<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 September 30, 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 November 4, 1998, Registrant had 32,042,482 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                                             13

Item 2.  Changes in Securities and Use of Proceeds                     13

Item 6. Exhibits and Reports on Form 8-K                               13

</TABLE>


                                       2

<PAGE>

PART I  FINANCIAL INFORMATION:

ITEM 1.  FINANCIAL STATEMENTS

     ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
     CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                             SEPTEMBER 30,         JUNE 30,
                                                                                  1998               1998
                                                                             -------------       ------------
                                                                              (UNAUDITED)           (NOTE)
<S>                                                                          <C>                 <C>
ASSETS

     CURRENT ASSETS:
       Cash and cash equivalents                                             $  19,354,000       $ 11,809,000 
       Short-term investments                                                   23,916,000         38,046,000 
       Research revenue receivable                                               6,039,000          6,847,000 
       Other current assets                                                        677,000            694,000 
                                                                             -------------       ------------
          Total current assets                                                  49,986,000         57,396,000 

     PROPERTY, PLANT AND EQUIPMENT - NET                                        24,320,000         23,087,000 
     PURCHASED TECHNOLOGY--NET                                                  12,500,000         12,880,000 
     OTHER ASSETS--NET                                                             310,000            314,000 
                                                                             -------------       ------------
                                                                             $  87,116,000       $ 93,677,000 
                                                                             -------------       ------------
                                                                             -------------       ------------

     LIABILITIES AND STOCKHOLDERS' EQUITY

     CURRENT LIABILITIES:
       Accounts payable                                                      $   1,373,000       $  2,191,000 
       Accrued expenses                                                          2,119,000          3,121,000 
       Deferred revenue                                                          2,286,000          2,286,000 
       Current portion of long-term debt                                         1,281,000          1,068,000 
                                                                             -------------       ------------
          Total current liabilities                                              7,059,000          8,666,000 

     LONG-TERM DEBT                                                              8,527,000          8,882,000 
     OTHER                                                                          24,000             39,000 

     STOCKHOLDERS' EQUITY:
       Preferred stock--$.01 par value; 5,000,000 shares authorized;
          500,000 and 500,000 shares of Series D issued and outstanding at
          September 30, 1998 and June 30, 1998, respectively                         5,000              5,000 
          100,000 and 0 shares of Series E-1 issued and outstanding at
          September 30, 1998 and June 30, 1998, respectively                         1,000                 --
       Common stock--$.01 par value; 50,000,000 shares authorized;
          32,042,482 and 31,164,935 shares issued and outstanding at
          September 30, 1998 and June 30, 1998, respectively                       320,000            320,000
     Additional paid-in capital                                                346,102,000        340,016,000
     Accumulated deficit                                                      (274,922,000)      (264,251,000)
                                                                             -------------       ------------
          Total stockholders' equity                                            71,506,000         76,090,000
                                                                             -------------       ------------
                                                                               $87,116,000        $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
                                                             SEPTEMBER 30,
                                                         1998             1997
                                                     ------------   ------------
                                                              (UNAUDITED)
     <S>                                             <C>            <C>
     REVENUES:
       License and research revenue                  $  5,100,000   $  6,539,000

     OPERATING EXPENSES:
       Research and development                        13,546,000     12,046,000
       General and administrative                       2,185,000      1,812,000
                                                     ------------   ------------
                                                       15,731,000     13,858,000
                                                     ------------   ------------
     LOSS FROM OPERATIONS                             (10,631,000)    (7,319,000)

     INVESTMENT INCOME AND OTHER - NET                    442,000        969,000
                                                     ------------   ------------
     NET LOSS                                         (10,189,000)    (6,350,000)

     IMPUTED DIVIDEND ON SERIES E-1 PREFERRED STOCK      (483,000)             -
                                                     ------------   ------------
     NET LOSS APPLICABLE TO COMMON SHARES            $(10,672,000)   $(6,350,000)
                                                     ------------   ------------
                                                     ------------   ------------

     NET LOSS PER COMMON SHARE:
       BASIC AND DILUTED                                   $(0.33)        $(0.20)
                                                     ------------   ------------
                                                     ------------   ------------

     WEIGHTED AVERAGE SHARES OUTSTANDING:
       BASIC AND DILUTED                               32,021,000     31,316,000
                                                     ------------   ------------
                                                     ------------   ------------

</TABLE>

SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                       4

<PAGE>

     ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                               THREE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                                            1998                 1997
                                                                        ------------         ------------
                                                                                   (UNAUDITED)
<S>                                                                     <C>                  <C>
OPERATING ACTIVITIES:
  Net loss                                                              $(10,189,000)        $ (6,350,000)
  Adjustments to reconcile net loss to net cash used in operations:
     Depreciation and amortization                                         1,360,000            1,213,000
     Changes in operating assets and liabilities:
       Research revenue receivable                                           808,000            5,000,000
       Deferred revenue                                                            -             (154,000)
       Other assets                                                           21,000               35,000
       Accounts payable and accrued expenses and other                    (1,834,000)          (2,025,000)
                                                                        ------------         ------------
Net cash used in operating activities                                     (9,834,000)          (2,281,000)
                                                                        ------------         ------------

INVESTING ACTIVITIES:
  Purchases of short-term investments                                    (13,955,000)         (28,590,000)
  Sales and maturities of short-term investments                          28,069,000           32,203,000
  Property, plant and equipment                                           (2,213,000)          (1,044,000)
                                                                        ------------         ------------
Net cash provided by investing activities                                 11,901,000            2,569,000
                                                                        ------------         ------------

FINANCING ACTIVITIES:
  Issuance of common stock                                                         -              294,000
  Issuance of convertible preferred stock                                  5,621,000            9,750,000
  Principal payments on long-term debt                                      (143,000)            (254,000)
                                                                        ------------         ------------
Net cash provided by financing activities                                  5,478,000            9,790,000
                                                                        ------------         ------------

INCREASE IN CASH AND CASH EQUIVALENTS                                      7,545,000           10,078,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                          11,809,000           14,590,000
                                                                        ------------         ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                               $19,354,000         $ 24,668,000
                                                                        ------------         ------------
                                                                        ------------         ------------

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
  AND FINANCING ACTIVITIES:
Issuance of common stock in connection with
  acquired in-process technology                                         $         -         $  2,500,000

</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., 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 1998 have been reclassified to 
conform to the current year's presentation.

INTERIM CONDENSED FINANCIAL STATEMENTS

     The condensed consolidated balance sheet as of September 30, 1998, the 
condensed consolidated statements of operations for the three months ended 
September 30, 1998 and 1997, and the condensed consolidated statements of 
cash flows for the three months ended September 30, 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 
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 $12.1 million and $12.4 million, net of accumulated 
amortization of $11.1 million and $10.8 million at 


                                       6

<PAGE>

September 30 and June 30, 1998, respectively.  The technology acquired from 
BioPulmonics has a book value of approximately $386,000 and $471,000, and is 
being amortized over five to seven years and is net of accumulated 
amortization of $1.6 million and $1.5 million at September 30 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 September 30, 1998 and 
1997, the total comprehensive loss, which includes the unrealized loss on 
available-for-sale securities, was $10,206,000 and $6,439,000, 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 preferred shares are 
convertible at the option of the holder into common stock at $6 per share 


                                       7

<PAGE>

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 approximately $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 ($6.0 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.  Because the Company's common stock 
traded below $3.00 for ten consecutive days in October 1998, under the terms 
of the purchase agreement, the Company may not require the investors to 
purchase the additional $14 million in preferred stock; however, the 
investors have agreed to discuss a waiver of the trading limitation.

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.  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, and 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, Alliance expects 
to incur a substantial increase in development expenses related to LIQUIVENT 
and OXYGENT 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 September 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 September 30, 1998, the 
balance outstanding on this loan was $9.8 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 a license agreement (the 
"Schering License Agreement") with Schering, 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.  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.  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.

     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 September 30, 1998, the unused supplies were 
approximately $2.3 million.  In December 1997, 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 


                                       9

<PAGE>

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 $42.9 million at September 30, 
1998, compared to $48.7 million at June 30, 1998.  The Company's cash, cash 
equivalents, and short-term investments decreased to $43.3 million at 
September 30, 1998 from $49.9 million at June 30, 1998.  The decrease 
resulted primarily from cash used in operations of $9.8 million and property, 
plant and equipment additions of $2.2 million, offset by net proceeds from 
the sale of convertible Series E-1 Preferred Stock of $5.6 million.  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, particularly for LIQUIVENT and OXYGENT 
as they move into pivotal clinical trials.  The Company will seek additional 
collaborative research and development relationships with suitable corporate 
partners for its non-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 may 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, 


                                       10

<PAGE>

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 two years, computer systems and/or software used by many 
companies may need to be upgraded to comply with such "Year 2000" 
requirements.  Management has initiated its Year 2000 program, which has 
already identified several systems that are not yet Year 2000 compliant.  The 
Company expects to complete its initial assessment by the end of the year.  
The assessment will include critical third-party confirmations with respect 
to their computers, software and systems, and a listing of all equipment 
subject to Year 2000 concerns.  The Company has already initiated the removal 
and exchange of some 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.  While 
the Company has begun evaluating potential strategies for resolving its Year 
2000 problems, the dollar amount the Company 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.


                                       11

<PAGE>

     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; 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.

RESULTS OF OPERATIONS

     THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997

     The Company's license and research revenue decreased by approximately 
22% to $5.1 million for the three months ended September 30, 1998, compared 
to $6.5 million for the three months ended September 30, 1997.  The decrease 
is primarily a result of the lack of license revenue from the Schering 
License Agreement and decreased development expense reimbursement from the 
Ortho License Agreement, net of increased milestone payments received under 
the Schering License Agreement.  The Company expects research revenue to 
significantly decrease in 1999 compared to 1998, due to the lack of revenue 
from the Ortho License Agreement.

     Research and development expenses increased by approximately 12% to 
$13.5 million for the three months ended September 30, 1998, compared to 
$12 million for the three months ended September 30, 1997.  The increase in 
expenses was primarily due to a $1 million increase in staffing costs for 
employees engaged in research and development activities, a $218,000 increase 
in rent and lease expense, and a $141,000 increase in depreciation expense, 
as well as other increases related to the Company's research and development
activities.


                                       12

<PAGE>

     General and administrative expenses increased by approximately 21% to 
$2.2 million for the three months ended September 30, 1998, compared to 
$1.8 million for the three months ended September 30, 1997.  The increase in 
general and administrative expenses was primarily due to increased salaries 
and wages and professional fees.

     Investment income and other was $442,000 for the three months ended 
September 30, 1998, compared to $969,000 for the three months ended 
September 30, 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.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

     On August 14, 1998, the Company sold 100,000 shares of its convertible 
Series E-1 Preferred Stock to certain institutional investors for $6 million.  
The shares were sold in reliance on an exemption from registration 
requirements provided by Section 4(2) of the Securities Act of 1933, as 
amended.  The purchasers were all "accredited investors," as defined 
Regulation D promulgated thereunder.  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.  
The Company paid a fee of 6% of gross proceeds to certain financial advisors 
in connection with the transaction.  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.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  There were no exhibits.

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


                                       13

<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:  November 11, 1998


                                       14