
Chief Operating
Officer
Kathy B. White 1995 $ 182,692 $ 142,500 $ 929 $ 319,600 41,000 -0- $ 0
Corporate Vice
President
Robert J. Zollars 1995 $ 230,000 $ 43,200 -- -0- 10,000 -0- $ 9,346
Corporate Vice
President
Gail Gaumer 1995 $ 200,000 $ 43,200 -- -0- 8,500 -0- $ 8,446
Corporate Vice
President
</TABLE>

- ---------------
(1) Amounts shown include cash compensation earned by the named executive
officers during the year indicated, including amounts deferred at the
election of those officers. Bonuses are paid in the year following the year
during which they are earned.

(2) Amounts shown represent the market value at the date of grant, without
giving effect to the diminution in value attributable to the restrictions on
such stock. The amounts shown in this column include grants to the specified
named executive officers under Baxter's 1989 Long-Term Incentive Plan. The
restricted shares granted to Mr. Knight and Ms. White under that Plan could
be earned based on 1996 performance and, if so, they would ordinarily vest
on December 31, 1997. As of December 31, 1995, the number and value of the
aggregate Baxter restricted stock holdings of the named executive officers
are as follows: Mr. Knight -- 22,000 shares ($921,250); Mr. Damico -- 11,508
shares ($481,898); Ms. White -- 9,400 shares ($393,625); Mr. Zollars --
6,931 shares ($290,236); Ms. Gaumer -- 4,408 shares ($184,585). Dividends
are payable on all outstanding shares of Baxter restricted stock held by all
executives at the same rate and time and in the same form in which dividends
are payable on all outstanding shares of Baxter Stock, as required by
Baxter's 1987 Incentive Compensation Program.

(3) Amounts shown represent Baxter matching contributions in Baxter's Incentive
Investment Plan, a qualified section 401(k) profit sharing plan, additional
matching contributions in Baxter's deferred compensation plan and the dollar
value of Baxter split-dollar life insurance benefits. Those three amounts
for 1995, expressed in the same order as identified above, for the named
executive officers are as follows: Mr. Knight -- $4,500, $18,510, and $231;
Mr. Damico -- $4,500, $9,300, and $66; Ms. White -- (none); Mr. Zollars --
$4,500, $4,762, and $84; Ms. Gaumer -- $4,500, $3,852, and $94.

40
<PAGE>
Of the five named executive officers, Mr. Zollars and Ms. Gaumer are
eligible to receive a special incentive payment equal to one times annual base
salary. The payment will be made on December 31, 1996 as long as they have not
voluntarily resigned, been terminated for cause, or have accepted a position
outside of the Allegiance organization.

STOCK OPTION GRANTS

The following table contains information relating to the Baxter stock option
grants made in 1995 under Baxter's 1994 Incentive Compensation Program to the
named executive officers.

BAXTER OPTION GRANTS IN LAST FISCAL YEAR (1)(2)(3)

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------
PERCENT OF
NUMBER OF TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES IN EXERCISE OR PRICE APPRECIATION FOR OPTION TERM
OPTIONS FISCAL BASE PRICE EXPIRATION --------------------------------------------
NAME GRANTED (#) YEAR (4) ($/SH)(5) DATE 0% ($) 5% ($)(6) 10% ($)(6)
- -------------------------- ------------ ------------- ----------- ----------- ----------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mr. Knight................ 44,800 0.9% $ 37.25 7/29/05 $ -0- $ 1,049,498 $ 2,659,637
Mr. Damico................ 22,900 0.4% $ 37.25 7/29/05 $ -0- $ 536,462 $ 1,359,502
21,000 0.4% $ 37.25 7/29/05 $ -0- $ 491,952 $ 1,246,705
Ms. White (7)............. 20,000 0.4% $ 34.00 4/24/05 $ -0- $ 427,648 $ 1,083,744
Mr. Zollars............... 10,000 0.2% $ 37.25 7/29/05 $ -0- $ 234,263 $ 593,669
Ms. Gaumer................ 8,500 0.2% $ 37.25 7/29/05 $ -0- $ 199,124 $ 504,619
</TABLE>

- ---------------
(1) No SARs were granted by Baxter in 1995.

(2) All options shown in this table except for the 20,000 share grant to Ms.
White, become exercisable five years from the date of grant, subject to
accelerated vesting as follows. One hundred percent of the option will
become exercisable on the first business day after the ninetieth consecutive
calendar day during which the average fair market value of Baxter Stock
equals or exceeds $50 per share. Ms. White's 20,000 share grant becomes
exercisable five years from the date of grant, subject to accelerated
vesting as follows. Fifty percent of the option became exercisable on
December 27, 1995; fifty percent of the option will become exercisable on
the first business day after the ninetieth consecutive calendar day during
which the average fair market value of Baxter Stock equals or exceeds $50
per share. The exercise price may be paid in cash or shares of Baxter Stock.
Baxter's 1994 Program provides that if specified corporate control changes
occur, all outstanding options will become exercisable immediately.

(3) The Compensation Committee of the Board of Directors of Baxter adopted an
equitable adjustment formula applicable to all options to purchase Baxter
Stock which are outstanding as of the Distribution Date. The formula, which
is consistent with tax and accounting rules, is intended to preserve the
value of the options after the Distribution Date.

(4) In 1995, Baxter granted options on approximately 5.2 million shares of
Baxter Stock to approximately 6,400 employees.

(5) The exercise price shown is the closing price of Baxter Stock on the date of
grant, which was July 31, 1995 for all options except the option granted to
Ms. White for 20,000 shares. The exercise price shown for the 20,000 shares
granted to Ms. White is the closing price of Baxter Stock on the date of
grant which was April 24, 1995.

(6) The amounts shown in these two columns represent the potential realizable
values using the options granted and the exercise price. The assumed rates
of stock price appreciation are set by the Commission's executive
compensation disclosure rules and are not intended to forecast the future
appreciation of Baxter Stock.

(7) The 20,000 share grant to Ms. White was an element of the compensation
package provided to her upon joining Baxter in her current role. The 21,000
share grant she received was part of Baxter's normal option grant process.

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STOCK OPTION EXERCISES

The following table contains information relating to the exercise of Baxter
stock options by the named executive officers in 1995 as well as the number and
value of their unexercised Baxter options as of December 31, 1995.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END (#)(1) AT FISCAL YEAR END ($)(2)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ------------ ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Knight............... -0- N/A 46,757 53,800 $ 619,426 $ 350,075
Mr. Damico............... -0- N/A 32,140 27,733 $ 486,278 $ 182,652
Ms. White................ -0- N/A 10,000 31,000 $ 78,750 $ 175,875
Mr. Zollars.............. -0- N/A 27,784 12,534 $ 429,462 $ 82,722
Ms. Gaumer............... -0- N/A 20,320 9,867 $ 310,449 $ 61,014
</TABLE>

- ------------
(1) The sum of the numbers under the Exercisable and Unexercisable columns of
this heading represents each named executive officer's total outstanding
Baxter options.

(2) The dollar amounts shown under the Exercisable and Unexercisable columns
represent the number of exercisable and unexercisable Baxter options,
respectively, which were "In-the-Money" on December 31, 1995, multiplied by
the difference between the closing price of Baxter Stock on December 31,
1995, which was $41.875 per share, and the exercise price of the Baxter
options. For purposes of these calculations, In-the-Money options are those
with an exercise price below $41.875 per share.

BAXTER PENSION PLAN

The Baxter International Inc. and Subsidiaries Pension Plan's (the "Baxter
Pension Plan") normal retirement benefit equals 1.75% of the average of an
employee's five highest consecutive calendar years of earnings out of his or her
last ten calendar years of earnings ("Final Average Pay"), multiplied by the
employee's years of benefit service, as determined by the Baxter Pension Plan.
In general, the earnings covered by the Baxter Pension Plan include salary,
annual cash bonuses and other regular pay. The figures shown include benefits
payable under the Baxter Pension Plan and Baxter's related defined benefit
excess pension plan. The estimates assume that benefit payments begin at age 65
under a single life annuity form. The figures are net of the Social Security
offset specified by the Baxter Pension Plan's benefit formula and therefore do
not include Social Security benefits payable from the federal government. The
primary Social Security amount used in the calculations is that payable for an
individual attaining age 65 in 1995.

Eligible Allegiance employees (transferring employees) will continue to
participate for purposes of benefit accruals in the Baxter Pension Plan through
the Distribution Date. All benefit accruals for Allegiance employees in the
Baxter Pension Plan cease as of the Distribution Date and all Allegiance
employees will be fully vested in their accrued benefits under the Baxter
Pension Plan as of such date. The terms of the Baxter Pension Plan will be
amended with respect to Allegiance employees to impute certain compensation paid
by Allegiance during 1996 in order to provide for a full year's earnings for
1996 to be included in determining the Final Average Pay of transferring
employees. Allegiance employees with vested accrued benefits in the Baxter
Pension Plan will have those benefits maintained by the Baxter Pension Plan
until they are eligible or required to receive them.

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<PAGE>
PENSION PLAN TABLE
Estimated Annual Retirement Benefits
Years of Pension Plan Participation (1)

<TABLE>
<CAPTION>
FINAL AVERAGE
PAY (1) 15 20 25 30 35
- -------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 22,300 $ 29,800 $ 37,200 $ 44,700 $ 52,300
200,000 48,600 64,800 81,000 97,200 113,500
300,000 74,800 99,800 124,700 149,700 174,800
400,000 101,100 134,800 168,500 202,200 236,000
500,000 127,300 169,800 212,200 254,700 297,300
600,000 153,600 204,800 256,000 307,200 358,500
700,000 179,800 239,800 299,700 359,700 419,800
</TABLE>

- ------------
(1) As of January 1, 1996, the named executive officers' years of Baxter Pension
Plan participation and Final Average Pay for purposes of calculating annual
retirement benefits payable under the Baxter Pension Plan are as follows:
Mr. Knight -- 13 years and $538,702; Mr. Damico -- 16 years and $370,048;
Ms. White -- 0 years and $0; Mr. Zollars -- 16 years and $254,798; Ms.
Gaumer -- 16 years and $216,743.

Although age 65 is the normal retirement age under the Baxter Pension Plan,
the Baxter Pension Plan has early retirement provisions based on a "point"
system. Under the point system, each participant is awarded one point for each
year of benefit service as determined by the Baxter Pension Plan and one point
for each year of age. Participants who terminate employment after accumulating
65 points, and who wait to begin receiving their Baxter Pension Plan benefits
until they have 85 points, receive the same Baxter Pension Plan benefits they
would otherwise receive at age 65, regardless of their actual age when they
begin receiving their Baxter Pension Plan benefits.

BAXTER STOCK HELD BY ALLEGIANCE EMPLOYEES

Baxter restricted stock held by Allegiance employees will continue to be
earned, based upon performance through December 31, 1996, and vested, in
accordance with the terms and conditions of those grants, as if the employee's
service with Allegiance were service with Baxter. Allegiance employees holding
Baxter Stock Options will, as of the Distribution Date, be considered terminated
and, as such, vesting and exercise will be in accordance with the terms and
conditions of the outstanding grants.

COMPENSATION OF EXECUTIVE OFFICERS

The compensation of Allegiance's executive officers for periods beginning on
and after the Distribution Date will be determined by the Board of Directors or
its Compensation and Nominations Committee.

COMPENSATION PHILOSOPHY. Allegiance's philosophy is to provide compensation
opportunities supporting Allegiance's values. Forms and levels of total
compensation will be structured to be competitive when compared to other
companies of similar focus and size. These companies are reported in surveys
whose participants include many companies in the Fortune 500 as well as other
companies with which Allegiance and its subsidiaries compete for executive
talent ("comparable companies"). This philosophy is intended to assist
Allegiance in attracting, retaining and motivating executives with superior
leadership and management abilities. Consistent with this philosophy, a total
compensation structure has been determined for each officer, including Mr.
Knight, consisting primarily of salary, cash bonus, stock options and benefits.
The proportions of these elements of compensation will vary among the officers
depending upon their levels of responsibility. The senior executive officers
will receive a larger portion of their total compensation through
performance-based incentive plans, which place a greater percentage of their
compensation at risk while more closely aligning their interests with the
interests of Allegiance's stockholders.

Allegiance's philosophy with respect to the cap on the tax-deductibility of
executive compensation will be to maximize the benefit of tax laws for
Allegiance's stockholders by seeking performance-based

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<PAGE>
exemptions where consistent with Allegiance's compensation policies and
practices. Allegiance will adopt performance goals for the officer cash bonus
plan which are expected to satisfy the deductibility requirements with respect
to any payments under those plans.

COMPENSATION ELEMENTS. Salaries will be established each year at a level
primarily intended to be competitive at the 50th percentile with salaries of
executive officers in comparable companies. In addition, officer salaries will
be based on the officer's individual performance. Bonuses are intended to
provide executive officers with an opportunity to receive additional cash
compensation but only if they earn it through Allegiance's achievement of strong
performance results as measured by key financial indicators. Each year, a bonus
target will be established for each executive officer at the 50th percentile of
the market data of comparable companies. After year-end results are calculated,
each officer's bonus will be determined based on Allegiance's performance
against the key financial indicators established for the year. Achievement of
the performance objective will determine an officer's opportunity to earn bonus
compensation either significantly above or below the 50th percentile of
opportunity within comparable companies.

Stock options will be granted under the Allegiance Corporation's 1996
Incentive Compensation Program. They represent a vehicle for more closely
aligning management's and stockholders' interests, specifically motivating
executives to remain focused on the market value of Allegiance Stock. The number
of stock options granted to executive officers is expected to be formula-driven.
The formula is designed to provide an opportunity to earn stock-based
compensation at a third-quartile level compared to executives in comparable
companies.

1996 INCENTIVE COMPENSATION PROGRAM

The Company's 1996 Incentive Compensation Program (the "Program") is
designed to promote success and enhance the value of Allegiance by linking
participants' interests more closely to those of Allegiance stockholders and by
providing participants with an incentive for excellence.

The Program is administered by the Compensation Committee of Allegiance
("Committee"). Incentives may consist of the following: (a) stock options; (b)
restricted stock; (c) stock awards; (d) performance shares; and (e) other
incentives, including cash. Incentives may be granted to any employee of
Allegiance (including directors of Allegiance who are also employees of
Allegiance) selected from time to time by the Committee. The Company has
authorized 9,683,000 shares for issuance under the Program.

Under the Program, the Committee may grant non-qualified and incentive stock
options to eligible employees to purchase shares of Allegiance Stock from
Allegiance. The Program gives the Committee discretion, with respect to any such
stock option, to determine the number and purchase price of the shares subject
to the option, the term of each option and the time or times during its term
when the option becomes exercisable, subject to the following limitations. No
stock option may be granted with a purchase price less than the fair market
value of the shares subject to the option on the date of grant and the term may
not exceed 10 years and one day from the date of grant. Except to the extent
that the Committee determines that another value is more appropriate given the
circumstances, the fair market value of shares on the date of a grant shall mean
the closing sale price of Allegiance Stock as reported on the New York Exchange
composite reporting tape. The initial option grant to the named executive
officers will be as follows: Mr. Knight, 514,000 shares; Mr. Damico, 330,000
shares; Ms. White, 124,000 shares; Mr. Zollars, 106,000; and Ms. Gaumer, 80,000
shares. These grants are intended to cover a two-year period.

SARs may be granted by the Committee pursuant to the Program in such number
and on such terms as the Committee may decide, provided that the term of an SAR
may not exceed 10 years and one day from the date of grant. SARs may be granted
together with or independently of any stock option. SARs may be paid in
Allegiance Stock or cash, as determined by the Committee.

Restricted stock consists of the sale or transfer by Allegiance to an
eligible employee of one or more shares of Allegiance Stock which are subject to
restrictions on their sale or other transfer by the

44
<PAGE>
employee. The price, if any, at which restricted stock will be sold will be
determined by the Committee, and it may vary from time to time and among
employees and may require no payment or be less than the fair market value of
the shares at the date of sale.

Stock awards consist of the transfer by Allegiance to an eligible employee
of shares of Allegiance Stock, without payment, as additional compensation for
his or her services to Allegiance or a subsidiary of Allegiance.

Performance shares consist of the grant by Allegiance to an eligible
employee of a contingent right to receive payment of shares of Allegiance Stock.
The performance shares will be paid in shares of Allegiance Stock, or cash
equivalents at the Committee's discretion, to the extent performance goals set
forth in the grant are achieved.

CHANGE IN CONTROL PLAN

Under Allegiance's Change of Control Plan ("Change in Control Plan"), the
Company entered into agreements with certain employees of the Company selected
to participate (including each of the named executive officers) which entitles
such employees to separation pay and benefits following a change of control in
Allegiance and the employee's subsequent termination of employment unless such
termination is voluntary and unprovoked or results from death, disability,
retirement or cause. The eligible termination must occur within 24 months of the
change of control or the agreement is void. Each agreement continues for three
years from the Distribution Date and automatically renews every three years from
that date unless the participants receive written notice of termination at least
ninety days prior to the renewal date. The separation pay provided will equal
the employee's one years' annualized base salary and target cash bonus plus the
value of all deferred or unvested awards under all incentive compensation plans
per the terms of the Program. For Messrs. Knight, Damico and McKee, the
separation pay provided will equal three years' annualized base salary and
target cash bonus plus the value of all deferred or unvested awards under all
incentive compensation plans per the terms of the Program. In addition, in the
event that any payments would be subject to an excise tax under the Code, the
Company will pay Messrs. Knight, Damico and McKee an additional gross-up amount
for any excise tax and federal, state and local income taxes, such that the net
amount of the payments would be equal to the net payments after income taxes had
the excise tax and resulting gross-up not been imposed.

ALLEGIANCE RETIREMENT PLAN

Allegiance's qualified defined contribution retirement plan (the "Allegiance
Retirement Plan") for its United States employees includes a section 401(k)
deferred compensation account ("401(k) account"), a company matching
contribution account, a fixed account, a performance account, and a transition
account for each eligible employee as described below.

The defined contribution accounts for transferring employees under the
Baxter International Inc. and Subsidiaries Incentive Investment Plan (the
"Baxter Incentive Investment Plan"), Baxter's qualified section 401(k) profit
sharing plan, were transferred to the Allegiance Retirement Plan. The Allegiance
Retirement Plan has established a fund to hold the Baxter stock currently held
on behalf of Allegiance employees in the Baxter Incentive Investment Plan. The
Allegiance Retirement Plan allows participants to redirect the balances of their
Allegiance Retirement Plan accounts that are invested in the Baxter stock fund
but will not allow participants to direct that their plan accounts make new
investments in Baxter stock within the Allegiance Retirement Plan.

401(k) ACCOUNT AND COMPANY MATCHING CONTRIBUTION ACCOUNT

Employees of Allegiance are eligible to contribute to the Allegiance 401(k)
account. Participants may elect to contribute, on a before-tax basis, up to
twelve percent of their annual base compensation into their 401(k) accounts.
Allegiance will match the first three percent of the participant's annual base
compensation contributed to the plan on a dollar for dollar basis.

45
<PAGE>
FIXED ACCOUNT

Subject to the terms of the Allegiance Retirement Plan, employees of
Allegiance are eligible to receive contributions to their fixed accounts under
such plan. Allegiance will make annual contributions to each fixed account equal
to three percent of a participant's annual base compensation.

PERFORMANCE ACCOUNT

Subject to the terms of the Allegiance Retirement Plan, Allegiance may make
additional performance account contributions on a discretionary basis as certain
performance measures are achieved. The additional contributions will be
allocated to each eligible participant's account in proportion to each
participant's annual base compensation. These additional discretionary
contributions may be made more frequently or less frequently than the annual
three percent contribution to the fixed accounts.

TRANSITION ACCOUNT

Allegiance recognizes that certain longer service employees need additional
benefits to assist in transitioning from Baxter's United States Pension Plan to
Allegiance's Retirement Plan. Contributions to a transition account within the
Allegiance Retirement Plan are provided by the Company to two groups of
Allegiance employees.

Employees with at least 55 "points" and 10 years of "benefit service" (as
determined under the terms of the Baxter Pension Plan explained under "-- Baxter
Pension Plan") as of the Distribution Date will have transition profit sharing
contributions made annually over an eight year period, and each of these
contributions will be equal to not less than 3% and not more than 8% of the
participant's annual base compensation, depending on the participant's points
under the Baxter Pension Plan as of the Distribution Date. The named executive
officers eligible to receive contributions to the transition account are as
follows: Mr. Knight -- 0%; Mr. Damico -- 3%; Ms. White -- 0%; Mr. Zollars -- 3%;
and Ms. Gaumer -- 3%.

Allegiance employees who have at least 15 years of "benefit service" but
less than 55 "points" (as determined under the terms of the Baxter Pension Plan
explained on page 49) as of the Distribution Date will receive transition profit
sharing contributions made annually over an eight year period, and each of these
contributions will be equal to 2% of the participant's annual base compensation.

ALLEGIANCE EXCESS PLAN

Federal income tax laws limit the amount which may be contributed to the
accounts of all participants, including certain highly compensated participants
under the Allegiance Retirement Plan. Allegiance will adopt an unfunded
non-qualified excess plan (the "Allegiance Excess Plan") that will credit
certain participants affected by the limits with the amount of contributions
that the participants would have contributed or that Allegiance would have
contributed on their behalf to the Allegiance Retirement Plan but for such
limits.

EMPLOYEE STOCK PURCHASE PLAN

Allegiance will adopt an employee stock purchase plan for its United States
employees, as described in Section 423 of the Code. All active employees of
Allegiance and its United States subsidiaries will be eligible to participate in
the Company's Employee Stock Purchase Plan. The Employee Stock Purchase Plan
makes available shares of Allegiance Stock for purchase by eligible employees
through payroll deductions at a maximum rate to be determined by the Committee.
The purchase price per share will be equal to 85% of the lesser of the fair
market value of Allegiance Stock on the effective date of subscription or the
fair market value of Allegiance Stock on the date of exercise. 2,000,000 shares
will be reserved for issuance under this plan.

COMPENSATION COMMITTEE INTERLOCKS DISCLOSURE AND INSIDER PARTICIPATION

There are no compensation committee interlocks.

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<PAGE>
RELATIONSHIP WITH BAXTER

Allegiance and Baxter have entered into various agreements for the purpose
of governing certain of the ongoing relationships between Baxter and Allegiance
after the Distribution, and to provide mechanisms for an orderly transfer of the
Allegiance Business from Baxter to Allegiance and facilitate an orderly
transition to the status of two separate, publicly traded companies.

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,
cardiovascular devices and other products in the United States and provides
Baxter with certain administrative services including credit and collection,
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.

REORGANIZATION AGREEMENT

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) principally designed to place
financial responsibility for the 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 the products and
operations thereof whether or not the underlying basis for such litigation,
proceeding or claim 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. See "Business -- Legal Proceedings."

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. 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 each of Baxter and Allegiance will indemnify the other in the event of
certain liabilities arising under the Exchange Act.

The Reorganization Agreement 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 1966, 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(1)(b) of Revenue Procedure 96-30
issued by 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 receive Allegiance Stock or Allegiance. Allegiance expects that these
limitations will not significantly constrain its activities or its ability to
respond to unanticipated developments.

The Reorganization Agreement also 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

47
<PAGE>
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.

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 directors and officers of Baxter who will
become directors and officers of Allegiance as of the Distribution Date for acts
relating to periods prior to the Distribution Date.

The Reorganization Agreement also 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"). The
Reorganization Agreement provides that 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 will be transferred to Allegiance's new retirement
savings plan. The Reorganization Agreement also generally provides that
Allegiance will assume 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 will become 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 have 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

Baxter's principal domestic operating subsidiary, Baxter Healthcare
Corporation ("BHC"), and an Allegiance subsidiary have 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 the foregoing business units.

In most instances, Allegiance will act as Baxter's agent for the physical
distribution of Baxter's products in return for a fee. In such situations,
Baxter will maintain the contractual relationship with the customer, will manage
sales, order-taking, and billing and collections, and will retain title to the
products until shipment to the ultimate customer. In certain situations,
Allegiance will act as a full-service, value-added distributor for Baxter
products with a direct contractual relationship with the ultimate customer. In
these situations, Allegiance will provide additional sales, sales support, and
other customer and product-related services to the customer and will purchase
the products from Baxter at specified prices. In addition, Baxter will pay to
Allegiance the fee described above. Such additional services may include

48
<PAGE>
aggregating Baxter's products with others to be sold as "kits" for a given
medical procedure or other cost management services which assist the customer in
reducing product consumption, improving utilization of assets, improving
logistics, and reducing or eliminating operating costs.

The initial term of the Domestic Distribution Agreements range from three
years (Renal and Biotechnology) to five years (I.V. Systems and Cardiovascular).
The agreements may be renewed upon expiration upon the 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 will have 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 than if such a competitor was not
involved. For purposes of these agreements, a "Change In Control" includes the
acquisition of more than 30 per cent of the stock of either party or one of its
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
comprising the United States of America 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 date of the Distribution.
Similarly, the service levels and performance standards remain as they were
prior to the date of the Distribution.

In addition to the Domestic Distribution Agreements, Baxter and Allegiance
have entered into agreements pursuant to 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 have entered into several services agreements, to be
effective from and after the Distribution Date, pursuant to 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,
sales and use tax, human resources (including international expatriate
services), research and development, travel, property management, and other
services. These agreements have varying terms and, subject to certain
exceptions, are generally terminable by either party upon 12 months or less
notice. Under certain circumstances involving a Change In Control the agreements
may be terminated earlier than normal. The agreements may be renewed upon
expiration upon the mutual agreement of the parties. The prices at which such
services will be provided generally will be equal to or based on the actual cost
of rendering such services.

In addition, Baxter leases from Allegiance, for a term of ten years, a
217,000 square foot office building at Allegiance's McGaw Park, Illinois
headquarters site. The leased building will continue to be occupied by Baxter's
Renal Division. Allegiance subleases from Baxter all or a substantial part of an
85,000 square foot office building located 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

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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.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information as of September 30, 1996
regarding the beneficial ownership of Allegiance Stock by (i) each director of
the Company, (ii) each named executive officer and (iii) all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Allegiance Stock listed
below, based on information provided by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable. The address of each of the stockholders named below is the
Company's principal executive offices. The Company is not aware of any
stockholders who beneficially own 5% or more of the Allegiance Stock.

<TABLE>
<CAPTION>
NAME NUMBER PERCENT
- ------------------------------------------------------------------------------------------ --------- -----------------
<S> <C> <C>
Lester B. Knight.......................................................................... 56,348 *
Joseph F. Damico.......................................................................... 39,083 *
Silas Cathcart............................................................................ 1,466 *
David W. Grainger......................................................................... 6,500 *
Arthur F. Golden.......................................................................... -- *
Michael D. O'Halleran..................................................................... -- *
Kenneth D. Bloem.......................................................................... -- *
Connie Curran, Ed.D....................................................................... -- *
Kathy Brittain White...................................................................... 3,880 *
Gail Gaumer............................................................................... 17,366 *
Robert J. Zollars......................................................................... 18,142 *
All directors and executive officers as a group (18 persons).............................. 188,252 *
</TABLE>

- ------------
* less than 1%

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DESCRIPTION OF CREDIT FACILITIES

On September 23, 1996, the Company entered into two unsecured revolving
credit agreements (the "Credit Facilities"), providing for up to an aggregate of
$1.5 billion in borrowings, with the financial institutions listed therein (the
"Banks"), the First National Bank of Chicago, as Syndication Agent, NationsBank
of Texas, N.A., as Documentation Agent, Morgan Guaranty Trust Company of New
York, as Co-Syndication Agent, and Bank of America National Trust and Savings
Association, as Administrative Agent, and as arranged by BA Securities, Inc. The
following summary of the Credit Facilities does not purport to be complete and
is subject to the detailed provisions of the Credit Facilities, copies of which
are exhibits to the Registration Statement of which this Prospectus is a part.

One of the Credit Facilities provides for borrowings up to an aggregate of
$1.2 billion and expires in September 2001. The other Credit Facility provides
for borrowings up to an aggregate of $300 million and expires in September 1997.
As of September 30, 1996, approximately $1.1 billion was outstanding under the
$1.2 billion credit facility and no amounts were outstanding under the $300
million credit facility. Amounts borrowed under the Credit Facilities may be
used only to repay indebtedness owing to Baxter at the time of the Distribution,
for the payment of fees and expenses related to the Distribution and for general
corporate purposes of Allegiance. As of September 30, 1996, approximately $400
million was available for borrowing under the Credit Facilities.

Borrowings under the Credit Facilities are unsecured obligations of
Allegiance and rank PARI PASSU with all other unsecured and unsubordinated
indebtedness of Allegiance, including the Securities offered pursuant to this
Prospectus.

Borrowings under the Credit Facilities typically bear interest at either the
"Base Rate" or the "Euro Dollar Rate," at the option of the Company, plus
applicable interest margin. The Base Rate is the higher of (i) the reference
rate of Bank of America National Trust and Savings Association or (ii) the sum
of the latest Federal Funds Rate and 0.50%. In addition, same day, short term
(seven days or less) borrowings under the Credit Facilities bear interest at the
"IBOR Rate" plus 1%. The IBOR Rate is defined as a Bank's cost of funds in the
interbank market for a same day borrowing of the type requested by Allegiance.
Furthermore, at the request of Allegiance, any of the Banks may offer to loan to
Allegiance amounts available for borrowing under the Credit Facilities at
interest rates agreed upon by Allegiance through a competitive bid process
initiated by Allegiance.

The Credit Facilities contain a number of covenants that, among other
things, restrict Allegiance's ability to dispose of its assets, incur additional
indebtedness, create liens on assets, engage in mergers or consolidations or
change the businesses conducted by Allegiance, and otherwise restrict certain
corporate activities by Allegiance. In addition, under the Credit Facilities,
Allegiance is required to comply with and maintain specified financial ratios
and tests, including, without limitation, an interest expense coverage ratio, a
leverage ratio and subsidiary debt levels thresholds.

The Credit Facilities specify certain customary events of default,
including, without limitation, non-payment of principal, interest or fees,
violation of covenants, inaccuracy of representations and warranties in any
material respect, cross default and cross-acceleration to certain other
indebtedness and agreements, bankruptcy and insolvency events, material
judgments and liabilities, changes of control and unenforceability of certain
documents under the Credit Facilities.

DESCRIPTION OF SECURITIES

The Notes, the 2016 Debentures and the 2026 Debentures (together, the
"Securities") will each constitute a series of senior debt securities of the
Company, and will rank PARI PASSU with each other and with all other unsecured
and unsubordinated indebtedness of the Company. The Securities of each series
will be issued pursuant to an Indenture, to be dated as of October 1, 1996
between Allegiance and PNC Bank, Kentucky, Inc., as Trustee (the "Trustee"), a
copy of which is filed as an exhibit to the

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<PAGE>
Registration Statement of which this Prospectus is a part. The Indenture
provides for the issuance from time to time in one or more series of unsecured
debentures, notes or other evidences of indebtedness and does not limit the
aggregate principal amount of securities that may be issued thereunder.

The following summaries of certain provisions of the Securities and the
Indenture do not purport to be complete and are subject, and are qualified in
their entirety by reference, to all the provisions of the Securities and the
Indenture, including the definitions therein of certain terms. Wherever
particular Sections or defined terms of the Indenture are referred to herein,
such Sections or defined terms are incorporated by reference.

NOTES

The Notes will be unsecured obligations of the Company, will be limited to
$200,000,000 aggregate principal amount and will mature on October 15, 2006 .
The Notes will bear interest at the rate per annum shown on the front cover of
this Prospectus from October 15, 1996 or from the most recent Interest Payment
Date to which interest has been paid or provided for, payable semi-annually on
April 15 and October 15 of each year, commencing April 15, 1997, to the Persons
in whose names the Notes (or any predecessor Notes) are registered at the close
of business on the preceding March 31 or September 30 , as the case may be. The
Notes will not be redeemable at the option of the Company prior to maturity and
are not subject to any sinking fund.

DEBENTURES

The 2016 Debentures and the 2026 Debentures will each be unsecured
obligations of the Company, will be limited to $150,000,000 aggregate principal
amount and $200,000,000 aggregate principal amount, respectively, and will
mature on October 15, 2016 and October 15, 2026, respectively. The 2016
Debentures and the 2026 Debentures will bear interest at the respective rates
per annum shown on the front cover of this Prospectus from October 15, 1996 or
from the most recent Interest Payment Date to which interest has been paid or
provided for, payable semi-annually on April 15 and October 15 of each year,
commencing April 15, 1997, to the Persons in whose names such Debentures (or any
predecessor Debentures) are registered at the close of business on the preceding
March 31 or September 30, as the case may be. The 2016 Debentures and the 2026
Debentures will not be redeemable at the option of the Company. The 2026
Debentures may be repaid on October 15, 2003, at the option of the registered
holders of the 2026 Debentures, at 100% of their principal amount, together with
accrued interest to October 15, 2003. In order for a holder to exercise this
option, the Company must receive at its office or agency in New York, New York,
during the period beginning on August 15, 2003 and ending at 5:00 p.m. (New York
City time) on September 15, 2003 (or, if September 15, 2003 is not a Business
Day, the next succeeding Business Day), the certificate representing the 2026
Debenture subject to repayment with the form "Option to Elect Repayment on
October 15, 2003" on such certificate duly completed. Any such notice received
by the Company during the period beginning on August 15, 2003 and ending at 5:00
p.m. (New York City time) on September 15, 2003 shall be irrevocable. See "--
Book Entry, Delivery and Form". The repayment option may be exercised by the
holder of a 2026 Debenture for less than the entire principal amount of the 2026
Debenture held by such holder, so long as the principal amount that is to be
repaid is equal to $1,000 or an integral multiple of $1,000. All questions as to
the validity, form, eligibility (including time of receipt) and acceptance of
any 2026 Debenture for repayment will be determined by the Company, whose
determination will be final and binding.

Failure by the Company to repay the 2026 Debentures when required as
described in the preceding paragraph will result in an Event of Default under
the Indenture.

As long as the 2026 Debentures are represented by a Global Debenture (as
defined below), the Depositary or the Depositary's nominee will be the
registered holder of the 2026 Debentures and therefore will be the only entity
that can exercise a right to repayment. See "-- Book Entry, Delivery and Form."

No similar right of repayment is available to holders of the Notes or the
2016 Debentures.

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RESTRICTIVE COVENANTS

LIMITATIONS ON LIENS

The Company covenants that it will not issue, incur, create, assume or
guarantee, and will not permit any Restricted Subsidiary (as defined below) to
issue, incur, create, assume or guarantee, any debt for borrowed money secured
by a mortgage, security interest, pledge, lien, charge or other encumbrance
("mortgages") upon any Principal Property (as defined below) of the Company or
any Restricted Subsidiary or upon any shares of stock or indebtedness of any
Restricted Subsidiary (whether such Principal Property, shares or indebtedness
are now existing or owned or hereafter created or acquired) without in any such
case effectively providing concurrently with the issuance, incurrence, creation,
assumption or guarantee of any such secured debt, or the grant of a mortgage
with respect to any such indebtedness, that the Securities (together with, if
the Company shall so determine, any other indebtedness of or guarantee by the
Company or such Restricted Subsidiary ranking equally with the Securities) shall
be secured equally and ratably with (or, at the option of the Company, prior to)
such secured debt. The foregoing restriction, however, will not apply to: (a)
mortgages on property existing at the time of acquisition thereof by the Company
or any Subsidiary, provided that such mortgages were in existence prior to the
contemplation of such acquisition; (b) mortgages on property, shares of stock or
indebtedness or other assets of any corporation existing at the time such
corporation becomes a Restricted Subsidiary, provided that such mortgages are
not incurred in anticipation of such corporation becoming a Restricted
Subsidiary; (c) mortgages on property, shares of stock or indebtedness existing
at the time of acquisition thereof by the Company or a Restricted Subsidiary or
mortgages thereon to secure the payment of all or any part of the purchase price
thereof, or mortgages on property, shares of stock or indebtedness to secure any
indebtedness for borrowed money incurred prior to, at the time of, or within 270
days after, the latest of the acquisition thereof, or, in the case of property,
the completion of construction, the completion of improvements, or the
commencement of substantial commercial operation of such property for the
purpose of financing all or any part of the purchase price thereof, such
construction, or the making of such improvements; (d) mortgages to secure
indebtedness owing to the Company or to a Restricted Subsidiary; (e) mortgages
existing at the date of the Indenture; (f) mortgages on property of a
corporation existing at the time such corporation is merged into or consolidated
with the Company or a Restricted Subsidiary or at the time of a sale, lease or
other disposition of the properties of a corporation as an entirety or
substantially as an entirety to the Company or a Restricted Subsidiary, provided
that such mortgage was not incurred in anticipation of such merger or
consolidation or sale, lease or other disposition; (g) mortgages in favor of the
United States or any State, territory or possession thereof (or the District of
Columbia), or any department, agency, instrumentality or political subdivision
of the United States or any State, territory or possession thereof (or the
District of Columbia), to secure partial, progress, advance or other payments
pursuant to any contract or statute or to secure any indebtedness incurred for
the purpose of financing all or any part of the purchase price or the cost of
constructing or improving the property subject to such mortgages; (h) mortgages
created in connection with the acquisition of assets or a project financed with,
and created to secure, a Nonrecourse Obligation (as defined below); and (i)
extensions, renewals, refinancings or replacements of any mortgage referred to
in the foregoing clauses (a), (b), (c) (e), (f), (g) and (h); provided, however,
that any mortgages permitted by any of the foregoing clauses (a), (b), (c) (e),
(f), (g) and (h) shall not extend to or cover any property of the Company or
such Restricted Subsidiary, as the case may be, other than the property, if any,
specified in such clauses and improvements thereto, and provided further that
any refinancing or replacement of any mortgages permitted by the foregoing
clauses (g) and (h) shall be of the type referred to in such clauses (g) or (h),
as the case may be.

Notwithstanding the restrictions described in the preceding paragraph, the
Company or any Restricted Subsidiary will be permitted to issue, incur, create,
assume or guarantee debt secured by a mortgage which would otherwise be subject
to such restrictions, without equally and ratably securing the Securities,
provided that after giving effect thereto, the aggregate amount of all debt so
secured by

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mortgages (not including mortgages permitted under clauses (a) through (i)
above) does not exceed 10% of the Consolidated Net Tangible Assets (as defined
below) of the Company as most recently determined on or prior to such date.

LIMITATIONS ON SALE AND LEASE-BACK TRANSACTIONS

The Company covenants that it will not, nor will it permit any Restricted
Subsidiary to, enter into any Sale and Lease-Back Transaction (as defined below)
with respect to any Principal Property, other than any such transaction
involving a lease for a term of not more than three years or any such
transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries, unless: (a) the Company or such Restricted Subsidiary
would be entitled to incur indebtedness secured by a mortgage on the Principal
Property involved in such transaction at least equal in amount to the
Attributable Debt (as defined below) with respect to such Sale and Lease-Back
Transaction, without equally and ratably securing the Securities, pursuant to
the limitation on liens in the Indenture; or (b) the Company shall apply an
amount equal to the greater of the net proceeds of such sale or the Attributable
Debt with respect to such Sale and Lease-Back Transaction within 180 days of
such sale to either (or a combination of) the retirement (other than any
mandatory retirement, mandatory prepayment or sinking fund payment or by payment
at maturity) of debt for borrowed money of the Company or a Restricted
Subsidiary that matures more than 12 months after the creation of such
indebtedness or the purchase, construction or development of other comparable
property.

LIMITATIONS ON SUBSIDIARY DEBT

The Company shall not permit any Subsidiary of the Company to Incur or
suffer to exist any Debt, except: (1) Debt outstanding on the date of this
Indenture; (2) Debt issued to and held by the Company or a Wholly Owned
Subsidiary; (3) Debt Incurred by a Person prior to the time such Person became,
merges into, or consolidates with a Subsidiary, or a Subsidiary merges into or
consolidates with such Person and thereby such Person becomes a Subsidiary
(which Debt was not Incurred in anticipation of such transaction and was
outstanding prior to such transaction); (4) Debt which is exchanged for, or the
proceeds of which are used to refinance or refund, any Debt permitted to be
outstanding pursuant to clauses (1) through (3) above (or any extension or
renewal thereof), in an aggregate principal amount not to exceed the principal
amount of the Debt so exchanged, refinanced or refunded and provided such
refinancing or refunding Debt by its terms, or by the terms of any agreement or
instrument pursuant to which such Debt is issued (x) does not provide for
payments of principal at the stated maturity of such Debt or by way of a sinking
fund applicable to such Debt or by way of any mandatory redemption, defeasance,
retirement or repurchase or such Debt by the Company (including any redemption,
retirement or repurchase which is contingent upon events or circumstances, but
excluding any retirement required by virtue of acceleration of such Debt upon an
event of default thereunder), in each case prior to the stated maturity of the
Debt being refinanced or refunded and (y) does not permit redemption or other
retirement (including pursuant to an offer to purchase made by the Company) of
such Debt at the option of the holder thereof prior to the stated maturity of
the Debt being refinanced or refunded, other than a redemption or other
retirement at the option of the holder of such Debt (including pursuant to an
offer to purchase made by the Company) which is conditioned upon the change of
control of the Company; and (5) Debt having a principal amount and liquidation
value not in excess of 20% of the Consolidated Net Tangible Assets of the
Company in the aggregate.

CERTAIN DEFINITIONS APPLICABLE TO COVENANTS

The term "Attributable Debt" when used in connection with a Sale and
Lease-Back Transaction involving a Principal Property shall mean, at the time of
determination, the lesser of: (a) the fair value of such property (as determined
in good faith by the Board of Directors of the Company); or (b) the present
value of the total net amount of rent required to be paid under such lease
during the remaining term thereof (including any renewal term or period for
which such lease has been extended), discounted at the rate of interest set
forth or implicit in the terms of such lease or, if not practicable to determine
such rate, the weighted average interest rate per annum (in the case of Original
Issue Discount Securities, the imputed interest rate) borne by the Securities of
each series outstanding pursuant to the Indenture compounded semi-annually. For
purposes of the foregoing definition, rent shall not include amounts

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required to be paid by the lessee, whether or not designated as rent or
additional rent, on account of or contingent upon maintenance and repairs,
insurance, taxes, assessments, water rates and similar charges. In the case of
any lease which is terminable by the lessee upon the payment of a penalty, such
net amount shall be the lesser of the net amount determined assuming termination
upon the first date such lease may be terminated (in which case the net amount
shall also include the amount of the penalty, but no rent shall be considered as
required to be paid under such lease subsequent to the first date upon which it
may be so terminated) and the net amount determined assuming no such
termination.

The term "Consolidated Net Tangible Assets" shall mean, as of any particular
time, total assets (excluding applicable reserves and other properly deductible
items) less: (a) total current liabilities, except for (1) notes and loans
payable, (2) current maturities of long-term debt, and (3) current maturities of
obligations under capital leases; and (b) goodwill, patents and trademarks, to
the extent included in total assets; all as set forth on the most recent
consolidated balance sheet of the Company and its Restricted Subsidiaries and
computed in accordance with generally accepted accounting principles.

The term "Debt" shall mean (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person and
whether or not contingent, (i) every obligation of such Person for money
borrowed, (ii) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations Incurred in connection
with the acquisition of property, assets or businesses, (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business), (v) the maximum
fixed redemption or repurchase price of redeemable stock of such Person at the
time of determination, (vi) every obligation to pay rent or other payment
amounts of such Person with respect to any Sale and Lease-back Transaction to
which such Person is a party and (vii) every obligation of the type referred to
in Clauses (i) through (vi) of another Person and all dividends of another
Person the payment of which, in either case, such Person has guaranteed or is
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise.

The term "Incur" shall mean, with respect to any Debt or other obligation of
any Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, guarantee or otherwise become liable in respect of such Debt or other
obligation or the recording, as required pursuant to generally accepted
accounting principles or otherwise, of any such Debt or other obligation on the
balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and
"Incurring" shall have the meanings correlative to the foregoing); PROVIDED,
HOWEVER, that a change in generally accepted accounting principles that results
in an obligation of such Person that exists at such time becoming Debt shall not
be deemed an Incurrence of such Debt.

The term "Nonrecourse Obligation" means indebtedness or other obligations
substantially related to (i) the acquisition of assets not previously owned by
the Company or any Restricted Subsidiary or (ii) the financing of a project
involving the development or expansion of properties of the Company or any
Restricted Subsidiary, as to which the obligee with respect to such indebtedness
or obligation has no recourse to the Company or any Restricted Subsidiary or any
assets of the Company or any Restricted Subsidiary other than the assets which
were acquired with the proceeds of such transaction or the project financed with
the proceeds of such transaction (and the proceeds thereof).

The term "Principal Property" shall mean the land, land improvements,
buildings and fixtures (to the extent they constitute real property interests,
including any leasehold interest therein) constituting the principal corporate
office, any manufacturing facility or any distribution center (whether now owned
or hereafter acquired) which: (a) is owned by the Company or any Subsidiary; (b)
is located within any of the present 50 states of the United States (or the
District of Columbia); (c) has not been determined in good faith by the Board of
Directors of the Company not to be materially important to the total business

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conducted by the Company and its Subsidiaries taken as a whole; and (d) has a
market value on the date as of which the determination is being made in excess
of 1.0% of Consolidated Net Tangible Assets of the Company as most recently
determined on or prior to such date.

The term "Restricted Subsidiary" shall mean any Subsidiary that owns any
Principal Property.

The term "Sale and Lease-Back Transaction" shall mean any arrangement with
any person providing for the leasing by the Company or any Restricted Subsidiary
of any Principal Property which property has been or is to be sold or
transferred by the Company or such Restricted Subsidiary to such person.

The term "Subsidiary" shall mean any corporation of which at least a
majority of the outstanding voting stock having the power to elect a majority of
the board of directors of such corporation is at the time owned, directly or
indirectly, by the Company or by one or more other Subsidiaries, or by the
Company and one or more other Subsidiaries. For the purposes of this definition,
"voting stock" means stock which ordinarily has voting power for the election of
directors, whether at all times or only so long as no senior class of stock has
such voting power by reason of any contingency.

The term "Wholly Owned Subsidiary" of any Person shall mean a Subsidiary of
such Person all of the outstanding capital stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries of such Person or by
such Person and one or more Wholly Owned Subsidiaries of such Person.

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Company may not consolidate with or merge into, or convey, transfer or
lease its properties and assets substantially as an entirety to, any Person (a
"successor Person"), and may not permit any Person to consolidate with or merge
into, or convey, transfer or lease its properties and assets substantially as an
entirety to, the Company, unless (i) the successor Person (if any) is a
corporation, partnership, trust or other entity organized and validly existing
under the laws of any domestic jurisdiction and assumes the Company's
obligations on the Securities and under the Company's obligations on the
Securities and under the Indenture, (ii) immediately after giving effect to the
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing, (iii) if, as a result of the transaction, property of the Company
would become subject to a mortgage, pledge, lien, security interest or other
encumbrance that would not be permitted under the limitation on mortgage,
pledge, lien, security interest or other encumbrance described above under
"Restrictive Covenants," the Company takes such steps as shall be necessary to
secure the Securities equally and ratably with (or prior to) the indebtedness
secured by such mortgage, pledge, lien, security interest or other encumbrance
and (iv) certain other conditions are met. (Section 801)

EVENTS OF DEFAULT

Each of the following will constitute an Event of Default under the
Indenture with respect to Securities of any series: (a) failure to pay principal
of or any premium on any Security of that series at its Maturity; (b) failure to
pay any interest on any Securities of that series when due, continued for 30
days; (c) failure to deposit any sinking fund payment, when due, in respect of
any Security of that series; (d) failure to perform, or the breach of, any
covenant or warranty of the Company in the Indenture (other than a covenant or
warranty included in the Indenture solely for the benefit of a series of
Securities other than that series), continued for 60 days after written notice
has been given by the Trustee, or the Holders of at least 10% in principal
amount of the Outstanding Securities of that series, as provided in the
Indenture; (e) failure to pay when due (subject to any applicable grace period)
the principal of, or acceleration of, any indebtedness for money borrowed by the
Company (including a default with respect to Securities of any series other than
that series) having an aggregate principal amount outstanding of at least
$10,000,000, if, in the case of any such failure, such indebtedness has not been
discharged or, in the case of any such acceleration, such indebtedness has not
been discharged or such acceleration has not been rescinded or annulled, in each
case within 10 days after written notice has been given by the

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Trustee, or the Holders of at least 10% in principal amount of the Outstanding
Securities of that series, as provided in the Indenture; and (f) certain events
in bankruptcy, insolvency or reorganization of the Company or any Restricted
Subsidiary. (Section 501)

If an Event of Default (other than an Event of Default described in clause
(f) above) with respect to the Securities of any series at the time Outstanding
shall occur and be continuing, either the Trustee or the Holders of at least 25%
in principal amount of the Outstanding Securities of that series by notice as
provided in the Indenture may declare the principal amount of the Securities of
that series (or, if any Securities of that series are Original Issue Discount
Securities, such portion of the principal amount of such Securities, as may be
specified in the terms of such Securities) to be due and payable immediately. If
an Event of Default described in clause (f) above with respect to the Securities
of any series at the time Outstanding occurs, the principal amount of all the
Securities of that series (or, in the case of any such Original Issue Discount
Security, such specified amount) will automatically, and without any action by
the Trustee or any Holder, become immediately due and payable. After any such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in principal amount of the Outstanding Securities of that series
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other that the non-payment of accelerated principal (or other
specified amount), have been cured or waived as provided in the Indenture.
(Section 502) For information as to waiver of defaults, see "Modification and
Waiver."

Subject to the provisions of the Indenture relating to the duties and
responsibilities of the Trustee, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request or
direction of any of the Holders, unless such Holders shall have offered to the
Trustee reasonable indemnity. (Section 603) Subject to such provisions of the
Indenture, the Holders of a majority in principal amount of the Outstanding
Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the
Securities of that series. (Section 512)

No Holder of a Security of any series will have any right to institute any
proceeding with respect to the Indenture, or for the appointment of a receiver
or a trustee, or for any other remedy thereunder, unless (i) such Holder has
previously given to the Trustee written notice of a continuing Event of Default
with respect to the Securities of that series, (ii) the Holders of at least 25%
in principal amount of the Outstanding Securities of that series have made
written request, and such Holder or Holders have offered reasonable indemnity,
to the Trustee to institute such proceeding as trustee and (iii) the Trustee has
failed to institute such proceeding, and has not received from the Holders of a
majority in principal amount of the Outstanding Securities of that series a
direction inconsistent with such request, within 60 days after such notice,
request and offer. (Section 507) However, such limitations do not apply to a
suit instituted by a Holder of a Security for the enforcement of payment of the
principal of or any premium or interest on such Security on or after the
applicable due date specified in such Security. (Section 508)

The Company will be required to furnish to the Trustee annually a statement
by certain of its officers as to whether or not the Company, to the best of
their knowledge, is in default in the performance or observance of any of the
terms, provisions and conditions of the Indenture and, if so, specifying all
such known defaults. (Section 1004)

MODIFICATION AND WAIVER

Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of not less than 66 2/3% in
principal amount of the Outstanding Securities of each series affected by such
modification or amendment; PROVIDED, HOWEVER, that no such modification or
amendment may, without the consent of the Holder of each Outstanding Security
affected thereby, (a) change the Stated Maturity of the principal of, or any
instalment of principal of or interest on, any Security, (b) reduce the
principal amount of, or any premium or interest on, any Security, (c) reduce the
amount of principal of an Original Issue Discount Security or any other Security
payable upon acceleration of the Maturity thereof, (d) change the place or
currency of payment of principal of, or any

57
<PAGE>
premium or interest on, any Security, (e) impair the right to institute suit for
the enforcement of any payment on or with respect to any Security, (f) reduce
the percentage in principal amount of Outstanding Securities of any series, the
consent of whose Holders is required for modification or amendment of the
Indenture, (g) reduce the percentage in principal amount of Outstanding
Securities of any series necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults or (h) modify such
provisions with respect to modification and waiver. (Section 902)

The Holders of not less than 66 2/3% in principal amount of the Outstanding
Securities of any series may waive compliance by the Company with certain
restrictive provisions of the Indenture. (Section 1010) The Holders of not less
than a majority in principal amount of the Outstanding Securities of any series
may waive any past default under the Indenture, except a default in the payment
of principal, premium or interest and certain covenants and provisions of the
Indenture which cannot be amended without the consent of the Holder of each
Outstanding Security of such series affected. (Section 513)

The Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding Securities have given or taken any
direction, notice, consent, waiver or other action under the Indenture as of any
date, (i) the principal amount of an Original Issue Discount Security that will
be deemed to be Outstanding will be the amount of the principal thereof that
would be due and payable as of such date upon acceleration of the Maturity
thereof to such date, (ii) is, as of such date, the principal amount payable at
the Stated Maturity of a Security is not determinable (for example, because it
is based on an index), the principal amount of such Security deemed to be
Outstanding as of such date will be an amount determined in the manner
prescribed for such Security and (iii) the principal amount of a Security
denominated in one or more foreign currencies or currency units that will be
deemed to be Outstanding will be the U.S. dollar equivalent, determined as of
such date in the manner of such Security (or, in the case of a Security
described in clause (i) or (ii) above, of the amount described in such clause).
Certain Securities, including those for whose payment or redemption money has
been deposited or set aside in trust for the Holders and those that have been
fully defeased pursuant to Section 1302, will not be deemed to be Outstanding.
(Section 101)

Except in certain limited circumstances, the Company will be entitled to set
any day as a record date for the purpose of determining the Holders of
Outstanding Securities of any series entitled to give or take any demand,
authorization, direction, notice, consent, waiver or other action under the
Indenture, in the manner and subject to the limitations provided in the
Indenture. In certain limited circumstances, the Trustee will be entitled to set
a record date for action by Holders. If a record date is set for any action to
be taken by Holders of a particular series, such action may be taken only by
persons who are Holders of Outstanding Securities of that series on the record
date. To be effective, such action must be taken by Holders of the requisite
principal amount of such Securities within a specified period following the
record date. For any particular record date, this period will be 180 days or
such shorter period as may be specified by the Company (or the Trustee, if it
set the record date), and may be shortened or lengthened (but not beyond 180
days) from time to time. (Section 104)

DEFEASANCE AND COVENANT DEFEASANCE

The Company has elected, in the Board Resolution establishing the terms of
each series of Securities, to have the provisions of Section 1302, relating to
defeasance and discharge of indebtedness and Section 1303, relating to
defeasance of certain restrictive covenants in the Indenture, applied to the
Securities of each series, or to any specified part of a series at the option of
the Company at any time. (Section 1301)

DEFEASANCE AND DISCHARGE. Upon the Company's exercise of its option to have
Section 1302 applied to any Securities or any series of Securities, the Company
will be discharged from all its obligations with respect to such Securities
(except for certain obligations to exchange or register the transfer of
Securities, to replace stolen, lost or mutilated Securities, to maintain paying
agencies and to hold moneys for payment in trust) upon the deposit in trust for
the benefit of the Holders of such Securities of money or U.S. Government
Obligations, or both, which, through the payment of principal and interest in
respect thereof in accordance with their terms, the terms of the Indenture and
such

58
<PAGE>
Securities. Such defeasance or discharge may occur only if, among other things,
the Company has delivered to the Trustee an Opinion of Counsel to the effect
that the Company has received from, or there has been published by, the United
States Internal Revenue Service a ruling, or there has been a change in tax law,
in either case to the effect that Holders of such Securities will not recognize
gain or loss for federal income tax purposes as a result of such deposit,
defeasance and discharge and will be subject to federal income tax on the same
amount, in the same manner and at the same times as would have been the case if
such deposit, defeasance and discharge were not to occur. (Sections 1302 and
1304)

DEFEASANCE OF CERTAIN COVENANTS. Upon the Company's exercise of its option
to have Section 1303 applied to any Securities or any series of Securities, the
Company may omit to comply with certain restrictive covenants, including those
described under "Restrictive Covenants" and in the last sentence under
"Consolidation, Merger and Sale of Assets", and the occurrence of certain Events
of Default, which are described above in clause (d) (with respect to such
restrictive covenants) and clause (e) under "Events of Default," will be deemed
not to be or result in an Event of Default, in each case with respect to such
Securities. The Company, in order to exercise such option, will be required to
deposit, in trust for the benefit of the Holders of such Securities, money or
U.S. Government Obligations, or both, which, through the payment of principal
and interest in respect thereof in accordance with their terms, will provide
money in an amount sufficient to pay the principal of and any premium and
interest on such Securities on the respective Stated Maturities in accordance
with the terms of the Indenture and such Securities. The Company will also be
required, among other things, to deliver to the Trustee an Opinion of Counsel to
the effect that Holders of such Securities will not recognize gain or loss for
federal income tax purposes as a result of such deposit and defeasance of
certain obligations and will be subject to federal income tax on the same
amount, in the same manner and at the same times as would have been the case if
such deposit and defeasance were not to occur. In the event the Company
exercised this option with respect to any Securities and such Securities were
declared due and payable because of the occurrence of any Event of Default, the
amount of money and U.S. Government Obligations so deposited in trust would be
sufficient to pay amounts due on such Securities at the time of their respective
Stated Maturities but may not be sufficient to pay amounts due on such
Securities upon any acceleration resulting from such Event of Default. In such
case, the Company would remain liable for such payments. (Sections 1303 and
1304)

BOOK ENTRY, DELIVERY AND FORM

The Notes and Debentures will each be issued in the form of one or more
fully registered certificates registered in the name of Cede & Co., the nominee
of The Depository Trust Company (the "Depository"). Except as provided below,
owners of beneficial interests in the certificates for the Notes registered in
the name of the Depository ("Global Notes") or in the certificates for the
Debentures registered in the name of the Depository ("Global Debentures") will
not be entitled to have either the Global Notes or the Global Debentures, as the
case may be, registered in their names and will not receive or be entitled to
receive physical delivery of either the Global Notes or the Global Debentures in
definitive form. Unless and until definitive Notes or Debentures are issued to
owners of beneficial interests in the Global Notes or the Global Debentures,
such owners of beneficial interests will not be recognized as Holders of either
the Notes or the Debentures, as the case may be, by the Trustee. Hence, until
such time, owners of beneficial interests in either the Global Notes or the
Global Debentures will only be able to exercise the rights of Holders indirectly
through the Depository and its participating organizations. Except as set forth
below, the certificates may not be transferred except as a whole by the
Depository to a nominee of the Depository or by a nominee of the Depository to
the Depository or another nominee of the Depository or by the Depository or any
nominee to a successor or the Depository or a nominee of such successor.

The Depository has advised the Company that it is a limited-purpose trust
Company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
The Depository was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transaction among its
participants in such securities through electronic book-entry

59
<PAGE>
changes in accounts of the participants, thereby eliminating the need for
physical movement of securities certificates. The Depository's participants
include securities brokers and dealers (including the Underwriters), banks,
trust companies, clearing corporations and certain other organizations, some of
which (and/or their representatives) own the Depository. Access to the
Depository's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Persons who are
not participants may beneficially own securities held by the Depository only
through participants.

The Depository advises that pursuant to procedures established by it (i)
upon the issuance of the Notes and the Debentures by the Company, the Depository
will credit the accounts of participants designated by the Underwriters with the
amount of the Global Notes and the Global Debentures purchased by the
Underwriters, and (ii) ownership of beneficial interests in the certificates
representing the Global Notes and the Global Debentures will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by the Depository (with respect to participants' interests) and the participants
and the indirect participants (with respect to beneficial owners' interests).
The laws of some states require that certain persons take physical delivery in
definitive form of securities which they own. Consequently, the ability to
transfer beneficial interests in such certificates is limited to such extent.

Neither the Company, the Trustee, any Payment Agent, nor the Security
Registrar will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the certificates representing the Global Notes or the Global
Debentures or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.

Principal and interest payments on the Global Notes and the Global
Debentures registered in the name of the Depository's nominee will be made by
the Trustee to the Depository's nominee as the registered owner of the
certificates relating to the Global Notes and the Global Debentures. The
Indenture provides that the Company and the Trustee will treat the persons in
whose names either the Global Notes or the Global Debentures are registered (the
Depository or its nominee) as the owners of the Global Notes or the Global
Debentures, as the case may be, for the purpose of receiving payment of
principal and interest on either the Global Notes or the Global Debentures and
for all other purposes whatsoever. Therefore, neither the Company, the Trustee
nor any Paying Agent has any direct responsibility or liability for the payment
of principal or interest on the Global Notes or the Global Debentures to owners
of beneficial interests in the certificates relating to the Global Notes or the
Global Debentures. The Depository has advised the Company, and the Trustee that
its present practice is, upon receipt of any payment of principal or interest,
to immediately credit the accounts of the participants with such payment in
amounts proportionate to their respective holdings in principal amount of
beneficial interests in the certificates relating to the Global Notes the Global
Debentures, as shown on the records of the Depository. Payments by participants
and indirect participants to owners of beneficial interests in the certificates
relating to the Global Notes and the Global Debentures will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of the participants or indirect
participants.

So long as the 2026 Debentures are represented by a Global Debenture, the
Depository's nominee will be the only entity that can exercise a right to
repayment pursuant to the Holder's option to elect repayment of its 2026
Debentures. Notice by participants or by owners of beneficial interests in a
Global Debenture held through such participants of the exercise of the option to
elect repayment of beneficial interests in 2026 Debentures represented by a
Global Debenture must be transmitted to the Depository in accordance with its
procedures on a form required by the Depository and provided to participants. In
order to ensure that the Depository or the Depository's nominee will timely
exercise a right to repayment with respect to a particular 2026 Debenture, the
beneficial owner of such 2026 Debenture must instruct the broker or other
participant through which it holds an interest in such 2026 Debenture to notify
the Depository of its desire to exercise a right to repayment. Different firms
have different cut-off times for accepting instructions from their customers
and, accordingly, each beneficial owner should consult the

60
<PAGE>
broker or other participant through which it holds an interest in a 2026
Debenture in order to acertain the cut-off time by which such an instruction
must be given in order for timely notice to be delivered to the Depository. The
Company will not be liable for any delay in delivery of such notice to the
Depository.

If the Depository is at any time unwilling or unable to continue as
depository and a successor depository is not appointed by the Company, the
Company will issue Notes and Debentures in definitive form in exchange for the
total amount of the certificates representing the Global Notes and the Global
Debentures. In addition, the Company may at any time determine not to have Notes
or Debentures represented by Global Notes or Global Debentures, as the case may
be, and, in such event, the Company will issue Notes or Debentures in definitive
form in exchange for the total amount of the certificates representing the
Global Notes or the Global Debentures. In addition, if any event shall have
happened and be continuing that constitutes an Event of Default with respect to
the Notes or the Debentures, the owners of beneficial interests in certificates
for the Global Notes or the Global Debenture will be entitled to receive Notes
or Debentures, as the case may be, in certificated form in exchange for the
Book-Entry certificate or certificates representing the Global Notes or the
Global Debentures, as the case may be. In any such instance, an owner of a
beneficial interest in such certificates will be entitled to physical delivery
in definitive form of Notes or Debentures equal in amount to such beneficial
interest and to have such Notes or Debentures registered in its name.

EXCHANGE AND TRANSFER

At the option of the Holder, subject to the terms of the Indenture and the
limitations applicable to Global Securities, Securities of each series will be
exchangeable for other Securities of the same series of any authorized
denomination and of like tenor and aggregate principal amount. (Section 305)

Subject to the terms of the Indenture and the limitations applicable to
Global Securities, Securities may be presented for exchange as provided above or
for registration of transfer (duly endorsed or with the form of transfer
endorsed thereon duly executed) at the office of the Security Registrar or at
the office of any transfer agent designated by the Company for such purpose. No
service charge will be made for any registration of transfer or exchange of
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. Such transfer
or exchange will be effected by the Security Registrar or such transfer agent,
as the case may be, being satisfied with the documents of title and identity of
the person making the request. The Company has appointed the Trustee as Security
Registrar. The Company may at any time designate additional transfer agents or
rescind the designation of any transfer agent or approve a change in the office
through which any transfer agent acts, except that the Company will be required
to maintain a transfer agent in each Place of Payment for the Securities of each
series. (Sections 305 and 1002)

If the Securities of any series (or of any series and specified terms) are
to be redeemed in part, the Company will not be required to (i) issue, register
the transfer of or exchange any Security of that series (or of that series and
specified tenor, as the case may be) during a period beginning at the opening of
business 15 days before the day of mailing of a notice of redemption of any such
Security that may be selected for redemption and ending at the close of business
on the day of such mailing or (ii) register the transfer of or exchange any
Security so selected for redemption, in whole or in part, except the unredeemed
portion of any such Security being redeemed in part. (Section 305)

PAYMENT AND PAYING AGENTS

Payment of interest on a Security on any Interest Payment Date will be made
to the Person in whose name such Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest. (Section 307)

Principal of and any premium and interest on the Securities of a particular
series will be payable at the office or agency of such Paying Agent or Paying
Agents as the Company may designate for such purpose from time to time. The
corporate trust office of the Trustee will be designated as the Company's sole
Paying Agent for payments with respect to Securities of each series. The Company
may at any time

61
<PAGE>
designate additional Paying Agents or rescind the designation of any Paying
Agent or approve a change in the office through which any Paying Agent acts,
except that the Company will be required to maintain an office or agency in each
Place of Payment for the Securities of any series. (Sections 1002 and 1003)

All moneys paid by the Company to a Paying Agent for the payment of the
principal of or any premium or interest on any Security which remain unclaimed
at the end of two years after such principal, premium or interest has become due
and payable will be repaid to the Company, and the Holder of such Security
thereafter may look only to the Company for payment thereof as an unsecured
general creditor. (Section 1003)

NOTICES TO HOLDERS

Notices to Holders of Securities will be given in writing and mailed,
first-class postage prepaid, to the addresses of such Holders as they may appear
in the Security Register. (Section 106)

TITLE

Prior to due presentment of a Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name such Security is registered as the owner thereof, whether
or not such Security may be overdue, for the purpose of making payment and for
all other purposes. (Section 308)

GOVERNING LAW

The Indenture and the Securities will be governed by and construed in
accordance with the law of the State of New York. (Section 112)

REGARDING THE TRUSTEE

The Company maintains a banking relationship with PNC Bank, Kentucky, Inc.

62
<PAGE>
UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement
dated the date hereof, the Company has agreed to sell to each of the
Underwriters named below, and each of such Underwriters has severally agreed to
purchase, the respective principal amount of each series of the Securities set
forth opposite its name below:

<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF 2016 AMOUNT OF 2026
UNDERWRITER NOTES DEBENTURES DEBENTURES
- -------------------------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Goldman, Sachs & Co............................... $ 66,000,000 $ 49,500,000 $ 66,000,000
J.P. Morgan Securities Inc........................ 64,000,000 48,000,000 64,000,000
Smith Barney Inc.................................. 40,000,000 30,000,000 40,000,000
BA Securities, Inc................................ 10,000,000 7,500,000 10,000,000
First Chicago Capital Markets, Inc................ 10,000,000 7,500,000 10,000,000
NationsBanc Capital Markets, Inc.................. 10,000,000 7,500,000 10,000,000
---------------- ---------------- ----------------
Total......................................... $ 200,000,000 $ 150,000,000 $ 200,000,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>

Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of each series of the
Securities, if any are taken.

The Underwriters propose to offer each series of the Securities in part
directly to the public at the respective initial public offering price set forth
on the cover page of this Prospectus and in part to certain securities dealers
at such prices less a concession not to exceed 0.400 % of the principal amount
of the Notes, not to exceed 0.500% of the principal amount of the 2016
Debentures, and not to exceed 0.375% of the principal amount of the 2026
Debentures. The Underwriters may allow, and such dealers may reallow, a
concession not to exceed 0.250% of the principal amount of the Notes, not to
exceed 0.250% of the principal amount of the 2016 Debentures, and not to exceed
0.250% of the principal amount of the 2026 Debentures to certain brokers and
dealers. After the Securities are released for sale to the public, the offering
prices and other selling terms may from time to time be varied by the
Underwriters.

Each series of Securities is a new issue of securities with no established
trading market. The Company has been advised by the Underwriters that the
Underwriters intend to make a market in each series of the Securities but are
not obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
each series of the Securities.

From time to time in the ordinary course of their businesses, affiliates of
certain of the Underwriters have engaged and may in the future engage in general
financing and banking transactions with the Company and its affiliates.
Furthermore, more than 10% of the proceeds of the offering, not including
underwriting compensation, will be received by lenders to the Company under its
$1.2 billion credit facility that are affiliated with certain members of the
National Association of Securities Dealers, Inc. ("NASD") who are participating
in the offering. As a result, the offering is being conducted in accordance with
NASD Corporate Financing Rule 2710(c)(8) and Rule 2720(c)(3)(A).

Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment banking services to the Company and its
affiliates, for which such Underwriters have received and will receive customary
fees and commissions.

The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.

63
<PAGE>
VALIDITY OF SECURITIES

The validity of the Securities offered hereby will be passed upon for the
Company by McDermott, Will & Emery, Chicago, Illinois and for the Underwriters
by Sullivan & Cromwell, New York, New York.

EXPERTS

The financial statements as of December 31, 1995 and 1994 and for each of
the three years in the period ended December 31, 1995 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

64
<PAGE>
ALLEGIANCE CORPORATION
INDEX TO COMBINED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2

Combined Statements of Income.............................................................................. F-3

Combined Balance Sheets.................................................................................... F-4

Combined Statements of Cash Flows.......................................................................... F-5

Combined Statements of Equity.............................................................................. F-6

Notes to Combined Financial Statements..................................................................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Baxter International Inc.

In our opinion, the accompanying combined balance sheets and the related
combined statements of income, cash flows and equity present fairly, in all
material respects, the financial position of Allegiance Corporation at December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of Baxter International Inc.'s management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

Our audits of the combined financial statements of Allegiance also included
an audit of Financial Statement Schedule II appearing on page F-19 of this
Prospectus. 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 combined financial statements.

Price Waterhouse LLP
Chicago, Illinois
June 26, 1996

F-2
<PAGE>
ALLEGIANCE CORPORATION
COMBINED STATEMENTS OF INCOME
(IN MILLIONS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales..................................................... $ 2,201 $ 2,485 $ 4,922 $ 5,109 $ 5,019
Costs and expenses
Cost of goods sold.......................................... 1,746 1,940 3,878 3,731 3,613
Selling, general and administrative expenses................ 345 384 756 1,005 1,061
Restructuring charges....................................... -- -- 76 -- 484
Goodwill amortization....................................... 18 19 38 41 41
Other (income) expense...................................... (1) 2 (302) (6) (26)
--------- --------- --------- --------- ---------
Total costs and expenses.................................. 2,108 2,345 4,446 4,771 5,173
--------- --------- --------- --------- ---------
Income (loss) before income taxes............................. 93 140 476 338 (154)
Income tax expense (benefit).................................. 36 55 203 123 (86)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of accounting change... 57 85 273 215 (68)
Cumulative effect of change in accounting for other
postemployment benefits, net of income tax benefit of $3..... -- -- -- -- (5)
--------- --------- --------- --------- ---------
Net income (loss)......................................... $ 57 $ 85 $ 273 $ 215 $ (73)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

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

F-3
<PAGE>
ALLEGIANCE CORPORATION
COMBINED BALANCE SHEETS
(IN MILLIONS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
JUNE 30, --------- ---------
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and equivalents......................................................... $ 5 $ 1 $ 3
Accounts receivable, net of allowance for doubtful accounts of $27 at June
30, 1996, and $18 and $17 at December 31, 1995 and 1994, respectively....... 450 487 635
Notes and other current receivables.......................................... 26 59 246
Inventories.................................................................. 656 684 721
Short-term deferred income taxes............................................. 119 129 145
Prepaid expenses............................................................. 16 12 25
------------ --------- ---------
Total current assets....................................................... 1,272 1,372 1,775
------------ --------- ---------
Property, plant and equipment
Property, plant and equipment................................................ 1,523 1,307 1,330
Accumulated depreciation and amortization.................................... 663 429 410
------------ --------- ---------
Net property, plant and equipment............................................ 860 878 920
------------ --------- ---------
Other assets
Goodwill and other intangibles............................................... 1,096 1,116 1,214
Other........................................................................ 65 78 122
------------ --------- ---------
Total other assets......................................................... 1,161 1,194 1,336
------------ --------- ---------
Total assets............................................................. $ 3,293 $ 3,444 $ 4,031
------------ --------- ---------
------------ --------- ---------
Current liabilities
Accounts payable and accrued liabilities..................................... $ 550 $ 692 $ 720
Long-term deferred income taxes................................................ 115 110 54
Other noncurrent liabilities................................................... 68 64 188
Equity
Divisional retained earnings................................................. 1,750 1,768 2,259
Equity investment by parent.................................................. 810 810 810
------------ --------- ---------
Total equity............................................................... 2,560 2,578 3,069
------------ --------- ---------
Total liabilities and equity............................................. $ 3,293 $ 3,444 $ 4,031
------------ --------- ---------
------------ --------- ---------
</TABLE>

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

F-4
<PAGE>
ALLEGIANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- -------------------------------
1996 1995 1995 1994 1993
--------------- --------- --------- --------- ---------
(UNAUDITED)
(BRACKETS DENOTE CASH OUTFLOWS)
<S> <C> <C> <C> <C> <C>
Cash flow provided by operations
Income (loss) before cumulative effect of accounting
change...................................................... $ 57 $ 85 $ 273 $ 215 $ (68)
Adjustments
Depreciation and amortization.............................. 73 83 165 223 221
Deferred income taxes...................................... 16 19 50 3 (199)
Gain on asset dispositions, net............................ -- 4 (263) (11) (36)
Restructuring charges...................................... -- -- 76 -- 484
Other...................................................... -- 2 5 2 11
Changes in balance sheet items
Accounts receivable........................................ 69 31 73 8 (6)
Inventories................................................ 24 (76) 29 86 (124)
Accounts payable and other current liabilities............. (88) 14 (120) (43) 78
Restructuring program payments............................. (21) (29) (62) (54) (18)
Other...................................................... 6 6 27 (7) (7)
--- --------- --------- --------- ---------
Cash flow provided by operations............................. 136 139 253 422 336
--- --------- --------- --------- ---------
Investment transactions
Capital expenditures......................................... (33) (48) (112) (122) (273)
Acquisitions (net of cash received).......................... (14) -- (5) (2) (14)
Proceeds from asset dispositions............................. (10) 178 626 107 68
--- --------- --------- --------- ---------
Investment transactions, net................................. (57) 130 509 (17) (219)
--- --------- --------- --------- ---------
Financing transactions
Payments to Baxter International Inc......................... (75) (268) (764) (402) (119)
--- --------- --------- --------- ---------
Financing transactions, net.................................. (75) (268) (764) (402) (119)
--- --------- --------- --------- ---------
Increase (decrease) in cash and equivalents.................... 4 1 (2) 3 (2)
Cash and equivalents at beginning of period.................... 1 3 3 -- 2
--- --------- --------- --------- ---------
Cash and equivalents at end of period.......................... $ 5 $ 4 $ 1 $ 3 $ --
--- --------- --------- --------- ---------
--- --------- --------- --------- ---------
</TABLE>

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

F-5
<PAGE>
ALLEGIANCE CORPORATION
COMBINED STATEMENTS OF EQUITY
(IN MILLIONS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
SIX MONTHS --------- --------- ---------
ENDED JUNE 30,
1996
--------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Divisional retained earnings
Beginning balance............................................... $ 1,768 $ 2,259 $ 2,446 $ 2,633
Net income (loss)............................................... 57 273 215 (68)
Payments to Baxter International Inc............................ (75) (764) (402) (119)
------- --------- --------- ---------
Ending balance.................................................. 1,750 1,768 2,259 2,446
------- --------- --------- ---------
Equity investment of parent....................................... 810 810 810 810
------- --------- --------- ---------
Total equity.................................................. $ 2,560 $ 2,578 $ 3,069 $ 3,256
------- --------- --------- ---------
------- --------- --------- ---------
</TABLE>

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

F-6
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS

1. DESCRIPTION OF THE BUSINESS
On November 27, 1995, the board of directors of Baxter International Inc.
("Baxter") approved in principle a plan to distribute to Baxter stockholders all
of the outstanding stock of its health-care cost management business in a
spin-off transaction (the "Distribution") which is expected to be tax-free.
Allegiance Corporation ("Allegiance" or the "Company") operates in a single
industry segment as a leading provider of medical products and services that
help its health-care customers manage and reduce the total cost of providing
patient care. Through its nationwide distribution network, Allegiance
distributes a broad offering of medical, surgical and laboratory supplies,
including its own self-manufactured surgical and respiratory-therapy products,
to hospital and alternate-care customers. Allegiance also provides cost
management services to its health-care customers through inventory management
programs, customized packaging, and procedure and process consulting. The
delivery of such a broad array of product and service offerings requires focused
investments in cost management services, information systems and manufacturing
efficiencies.

The Distribution is expected to occur in late 1996 and will result in
Allegiance operating as an independent entity with publicly traded common stock.
Baxter will have no ownership interest in Allegiance after the spin-off but will
continue to conduct business as described in the Reorganization and other
agreements outlined in Note 8 to the Combined Financial Statements. However,
Baxter will, unless released by third parties, remain liable for certain lease,
guarantee and other obligations and liabilities that are transferred to and
assumed by Allegiance. Allegiance will be obligated by the Reorganization
agreement to indemnify Baxter against liabilities related to those transferred
obligations and liabilities.

Allegiance's historical results of operations in 1995, 1994 and 1993 include
revenues and expenses related to certain divested businesses. The Industrial and
Life Sciences division was sold in September 1995 and the diagnostics
manufacturing businesses were sold in December 1994. See Note 3 to the Combined
Financial Statements for additional information related to these divestitures.

The following table presents selected financial data for Allegiance
excluding the revenue and expenses associated with these divested businesses:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net sales..................................................... $ 2,201 $ 2,244 $ 4,575 $ 4,314 $ 4,249
Costs and expenses
Cost of goods sold.......................................... 1,746 1,770 3,625 3,311 3,245
Selling, general and administrative expenses................ 345 346 701 711 746
Restructuring charges....................................... -- -- -- -- 304
Goodwill amortization....................................... 18 18 37 37 37
Other (income) expense...................................... (1) 2 (33) (3) (44)
--------- --------- --------- --------- ---------
Total costs and expenses.................................. 2,108 2,136 4,330 4,056 4,288
--------- --------- --------- --------- ---------
Pretax income (loss).......................................... 93 108 245 258 (39)
Income tax expense (benefit).................................. 36 42 94 101 (13)
--------- --------- --------- --------- ---------
Income (loss)............................................. $ 57 $ 66 $ 151 $ 157 $ (26)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the combined financial statements. These
policies are in conformity with generally

F-7
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accepted accounting principles and have been applied consistently in all
material respects. 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.

BASIS OF PRESENTATION

The accompanying combined financial statements include those assets,
liabilities, revenues and expenses directly attributable to Allegiance's
operations. These financial statements have been prepared as if Allegiance had
operated as a free-standing entity for all periods presented. Operations outside
the United States and Puerto Rico, which are not significant, are included in
the combined financial statements on the basis of fiscal years ending November
30.

The financial information included herein does not necessarily reflect what
the financial position and results of operations of Allegiance would have been
had it operated as a stand-alone entity during the periods covered, and may not
be indicative of future operations or financial position.

INTERIM FINANCIAL STATEMENTS

In the opinion of management, the interim combined financial statements
reflect all adjustments necessary for a fair presentation of the interim
periods. All such adjustments are of a normal, recurring nature. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the full year.

CASH AND EQUIVALENTS

Cash and equivalents include cash, cash investments and marketable
securities with original maturities of three months or less. Cash payments for
income taxes related to Allegiance's operations were made by Baxter.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or
market. Market for raw materials is based on replacement costs and for other
inventory classifications on net realizable value. Appropriate consideration is
given to deterioration, obsolescence and other factors in evaluating net
realizable value.

Inventories consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
JUNE 30,
1996
-------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Raw materials................................................... $ 63 $ 54 $ 64
Work in process................................................. 53 49 55
Finished products............................................... 540 581 602
----- --------- ---------
Total inventories........................................... $ 656 $ 684 $ 721
----- --------- ---------
----- --------- ---------
</TABLE>

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation and
amortization are provided for financial reporting purposes principally on the
straight-line method over the following estimated useful lives: buildings and
leasehold improvements, 20 to 44 years; machinery and other equipment, 3 to 20

F-8
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years; equipment leased or rented to customers, 1 to 5 years. Leasehold
improvements are depreciated over the life of the related facility leases or the
asset whichever is shorter. Straight-line and accelerated methods of
depreciation are used for income tax purposes.

Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Land.................................................................. $ 102 $ 104
Buildings and leasehold improvements.................................. 396 386
Machinery and equipment............................................... 724 778
Equipment leased or rented to customers............................... 14 16
Construction in progress.............................................. 71 46
--------- ---------
Total property, plant and equipment, at cost........................ 1,307 1,330
Accumulated depreciation and amortization............................. (429) (410)
--------- ---------
Net property, plant and equipment................................. $ 878 $ 920
--------- ---------
--------- ---------
</TABLE>

Depreciation expense was $106, $154 and $156 million in 1995, 1994 and 1993,
respectively. Repairs and maintenance expense was $36 million in 1995, $30
million in 1994 and $33 million in 1993.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of cost over the fair value of net assets
acquired and is amortized on a straight-line basis over estimated useful lives
not exceeding 40 years. Based upon management's assessment of the future
undiscounted operating cash flows of acquired businesses, the carrying value of
goodwill at December 31, 1995, has not been impaired. As of December 31, 1995
and 1994, goodwill was $1,092 million and $1,170 million, respectively, net of
accumulated amortization of $369 million and $345 million, respectively.

Other intangible assets include purchased patents, trademarks, deferred
charges and other identified rights which are amortized on a straight-line basis
over their legal or estimated useful lives, whichever is shorter (generally not
exceeding 17 years). As of December 31, 1995 and 1994, other intangibles were
$24 million and $44 million, respectively, net of accumulated amortization of
$46 million and $38 million, respectively.

INCOME TAXES

Allegiance's operations were historically included in Baxter's consolidated
U.S. federal and state income tax returns and in the tax returns of certain
Baxter foreign subsidiaries. The provision for income taxes has been determined
as if Allegiance had filed separate tax returns under its existing structure for
the periods presented. Accordingly, the effective tax rate of Allegiance in
future years could vary from its historical effective rates depending on
Allegiance's future legal structure and tax elections. All income taxes are
settled with Baxter on a current basis through the "Divisional Retained
Earnings" account.

Provision has been made for income taxes in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 109, "Accounting for Income
Taxes."

DERIVATIVES

Gains and losses on hedges of existing assets or liabilities are included in
the carrying amounts of those assets or liabilities and are ultimately
recognized in income as part of those carrying amounts.

F-9
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gains and losses relating to qualifying hedges of firm commitments or
anticipated transactions also are deferred and are recognized in income or as
adjustments of carrying amounts when the hedged transaction occurs.

3. ACQUISITIONS, INVESTMENTS IN AFFILIATES AND DIVESTITURES

ACQUISITIONS

Allegiance invested $5 million in 1995, $2 million in 1994 and $14 million
in 1993 for acquisitions accounted for as purchase transactions and investments
in affiliated companies. Had the acquisitions taken place on January 1,
consolidated results in the year of acquisition would not have been materially
different from reported results. These acquisitions involved no significant
change in Allegiance's strategic direction and were made to acquire
technologies, broaden product lines and expand market coverage.

DIVESTITURES

In 1995, Allegiance disposed of several businesses or product lines which
resulted in a net gain of $141 million (net of $122 million in related income
tax expense). The majority of the net gain for 1995 related to the divestiture
of Allegiance's Industrial and Life Sciences Division ("Industrial") to VWR
Corporation for approximately $400 million in cash and $25 million in deferred
payments, resulting in a gain of $268 million. As part of the divestiture,
Allegiance will continue to supply its self-manufactured products and supplies
sold in non-health-care markets to VWR Corporation under a long-term
distribution agreement. Allegiance disposed of or discontinued several minor
non-strategic or unprofitable product lines or investments which resulted in a
net gain of $8 million (net of $3 million in related income tax expense) in 1994
and $22 million (net of $14 million in related income tax expense) in 1993. The
majority of these transactions resulted in the disposition of Allegiance's
entire interest in such product lines and investments.

Proceeds from divestitures were $626 million in 1995, $107 million in 1994
and $68 million in 1993. Proceeds in 1995 included approximately $400 million
for the Industrial divestiture discussed earlier. The divestiture of the
diagnostics manufacturing business discussed in Note 4 to the Combined Financial
Statements included proceeds of approximately $200 million in 1995 and $44
million in 1994.

4. RESTRUCTURING CHARGES
In November 1993, Baxter's board of directors approved a series of strategic
actions to improve shareholder value and reduce costs. The strategic actions of
the program were designed in part to make the Allegiance Business more efficient
and responsive in addressing the changes occurring in the U.S. health-care
system. In November 1993, a $484 million pretax provision was recorded to cover
costs associated with these restructuring initiatives. Since the announcement of
the 1993 restructuring program, Allegiance has implemented, or is in the process
of implementing, all of the major strategic actions associated with the
restructuring program, which is expected to be completed in 1997.

Included in the 1993 restructuring plan was the intent to divest the
diagnostics manufacturing businesses and a valuation allowance was established
as a component of the 1993 restructuring charge. In December 1994, subject to
certain settlement provisions, the divestiture of these businesses was completed
and net proceeds were received of approximately $44 million in cash, $200
million in installment notes (which were collected in cash during January 1995)
and $40 million in face value of preferred stock. In addition, accounts
receivable were retained of approximately $85 million, which was collected from
customers in the normal course of business. Allegiance has retained the rights
to distribute all current diagnostics products in the U.S.

F-10
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

4. RESTRUCTURING CHARGES (CONTINUED)
Throughout 1995, active discussions took place with the buyer of the
diagnostics businesses related to interpretations of and responsibility relative
to the settlement provisions contained in the purchase and sale and related
agreements. The divestiture was also significantly complicated by a dispute
between the diagnostics manufacturing businesses and one of its major suppliers,
which ultimately led to a lower than expected final valuation of the business.
This dispute has been settled. In the third quarter of 1995, settlement
negotiations were completed with the buyer of the diagnostics businesses and
adjustments to the purchase price were finalized along with a revision of cost
estimates to complete the divestiture. This resulted in an additional
restructuring charge of approximately $76 million.

Employee-related costs include provisions for severance, outplacement
assistance, relocation and retention payments for employees in the affected
operations worldwide. Since the inception of the restructuring program,
approximately 1,920 of the 2,860 positions that were originally expected to be
affected by the program have been eliminated. As process changes were
implemented in connection with the restructuring program, it became apparent
that, as certain management level positions were eliminated, other lower cost
positions were added. While this has generated savings levels consistent with
expectations, management has revised its targeted head count reduction to 2,230
net positions. The majority of the remaining reductions will occur in 1996 and
1997, as facility closures and consolidations are completed as planned.

Noncash restructuring reserve utilization with respect to divestitures and
asset write-downs of $160 million, $66 million and $21 million in 1994 and 1995,
and for the six months ended June 30, 1996, respectively, included $118 million,
$16 million and $3 million, respectively, relating to the divestiture of the
diagnostics manufacturing businesses. Also included was $42 million in 1994, $50
million in 1995 and $16 million for the six months ended June 30, 1996, relating
primarily to the closure of a manufacturing facility and consolidations or
certain distribution facilities. The utilization relating to the diagnostics
divestiture primarily represents the excess of the net assets of the businesses
sold over the proceeds received. The utilization relating to the manufacturing
facility closure and distribution facility consolidations primarily represents
fixed asset and inventory write-downs.

F-11
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

4. RESTRUCTURING CHARGES (CONTINUED)
The following table summarizes the 1993 restructuring program for Allegiance
businesses:

<TABLE>
<CAPTION>
DIVESTITURES
EMPLOYEE- AND ASSET OTHER
RELATED COSTS WRITE- DOWNS COSTS TOTAL
--------------- ------------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Initial restructuring charge................... $ 103 $ 278 $ 103 $ 484
Utilization:
Cash......................................... (31) (22) (23) (76)
Noncash...................................... -- (160) -- (160)
----- ------ --------- ---------
December 31, 1994.............................. $ 72 $ 96 $ 80 $ 248
----- ------ --------- ---------
Utilization:
Cash......................................... (29) (43) (33) (105)
Noncash...................................... -- (66) -- (66)
Adjustment to reserve.......................... -- 76 -- 76
----- ------ --------- ---------
December 31, 1995.............................. $ 43 $ 63 $ 47 $ 153
----- ------ --------- ---------
Utilization:
Cash......................................... (11) (13) (10) (34)
Noncash...................................... -- (21) -- (21)
----- ------ --------- ---------
June 30, 1996.................................. $ 32 $ 29 $ 37 $ 98
----- ------ --------- ---------
----- ------ --------- ---------
</TABLE>

The 1995 restructuring reserve balance consisted of $89 million of current
and $64 million noncurrent liabilities. The balance in the 1994 reserves
consisted of $80 million of current and $168 million of non-current liabilities.

5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
--------- ---------------
(IN MILLIONS)
<S> <C> <C>
Accounts payable, principally trade................................... $ 378 $ 390
Employee compensation and withholdings................................ 88 109
Restructuring......................................................... 89 80
Property, payroll and other taxes..................................... 40 37
Other................................................................. 97 104
--------- -----
Accounts payable and accrued liabilities.............................. $ 692 $ 720
--------- -----
--------- -----
</TABLE>

6. LEASE OBLIGATIONS
Certain facilities and equipment are leased under operating leases expiring
at various dates. Most of the operating leases contain renewal options. Total
expense for all operating leases was $26 million in 1995, $38 million in 1994
and $38 million in 1993.

F-12
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

6. LEASE OBLIGATIONS (CONTINUED)
Future minimum lease payments (including interest) under noncancelable
operating leases at December 31, 1995 were as follows:

<TABLE>
<CAPTION>
OPERATING
LEASES
---------------
(IN MILLIONS)
<S> <C>
1996.................................................................. $ 20
1997.................................................................. 15
1998.................................................................. 11
1999.................................................................. 6
2000.................................................................. 4
Thereafter............................................................ 6
---
Total obligations and commitments..................................... $ 62
---
---
</TABLE>

7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

CONCENTRATIONS OF CREDIT RISK

Allegiance provides credit, in the normal course of business, to hospitals,
private and government institutions, health-care agencies, insurance agencies
and doctors' offices. Allegiance performs ongoing credit evaluations of its
customers and maintains reserves for potential credit losses which, when
realized, have been within the range of management's allowance for doubtful
accounts.

FINANCIAL INSTRUMENT USE

For all periods presented, Allegiance has been considered in Baxter's
overall risk management strategy. As part of this strategy, Baxter uses certain
financial instruments to reduce its exposure to adverse movements in foreign
exchange rates. These financial instruments are not used for trading purposes.

FOREIGN EXCHANGE RISK MANAGEMENT

As part of implementing its strategy, Baxter has allocated to Allegiance the
income and expense associated with certain option contracts used to hedge
anticipated cost of production expected to be denominated in foreign currencies.
The terms of these financial instruments were less than one year. Allocated net
expense and the related notional amounts for these options were immaterial in
all years presented. Subsequent to year-end 1995, Baxter entered into options to
reduce its foreign exchange exposures. Baxter allocated to Allegiance options
with a notional value of approximately $40 million to hedge anticipated costs of
production expected to be denominated in foreign currency.

FAIR VALUES OF FINANCIAL INSTRUMENTS

<TABLE>
<CAPTION>
CARRYING AMOUNTS APPROXIMATE FAIR VALUES
------------------------ ------------------------
AS OF DECEMBER 31 (IN MILLIONS) 1995 1994 1995 1994
- ---------------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Investment in affiliates.................................. $ 15 $ 9 $ 15 $ 9
</TABLE>

The carrying values of cash and cash equivalents, accounts receivable and
payable, and accrued liabilities, approximate fair value due to the short-term
maturities of these assets and liabilities.

Investments in affiliates are accounted for by both the cost and equity
methods and pertain to several minor equity investments in companies for which
fair values are determined by quoted market prices and others for which fair
values are not readily available, but are believed to exceed carrying amounts.

F-13
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

8. RELATED PARTY TRANSACTIONS
Baxter has provided to Allegiance certain legal, treasury, insurance and
administrative services. Charges for these services are based on actual costs
incurred by Baxter. In addition, Allegiance is the primary distributor of
Baxter's intravenous solutions, cardiovascular devices and other products in the
United States and also provides other services to Baxter. Negotiated fees for
these distribution services have generally been under the same terms and
conditions granted to independent third parties. Additionally, these fees are
not materially different than the terms of the Distribution Agreement subsequent
to the Distribution. A summary of related party transactions, all of which are
with Baxter or Baxter affiliates, is shown in the table below (in millions):

<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Allegiance provided:
Distribution services to Baxter in the U.S......................... $ 214 $ 206 $ 201
Administrative services to Baxter.................................. $ 25 $ 24 $ 23
Allegiance received:
Administrative services from Baxter................................ $ 48 $ 46 $ 44
International distribution services from Baxter.................... $ 26 $ 25 $ 23
</TABLE>

Management believes that the basis used for allocating corporate services is
reasonable. However, the terms of these transactions may differ from those that
would result from transactions among unrelated parties.

Allegiance participates in a centralized cash management program
administered by Baxter. Short-term advances from Baxter or excess cash sent to
Baxter has been treated as an adjustment to the "Divisional Retained Earnings"
account through the Balance Sheet date. No interest is charged on this balance.

Effective on the Distribution Date, Baxter and Allegiance will enter into a
series of administrative services agreements pursuant to which Baxter and
Allegiance will continue to provide, for a specified period of time, certain
administrative services which each entity historically has provided to the
other. These agreements require both parties to pay to each other a fee which
approximates the actual costs of these services. Additionally, subsequent to the
spin-off, Allegiance will have continuing significant relationships with Baxter
as a distributor, customer and supplier for a wide array of health-care products
and services, and for specified transitional administrative support services.
See "Arrangements Between Baxter and Allegiance" included elsewhere in this
Information Statement, for detailed descriptions of the related agreements.

9. RETIREMENT AND OTHER BENEFIT PROGRAMS
Allegiance participated in Baxter-sponsored non-contributory, defined
benefit pension plans covering substantially all employees in the U.S. and
Puerto Rico. The benefits were based on years of service and the employee's
compensation during 5 of the last 10 years of employment as defined by the
plans. Plan assets, which are maintained in a trust administered by Baxter,
consist primarily of equity and fixed income securities. Baxter and Allegiance
have announced their intent to freeze benefits under these plans at the date of
the spin-off for Allegiance employees. Allegiance has also announced that it
will not have a defined benefit pension plan to replace the Baxter plan. The
pension liability related to Allegiance employees' service prior to the spin-off
date will remain with Baxter.

Pension expense associated with the Baxter-sponsored plans prior to its
being frozen was $17 million, $22 million and $28 million for 1995, 1994 and
1993, respectively. The assumed discount rate applied to benefit obligations to
determine 1995 pension expense was 9% and the assumed long-term rate of return
on assets was 9.5% for the U.S. and Puerto Rico plans.

F-14
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

9. RETIREMENT AND OTHER BENEFIT PROGRAMS (CONTINUED)
In addition to pension benefits, Allegiance participated in Baxter-sponsored
contributory health-care and life insurance benefits for substantially all
domestic retired employees. Baxter and Allegiance have announced that they will
freeze benefits under these plans at the date of the spin-off for Allegiance
employees. Expense associated with these benefits prior to the date of the
spin-off were $9 million in 1995, $9 million in 1994 and $11 million in 1993.
Allegiance has announced its intention not to establish new health-care and life
insurance plans for employees retiring subsequent to the Distribution Date.

Effective, January 1, 1993, Allegiance adopted FASB Statement No. 112,
"Employers' Accounting for Postemployment Benefits" which requires accrual
accounting for postemployment benefits such as disability related and
workers-compensation payments. The company recorded the obligation as a
cumulative effect of an accounting change for $5 million (net of $3 million in
related income tax benefits). The effect of this change on 1993 operating income
versus the prior method of accounting for these benefits was not material. The
liability associated with these benefits was $14 million for 1995 and 1994.

Most U.S. employees are eligible to participate in a qualified 401(k) plan.
Participants may contribute up to 12% of their annual compensation (limited in
1995 to $9,240 per individual) to the plan and Allegiance matches participants'
contributions, up to 3% of compensation. Matching contributions made by
Allegiance were $11 million in 1995, $14 million in 1994 and $14 million in
1993.

10. OTHER (INCOME) EXPENSE
Components of other (income) expense are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Asset dispositions, net.............................................. $ (263) $ (11) $ (36)
Foreign exchange..................................................... -- 5 --
Other................................................................ (39) -- 10
--------- --- ---
Total other income................................................... $ (302) $ (6) $ (26)
--------- --- ---
--------- --- ---
</TABLE>

11. INCOME TAXES
Income (loss) before tax expense by category is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
U.S................................................................. $ 434 $ 292 $ (191)
International....................................................... 42 46 37
--------- --------- ---------
Income (loss) before income tax expense............................. $ 476 $ 338 $ (154)
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-15
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES (CONTINUED)
Income tax expense before cumulative effect of accounting change by category
and by income statement classification is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Current
U.S.
Federal......................................................... $ 124 $ 91 $ 79
State and local, including Puerto Rico.......................... 34 26 29
International..................................................... (5) 3 5
--------- --------- ---------
Current income tax expense........................................ 153 120 113
--------- --------- ---------
Deferred
U.S.
Federal......................................................... 38 (5) (164)
State and local, including Puerto Rico.......................... 8 4 (34)
International..................................................... 4 4 (1)
--------- --------- ---------
Deferred income tax expense (benefit)............................. 50 3 (199)
--------- --------- ---------
Income tax expense (benefit)........................................ $ 203 $ 123 $ (86)
--------- --------- ---------
--------- --------- ---------
</TABLE>

The income tax expense shown above was calculated as if Allegiance were a
stand-alone entity.

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

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Deferred tax assets
Accrued expenses................................................... $ 70 $ 60 $ 60
Restructuring costs................................................ 57 77 111
Other.............................................................. -- -- 1
--------- --------- ---------
Total deferred tax assets........................................ 127 137 172
--------- --------- ---------
Deferred tax liabilities
Asset basis differences............................................ 107 46 70
Other.............................................................. 1 -- 8
--------- --------- ---------
Total deferred tax liabilities................................... 108 46 78
--------- --------- ---------
Net deferred tax assets.......................................... $ 19 $ 91 $ 94
--------- --------- ---------
--------- --------- ---------
</TABLE>

In 1995, $22 million of deferred tax assets were transferred to Baxter. The
deferred tax assets related to the asset basis difference associated with
preferred stock received in connection with the divestiture of the diagnostics
manufacturing businesses. Since agreements entered into with the buyer of the
diagnostics manufacturing businesses require that the preferred stock be
retained by Baxter for a prescribed period of time, the related deferred tax
assets were transferred to Baxter.

F-16
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

11. INCOME TAXES (CONTINUED)
Income tax expense differs from income tax expense calculated by using the
U.S. federal income tax rate for the following reasons:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate....................... $ 166 $ 118 $ (54)
Tax-exempt operations................................................ (17) (23) (37)
Non deductible goodwill.............................................. 28 14 14
State and local taxes................................................ 27 15 (12)
Foreign tax (benefit)................................................ (1) (2) (2)
Other................................................................ -- 1 5
--------- --------- ---------
Income tax expense (benefit)....................................... $ 203 $ 123 $ (86)
--------- --------- ---------
--------- --------- ---------
</TABLE>

Allegiance has manufacturing operations outside the U.S. that benefit from
reductions in local tax rates under tax incentives that will continue at least
through 1998. U.S. federal income taxes, net of available foreign tax credits,
on unremitted earnings deemed permanently reinvested would not be material.

12. LEGAL PROCEEDINGS
Upon the Distribution, Allegiance will assume the defense of litigation
involving claims related to Allegiance Business, including certain claims of
alleged personal injuries as a result of exposure to natural rubber latex gloves
described below. Allegiance has not been named as a defendant in this litigation
but will be defending and indemnifying Baxter Healthcare Corporation ("BHC"), as
contemplated by the Reorganization Agreement, for all expenses and potential
liabilities associated with claims pertaining to this litigation. It is expected
that Allegiance will be named as a defendant in future litigation and may be
added as a defendant in existing litigation. (Information subsequent to June 26,
1996 is unaudited).

BHC was one of ten defendants named in a purported class action filed in
August 1993, on behalf of all medical and dental personnel in the state of
California who allegedly suffered allergic reactions to natural rubber latex
gloves and other protective equipment or who allegedly have been exposed to
natural rubber latex products. (KENNEDY, ET AL., V. BAXTER HEALTHCARE
CORPORATION, ET AL., Sup. Ct., Sacramento Co., Cal., #535632). The case alleges
that users of various natural rubber latex products, including medical gloves
made and sold by BHC and other manufacturers, suffered allergic reactions to the
products ranging from skin irritation to systemic anaphylaxis. The Court granted
defendants' demurrer to the class action allegations. On February 29, 1996, the
California Appellate Court upheld the trial court's ruling. In April 1994, a
similar purported class action, GREEN, ET AL. V. BAXTER HEALTHCARE CORPORATION,
ET AL., (Cir. Ct., Milwaukee Co., WI, 94CV004977) was filed against Baxter and
three other defendants. The class action allegations have been withdrawn, but
additional plaintiffs added individual claims. On July 1, 1996, the Company was
served with a similar purported class action, WOLF V. BAXTER HEALTHCARE CORP. ET
AL., Circuit Court, Wayne County, MI, 96-617844NP. The Company is the only named
defendant in that suit. As of August 19, 1996, 36 additional lawsuits have been
served on BHC containing similar allegations of senseitization to natural rubber
latex products. Allegiance intends to vigorously defend against these actions.
Since none of these cases has proceeded to a hearing on the merits, Allegiance
is unable to evaluate the extent of any potential liability, and unable to
estimate any potential loss.

Allegiance believes that a substantial portion of the liability and defense
costs related to natural rubber latex gloves cases and claims will be covered by
insurance, subject to self-insurance retentions, exclusions, conditions,
coverage gaps, policy limits and insurer solvency. BHC has notified its
insurance

F-17
<PAGE>
ALLEGIANCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)

12. LEGAL PROCEEDINGS (CONTINUED)
companies that it believes that these cases and claims are covered by BHC's
insurance. Most of BHC's insurers have reserved their rights (i.e., neither
admitted nor denied coverage), and may attempt to reserve in the future, the
right to deny coverage, in whole or in part, due to differing theories
regarding, among other things, the applicability of coverage and when coverage
may attach. It is not expected that the outcome of these matters will have a
material adverse effect on Allegiance's business, cash flow, results of
operations or financial condition.

As of June 30, 1996, BHC has been named as a potentially responsible party
for cleanup costs at ten hazardous waste sites, for which Allegiance has assumed
responsibility. Allegiance's largest assumed exposure is at the Thermo-Chem site
in Muskegon, Michigan. Allegiance expects that the total cleanup costs for this
site will be between $44 million and $65 million, of which Allegiance's share
will be approximately $5 million. This amount, net of payments of approximately
$1 million, has been accrued and is reflected in Allegiance's combined financial
statements. The estimated exposure for the remaining nine sites is approximately
$4 million, which has been accrued and reflected in Allegiance's combined
financial statements.

13. INDUSTRY INFORMATION
Allegiance operates in a single industry segment as a leading provider of
medical products and services that help its health-care customers manage and
reduce the total cost of providing patient care. Through its nationwide
distribution network, Allegiance distributes a broad offering of hospital
supplies, including its own self-manufactured surgical and respiratory-therapy
products, to hospital and alternate-care customers. Allegiance also provides
cost management services to its health-care customers through inventory
management programs, customized packaging, and procedure and process consulting.

International sales from self-manufactured products are primarily in Canada,
France and Germany. For surgical products, the majority of raw materials used
for the manufacture of latex gloves are located in Malaysia. None of these
geographic locations represent 10% or more of net sales or identifiable assets
of Allegiance.

For the last three years, sales to customers which are members of two large
hospital buying groups, Premier and VHA, Inc. ("VHA"), as a percentage of total
sales were 27% and 16%, respectively in 1995, 23% and 13%, respectively in 1994,
and 23% and 13%, respectively in 1993. Premier and VHA each are comprised of a
group of health-care organizations which benefit from the pricing and other
benefits available to members of the group. However, some members are free to
purchase from the vendors of their choice. The loss of the relationship with
either group would not necessarily mean the loss of sales attributable to all
members of such group.

F-18
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
DESCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 2
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 11
Company Background............................. 11
Capitalization................................. 12
Selected Historical Financial Data............. 13
Pro Forma Financial Information................ 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 19
Business....................................... 27
Management..................................... 36
Relationship with Baxter....................... 47
Principal Stockholders......................... 50
Description of Credit Facilities............... 51
Description of Securities...................... 51
Underwriting................................... 63
Validity of Securities......................... 64
Experts........................................ 64
Index to Financial Statements.................. F-1
</TABLE>

THROUGH AND INCLUDING JANUARY 8, 1997 (THE 90TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

$550,000,000

ALLEGIANCE CORPORATION

$200,000,000
7.30% NOTES DUE OCTOBER 15, 2006
$150,000,000
7.80% DEBENTURES DUE OCTOBER 15, 2016
$200,000,000
7.00% DEBENTURES DUE OCTOBER 15, 2026

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[LOGO]

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GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
SMITH BARNEY INC.
BA SECURITIES, INC.
FIRST CHICAGO
CAPITAL MARKETS, INC.
NATIONSBANC
CAPITAL MARKETS, INC.

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