<PAGE>

                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549
                                          
                                     FORM 10-Q

(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, 1998
                                          
                                         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)

3040 Science Park Road
San Diego, California                   92121     
---------------------------------       --------------------------------------
(Address of principal                   Zip Code
executive offices)

Registrant's telephone number,
including area code:                    619/558-4300   
                                        --------------------------------------

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

As of February 8, 1999, Registrant had 33,137,739 shares of its Common Stock,
$.01 par value, outstanding. 
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES


INDEX

<TABLE>
<CAPTION>
                                                                          Page No.
                                                                          --------
<S>                                                                       <C>
PART I - FINANCIAL INFORMATION


Item 1. Financial Statements                                                  


     Condensed Consolidated Balance Sheets                                   3


     Condensed Consolidated Statements of Operations                         4


     Condensed Consolidated Statements of Cash Flows                         5


     Notes to Condensed Consolidated Financial Statements                    6


Item 2. Management's Discussion and Analysis of
 Financial Condition and Results of Operations                               8


PART II - OTHER INFORMATION

Item 1. Legal Proceedings                                                   14

Item 4. Submission of Matters to a Vote of Security Holders                 15

Item 6. Exhibits and Reports on Form 8-K                                    15
</TABLE>

                                          2
<PAGE>

PART I FINANCIAL INFORMATION:
ITEM 1.  FINANCIAL STATEMENTS

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
                                                               DECEMBER 31,     JUNE 30,
                                                                  1998            1998
                                                               ------------     --------
ASSETS                                                         (UNAUDITED)       (NOTE)
<S>                                                           <C>            <C>
CURRENT ASSETS:

    Cash and cash equivalents                                 $  13,772,000  $  11,809,000
    Short-term investments                                       23,071,000     38,046,000
    Research revenue receivable                                   2,875,000      6,847,000
    Other current assets                                            618,000        694,000
                                                              -------------  -------------
        Total current assets                                     40,336,000     57,396,000


PROPERTY, PLANT AND EQUIPMENT - NET                              24,259,000     23,087,000
PURCHASED TECHNOLOGY - NET                                       12,120,000     12,880,000
OTHER ASSETS - NET                                                  469,000        314,000
                                                              -------------  -------------
                                                              $  77,184,000  $  93,677,000
                                                              -------------  -------------
                                                              -------------  -------------
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

    Accounts payable                                          $   3,830,000  $   2,191,000
    Accrued expenses                                              2,013,000      3,121,000
    Deferred revenue                                              2,286,000      2,286,000
    Current portion of long-term debt                             2,143,000      1,068,000
                                                              -------------  -------------
        Total current liabilities                                10,272,000      8,666,000


LONG-TERM DEBT                                                   12,500,000      8,882,000
OTHER                                                                24,000         39,000


STOCKHOLDERS' EQUITY:

    Preferred stock - $.01 par value; 5,000,000 shares 
     authorized; 500,000 shares of Series D issued and 
     outstanding at December 31, 1998 and June 30, 1998               5,000          5,000
     100,000 and 0 shares of Series E-1 issued and 
     outstanding at December 31, 1998 and June 30, 1998, 
     respectively                                                     1,000              -

   Common stock - $.01 par value; 75,000,000 shares authorized;
     32,042,482 and 31,994,338 shares issued and outstanding 
     at December 31, 1998 and June 30, 1998, respectively           320,000        320,000
   Additional paid-in capital                                   346,057,000    340,016,000
   Accumulated deficit                                         (291,995,000)  (264,251,000)
                                                              -------------  -------------
        Total stockholders' equity                               54,388,000     76,090,000
                                                              -------------  -------------
                                                              $  77,184,000  $  93,677,000
                                                              -------------  -------------
                                                              -------------  -------------
</TABLE>

Note:     The balance sheet at June 30, 1998 has been derived from the
          audited financial statements at that date but does not include
          all of the information and footnotes required by generally
          accepted accounting principles for complete financial statements.

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                          3
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                     THREE MONTHS ENDED             SIX MONTHS ENDED
                                                         DECEMBER 31,                  DECEMBER 31,

                                                     1998           1997           1998           1997
                                                  ----------     ----------     ----------    -----------
                                                         (UNAUDITED)                   (UNAUDITED)
<S>                                               <C>            <C>            <C>           <C>
REVENUES:

    License and research revenue                $  1,048,000    $ 5,274,000   $  6,148,000   $ 11,813,000


OPERATING EXPENSES:

    Research and development                      16,418,000     11,778,000     29,964,000     23,824,000
    General and administrative                     1,990,000      1,868,000      4,175,000      3,680,000
                                                ------------    -----------   ------------   ------------
                                                  18,408,000     13,646,000     34,139,000     27,504,000
                                                ------------    -----------   ------------   ------------
LOSS FROM OPERATIONS                             (17,360,000)    (8,372,000)   (27,991,000)   (15,691,000)

INVESTMENT INCOME AND OTHER - NET                    287,000        908,000        729,000      1,877,000
                                                ------------    -----------   ------------   ------------
Net loss                                         (17,073,000)    (7,464,000)   (27,262,000)   (13,814,000)

IMPUTED DIVIDEND ON
  SERIES E-1 PREFERRED STOCK                               -              -       (483,000)             -
                                                ------------    -----------   ------------   ------------
NET LOSS APPLICABLE TO COMMON SHARES            $(17,073,000)   $(7,464,000)  $(27,745,000)  $(13,814,000)
                                                ------------    -----------   ------------   ------------
                                                ------------    -----------   ------------   ------------
NET LOSS PER COMMON SHARE:
    BASIC AND DILUTED                           $      (0.53)   $     (0.24)  $      (0.87)  $      (0.44)
                                                ------------    -----------   ------------   ------------
                                                ------------    -----------   ------------   ------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
    BASIC AND DILUTED                             32,042,000     31,458,000     32,032,000     31,387,000
                                                ------------    -----------   ------------   ------------
                                                ------------    -----------   ------------   ------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
                                              4
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                                   SIX MONTHS ENDED
                                                                                      DECEMBER 31,

                                                                                  1998           1997
                                                                              ------------   ------------
                                                                                    (UNAUDITED)
<S>                                                                           <C>            <C>
OPERATING ACTIVITIES:
    Net loss                                                                  $(27,262,000)  $(13,814,000)
    Adjustments to reconcile net loss to net cash used in operations:
       Depreciation and amortization                                             2,795,000      2,488,000
       Changes in operating assets and liabilities:
           Research revenue receivable                                           3,972,000      3,037,000
           Deferred revenue                                                              -       (214,000)
           Other assets                                                            (79,000)       (73,000)
           Accounts payable and accrued expenses and other                         516,000     (1,833,000)
                                                                              ------------   ------------
Net cash used in operating activities                                          (20,058,000)   (10,409,000)
                                                                              ------------   ------------
INVESTING ACTIVITIES:
    Purchases of short-term investments                                        (23,711,000)   (50,879,000)
    Sales and maturities of short-term investments                              38,663,000     54,808,000
    Property, plant and equipment                                               (3,207,000)    (2,818,000)
    Payment for acquired in-process technology                                           -        (57,000)
                                                                              ------------   ------------
Net cash provided by investing activities                                       11,745,000      1,054,000
                                                                              ------------   ------------
FINANCING ACTIVITIES:
    Issuance of common stock                                                             -        394,000
    Issuance of convertible preferred stock                                      5,583,000      9,600,000
    Proceeds from long-term debt                                                 5,050,000              -
    Principal payments on long-term debt                                          (357,000)      (546,000)
                                                                              ------------   ------------
Net cash provided by financing activities                                       10,276,000      9,448,000
                                                                              ------------   ------------
INCREASE IN CASH AND CASH EQUIVALENTS                                            1,963,000         93,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                11,809,000     15,368,000
                                                                              ------------   ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    $ 13,772,000   $ 15,461,000
                                                                              ------------   ------------
                                                                              ------------   ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
 AND FINANCING ACTIVITIES:

Issuance of common stock in connection with
 acquired in-process technology                                               $          -   $  7,500,000
</TABLE>

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
                                          5
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

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

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

     Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company" or "Alliance") are engaged in identifying, designing, and developing
novel medical products.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of Alliance
Pharmaceutical Corp., the accounts of its wholly owned subsidiary Astral, Inc.,
its wholly owned subsidiary MDV Technologies, Inc. ("MDV") from the acquisition
date of November 1996, and its majority-owned subsidiaries, Talco
Pharmaceutical, Inc. and Applications et Transferts de Technologies Avancees
("ATTA").  ATTA was dissolved in 1997.  All significant intercompany accounts
and transactions have been eliminated.  Certain amounts in fiscal 1998 have been
reclassified to conform to the current year's presentation.

INTERIM CONDENSED FINANCIAL STATEMENTS

     The condensed consolidated balance sheet as of December 31, 1998, the
condensed consolidated statements of operations for the three and six months
ended December 31, 1998 and 1997, and the condensed consolidated statements of
cash flows for the six months ended December 31, 1998 and 1997 are 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
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended June 30, 1998.

PURCHASED TECHNOLOGY

     The purchased technology was primarily acquired as a result of the merger
of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in fiscal
1989.  The technology acquired is the Company's core perfluorochemical ("PFC")
technology and was valued based on an analysis of the present value of future
earnings anticipated from this technology at that time.  The Company identified
alternative future uses for the PFC technology, including the OXYGENT-TM-
(temporary blood substitute) and LIQUIVENT-Registered Trademark- (intrapulmonary
oxygen carrier) products. Purchased technology also includes $2 million for
technology capitalized as a result of the acquisition of BioPulmonics, Inc.
("BioPulmonics") in December 1991.  Since the acquisition, an alternative future
use of the acquired technology has been pursued by the Company.  An
intrapulmonary drug delivery system using the PFC-based liquid as a carrier (or
dispersing agent) is being developed by Alliance from the liquid ventilation
technology.

     The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20-year life.  The PFC technology has a
book value of $11.8 million and $12.4 million, net of accumulated amortization
of $11.4 million and $10.8 million at December 31 
                                       

                                       6
<PAGE>

and June 30, 1998, respectively.  The technology acquired from BioPulmonics 
has a book value of approximately $300,000 and $471,000, and is being 
amortized over five to seven years and is net of accumulated amortization of 
$1.7 million and $1.5 million at December 31 and June 30, 1998, respectively.

     The carrying value of purchased technology is reviewed periodically based
on the projected cash flows to be received from license fees, milestone
payments, royalties and other product revenues.  If such cash flows are less
than the carrying value of the purchased technology, the difference will be
charged to expense.

NEW ACCOUNTING STANDARDS

     Effective July 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement No. 130, Comprehensive Income ("SFAS No. 130") and
Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131").  SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS No. 130 had no impact on the Company's net loss or
stockholder's equity.  SFAS No. 130 requires unrealized gains and losses on the
Company's available-for-sale securities to be included in comprehensive income. 
During the three months ended December 31, 1998 and 1997, the total
comprehensive loss, which includes the unrealized loss on available-for-sale
securities, was $17,079,000 and $7,465,000, respectively.  During the six months
ended December 31, 1998 and 1997, the total comprehensive loss was $27,285,000
and $13,904,000, respectively.  SFAS No. 131 amends the requirements for public
enterprises to report financial and descriptive information about its reportable
operating segments.  Operating segments, as defined in SFAS No. 131, are
components of an enterprise for which separate financial information is
available regularly by the Company in deciding how to allocate resources in
assessing performance.  The financial information is required to be reported on
the basis that is used internally for evaluating the segment performance.  The
Company believes it operates in one business and operating segment.  The
adoption of SFAS No. 131 did not affect results of operations or financial
position of the Company.

NET INCOME (LOSS) PER SHARE

     The Company computes net loss per common share in accordance with Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").  SFAS No.
128 requires the presentation of basic and diluted earnings per share amounts. 
Basic earnings per share is calculated based upon the weighted average number of
common shares outstanding during the period while diluted earnings per share
also gives effect to all potential dilutive common shares outstanding during the
period such as common shares underlying options, warrants, and convertible
securities, and contingently issuable shares.  All potential dilutive common
shares have been excluded from the calculation of diluted earnings per share as
their inclusion would be anti-dilutive.

2.  PREFERRED STOCK

     In August 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain investors for $6 million and obtained the
right to sell similar preferred stock periodically through early 1999 in an
amount not to exceed an additional $14 million.  The right 

                                        7
<PAGE>

to sell additional preferred stock to these investors has terminated.  The 
preferred shares are convertible at the option of the holder into common 
stock at $6 per share through January 3, 1999, and thereafter certain 
adjustments may apply based on the market price.  These adjustments to the 
market price could potentially result in a conversion price below the then 
trading market price of the stock. As a result of this beneficial conversion 
feature, the Company has recognized an imputed dividend of $483,000 on these 
preferred shares.  At the option of the Company, beginning in 2003, the 
Company can either force the conversion of any remaining unconverted shares 
into common stock or can redeem the stock at the then prevailing conversion 
price.  The Company may be liable for penalties if certain conditions are not 
met.  The Series E-1 Preferred Stock has ten votes per share and votes with 
the holders of common stock, except where otherwise required by law.  The 
Series E-1 Preferred Stock has a liquidation preference of $60 per share ($6 
million).  No dividends will accrue to the holders of the preferred stock; 
however, the investors obtained a right to receive a royalty on future sales 
of one of the Company's products under development, provided that the product 
is approved by the U.S. Food and Drug Administration by December 2003.  The 
royalty amount will be between 0.4% and 1.6%, subject to adjustments 
downward, of net sales of the product for a period of three years. The 
Company has certain rights to repurchase the royalty right.  On January 4, 
1999, 47,837 shares of preferred stock were converted into 1,091,338 shares 
of common stock at an average price of $2.63 per share.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATIONS (References to years are to the Company's fiscal years 
ended June 30.)

     Alliance has devoted substantial resources to research and development
related to its medical products.  The Company has been unprofitable since
inception and expects to incur operating losses for at least the next several
years due to substantial spending on research and development, preclinical
testing, clinical trials, regulatory activities, and commercial manufacturing
start-up.  The Company has collaborative research and development agreements
with Schering AG, Germany ("Schering") for IMAGENT-Registered Trademark- and
VIA Medical Corporation ("VIA") for RODA-TM-.  Under the arrangement for
IMAGENT, Schering has agreed to reimburse the Company for some of its
development expenses.  Schering will also make milestone payments to the Company
upon the achievement of certain product development events, followed by
royalties on sales at commercialization. As of December 30, 1998, Schering and
the Company modified the Schering license agreement (the "Schering License
Agreement") to reduce the quarterly reimbursements, to increase the milestone
payments, and to revise the method of calculating royalties. With respect to
RODA, the Company has agreed to reimburse VIA for substantially all of its
development expenses and to share revenues from the sale of products.  Due to
the termination of the license agreement (the "HMRI License Agreement") with
Hoechst Marion Roussel, Inc. ("HMRI") in December 1997, the restructuring of the
license agreement (the "Ortho License Agreement") with Ortho Biotech, Inc. and
The R.W. Johnson Pharmaceutical Research Institute, a division of Ortho
Pharmaceutical Corporation, both affiliates of Johnson & Johnson (collectively
referred to as "Ortho") in May 1998, and the reduction in the on-going
reimbursements from Schering, Alliance expects to incur a substantial increase
in development expenses and a substantial decrease in related research revenue
relative to prior years.  There can be no assurance that the Company will be
able to achieve profitability at all or on a sustained basis.

                                       8
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Through December 1998, the Company financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners.  To date, the Company's revenue from the sale of products
has not been significant.

     In January 1997, the Company entered into a loan and security agreement
with a bank under which the Company received $3.5 million and, in December 1997,
the amount available under the loan was increased to $15.2 million.  In
June 1998, the Company restructured the loan to provide for up to $15 million. 
Amounts borrowed are secured by certain fixed assets and are to be repaid over
4.5 years.  If certain financial covenants are not satisfied, the outstanding
balance may become due and payable.  On December 31, 1998, the balance
outstanding on this loan was $14.6 million.  The Company also has a $1.5 million
line of credit available with another bank.  The Company has financed
substantially all of its office and research facilities and related leasehold
improvements under operating lease arrangements and loan and security
agreements.

     In September 1997, the Company entered into the Schering License Agreement,
which provides Schering with worldwide exclusive marketing and manufacturing
rights to Alliance's drug compounds, drug compositions, and medical devices and
systems related to perfluorocarbon ultrasound imaging products, including
IMAGENT.  In conjunction with the Schering License Agreement, Schering Berlin
Venture Corp., an affiliate of Schering, purchased 500,000 shares of the
Company's convertible Series D Preferred Stock for $10 million.  The product is
being developed jointly by Alliance and Schering.  Under the Schering License
Agreement, Schering paid to Alliance in 1998 an initial license fee of
$4 million, and agreed to pay further milestone payments and royalties on
product sales.  Schering is also providing funding to Alliance for some of its
development expenses related to IMAGENT. Because of changes in the development
of the field of ultrasound contrast agents and in the parties' development
plans, Alliance and Schering amended the Schering License Agreement as of
December 30, 1998.  Under the original arrangement, royalty rates were based
upon the development of specific medical uses for IMAGENT, which placed
limitations on the development effort.  The parties elected to revise the
royalty calculation which is now based on sales of IMAGENT, a more traditional
method of determining royalties.  This modification permits the parties to  be
flexible in developing IMAGENT.  Although the method of calculating royalties
has been changed, the Company believes that there will be no material difference
in the amount of royalties to be earned by the Company under the Schering
License Agreement.  Additionally, the parties reduced ongoing development
reimbursements and added new milestone payments.

     From February 1996 through June 1997, HMRI was responsible for most of the
costs of development and marketing of LIQUIVENT.  The Company announced in
June 1997 that the parties agreed in principle to modify the HMRI License
Agreement to (i) adjust certain milestone payments, (ii) temporarily revise the
method for reimbursing the expenses for portions of the development work, and
(iii) provide for the Company to repurchase any unused clinical trial supplies
if the license agreement is terminated before January 1, 1998.  The Company sold
$2.5 million in clinical trial supplies to HMRI and recorded it as deferred
revenue.  At December 31, 1998, the unused supplies were approximately
$2.3 million.  In December 1997, 

                                      9
<PAGE>

the HMRI License Agreement was terminated. Therefore, Alliance has not been 
reimbursed for its LIQUIVENT development expenses since July 1, 1997, and it 
will be responsible for all future LIQUIVENT development expenses worldwide.  
HMRI has no continuing rights to the development or marketing of LIQUIVENT.  
The parties are considering a repurchase by Alliance of  clinical trial 
supplies from HMRI.  In May 1998, HMRI asserted a claim for an amount up to 
$7.5 million, payable in 2002 in cash or common stock, at the Company's 
election.  In September 1998, HMRI increased the demand to $16.8 million, 
plus interest and punitive damages, and filed a demand for arbitration.  The 
Company does not believe that the claim is meritorious, intends to vigorously 
contest such claim, and has filed a counterclaim for unspecified damages.  
The Company believes that the ultimate resolution will not have a material 
adverse effect on the Company's financial condition, results of operations or 
liquidity.  However, no assurances can be given that the Company will prevail 
on the claim or that an adverse result will not have a material adverse 
effect on the Company.

     From September 1994 until May 1998, under the Ortho License Agreement,
Ortho was responsible for substantially all the costs of developing and
marketing OXYGENT.  In May 1998, Ortho and the Company restructured the Ortho
License Agreement and Alliance assumed responsibility for worldwide development
of OXYGENT at its expense.  Under the restructured agreement, Ortho retained
certain rights to be the exclusive marketing agent for the product. In 1998,
Ortho reimbursed the Company $10.2 million for research and development
expenses.  As a result of the restructuring, Alliance expects to incur a
substantial increase in development expenses related to OXYGENT and a
substantial decrease in related research revenue over prior years.

     The Company had net working capital of $30.1 million at December 31, 1998,
compared to $48.7 million at June 30, 1998.  The Company's cash, cash
equivalents, and short-term investments decreased to $36.8 million at
December 31, 1998 from $49.9 million at June 30, 1998.  The decrease resulted
primarily from cash used in operations of $20.1 million, and property, plant and
equipment additions of $3.2 million, partially offset by net proceeds from the
sale of convertible Series E-1 Preferred Stock of $5.6 million and by additional
proceeds of $5.1 million from its loan and security agreement.  The Company's
operations to date have consumed substantial amounts of cash and are expected to
continue to do so for the foreseeable future.

     The Company continually reviews its product development activities in an
effort to allocate its resources to those product candidates that the Company
believes have the greatest commercial potential.  Factors considered by the
Company in determining the products to pursue include projected markets and
need, potential for regulatory approval and reimbursement under the existing
healthcare system, status of its proprietary rights, technical feasibility,
expected and known product attributes, and estimated costs to bring the product
to market.  Based on these and other factors, the Company may from time to time
reallocate its resources among its product development activities.  Additions to
products under development or changes in products being pursued can
substantially and rapidly change the Company's funding requirements.

     The Company expects to incur substantial additional expenditures associated
with product development as the products proceed in pivotal clinical trials. 
The Company will seek additional collaborative research and development
relationships with suitable corporate partners for its non-

                                        10
<PAGE>

licensed products. There can be no assurance that such relationships, if any, 
will successfully reduce the Company's funding requirements.  Additional 
equity or debt financing will be required, and there can be no assurance that 
such financing will be available on reasonable terms, if at all. If adequate 
funds are not available, the Company may be required to delay, scale back, or 
eliminate one or more of its product development programs, or obtain funds 
through arrangements with collaborative partners or others that may require 
the Company to relinquish rights to certain of its technologies, product 
candidates, or products that the Company would not otherwise relinquish.

     Alliance anticipates that its current capital resources, expected revenue
from the Schering License Agreement and investments will be adequate to satisfy
its capital requirements through fiscal 1999.  The Company's future capital
requirements will depend on many factors, including, but not limited to,
continued scientific progress in its research and development programs, progress
with preclinical testing and clinical trials, the time and cost involved in
obtaining regulatory approvals, patent costs, competing technological and market
developments, changes in existing collaborative relationships, the ability of
the Company to establish additional collaborative relationships, and the cost of
manufacturing scale-up.

     While the Company believes that it can produce materials for clinical
trials and the initial market launch for OXYGENT and IMAGENT at its existing
San Diego facilities and for LIQUIVENT at its Otisville, New York facility, it
may need to expand its commercial manufacturing capabilities for its products in
the future.  Any expansion for any of its products may occur in stages, each of
which would require regulatory approval, and product demand could at times
exceed supply capacity.  The Company has not selected a site for such expanded
facilities and cannot predict the amount it will expend for the construction of
such facilities.  There can be no assurance as to when or whether the FDA will
determine that such facilities comply with Good Manufacturing Practices.  The
projected location and construction of such facilities will depend on regulatory
approvals, product development, and capital resources, among other factors.  The
Company has not obtained any regulatory approvals for its production facilities
for these products, nor can there be any assurance that it will be able to do
so.  The Schering License Agreement requires the Company to manufacture products
at its San Diego facility for a period of time after market launch at a
negotiated price.  Schering will be responsible for establishing production
capacity beyond the maximum capacity of the San Diego facility.

YEAR 2000

     Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field.  Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish the 21st century dates from 20th century dates.  As a result, in
less than one year, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements.  Management
has a continuing Year 2000 program, which has already identified several systems
that are not yet Year 2000 compliant. The Company has substantially completed an
inventory of its systems, software and embedded chips, and is in the process of
obtaining confirmations from critical third parties with respect to their
computers, software and systems.  Many systems have already been replaced over
the past two years in the ordinary course of Company plans for upgrading its
equipment, software and systems.  The Company has initiated the removal and
exchange of other 

                                      11
<PAGE>

non-compliant systems and expects to continue such replacement or other 
remedial programs to assure that its computers, software, and other systems 
will continue to operate in the Year 2000.  The Company's costs to date to 
resolve its Year 2000 problems is not material; however, the total amount it 
will spend to remediate such issues remains uncertain. The Company believes 
such costs will not have a material effect on the Company's consolidated 
financial position or results of operations.  There can be no assurance, 
however, that the Company's computer systems and applications of other 
companies on which the Company's operations rely, will be timely converted, 
or that any such failure to convert by another company will not have a 
material adverse effect on the Company systems.  Moreover, a failure of (i) 
the Company's scientific, manufacturing and other equipment to operate at all 
or operate accurately, (ii) clinical trial site medical equipment to perform 
properly, (iii) necessary materials or supplies to be available to the 
Company when needed, or (iv) other equipment, software, or systems as a 
result of Year 2000 problems, could have a material adverse effect on the 
Company's business or financial condition.

     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 1999, 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; the uncertainties associated with obtaining and 
enforcing patents important to the Company's business; possible competition 
from other products; and Year 2000 issues.  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.

                                     12
<PAGE>

RESULTS OF OPERATIONS

     SIX MONTHS ENDED DECEMBER 31, 1998 AS COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 1997

     The Company's license and research revenue decreased by $5.7 million to
$6.1 million for the six months ended December 31, 1998, compared to
$11.8 million for the six months ended December 31, 1997.  The decrease is
primarily a result of the decreased research revenue from Ortho under the Ortho
License Agreement.  Also, revenue for the six months ended December 31, 1997
included a $4 million initial license fee from Schering.  The Company expects
research revenue to significantly decrease in 1999 compared to 1998, due to the
restructuring of the Ortho License Agreement and reduced research reimbursement
from the Schering License Agreement.

     Research and development expenses increased by 26% to $30 million for the
six months ended December 31, 1998, compared to $23.8 million for the six months
ended December 31, 1997.  The increase in expenses was primarily due to a
$3.3 million increase in payments to outside researchers for preclinical and
clinical trials and other product development work, a $1.3 million increase in
staffing costs for employees engaged in research and development activities, a
$548,000 increase in rent and lease expense, a $480,000 increase in supplies and
chemical costs, as well as other increases related to the Company's research and
development activities.  The increase for the six month period is primarily 
attributable to increased expenses related to the IMAGENT Phase 3 clinical 
trial and the preparation of the IMAGENT manufacturing facilities for 
regulatory approval.

     General and administrative expenses increased by approximately 13% to
$4.2 million for the six months ended December 31, 1998, compared to
$3.7 million for the six months ended December 31, 1997.  The increase in
general and administrative expenses was primarily due to a $323,000 increase in
professional fees and a $137,000 increase in staffing costs.

     Investment income and other was $729,000 for the six months ended
December 31, 1998, compared to $1.9 million for the six months ended
December 31, 1997.  The decrease was primarily a result of lower average cash
and short-term investment balances.

     THREE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1997

     The Company's license and research revenue decreased by $4.2 million to
approximately $1 million for the three months ended December 31, 1998, compared
to $5.3 million for the three months ended December 31, 1997.  The decrease is
primarily a result of decreased research revenue from the Ortho License
Agreement and the reduction in research and milestone revenue from the Schering
License Agreement.  The Company expects research revenue to continue to
significantly decrease in 1999 compared to 1998, due to the restructuring of the
Ortho License Agreement and reduced research reimbursement from the Schering
License Agreement.

     Research and development expenses increased by 39% to $16.4 million for the
three months ended December 31, 1998, compared to $11.8 million for the three
months ended December 31, 1997.  The increase in expenses was primarily due to a
$3.2 million increase in 

                                         13
<PAGE>

payments to outside researchers for preclinical and clinical trials and other 
product development work, a $474,000 increase in supplies and chemical costs, 
a $330,000 increase in rent and lease expense, a $265,000 increase in 
staffing costs for employees engaged in research and development activities, 
as well as other increases related to the Company's research and development 
activities. The increase for the three month period is primarily attributable 
to increased expenses related to the IMAGENT Phase 3 clinical trial and the 
preparation of the IMAGENT manufacturing facilities for regulatory approval.

     General and administrative expenses were $2 million for the three months
ended December 31, 1998, compared to $1.9 million for the three months ended
December 31, 1997.  The increase in general and administrative expenses was
primarily due to increased professional fees.

     Investment income and other was $287,000 for the three months ended
December 31, 1998, compared to $908,000 for the three months ended December 31,
1997.  The decrease was primarily a result of lower average cash and short-term
investment balances.

     Alliance expects to continue to incur substantial and increasing expenses
associated with its research and development programs.  Operating losses may
fluctuate from quarter to quarter as a result of differences in the timing of
revenues earned and expenses incurred and such fluctuations may be substantial. 
The Company's historical results are not necessarily indicative of future
results.

PART II  OTHER INFORMATION:

ITEM 1.  LEGAL PROCEEDINGS

     In September 1998, HMRI delivered to the Company a demand for arbitration
("Demand") in connection with its termination of the HMRI License Agreement.  On
October 8, 1998, HMRI filed the Demand with the American Arbitration
Association.  The Demand seeks up to $16.8 million, plus interest and punitive
damages.  The Demand alleges that the Company breached its agreement with HMRI,
did not act in good faith, and misrepresented that if the HMRI License Agreement
was terminated by December 31, 1997, the Company would pay certain monies to
HMRI.  The Company does not believe the claim is meritorious, intends to
vigorously contest such claim, and has filed a counterclaim for unspecified
damages.  The Company believes that the ultimate resolution will not have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.  However, no assurances can be given that the Company
will prevail on the claim or that an adverse result will not have a material
adverse effect on the Company.

                                       14
<PAGE>

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

     An annual meeting of shareholders was held on November 11, 1998.  The
following directors were re-elected for the following year and until the
election and qualification of their respective successors:
 
<TABLE>
<CAPTION>
                                                                                  Broker
              Director                     For          Against    Withheld      Non-Votes
              --------                     ---          -------    --------      ---------
       <S>                              <C>            <C>           <C>           <C>
       Pedro Cuatrecasas, M.D.          28,310,665     1,514,162       0             0

       Carroll O. Johnson               28,310,665     1,514,162       0             0

       Stephen M. McGrath               28,305,163     1,519,664       0             0

       Donald E. O'Neill                28,310,465     1,514,362       0             0

       Helen M. Ranney, M.D.            28,304,063     1,520,764       0             0

       Jean G. Riess, Ph.D.             28,310,665     1,514,162       0             0

       Duane J. Roth                    28,308,390     1,516,437       0             0

       Theodore D. Roth                 28,309,190     1,515,637       0             0

       Thomas F. Zuck, M.D.             28,304,963     1,519,864       0             0
</TABLE>

     The shareholders of the Company voted to increase the number of authorized
shares of Common Stock from 50,000,000 shares to 75,000,000 in accordance with
the following vote:

     27,637,772  For  2,085,379  Against  101,676  Withheld  0  Broker Non-Votes
     ----------       ---------           -------           ---

     The shareholders of the Company voted to ratify the appointment of Ernst &
Young LLP as independent auditors of the Company for its fiscal year ending June
30, 1999 in accordance with the following vote:

     29,672,279  For  99,800  Against  52,748  Withheld  0  Broker Non-Votes
     ----------       ------           ------           ---

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     3.   Certificate of Amendment to the Certificate of Incorporation of the
          Company filed on January 15, 1999.

     10.  First Amendment to License Agreement, dated as of December 30, 1998,
          between the Company and Schering Aktiengesellschaft.

(b)  There was no report on Form 8-K. 

                                         15
<PAGE>

SIGNATURES

     Pursuant to the requirements 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)

                                          /s/ Tim T. Hart   
                                    -----------------------------
                                           Tim T. Hart
                                      Chief Financial Officer
                                           and Treasurer

Date:  February 11, 1999
 







                                     16
<PAGE>
                                          
                           Alliance Pharmaceutical Corp.
                                          
                                     Form 10-Q
                                          
                                   EXHIBIT INDEX

     The following exhibits are being filed herewith:

<TABLE>
<CAPTION>
  Number                                  Document
  ------         -------------------------------------------------------------
<S>              <C>
    3.           Certificate of Amendment to the Certificate of Incorporation
                 of the Company filed on January 15, 1999.

    10.          First Amendment to License Agreement, dated as of December 30,
                 1998, between the Company and Schering Aktiengesellschaft. *
</TABLE>

* Confidential treatment being requested.








                                         17