SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2001

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(State or other jurisdiction
of incorporation or organization)               |  | 14-1644018(I.R.S. Employer
Identification Number)
|------------------------------------------------------------------------------------ |  | -------------------------------------------------
|3040 Science Park Road
San Diego, California(Address of principal executive offices) |  | 92121Zip Code                                    
|Registrant's telephone number,
including area code:                                  |  | 858/410-5200                                     

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

As
of May 9, 2001, Registrant had 49,539,271 shares of its Common Stock, $.01 par value, outstanding.

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

INDEX

|                                                                                              |  | Page No.
|--------------------------------------------------------------------------------------------- |  | --------
|PART IFINANCIAL INFORMATION                                                                  |  |         
|Item 1. Financial Statements                                                                  |  |         
|Condensed Consolidated Balance Sheets                                                         |  | 3       
|Condensed Consolidated Statements of Operations                                               |  | 4       
|Condensed Consolidated Statements of Cash Flows                                               |  | 5       
|Notes to Condensed Consolidated Financial Statements                                          |  | 6       
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 8       
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 13      
|PART IIOTHER INFORMATION                                                                     |  |         
|Item 1. Legal Proceedings                                                                     |  | 13      
|Item 6. Exhibits and Reports on Form 8-K                                                      |  | 14      

2

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Part I Financial Information:
Item 1. Financial Statements

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                         | March 31,
2001             |            | June 30,
2000 |           
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ------------- | ----------
|
|Assets                               |                                                                                                                                                                         |                            |            |               |           
|Current assets:                      |                                                                                                                                                                         |                            |            |               |           
|                                     | Cash and cash equivalents                                                                                                                                               |                            | $          | 13,497,000    |           
|                                     | Short-term investments                                                                                                                                                  |                            |            | 327,000       |           
|                                     | Research revenue receivable                                                                                                                                             |                            |            |              |           
|                                     | Restricted cash                                                                                                                                                         |                            |            | 975,000       |           
|                                     | Other current assets                                                                                                                                                    |                            |            | 1,327,000     |           
|                                     |                                                                                                                                                                         |                            |            |               |           
|                                     |                                                                                                                                                                         | Total current assets       |            |               | 16,126,000
|Property, plant and equipment  net  |                                                                                                                                                                         |                            | 19,208,000 |               |           
|Purchased technology  net           |                                                                                                                                                                         |                            | 13,915,000 |               |           
|Restricted cash                      |                                                                                                                                                                         |                            | 5,525,000  |               |           
|Investment in joint venture          |                                                                                                                                                                         |                            | 5,000,000  |               |           
|Other assets  net                   |                                                                                                                                                                         |                            | 1,380,000  |               |           
|                                     |                                                                                                                                                                         |                            |            |               |           
|                                     |                                                                                                                                                                         | $                          | 61,154,000 |               | $         
|                                     |                                                                                                                                                                         |                            |            |               |           
|Liabilities and Stockholders' Equity |                                                                                                                                                                         |                            |            |               |           
|Current liabilities:                 |                                                                                                                                                                         |                            |            |               |           
|                                     | Accounts payable                                                                                                                                                        |                            | $          | 8,830,000     |           
|                                     | Accrued expenses                                                                                                                                                        |                            |            | 2,684,000     |           
|                                     | Current portion of long-term debt                                                                                                                                       |                            |            | 3,589,000     |           
|                                     |                                                                                                                                                                         |                            |            |               |           
|                                     |                                                                                                                                                                         | Total current liabilities  |            |               | 15,103,000
|Deferred revenue                     |                                                                                                                                                                         |                            | 10,000,000 |               |           
|Long-term debt                       |                                                                                                                                                                         |                            | 29,954,000 |               |           
|Stockholders' equity:                |                                                                                                                                                                         |                            |            |               |           
|                                     | Preferred stock  $.01 par value; 5,000,000 shares authorized; 500,000 shares of Series F issued and outstanding at March 31, 2001 and June 30, 2000                    |                            |            | 5,000         |           
|                                     | Common stock  $.01 par value; 125,000,000 shares authorized; 49,521,159 and 47,233,454 shares issued and outstanding at March 31, 2001 and June 30, 2000, respectively |                            |            | 495,000       |           
|                                     | Additional paid-in capital                                                                                                                                              |                            |            | 425,828,000   |           
|                                     | Accumulated comprehensive income (loss)                                                                                                                                 |                            |            | (131,000      | )         
|                                     | Accumulated deficit                                                                                                                                                     |                            |            | (420,100,000  | )         
|                                     |                                                                                                                                                                         |                            |            |               |           
|                                     |                                                                                                                                                                         | Total stockholders' equity |            |               | 6,097,000 
|                                     |                                                                                                                                                                         |                            |            |               |           
|                                     |                                                                                                                                                                         | $                          | 61,154,000 |               | $         
|                                     |                                                                                                                                                                         |                            |            |               |           

Note: The balance sheet at June 30, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.

3

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                              |                              | Three months ended March 31, |             | Nine months ended March 31, |  
|--------------------------------------------- | ---------------------------- | ---------------------------- | ----------- | --------------------------- | -
|
|
|Revenues:                                     |                              |                              |             |                             |  
|                                              | License and research revenue |                              | $           | 1,211,000                   |  
|Operating expenses:                           |                              |                              |             |                             |  
|                                              | Research and development     |                              |             | 16,310,000                  |  
|                                              | General and administrative   |                              |             | 2,138,000                   |  
|                                              |                              |                              |             |                             |  
|                                              |                              |                              | 18,448,000  |                             |  
|                                              |                              |                              |             |                             |  
|Loss from operations                          |                              |                              | (17,237,000 | )                           |  
|Imputed interest expense on convertible notes |                              |                              |            |                             |  
|Investment income                             |                              |                              | 442,000     |                             |  
|Interest expense                              |                              |                              | (428,000    | )                           |  
|                                              |                              |                              |             |                             |  
|Net loss applicable to common shares          |                              | $                            | (17,223,000 | )                           | $
|                                              |                              |                              |             |                             |  
|Net loss per common share:                    |                              |                              |             |                             |  
|                                              | Basic and diluted            |                              | $           | (0.35                       | )
|                                              |                              |                              |             |                             |  
|Weighted average shares outstanding:          |                              |                              |             |                             |  
|                                              | Basic and diluted            |                              |             | 49,492,000                  |  
|                                              |                              |                              |             |                             |  

See Accompanying Notes to Condensed Consolidated Financial Statements

4

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

|                                                                        |                                                                   | Nine months ended March 31,                             |                                                
|----------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------- | -----------------------------------------------
|
|
|Operating activities:                                                   |                                                                   |                                                         |                                                
|                                                                        | Net loss                                                          |                                                         | $                                              
|                                                                        | Adjustments to reconcile net loss to net cash used in operations: |                                                         |                                                
|                                                                        |                                                                   | Depreciation and amortization                           |                                                
|                                                                        |                                                                   | Imputed interest expense on convertible debentures      |                                                
|                                                                        |                                                                   | Expense associated with warrant issuance                |                                                
|                                                                        |                                                                   | Gain on sale of equity securities                       |                                                
|                                                                        |                                                                   | Receipt of equity securities in exchange for technology |                                                
|                                                                        |                                                                   | Issuance of common stock in exchange for technology     |                                                
|                                                                        |                                                                   | Non-cash compensation  net                             |                                                
|                                                                        |                                                                   | Changes in operating assets and liabilities:            |                                                
|                                                                        |                                                                   |                                                         | Research revenue receivable                    
|                                                                        |                                                                   |                                                         | Restricted cash and other assets               
|                                                                        |                                                                   |                                                         | Accounts payable and accrued expenses and other
|                                                                        |                                                                   |                                                         |                                                
|Net cash used in operating activities                                   |                                                                   |                                                         | (45,847,000                                    
|                                                                        |                                                                   |                                                         |                                                
|Investing activities:                                                   |                                                                   |                                                         |                                                
|                                                                        | Sales and maturities of short-term investments                    |                                                         |                                                
|                                                                        | Cash acquired from MBI acquisition                                |                                                         |                                                
|                                                                        | Property, plant and equipment  net                               |                                                         |                                                
|                                                                        |                                                                   |                                                         |                                                
|Net cash provided by (used in) investing activities                     |                                                                   |                                                         | 9,823,000                                      
|                                                                        |                                                                   |                                                         |                                                
|Financing activities:                                                   |                                                                   |                                                         |                                                
|                                                                        | Issuance of common stock                                          |                                                         |                                                
|                                                                        | Proceeds from long-term debt                                      |                                                         |                                                
|                                                                        | Proceeds from option to purchase convertible notes                |                                                         |                                                
|                                                                        | Principal payments on long-term debt                              |                                                         |                                                
|                                                                        |                                                                   |                                                         |                                                
|Net cash provided by financing activities                               |                                                                   |                                                         | 20,800,000                                     
|                                                                        |                                                                   |                                                         |                                                
|Decrease in cash and cash equivalents                                   |                                                                   |                                                         | (15,224,000                                    
|Cash and cash equivalents at beginning of period                        |                                                                   |                                                         | 28,721,000                                     
|                                                                        |                                                                   |                                                         |                                                
|Cash and cash equivalents at end of period                              |                                                                   | $                                                       | 13,497,000                                     
|                                                                        |                                                                   |                                                         |                                                
|Supplemental disclosure of non-cash investing and financing activities: |                                                                   |                                                         |                                                
|Issuance of common stock related to MBI acquisition                     |                                                                   | $                                                       | 10,526,000                                     
|Net liabilities acquired from MBI acquisition                           |                                                                   | $                                                       | 1,860,000                                      
|Issuance of common stock upon conversion of notes                       |                                                                   | $                                                       | 6,100,000                                      
|Deferred interest expense on long-term debt                             |                                                                   | $                                                       |                                                

See Accompanying Notes to Condensed Consolidated Financial Statements.

5

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

Principles of Consolidation

The consolidated financial statements include the accounts of Alliance Pharmaceutical Corp., the accounts of its recently acquired subsidiary Molecular
Biosystems, Inc. ("MBI") from the acquisition date of December 29, 2000, its wholly owned subsidiary Astral, Inc., its wholly owned subsidiary MDV Technologies, Inc., its
wholly owned subsidiary Alliance Pharmaceutical GmbH from its inception in December 1998, and its majority-owned subsidiary Talco Pharmaceutical, Inc. All significant intercompany
accounts and transactions have been eliminated. Certain amounts in 2000 have been reclassified to conform to the current year's presentation.

Interim Condensed Financial Statements

The condensed consolidated balance sheet as of March 31, 2001, the condensed consolidated statements of operations for the three and nine months ended
March 31, 2001 and 2000, and the condensed consolidated statements of cash flows for the nine months ended March 31, 2001 and 2000 are unaudited. In the opinion of management, such
unaudited financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for the
periods presented. Interim results are not necessarily indicative of the results to be expected for the full year. The financial statements should be read in conjunction with the Company's
consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2000.

Purchased Technology

The purchased technology was primarily acquired as a result of the merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in fiscal
1989. The technology acquired is the Company's core perfluorochemical ("PFC") technology and was valued based on an analysis of the present value of future earnings anticipated from this technology at
that time. The Company identified alternative future uses for the PFC technology, including theOxygent(temporary blood substitute) and LiquiVent®(intrapulmonary oxygen carrier) products. Purchased technology also includes $5 million for technology capitalized as a
result of the acquisition of MBI in December 2000.

The
PFC technology is the basis for the Company's main drug development programs and is being amortized over a 20-year life. The PFC technology has a book value of
$9.2 million and $10.1 million, net of accumulated amortization of $14 million and $13.2 million at March 31, 2001 and June 30, 2000, respectively. At
March 31, 2001, the technology acquired from MBI has a book value of $4.7 million, net of accumulated amortization of $315,000, and is being amortized over four years.

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

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Comprehensive Income and Loss

Effective July 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement No. 130, "Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the
Company's net loss or stockholders' equity. SFAS No. 130 requires unrealized gains and losses on the Company's available-for-sale securities to be included in
comprehensive income. During the three months ended March 31, 2001 and 2000, the total comprehensive loss, which includes the unrealized gain or loss on
available-for-sale securities, was $17,546,000 and $13,207,000, respectively. During the nine months ended March 31, 2001 and 2000, the
total comprehensive loss, which includes the unrealized gain or loss on available-for-sale securities, was $50,550,000 and $24,027,000, respectively.

Net Income (Loss) Per Share

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

2. ACQUISITION OF MOLECULAR BIOSYSTEMS, INC.

On December 29, 2000, the Company acquired MBI in exchange for 770,000 shares of Alliance common stock. MBI is the developer of Optison®, an intravenous
ultrasound contrast agent being marketed in both the United States and Europe. The acquisition was accounted for as
a purchase in accordance with the provisions of APB No. 16.

A
summary of the MBI acquisition costs and allocation to the assets acquired and liabilities assumed is as follows:

Total acquisition costs:Issuance of common stock

$
10,526,000Acquisition-related expenses


600,000$
11,126,000Allocated to assets and liabilities as follows:Tangible assets acquired

$
10,130,000Assumed liabilities


(4,040,000
)Purchased technology


5,036,000$
11,126,000


7

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Assuming
that the acquisition of MBI had occurred on the first day of the Company's fiscal year ended June 30, 2000, (unaudited) pro forma condensed consolidated financial
information would be as follows:

|                                      |  | Nine months ended March 31, |            
|------------------------------------- |  | --------------------------- | -----------
|
|Revenues                              |  | $                           | 3,325,000  
|Net Loss                              |  |                             | (51,093,000
|Net loss per share, basic and diluted |  |                             | (1.05      

This
pro forma information is not necessarily indicative of the actual results that would have been achieved had MBI been acquired the first day of the Company's fiscal year ended
June 30, 2000, nor is it necessarily indicative of future results.

3. SUBSEQUENT EVENT

On May 2, 2001, the Company announced that its agreement with Baxter Healthcare Corporation ("Baxter") for the continued development of Oxygentis proceeding
as the two companies finalize a comprehensive international plan for seeking regulatory approvals for the product. As a result of
this plan, which includes a revised timeline for clinical development and product launch, Baxter and Alliance have agreed to modify their original payment schedule. In connection with the
announcement, Baxter made a $4 million investment in Alliance Series F Preferred Stock and will make a $3 million investment later in May 2001. In order to maintain its
rights to the product, Baxter must invest an additional $23 million prior to the end of September 2001.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations(References to years are to the Company's fiscal years
ended June 30.)

Since
commencing operations in 1983, the Company has applied substantially all of its resources to research and development programs and to clinical trials. The Company has incurred
losses since inception and, as of March 31, 2001, has an accumulated deficit of $420.1 million. The Company expects to incur significant losses over at least the next few years as the
Company continues its research and product development efforts and attempt to commercialize its products.

The
Company's revenues have come primarily from collaborations with corporate partners, including research and development and milestone payments. The Company's expenses have
consisted primarily of research and development costs and administrative costs. To date, the Company's revenues from the sale of products have not been significant. The Company believes its 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 the Company or its competitors, and market acceptance of products under development.

Liquidity and Capital Resources

Through March 2001, the Company financed its activities primarily from public and private sales of equity, debt financing and funding from
collaborations with corporate partners.

In
November 2000, the Company sold $7 million in principal amount of five-year 6% subordinated convertible notes to certain investors. The notes are
convertible at any time after November 15, 2001, at each investor's option into shares of Alliance common stock at $15.72 per share, subject to certain

8

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antidilution provisions. The Company will have certain rights to cause the notes to convert into common stock. The investors also paid $1.5 million for the option to purchase at any time
$9.9 million of zero-coupon subordinated convertible notes, convertible into Alliance common stock at $22.17 per share, subject to certain antidilution provisions. In connection
with the transaction, Alliance placed $1.5 million in a restricted cash account to be used to pay interest on the issued notes.

In
August and September 2000, the Company sold $12 million in principal amount of four-year 5% subordinated convertible debentures to certain investors. The
debentures are convertible at any time at each investor's option into shares of Alliance common stock at $13.32 per share, subject to certain antidilution provisions. The conversion price of the
debentures was below the trading market price on the day the debentures were issued. As a result of this beneficial conversion price, the Company recorded an immediate charge to interest expense of
$1.1 million on these convertible debentures. The Company will have certain rights to cause the debentures to convert into common stock. The investors will have the option at any time to
purchase, and the Company will have certain rights to require the investors to purchase, an additional $12 million of four-year 5% subordinated convertible debentures, convertible
into Alliance common stock at $16 per share, subject to certain antidilution provisions.

In
February 2000, the Company sold $15 million in principal amount of four-year 5% subordinated convertible debentures to certain investors. During the nine
months ended March 31, 2001, $6.1 million of these debentures were converted into 632,124 shares of Alliance common stock.

In
June 1998, the Company entered into a loan and security agreement with a bank to provide for up to $15 million at the bank's prime rate plus 0.5%. Amounts borrowed
are secured by a $5 million restricted certificate of deposit, by certain fixed assets and patents, and are scheduled to be repaid over three years. If certain financial covenants are not
satisfied, the outstanding balance may become due and payable. On March 31, 2001, the balance outstanding on this loan was $6 million.

In
May 2000, Alliance and Baxter entered into a joint venture for the manufacture, marketing, sales and distribution ofOxygentin the United States, Canada and countries in the European Union (the "Baxter Territory"). The companies formed PFC Therapeutics, LLC ("PFC Therapeutics") to oversee the further development,
manufacture, marketing, sales and distribution ofOxygent; and each party invested $5 million in PFC Therapeutics. In connection with the
transaction, PFC Therapeutics obtained an exclusive license in the Baxter Territory, to manufacture and market all of the Company's injectable perfluorochemical emulsions capable of transporting
oxygen in therapeutic effective amounts in the bloodstream, includingOxygent.PFC Therapeutics paid Alliance a prepaid royalty of $10 million,
which has been recorded as deferred revenue. Alliance and Baxter will also share in the distribution of PFC Therapeutics' future cash flows. Under the arrangement, Alliance will continue to fund the
current development plan forOxygent'sinitial approval in the Baxter Territory. PFC Therapeutics has a right of first offer to license Oxygentin one or
more countries outside the Baxter Territory. Pursuant to a manufacturing and supplier agreement between Alliance and PFC Therapeutics,
Alliance will initially manufactureOxygentfor distribution in the Baxter Territory. Under separate agreements between Baxter and PFC Therapeutics,
Baxter will have the exclusive right to promote, market, distribute and
sellOxygentin the Baxter Territory, and Baxter has the right to take over the manufacturing responsibility for Oxygent. In connection with this
arrangement, Baxter purchased 500,000 shares of the Company's convertible Series F Preferred Stock for
$20 million. On May 2, 2001, Baxter made a $4 million investment in Alliance Series F Preferred Stock and agreed to make a $3 million investment later in
May 2001. In order to maintain its rights to the product, Baxter must invest an additional $23 million prior to the end of September 2001.

The
Company had net working capital of $1,023,000 at March 31, 2001, compared to $21.3 million at June 30, 2000. The Company's cash, cash equivalents, and
short-term investments decreased to

9

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$13.8 million at March 31, 2001, from $33.5 million at June 30, 2000. The decrease resulted primarily from net cash used in operations of $45.8 million and principal
payments on long-term debt of $3.5 million, partially offset by proceeds of $19 million from the sale of convertible debentures and notes and proceeds of $4.6 million
from the sale of short-term investments. For the current quarter and until further clinical trials are initiated for Oxygent, Imavist or LiquiVent, the Company expects clinical trial
expenses to decrease. As a result of the MBI acquisition in December 2000, the Company increased its cash and marketable securities by $8 million. Approximately $2.3 million of
cash was used during the quarter ended March 31, 2001 for non-recurring liabilities related to the MBI acquisition. The Company's operations to date have consumed substantial amounts of cash
and are expected to continue to do so for the foreseeable future.

On
January 8, 2001, the Company announced that it had voluntarily suspended enrollment in its Phase 3 cardiac surgery study with Oxygentdue to an imbalance between the treatment and control groups in
certain adverse events, primarily the incidence of stroke. On January 22,
2001, the Company announced that it was reducing its workforce by approximately 50 employees and undertaking other planned decreases in expenditures to conserve cash. The terminated employees received
non-recurring severance payments during the quarter. Until the Company hires additional employees, salary and wage expenses are expected to decrease.

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

The
Company expects to incur substantial expenditures associated with product development, particularly forImavist and Oxygent.The Company is seeking
additional collaborative research and
development relationships with suitable corporate partners for its non-licensed products. With respect toLiquiVent, prior to the end of the
fiscal year the Company expects to receive preliminary data from its recently completed Phase 2/3 clinical trial. If the data is favorable, the Company intends to seek a partner prior
to undertaking further development of the product. There can be no assurance that such relationships, if any, will successfully reduce the Company's funding requirements. Additional equity or debt
financing may be required, and there can be no assurance that such financing will be available on reasonable terms, if at all. If adequate funds are not available, the Company may be required to
delay, scale back, or eliminate one or more of its product development programs, or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, or products that the Company would not otherwise relinquish.

Alliance
anticipates that its current capital resources, expected investments by Baxter and expected revenue from investments will be adequate to satisfy its capital requirements
through at least calendar 2001. The Company's future capital requirements will depend on many factors, including, but not limited to, continued scientific progress in its research and development
programs, progress with preclinical testing and clinical trials, the time and cost involved in obtaining regulatory approvals, patent costs, competing technological and market developments, changes in
existing collaborative

10

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relationships, the ability of the Company to establish additional collaborative relationships, and the cost of manufacturing scale-up.

While
the Company believes that it can produce materials for clinical trials and the initial market launch forOxygentand Imavistat its existing San Diego,
California facilities, it may need to expand its commercial manufacturing capabilities for its products in the
future. Any expansion for any of its products may occur in stages, each of which would require regulatory approval, and product demand could at times exceed supply capacity. The Company has not
selected a site for such expanded facilities and cannot predict the amount it will expend for the construction of such facilities. There can be no assurance as to when or whether the U.S. Food and
Drug Administration ("FDA") will determine that such facilities comply with Good Manufacturing Practices. The projected location and construction of such facilities will depend on regulatory
approvals, product development, and capital resources, among other factors. The Company has not obtained any regulatory approvals for its production facilities for these products, nor can there be any
assurance that it will be able to do so. The Company currently has responsibility for manufacturingOxygent; however, Baxter has the right to take over
responsibility for manufacturing the product for sale in the Baxter Territory. The license agreement with Schering AG, Germany ("Schering") requires the Company to manufacture products at its San
Diego facility for a period of time after market launch at a negotiated price. Schering will be responsible for establishing production capacity beyond the maximum capacity of the San Diego facility.
The Company is in the process of moving its manufacturing equipment forLiquiVentto San Diego and intends to reestablish the manufacturing facility at
such time as the Company deems appropriate. The Company is in the process of selling its facility in Otisville, New York.

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 2001, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the
Company. These risks include, but are not limited to, the inability to obtain adequate financing for the Company's development efforts; the inability to enter into collaborative relationships to
further develop and commercialize the Company's products; changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company's products;
the uncertainties associated with the lengthy regulatory approval process; 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 Securities and Exchange Commission from time to time,

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including the last Form 10-K, and those risk factors set forth in the most recent registration statement on Form S-3 (File No. 333-47032) and
Form S-4 (File No. 333-49676).

Results of Operations



The Company's license and research revenue decreased by $14.2 million to $1.6 million for the nine months ended March 31, 2001, compared
to $15.8 million for the nine months ended March 31, 2000. Fiscal year 2000 revenue included $14.1 million from the sale of certain aspects of its PulmoSpheres®technology to Inhale
Therapeutic Systems, Inc ("Inhale"). The Company expects revenue to decrease in 2001 compared to 2000,
primarily because 2000 included substantial revenue received from Inhale.

Research
and development expenses increased by approximately 12% to $44.1 million for the nine months ended March 31, 2001, compared to $39.2 million for the nine
months ended March 31, 2000. The increase in expenses was primarily due to a $3.1 million increase in payments to outside researchers for clinical trials and other product development
work, a $950,000 increase in utility expenses, as well as other increases related to the Company's research and development activities.

General
and administrative expenses were $6.8 million for the nine months ended March 31, 2001, compared to $7.1 million for the nine months ended
March 31, 2000. The decrease in general and administrative expenses was primarily due to decreased professional fees related to partnering and financing activities.

Investment
income was $5.2 million for the nine months ended March 31, 2001, compared to $802,000 for the nine months ended March 31, 2000. The increase was
primarily a result of an increase in realized gains from the sale of short-term investments.

Interest
expense was $1.7 million for the nine months ended March 31, 2001, compared to $1.5 million for the nine months ended March 31, 2000. The increase
was primarily a result of higher average long-term debt balances.

For
the nine months ended March 31, 2001, the Company recorded imputed interest expense of $1.1 million related to the beneficial conversion feature on the
$12 million subordinated convertible debentures.

In
February 2000, the Company recorded interest expense of $3.7 million related to the beneficial conversion feature on the $15 million subordinated convertible
debentures.



The Company's license and research revenue increased to $1.2 million for the three months ended March 31, 2001, compared to $9,000 for the three
months ended March 31, 2000. The increase is primarily a result of increased license revenue arising from a one-time payment from a patent licensee.

Research
and development expenses increased by 15% to $16.3 million for the three months ended March 31, 2001, compared to $14.2 million for the three months
ended March 31, 2000. The increase in expenses was primarily due to a $1.5 million increase in payments to outside researchers for clinical
trials and other product development work, as well as other increases related to the company's research and development activities.

General
and administrative expenses were $2.1 million for the three months ended March 31, 2001, compared to $2.8 million for the three months ended
March 31, 2000. The decrease in general

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and administrative expenses was primarily due to decreased professional fees related to partnering and financing activities.

Investment
income and other was $442,000 for the three months ended March 31, 2001, compared to $280,000 for the three months ended March 31, 2000. The increase was
primarily a result of an increase in realized gains from the sale of short-term investments.

Interest
expense was $428,000 for the three months ended March 31, 2001, compared to $806,000 for the three months ended March 31, 2000. The decrease was primarily due
to non-cash interest expense charges related to warrants issued during fiscal 2000.

In
February 2000, the Company recorded interest expense of $3.7 million related to the beneficial conversion feature on the $15 million subordinated convertible
debentures.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is or has been exposed to changes in interest rates primarily from its long-term debt arrangements and, secondarily, its investments in
certain securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company believes that a hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company's interest sensitive financial instruments at
March 31, 2001.

Part II Other Information:

Item 1. Legal Proceedings

On February 23, 2001, a lawsuit was filed by two former shareholders of MBI purportedly on behalf of themselves and others against Alliance and certain
of its officers. On March 1, 2001 and March 19, 2001, two additional similar lawsuits were filed by other former shareholders of MBI. The lawsuits, filed in the U.S. District Court for
the Southern District of New York, allege violations of certain Federal securities laws in connection with Alliance's acquisition of MBI. The plaintiffs are seeking rescission or compensatory damages,
payment of fees and expenses, and further relief. Alliance believes that the lawsuits are completely without merit.

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Item 6. Exhibits and Reports on Form 8-K

3

Restated Certificate of Incorporation of the Company filed on May 7, 200110(a)

Severance Agreement and Release between Artemios B. Vassos and the Company dated January 31, 2001(1)10(b)

Consulting Agreement between Artemios B. Vassos and the Company dated November 4, 2000(1)10(c)

1991 Stock Option Plan of the Company as amended through May 8, 200110(d)

2000 Stock Option Plan of the Company as amended through May 8, 200110(e)

2001 Stock Option Plan of the Company as amended through May 8, 2001


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

| |  | ALLIANCE PHARMACEUTICAL CORP.
(Registrant)
/s/ Tim T. HartTim T. Hart
Chief Financial Officer
and Treasurer
| |  | -----------------------------------------------------------------------------------------------------------

Date: May 14, 2001

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