<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB
(Mark One)
    X             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
----------           OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 2005

                                       or

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

          For the transition period from ____________ to ____________

                         Commission File Number 0-12950

                          ALLIANCE PHARMACEUTICAL CORP.
             (Exact name of Registrant as specified in its charter)

New York                                    14-1644018
-----------------------------------         ------------------------------------
(State or other jurisdiction                (I.R.S. Employer
of incorporation or organization)           Identification Number)

4660 La Jolla Village Dr, #825
San Diego, California                       92122
-----------------------------------         ------------------------------------
(Address of principal                       Zip Code
executive offices)

Registrant's telephone number,
including area code:                        (858) 410-5200
                                            ------------------------------------

Indicate by a check whether the registrant (1) has filed all reports required to
be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes       X                                    No
    -------------                                 -----------

Indicate by a check whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934).
Yes                                            No      X
    -------------                                 -----------

As of February 9, 2006, Registrant had 34,829,827 shares of its Common Stock,
$.01 par value, outstanding.
Transitional Small Business Disclosure Format:    Yes               No   X
                                                      -----            -----



<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------


INDEX
-----
                                                                        Page No.
                                                                        --------


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheet (unaudited)                     3

         Condensed Consolidated Statements of Operations (unaudited)          4

         Condensed Consolidated Statements of Cash Flows (unaudited)          5

         Notes to Unaudited Condensed Consolidated Financial Statements       6


Item 2.  Management's Discussion and Analysis or Plan of Operation           15


Item 3.  Controls and Procedures                                             20


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                   21

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds         22

Item 3.  Defaults Upon Senior Securities                                     22

Item 4.  Submission of Matters to a Vote of Security Holders                 22

Item 5   Other Information                                                   22

Item 6.  Exhibits                                                            22


                                       2


<PAGE>

PART I FINANCIAL INFORMATION:
ITEM 1.  FINANCIAL STATEMENTS

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
-------------------------------------------------------------------------------

                                                                   DECEMBER 31,
                                                                       2005
                                                                  -------------
ASSETS                                                             (UNAUDITED)
------

CURRENT ASSETS:
    Cash and cash equivalents                                     $   5,126,000
    Other current assets                                                 29,000
                                                                  -------------
              Total current assets                                    5,155,000

PROPERTY, PLANT AND EQUIPMENT - NET                                      87,000
OTHER ASSETS - NET                                                       10,000
                                                                  -------------
                                                                  $   5,252,000
                                                                  =============

LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------

CURRENT LIABILITIES:
    Accounts payable                                              $     455,000
    Accrued expenses                                                    150,000
    Deferred revenue                                                    600,000
    Senior notes payable and accrued interest                        11,281,000
                                                                  -------------
              Total current liabilities                              12,486,000

OTHER LIABILITIES                                                     1,250,000
                                                                  -------------

              Total liabilities                                      13,736,000
                                                                  -------------

STOCKHOLDERS' DEFICIT:
    Preferred stock - $.01 par value; 5,000,000 shares
         authorized; Series F preferred stock - 793,750
         shares issued and outstanding                                    8,000
    Common stock - $.01 par value; 125,000,000 shares
         authorized; 34,829,827 shares issued and outstanding           348,000
    Additional paid-in capital                                      475,588,000
    Accumulated deficit                                            (484,428,000)
                                                                  -------------
              Total stockholders' deficit                            (8,484,000)
                                                                  -------------
                                                                  $   5,252,000
                                                                  =============


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                       3


<PAGE>

<TABLE>
ALLIANCE PHARMACEUTICAL CORP.
-----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------

                                             THREE MONTHS ENDED              SIX MONTHS ENDED
                                                DECEMBER 31,                    DECEMBER 31,
                                            2005           2004             2005             2004
                                        ------------    ------------    ------------    ------------
                                                (UNAUDITED)                     (UNAUDITED)
<S>                                     <C>             <C>             <C>             <C>
REVENUES:
   Royalty, license and research        $     53,000    $     25,000    $     77,000    $     72,000

OPERATING EXPENSES:
   Research and development                  287,000         239,000         836,000       1,199,000
   General and administrative                195,000         569,000         600,000       1,206,000
                                        ------------    ------------    ------------    ------------
                                             482,000         808,000       1,436,000       2,405,000
                                        ------------    ------------    ------------    ------------
LOSS FROM OPERATIONS                        (429,000)       (783,000)     (1,359,000)     (2,333,000)

INVESTMENT INCOME                             52,000          34,000         102,000          65,000
OTHER INCOME                                      --          10,000          82,000          10,000
INTEREST EXPENSE                            (125,000)       (160,000)       (314,000)     (2,409,000)
GAIN ON DISPOSITION OF LIABILITIES                --              --         730,000              --
GAIN ON DISPOSITION OF ASSETS                     --         116,000         476,000         259,000
                                        ------------    ------------    ------------    ------------
NET LOSS                                $   (502,000)   $   (783,000)   $   (283,000)   $ (4,408,000)
                                        ============    ============    ============    ============

NET LOSS PER COMMON SHARE,
                    BASIC AND DILUTED   $      (0.01)   $      (0.02)   $      (0.01)   $      (0.10)
                                        ============    ============    ============    ============

WEIGHTED AVERAGE SHARES OUTSTANDING,
                    BASIC AND DILUTED     34,830,000      31,787,000      34,830,000      44,632,000
                                        ============    ============    ============    ============


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                               4
</TABLE>


<PAGE>

<TABLE>
ALLIANCE PHARMACEUTICAL CORP.
-----------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------
                                                                                      SIX MONTHS ENDED
                                                                                         DECEMBER 31,
                                                                                     2005            2004
                                                                                 ------------    ------------
                                                                                         (UNAUDITED)
<S>                                                                              <C>             <C>
OPERATING ACTIVITIES:
   Net loss                                                                      $   (283,000)   $ (4,408,000)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                    10,000           5,000
      Accrued interest on senior notes                                                314,000         170,000
      Compensatory stock options                                                       19,000           2,000
      Beneficial conversion expense                                                        --       2,238,000
      Gain on disposition of liabilities                                             (730,000)             --
      Gain on disposition of assets                                                  (476,000)       (259,000)
      Changes in operating assets and liabilities:
         Restricted cash and other assets                                           1,059,000          25,000
         Accounts payable and accrued expenses and other                           (1,766,000)          5,000
                                                                                 ------------    ------------
Net cash used in operating activities                                              (1,853,000)     (2,222,000)
                                                                                 ------------    ------------

INVESTING ACTIVITIES:
   Purchase of property and equipment                                                  (3,000)         (1,000)
   Proceeds from disposition of assets                                                200,000          90,000
                                                                                 ------------    ------------
Net cash provided by investing activities                                             197,000          89,000
                                                                                 ------------    ------------


DECREASE IN CASH AND CASH EQUIVALENTS                                              (1,656,000)     (2,133,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    6,782,000       8,429,000
                                                                                 ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $  5,126,000    $  6,296,000
                                                                                 ============    ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock in exchange for cancellation of warrant                 $         --    $     25,000
                                                                                 ============    ============
Issuance of senior convertible notes for common stock                            $         --    $ 10,692,000
                                                                                 ============    ============
Issuance of senior convertible notes for secured convertible note                $         --    $    500,000
                                                                                 ============    ============
Reclassification of warrant liability                                            $         --    $  7,942,000
                                                                                 ============    ============

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

</TABLE>

                                               5


<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

          THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION
------------

         Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company", "Alliance", "we" or "us") are engaged in identifying, designing and
developing novel medical products. Currently, the Company is focused on
developing its lead product, OXYGENT(TM), an intravascular oxygen carrier
designed to augment oxygen delivery in surgical patients at risk of acute tissue
hypoxia (oxygen deficiency).

LIQUIDITY AND BASIS OF PRESENTATION
-----------------------------------

         The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. The Company has incurred
operating losses through December 31, 2005 and has negative working capital at
that date of approximately $7.3 million. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.

         As discussed in Note 5, in June 2004, the Company completed a private
placement financing with net proceeds to the Company of approximately $10
million from the sale of common stock (the "June 2004 Private Placement"). In
September 2004, the terms of the June 2004 Private Placement were renegotiated
by mutual agreement of the Company and investors holding approximately $10.7
million of the original $11 million invested by the various investors in the
June 2004 Private Placement. Concurrently, the investors who elected to rescind
the June 2004 Private Placement were issued senior convertible promissory notes
in like investment amounts (the "Senior Notes"), which, unless previously
converted, will mature and the unpaid principal, together with accrued interest,
shall become due and payable on March 26, 2006. If the holders of the Senior
Notes do not demand repayment in March 2006, the Company believes it has capital
to fund operations for the next 12 months; however, it does not have the
resources to repay the Senior Notes. If the holders of the Senior Notes demand
repayment in March 2006, the Company would have to raise additional funds to
repay the Senior Notes or renegotiate their terms. The accompanying unaudited
condensed consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amount and classification of liabilities that may result from the
outcome of this uncertainty.

PRINCIPLES OF CONSOLIDATION
---------------------------

         The accompanying unaudited condensed consolidated financial statements
include the accounts of Alliance Pharmaceutical Corp., the accounts of its
wholly owned subsidiaries - Molecular Biosystems, Inc. ("MBI") and Astral, Inc.
("Astral") (until September 6, 2005) - and its majority-owned subsidiaries -
Talco Pharmaceutical, Inc. and PFC Therapeutics, LLC ("PFC Therapeutics"). The
Company's subsidiaries have minimal operations and all significant intercompany
accounts and transactions have been eliminated.

INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS
------------------------------------------------

         The condensed consolidated balance sheet as of December 31, 2005, the
condensed consolidated statements of operations for the three months and six
months ended December 31, 2005 and 2004, and the condensed consolidated
statements of cash flows for the six months ended December 31, 2005 and 2004 are


                                       6


<PAGE>

unaudited. In the opinion of management, such unaudited financial statements
include all adjustments, consisting only of normal recurring accruals, necessary
for a fair presentation of the results for the periods presented. Interim
results are not necessarily indicative of the results to be expected for the
full year. The financial statements should be read in conjunction with the
Company's audited consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended June
30, 2005.

USE OF ESTIMATES
----------------

         The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the condensed consolidated
financial statements. Significant estimates made by management include, among
others, recoverability of property, plant and equipment and valuation of
deferred tax assets. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS
-------------------------

         The Company considers instruments purchased with an original maturity
of three months or less to be cash equivalents.

CONCENTRATION OF CREDIT RISK
----------------------------

         Cash and cash equivalents are financial instruments that potentially
subject the Company to concentration of credit risk. The Company invests its
excess cash primarily in U.S. government securities and debt instruments of
financial institutions and corporations with strong credit ratings. The Company
has established guidelines relative to diversification and maturities to
maintain safety and liquidity. These guidelines are reviewed periodically and
modified to take advantage of trends in yields and interest rates. The Company
places its cash with high quality financial institutions and at times may have
deposits which exceed the Federal Deposit Insurance Corporation (the "FDIC")
$100,000 insurance limit. At December 31, 2005, the Company had approximately $5
million in these accounts in excess of the FDIC insurance limits.

REVENUE RECOGNITION
-------------------

         The Company recognizes revenue in accordance with Staff Accounting
Bulletin ("SAB") No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS", as
revised by SAB No. 104. As such, the Company recognizes revenue when persuasive
evidence of an arrangement exists, title transfer has occurred, or services have
been performed, the price is fixed or readily determinable and collectibility is
probable.

         Revenue is deferred until all contractual obligations have been
satisfied.

         RESEARCH AND DEVELOPMENT REVENUES UNDER COLLABORATIVE AGREEMENTS
         ----------------------------------------------------------------

         Research and development revenues under collaborative agreements are
recognized as the related expenses are incurred, up to contractual limits.
Payments received under these agreements that are related to future performance
are deferred and recorded as revenue as they are earned over the specified
future performance period. Revenue related to nonrefundable, upfront fees are
recognized over the period of the contractual arrangements as performance
obligations related to the services to be provided have been satisfied. Revenue
related to milestones is recognized upon completion of the milestone's
performance requirement.

         LICENSING AND ROYALTY REVENUES
         ------------------------------

         Licensing and royalty revenues for which no services are required to be
performed in the future are recognized immediately, if collectibility is
reasonably assured.

                                       7


<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------

         Research and development expenditures are charged to expense as
incurred. Research and development expenditures include the cost of salaries and
benefits for clinical, scientific, manufacturing, engineering and operations
personnel, payments to outside researchers for preclinical and clinical trials
and other product development work, payments related to facility lease and
utility expenses, depreciation and amortization, patent costs, as well as other
expenditures. During the six-month periods ended December 31, 2005 and 2004, the
Company incurred research and development expenses of $836,000 and $1.2 million,
respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

         The carrying amount of certain of the Company's financial instruments
as of December 31, 2005 approximates their respective fair values because of the
short-term nature of these instruments. Such instruments consist of cash,
accounts payable, accrued expenses and other liabilities. The carrying value of
debt approximates fair value as the related interest rate approximates a rate
currently available to the Company.

COMPUTATION OF NET LOSS PER COMMON SHARE
----------------------------------------

         Basic loss per share was computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. All
potential dilutive common shares have been excluded from the calculation of
diluted loss per share for the three months and six months ended December 31,
2005 and 2004, as their inclusion would be anti-dilutive.

ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------

         Stock-based awards to non-employees are accounted for using the fair
value method in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," and Emerging Issues
Task Force ("EITF") Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE
ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING
GOODS OR SERVICES." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date used to determine the fair value of the equity instrument issued is the
earlier of the date on which the third-party performance is complete or the date
on which it is probable that performance will occur.

         The Company has adopted the disclosure-only provisions of SFAS No. 123.
The Company in its financial statements applies Accounting Principles Board
Opinion ("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related
interpretations in accounting for its stock option plans and, accordingly, no
employee stock-based compensation cost has been recognized for stock options in
the three-month and six-month periods ended December 31, 2005 or 2004. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date and amortized to expense over their vesting
period as prescribed by SFAS No. 123, the Company's net loss and net loss per
share would have been adjusted to the pro forma amounts indicated below for the
three months and six months ended December 31:

                                       8


<PAGE>

<TABLE>
                                   THREE MONTHS ENDED    THREE MONTHS ENDED    SIX MONTHS ENDED      SIX MONTHS ENDED
                                      DECEMBER 31,          DECEMBER 31,         DECEMBER 31,           DECEMBER 31,
                                          2005                  2004                 2005                  2004
                                    ----------------     -----------------     -----------------     -----------------
<S>                                 <C>                  <C>                   <C>                   <C>
Net loss:
     As reported                    $      (502,000)     $       (783,000)     $       (283,000)     $     (4,408,000)
     Fair value of stock-based
        employee compensation               (78,000)             (157,000)             (233,000)             (317,000)
                                    ----------------     -----------------     -----------------     -----------------
     Pro forma                      $      (580,000)     $       (940,000)     $       (516,000)     $     (4,725,000)
                                    ================     =================     =================     =================

Net loss per share, basic and diluted
     As reported                    $         (0.01)     $          (0.02)     $          (0.01)     $          (0.10)
                                    ================     =================     =================     =================
     Pro forma                      $         (0.02)     $          (0.03)     $          (0.01)     $          (0.11)
                                    ================     =================     =================     =================
</TABLE>

         The impact of outstanding non-vested stock options granted prior to
1996 (the effective date of SFAS No. 123) has been excluded from the pro forma
calculations; accordingly, the pro forma adjustments for the three-month and
six-month periods ended December 31, 2005 and 2004 are not indicative of future
period pro forma adjustments if the calculation reflected all applicable stock
options. The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model. The estimated weighted average fair value at
grant date for the options granted during the periods ended December 31, 2005
and 2004 was $0.11 and $0.24 per option, respectively.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

         In December 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123 (revised 2004), "SHARE-BASED PAYMENT" ("Statement 123(R)")
to provide investors and other users of financial statements with more complete
and neutral financial information by requiring that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Statement 123(R) replaces SFAS No. 123 and supersedes APB No.
25. SFAS No. 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, SFAS No. 123 permitted entities the option of continuing to
apply the guidance in APB No. 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. The Company will be required to apply
Statement 123(R) in fiscal 2007. The Company is in the process of evaluating
whether the adoption of Statement 123(R) will have a significant impact on the
Company's overall results of operations or financial position.

         Other recent accounting pronouncements issued by the FASB (including
its EITF), the American Institute of Certified Public Accountants and the
Securities and Exchange Commission (the "SEC") did not or are not believed by
management to have a material impact on the Company's present or future
financial statements.

2.  PFC THERAPEUTICS, LLC

         On May 16, 2005, PFC Therapeutics and Beijing Double-Crane
Pharmaceutical Co., Ltd. ("Double-Crane"), the market leader for IV solutions
and one of the largest pharmaceutical companies in the People's Republic of
China (the "PRC"), entered into a development, license and supply agreement
("Double-Crane Agreement") for the development of OXYGENT in the PRC. Pursuant


                                       9


<PAGE>

to the Double-Crane Agreement, Double-Crane made an upfront license fee payment
and will make certain milestone and royalty payments to the Company. The payment
of the upfront license fee has been deferred, as the Company's obligations to
perform have not been satisfied, and such amount is included in current
liabilities in the accompanying unaudited condensed consolidated balance sheet
at December 31, 2005. Double-Crane will conduct clinical trials in the PRC, in
accordance with international guidelines, to receive marketing approval for
OXYGENT in the PRC. The Company will have the right to use in other countries
any data derived from the clinical trials. Double-Crane will have the option to
manufacture OXYGENT in the PRC after obtaining approval from the regulatory
authorities in the PRC and they will also have a right of first refusal to add
specific additional countries to the Double-Crane Agreement upon further
negotiation with the Company.

3.  SALE OF IMAGENT(R) ASSETS

         On June 18, 2003, Imcor Pharmaceutical Co. ("Imcor"), formerly known as
Photogen Technologies, Inc., acquired certain assets and assumed certain
liabilities from Alliance. The assets acquired by Imcor included all of
Alliance's assets related to designing, developing, manufacturing, marketing,
selling, licensing, supporting and maintaining its IMAGENT product, an
ultrasound contrast agent that was approved by the United States Food & Drug
Administration ("FDA") for marketing in the U.S. in June 2002. The amount of
consideration was determined through arms-length negotiation. To the extent
obligations with certain creditors were completely settled, Alliance recorded a
gain from sale of assets of approximately $10.6 million during the year ended
June 30, 2003, approximately $15 million during the year ended June 30, 2004,
approximately $306,000 during the year ended June 30, 2005 and approximately
$476,000 during the six-month period ended December 31, 2005 related to the
disposition of these assets. To date, Alliance has recorded approximately $26.4
million as a gain on the disposition of assets as a result of Imcor issuing
shares of its stock valued at approximately $3.7 million to Alliance creditors,
Imcor funding approximately $1.8 million of Alliance's obligations, and
approximately $20.9 million related to settlement agreements or Imcor's assumed
obligations of Alliance.

         On September 19, 2005, Alliance and Imcor entered into a global
settlement agreement pursuant to which each party released the other from any
further obligations under the IMAGENT Purchase Agreement, effectively
terminating all ongoing obligations and rights under the agreement and providing
for the allocation between the parties of the proceeds of any future transaction
involving the disposition of the IMAGENT asset. In addition, the parties have
agreed to a settlement of the Amersham Litigation, in which all parties granted
each other fully paid-up, irrevocable, royalty-free, non-exclusive
cross-licenses, with the right to sublicense, and mutual releases (see Part II,
Item 1). Alliance received $200,000 as a result of the above settlement
agreements during the quarter ended September 30, 2005.

         The detail of items comprising the gain on disposition of IMAGENT
assets for the six months ended December 31, 2005 and 2004 is calculated as
follows (in thousands):

                    SIX MONTHS ENDED DECEMBER 31:               2005       2004
                                                               ------     ------

Cash payments funded by Imcor for liabilities of Alliance      $  200     $   90
Assumption by Imcor of operating liabilities and other debt
  and settlements with vendors and creditors of Alliance          276        169

                                                               ------     ------
Gain on sale of assets of IMAGENT to Imcor                     $  476     $  259
                                                               ======     ======


                                       10


<PAGE>

4.  ASTRAL, INC.

         On September 6, 2005, Alliance and Astral entered into an asset
contribution agreement (the "Astral Agreement") with MultiCell Technologies,
Inc. ("MultiCell") and Astral Therapeutics, Inc. ("Astral Therapeutics")
pursuant to which Alliance and Astral contributed all of their respective assets
(including intellectual property, laboratory equipment and furniture), which had
a net book value of zero at the date of contribution, that relate primarily to
the business of Astral to Astral Therapeutics, a new entity formed for the
purpose of further developing the Astral assets. In return, Alliance received an
amount of common stock (490,000 shares) of Astral Therapeutics equal to
approximately 49% of the outstanding capital stock of Astral Therapeutics. In
addition, in connection with this transaction, Astral Therapeutics assumed
certain obligations and liabilities of Alliance with respect to the Astral
assets. Subsequent to the transfer of the Astral assets, MultiCell purchased $2
million in Series A Preferred Stock of Astral Therapeutics. MultiCell paid $1
million of this amount at the closing of the purchase of the Series A Preferred
Stock and is obligated to pay the balance in four quarterly installments of
$250,000 over the next year pursuant to a promissory note that is secured by a
pledge of $1 million in value of Astral Therapeutics Series A Preferred Stock.
After the purchase and sale of the Series A Preferred Stock of Astral
Therapeutics to MultiCell, Alliance owned approximately 33% of the fully diluted
outstanding capital stock of Astral Therapeutics. Pursuant to the Astral
Agreement, MultiCell assumed all of Astral's obligations under Astral's
assignment agreement with Mixture Sciences, Inc. ("Mixture Sciences"). In total,
the Company transferred approximately $730,000 of net liabilities to Astral
Therapeutics (which amount was recorded as a gain on disposition of liabilities
in the quarter ended September 30, 2005) in exchange for 490,000 shares of
common stock of Astral Therapeutics. Subsequently, Astral Therapeutics' name was
changed to MultiCell Immunotherapeutics, Inc. ("MCTI").

         It was determined by the Company's management that MCTI has sufficient
equity or that MCTI's equity holders have adequate decision-making authority or
the obligation and right as equity holders to absorb MCTI's expected losses or
to receive its expected residual returns. Therefore, MCTI is not subject to FASB
Interpretation No. 46 and such investment will be accounted for under the equity
method.

5.  DEBT OBLIGATIONS

PFC NOTE
--------

         On November 20, 2003, PFC Therapeutics issued a secured convertible
note in the principal amount of $500,000 (the "PFC Note") to an investor. The
investor also received a warrant to purchase a number of units of ownership
interests of PFC Therapeutics representing 10% of its issued and outstanding
units (determined on a fully-diluted basis on the date of exercise of the
warrant) at an exercise price of $0.01 per unit, at any time or from time to
time from January 31, 2004 to and including January 31, 2009. In September 2004,
the holder of the PFC Note exchanged such warrant for 2,500,000 shares of common
stock of the Company and the PFC Note for a Senior Note (described below) in the
principal amount of $500,000.

SENIOR NOTES PAYABLE
--------------------

         On July 2, 2004, Nycomed notified the Company that it was unilaterally
terminating the Nycomed Agreement effective August 16, 2004. Subsequently, a
dispute arose between the Company and some of its investors who participated in
the June 2004 Private Placement. After considering all of the facts and
circumstances relevant to the dispute, the Company's Board of Directors
determined that it was in the Company's and the Company's stockholders' best
interests to offer, as a settlement of the dispute, to rescind the June 2004
Private Placement.

         On September 24, 2004, investors holding 30,546,423 shares of common
stock and warrants to purchase 22,909,821 shares of common stock representing
approximately $10.7 million of the $11 million invested in the June 2004 Private
Placement elected to rescind the June 2004 Private Placement. In doing so, each
of these investors returned to the Company its stock certificate representing
the number of shares and the warrant that it received in the June 2004 Private


                                       11


<PAGE>

Placement for cancellation. Immediately thereafter, these same investors entered
into the Senior Note Purchase Agreement whereby the Company issued to such
investors Senior Notes convertible into common stock at $0.25 per share in
principal amounts equal to the amounts such investors invested in the June 2004
Private Placement.

         After giving effect to both transactions, the Company issued 880,714
shares of common stock and warrants to purchase 660,536 shares of common stock
in the June 2004 Private Placement, and the Company issued Senior Notes in an
aggregate principal amount of approximately $10.7 million.

         On September 24, 2004, the Company recorded a beneficial conversion
feature ("BCF") charge of approximately $2.2 million (included in interest
expense), based on the difference between the $0.25 conversion rate of the
Senior Notes and the closing price of $0.30 of the Company's common stock on
September 24, 2004. Such BCF charge included the conversion of the $500,000 PFC
Note (see above).

         The Senior Notes are due March 24, 2006, and bear interest at 6% per
annum. The Senior Notes can be converted at anytime prior to the maturity date
at the conversion price of $0.25. The Senior Note Purchase Agreement included
certain restrictive covenants, including, without limitation, a covenant that
the Company maintain at least $5.5 million in cash or cash equivalents on hand
at all times (the "Cash Covenant") while the Senior Notes are outstanding. The
Cash Covenant ceased to apply on the date that the Company entered into a
binding agreement for the joint development of OXYGENT with a Qualified Third
Party. Accordingly, the agreement with Double-Crane (a "Qualified Third Party"
as defined) (see Note 2) satisfied the termination requirements of the Cash
Covenant; therefore, as of May 13, 2005, the restrictions related to the amount
of cash and cash equivalents that the Company was required to maintain on hand
in order not to be in default under the Senior Notes, as set forth in the Cash
Covenant, ceased and are of no further force or effect.

         No Senior Notes were converted during the current quarter. At December
31, 2005, the principal and accrued interest balances approximate $10,476,000
and $805,000, respectively.

OTHER COMMITMENTS
-----------------

         The Company leases the facilities in which it operates under certain
operating leases. Payments for the office facilities approximate $10,000 per
month and expire through September 2006.

         On July 2, 2003, HUB Properties Trust ("HUB") filed a lawsuit in the
Superior Court of the State of California for the County of San Diego against
us, Immune Complex and other parties. The suit alleged that the defendants were
liable to HUB for damages stemming from HUB's inability to lease two properties
due to defendants' failure to timely deactivate the radiological materials
licenses on the properties. The suit was for damages in excess of the $779,000
security deposit. Initially, HUB sought in excess of $3.5 million in damages. On
August 21, 2003, Immune Complex filed its cross-complaint for indemnity against
us. The Company filed a cross-complaint against HUB for damages (a refund of all
or some of the security deposit). In June of 2004, Alliance deposited $1 million
into a controlled bank account as security for any liability the Company might
incur as a result of the HUB litigation. Because of certain pre-trial rulings
limiting HUB's claim, the damages HUB sought at trial were roughly $3 million.
In addition, the parties stipulated prior to trial that Alliance owed HUB
approximately $638,000 in damages based on HUB's allegations. On April 27, 2005,
the jury returned a verdict in favor of HUB in the amount of $1,479,000. The
Court signed a judgment incorporating this verdict on April 28, 2005. HUB also
sought inclusion in the judgment of an award of pre- and post-judgment interest,
as well as attorney fees and costs, totaling approximately $1,370,000. The court
ruled that HUB was entitled to attorney fees of $750,000, costs of $60,000 and
pre-judgment interest of $4,000. Both HUB and Alliance filed Notices of Appeal.
Alliance remitted $779,000 of the $2.3 million judgment in the form of a
security deposit. In September 2005, per the controlled bank account agreement,
HUB withdrew the $1 million security amount plus approximately $11,000 in
interest in partial


                                       12


<PAGE>

satisfaction of the judgment award. In November 2005, Alliance and HUB entered
into a settlement and mutual release agreement whereby the award balance of
approximately $536,000 was reduced and Alliance paid the compromised amount of
$400,000 in full settlement of the lawsuit.

         On February 23, 2001, a lawsuit was filed against us and some of our
officers by two former shareholders of MBI purportedly on behalf of themselves
and other MBI shareholders. On March 1, 2001 and March 19, 2001, two additional
similar lawsuits were filed by other former shareholders of MBI. The lawsuits,
filed in the U.S. District Court for the Southern District of New York, alleged
that our registration statement and prospectus filed and issued in connection
with the acquisition of MBI contained misrepresentations and omissions of
material facts in violation of certain federal securities laws. In May 2001, the
actions were consolidated. The plaintiffs were seeking rescission or
compensatory damages, payment of fees and expenses, and further relief. In
January 2002, the plaintiffs filed a second amended complaint adding an
additional securities claim against us and the named officers. In August 2003,
the court granted summary judgment as to certain securities claims and dismissed
the claims, and denied summary judgment as to other securities claims. On
November 3, 2005, the Court preliminarily approved a settlement reached by the
parties, which will be funded by our insurers. A hearing for final approval of
the settlement has been scheduled for February 15, 2006.

INDEMNIFICATION OBLIGATIONS
---------------------------

         The Company has undertaken certain indemnification obligations pursuant
to which it may be required to make payments to an indemnified party in relation
to certain transactions. The Company has agreed to indemnify its directors,
officers, employees and agents to the maximum extent permitted under the laws of
the State of New York. In connection with its facility leases, the Company has
agreed to indemnify its lessors for certain claims arising from the use of the
facilities. In connection with certain of its debt, stock purchase and other
agreements, the Company has agreed to indemnify lenders, sellers and various
other parties for certain claims arising from the Company's breach of
representations, warranties and other provisions contained in the agreements.
The duration of certain of these indemnification obligations does not provide
for any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make any
payments for these obligations and no liabilities have been recorded for these
indemnities in the accompanying unaudited condensed consolidated balance sheet.

6.  EQUITY

PREFERRED STOCK
---------------

         In May 2000, Alliance entered into a joint venture with Baxter
Healthcare Corporation ("Baxter") and sold 500,000 shares of its Series F
Preferred Stock for $20 million. Subsequently, the Company sold 293,750
additional shares for $11.75 million. The shares are convertible based on the
following provisions: 1) at the option of Baxter on or after May 19, 2004; 2)
termination of the license agreement between Alliance and PFC Therapeutics; 3)
at the option of Baxter on or after the period of time in which the price of
Alliance's common stock is equal to or greater than $110 per share; or 4) at the
option of Baxter upon a change of control at Alliance. The Series F Preferred
Stock has no annual dividend and is not entitled to any voting rights except as
otherwise required by law.

         The Series F Preferred Stock is convertible at the following conversion
rates: 1) if Alliance's common stock price averages $110 per share over a 20-day
period through May 19, 2004, the conversion price for the Series F Preferred
Stock will be $110 per share; 2) if the license agreement between Alliance and
PFC Therapeutics is terminated, the conversion price will not be less than $50
per share; or 3) if the events discussed above do not occur, the conversion
price will be based on the market value of Alliance's common stock at the time
of conversion, subject to "Certain Limitations."

                                       13


<PAGE>

         In March 2004, Alliance terminated its license agreement with PFC
Therapeutics and therefore, the conversion price of the Series F Preferred Stock
to common stock is fixed at $50 per common share. Based on this conversion
price, the outstanding shares of Series F Preferred Stock are convertible into
635,000 shares of common stock. The Company has accounted for the Series F
Preferred Stock as a component of stockholders' equity.

STOCK OPTIONS
-------------

         In October 2005, the Company granted options to purchase an aggregate
of 135,000 shares of common stock to various employees of the Company. The
exercise price of the options is $0.11 per share (the fair market value of the
Company's common stock on the date of grant) and vest through October 2008. The
options expire in October 2015.

         In October 2005, the Company granted options to purchase 200,000 shares
of common stock to the new President and Chief Operating Officer of the Company.
The exercise price of the options is $0.11 per share (the fair market value of
the Company's common stock on the date of grant). The options vest upon certain
performance-related objectives, as defined, none of which has been reached at
December 31, 2005, and expire in October 2015.

         In November 2005, the Company granted options to purchase an aggregate
of 132,500 shares of common stock to the non-employee directors of the Company.
The exercise price of the options is $0.11 per share (the fair market value of
the Company's common stock on the date of grant). The options vested upon grant.

                                       14


<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

(References to years are to the Company's fiscal years ended June 30.)

PLAN OF OPERATION
-----------------

         Since our inception in 1983, we have financed our operations primarily
through the sale of equity and debt securities, and we have applied
substantially all of our resources to research and development programs and to
clinical trials. We have incurred operating losses since inception and as of
December 31, 2005, have an accumulated deficit of $484.4 million. We expect to
incur significant operating losses over at least the next few years as we
continue our research and product development efforts and attempt to
commercialize our products.

         Our revenues from operations have come primarily from collaborations
with corporate partners, including research and development, milestone and
royalty payments. Our expenses have consisted primarily of research and
development costs and administrative costs. To date, our revenues from the sale
of products have not been significant. We believe our future operating results
may be subject to quarterly fluctuations due to a variety of factors, including
the timing of future collaborations and the achievement of milestones under
collaborative agreements, whether and when new products are successfully
developed and introduced by us or our competitors, and market acceptance of
products under development.

FORWARD-LOOKING INFORMATION
---------------------------

         Except for historical information, the statements made herein and
elsewhere are forward-looking. The Company wishes to caution readers that these
statements are only predictions and that the Company's business is subject to
significant risks. The factors discussed herein and other important factors, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 2006, and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. These risks include, but are
not limited to, the inability to obtain adequate financing for the Company's
development efforts; the inability to enter into collaborative relationships to
further develop and commercialize the Company's products; changes in any such
relationships, or the inability of any collaborative partner to adequately
commercialize any of the Company's products; the uncertainties associated with
the lengthy regulatory approval process, including uncertainties associated with
FDA decisions and timing on product development or approval; and the
uncertainties associated with obtaining and enforcing patents important to the
Company's business; and possible competition from other products. Furthermore,
even if the Company's products appear promising at an early stage of
development, they may not reach the market for a number of important reasons.
Such reasons include, but are not limited to, the possibilities that the
potential products will be found ineffective during clinical trials; failure to
receive necessary regulatory approvals; difficulties in manufacturing on a large
scale; failure to obtain market acceptance; and the inability to commercialize
because of proprietary rights of third parties. The research, development and
market introduction of new products will require the application of considerable
technical and financial resources, while revenues generated from such products,
assuming they are developed successfully, may not be realized for several years.
Other material and unpredictable factors which could affect operating results
include, without limitation, the uncertainty of the timing of product approvals
and introductions and of sales growth; the ability to obtain necessary raw
materials at cost-effective prices or at all; the effect of possible technology
and/or other business acquisitions or transactions; and the increasing emphasis
on controlling healthcare costs and potential legislation or regulation of
healthcare pricing. Further cautionary information is contained in documents the
Company files with the SEC from time to time, including the Company's most
recently filed Annual Report on Form 10-KSB, and you are encouraged to read the
section entitled, "Risk Factors" included in the Company's most recently filed
Annual Report on Form 10-KSB.

                                       15


<PAGE>

RESEARCH AND DEVELOPMENT
------------------------

         For the six months ended December 31, 2005 and 2004, we incurred
research and development expenses of $811,000 and $307,000, respectively, for
OXYGENT, an intravascular oxygen carrier that we are developing to augment
oxygen delivery in surgical patients at risk of acute oxygen deficit. Research
and development costs to date for our oxygen-therapeutic product candidates,
including OXYGENT, total approximately $157.8 million. While difficult to
predict, we estimate that the completion of clinical trials for OXYGENT will
cost at least an additional $60 million. We do not anticipate that OXYGENT will
reach the market for several years, if at all, and, because of the numerous
risks and uncertainties associated with product development efforts, we are
unable to predict with any certainty the extent of any future expenditures or
when material net cash inflows from OXYGENT may commence, if at all.

         Astral, our wholly owned subsidiary until September 6, 2005, was
engaged in the development of immunoglobulins that are engineered to bear
specific disease-associated peptides. For the six months ended December 31, 2005
and 2004, Astral incurred net research and development expenses of $25,000, and
$892,000 largely due to the $720,000 expense of the assignment of intellectual
property agreement with Mixture Sciences in 2004, respectively. In September
2005, pursuant to the Astral Agreement, approximately $730,000 of accrued Astral
expenses were assumed by MultiCell. (See Note 4.)

RESULTS OF OPERATIONS
---------------------

SIX MONTHS ENDED DECEMBER 31, 2005 AS COMPARED WITH SIX MONTHS ENDED DECEMBER
31, 2004

         Our revenue increased to $77,000 for the six months ended December 31,
2005, compared to $72,000 for the six months ended December 31, 2004. This
increase was primarily due to an increase in royalties received from sales other
than IMAGENT.

         Research and development expenses decreased by $363,000, or 30%, to
$836,000 for the six months ended December 31, 2005, compared to $1.2 million
for the six months ended December 31, 2004. The decrease in research and
development expenses was primarily due to the assumption of Astral expenses by
MultiCell per the Astral Agreement (see Note 4), which expenses totaled $892,000
during the six months ended December 31, 2004, partially offset by an increase
of $504,000 spent on OXYGENT-related activities during the current period in
preparation for a Proof of Concept Phase 2 clinical study in Europe and the
transfer of our production technology to an FDA-approved GMP facility.

         General and administrative expenses decreased by $606,000, or 50%, to
$600,000 for the six months ended December 31, 2005, compared to $1.2 million
for the six months ended December 31, 2004. The decrease in general and
administrative expenses was primarily due to a $617,000 decrease in legal fees
and litigation expense, including the reduction of the amount owed to HUB by
Alliance per the settlement and mutual release agreement whereby the award
balance of approximately $536,000 was reduced and Alliance paid the compromised
amount of $400,000 in full settlement of the lawsuit. (See Part II, Item 1.)

         For the six months ended December 31, 2005, we recorded an aggregate
gain on the dispositions of assets and liabilities of $1.2 million. This amount
consisted of $730,000 recorded in connection with the assumption of liabilities
per the terms of the Astral Agreement (see Note 4) and $476,000 resulting from
the recording of payments from Imcor of $200,000 to fund our obligations, and
the assumption by Imcor of certain of our obligations and settlements with
various vendors and creditors of $276,000 during the period in connection with
the IMAGENT asset sale transaction. For the six months ended December 31, 2004,
we recorded a gain of $259,000, resulting from the recording of payments of
$90,000 from Imcor, and the assumption by Imcor of obligations and settlements
with various vendors and creditors of $169,000 during the period.

                                       16


<PAGE>

         Investment income increased by $37,000 to $102,000 for the six months
ended December 31, 2005, compared to $65,000 for the six months ended December
31, 2004. The increase was primarily a result of higher interest rates.

         Other income was $82,000 for the six months ended December 31, 2005, a
result of proceeds recorded from the sale of raw material, compared to $10,000
for the six months ended December 31, 2004, which was primarily a result of
proceeds recorded from the sale of raw material.

         Interest expense was $314,000 for the six months ended December 31,
2005, compared to $2.4 million for the six months ended December 31, 2004. The
expense for the prior period was primarily the result of the BCF expense
recorded in connection with the exchange of the Company's common stock for the
Senior Notes on September 24, 2004 and the accrued interest on such Senior
Notes.

THREE MONTHS ENDED DECEMBER 31, 2005 AS COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 2004

         Our revenue increased approximately 113% to $53,000 for the three
months ended December 31, 2005, compared to $25,000 for the three months ended
December 31, 2004. The revenue for both quarters consisted of royalties from
products other than IMAGENT.

         Research and development expenses increased by $48,000, or 20%, to
$287,000 for the three months ended December 31, 2005, compared to $239,000 for
the three months ended December 31, 2004. The increase in research and
development expenses was primarily due to an increase spent on OXYGENT-related
activities during the current period in preparation for a Proof of Concept Phase
2 clinical study in Europe and the transfer of our production technology to an
FDA-approved GMP facility.

         General and administrative expenses decreased by $374,000, or 66%, to
$195,000 for the three months ended December 31, 2005, compared to $569,000 for
the three months ended December 31, 2004. The decrease in general and
administrative expenses was primarily due to a decrease in legal fees and
litigation expense. (See Part II, Item 1.)

         For the three months ended December 31, 2005, there was no gain
recorded on the disposition of assets or liabilities. For the three months ended
December 31, 2004, we recorded a gain on the disposition of the IMAGENT assets
of $116,000, resulting from the recording of the assumption by Imcor of certain
of our obligations and settlements with various vendors and creditors during the
period in connection with the IMAGENT asset sale transaction.

         Investment income increased by $18,000 to $52,000 for the three months
ended December 31, 2005, compared to $34,000 for the three months ended December
31, 2004. The increase was primarily a result of higher interest rates during
the period.

         Interest expense was $125,000 for the three months ended December 31,
2005, compared to $160,000 interest expense for the three months ended December
31, 2004. The expense for both periods was primarily the result of recording
accrued interest on the Senior Notes.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

         Since inception, we have funded our operations primarily through the
sale of equity securities, payments from our collaboration agreements and debt
financing. From inception to December 31, 2005, we had received $243 million in
net proceeds from sales of our equity securities, $260.5 million in payments
from collaboration agreements and $74.3 million in debt financing of which $37.4
million of such debt has been converted into equity and $25.9 million of such
debt has been retired through the restructuring of various agreements and the
issuance of warrants to purchase our common stock.

                                       17


<PAGE>

         At December 31, 2005, we had approximately $5.1 million in cash, cash
equivalents and investment securities compared to $6.8 million at June 30, 2005.
The decrease resulted primarily from net cash used in operations of $1.9
million, partially offset by $200,000 received from Imcor to fund payments to
vendors. At December 31, 2005, we had a working capital deficit of $7.3 million,
compared to working capital deficit of $8.1 million at June 30, 2005. The
deficit decrease was principally due to the payment of the HUB litigation award
and settlement, assumption of certain liabilities by MultiCell per the Astral
Agreement (see Note 4) and settlements with various vendors. Our operations to
date have consumed substantial amounts of cash and are expected to continue to
do so for the foreseeable future.

         Net cash used in operating activities totaled $1.9 million for the six
months ended December 31, 2005, compared to $2.2 million for the six months
ended December 31, 2004. The decrease in net cash used in operating activities
during the six months ended December 31, 2005 was primarily due to a decrease in
general and administrative payments, primarily a decrease in professional fees
that resulted from the June 2004 Private Placement rescission during the prior
period, partially offset by the settlement payment of $400,000 to HUB (see Part
II, Item 1), and a decrease in research and development payments, primarily paid
in connection with certain Astral expenses during the prior period, partially
offset by an increase in OXYGENT-related payments during the current period.

         Net cash provided by investing activities totaled $200,000 for the six
months ended December 31, 2005, due to proceeds received from Imcor to fund
payments to vendors. Net cash provided by investing activities totaled $89,000
for the six months ended December 31, 2004, primarily due to proceeds from Imcor
of $90,000.

         At December 31, 2005, the following approximate debt obligations were
outstanding:

         (a) $455,000 owed to various vendors;
         (b) $150,000 in accrued expenses, primarily consisting of $115,000 in
payroll and related expenses;
         (c) $11.3 million in Senior Notes, including $805,000 in accrued
interest;
         (d) $1.25 million in deferred royalty payments to be paid through
future IMAGENT earn-out payments, if any. In the event there are no future
IMAGENT earn-out payments, the deferred royalties will not be paid.

         Until we can generate significant continuing revenues, we expect to
satisfy our future cash needs through strategic collaborations, private or
public sales of our securities, debt financings or by licensing all or a portion
of our product candidates or technology. We cannot be certain that additional
funding will be available to us on acceptable terms, or at all. If funds are not
available, we may be required to delay, reduce the scope of, or eliminate one or
more of our research and development programs or our commercialization efforts.

         If the holders of our Senior Notes do not demand repayment in March
2006, we believe we have working capital to fund our operations for the next 12
months; however, we do not have the resources to repay the Senior Notes. If the
holders of our Senior Notes demand repayment in March 2006, the Company would
have to raise additional funds to repay the Senior Notes or renegotiate their
terms. If we are unable to do so, we do not have adequate resources to pay the
amount due to our Senior Note holders and such holders may initiate liquidation
proceedings against us. Therefore, we are seeking additional collaborative
research and development relationships with suitable corporate partners for our
products. Further, additional equity or debt financing may be required to fund
our ongoing operations. Because adequate funds have not been available to us in
the past, we have already delayed our OXYGENT development efforts and have
delayed, scaled back, and/or eliminated one or more of our other product
development programs.

         The accompanying unaudited condensed consolidated financial statements
have been prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. We have incurred operating


                                       18


<PAGE>

losses through December 31, 2005. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying unaudited condensed consolidated financial statements do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

WHERE YOU CAN FIND MORE INFORMATION
-----------------------------------

         We are subject to the informational requirements of the Securities
Exchange Act and must file reports, proxy statements and other information with
the SEC. The reports, information statements and other information we file with
the Commission can be inspected and copied at the Commission Public Reference
Room, 100 F Street, N.E. Washington, D.C. 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at (800) SEC-0330.
The Commission also maintains a Web site (http://www.sec.gov) that contains
reports, proxy, information statements and other information regarding
registrants, like us, which file electronically with the Commission.

         We were incorporated in New York in 1983. Our principal executive
offices are located at 4660 La Jolla Village Dr., Suite 825, San Diego,
California 92122, and our telephone number is (858) 410-5200.

         Our common stock is traded on the OTCBB under the symbol "ALLP.OB."

CRITICAL ACCOUNTING POLICIES
----------------------------

         There were no significant changes in critical accounting policies or
estimates from those at June 30, 2005.

                                       19


<PAGE>

ITEM 3.  CONTROLS AND PROCEDURES

         (a) Evaluation of Disclosure Controls and Procedures. The Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the
Company's disclosure controls and procedures. Based upon that evaluation, the
CEO and CFO concluded that as of December 31, 2005 our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to the Company (or the Company's consolidated subsidiaries) required to
be included in the Company's periodic filings with the SEC, subject to the
various limitations on effectiveness set forth below under the heading,
"Limitations on the Effectiveness of Internal Controls", such that the
information relating to the Company, required to be disclosed in SEC reports (i)
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
the Company's management, including our CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure.

         (b) Changes in internal control over financial reporting. There has
been no change in the Company's internal control over financial reporting that
occurred during the fiscal quarter ended December 31, 2005 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS

         The Company's management, including the CEO and CFO, does not expect
that our disclosure controls and procedures or our internal control over
financial reporting will necessarily prevent all fraud and material error. An
internal control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.

                                       20


<PAGE>

PART II OTHER INFORMATION:

ITEM 1.  LEGAL PROCEEDINGS

         On July 2, 2003, HUB filed a lawsuit in the Superior Court of the State
of California for the County of San Diego against us, Immune Complex and other
parties. The suit alleged that the defendants were liable to HUB for damages
stemming from HUB's inability to lease two properties due to defendants' failure
to timely deactivate the radiological materials licenses on the properties. The
suit was for damages in excess of the $779,000 security deposit. Initially, HUB
sought in excess of $3.5 million in damages. On August 21, 2003, Immune Complex
filed its cross-complaint for indemnity against us. The Company filed a
cross-complaint against HUB for damages (a refund of all or some of the security
deposit). In June of 2004, Alliance deposited $1 million into a controlled bank
account as security for any liability the Company might incur as a result of the
HUB litigation. Because of certain pre-trial rulings limiting HUB's claim, the
damages HUB sought at trial were roughly $3 million. In addition, the parties
stipulated prior to trial that Alliance owed HUB approximately $638,000 in
damages based on HUB's allegations. On April 27, 2005, the jury returned a
verdict in favor of HUB in the amount of $1,479,000. The Court signed a judgment
incorporating this verdict on April 28, 2005. HUB also sought inclusion in the
judgment of an award of pre- and post-judgment interest, as well as attorney
fees and costs, totaling approximately $1,370,000. The court ruled that HUB was
entitled to attorney fees of $750,000, costs of $60,000 and pre-judgment
interest of $4,000. Both HUB and Alliance filed Notices of Appeal. Alliance
remitted $779,000 of the $2.3 million judgment in the form of a security
deposit. In September 2005, per the controlled bank account agreement, HUB
withdrew the $1 million security amount plus approximately $11,000 in interest
in partial satisfaction of the judgment award. In November 2005, Alliance and
HUB entered into a settlement and mutual release agreement whereby the award
balance of approximately $536,000 was reduced and Alliance paid the compromised
amount of $400,000 in full settlement of the lawsuit.

         On June 13, 2003, Alliance and Imcor jointly brought a patent
infringement action against Amersham Health Inc., Amersham Health AS and
Amersham plc (collectively, "Amersham") in the U.S. District Court for the
District of New Jersey, Civil Action No. 03-2853 (the "Amersham Litigation").
The lawsuit alleged that (1) through the sale of Amersham's OPTISON product,
Amersham and its related entities infringed on eight patents acquired from
Alliance by Imcor through its purchase of the IMAGENT assets; (2) Alliance and
Imcor did not infringe any Amersham patent; (3) Amersham misappropriated
confidential trade secrets from Imcor (then Alliance) when Amersham (then
Nycomed) was negotiating a marketing agreement for IMAGENT; and (4) Amersham was
in violation of U.S. Antitrust laws. Alliance and Imcor were seeking damages and
injunctive relief against Amersham. Amersham counterclaimed for infringement of
12 of its patents and brought counterclaims against Alliance and our subsidiary
MBI asserting breach of contract, breach of good faith and fair dealing, and
tortious interference with contractual relations. Imcor paid all costs in this
lawsuit, including attorney fees and Alliance had little financial risk in the
lawsuit. In September 2005, all parties agreed to a settlement of the Amersham
Litigation, in which all parties granted each other fully paid-up, irrevocable,
royalty-free, non-exclusive cross-licenses, with the right to sublicense, and
mutual releases.

         On February 23, 2001, a lawsuit was filed against us and some of our
officers by two former shareholders of MBI purportedly on behalf of themselves
and other MBI shareholders. On March 1, 2001 and March 19, 2001, two additional
similar lawsuits were filed by other former shareholders of MBI. The lawsuits,
filed in the U.S. District Court for the Southern District of New York, alleged
that our registration statement and prospectus filed and issued in connection
with the acquisition of MBI contained misrepresentations and omissions of
material facts in violation of certain federal securities laws. In May 2001, the
actions were consolidated. The plaintiffs were seeking rescission or
compensatory damages, payment of fees and expenses, and further relief. In


                                       21


<PAGE>

January 2002, the plaintiffs filed a second amended complaint adding an
additional securities claim against us and the named officers. In August 2003,
the court granted summary judgment as to certain securities claims and dismissed
the claims, and denied summary judgment as to other securities claims. On
November 3, 2005, the Court preliminarily approved a settlement reached by the
parties, which will be funded by our insurers. A hearing for final approval of
the settlement has been scheduled for February 15, 2006.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

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

         An annual meeting of shareholders of the Company was held on November
10, 2005.

Proposal 1 - Election of Directors
----------------------------------

         The following directors were re-elected for the following year and
until the election and qualification of their respective successors:

                                                                    Broker
Director                       For        Against    Withheld      Non-Votes
--------                       ---        -------    --------      ---------
Pedro Cuatrecasas, M.D.    23,599,499        0        371,618         0
Carroll O. Johnson         23,598,669        0        372,448         0
Stephen M. McGrath         23,592,791        0        378,326         0
Jean G. Riess, Ph.D.       23,595,258        0        375,859         0
Duane J. Roth              23,562,555        0        408,562         0
Theodore D. Roth           23,561,993        0        409,124         0


ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS

(a)      Index to Exhibits

EXHIBIT          DESCRIPTION

     31.1    Certification of our Chief Executive Officer,  pursuant to
             Securities Exchange Act rule 13a-14(a) and 15d-14(a) as adopted
             pursuant to Section 302 of the Sarbanes Oxley Act of 2002. *

     31.2    Certification of our Chief Financial Officer,  pursuant to
             Securities Exchange Act rule 13a-14(a) and 15d-14(a) as adopted
             pursuant to Section 302 of the Sarbanes Oxley Act of 2002. *

     32.1    Statement of our Chief Executive Officer under Section 906 of the
             Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *

     32.2    Statement of our Chief Financial Officer under Section 906 of the
             Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *



-----------------
*  Filed Herewith.

                                       22


<PAGE>

                                   SIGNATURES

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

                                   ALLIANCE PHARMACEUTICAL CORP.
                                   (Registrant)

Date:    February 14, 2006          By: /s/ Duane J. Roth
                                            ------------------------------------
                                            Duane J. Roth
                                            Chairman and Chief Executive Officer


                                    By: /s/ Edward C. Hall
                                            ------------------------------------
                                            Edward C. Hall
                                            Chief Financial Officer



                                       23