<Page>

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

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

                For the quarterly period ended September 30, 2006

                                       or

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

           For the transition period from ____________ to ____________

                         Commission File Number 0-12950

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

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

4660 La Jolla Village Dr, #740
San Diego, California                    92122
--------------------------------------   --------------------------------------
(Address of principal                    Zip Code
executive offices)

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

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

As of November 10, 2006, Registrant had 39,465,538 shares of its Common Stock,
$.01 par value, outstanding.

Transitional Small Business Disclosure Format:    Yes              No     X
                                                      ---------       ---------



<Page>

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

INDEX
-----

                                                                        Page No.
                                                                        --------


PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

          Condensed Consolidated Balance Sheet (unaudited)                    3

          Condensed Consolidated Statements of Operations (unaudited)         4

          Condensed Consolidated Statements of Cash Flows (unaudited)         5

          Notes to Unaudited Condensed Consolidated Financial Statements      6


Item 2.   Management's Discussion and Analysis or Plan of Operation          17


Item 3.   Controls and Procedures                                            22


PART II - OTHER INFORMATION

Item 1.   Legal Proceedings                                                  23

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds        23

Item 3.   Defaults Upon Senior Securities                                    23

Item 4.   Submission of Matters to a Vote of Security Holders                23

Item 5    Other Information                                                  23

Item 6.   Exhibits                                                           23


                                        2
<PAGE>
<TABLE>
<CAPTION>

PART I FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS

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

                                                                                   SEPTEMBER 30,
                                                                                       2006
                                                                                 -----------------
ASSETS                                                                              (UNAUDITED)
------
<S>                                                                               <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                     $     3,014,000
    Other current assets                                                                   39,000
                                                                                 -----------------
              Total current assets                                                      3,053,000

PROPERTY, PLANT AND EQUIPMENT - NET                                                        89,000
OTHER ASSETS - NET                                                                         10,000
                                                                                 -----------------
                                                                                  $     3,152,000
                                                                                 =================

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
    Accounts payable                                                              $       656,000
    Accrued expenses                                                                       75,000
    Derivative liability                                                                  614,000
    Deferred revenue                                                                      600,000
    Senior notes payable and accrued interest                                          11,158,000
                                                                                 -----------------
              Total current liabilities                                                13,103,000

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

              Total liabilities                                                        14,353,000
                                                                                 -----------------

STOCKHOLDERS' DEFICIT:
    Preferred stock - $.01 par value; 5,000,000 shares authorized;
         Series F preferred stock - 793,750 shares issued and outstanding,                  8,000
         liquidation preference of $31,750,000
    Common stock - $.01 par value; 125,000,000 shares authorized;
         39,465,538 shares issued and outstanding                                         395,000
    Additional paid-in capital                                                        482,945,000
    Accumulated deficit                                                              (494,549,000)
                                                                                 -----------------
              Total stockholders' deficit                                             (11,201,000)
                                                                                 -----------------
                                                                                  $     3,152,000
                                                                                 =================


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                                 3


<Page>

ALLIANCE PHARMACEUTICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------

                                                                 THREE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                               2006               2005
                                                         ----------------   ----------------
                                                                     (UNAUDITED)
REVENUES:
   Royalty, license and research                         $        27,000    $        24,000

OPERATING EXPENSES:
   Research and development                                      603,000            549,000
   General and administrative                                    275,000            405,000
                                                         ----------------   ----------------
                                                                 878,000            954,000
                                                         ----------------   ----------------
LOSS FROM OPERATIONS                                            (851,000)          (930,000)

INVESTMENT INCOME                                                 43,000             51,000
OTHER INCOME                                                           -             82,000
INTEREST EXPENSE                                                (248,000)          (190,000)
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY                     227,000                  -
GAIN ON DISPOSITION OF LIABILITIES                                     -            730,000
GAIN ON DISPOSITION OF ASSETS                                          -            476,000
                                                         ----------------   ----------------
NET (LOSS) INCOME                                        $      (829,000)   $       219,000
                                                         ================   ================

NET (LOSS) INCOME PER COMMON SHARE, BASIC                $         (0.02)   $          0.01
                                                         ================   ================
NET (LOSS) INCOME PER COMMON SHARE, DILUTED              $         (0.02)   $          0.01
                                                         ================   ================
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC                    38,103,000         34,830,000
                                                         ================   ================
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED                  38,103,000         35,465,000
                                                         ================   ================


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                              4



<Page>

ALLIANCE PHARMACEUTICAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------
                                                                               THREE MONTHS ENDED
                                                                                  SEPTEMBER 30,
                                                                            2006               2005
                                                                      ----------------    ----------------
                                                                                  (UNAUDITED)
OPERATING ACTIVITIES:
   Net (loss) income                                                  $      (829,000)    $       219,000
   Adjustments to reconcile net (loss) income to net cash
         used in operating activities:
      Depreciation and amortization                                             6,000               5,000
      Accrued interest on senior notes                                        248,000             157,000
      Compensatory stock options                                               15,000               5,000
      Change in fair value of derivative liability                           (227,000)                  -
      Gain on disposition of liabilities                                            -            (730,000)
      Gain on disposition of assets                                                 -            (276,000)
      Changes in operating assets and liabilities:
         Other assets                                                          15,000           1,024,000
         Accounts payable and accrued expenses and other                      151,000          (1,293,000)
                                                                      ----------------    ----------------
Net cash used in operating activities                                        (621,000)           (889,000)
                                                                      ----------------    ----------------

INVESTING ACTIVITIES:
   Purchases of property and equipment                                         (8,000)                  -
   Proceeds from disposition of assets                                              -             200,000
                                                                      ----------------    ----------------
Net cash (used in) provided by investing activities                            (8,000)            200,000
                                                                      ----------------    ----------------


DECREASE IN CASH AND CASH EQUIVALENTS                                        (629,000)           (689,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                            3,643,000           6,782,000
                                                                      ----------------    ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                            $     3,014,000     $     6,093,000
                                                                      ================    ================

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
   Issuance of common stock upon conversion of senior notes           $       338,000     $             -
                                                                      ================    ================


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                                     5
</TABLE>



<Page>

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

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

                      THREE MONTHS ENDED SEPTEMBER 30, 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, OXYGENT(TM), an intravascular oxygen carrier
designed to augment oxygen delivery in surgical patients at risk of acute tissue
hypoxia (oxygen deficiency).

LIQUIDITY AND BASIS OF PRESENTATION

      The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the ordinary course of business. The Company has incurred
operating losses through September 30, 2006 and has negative working capital at
that date of approximately $10.1 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, were to mature and the unpaid principal, together with accrued
interest, is 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.


                                       6


<Page>

PRINCIPLES OF CONSOLIDATION

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

INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS

      The condensed consolidated balance sheet as of September 30, 2006, the
condensed consolidated statements of operations for the three months ended
September 30, 2006 and 2005, and the condensed consolidated statements of cash
flows for the three months ended September 30, 2006 and 2005 are unaudited. In
the opinion of management, such unaudited financial statements include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results for the periods presented. Interim results are not
necessarily indicative of the results to be expected for the full year. The
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and footnotes thereto included 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 September 30, 2006, the Company had approximately
$2.9 million in these accounts in excess of the FDIC insurance limits.


                                       7


<Page>

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 September 30, 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 does not have a sufficient number of authorized
shares to settle outstanding and exercisable options, warrants and convertible
instruments. Therefore, 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 is required to be recorded as non-operating, non-cash
income or expense at each subsequent balance sheet date until the Company has a
sufficient number of authorized shares to settle its convertible instruments and
non-employee options and warrants. If the fair value of the derivatives is
higher at the subsequent balance sheet date, the Company will record a
non-operating, non-cash charge. If the fair value of the derivatives is lower at
the subsequent balance sheet date, the Company will record non-operating,
non-cash income. 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.

      Warrant-related derivatives were valued using the Black-Scholes Option
Pricing Model with the following assumptions during the quarter ended September
30, 2006: dividend yield of 0%; annual volatility of 265%; and risk free
interest rate of 4.95%.

      The following is a summary of the changes to the derivative liability
during the quarter ended September 30, 2006:

          Derivative liability, June 30, 2006                  $  841,000
          Change in fair value                                   (227,000)
                                                               ----------
          Derivative liability, September 30, 2006             $  614,000
                                                               ==========


                                       8


<Page>

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 three-month periods ended September 30, 2006 and 2005,
the Company incurred research and development expenses of $603,000 and $549,000,
respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying amount of certain of the Company's financial instruments as
of September 30, 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 INCOME (LOSS) PER COMMON SHARE

      Basic income (loss) per share was computed by dividing the net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted income (loss) per share reflects the potential dilution that
could occur if net income was divided by the weighted average number of common
shares, plus common shares from the exercise of outstanding stock options and
warrants, and the conversion of convertible debt and preferred stock where the
effect of those securities is dilutive. All potential dilutive common shares
(approximating 37,000) have been excluded from the calculation of diluted loss
per share for the three months ended September 30, 2006, as their inclusion
would be anti-dilutive. The computations for basic and diluted income (loss) per
share are as follows:


                                       9


<Page>
<TABLE>
<CAPTION>
                                                    INCOME/(LOSS)           SHARES            INCOME/(LOSS)
                                                     (NUMERATOR)         (DENOMINATOR)          PER SHARE
                                                 -------------------   -----------------   ------------------
<S>                                              <C>                         <C>           <C>
THREE MONTHS ENDED SEPTEMBER 30, 2006
     Basic and diluted loss per share            $         (829,000)         38,103,000    $           (0.02)
                                                 ===================   =================   ==================

THREE MONTHS ENDED SEPTEMBER 30, 2005
     Basic income per share:
        Net income                               $          219,000          34,830,000    $            0.01
     Diluted income per share:
        Dilutive stock options and warrants                                           -
        Series F preferred stock                                                635,000
                                                 -------------------   -----------------   ------------------
        Net income plus assumed conversions      $          219,000          35,465,000    $            0.01
                                                 ===================   =================   ==================
</TABLE>

ACCOUNTING FOR STOCK-BASED COMPENSATION

      At September 30, 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 Securities
and Exchange Commission (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 months ended
September 30, 2006 reflect the impact of adopting SFAS No. 123(R). In accordance
with the modified prospective transition method, the Company's 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
quarter ended September 30, 2005, no stock-based employee compensation cost was
reflected in the accompanying condensed consolidated statement 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.


                                       10


<Page>

      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 statement of operations for the three
months ended September 30, 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 statement of
operations for the three months ended September 30, 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 months
ended September 30, 2006 of approximately 2% was based on historical forfeiture
experience. The estimated term of option grants for the three months ended
September 30, 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.

      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 months ended
September 30, 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 up to one year after the date of grant and have
a ten-year term. As of September 30, 2006, the Company is authorized to issue up
to 8,100,000 shares under these plans and has 3,993,110 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 no options
granted during the three months ended September 30, 2006 and 2005.

      The following table illustrates the effect on net income and net income
per share for the three months ended September 30, 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


<Page>
<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                                   SEPTEMBER 30,
                                                                       2005
                                                                ------------------
<S>                                                             <C>
      Net income:
           As reported                                          $         219,000
           Total stock-based employee compensation
              expense determined under fair-value-based
              method for all awards, net of tax-related effects          (155,000)
                                                                ------------------
           Pro forma                                            $          64,000
                                                                ==================

      Net income per share, basic:
           As reported                                          $            0.01
                                                                ==================
           Pro forma                                            $               -
                                                                ==================

      Net income per share, diluted:
           As reported                                          $            0.01
                                                                ==================
           Pro forma                                            $               -
                                                                ==================
</TABLE>

      A summary of option activity as of September 30, 2006 and changes during
the three months then ended is presented below:

<TABLE>
<CAPTION>
                                                                      SEPTEMBER 30, 2006
                                                ----------------------------------------------------------------
                                                                       WEIGHTED-AVERAGE
                                                               --------------------------------
                                                                                   REMAINING
                                                    SHARES        EXERCISE        CONTRACTUAL      AGGREGATE
                                                                   PRICE             TERM          INTRINSIC
                                                                                    (YEARS)          VALUE
                                                ----------------------------------------------------------------
<S>                                                <C>           <C>                 <C>             <C>
Options outstanding at July 1, 2006                2,937,018     $     5.65          7.51
Options granted                                            -
Options forfeited                                    (15,000)    $    73.75
Options exercised                                          -
                                                --------------------------------
Options outstanding at September 30, 2006          2,922,018     $     5.30          7.29            4,425
                                                ----------------------------------------------------------------
Options vested                                        94,375     $     0.26          7.89                -
                                                ----------------------------------------------------------------
Options exercisable at September 30, 2006          2,447,268     $     6.13          7.05            2,100
                                                ================================================================
</TABLE>

      There were no options granted or exercised during the three months ended
September 30, 2006. Upon the exercise of options, the Company issues new shares
from its authorized shares.

      As of September 30, 2006, there was approximately $278,000 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 three months ended September 30, 2006 was approximately
$15,000, 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 months ended September 30, 2006 was approximately $15,000
higher than if it had continued to account for share-based compensation under
APB 25. Net loss per share for the three months ended September 30, 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


<Page>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

2.    PFC THERAPEUTICS, LLC

      On May 16, 2005, PFC Therapeutics and Beijing Double-Crane Pharmaceutical
Co., Ltd. ("Double-Crane"), the market leader for IV solutions and one of the
largest pharmaceutical companies in the People's Republic of China (the "PRC"),
entered into a development, license and supply agreement ("Double-Crane
Agreement") for the development of OXYGENT in the PRC. Pursuant 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
September 30, 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.

      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 September 30, 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


<Page>

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 and such investment will be accounted for under the equity
method.

4.    SALE OF IMAGENT(R) ASSETS

      On June 18, 2003, Imcor Pharmaceutical Co. ("Imcor"), formerly known as
Photogen Technologies, Inc., acquired certain assets and assumed certain
liabilities from Alliance. The assets acquired by Imcor included all of
Alliance's assets related to designing, developing, manufacturing, marketing,
selling, licensing, supporting and maintaining its IMAGENT product, an
ultrasound contrast agent that was approved by the United States Food & Drug
Administration ("FDA") for marketing in the U.S. in June 2002. The amount of
consideration was determined through arms-length negotiation. To the extent
obligations with certain creditors were completely settled, Alliance recorded a
gain from sale of assets of approximately $10.6 million during the year ended
June 30, 2003, approximately $15 million during the year ended June 30, 2004,
approximately $306,000 during the year ended June 30, 2005 and approximately
$476,000 during the year ended June 30, 2006 related to the disposition of these
assets. To date, Alliance has recorded approximately $26.4 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 $1.8 million of Alliance's obligations, and approximately $20.9
million related to settlement agreements or Imcor's assumed obligations of
Alliance. In September 2005, Alliance and Imcor entered into a global 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.


                                       14


<Page>

5.    DEBT OBLIGATIONS

PFC NOTE

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

      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.


                                       15


<Page>

      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 options, warrants and
exercisable convertible instruments (see Note 1). As a result, under EITF No.
00-19, all non-employee options and warrants are classified as derivative
liabilities and recorded at their fair values at each balance sheet date. During
the quarter ended September 30, 2006, the Company recognized other income of
$227,000. At September 30, 2006, the derivative liability balance is $614,000.

      The Senior Notes can be converted at anytime prior to the maturity date.
During the quarter ended September 30, 2006, holders of certain Senior Notes
converted an aggregate of $338,000 in principal into an aggregate of 1,989,235
shares of our common stock at a conversion price of $0.17 per share. At
September 30, 2006, the principal and accrued interest balance approximates $9.7
million and $1.5 million, respectively.

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 expire through September 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.


                                       16


<Page>

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.


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

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

PLAN OF OPERATION

      Since our inception in 1983, we have financed our operations primarily
through the sale of equity and debt securities, and we have applied
substantially all of our resources to research and development programs and to
clinical trials. We have incurred operating losses since inception and as of
September 30, 2006, have an accumulated deficit of $494.5 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.


                                       17


<Page>

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.

RESEARCH AND DEVELOPMENT

      For the three months ended September 30, 2006 and 2005, we incurred
research and development expenses of $603,000 and $486,000, 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 $159.4 million. While difficult to
predict, we estimate that the completion of clinical trials for OXYGENT will
cost at least an additional $60 million. We do not anticipate that OXYGENT will
reach the market for several years, if at all, and, because of the numerous
risks and uncertainties associated with product development efforts, we are
unable to predict with any certainty the extent of any future expenditures or
when material net cash inflows from Oxygent may commence, if at all.


                                       18


<Page>

      On November 7, 2006, we issued a press release updating our clinical
development status. We disclosed 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 other options available in Germany, one of which may be the submission
of a revised protocol. Further, even though the relevant French Ethics Committee
has approved the start of the trial and we have responded to several of the
French Competent Authority's review questions, the French Competent Authority is
still continuing its consideration of our submission. We believe that if we
receive its approval by the end of this calendar year, we could initiate and
complete the trial in 2007 and we estimate that we have sufficient funds to do
so. If significant adjustments to the protocol are required for approval, we 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.

      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 three months ended September 30, 2005,
Astral incurred research and development expenses of $63,000. In September 2005,
pursuant to the Astral Agreement, approximately $730,000 of accrued Astral
expenses were assumed by MultiCell (see Note 3).

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2005

      Our revenue increased approximately 13% to $27,000 for the three months
ended September 30, 2006, compared to $24,000 for the three months ended
September 30, 2005. The revenue for both quarters consisted of royalties from
products other than IMAGENT.

      Research and development expenses increased by $54,000, or 10%, to
$603,000 for the three months ended September 30, 2006, compared to $549,000 for
the three months ended September 30, 2005. The increase in research and
development expenses was primarily due to an increase in expenses due to certain
OXYGENT development activities of $117,000 during the current period, partially
offset by the decrease in Astral expenses of $63,000.

      General and administrative expenses decreased by $130,000, or 32%, to
$275,000 for the three months ended September 30, 2006, compared to $405,000 for
the three months ended September 30, 2005. The decrease in general and
administrative expenses was primarily due to a decrease of $144,000 in legal and
accounting fees, partially offset by the recording of stock-based employee
compensation of $15,000 (see Note 1).

      For the three months ended September 30, 2006, we recorded a gain on
change in fair value of derivative liability of $227,000 related to recording
derivative liabilities at fair value in connection with the Amendment entered
into during April 2006 (see Note 5).


                                       19


<Page>

      For the three months ended September 30, 2005, we recorded an aggregate
gain on the dispositions of assets and liabilities of $1.2 million. This amount
consisted of $730,000 recorded in connection with the assumption of liabilities
per the terms of the Astral Agreement (see Note 3) and $476,000 resulting from
the recording of payments from Imcor of $200,000 to fund our obligations, and
the assumption by Imcor of certain of our obligations and settlements with
various vendors and creditors of $276,000 during the period in connection with
the IMAGENT asset sale transaction.

      Investment income decreased by $8,000 to $43,000 for the three months
ended September 30, 2006, compared to $51,000 for the three months ended
September 30, 2005. The decrease was primarily a result of lower cash balances
during the current period.

      Interest expense was $248,000 for the three months ended September 30,
2006, compared to $190,000 interest expense for the three months ended September
30, 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 September 30, 2006, we had received $243 million in
net proceeds from sales of our equity securities, $260.7 million in payments
from collaboration agreements and $74.3 million in debt financing of which $37.7
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 September 30, 2006, we had approximately $3 million in cash, cash
equivalents and investment securities compared to $3.6 million at June 30, 2006.
The decrease resulted primarily from net cash used in operations of $621,000. At
September 30, 2006, we had a working capital deficit of $10.1 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, an increase of
$158,000 in accounts payable and $248,000 in accrued interest on the Senior
Notes, partially offset by a decrease of $227,000 in the fair value of the
derivative liability and the conversion of $338,000 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.

      Net cash used in operating activities totaled $621,000 for the three
months ended September 30, 2006, compared to $889,000 for the three months ended
September 30, 2005. The decrease in net cash used in operating activities during
the three months ended September 30, 2006 was primarily due to a decrease in
general and administrative payments and an increase in accounts payable.

      Net cash used in investing activities totaled $8,000 for the three months
ended September 30, 2006, due to a purchase of equipment. Net cash provided by
investing activities totaled $200,000 for the three months ended September 30,
2005, due to proceeds from Imcor to fund payments to vendors.

      At September 30, 2006, the following approximate debt obligations were
outstanding:

      (a)   $656,000 owed to various vendors;
      (b)   $75,000 in payroll and other expenses;
      (c)   $614,000 in derivative liability in connection with the Amendment to
our Senior Notes;
      (d)   $11.2 million in Senior Notes, including $1.5 million in accrued
interest;
      (e)   $1.3 million in deferred royalty payments to be paid through future
IMAGENT earn-out payments, if any. In the event there are no future IMAGENT
earn-out payments, the deferred royalties will not be paid.


                                       20


<Page>

      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.

      As a result of the Amendment of the Senior Notes, the Company did not have
a sufficient number of authorized shares to settle outstanding and exercisable
options, warrants and convertible instruments. The Company was required to
classify all non-employee options and warrants as derivative liabilities and
record them at their fair values at each subsequent balance sheet date. Any
change in fair value was recorded as non-operating, non-cash income or expense
at each balance sheet date. Accordingly, Alliance recognized $227,000 in other
income and a derivative liability balance of $614,000 at September 30, 2006
based on the fair value of such instruments.

      We believe we have working capital to fund our operations for the next
nine 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 September 30, 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.

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.


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<Page>

ITEM 3.  CONTROLS AND PROCEDURES

      (a) Evaluation of Disclosure Controls and Procedures. The Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of the Company's
disclosure controls and procedures. Based upon that evaluation, the CEO and CFO
concluded that as of September 30, 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 fiscal quarter ended September 30, 2006 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS

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


                                       22


<Page>

PART II  OTHER INFORMATION:

ITEM 1.  LEGAL PROCEEDINGS

      None.

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

      During the quarter ended September 30, 2006, holders of certain Senior
Notes converted an aggregate of $338,000 in principal into an aggregate of
1,989,235 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.

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

         None.

ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS

(a)      Index to Exhibits

EXHIBIT     DESCRIPTION

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

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

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

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

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


                                       23


<Page>

                                   SIGNATURES

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

                                        ALLIANCE PHARMACEUTICAL CORP.
                                        (Registrant)

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


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


                                      24