<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 March 31, 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, #825
San Diego, California                      92122
-------------------------------------      -------------------------------------
(Address of principal                      Zip Code
executive offices)

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 [ ]

Indicate by a check whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934.)

Yes [ ]   No [X]

As of May 10, 2006, Registrant had 37,476,303 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           15


Item 3.   Controls and Procedures                                             20


PART II - OTHER INFORMATION

Item 1.   Legal Proceedings                                                   21

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds         21

Item 3.   Defaults Upon Senior Securities                                     21

Item 4.   Submission of Matters to a Vote of Security Holders                 21

Item 5    Other Information                                                   21

Item 6.   Exhibits                                                            21


                                       2
<PAGE>

<TABLE>
PART I FINANCIAL INFORMATION:
ITEM 1.  FINANCIAL STATEMENTS

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

                                                                                MARCH 31,
                                                                                   2006
                                                                              -------------
ASSETS                                                                          (UNAUDITED)
------
<S>                                                                           <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                 $   4,133,000
    Other current assets                                                             68,000
                                                                              -------------
              Total current assets                                                4,201,000

PROPERTY, PLANT AND EQUIPMENT - NET                                                  82,000
OTHER ASSETS - NET                                                                   10,000
                                                                              -------------
                                                                              $   4,293,000
                                                                              =============

LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------

CURRENT LIABILITIES:
    Accounts payable                                                          $     270,000
    Accrued expenses                                                                 75,000
    Deferred revenue                                                                600,000
    Senior notes payable and accrued interest                                    11,442,000
                                                                              -------------
              Total current liabilities                                          12,387,000

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

              Total liabilities                                                  13,637,000
                                                                              -------------

STOCKHOLDERS' DEFICIT:
    Preferred stock - $.01 par value; 5,000,000 shares authorized;
        Series F preferred stock - 793,750 shares issued and outstanding
    8,000 Common stock - $.01 par value; 125,000,000 shares authorized;
        34,829,827 shares issued and outstanding                                    348,000
    Additional paid-in capital                                                  475,594,000
    Accumulated deficit                                                        (485,294,000)
                                                                              -------------
              Total stockholders' deficit                                        (9,344,000)
                                                                              -------------
                                                                              $   4,293,000
                                                                              =============


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                             3
</TABLE>
<PAGE>

<TABLE>
     ALLIANCE PHARMACEUTICAL CORP.
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------------------

                                                 THREE MONTHS ENDED              NINE MONTHS ENDED
                                                      MARCH 31,                      MARCH 31,
                                                2006            2005            2006            2005
                                            ------------    ------------    ------------    ------------
                                                    (UNAUDITED)                     (UNAUDITED)
<S>                                         <C>             <C>             <C>             <C>
REVENUES:
   Royalty, license and research            $     26,000    $  1,383,000    $    103,000    $  1,455,000

OPERATING EXPENSES:
   Research and development                      469,000         376,000       1,305,000       1,575,000
   General and administrative                    311,000         851,000         911,000       2,057,000
                                            ------------    ------------    ------------    ------------
                                                 780,000       1,227,000       2,216,000       3,632,000
                                            ------------    ------------    ------------    ------------
INCOME (LOSS) FROM OPERATIONS                   (754,000)        156,000      (2,113,000)     (2,177,000)

INVESTMENT INCOME                                 49,000          41,000         151,000         106,000
OTHER INCOME                                           -               -          82,000          10,000
INTEREST EXPENSE                                (161,000)       (170,000)       (475,000)     (2,579,000)
GAIN ON DISPOSITION OF LIABILITIES                     -               -         730,000               -
GAIN ON DISPOSITION OF ASSETS                          -          44,000         476,000         303,000
                                            ------------    ------------    ------------    ------------
NET INCOME (LOSS)                           $   (866,000)   $     71,000    $ (1,149,000)   $ (4,337,000)
                                            ============    ============    ============    ============

NET INCOME (LOSS) PER COMMON SHARE,
                    BASIC AND DILUTED       $      (0.02)   $          -    $      (0.03)   $      (0.11)
                                            ============    ============    ============    ============

WEIGHTED AVERAGE SHARES OUTSTANDING,
                    BASIC AND DILUTED         34,830,000      33,130,000      34,830,000      40,784,000
                                            ============    ============    ============    ============


SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                                   4
</TABLE>
<PAGE>

<TABLE>
     ALLIANCE PHARMACEUTICAL CORP.
     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------
                                                                             NINE MONTHS ENDED
                                                                                  MARCH 31,
                                                                            2006            2005
                                                                        ------------    ------------
                                                                                (UNAUDITED)
<S>                                                                     <C>             <C>
OPERATING ACTIVITIES:
   Net loss                                                             $ (1,149,000)   $ (4,337,000)
   Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization                                           16,000           7,000
      Accrued interest on senior notes                                       475,000         341,000
      Compensatory stock options                                              25,000          11,000
      Beneficial conversion expense                                                -       2,238,000
      Gain on disposition of liabilities                                    (730,000)              -
      Gain on disposition of assets                                         (476,000)       (303,000)
      Changes in operating assets and liabilities:
         Restricted cash and other assets                                  1,020,000          26,000
         Accounts payable and accrued expenses and other                  (2,026,000)        415,000
                                                                        ------------    ------------
Net cash used in operating activities                                     (2,845,000)     (1,602,000)
                                                                        ------------    ------------

INVESTING ACTIVITIES:
   Purchase of property and equipment                                         (4,000)        (18,000)
   Proceeds from disposition of assets                                       200,000         126,000
                                                                        ------------    ------------
Net cash provided by investing activities                                    196,000         108,000
                                                                        ------------    ------------


DECREASE IN CASH AND CASH EQUIVALENTS                                     (2,649,000)     (1,494,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                           6,782,000       8,429,000
                                                                        ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                              $  4,133,000    $  6,935,000
                                                                        ============    ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Issuance of common stock in exchange for cancellation of warrant   $               -    $     25,000
                                                                        ============    ============
Issuance of senior convertible notes for common stock              $               -    $ 10,692,000
                                                                        ============    ============
Issuance of senior convertible notes for secured convertible note  $               -    $    500,000
                                                                        ============    ============
Reclassification of warrant liability                              $               -    $  7,942,000
                                                                        ============    ============

SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                                 5
</TABLE>
<PAGE>

ALLIANCE PHARMACEUTICAL CORP.

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

           THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2006 AND 2005

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 March 31, 2006 and has negative working capital at that
date of approximately $8.2 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, was to become due and payable on March 24, 2006. Because the holders
of the Senior Notes were willing to renegotiate their terms and did not demand
repayment in March 2006 (see Note 7), the Company believes it has working
capital to fund its operations for the next 12 months. As discussed in Note 7,
the maturity date of the Senior Notes was extended to April 1, 2007; however,
the Company will not have the resources to repay the Senior Notes on April 1,
2007. The Company will have to raise additional funds to repay the Senior Notes
or renegotiate their terms. If the Company is unable to do so, it will not have
adequate resources to pay the amount due to the Senior Note holders and such
holders may initiate liquidation proceedings against it. Therefore, the Company
is seeking additional collaborative research and development relationships with
suitable corporate partners for its products. Further, additional equity or debt
financing may be required to fund ongoing operations. Because adequate funds
have not been available to the Company in the past, the Company has already
delayed its OXYGENT development efforts and has delayed, scaled back, and/or
eliminated one or more of its other product development programs. The
accompanying unaudited condensed consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

PRINCIPLES OF CONSOLIDATION
---------------------------

     The accompanying unaudited condensed consolidated financial statements
include the accounts of Alliance Pharmaceutical Corp., the accounts of its
wholly owned subsidiaries Molecular Biosystems, Inc. ("MBI") and Astral, Inc.
("Astral") (until September 6, 2005), and its majority-owned subsidiaries Talco


                                       6
<PAGE>

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 March 31, 2006, the
condensed consolidated statements of operations for the three months and nine
months ended March 31, 2006 and 2005, and the condensed consolidated statements
of cash flows for the nine months ended March 31, 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, 2005.

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 valuation of
deferred tax assets. 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 March 31, 2006, the Company had approximately $4
million in these accounts in excess of the FDIC insurance limits.

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


                                       7
<PAGE>

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 nine-month periods ended March 31, 2006 and 2005, the
Company incurred research and development expenses of $1.3 million and $1.6
million, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------

     The carrying amount of certain of the Company's financial instruments as of
March 31, 2006 approximates their respective fair values because of the
short-term nature of these instruments. Such instruments consist of cash and
cash equivalents, 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. All potential dilutive common shares have been excluded from the
calculation of diluted loss per share for the three months and nine months ended
March 31, 2006 and 2005, as their inclusion would be anti-dilutive.

ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------

     Stock-based awards to non-employees are accounted for using the fair value
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," and Emerging Issues Task
Force ("EITF") Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE
ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING
GOODS OR SERVICES." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date used to determine the fair value of the equity instrument issued is the
earlier of the date on which the third-party performance is complete or the date
on which it is probable that performance will occur.

     The Company has adopted the disclosure-only provisions of SFAS No. 123. The
Company in its financial statements applies Accounting Principles Board Opinion
("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related
interpretations in accounting for its stock option plans and, accordingly, no
employee stock-based compensation cost has been recognized for stock options in
the three-month and nine-month periods ended March 31, 2006 or 2005. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date and amortized to expense over their vesting
period as prescribed by SFAS No. 123, the Company's net income (loss) and net
income (loss) per share would have been adjusted to the pro forma amounts
indicated below for the three months and nine months ended March 31:


                                       8
<PAGE>

<TABLE>
                                    THREE MONTHS    THREE MONTHS     NINE MONTHS     NINE MONTHS
                                        ENDED           ENDED           ENDED           ENDED
                                      MARCH 31,       MARCH 31,       MARCH 31,       MARCH 31,
                                        2006            2005            2006            2005
                                    ------------    ------------    ------------    ------------
<S>                                 <C>             <C>             <C>             <C>
Net income (loss):
     As reported                    $   (866,000)   $     71,000    $ (1,149,000)   $ (4,337,000)
     Fair value of stock-based
        employee compensation            (32,000)       (161,000)       (265,000)       (478,000)
                                    ------------    ------------    ------------    ------------
     Pro forma                      $   (898,000)   $    (90,000)   $ (1,414,000)   $ (4,815,000)
                                    ============    ============    ============    ============

Net income (loss) per share,  basic and diluted
     As reported                    $      (0.02)   $          -    $      (0.03)   $      (0.11)
                                    ============    ============    ============    ============
     Pro forma                      $      (0.03)   $          -    $      (0.04)   $      (0.12)
                                    ============    ============    ============    ============
</TABLE>

     The impact of outstanding non-vested stock options granted prior to 1996
(the effective date of SFAS No. 123) has been excluded from the pro forma
calculations; accordingly, the pro forma adjustments for the three-month and
nine-month periods ended March 31, 2006 and 2005 are not indicative of future
period pro forma adjustments if the calculation reflected all applicable stock
options. The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model. The estimated weighted average fair value at
grant date for the options granted during the periods ended March 31, 2006 and
2005 was $0.11 and $0.27 per option, respectively.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

     In December 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123 (revised 2004), "SHARE-BASED PAYMENT" ("Statement 123(R)")
to provide investors and other users of financial statements with more complete
and neutral financial information by requiring that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. Statement 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. Statement 123(R) replaces SFAS No. 123 and supersedes APB No.
25. SFAS No. 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, SFAS No. 123 permitted entities the option of continuing to
apply the guidance in APB No. 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. The Company will be required to apply
Statement 123(R) in fiscal 2007. The Company is in the process of evaluating
whether the adoption of Statement 123(R) will have a significant impact on the
Company's overall results of operations or financial position.

     Other recent accounting pronouncements issued by the FASB (including its
EITF), the American Institute of Certified Public Accountants and the Securities
and Exchange Commission (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


                                       9
<PAGE>

Double-Crane Agreement, Double-Crane made an upfront license fee payment and
will make certain milestone and royalty payments to the Company. The payment of
the upfront license fee 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 unaudited condensed consolidated balance sheet
at March 31, 2006. Double-Crane will conduct clinical trials in the PRC, in
accordance with international guidelines, to receive marketing approval for
OXYGENT in the PRC. The Company will have the right to use in other countries
any data derived from the clinical trials. Double-Crane will have the option to
manufacture OXYGENT in the PRC after obtaining approval from the regulatory
authorities in the PRC and they will also have a right of first refusal to add
specific additional countries to the Double-Crane Agreement upon further
negotiation with the Company.

     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, we received the non-refundable portion of an exclusivity fee of $100,000
per the terms of the LEO Exclusivity Agreement. On February 25, 2005, PFC
Therapeutics and LEO agreed to amend the LEO Exclusivity Agreement extending 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 us to LEO of
the results of a Proof of Concept clinical study. Because the amendment extends
LEO's due diligence time-period, this amount has been deferred and is included
in current liabilities in the accompanying unaudited condensed consolidated
balance sheet at March 31, 2006.

3. 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 nine-month period ended March 31, 2006 related to the
disposition of these assets. To date, Alliance has recorded approximately $26.4
million as a gain on the disposition of assets 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.

     On September 19, 2005, Alliance and Imcor entered into a global settlement
agreement pursuant to which each party released the other from any further
obligations under the IMAGENT 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 have
agreed to a settlement of the 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 (see Part II,
Item 1). Alliance received $200,000 as a result of the above settlement
agreements during the quarter ended September 30, 2005.


                                       10
<PAGE>

     The detail of items comprising the gain on disposition of IMAGENT assets
for the nine months ended March 31, 2006 and 2005 is calculated as follows (in
thousands):

             NINE MONTHS ENDED MARCH 31:                          2006     2005
                                                                 ------   ------

Cash payments funded by Imcor for liabilities of Alliance        $  200   $  126
Assumption by Imcor of operating liabilities and other debt
  and settlements with vendors and creditors of Alliance            276      177

                                                                 ------   ------
Gain on disposition of assets of IMAGENT to Imcor                $  476   $  303
                                                                 ======   ======


4. 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 is obligated to pay the balance in four quarterly installments of
$250,000 over the next year pursuant to a promissory note that is 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
in the quarter ended September 30, 2005) 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.

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

                                       11
<PAGE>

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 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 notified the Company that it was unilaterally
terminating 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 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.

     On September 24, 2004, the Company recorded a beneficial conversion feature
("BCF") charge of approximately $2.2 million (included in interest expense),
based on the difference between the $0.25 conversion rate of the Senior Notes
and the closing price of $0.30 of the Company's common stock on September 24,
2004. Such BCF charge included the conversion of the $500,000 PFC Note (see
above).

     The Senior Notes were due March 24, 2006, and bore interest at 6% per
annum. In April 2006, the Company entered into an amendment (the "Amendment") of
its Senior Convertible Promissory Note Purchase Agreement and Registration
Rights Agreement with each of the existing holders of Alliance's Senior Notes
(see Note 7). 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. Finally, Alliance
will continue to seek potential strategic partners or merger candidates as a
part of its business strategy.

     The Senior Notes can be converted at anytime prior to the maturity date.
The Senior Note Purchase Agreement included certain restrictive covenants,
including, without limitation, a covenant that the Company maintain at least
$5.5 million in cash or cash equivalents on hand at all times (the "Cash
Covenant") while the Senior Notes are outstanding. The Cash Covenant ceased to
apply on the date that the Company entered into a binding agreement for the
joint development of OXYGENT with a Qualified Third Party. Accordingly, the
agreement with Double-Crane (a "Qualified Third Party" as defined) (see Note 2)
satisfied the termination requirements of the Cash Covenant; therefore, as of
May 13, 2005, the restrictions related to the amount of cash and cash
equivalents that the Company was required to maintain on hand in order not to be
in default under the Senior Notes, as set forth in the Cash Covenant, ceased and
are of no further force or effect.


                                       12
<PAGE>

     No Senior Notes were converted during the current quarter. At March 31,
2006, the principal and accrued interest balances approximate $10,476,000 and
$966,000, 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 2006.

     On February 23, 2001, a lawsuit was filed against us and some of our
officers by two former shareholders of MBI purportedly on behalf of themselves
and other MBI shareholders. 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, alleged
that our registration statement and prospectus filed and issued in connection
with the acquisition of MBI contained misrepresentations and omissions of
material facts in violation of certain federal securities laws. In May 2001, the
actions were consolidated. The plaintiffs were seeking rescission or
compensatory damages, payment of fees and expenses, and further relief. In
January 2002, the plaintiffs filed a second amended complaint adding an
additional securities claim against us and the named officers. In August 2003,
the court granted summary judgment as to certain securities claims and dismissed
the claims, and denied summary judgment as to other securities claims. On
February 15, 2006, the Court approved a settlement of the lawsuit, which will be
funded by our insurers, and dismissed the lawsuit with prejudice.

INDEMNIFICATION OBLIGATIONS
---------------------------

     The Company has undertaken certain indemnification obligations pursuant to
which it may be required to make payments to an indemnified party in relation to
certain transactions. The Company has agreed to indemnify its directors,
officers, employees and agents to the maximum extent permitted under the laws of
the State of New York. In connection with its facility leases, the Company has
agreed to indemnify its lessors for certain claims arising from the use of the
facilities. In connection with certain of its debt, stock purchase and other
agreements, the Company has agreed to indemnify lenders, sellers and various
other parties for certain claims arising from the Company's breach of
representations, warranties and other provisions contained in the agreements.
The duration of certain of these indemnification obligations does not provide
for any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make any
payments for these obligations and no liabilities have been recorded for these
indemnities in the accompanying unaudited condensed consolidated balance sheet.

6. EQUITY

PREFERRED STOCK
---------------

     In May 2000, Alliance entered into a joint venture with Baxter Healthcare
Corporation ("Baxter") and sold 500,000 shares of its Series F Preferred Stock
for $20 million. Subsequently, the Company sold 293,750 additional shares for
$11.75 million. The shares are convertible based on the following provisions: 1)
at the option of Baxter on or after May 19, 2004; 2) termination of the license
agreement between Alliance and PFC Therapeutics; 3) at the option of Baxter on
or after the period of time in which the price of Alliance's common stock is
equal to or greater than $110 per share; or 4) at the option of Baxter upon a
change of control at Alliance. The Series F Preferred Stock has no annual
dividend and is not entitled to any voting rights except as otherwise required
by law.


                                       13
<PAGE>

     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.

STOCK OPTIONS
-------------

     No options were granted during the third fiscal quarter ended March 31,
2006.

7. SUBSEQUENT EVENTS

     Subsequent to March 31, 2006, Alliance entered into the Amendment to its
Senior Convertible Promissory Note Purchase Agreement and Registration Rights
Agreement 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 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
additional 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 or, if sold directly by
Alliance, then Alliance will pay the holders a royalty on net sales of such
products. Finally, Alliance will continue to seek potential strategic partners
or merger candidates as a part of its business strategy.

     Since the Amendment of the Senior Notes results 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 will be treated as an extinguishment of debt in
the quarter ending June 30, 2006, but will result in no gain or loss. The
Company will record a BCF of $10,076,000 in connection with the conversion
feature of the amended Senior Notes and will amortize the discount using the
effective interest method through maturity of such instruments.

     Subsequent to March 31, 2006 and as of May 10, 2006, holders of certain
Senior Notes converted an aggregate of approximately $450,000 into an aggregate
of 2,646,476 shares of our common stock at a conversion price of $0.17 per share
per the terms of the Amendment.


                                       14
<PAGE>

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
March 31, 2006, have an accumulated deficit of $485.3 million. We expect to
incur significant operating losses over at least the next few years as we
continue our research and product development efforts and attempt to
commercialize our products.

     Our revenues from operations have come primarily from collaborations with
corporate partners, including research and development, milestone and royalty
payments. Our expenses have consisted primarily of research and development
costs and administrative costs. To date, our revenues from the sale of products
have not been significant. We believe our future operating results may be
subject to quarterly fluctuations due to a variety of factors, including the
timing of future collaborations and the achievement of milestones under
collaborative agreements, whether and when new products are successfully
developed and introduced by us or our competitors, and market acceptance of
products under development.

FORWARD-LOOKING INFORMATION
---------------------------

     Except for historical information, the statements made herein and elsewhere
are forward-looking. The Company wishes to caution readers that these statements
are only predictions and that the Company's business is subject to significant
risks. The factors discussed herein and other important factors, in some cases
have affected, and in the future could affect, the Company's actual results and
could cause the Company's actual consolidated results for 2006, 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, 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.


                                       15
<PAGE>

RESEARCH AND DEVELOPMENT
------------------------

     For the nine months ended March 31, 2006 and 2005, we incurred research and
development expenses of $1.3 million and $572,000, 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 $158.2 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.

     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 nine months ended March 31, 2006 and 2005,
Astral incurred net research and development expenses of $25,000, and $1 million
largely due to the $720,000 expense of the assignment of intellectual property
agreement with Mixture Sciences in 2005, respectively. In September 2005,
pursuant to the Astral Agreement, approximately $730,000 of accrued Astral
expenses were assumed by MultiCell. (See Note 4.)

RESULTS OF OPERATIONS
---------------------

NINE MONTHS ENDED MARCH 31, 2006 AS COMPARED WITH NINE MONTHS ENDED MARCH 31,
2005

     Our revenue decreased to $103,000 for the nine months ended March 31, 2006,
compared to $1.5 million for the nine months ended March 31, 2005. The prior
period's revenue was primarily $1.4 million received per the terms of a
milestone and royalty buy-out agreement.

     Research and development expenses decreased by $270,000, or 17%, to $1.3
million for the nine months ended March 31, 2006, compared to $1.6 million for
the nine months ended March 31, 2005. The decrease in research and development
expenses was primarily due to the assumption of Astral expenses by MultiCell per
the Astral Agreement (see Note 4), which expenses totaled $1 million during the
nine months ended March 31, 2005, partially offset by an increase of $708,000
spent on OXYGENT-related activities during the current period in preparation for
a Proof of Concept Phase 2 clinical study in Europe and the transfer of our
production technology to an FDA-approved GMP facility.

     General and administrative expenses decreased by $1.1 million, or 56%, to
$911,000 for the nine months ended March 31, 2006, compared to $2.1 million for
the nine months ended March 31, 2005. The decrease in general and administrative
expenses was primarily due to a $938,000 decrease in legal fees and litigation
expense, including the reduction of the amount owed to HUB by Alliance per the
settlement and mutual release agreement whereby the award balance of
approximately $536,000 was reduced and Alliance paid the compromised amount of
$400,000 in full settlement of the lawsuit. (See Part II, Item 1.)

     For the nine months ended March 31, 2006, 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 4) 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. For the nine months ended March 31, 2005, we
recorded a gain of $303,000, resulting from the recording of payments of
$126,000 from Imcor, and the assumption by Imcor of obligations and settlements
with various vendors and creditors of $177,000 during the period.


                                       16
<PAGE>

     Investment income increased by $45,000 to $151,000 for the nine months
ended March 31, 2006, compared to $106,000 for the nine months ended March 31,
2005. The increase was primarily a result of higher interest rates.

     Other income was $82,000 for the nine months ended March 31, 2006, a result
of proceeds recorded from the sale of raw material, compared to $10,000 for the
nine months ended March 31, 2005, which was primarily a result of proceeds
recorded from the sale of raw material.

     Interest expense was $475,000 for the nine months ended March 31, 2006,
compared to $2.6 million for the nine months ended March 31, 2005. The expense
for the prior period was primarily the result of the BCF expense recorded in
connection with the exchange of the Company's common stock for the Senior Notes
on September 24, 2004 and the accrued interest on such Senior Notes.

THREE MONTHS ENDED MARCH 31, 2006 AS COMPARED WITH THREE MONTHS ENDED MARCH 31,
2005

     Our revenue decreased approximately 98% to $26,000 for the three months
ended March 31, 2006, compared to $1.4 million for the three months ended March
31, 2005 received per the terms of a milestone and royalty buy-out agreement.

     Research and development expenses increased by $93,000, or 25%, to $469,000
for the three months ended March 31, 2006, compared to $376,000 for the three
months ended March 31, 2005. The increase in research and development expenses
was primarily due to an increase spent on OXYGENT-related activities during the
current period in preparation for a Proof of Concept Phase 2 clinical study in
Europe and the transfer of our production technology to an FDA-approved GMP
facility.

     General and administrative expenses decreased by $540,000, or 63%, to
$311,000 for the three months ended March 31, 2006, compared to $851,000 for the
three months ended March 31, 2005. The decrease in general and administrative
expenses was primarily due to a decrease in legal fees and litigation expense.
(See Part II, Item 1.)

     For the three months ended March 31, 2006, there was no gain recorded on
the disposition of assets or liabilities. For the three months ended March 31,
2005, we recorded a gain on the disposition of the IMAGENT assets of $44,000,
resulting from the recording of the assumption by Imcor of certain of our
obligations and settlements with various vendors and creditors during the period
in connection with the IMAGENT asset sale transaction.

     Investment income increased by $8,000 to $49,000 for the three months ended
March 31, 2006, compared to $41,000 for the three months ended March 31, 2005.
The increase was primarily a result of higher interest rates during the period.

     Interest expense was $161,000 for the three months ended March 31, 2006,
compared to $170,000 interest expense for the three months ended March 31, 2005.
The expense for both periods was primarily the result of recording accrued
interest on the Senior Notes.

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 March 31, 2006, we had received $243 million in net
proceeds from sales of our equity securities, $260.5 million in payments from
collaboration agreements and $74.3 million in debt financing of which $37.4
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.


                                       17
<PAGE>

     At March 31, 2006, we had approximately $4.1 million in cash, cash
equivalents and investment securities compared to $6.8 million at June 30, 2005.
The decrease resulted primarily from net cash used in operations of $2.8
million, partially offset by $200,000 received from Imcor to fund payments to
vendors. At March 31, 2006, we had a working capital deficit of $8.2 million,
compared to a working capital deficit of $8.1 million at June 30, 2005. The
deficit increase was principally due to the net cash used in operations,
partially offset by the compromise of the HUB litigation award and settlement
(see Part II, Item 1), assumption of certain liabilities by MultiCell per the
Astral Agreement (see Note 4) and settlements with various vendors. 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 $2.8 million for the nine
months ended March 31, 2006, compared to $1.6 million for the nine months ended
March 31, 2005. The increase in net cash used in operating activities during the
nine months ended March 31, 2006 was primarily due to a decrease in revenues,
partially offset by a decrease in professional fees.

     Net cash provided by investing activities totaled $196,000 for the nine
months ended March 31, 2006, primarily due to proceeds received from Imcor to
fund payments to vendors. Net cash provided by investing activities totaled
$108,000 for the nine months ended March 31, 2005, primarily due to proceeds
from Imcor of $126,000.

     At March 31, 2006, the following approximate debt obligations were
outstanding:

     1.   $270,000 owed to various vendors;
     2.   $75,000 in accrued expenses, primarily consisting of payroll and
          related expenses;
     3.   $11.4 million in Senior Notes, including $966,000 in accrued interest;
     4.   $1.25 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.

     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 to its Senior
Convertible Promissory Note Purchase Agreement and Registration Rights Agreement
with each of the existing holders of Alliance's Senior Notes (see Note 7).
Pursuant to the Amendment, the maturity date of each outstanding Senior Note was
extended from March 24, 2006 to April 1, 2007. The conversion price of each
Senior Note was reduced from $0.25 to $0.17 and the interest that will accrue on
each Senior Note from March 25, 2006 through April 1, 2007 was increased from 6%
to 10% per annum. In addition to amounts due under the Senior Notes, the holders
of the Senior Notes are entitled to receive up to an aggregate of $11.4 million
in payments based on future royalties from OXYGENT product sales (or under
certain conditions from milestone payments) payable at a rate equal to 50% of
such payments that Alliance actually receives.

     We believe we have working capital to fund our operations for the next 12
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.


                                       18
<PAGE>

     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 March 31, 2006. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying unaudited condensed consolidated financial statements do not
include any adjustment to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

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 825, 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, 2005.


                                       19
<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 March 31, 2006 our disclosure controls and procedures were
effective 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 March 31, 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.


                                       20
<PAGE>

PART II OTHER INFORMATION:

ITEM 1. LEGAL PROCEEDINGS

     On February 23, 2001, a lawsuit was filed against us and some of our
officers by two former shareholders of MBI purportedly on behalf of themselves
and other MBI shareholders. 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, alleged
that our registration statement and prospectus filed and issued in connection
with the acquisition of MBI contained misrepresentations and omissions of
material facts in violation of certain federal securities laws. In May 2001, the
actions were consolidated. The plaintiffs were seeking rescission or
compensatory damages, payment of fees and expenses, and further relief. In
January 2002, the plaintiffs filed a second amended complaint adding an
additional securities claim against us and the named officers. In August 2003,
the court granted summary judgment as to certain securities claims and dismissed
the claims, and denied summary judgment as to other securities claims. On
February 15, 2006, the Court approved a settlement of the lawsuit, which will be
funded by our insurers, and dismissed the lawsuit with prejudice.

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

     None.

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.


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<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: May 15, 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



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