**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**









(Mark
      One)




x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR
                15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**FOR
                THE QUARTERLY PERIOD ENDED DECEMBER
                31, 2006** ̈
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR
                15(d) OF THE SECURITIES AND EXCHANGE ACT OF
                1934




**For
      the transition period from ______ to ______**






**Commission
      file number 000-12950**


____________________________





**ALLIANCE
      PHARMACEUTICAL CORP.**






**(Exact
      Name of Small Business Issuer as Specified in Its Charter)**




**New
                York**
            **14-1644018**(State
                of Other Jurisdiction of Incorporation or
              Organization)
            (IRS
                Employer Identification No.)**4660
                La Jolla Village Drive, Suite 740**
              **San
                Diego, CA**
            **92122**(Address
                of Principal Executive Offices)
            (Zip
                Code)




**Issuer’s
      Telephone Number, Including Area Code: (858) 410-5200**






**(Former
      Name, Former Address and Former Fiscal Year, if Changed Since Last
      Report)**




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No  ̈




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




Common
      Stock, $0.01 par value per share, 150,000,000 shares authorized, 40,053,773
      shares issued and outstanding as of February 6, 2006.




Transitional
      Small Business Disclosure Format (Check one): Yes  ̈ No x









**ALLIANCE
      PHARMACEUTICAL CORP.**







INDEXPage
                No.PART I - FINANCIAL
              INFORMATIONItem 1.
            Financial
              StatementsCondensed Consolidated Balance Sheet
              (unaudited)
            
            3Condensed Consolidated Statements of
              Operations (unaudited)
            
            4Condensed Consolidated Statements of
              Cash
              Flows (unaudited)
            
            5Notes to Unaudited Condensed Consolidated
              Financial Statements
            
            6Item 2.
            Management's Discussion and Analysis
              or Plan
              of Operation
            
            18Item 3.
            Controls and Procedures
            
            23PART II - OTHER
              INFORMATIONItem 1.
            Legal Proceedings
            
            24Item 2.
            Unregistered Sales of Equity Securities
              and
              Use of Proceeds
            
            24Item 3.
            Defaults Upon Senior Securities
            
            24Item 4.
            Submission of Matters to a Vote of Security
              Holders
            
            25Item 5.
            Other Information
            
            25Item 6.
            Exhibits
            
            25




2




**Part
        I Financial Information:**
 **Item
        1. Financial Statements**
 ALLIANCE
        PHARMACEUTICAL
        CORP.
 **CONDENSED
                CONSOLIDATED BALANCE
                SHEET***December
                  31,**2006**(Unaudited)***Assets****Current
                  assets:**Cash
                  and cash equivalents
              
              
              
              
              $
              1,960,000Other
                  current assets
              
              
              
              
              
              25,000Total
                  current assets
              
              
              
              
              
              1,985,000**Property,
                  plant and equipment - net**
              
              
              
              
              
              145,000**Other
                  assets - net**
              
              
              
              
              
              10,000$
              2,140,000**Liabilities
                  and Stockholders' Deficit****Current
                  liabilities:**Accounts
                  payable
              
              
              
              
              $
              454,000Accrued
                  expenses
              
              
              
              
              
              397,000Deferred
                  revenue
              
              
              
              
              
              600,000Senior
                  notes payable and accrued interest
              
              
              
              
              
              11,300,000Total
                  current liabilities
              
              
              
              
              
              12,751,000**Other
                  liabilities**
              
              
              
              
              
              750,000Total
                  liabilities
              
              
              
              
              
              13,501,000**Stockholders'
                  deficit:**Preferred
                  stock - $0.01 par value; 5,000,000 shares
                  authorized;Series
                  F preferred stock - 793,750 shares issued and outstanding,
              
              
              
              
              
              8,000liquidation
                  preference of $31,750,000Common
                  stock - $0.01 par value; 150,000,000 shares
                  authorized;40,053,773
                  shares issued and outstanding
              
              
              
              
              
              400,000Additional
                  paid-in capital
              
              
              
              
              
              483,538,000Accumulated
                  deficit
              
              
              
              
              
              (495,307,000
              )Total
                  stockholders' deficit
              
              
              
              
              
              (11,361,000
              )$
              2,140,000




*See
        Accompanying Notes to Unaudited Condensed Consolidated Financial
        Statements*


3




**ALLIANCE
        PHARMACEUTICAL CORP.**
 **CONDENSED
                CONSOLIDATED STATEMENTS OF
                OPERATIONS***Three
                  months ended*
                *December
                    31,*
              
              
              *Six
                  months ended*
                *December 31,*2006
              
              
              2005
              
              
              2006
              
              
              2005*(Unaudited)*
              
              
              *(Unaudited)***Revenues:**Royalty,
                  license and research
              
              $
              -
              
              
              $
              53,000
              
              
              $
              27,000
              
              
              $
              77,000**Operating
                  expenses:**Research
                  and development
              
              
              735,000
              
              
              
              287,000
              
              
              
              1,338,000
              
              
              
              836,000General
                  and administrative
              
              
              604,000
              
              
              
              195,000
              
              
              
              879,000
              
              
              
              600,0001,339,000
              
              
              
              482,000
              
              
              
              2,217,000
              
              
              
              1,436,000**Loss
                  from operations**
              
              
              (1,339,000
              )
              
              
              (429,000
              )
              
              
              (2,190,000
              )
              
              
              (1,359,000
              )**Investment
                  income**
              
              
              34,000
              
              
              
              52,000
              
              
              
              77,000
              
              
              
              102,000**Other
                  income**
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              82,000**Interest
                  expense**
              
              
              (242,000
              )
              
              
              (125,000
              )
              
              
              (490,000
              )
              
              
              (314,000
              )**Change
                  in fair value of derivative liability**
              
              
              130,000
              
              
              
              -
              
              
              
              357,000
              
              
              
              -**Gain
                  on disposition of liabilities**
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              730,000**Gain
                  on disposition of assets**
              
              
              659,000
              
              
              
              -
              
              
              
              659,000
              
              
              
              476,000**Net
                  loss**
              
              $
              (758,000
              )
              
              $
              (502,000
              )
              
              $
              (1,587,000
              )
              
              $
              (283,000
              )**Net
                    loss per common share,**
                  **basic
                    and diluted**
              
              $
              (0.02
              )
              
              $
              (0.01
              )
              
              $
              (0.04
              )
              
              $
              (0.01
              )**Weighted
                  average shares
                  outstanding,**
                **basic
                  and diluted**
              
              
              39,649,000
              
              
              
              34,830,000
              
              
              
              38,883,000
              
              
              
              34,830,000






*See
        Accompanying Notes to Unaudited Condensed Consolidated Financial
        Statements*


4




**ALLIANCE
        PHARMACEUTICAL CORP.**
 **CONDENSED
                CONSOLIDATED STATEMENTS OF CASH
                FLOWS****Six
                  months ended**
                *December
                  31,*2006
              
              
              
              2005*(Unaudited)***Operating
                  activities:**Net
                  loss
              $
              (1,587,000
              )
              
              $
              (283,000
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Depreciation
                  and amortization
              
              16,000
              
              
              
              10,000Accrued
                  interest on senior notes payable
              
              490,000
              
              
              
              314,000Compensatory
                  stock options
              
              30,000
              
              
              
              19,000Change
                  in fair value of derivative liability
              
              (357,000
              )
              
              
              -Gain
                  on disposition of liabilities
              
              -
              
              
              
              (730,000
              )Gain
                  on disposition of assets
              
              (659,000
              )
              
              
              (476,000
              )Changes
                  in operating assets and liabilities:Other
                  assets
              
              29,000
              
              
              
              1,059,000Accounts
                  payable, accrued expenses and other
              
              329,000
              
              
              
              (1,766,000
              )Net
                  cash used in operating activities
              
              (1,709,000
              )
              
              
              (1,853,000
              )**Investing
                  activities:**Purchases
                  of property and equipment
              
              (74,000
              )
              
              
              (3,000
              )Proceeds
                  from disposition of assets
              
              100,000
              
              
              
              200,000Net
                  cash provided by investing activities
              
              26,000
              
              
              
              197,000**Decrease
                  in cash and cash equivalents**
              
              (1,683,000
              )
              
              
              (1,656,000
              )**Cash
                  and cash equivalents at beginning of period**
              
              3,643,000
              
              
              
              6,782,000**Cash
                  and cash equivalents at end of period**
              $
              1,960,000
              
              
              $
              5,126,000**Supplemental
                  disclosure of non-cash financing activities:**Issuance
                  of common stock upon conversion of senior notes
              $
              438,000
              
              
              $
              -Reclassification
                  of derivative liability
              $
              484,000
              
              
              $
              -
 *See
            Accompanying Notes to Unaudited Condensed Consolidated Financial
            Statements*
 5




**ALLIANCE
      PHARMACEUTICAL CORP.**




**NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**THREE
      AND SIX MONTHS ENDED DECEMBER 31, 2006**




**1.ORGANIZATION
      AND SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




***Organization***




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




***Liquidity
      and Basis of Presentation***




The
      accompanying condensed consolidated financial statements have been prepared
      assuming the Company will continue as a going concern, which contemplates,
      among
      other things, the realization of assets and satisfaction of liabilities in
      the
      ordinary course of business. The Company has incurred operating losses through
      December 31, 2006 and has negative working capital at that date of approximately
      $10.8 million. These factors, among others, raise substantial doubt about the
      Company’s ability to continue as a going concern.




As
      discussed in Note 5, in June 2004, the Company completed a private placement
      financing with net proceeds to the Company of approximately $10 million from
      the
      sale of common stock (the “June 2004 Private Placement”). In September 2004, the
      terms of the June 2004 Private Placement were renegotiated by mutual agreement
      of the Company and investors holding approximately $10.7 million of the original
      $11 million invested by the various investors in the June 2004 Private
      Placement. Concurrently, the investors who elected to rescind the June 2004
      Private Placement were issued senior convertible promissory notes in like
      investment amounts (the “Senior Notes”), which, unless previously converted,
      will mature and the unpaid principal, together with accrued interest, are due
      and payable on April 1, 2007. The Company will not have the resources to repay
      the Senior Notes on April 1, 2007. The Company will have to raise additional
      funds to repay the Senior Notes or renegotiate their terms. If the Company
      is
      unable to do so, it will not have adequate resources to pay the amount due
      to
      the Senior Note holders and such holders may initiate liquidation proceedings
      against it. Therefore, the Company is seeking additional collaborative research
      and development relationships with suitable corporate partners for its products.
      Further, additional equity or debt financing may be required to fund ongoing
      operations. Because adequate funds have not been available to the Company in
      the
      past, the Company has already delayed its *Oxygent* development efforts and has delayed, scaled back, and/or eliminated one or
      more
      of its other product development programs. The accompanying unaudited condensed
      consolidated financial statements do not include any adjustments to reflect
      the
      possible future effects on the recoverability and classification of assets
      or
      the amount and classification of liabilities that may result from the outcome
      of
      this uncertainty.




***Principles
      of Consolidation***




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




6




***Interim
      Unaudited Condensed Financial Statements***




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared by the Company in accordance with accounting principles generally
      accepted in the United States of America for interim financial information.
      These principles are consistent in all material respects with those applied
      in
      the Company's financial statements contained in the Company's annual report
      on
      Form 10-KSB for the fiscal year ended June 30, 2006, and pursuant to the
      instructions to Form 10-QSB and Item 310(b) of Regulation S-B promulgated by
      the
      Securities and Exchange Commission (the “SEC”). Interim financial statements do
      not include all of the information and footnotes required by accounting
      principles generally accepted in the United States of America for complete
      financial statements. In the opinion of management, the accompanying unaudited
      condensed consolidated financial statements contain all adjustments (all of
      which are of a normal recurring nature, including the elimination of
      intercompany accounts) necessary to present fairly the financial position,
      results of operations and cash flows of the Company for the periods indicated.
      Interim results of operations are not necessarily indicative of the results
      to
      be expected for the full year or any other interim periods. These unaudited
      condensed consolidated financial statements should be read in conjunction with
      the financial statements and footnotes thereto contained in the Company's annual
      report on Form 10-KSB for the year ended June 30, 2006.




***Use
      of Estimates***




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




***Cash
      and Cash Equivalents***




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




***Concentration
      of Credit Risk***




Cash
      and
      cash equivalents are financial instruments that potentially subject the Company
      to concentration of credit risk. The Company invests its excess cash primarily
      in U.S. government securities and debt instruments of financial institutions
      and
      corporations with strong credit ratings. The Company has established guidelines
      relative to diversification and maturities to maintain safety and liquidity.
      These guidelines are reviewed periodically and modified to take advantage of
      trends in yields and interest rates. The Company places its cash with high
      quality financial institutions and at times may have deposits which exceed
      the
      Federal Deposit Insurance Corporation (the “FDIC”) $100,000 insurance limit. At
      December 31, 2006, the Company had approximately $1.9 million in these accounts
      in excess of the FDIC insurance limits. ******




7




***Property,
      Plant and Equipment***




Property,
      plant and equipment are stated at cost and depreciated using the straight-line
      method over the estimated useful lives of the assets, ranging from three to
      five
      years. Major betterments and renewals are capitalized, while routine repairs
      and
      maintenance are charged to expense when incurred.




The
      Company assesses the recoverability of property, plant and equipment by
      determining whether such assets can be recovered through projected undiscounted
      cash flows. The amount of impairment, if any, is measured based on fair value
      and is charged to operations in the period in which impairment is determined
      by
      management. At December 31, 2006, management has determined that there is no
      impairment of property, plant and equipment. There can be no assurance, however,
      that market conditions will not change, which could result in future property,
      plant and equipment impairment.




***Accounting
      for Derivative Instruments***




As
      a
      result of the amendment to its Senior Convertible Promissory Note Purchase
      Agreement and Registration Rights Agreement (the “Amendment”) in April 2006
      (see Note 5), the Company did not have a sufficient number of authorized shares
      to settle outstanding and exercisable options, warrants and convertible
      instruments until November 14, 2006, when the Company’s shareholders at its
      Annual Meeting approved an amendment of the Company’s Certificate of
      Incorporation to increase the number of authorized shares of common stock from
      125 million to 150 million. The amendment was filed with the Secretary of State
      of the State of New York on December 15, 2006. Under the provisions of Emerging
      Issues Task Force ("EITF") Issue No. 00-19, " *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock* ,"
      as a
      result of the Amendment, the Company was required to classify all non-employee
      options and warrants as derivative liabilities, totaling $3.5 million as of
      the
      Amendment date, and record them at their fair values at the date of the
      Amendment. Any change in fair value was required to be recorded as
      non-operating, non-cash income or expense at each subsequent balance sheet
      date
      until the Company had a sufficient number of authorized shares to settle its
      convertible instruments and non-employee options and warrants, which date was
      November 14, 2006. At the date of the Amendment, the Company reclassified the
      fair value of non-employee options and warrants of $3.5 million from additional
      paid-in capital to derivative liability. On November 14, 2006, the date of
      the
      approval of the increase in authorized shares, the Company reclassified the
      fair
      value of the derivative liability of $484,000 to additional paid-in
      capital.




Warrant-related
      derivatives were valued using the Black-Scholes Option Pricing Model with the
      following assumptions during the period ended November 14, 2006: dividend yield
      of 0%; annual volatility of 165%; and risk free interest rate of
      4.95%.




The
      following is a summary of the changes to the derivative liability during the
      period ended December 31, 2006:




Derivative
                liability, June 30, 2006
              
              $
              841,000Change
                in fair value
              
              
              (357,000
              )Derivative
                liability, November 14, 2006
              
              $
              484,000Reclassification
                  to equity upon approval of increase
                in
                  authorized shares, November 14, 2006
              
              $
              (484,000
              )Derivative
                liability, December 31, 2006
              
              $
              -
                0
                -




8


***Revenue
      Recognition***




The
      Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”)
      No. 101, “ *Revenue
      Recognition in Financial Statements,* ”
as
      revised by SAB No. 104. As such, the Company recognizes revenue when persuasive
      evidence of an arrangement exists, title transfer has occurred, or services
      have
      been performed, the price is fixed or readily determinable and collectibility
      is
      probable.




Revenue
      is deferred until all contractual obligations have been satisfied.




*Research
      and Development Revenues under Collaborative Agreements*




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




*Licensing
      and Royalty Revenues*




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




***Research
      and Development Expenses***




Research
      and development expenditures are charged to expense as incurred. Research and
      development expenditures include the cost of salaries and benefits for clinical,
      scientific, manufacturing, engineering and operations personnel, payments to
      outside researchers for preclinical and clinical trials and other product
      development work, payments related to facility lease and utility expenses,
      depreciation and amortization, patent costs, as well as other expenditures.
      During the six-month periods ended December 31, 2006 and 2005, the Company
      incurred research and development expenses of $1.3 million and $836,000,
      respectively.




***Fair
      Value of Financial Instruments***




The
      carrying amount of certain of the Company’s financial instruments as of December
      31, 2006 approximates their respective fair values because of the short-term
      nature of these instruments. Such instruments consist of cash, accounts payable,
      accrued expenses and other liabilities. The carrying value of debt approximates
      fair value as the related interest rate approximates a rate currently available
      to the Company.




***Computation
      of Net Loss Per Common Share***




Basic
      loss per share was computed by dividing the net loss by the weighted average
      number of common shares outstanding during the period. All potential dilutive
      common shares have been excluded from the calculation of diluted loss per share
      for the three and six months ended December 31, 2006 and 2005, as their
      inclusion would be anti-dilutive.




9


**Accounting
      for****Stock-Based
      Compensation**




At
      December 31, 2006, the Company has two stock-based employee compensation
      plans.




On
      July 1, 2006, the Company adopted SFAS No. 123 (revised 2004 *),
      "Share-Based Payment"* ("SFAS
      No. 123(R)"), which establishes standards for the accounting of transactions
      in
      which an entity exchanges its equity instruments for goods or services,
      primarily focusing on accounting for transactions where an entity obtains
      employee services in share-based payment transactions. SFAS No. 123(R)
      requires a public entity to measure the cost of employee services received
      in
      exchange for an award of equity instruments, including stock options, based
      on
      the grant-date fair value of the award and to recognize it as compensation
      expense over the period the employee is required to provide service in exchange
      for the award, usually the vesting period. SFAS No. 123(R) supersedes the
      Company's previous accounting under Accounting Principles Board Opinion No.
      25,
      " *Accounting
      for Stock Issued to Employees* "
      ("APB
      25") for periods beginning in the Company’s fiscal 2007. In March 2005, the SEC
      issued SAB No. 107 relating to SFAS No. 123(R). The Company has applied the
      provisions of SAB No. 107 in its adoption of SFAS No. 123(R).




The
      Company adopted SFAS No. 123(R) using the modified prospective transition
      method, which requires the application of the accounting standard as of
      July 1, 2006, the first day of the Company's fiscal year 2007. The
      Company's condensed consolidated financial statements as of and for the three
      and six months ended December 31, 2006 reflect the impact of adopting SFAS
      No. 123(R). In accordance with the modified prospective transition method,
      the Company's condensed consolidated financial statements for prior periods
      have
      not been restated to reflect, and do not include, the impact of SFAS
      No. 123(R).




SFAS
      No. 123(R) requires companies to estimate the fair value of share-based
      payment awards on the date of grant using an option-pricing model. The value
      of
      the portion of the award that is ultimately expected to vest is recognized
      as
      expense over the requisite service periods in the Company's condensed
      consolidated statement of operations. Prior to the adoption of SFAS No. 123(R),
      the Company accounted for stock-based payments to employees and directors using
      the intrinsic value method in accordance with APB 25 as allowed under SFAS
      No.
      123 " *Accounting
      for Stock-Based Compensation* " and,
      as
      such, generally recognized no compensation cost for employee stock options.
      During the three and six months ended December 31, 2005, no stock-based employee
      compensation cost was reflected in the accompanying condensed consolidated
      statements of operations, as all options granted under those plans had exercise
      prices equal to or greater than the market value of the underlying common stock
      on the date of grant.




Stock-based
      compensation expense recognized during the period is based on the value of
      the
      portion of share-based payment awards that is ultimately expected to vest during
      the period. Stock-based compensation expense recognized in the Company's
      condensed consolidated statements of operations for the three and six months
      ended December 31, 2006 included compensation expense for share-based payment
      awards granted prior to, but not yet vested as of June 30, 2006 based on the
      grant date fair value estimated in accordance with the pro forma provisions
      of
      SFAS No. 123 and compensation expense for the share-based payment awards
      granted subsequent to June 30, 2006 based on the grant date fair value estimated
      in accordance with the provisions of SFAS No. 123(R). As stock-based
      compensation expense recognized in the condensed consolidated statements of
      operations for the three and six months ended December 31, 2006 is based on
      awards ultimately expected to vest, it has been reduced for estimated
      forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time
      of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimates. The estimated average forfeiture rate for the
      three
      and six months ended December 31, 2006 of approximately 2% was based on
      historical forfeiture experience. The estimated term of option grants for the
      three and six months ended December 31, 2006 was seven years. In the Company’s
      pro forma information required under SFAS No. 123 for the periods prior to
      fiscal 2007, the Company accounted for forfeitures as they
      occurred.




10





SFAS
      No.
      123(R) requires cash flows resulting from the tax benefits resulting from tax
      deductions in excess of the compensation cost recognized for those options
      to be
      classified as financing cash flows. Due to the Company’s loss position, there
      were no such tax benefits during the three and six months ended December 31,
      2006. Prior to the adoption of SFAS No. 123(R), those benefits would have been
      reported as operating cash flows had the Company received any tax benefits
      related to stock option exercises.




***Description
      of Plans***




The
      Company’s stock option plans provide for grants of options to employees and
      directors of the Company to purchase the Company’s shares, as determined by
      management and the board of directors, at the fair value of such shares on
      the
      grant date. The options generally vest over a four to five-year period beginning
      on the date of grant up to one year after the date of grant and have a ten-year
      term. As of December 31, 2006, the Company is authorized to issue up to
      8,100,000 shares under these plans and has 3,935,610 shares available for future
      issuance.




***Summary
      of Assumptions and Activity***




The
      fair
      value of stock-based awards to employees and directors is calculated using
      the
      Black-Scholes option pricing model, even though the model was developed to
      estimate the fair value of freely tradable, fully transferable options without
      vesting restriction, which differ significantly from the Company’s stock
      options. The Black-Scholes model also requires subjective assumptions regarding
      future stock price volatility and expected time to exercise, which greatly
      affect the calculated values. The expected term of options granted is derived
      from historical data on employee exercises and post-vesting employment
      termination behavior. The risk-free rate selected to value any particular grant
      is based on the U.S Treasury rate that corresponds to the pricing term of the
      grant effective as of the date of the grant. The expected volatility is based
      on
      the historical volatility of our common stock. These factors could change in
      the
      future, affecting the determination of stock-based compensation expense in
      future periods. There
      were 57,500 and 467,500 options granted during the periods ended December 31,
      2006 and 2005, respectively.




The
      following table illustrates the effect on net loss and net loss per share for
      the three and six months ended December 31, 2005 as if the Company had applied
      the fair value recognition provisions of SFAS No. 123 to options granted under
      the Company’s stock option plans. For purposes of this pro forma disclosure, the
      fair value of the options is estimated using the Black Scholes option-pricing
      model and amortized on a straight-line basis to expense over the options’
vesting periods:




11




**Three
                  Months Ended**
              
              **Six
                  Months Ended****December
                  31,**
              
              **December
                  31,****2005**
              
              **2005**Net
                  loss:As
                  reported
              $
              (502,000
              )
              $
              (283,000
              )Total
                  stock-based employee compensationexpense
                  determined under fair-value-basedmethod
                  for all awards, net of tax-related effects
              
              (78,000
              )
              
              (233,000
              )Pro
                  forma
              $
              (580,000
              )
              $
              (516,000
              )Net
                  loss per share, basic and diluted:As
                  reported
              $
              (0.01
              )
              $
              (0.01
              )Pro
                  forma
              $
              (0.02
              )
              $
              (0.01
              )






A
      summary
      of option activity as of December 31, 2006 and changes during the six months
      then ended is presented below:




**December
                  31, 2006****Weighted-Average****Shares**
              
              **Exercise
                  Price**
              
              
              
              **Remaining
                  Contractual Term (Years)**
              
              
              **Aggregate
                  Intrinsic Value**Options
                  outstanding at July 1, 2006
              
              2,937,018
              
              $
              5.65
              
              
              
              7.51Options
                  granted
              
              57,500
              
              $
              0.13Options
                  forfeited
              
              (56,250
              )
              $
              19.66Options
                  exercised
              
              -Options
                  outstanding at December 31, 2006
              
              **2,938,268**
              
              **$**
              **4.35**
              
              
              
              **7.20**
              
              
              **-**Options
                  expected to vest
              
              477,067
              
              $
              4.01
              
              
              
              7.64
              
              
              -Options
                  exercisable at December 31, 2006
              
              **2,453,508**
              
              **$**
              **5.01**
              
              
              
              **6.96**
              
              
              **-**





There
      were 57,500 options granted and no options exercised during the six months
      ended
      December 31, 2006.




As
      of
      December 31, 2006, there was approximately $264,000 of total unrecognized
      compensation cost related to employee and director stock option compensation
      arrangements. That cost is expected to be recognized on a straight-line basis
      over the next five years on average. The total fair value of shares vested
      during the six months ended December 31, 2006 was approximately $30,000, net
      of
      an estimated forfeiture rate of 2%.




As
      a
      result of adopting SFAS No. 123(R) on July 1, 2006, the Company's net
      loss for the three and six months ended December 31, 2006 was approximately
      $15,000 and $30,000 higher, respectively than if it had continued to account
      for
      share-based compensation under APB 25. Net loss per share for the three and
      six
      months ended December 31, 2006 was approximately the same. The Company allocated
      all the stock-based compensation expense related to employee and director stock
      options to general and administrative expenses.




12




***Recently
        Issued Accounting Pronouncements***
  In
        July
        2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
        No. 48, “ *Accounting
        for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
        109”* (“FIN
        48”). This interpretation clarifies the application of SFAS No. 109,
“ *Accounting
        for Income Taxes,”* by
        defining criteria that an individual tax position must meet for any part
        of the
        benefit of that position to be recognized in a company’s financial statements
        and also provides guidance on measurement, derecognition, classification,
        interest and penalties, accounting in interim periods, disclosure and
        transition. FIN 48 is effective for fiscal years beginning after December
        15,
        2006. The Company expects to adopt FIN 48 on July 1, 2007. The Company is
        currently assessing the impact the adoption of FIN 48 will have on its financial
        position and results of operations.
  **2.PFC
        THERAPEUTICS, LLC**
  On
        May
        16, 2005, PFC Therapeutics and Beijing Double-Crane Pharmaceutical Co., Ltd.
        ("Double-Crane"), the market leader for IV solutions and one of the largest
        pharmaceutical companies in the People's Republic of China (the "PRC"), entered
        into a development, license and supply agreement ("Double-Crane Agreement")
        for
        the development of *Oxygent* in the
        PRC. Pursuant to the Double-Crane Agreement, Double-Crane made an upfront
        license fee payment and will make certain milestone and royalty payments
        to the
        Company. The upfront license fee of $500,000 has been deferred, as the Company’s
        obligations to perform have not been satisfied, and such amount is included
        in
        current liabilities in the accompanying condensed consolidated balance sheet
        at
        December 31, 2006. Double-Crane will conduct clinical trials in the PRC,
        in
        accordance with international guidelines, to receive marketing approval for *Oxygent* in the
        PRC. The Company will have the right to use in other countries any data derived
        from the clinical trials. Double-Crane will have the option to manufacture *Oxygent* in the
        PRC after obtaining approval from the regulatory authorities in the PRC and
        they
        will also have a right of first refusal to add specific additional countries
        to
        the Double-Crane Agreement upon further negotiation with the Company. (See
        Note
        7 “Subsequent Events” for an update.)
  On
        December 22, 2004, PFC Therapeutics and LEO Pharma A/S (“LEO”), one of the
        leading Danish research-based pharmaceutical companies that markets significant
        products within the fields of dermatology, metabolic and cardiovascular diseases
        and ophthalmology and antibiotics, signed an exclusivity agreement to enter
        into
        a license agreement, subject to continued due diligence by LEO, to develop
        and
        commercialize *Oxygent* in
        Europe (EU member countries, EU membership applicants, Norway and Switzerland)
        and Canada (the “LEO Exclusivity Agreement”). The terms of the license
        agreement, if entered into, will include certain initial and future payments
        to
        PFC Therapeutics upon the completion of various regulatory and commercial
        milestones for *Oxygent* development
        in Europe and royalties on commercial sales of *Oxygent* in
        Europe
        and Canada. On January 5, 2005, the Company received the non-refundable portion
        of an exclusivity fee of $100,000 per the terms of the LEO Exclusivity
        Agreement. Because the amendment discussed below extends LEO’s due diligence
        time-period, this amount has been deferred and is included in current
        liabilities in the accompanying condensed consolidated balance sheet at December
        31, 2006.
  On
        February 25, 2005, PFC Therapeutics and LEO agreed to amend the LEO Exclusivity
        Agreement. The amendment extends the period of time in which LEO may undertake
        its due diligence investigation from March 1, 2005 to a date that is sixty
        (60)
        days after submission by the Company to LEO of the results of a "proof of
        concept" clinical study in surgery patients to be conducted by the Company
        to
        confirm the results of an earlier study. The Company anticipates that the
        "proof
        of concept" study will be completed during calendar 2007. The remaining terms
        of
        the LEO Exclusivity Agreement remain in full force and effect, provided that
        any
        definitive license agreement entered into between PFC Therapeutics and LEO
        relating to the marketing and commercialization of *Oxygent* will
        include an additional milestone payment, the amount of which is to be proposed
        by Alliance, relating to the "proof of concept" clinical trial described
        above.
  13
 **3.ASTRAL,
        INC.**
  On
        September 6, 2005, Alliance and Astral entered into an asset contribution
        agreement (the “Astral Agreement”) with MultiCell Technologies, Inc.
        (“MultiCell”) and Astral Therapeutics, Inc. (“Astral Therapeutics”) pursuant to
        which Alliance and Astral contributed all of their respective assets (including
        intellectual property, laboratory equipment and furniture), which had a net
        book
        value of zero at the date of contribution, that relate primarily to the business
        of Astral to Astral Therapeutics, a new entity formed for the purpose of
        further
        developing the Astral assets. In return, Alliance received an amount of common
        stock (490,000 shares) of Astral Therapeutics equal to approximately 49%
        of the
        outstanding capital stock of Astral Therapeutics. In addition, in connection
        with this transaction, Astral Therapeutics assumed certain obligations and
        liabilities of Alliance with respect to the Astral assets. Subsequent to
        the
        transfer of the Astral assets, MultiCell purchased $2 million in Series A
        Preferred Stock of Astral Therapeutics. MultiCell paid $1 million of this
        amount
        at the closing of the purchase of the Series A Preferred Stock and paid the
        balance in four quarterly installments of $250,000 through September 2006
        pursuant to a promissory note that was secured by a pledge of $1 million
        in
        value of Astral Therapeutics Series A Preferred Stock. After the purchase
        and
        sale of the Series A Preferred Stock of Astral Therapeutics to MultiCell,
        Alliance owned approximately 33% of the fully diluted outstanding capital
        stock
        of Astral Therapeutics. Pursuant to the Astral Agreement, MultiCell assumed
        all
        of Astral’s obligations under Astral’s assignment agreement with Mixture
        Sciences, Inc. (“Mixture Sciences”). In total, the Company transferred
        approximately $730,000 of net liabilities to Astral Therapeutics (which amount
        was recorded as a gain on disposition of liabilities during the year ended
        June
        30, 2006) in exchange for 490,000 shares of common stock of Astral Therapeutics.
        Subsequently, Astral Therapeutics’ name was changed to MultiCell
        Immunotherapeutics, Inc. (“MCTI”).
  It
        was
        determined by the Company’s management that MCTI has sufficient equity or that
        MCTI’s equity holders have adequate decision-making authority or the obligation
        and right as equity holders to absorb MCTI’s expected losses or to receive its
        expected residual returns. Therefore, MCTI is not subject to FASB Interpretation
        No. 46 *“Consolidation
        of Variable Interest Entities”* and
        such
        investment will be accounted for under the equity method.
  **4.SALE
        OF** ***Imagent*** **Ò** **ASSETS**
  On
        June
        18, 2003, Imcor Pharmaceutical Co. (“Imcor”), formerly known as Photogen
        Technologies, Inc., acquired certain assets and assumed certain liabilities
        from
        Alliance. The assets acquired by Imcor included all of Alliance’s assets related
        to designing, developing, manufacturing, marketing, selling, licensing,
        supporting and maintaining its *Imagent* product,
        an ultrasound contrast agent that was approved by the United States Food
&
Drug Administration (“FDA”) for marketing in the U.S. in June 2002. The amount
        of consideration was determined through arms-length negotiation. To the extent
        obligations with certain creditors were completely settled, Alliance recorded
        a
        gain from sale of assets of approximately $10.6 million during the year ended
        June 30, 2003, approximately $15 million during the year ended June 30, 2004,
        approximately $306,000 during the year ended June 30, 2005, approximately
        $476,000 during the year ended June 30, 2006 and $659,000 during the six
        months
        ended December 31, 2006 (see below) related to the disposition of these assets. To
        date,
        Alliance has recorded approximately $27 million as a gain on the disposition
        of
        an asset as a result of Imcor issuing shares of its stock valued at
        approximately $3.7 million to Alliance creditors, Imcor funding approximately
        $1.9 million of Alliance’s obligations, and approximately $21.4 million related
        to settlement agreements or Imcor’s assumed obligations of Alliance.
  14
  In
        September 2005, Alliance and Imcor entered into a global settlement agreement
        (the “Imcor Settlement Agreement”) pursuant to which each party released the
        other from any further obligation under the *Imagent* Asset
        Purchase Agreement, effectively terminating all ongoing obligations and rights
        under the agreement, and providing for the allocation between the parties
        of the
        proceeds of any future transaction involving the disposition of the *Imagent* asset.
        In addition, the parties agreed to a settlement of the Amersham Health Inc.,
        Amersham Health AS and Amersham plc (collectively, “Amersham”) litigation, in
        which all parties granted each other fully paid-up, irrevocable, royalty-free,
        non-exclusive cross-licenses, with the right to sublicense, and mutual releases.
        Alliance received $200,000 as a result of the above settlement agreements
        during
        the quarter ended September 30, 2005.
  Imcor
        has
        announced that it has adopted a restructuring plan whereby it is
        evaluating alternatives with respect to efforts to sell or otherwise maximize
        asset values related to the *Imagent* technology, and is considering the sale or license of its *Imagent* assets,
        a merger or other material transaction. Since such a transaction may include
        selling the *Imagent* technology, a license or sale of the patent portfolio underlying the *Imagent* technology, a manufacturing rights agreement, or another form of transaction,
        Alliance has determined that there will be no
        future *Imagent* earn-out
        payments and deferred royalties previously recorded will not be paid; therefore,
        Alliance reclassified $500,000 in deferred royalties to gain on disposition
        of
        an asset during the period ended December 31, 2006.
  In
        November 2006, Imcor entered into an amended and restated license agreement
        with
        one of its partners. Pursuant to the terms of the Imcor Settlement Agreement
        mentioned above, an aggregate of $100,000 (approximately $91,000 net, after
        deducting our allocated share of direct expenses) was paid to Alliance in
        the
        period ended December 31, 2006.
  **5.DEBT
        OBLIGATIONS**
  ***P*** ***FC
        Note***
  On
        November 20, 2003, PFC Therapeutics issued a secured convertible note in
        the
        principal amount of $500,000 (the “PFC Note”) to an investor. The investor also
        received a warrant to purchase a number of units of ownership interests of
        PFC
        Therapeutics representing 10% of its issued and outstanding units (determined
        on
        a fully-diluted basis on the date of exercise of the warrant) at an exercise
        price of $0.01 per unit, at any time or from time to time from January 31,
        2004
        to and including January 31, 2009. In September 2004, the holder of the PFC
        Note
        exchanged such warrant for 2,500,000 shares of common stock of the Company,
        which were issued in October 2004, valued at $1 million based on the estimated
        fair value on the date of issuance, and the PFC Note for a Senior Note
        (described below) in the principal amount of $500,000.
  ***Senior
        Notes Payable***
  On
        July
        2, 2004, Nycomed Denmark ApS (“Nycomed”) notified the Company that it was
        unilaterally terminating its Development, Assignment and Supply Agreement
        (the
“Nycomed Agreement”) effective August 16, 2004. Subsequently, a dispute arose
        between the Company and some of its investors who participated in the June
        2004
        Private Placement. After considering all of the facts and circumstances relevant
        to the dispute, the Company’s Board of Directors determined that it was in the
        Company’s and the Company’s stockholders’ best interests to offer, as a
        settlement of the dispute, to rescind the June 2004 Private
        Placement.
  15
  On
        September 24, 2004, investors holding 30,546,423 shares of common stock and
        warrants to purchase 22,909,821 shares of common stock representing
        approximately $10.7 million of the $11 million invested in the June 2004
        Private
        Placement elected to rescind the June 2004 Private Placement. In doing so,
        each
        of these investors returned to the Company its stock certificate representing
        the number of shares and the warrant that it received in the June 2004 Private
        Placement for cancellation. Immediately thereafter, these same investors
        entered
        into the Senior Note Purchase Agreement whereby the Company issued to such
        investors Senior Notes convertible into common stock at $0.25 per share,
        which
        was subsequently amended (see below), in principal amounts equal to the amounts
        such investors invested in the June 2004 Private Placement.
  After
        giving effect to both transactions, the Company issued 880,714 shares of
        common
        stock and warrants to purchase 660,536 shares of common stock in the June
        2004
        Private Placement, and the Company issued Senior Notes in an aggregate principal
        amount of approximately $10.7 million.
  The
        Senior Notes were due March 24, 2006, and bore interest at 6% per annum.
        In
        April 2006, the Company entered into the Amendment with each of the
        existing holders of Alliance's Senior Notes. Pursuant to the Amendment, the
        maturity date of each outstanding Senior Note was extended from March 24,
        2006
        to April 1, 2007.  The conversion price of each Senior Note was
        reduced from $0.25 to $0.17, and the interest that will accrue on each Senior
        Note from March 25, 2006 through April 1, 2007 was increased from 6%
        to 10% per annum.  In addition to the amounts due under the Senior
        Notes, the holders of the Senior Notes are entitled to receive up
        to an aggregate of $11.4 million in payments based on future
        royalties from *Oxygent* product
        sales (or under certain conditions from milestone payments) payable at a
        rate
        equal to 50% of such payments Alliance actually receives.
  Since
        the
        Amendment of the Senior Notes resulted in terms that, pursuant to EITF Issue
        No.
        96-19, “ *Debtor’s
        Accounting for a Modification or Exchange of Debt Instruments* ,”
are
        substantially different from the terms of the original Senior Notes, the
        modification was treated as an extinguishment of debt in the year ended June
        30,
        2006. The Company recorded a total debt discount of $10.1 million in connection
        with the conversion feature of the amended Senior Notes, based on the difference
        between the $0.17 amended conversion rate of the Senior Notes and the closing
        price of $0.32 of the Company’s common stock on the date of the Amendment. The
        discount was immediately recorded as an expense in connection with the
        extinguishment of debt and was included in the consolidated statement of
        operations at June 30, 2006.
  The
        Amendment caused the Company to have an insufficient number of authorized
        shares
        to settle all outstanding and exercisable options, warrants and convertible
        instruments until shareholders approved an increase in authorized shares
        of
        common stock on November 14, 2006 (see Note 1). As a result, under EITF No.
        00-19, all non-employee options and warrants were classified as derivative
        liabilities and recorded at their fair values at each balance sheet date.
        During
        the period ended November 14, 2006, the Company recognized other income of
        $357,000 and the derivative liability balance of $484,000 at that date was
        reclassified to additional paid-in capital since the increase in the number
        of
        shares approved by the shareholders (see Note 1) was sufficient to settle
        all
        outstanding convertible instruments; thus there was no derivative liability
        at
        December 31, 2006.
  The
        Senior Notes can be converted at anytime prior to the maturity date. During
        the
        six months ended December 31, 2006, holders of certain Senior Notes converted
        an
        aggregate of $438,000 in principal into an aggregate of 2,577,470 shares
        of our
        common stock at a conversion price of $0.17 per share. At December 31, 2006,
        the
        principal and accrued interest balances approximate $9.6 million and $1.7
        million, respectively.
  16
  ***Other
        Commitments***
  The
        Company leases the facilities in which it operates under certain non-cancelable
        operating leases. Payments for the office facilities approximate $10,000
        per
        month and the leases expire September 30, 2007.
  ***Indemnification
        Obligations***
  The
        Company has undertaken certain indemnification obligations pursuant to which
        it
        may be required to make payments to an indemnified party in relation to certain
        transactions.  The Company has agreed to indemnify its directors, officers,
        employees and agents to the maximum extent permitted under the laws of the
        State
        of New York.  In connection with its facility leases, the Company has
        agreed to indemnify its lessors for certain claims arising from the use of
        the
        facilities.  In connection with certain of its debt, stock purchase and
        other agreements, the Company has agreed to indemnify lenders, sellers and
        various other parties for certain claims arising from the Company's breach
        of
        representations, warranties and other provisions contained in the
        agreements.  The duration of certain of these indemnification obligations
        does not provide for any limitation of the maximum potential future payments
        the
        Company could be obligated to make.  Historically, the Company has not been
        obligated to make any payments for these obligations and no liabilities have
        been recorded for these indemnities in the accompanying unaudited condensed
        consolidated balance sheet.
  **6.EQUITY**
  ***Preferred
        Stock***
  In
        May
        2000, Alliance entered into a joint venture with Baxter Healthcare Corporation
        (“Baxter”) and sold 500,000 shares of its Series F Preferred Stock for $20
        million. Subsequently, the Company sold 293,750 additional shares for $11.75
        million. The shares are convertible based on the following provisions: 1)
        at the
        option of Baxter on or after May 19, 2004; 2) termination of the license
        agreement between Alliance and PFC Therapeutics; 3) at the option of Baxter
        on
        or after the period of time in which the price of Alliance’s common stock is
        equal to or greater than $110 per share; or 4) at the option of Baxter upon
        a
        change of control at Alliance. The Series F Preferred Stock has no annual
        dividend and is not entitled to any voting rights except as otherwise required
        by law.
  The
        Series F Preferred Stock is convertible at the following conversion rates:
        1) if
        Alliance’s common stock price averages $110 per share over a 20-day period
        through May 19, 2004, the conversion price for the Series F Preferred Stock
        will
        be $110 per share; 2) if the license agreement between Alliance and PFC
        Therapeutics is terminated, the conversion price will not be less than $50
        per
        share; or 3) if the events discussed above do not occur, the conversion price
        will be based on the market value of Alliance’s common stock at the time of
        conversion, subject to “Certain Limitations.”
  In
        March
        2004, Alliance terminated its license agreement with PFC Therapeutics and
        therefore, the conversion price of the Series F Preferred Stock to common
        stock
        is fixed at $50 per common share. Based on this conversion price, the
        outstanding shares of Series F Preferred Stock are convertible into 635,000
        shares of common stock. The Company has accounted for the Series F Preferred
        Stock as a component of stockholders’ equity.
  17
  **7.SUBSEQUENT
        EVENTS**
  On
        February 6, 2007, the Company announced the manufacture and release for shipment
        of *Oxygent* for
        clinical trials. Alliance has now successfully completed the contract
        manufacture of *Oxygent* clinical
        trial material.  The clinical supplies will be used in the Phase 2 "proof
        of concept" trial that will be conducted in Europe and by Double-Crane to
        submit
        its Investigational New Drug (“IND”) application to the State Food and Drug
        Administration P.R. China (“sFDA”). Following the sFDA review, which
        Double-Crane estimates to be six to nine months, Double-Crane will be able
        to
        initiate the clinical development program for *Oxygent* in
        China, starting with its Phase 1 safety study. Approval from the sFDA to
        begin
        the study triggers a milestone payment to Alliance. Double-Crane will conduct
        clinical trials in China, in accordance with international guidelines, which
        will allow Alliance to use any data derived from the clinical trials in other
        countries.  Double-Crane
        will be pursuing a transfusion avoidance indication for its
        territory.
  **Item
        2.Management's
        Discussion and Analysis or Plan of Operation** ****
  (References
        to year are to the Company's fiscal year ended June 30)
  ***Plan
        of Operation***
  Since
        our
        inception in 1983, we have financed our operations primarily through the
        sale of
        equity and debt securities, and we have applied substantially all of our
        resources to research and development programs and to clinical trials. We
        have
        incurred operating losses since inception and as of December 31, 2006, have
        an
        accumulated deficit of $495.3 million. We expect to incur significant operating
        losses over at least the next few years as we continue our research and product
        development efforts and attempt to commercialize our products.
  Our
        revenues from operations have come primarily from collaborations with corporate
        partners, including research and development, milestone and royalty payments.
        Our expenses have consisted primarily of research and development costs and
        administrative costs. To date, our revenues from the sale of products have
        not
        been significant. We believe our future operating results may be subject
        to
        quarterly fluctuations due to a variety of factors, including the timing
        of
        future collaborations and the achievement of milestones under collaborative
        agreements, whether and when new products are successfully developed and
        introduced by us or our competitors, and market acceptance of products under
        development.
  ***Forward-Looking
        Information***
  Except
        for historical information, the statements made herein and elsewhere are
        forward-looking. The Company wishes to caution readers that these statements
        are
        only predictions and that the Company’s business is subject to significant
        risks. The factors discussed herein and other important factors, in some
        cases
        have affected, and in the future could affect, the Company’s actual results and
        could cause the Company’s actual consolidated results for 2007, 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, manufacture and commercialize the Company’s products; changes in any
        such relationships, or the inability of any collaborative partner to adequately
        commercialize any of the Company’s products; the uncertainties associated with
        the lengthy regulatory approval process, including uncertainties associated
        with
        FDA decisions and timing on product development or approval; and the
        uncertainties associated with obtaining and enforcing patents important to
        the
        Company’s business; and possible competition from other products. Furthermore,
        even if the Company’s products appear promising at an early stage of
        development, they may not reach the market for a number of important reasons.
        Such reasons include, but are not limited to, the possibilities that the
        potential products will be found ineffective during clinical trials; failure
        to
        receive necessary regulatory approvals; difficulties in manufacturing on
        a large
        scale; failure to obtain market acceptance; and the inability to commercialize
        because of proprietary rights of third parties. The research, development
        and
        market introduction of new products will require the application of considerable
        technical and financial resources, while revenues generated from such products,
        assuming they are developed successfully, may not be realized for several
        years.
        Other material and unpredictable factors which could affect operating results
        include, without limitation, the uncertainty of the timing of product approvals
        and introductions and of sales growth; the ability to obtain necessary raw
        materials at cost-effective prices or at all; the effect of possible technology
        and/or other business acquisitions or transactions; and the increasing emphasis
        on controlling healthcare costs and potential legislation or regulation of
        healthcare pricing. Further cautionary information is contained in documents
        the
        Company files with the SEC from time to time, including the Company’s most
        recently filed Annual Report on Form 10-KSB, and you are encouraged to read
        the section entitled, “Risk Factors” included in the Company’s most recently
        filed Annual Report on Form 10-KSB.
  18
  ***Research
        and Development*** ******
  For
        the
        six months ended December 31, 2006 and 2005, we incurred research and
        development expenses of $1.3 million and $811,000, respectively, for *Oxygent* ,
        an
        intravascular oxygen carrier that we are developing to augment oxygen delivery
        in surgical patients at risk of acute oxygen deficit. Research and development
        costs to date for our oxygen-therapeutic product candidates, including *Oxygent* ,
        total
        approximately $160.1 million. While difficult to predict, we estimate that
        the
        completion of clinical trials for *Oxygent* will
        cost at least an additional $70 million. We do not anticipate that *Oxygent* will
        reach the market for several years, if at all, and, because of the numerous
        risks and uncertainties associated with product development efforts, we are
        unable to predict with any certainty the extent of any future expenditures
        or
        when material net cash inflows from *Oxygent* may
        commence, if at all.
  On
        November 7, 2006, we issued a press release disclosing that, even though
        the
        German Competent Authority (regulatory agency) approved the start of a Phase
        2
        clinical trial for *Oxygent* to
        prevent post-op ileus resulting from hypoxia during major surgery, the relevant
        German Ethics Committee responded with a negative vote on the protocol based
        upon risk/benefit in the cardiac patient population selected. Though we appealed
        this decision and offered additional clarification and supporting data for
        the
        protocol, the German Ethics Committee has informed us that it declines approval
        of the study protocol as submitted. We are now exploring additional sites
        in
        France as well as in other countries.
  On
        December 18, 2006, we issued a press release updating our clinical development
        status. Earlier, Alliance had reported that the French Ethics Committee
        (Investigational Review Board) had approved the start of the trial and that
        the
        French Competent Authority (regulatory agency) was considering Alliance’s
        response to its review questions.  That review has been completed and the
        approval was granted to start the trial.
  Alliance
        has submitted a clinical trial protocol revision to the French Ethics Committee
        and the French Competent Authority, which modifies the dosing regimen to
        a
        dose-escalation protocol. This modification allows for the safety and efficacy
        to be evaluated in three dose levels; however, this modification potentially
        could add additional 30 to 60 patients to the trial, depending upon the
        evaluation of efficacy at each dosing level. Alliance intends to begin the
        trial in the first half of calendar 2007. We have enough funds to complete
        the
        first dose group, but may need additional funds to complete the
        study.
  In
        addition, Alliance has successfully completed the technology transfer to
        its
        contract manufacturer for the production of clinical trial material. Clinical
        supplies are currently being produced to meet the requirements of the above
        clinical trials and of Double-Crane for initiation of its clinical development
        of *Oxygent* .
        (See
        Note 7 “Subsequent Events” for an update.)
  Astral,
        our wholly owned subsidiary until September 6, 2005, was engaged in the
        development of immunoglobulins that are engineered to bear specific
        disease-associated peptides. For the six months ended December 31, 2005,
        Astral
        incurred research and development expenses of $25,000. In September 2005,
        pursuant to the Astral Agreement, approximately $730,000 of accrued Astral
        expenses were assumed by MultiCell (see Note 3).
  19
 ***Results
        of Operations*** ******
  **Three
        Months ended December 31, 2006 as Compared with Three Months ended December
        31,
        2005**
  We
        recorded no revenue for the three months ended December 31, 2006, compared
        to
        $53,000 for the three months ended December 31, 2005. The revenue for last
        year’s quarter consisted of royalties from products other than *Imagent* .
  Research
        and development expenses increased by $448,000, or 156%, to $735,000 for
        the
        three months ended December 31, 2006, compared to $287,000 for the three
        months
        ended  December
        31, 2005. The increase in research and development expenses was primarily
        due to
        an increase in contract manufacturing of *Oxygent* clinical
        trial material during the current period.
  General
        and administrative expenses increased by $409,000, or 210%, to $604,000 for
        the
        three months ended December 31, 2006, compared to $195,000 for the three
        months
        ended December 31, 2005. The increase in general and administrative expenses
        was
        primarily the result of an accrual of $249,000 in possible income tax and
        penalty liabilities for tax year 2003 (fiscal year 2004) in connection with
        the
        sale of the *Imagent* assets,
        which we are actively investigating as to possible alternative treatments,
        and
        an increase of $151,000 in legal fees, as a result of a correction of an
        over-accrual of litigation expenses during last year’s period.
  For
        the
        three months ended December 31, 2006, we recorded a gain on the change in
        fair
        value of derivative liability of $130,000 related to recording derivative
        liabilities at fair value in connection with the Amendment entered into during
        April 2006 (see Note 5).
  For
        the
        three months ended December 31, 2006, we recorded a gain on the disposition
        of
        an asset of $659,000 primarily related to $100,000 received per the terms
        of the
        Imcor Settlement Agreement and the write off of deferred royalties in the
        approximate amount of $500,000 previously recorded in connection with the *Imagent* asset
        sale transaction (see Note 4).
  Investment
        income decreased by $18,000 to $34,000 for the three months ended December
        31,
        2006, compared to $52,000 for the three months ended December 31, 2005. The
        decrease was primarily a result of lower cash balances during the current
        period.
  Interest
        expense was $242,000 for the three months ended December 31, 2006, compared
        to
        $125,000 for the three months ended December 31, 2005. The increased expense
        for
        the current period was primarily the result of recording accrued interest
        at a
        higher interest rate on the Senior Notes per terms of the Amendment (see
        Note
        5).
  **Six
        Months ended December 31, 2006 as Compared with Six Months ended
        December 31, 2005**
  Our
        revenue decreased to $27,000 for the six months ended December 31, 2006,
        compared to $77,000 for the six months ended December 31, 2005. This
        decrease was primarily due to a decrease in royalties received from sales
        other
        than *Imagent* .
  Research
        and development expenses increased by $502,000, or 60%, to $1.3 million for
        the
        six months ended December 31, 2006, compared to $836,000 for the six
        months ended December 31, 2005. The increase in research and development
        expenses was primarily due to the increase in contract manufacturing of *Oxygent* clinical
        trial material.
  20
  General
        and administrative expenses increased by $279,000, or 47%, to $879,000 for
        the
        six months ended December 31, 2006, compared to $600,000 for the six months
        ended December 31, 2005. The increase in general and administrative
        expenses was primarily the result of an accrual of $249,000 in possible income
        tax and penalty liabilities for tax year 2003 (fiscal year 2004) in connection
        with the sale of the *Imagent* assets,
        which we are actively investigating as to possible alternative treatments.
        During the current period, we also recorded stock-based employee compensation
        of
        $30,000 (see Note 1).
  For
        the
        six months ended December 31, 2006, we recorded a gain on the change in fair
        value of derivative liability of $357,000 related to recording derivative
        liabilities at fair value in connection with the Amendment entered into during
        April 2006 (see Note 5).
  For
        the
        six months ended December 31, 2006, we recorded a gain on the disposition
        of
        assets of $659,000. This amount primarily consisted of payments per the terms
        of
        the Imcor Settlement Agreement of $100,000, and the reclassification of
        approximately $500,000 of deferred royalties during the period in connection
        with the *Imagent* asset
        sale transaction. For the six months ended December 31, 2005, we recorded
        a gain
        on the disposition of liabilities of $730,000 recorded in connection with
        the
        assumption of liabilities per the terms of the Astral Agreement and a gain
        on
        the disposition of assets of $476,000 resulting from the recording of payments
        from Imcor of $200,000 to fund our obligations, and the assumption by Imcor
        of
        certain of our obligations and settlements with various vendors and creditors
        of
        $276,000 during the period in connection with the *Imagent* asset
        sale transaction.
  Investment
        income decreased by $25,000 to $77,000 for the six months ended
        December 31, 2006, compared to $102,000 for the six months ended
        December 31, 2005. The decrease was primarily a result of lower cash
        balances during the current period.
  Other
        income was $82,000 for the six months ended December 31, 2005, a result of
        proceeds recorded from the sale of raw material.
  Interest
        expense was $490,000 for the six months ended December 31, 2006, compared
        to $314,000 for the six months ended December 31, 2005. The increased
        expense for the current period was primarily the result of recording accrued
        interest at a higher interest rate on the Senior Notes per terms of the
        Amendment (see Note 5).
  ***Liquidity
        and Capital Resources***
  Since
        inception, we have funded our operations primarily through the sale of equity
        securities, payments from our collaboration agreements and debt financing.
        From
        inception to December 31, 2006, we had received $243 million in net proceeds
        from sales of our equity securities, $260.8 million in payments from
        collaboration agreements and $74.3 million in debt financing of which $37.8
        million of such debt has been converted into equity and $25.9 million of
        such
        debt has been retired through the restructuring of various agreements and
        the
        issuance of warrants to purchase our common stock.
  At
        December 31, 2006, we had approximately $2 million in cash, cash equivalents
        compared to $3.6 million at June 30, 2006. The decrease resulted primarily
        from
        net cash used in operations of $1.7 million. At December 31, 2006, we had
        a
        working capital deficit of $10.8 million, compared to working capital deficit
        of
        $9.6 million at June 30, 2006. The deficit increase was principally due to
        the
        net cash used in operations, a net increase of $329,000 in accounts payable
        and
        accrued expenses and $490,000 in accrued interest on the Senior Notes, partially
        offset by the reduction of fair value of the derivative liability of $357,000,
        the reclassification of the derivative liability of $484,000 to additional
        paid-in capital and the conversion of $438,000 of Senior Notes. Our operations
        to date have consumed substantial amounts of cash and are expected to continue
        to do so for the foreseeable future.
  21
 Net
        cash
        used in operating activities totaled $1.7 million for the six months ended
        December 31, 2006, compared to $1.9 million for the six months ended December
        31, 2005. The decrease in net cash used in operating activities during the
        six
        months ended December 31, 2006 was primarily due to a decrease in general
        and
        administrative payments and an increase in accrued expenses.
  Net
        cash
        provided by investing activities totaled $26,000 for the six months ended
        December 31, 2006, primarily due to $100,000 received under the terms of
        the
        Imcor Settlement Agreement, less $74,000 in equipment purchases. Net cash
        provided by investing activities totaled $197,000 for the six months ended
        December 31, 2005, primarily due to proceeds from Imcor to fund payments
        to
        vendors.
  At
        December 31, 2006, the following approximate obligations were
        outstanding:
  (a)  $454,000
        owed to various vendors;
 (b)  $249,000
        in back corporate income taxes and penalties, and $148,000 in payroll and
        other
        expenses;
 (c)  $11.3
        million in Senior Notes, including $1.7 million in accrued interest;
        and
 (d)  $750,000
        in other liabilities.
  Until
        we
        can generate significant continuing revenues, we expect to satisfy our future
        cash needs through strategic collaborations, private or public sales of our
        securities, debt financings or by licensing all or a portion of our product
        candidates or technology. We cannot be certain that additional funding will
        be
        available to us on acceptable terms, or at all. If funds are not available,
        we
        may be required to delay, reduce the scope of, or eliminate one or more of
        our
        research and development programs or our commercialization efforts.
  In
        April
        2006, Alliance entered into the Amendment of its Senior Notes (see Note
        5).  Pursuant to the Amendment, the maturity date of each outstanding
        Senior Note was extended from March 24, 2006 to April 1, 2007.  The
        conversion price of each Senior Note was reduced from $0.25 to $0.17 and
        the
        interest that will accrue on each Senior Note from March 25, 2006
        through April 1, 2007 was increased from 6% to 10% per annum.  In
        addition to amounts due under the Senior Notes, the holders of
        the Senior Notes are entitled to receive up to an aggregate
        of $11.4 million in payments based on future royalties from *Oxygent* product
        sales (or under certain conditions from milestone payments) payable at a
        rate
        equal to 50% of such payments that Alliance actually receives.
  We
        believe we have working capital to fund our operations for the next six months;
        however, we will not have the resources to repay the Senior Notes on April
        1,
        2007.  The
        Company will have to raise additional funds to repay the Senior Notes or
        renegotiate their terms. If we are unable to do so, we will not have adequate
        resources to pay the amount due to our Senior Note holders and such holders
        may
        initiate liquidation proceedings against us. Therefore, we are seeking
        additional collaborative research and development relationships with suitable
        corporate partners for our products. Further, additional equity or debt
        financing may be required to fund our ongoing operations. Because adequate
        funds
        have not been available to us in the past, we have already delayed our *Oxygent* development efforts and have delayed, scaled back, and/or eliminated one
        or more
        of our other product development programs.
  The
        accompanying unaudited condensed consolidated financial statements have been
        prepared assuming the Company will continue as a going concern, which
        contemplates, among other things, the realization of assets and satisfaction
        of
        liabilities in the ordinary course of business. We have incurred operating
        losses through December 31, 2006. These factors, among others, raise substantial
        doubt about the Company’s ability to continue as a going concern. The
        accompanying unaudited condensed consolidated financial statements do not
        include any adjustment to reflect the possible future effects on the
        recoverability and classification of assets or the amount and classification
        of
        liabilities that may result from the outcome of this uncertainty.
  22
  ***Where
        you can find more information***
  We
        are
        subject to the informational requirements of the Securities Exchange Act
        and
        must file reports, proxy statements and other information with the SEC. The
        reports, information statements and other information we file with the
        Commission can be inspected and copied at the Commission Public Reference
        Room,
        100 F Street, N.E. Washington, D.C. 20549. You may obtain information on
        the
        operation of the Public Reference Room by calling the SEC at (800) SEC-0330.
        The
        Commission also maintains a Web site (http://www.sec.gov) that contains reports,
        proxy, information statements and other information regarding registrants,
        like
        us, which file electronically with the Commission.
  We
        were
        incorporated in New York in 1983. Our principal executive offices are located
        at
        4660 La Jolla Village Dr., Suite 740, San Diego, California 92122, and our
        telephone number is (858) 410-5200.
  Our
        common stock is traded on the OTCBB under the symbol "ALLP.OB.”
  ***Critical
        Accounting Policies***
  There
        were no significant changes in critical accounting policies or estimates
        from
        those at June 30, 2006.
  **Item
        3.Controls And
        Procedures**
  (a)
        Evaluation of Disclosure Controls and Procedures. The Company carried out
        an
        evaluation, under the supervision and with the participation of the Company's
        management, including the Company's Chief Executive Officer ("CEO") and Chief
        Financial Officer ("CFO"), of the effectiveness of the Company's disclosure
        controls and procedures. Based upon that evaluation, the CEO and CFO concluded
        that as of December 31, 2006 our disclosure controls and procedures were
        effective at the reasonable assurance level in timely alerting them to the
        material information relating to the Company (or the Company’s consolidated
        subsidiaries) required to be included in the Company’s periodic filings with the
        SEC, subject to the various limitations on effectiveness set forth below
        under
        the heading, “Limitations on the Effectiveness of Internal Controls”, such that
        the information relating to the Company, required to be disclosed in SEC
        reports
        (i) is recorded, processed, summarized and reported within the time periods
        specified in SEC rules and forms, and (ii) is accumulated and communicated
        to
        the Company's management, including our CEO and CFO, as appropriate to allow
        timely decisions regarding required disclosure.
  (b)
        Changes in internal control over financial reporting. There has been no change
        in the Company's internal control over financial reporting that occurred
        during
        the three-month period ended December 31, 2006 that has materially affected,
        or
        is reasonably likely to materially affect, the Company's internal control
        over
        financial reporting.
  23
  LIMITATIONS
        ON THE EFFECTIVENESS OF INTERNAL CONTROLS
  The
        Company's management, including the CEO and CFO, does not expect that our
        disclosure controls and procedures or our internal control over financial
        reporting will necessarily prevent all fraud and material error. An internal
        control system, no matter how well conceived and operated, can
        provide  only
        reasonable, not absolute, assurance that the objectives of the control system
        are met. Further, the design of a control system must reflect the fact that
        there are resource constraints, and the benefits of controls must be considered
        relative to their costs. Because of the inherent limitations in all control
        systems, no evaluation of controls can provide absolute assurance that all
        control issues and instances of fraud, if any, within the Company have been
        detected. These inherent limitations include the realities that judgments
        in
        decision-making can be faulty, and that breakdowns can occur because of simple
        error or mistake. Additionally, controls can be circumvented by the individual
        acts of some persons, by collusion of two or more people, or by management
        override of the internal control. The design of any system of controls also
        is
        based in part upon certain assumptions about the likelihood of future events,
        and there can be no assurance that any design will succeed in achieving its
        stated goals under all potential future conditions. Over time, control may
        become inadequate because of changes in conditions, and/or the degree of
        compliance with the policies or procedures may deteriorate.
  **Part
        II Other Information:**
  **Item
        1.Legal Proceedings**
  None.
  **Item
        2.** **Unregistered
        Sales of Equity Securities and Use of Proceeds**
  During
        the six months ended December 31, 2006, holders of certain Senior Notes
        converted an aggregate of $438,000 in principal into an aggregate of 2,577,470
        shares of our common stock at a conversion price of $0.17 per share.
  The
        offers and sales of these securities were deemed to be exempt from registration
        under the Securities Act of 1933, as amended, (the "Securities Act") in reliance
        on Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder
        as transactions by us not involving a public offering. The recipients of
        the
        securities in each such transaction represented their intention to acquire
        the
        securities for investment only and not with a view to or for sale in connection
        with any distribution thereof and appropriate legends were affixed to share
        certificates issued in such transactions. All recipients had adequate access
        to
        information about us.
  **Item
        3.Defaults Upon
        Senior Securities**
  None.
  24
 **Item
        4.Submission of
        Matters to a Vote of Security Holders**
  An
        annual
        meeting of shareholders of the Company was held on November 14,
        2006.
  ***Proposal
        1*** ***-*** ***Election of Directors***
  The
        following directors were re-elected for the following year and until the
        election and qualification of their respective successors:
 Director
              
              For
              
              Against
              
              Withheld
              
              Broker
                Non-VotesPedro
                  Cuatrecasas, M.D.
              
              
              29,000,882
              
              
              0
              
              
              541,951
              
              
              0Carroll
                  O. Johnson
              
              
              29,001,932
              
              
              0
              
              
              540,901
              
              
              0Stephen
                  M. McGrath
              
              
              28,989,883
              
              
              0
              
              
              552,950
              
              
              0Jean
                  G. Riess, Ph.D.
              
              
              29,000,731
              
              
              0
              
              
              542,102
              
              
              0Duane
                  J. Roth
              
              
              28,916,402
              
              
              0
              
              
              626,431
              
              
              0Theodore
                  D. Roth
              
              
              28,925,474
              
              
              0
              
              
              617,359
              
              
              0
 
 ***Proposal
        2 - Amendment of the Certificate of Incorporation to increase shares of Common
        Stock***
  The
        Certificate of Incorporation was amended to increase the number of authorized
        shares of Common Stock from 125 million to 150 million:
  For
              
              Against
              
              Abstain27,694,000
              
              1,696,115
              
              152,716
 
 ***Proposal
        3 - Ratification of Independent Registered Public Accounting
        Firm***
  Corbin
        & Company, LLP was ratified as our independent registered public accounting
        firm for the fiscal year ending June 30, 2007:
 For
                
                Against
                
                Abstain29,325,301
                
                103,356
                
                114,175
 **Item
        5.Other
        Information**
  None.
  **Item
        6.Exhibits**
  (a) Index
        to
        Exhibits
  **Exhibit**
              
              **Description**3.4
              
              Certificate
                  of Amendment of the Certificate of Incorporation filed on December
                  11,
                  2006.*3.5
              
              Certificate
                  of Correction of the Certificate of Amendment filed on December
                  15,
                  2006.*31.1
              
              Certification
                  of our Chief Executive Officer, pursuant to Securities Exchange
                  Act rule
                  13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the
                  Sarbanes
                  Oxley Act of 2002. *31.2
              
              Certification
                  of our Chief Financial Officer, pursuant to Securities Exchange
                  Act rule
                  13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the
                  Sarbanes
                  Oxley Act of 2002. *32.1
              
              Statement
                  of our Chief Executive Officer under Section 906 of the Sarbanes
                  Oxley Act
                  of 2002. (18 U.S.C. Section 1350). *32.2
              
              Statement
                  of our Chief Financial Officer under Section 906 of the Sarbanes
                  Oxley Act
                  of 2002. (18 U.S.C. Section 1350).
                  *
 * Filed
        Herewith .
  25
  **SIGNATURES**
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  ALLIANCE
                  PHARMACEUTICAL CORP.
                
                (Registrant)Date: February
                14, 2007
              By:
              /s/ Duane
                J.
                RothDuane J.
                RothChairman and Chief Executive
                  Officer
  By:
              /s/ Edward
                C.
                HallEdward C.
                HallChief Financial Officer










26