# SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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, 2004                                           
|      | 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 Small Business Issuer as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|New York                                                       |  | 14-1644018                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|6175 Lusk Boulevard
San Diego, California                      |  | 92121                               
|(Address of principal executive offices)                       |  | (Zip 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 13, 2004, Registrant had
28,541,818 shares of its Common Stock, $.01 par value, outstanding.

Transitional Small Business Disclosure Format
(check one):

Yes            No  X

---

# ALLIANCE PHARMACEUTICAL
CORP.

INDEX



|                               |                                                                  | PageNo.
|------------------------------ | ---------------------------------------------------------------- | -------
|                               |                                                                  |        
|PART I - FINANCIAL INFORMATION |                                                                 
|Item 1                         | Financial Statements                                            
|                               | Condensed Consolidated Balance Sheets                           
|                               | (Balance Sheet as of March 31, 2004 is unaudited)                | 3      
|                               | Condensed Consolidated Statements of Operations (Unaudited)      | 4      
|                               | Condensed Consolidated Statements of Cash Flows (Unaudited)      | 5      
|                               | Notes to Condensed Consolidated Financial Statements (Unaudited) | 6      
|Item 2                         | Management's Discussion and Analysis of                         
|                               | Financial Condition and Results of Operations                    | 16     
|Item 3                         | Controls and Procedures                                          | 23     
|PART II - OTHER INFORMATION   
|Item 1                         | Legal Proceedings                                                | 24     
|Item 2                         | Changes in Securities                                            | 25     
|Item 3                         | Defaults Upon Senior Securities                                  | 25     
|Item 4                         | Submission of Matters to a Vote of Security Holders              | 26     
|Item 5                         | Other Information                                                | 26     
|Item 6                         | Exhibits and Reports on Form 8-K                                 | 27     

2

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# Part I Financial
Information:Item 1. Financial Statements

# ALLIANCE
PHARMACEUTICAL CORP.        CONDENSED
CONSOLIDATED BALANCE SHEETS

---

|                                                               | March 31,2004 |  | June 30,2003 |             
|-------------------------------------------------------------- | ------------- |  | ------------ | ------------
|Assets                                                         |               |  |              | (Unaudited) 
|Current assets:                                                |               | 
|Cash and cash equivalents                                      |               |  | $            | 116,000     
|Other current assets                                           |               |  |              | 110,000     
|                                                               |               |  |              |             
|Total current assets                                           |               |  |              | 226,000     
|Restricted cash                                                |               |  |              | --          
|Other assets - net                                             |               |  |              | 466,000     
|                                                               |               |  |              |             
|                                                               |               |  | $            | 692,000     
|                                                               |               |  |              |             
|Liabilities and Stockholders' Deficit                          |               | 
|Current liabilities:                                           |               | 
|Accounts payable                                               |               |  | $            | 3,187,000   
|Accrued expenses                                               |               |  |              | 992,000     
|Short-term debt                                                |               |  |              | 500,000     
|                                                               |               |  |              |             
|Total current liabilities                                      |               |  |              | 4,679,000   
|Other liabilities                                              |               |  |              | 1,250,000   
|Stockholders' deficit:                                         |               | 
|Preferred stock - $.01 par value; 5,000,000 shares authorized; |               | 
|793,750 shares of Series F Preferred Stock issued and          |               | 
|outstanding at March 31, 2004 and June 30, 2003                |               |  |              | 8,000       
|Common stock - $.01 par value; 125,000,000 shares authorized;  |               | 
|28,541,818 and 27,973,961 shares issued and outstanding        |               | 
|at March 31, 2004 and June 30, 2003, respectively              |               |  |              | 285,000     
|Additional paid-in capital                                     |               |  |              | 470,545,000 
|Accumulated deficit                                            |               |  |              | (476,075,000
|                                                               |               |  |              |             
|Total stockholders' deficit                                    |               |  |              | (5,237,000  
|                                                               |               |  |              |             
|                                                               |               |  | $            | 692,000     
|                                                               |               |  |              |             

|Note: | The
balance sheet at June 30, 2003 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See Accompanying Notes to Condensed
Consolidated Financial Statements

3

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# ALLIANCE PHARMACEUTICAL
CORP.UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

---

|                                               | Three Months EndedMarch 31, |  | Nine Months EndedMarch 31, |           
|---------------------------------------------- | --------------------------- |  | -------------------------- | ----------
|
|                                               |                             |  | (Unaudited)                |           
|Revenues:                                      |                             |  |                            |           
|Royalty, license and research   revenue        |                             |  | $                          | --        
|Operating expenses:                            |                             | 
|Research and development                       |                             |  |                            | 205,000   
|General and administrative                     |                             |  |                            | 326,000   
|                                               |                             |  |                            |           
|                                               |                             |  |                            | 531,000   
|                                               |                             |  |                            |           
|Loss from operations                           |                             |  |                            | (531,000  
|Investment income                              |                             |  |                            | 1,000     
|Other income                                   |                             |  |                            | --        
|Loss on investment                             |                             |  |                            | --        
|Interest expense                               |                             |  |                            | --        
|Gain on disposition of asset                   |                             |  |                            | 13,312,000
|                                               |                             |  |                            |           
|Net income (loss)                              |                             |  | $                          | 12,782,000
|                                               |                             |  |                            |           
|Net income (loss) per common   share, basic    |                             |  | $                          | 0.45      
|                                               |                             |  |                            |           
|Net income (loss) per common   share, diluted  |                             |  | $                          | 0.43      
|                                               |                             |  |                            |           
|Weighted average shares   outstanding, basic   |                             |  |                            | 28,442,000
|                                               |                             |  |                            |           
|Weighted average shares   outstanding, diluted |                             |  |                            | 29,984,000
|                                               |                             |  |                            |           

See Accompanying Notes to Condensed
Consolidated Financial Statements

4

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# ALLIANCE PHARMACEUTICAL
CORP.UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS

---

|                                                   | Nine months ended March 31, | 
|-------------------------------------------------- | --------------------------- | 
|
|                                                   |                             | 
|Operating activities:                              |                             | 
|Net income (loss)                                  |                             | 
|Adjustments to reconcile net income (loss) to net  |                             | 
|cash used in operations:                           |                             | 
|Depreciation and amortization                      |                             | 
|Expense associated with option or warrant issuance |                             | 
|Expense associated with debt issuance              |                             | 
|Loss on investment                                 |                             | 
|Gain on disposition of asset                       |                             | 
|Changes in operating assets and liabilities:       |                             | 
|Restricted cash and other assets                   |                             | 
|Accounts payable, accrued expenses and other       |                             | 
|                                                   |                             | 
|Net cash used in operating activities              |                             | 
|                                                   |                             | 
|Investing activities:                              |                             | 
|Proceeds from disposition of assets                |                             | 
|Property, plant and equipment - net                |                             | 
|                                                   |                             | 
|Net cash provided by investing activities          |                             | 
|                                                   |                             | 
|Financing activities:                              |                             | 
|Issuance of common stock                           |                             | 
|Issuance of convertible preferred stock - net      |                             | 
|Proceeds from debt                                 |                             | 
|Proceeds from revolving line of credit             |                             | 
|                                                   |                             | 
|Net cash provided by financing activities          |                             | 
|                                                   |                             | 
|Decrease in cash and cash equivalents              |                             | 
|Cash and cash equivalents at beginning of period   |                             | 
|                                                   |                             | 
|Cash and cash equivalents at end of period         |                             | 
|                                                   |                             | 
|Supplemental disclosure of cash flow information:  |                             | 
|Interest paid                                      |                             | 
|                                                   |                             | 
|Supplemental disclosure of non-cash investing and  |                             | 
|financing activities:                              |                             | 
|Issuance of common stock upon conversion of notes  |                             | 
|                                                   |                             | 

See Accompanying Notes to Condensed
Consolidated Financial Statements

5

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# ALLIANCE PHARMACEUTICAL
CORP.NOTES TO UNAUDITED
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.

Liquidity and Basis of
Presentation

The
accompanying financial statements are prepared assuming the Company is a going concern.
The Company lacks sufficient working capital to fund its operations beyond June 30,
2004. Therefore, substantial additional capital resources will be required to fund the
ongoing operations related to the Companys research, development, manufacturing and
business development activities. Management believes there are a number of potential
alternatives available to meet the continuing capital requirements, such as public or
private financings or collaborative agreements, and is actively pursuing all the
alternatives. In addition, the Company continues to reduce its ongoing expenses and has
significantly curtailed its operating plans. The quarterly 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.

Principles of
Consolidation

The
consolidated financial statements include the accounts of Alliance Pharmaceutical Corp.,
the accounts of its wholly owned subsidiary Molecular Biosystems, Inc. (MBI)
from the acquisition date of December 29, 2000, its wholly owned subsidiaries Astral,
Inc. (Astral), MDV Technologies, Inc., and Alliance Pharmaceutical GmbH, its
majority-owned subsidiary Talco Pharmaceutical, Inc., and its majority-owned subsidiary
PFC Therapeutics, LLC (PFC Therapeutics) from June 18, 2003, when Alliance
acquired Baxter Healthcare Corporations (Baxter) ownership interest. Our
subsidiaries have minimal operations and significant intercompany accounts and
transactions have been eliminated.

Interim Condensed
Financial Statements

The
condensed consolidated balance sheet as of March 31, 2004, the condensed consolidated
statements of operations for the three and nine months ended March 31, 2004 and 2003,
and the condensed consolidated statements of cash flows for the nine months ended
March 31, 2004 and 2003 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 disclosures thereto included in the Companys
annual report on Form 10-KSB for the year ended June 30, 2003.

6

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Use of Estimates

The
preparation of financial statements in conformity with generally accepted accounting
principles 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
consolidated financial statements. 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 has not experienced any material losses on its short-term investments.

Revenue Recognition

Revenue
is generally recognized when all contractual obligations have been satisfied and
collection of the resulting receivable is reasonably assured.

Research
and Development Revenues Under Collaborative Agreements

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

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.

7

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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.

Computation of Earnings
Per Common Share

Basic
earnings per share was computed by dividing the net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings per share for the
three months and nine months ended March 31, 2004 reflect the potential dilution that
could occur if net income were divided by the weighted average number of common shares,
plus common shares from the exercise of outstanding stock options and warrants and the
conversion of preferred stock where the effect of those securities is dilutive. The
debentures outstanding during the nine months ended March 31, 2004 have not been included
in the diluted earnings per share calculation as the debentures were no longer convertible
following the consummation of the settlement agreements with the creditors at the time of
the sale of the Imagent assets. 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, 2003, as their inclusion would be anti-dilutive. The computations
for basic and diluted earnings per share are as follows:

|                                    | Income/(Loss)
(Numerator) |  | Shares
(Denominator) |             | Income/(Loss)
per share
|----------------------------------- | ------------------------- |  | -------------------- | ----------- | -----------------------
|Three Months ended March 31, 2004   |                           |  |                      |             |                        
|Basic earnings per share:           |                           | 
|Net income                          |                           |  | $                    | 12,782,000  |                        
|Diluted earnings per share:         |                           | 
|Dilutive stock options and warrants |                           |  |                      | --          |                        
|Series F preferred stock            |                           |  |                      | --          |                        
|                                    |                           |  |                      |             |                        
|Net income plus assumed conversions |                           |  | $                    | 12,782,000  |                        
|                                    |                           |  |                      |             |                        
|Nine Months ended March 31, 2004    |                           | 
|Basic earnings per share:           |                           | 
|Net income                          |                           |  | $                    | 12,344,000  |                        
|Diluted earnings per share:         |                           | 
|Dilutive stock options and warrants |                           |  |                      | --          |                        
|Series F preferred stock            |                           |  |                      | --          |                        
|                                    |                           |  |                      |             |                        
|Net income plus assumed conversions |                           |  | $                    | 12,344,000  |                        
|                                    |                           |  |                      |             |                        
|Three Months ended March 31, 2003   |                           | 
|Basic and diluted loss per share    |                           |  | $                    | (5,054,000  | )                      
|                                    |                           |  |                      |             |                        
|Nine Months ended March 31, 2003    |                           | 
|Basic and diluted loss per share    |                           |  | $                    | (22,129,000 | )                      
|                                    |                           |  |                      |             |                        

8

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Accounting for
StockBased Compensation

The
Company has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation and SFAS No. 148, an amendment to SFAS No. 123. In accordance with its
provisions, the Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans, and accordingly, no
compensation cost has been recognized for stock options during the three-month and
nine-month periods ended March 31, 2004 and 2003. 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 decreased
(increased) to the pro forma amounts indicated below for the three months and nine months
ended March 31:

|                                     | Three Months Ended March 31, 2004 |  | Three Months Ended March 31, 2003 |            | Nine Months Ended March 31, 2004 |   | Nine Months Ended March 31, 2003 |  
|------------------------------------ | --------------------------------- |  | --------------------------------- | ---------- | -------------------------------- | - | -------------------------------- | -
|Net income (loss)                    |                                   |  |                                   |            |                                  |   |                                  |  
|As reported                          |                                   |  | $                                 | 12,782,000 |                                  | $ | (5,054,000                       | )
|Fair value of stock-based            |                                   | 
|employee compensation                |                                   |  |                                   | (198,000   | )                                |   | (652,000                         | )
|                                     |                                   |  |                                   |            |                                  |   |                                  |  
|Pro forma                            |                                   |  | $                                 | 12,584,000 |                                  | $ | (5,706,000                       | )
|                                     |                                   |  |                                   |            |                                  |   |                                  |  
|                                     |                                   |  |                                   |           
|Net income (loss) per share, basic   |                                   | 
|As reported                          |                                   |  | $                                 | 0.45       |                                  | $ | (0.26                            | )
|Pro forma                            |                                   |  | $                                 | 0.44       |                                  | $ | (0.29                            | )
|                                     |                                   |  |                                   |           
|Net income (loss) per share, diluted |                                   | 
|As reported                          |                                   |  | $                                 | 0.43       |                                  | $ | (0.26                            | )
|Pro forma                            |                                   |  | $                                 | 0.42       |                                  | $ | (0.29                            | )
|                                     |                                   |  |                                   |           

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, 2004 and 2003
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 with the following assumptions for all periods:
risk-free interest rate range of 3.25% to 6.5%; dividend yield of 0%; volatility factor of
135%; and a weightedaverage expected term of 7 years. The estimated weighted average
fair value at grant date for the options granted during the three-month and nine-month
periods ended March 31, 2004 was $0.41 and $0.17 per option, respectively. The estimated
weighted average fair value at grant date for the options granted during the three-month
and nine-month periods ended March 31, 2003 was $0.07 and $0.26 per option, respectively.

9

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Comprehensive Income
(Loss)

SFAS
No. 130, Comprehensive Income requires unrealized gains and losses on the
Companys available-for-sale securities to be included in accumulated comprehensive
income (loss). During the three months and nine months ended March 31, 2004 and 2003, the
total comprehensive income (loss) was the same as the reported net income (loss).

|2. | PFC
THERAPEUTICS, LLC
|-- | ---------------------

In
May 2000, Alliance and Baxter entered into a joint venture for the manufacture,
marketing, sales, and distribution of OxygentTM in Europe and North
America. The companies formed PFC Therapeutics to oversee the further development,
manufacture, marketing, sales, and distribution of Oxygent. The Company accounted
for its investment of $5 million in PFC Therapeutics from May 2000 through June 2003 using
the equity method of accounting. There was no operating activity within the joint venture
from May 2000 through June 2003 and, therefore, there were no gains or losses resulting from
the joint venture.

In
June 2003, Alliance acquired Baxters 50% interest in PFC Therapeutics in exchange
for contingent payments to Baxter based on the future commercial sales of Oxygent
and other products. The percentage fee will be two percent (2%) of all of Alliances
or PFC Therapeutics future gross sales, if any, of the products, with a maximum
percentage fee of $30 million. In accordance with FASB No. 141, Business
Combinations, the Company has not recorded the value of the potential consideration to
be issued to Baxter for Baxters ownership interest in PFC Therapeutics as the future
payments are contingent on future commercial sales of an undeveloped product.

PFC
Therapeutics maintained $10 million of assets (of which the Companys investment in
PFC Therapeutics was $5 million) as of June 30, 2002 and 2001, and had no operating
activity (except the purchase of the prepaid royalty of $10 million from Alliance in 2000)
since inception of the joint venture.

In
June 2003, Alliance and certain of its creditors entered into an agreement (the
Participation Agreement), which, among other things, granted each creditor an
ownership interest in the OxygentBusiness (as defined in the Participation
Agreement). In April 2004, Alliance agreed to issue each of these creditors a warrant to
purchase a certain number of shares of Alliances common stock (the
Warrants). In exchange for the issuance of the Warrants, these creditors have
agreed to assign all of their rights under the Participation Agreement to Alliance.

|3. | SALE
OF Imagent®BUSINESS
|-- | ------------------------

On
June 18, 2003, IMCOR Pharmaceutical Co. (IMCOR), formerly known as Photogen
Technologies, Inc., acquired certain assets and assumed certain liabilities from Alliance
for approximately $1.1 million in cash and $3.5 million of IMCOR common stock. During the
period between 90 and 365 days after the closing, IMCOR agreed to pay up to $3 million and
deliver up to an aggregate of 1,985,522 shares of its common stock to completely settle
certain obligations of Alliance. The amount of consideration was determined through
arms-length negotiation. To the extent these obligations with certain creditors were
completely settled, Alliance recorded a gain from sale of assets of $10.6 million during
the year ended June 30, 2003 related to this disposition of an asset.

10

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On
February 5, 2004, IMCOR held a special meeting of its stockholders, where its stockholders
approved the issuance of more than 20% of IMCORs voting stock to certain creditors
of Alliance in connection with IMCORs assumed obligations of Alliance. During the
quarter ended March 31, 2004, Alliance recorded $13.3 million as a gain on the disposition
of an asset as a result of IMCOR issuing shares of its stock to Alliance creditors, IMCOR
funding $203,000 of Alliances obligations, and $9.4 million related to settlement
agreements entered into with creditors to reduce its obligations or IMCORs assumed
obligations of Alliance. For the nine-month period ended March 31, 2004, Alliance recorded
$15.7 million as a gain on the disposition of an asset as a result of IMCOR issuing shares
of its stock to Alliance creditors, IMCOR funding $963,000 of Alliances obligations,
and $11.1 million related to creditor settlements or IMCORs assumed obligations of
Alliance. To date, Alliance has recorded $26.3 million as a gain on the disposition of an
asset as a result of IMCOR issuing shares of its stock to Alliance creditors, IMCOR
funding $1.6 million of Alliances obligations, and $21 million related to settlement
agreements or IMCORs assumed obligations of Alliance. The remaining required cash
payments by IMCOR will not be applied against the corresponding liabilities of Alliance
until Alliance is legally released from the associated liabilities. Alliance will record
an additional gain on disposition of asset at the time that Alliance is legally released
from the liabilities.

In
addition, subsequent to the closing and through 2010, IMCOR is obligated to pay Alliance
further consideration in the form of an earn-out based on Imagent revenue invoiced
(subject to certain reductions). The assets acquired by IMCOR include 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 Federal Food & Drug Administration
(FDA) for marketing in the United States in June 2002.

The
amount of the earn-out will equal, for each year of the earn-out: (i) 7.5% of
Imagent revenue up to $20 million; (ii) 10% of Imagent revenue between $20
million and $30 million; (iii) 15% of Imagent revenue between $30 million and $40
million; and (iv) 20% of Imagent revenue above $40 million. The earn-out will be
reduced by amounts IMCOR must pay pursuant to a license agreement with Schering
Aktiengesellschaft (Schering), net of payments IMCOR receives from Schering
under the license agreement, and amounts of any indemnification claims IMCOR has against Alliance.
The earn-out is subject to three additional offsets (which are to be applied in the manner
described in the Asset Purchase Agreement dated June 18, 2003 by and between Alliance and
IMCOR (the Asset Purchase Agreement)) that entitle IMCOR to retain portions of
the earn-out otherwise payable to Alliance:

| |  | Up
to approximately $1.6 million for a fixed price offset, depending on the satisfaction of
certain          conditions;
| | - | ------------------------------------------------------------------------------------------------------------------------

11

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| |  | The
amount of any payments not committed to at closing IMCOR makes after the closing to
Alliances creditors plus up to $1 million of litigation expenses for certain patent
and other litigation; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Between
$4 million and $5 million, which is the principal and accrued interest under IMCORs
bridge loans to Alliance, depending on the satisfaction of certain conditions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
gain on disposition of Imagentassets of $15.7 million for the nine months ended
March 31, 2004 is calculated as follows (in thousands):

|                                        | 
|--------------------------------------- | 
|IMCOR issuance of common stock          | 
|IMCOR funding of Alliance's obligations | 
|Settlement agreements entered into with | 
|vendors and creditors                   | 
|                                        | 
|Gain on dispostion of Imagent asset for | 
|the nine months ended March 31, 2004    | 
|                                        | 

The
gain on disposition of Imagentassets of $26.3 million from the date of the sale to
March 31, 2004 is calculated as follows (in thousands):

|                                                                    | 
|------------------------------------------------------------------- | 
|IMCOR bridge loan to Alliance of $4,725 and accrued                 | 
|interest of $86, which was converted into a requirement by          | 
|Alliance to provide future royalty payments to IMCOR                | 
|IMCOR issuance of common stock                                      | 
|Cash payments by IMCOR for operating expenses on behalf of Alliance | 
|Assumption by IMCOR of operating liabilities and other debt         | 
|and settlements with vendors and creditors of Alliance              | 
|Assumption by IMCOR of Cardinal Health Agreement and related        | 
|line of credit                                                      | 
|Assumption by IMCOR of secured debentures, which held an effective  | 
|100% annualized interest rate (IMCOR has made payments of           | 
|$1.25 million as of June 30, 2003)                                  | 
|Carrying value of fixed assets of Alliance acquired by IMCOR        | 
|                                                                    | 
|Gain on sale of assets of Imagent to IMCOR                          | 
|                                                                    | 

12

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|4. | DEBT
OBLIGATIONS
|-- | ----------------

On
November 20, 2003, PFC Therapeutics sold a Secured Convertible Note in the principal
amount of $500,000 (the PFC Note) to an investor. According to the terms of
the PFC Note, upon consummation of a financing, the outstanding principal amount of the
PFC Note was, at the option of the investor, to convert into an equity interest in PFC
Therapeutics on the terms of equity portion (if any) of the financing. For purposes of the
PFC Note, financing was defined as any financing pursuant to which the Company
receives gross proceeds of $10 million. In the event the PFC Note was not converted in
connection with a financing, Alliance was to assign to the investor, as full repayment of
the PFC Note, 100% of the earn-out, up to an aggregate maximum amount of $1.5 million, to
be paid to Oxygentcreditors after January 1, 2006 (as defined in the
Imagent Asset Purchase Agreement dated June 18, 2003 by and between Alliance and
IMCOR). The investor also received a warrant to purchase a number of units of ownership
interests of PFC Therapeutics representing 10% of its issued and outstanding units
(determined on a fully-diluted basis on the date of exercise of the warrant) at an
exercise price of $0.01 per unit, at any time or from time to time from January 31, 2004
to and including January 31, 2009. The principal amount of the PFC Note is classified in
the current liabilities section of the Consolidated Balance Sheet at March 31, 2004. The
Company recorded imputed interest expense of $1 million and a beneficial conversion
feature charge of $1 million (included in interest expense) during the second quarter of
fiscal 2004 based on the valuation of the warrant issued in connection with the PFC Note.

On
February 13, 2004, the Company reached an agreement pursuant to which the PFC Note will be
converted into equity of PFC Therapeutics at the close of a financing and based on the
terms of the financing, and the warrant issued to the holder of the PFC Note will be
cancelled upon Alliance issuing 2.5 million shares of common stock to the note holder. A
registration statement will be filed in connection with the financing.

As
of June 18, 2003, the Company had received $5.8 million through the issuance of 8%
Convertible Secured Promissory Notes (the Notes) to various institutional
investors ($1.1 million) and IMCOR ($4.7 million). The Notes were to mature in two years
from the date of issuance and were convertible into shares of Alliances common stock
at $0.35 per share. Alliances obligations under the Notes were secured by certain of
its assets, including all of its assets related to and its rights and interests in
Imagent and Oxygent. In connection with the issuance of the Notes, Alliance
obtained the consent and waiver of anti-dilution rights from a majority of the investors
in the Companys October 2001 private placement. The Company also obtained a similar
consent and waiver from the holders of its 5% Convertible Debentures (the 2004
Debentures) issued in 2000. As amended in February 2003, these consents and waivers
applied to any future issuance of notes by the Company on the same terms as the Notes up
to an aggregate of $5 million. The Company reduced the exercise price on the warrants
issued to the investors in the October 2001 private placement from $3.38 to $0.35 per
share, in accordance with the terms of the warrants. Alliance reduced the conversion rate
of the 2004 Debentures to $1.60 per share. Alliance also agreed to issue warrants
exercisable for an aggregate of 2,000,000 shares of common stock, at an exercise price of
$0.50 per share, to holders of its 2004 Debentures and granted them a junior lien in the
assets securing the Notes.

In
connection with the sale of all of the assets related to designing, developing,
manufacturing, marketing, selling, licensing, supporting and maintaining Imagent, the
holders of the Notes (excluding IMCOR) and the holders of the 2004 Debentures agreed to
accept a Payout Amount (as defined in the Asset Purchase Agreement) in full satisfaction
of Alliances obligations and liabilities under such Notes and 2004 Debentures. To
induce the debt holders to enter into this agreement, Alliance and IMCOR agreed to deliver
certain consideration to each as described in the Asset Purchase Agreement and summarized
below. The debt of $4.8 million, including accrued interest, due to IMCOR has been
forgiven by IMCOR and will be repaid through a reduction of future Imagent royalty
payments, if any. In the event there are no future Imagent royalty payments, the value of
the Notes will remain forgiven.

13

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Upon
delivery of the specified consideration, Alliances obligations under the Notes and
the 2004 Debentures were terminated and satisfied in full, and each of the loan documents
was deemed terminated and of no further effect. The obligation of IMCOR to the debt
holders to deliver the consideration contemplated in the Asset Purchase Agreement is a
direct obligation of IMCOR for the benefit of Alliance, fully enforceable against IMCOR
irrespective of any actions, financial condition or other circumstances relating to IMCOR.
During the quarter, upon IMCOR issuing common stock as part of its outstanding obligation
to certain debt holders, the Company eliminated the carrying value of the short-term debt
totaling $12.1 million and recorded a corresponding gain on disposition of asset. The
Company also reduced accrued interest by $923,000 at March 31, 2004.

Alliances
specified consideration included the issuance of an aggregate of 4,555,000 shares of
common stock, which were issued on June 19, 2003, to certain secured creditors and up to
an aggregate of 14.84% interest in the Oxygent technology. The Company will value the
interest in Oxygent technology provided to certain creditors and record this value
as deferred royalty payments. As of March 31, 2004, the Company has recorded deferred
royalty payments of $1.25 million. Reductions to liabilities totaled $15.7 million due to
IMCOR issuance of stock to creditors, cash payments funded by IMCOR to vendors and
creditors, and settlements with vendors and creditors during the nine-month period ended
March 31, 2004. For settlement agreements with vendors that provide for extended repayment
terms, the Company will continue to record the entire outstanding obligation, less
payments to date, as the Company will not be released from the full liability until it has
repaid the entire settlement amount.  Upon repaying the agreed-upon settlement
amount, the Company will record a gain on settlement with creditors.

In
July and August 2002, the Company entered into two separate loan and security
agreements, totaling $3 million, with an investment firm. In connection with these
transactions, the Company issued warrants to purchase up to 200,000 shares of common stock
at an exercise price of $3.38 per share. As part of the sale of the Imagent assets,
IMCOR assumed Alliances obligations under these two loan and security agreements.

In
November 2000, the Company sold $7 million of five-year 6% subordinated convertible
notes. The notes were convertible at any time after November 15, 2001, at each
investors option into shares of Alliance common stock at $78.60 per share (as
adjusted for the 1:5 reverse stock split), 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. The balance of the restricted cash
account of $532,000 was withdrawn by the investors during the first quarter of fiscal
2004. Upon IMCOR issuance of common stock, the outstanding principal balance of $6.5
million was eliminated and a corresponding gain on sale of asset was recorded at March 31,
2004.

In
August and September 2000, the Company sold $12 million of four-year 5% subordinated
convertible debentures to certain investors. In connection with the issuance of the Notes
described above, Alliance obtained the consent and waiver of antidilution rights from the
investors. On June 18, 2003, the balance outstanding on these debentures was $5.9 million.
Pursuant to a payout agreement, the Company issued 1,250,000 shares of common stock and
paid $100,000 in cash to one of the investors. Upon IMCOR issuance of common stock, the
outstanding balance, including accrued interest, of $5.2 million was eliminated and a
corresponding gain on sale of asset was recorded at March 31, 2004.

14

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Pursuant
to a settlement agreement with a former landlord, the Company has a commitment to pay
$420,000 pursuant to a schedule included in the agreement. Accordingly, Alliance has made
payments totaling $35,000 and has included the balance of the compromised amount in
accrued expenses in the Consolidated Balance Sheet at March 31, 2004.

|5. | PREFERRED
STOCK
|-- | ---------------

In
May 2000, Alliance entered into a joint venture with Baxter and sold 500,000 shares of its
Series F Preferred Stock for $20 million. During the years ended June 30, 2003, 2002 and
2001, the Company sold to Baxter 6,250, 187,500 and 100,000 additional shares of its
Series F Preferred Stock for $250,000, $7.5 million and $4 million, respectively. The
shares are convertible based on the following provisions: 1) at the option of Baxter on or
after May 19, 2004; 2) upon 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 $22 per share ($110 per share
based on a post-reverse split of 5:1); or 4) at the option of Baxter upon a change of
control at Alliance. The Series F Preferred Stock has no annual dividend and is not
entitled to any voting rights except as otherwise required by law.

The
Series F Preferred Stock is convertible at the following conversion rates: 1) if
Alliances common stock price averages $22 ($110 per share on a post-reverse split
basis) per share over a 20-day period through May 19, 2004, the conversion price for the
Series F Preferred Stock will be $22 per share ($110 per share on a post-reverse split
basis); 2) if the license agreement between Alliance and PFC Therapeutics is terminated,
the conversion price will not be less than $10 per share ($50 per share on a post reverse
split basis); 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, as discussed below.

Certain
Limitations refers to the situation where if a conversion event occurs or a
conversion election is made and conversion of shares of Series F Preferred Stock would
result in the issuance by the Company of a number of shares (the Additional
Shares) of its common stock greater than the Issuance Limit, as defined below, then the
Company need not issue the Additional Shares, unless it first obtains shareholder approval
of the issuance of the Additional Shares. Issuance Limit means 9,389,477
shares (before the reverse stock split of 5:1) of common stock (that is, 19.9% of the
shares of common stock issued and outstanding as of May 16, 2000). If the Company does
not obtain shareholder approval for the issuance of the Additional Shares or in any event,
does not, prior to the expiration of 120 days after such conversion election, issue the
Additional Shares required to be issued as a result of such conversion event or conversion
election, the Company shall pay to each person entitled to receive such Additional Shares
an amount in cash equal to the aggregate market price of such Additional Shares on the day
that the conversion event occurred or the conversion election was made. The market price
for such day shall be the last reported sales price on the principal exchange on which the
common stock is listed, or if it is not so listed, the Nasdaq National Market or, if it is
not so listed, on the over-the-counter market.

15

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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 (post-reverse split of 5:1). 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.

|6. | SUBSEQUENT
EVENTS
|-- | -----------------

On
April 5, 2004, PFC Therapeutics and Nycomed, a leading European pharmaceutical company,
signed a collaboration agreement for Nycomed to develop and commercialize Oxygent
in Europe. Under terms of the agreement, Nycomed will be responsible for the remaining
clinical and regulatory development, and future marketing of Oxygent within a broad
European territory. The agreement also includes an option for Nycomed to acquire
Oxygent rights for China. PFC Therapeutics will be initially responsible for the
commercial supply of Oxygent to Nycomed and will receive a royalty on
Oxygent sales following commercialization.

On
April 19, 2004,PFC Therapeutics and Ilyang Pharm. Co., Ltd. (Ilyang),
a leading South Korean pharmaceutical research and development and marketing company, signed a licensing,
development and marketing agreement granting Ilyang exclusive rights to promote, market,
distribute and sell Oxygent for any approved clinical use, including all future
approved uses, in South Korea. Under terms of the agreement, PFC Therapeutics will be
initially responsible for the commercial supply of Oxygent to Ilyang and will
receive a royalty on Oxygent sales following commercialization. Ilyang will also
make certain future payments on the completion of various regulatory milestones for
development in Europe and the U.S.

The
goal of the Oxygent clinical development program will be to seek marketing
authorization for an indication to use Oxygent during surgery when tissues are in
acute need of additional oxygen supply, and thereby decrease or avoid the need for
transfusion of donor blood. Alliance will continue to pursue development and
commercialization of Oxygent in the U.S. and will continue working to secure
agreements for selected other countries.

In
April 2004, certain secured creditors that accepted an ownership interest in the
Oxygent technology as part of their payout amounts to satisfy Alliances
obligations and liabilities to such creditors agreed to exchange their ownership interest
in PFC Therapeutics for warrants to purchase shares of Alliances common stock.

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 of such years.)

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
operating losses since inception and, as of March 31, 2004, has an accumulated deficit of
$476 million. The Company expects to incur significant operating losses over at least the
next few years as the Company continues its research and product development efforts and
attempts to commercialize its products.

16

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The
Companys revenues have come primarily from collaborations with corporate partners,
including research and development, milestone and royalty 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.

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 2004, 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 Securities and
Exchange Commission from time to time, including the Company's latest Annual Report on Form 10-K for the fiscal year ended June 30, 2003.

17

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Research and Development

In
fiscal 2003, 2002 and 2001, the Company incurred research and development expenses for
Oxygent, an intravascular oxygen carrier being developed to augment oxygen delivery in
surgical and other patients at risk of acute oxygen deficit, of $3.1 million,
$13.9 million, and $27.1 million, respectively. Research and development costs
to date for our oxygen-carrying product candidates, including Oxygent, total approximately
$154 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 at least a few years, if at all, and, because of the
numerous risks and uncertainties associated with product development efforts, we are
unable to predict the extent of any future expenditures or when material net cash inflows
from Oxygent may commence, if at all.

Astral,
our wholly owned subsidiary, is engaged in the development of immunoglobulins that are
engineered to bear specific disease-associated peptides. In fiscal 2003, 2002 and
2001, Astral incurred research and development expenses of $1.5 million,
$2.9 million, and $2 million, respectively. Astrals research and
development costs to date total approximately $11 million. Because of the numerous risks
and uncertainties associated with early-stage technology platform research efforts, we are
unable to estimate with any certainty the costs of continued development of Astrals
product candidates for commercialization. We do not anticipate that any of Astrals
early-stage product candidates will reach the market for at least several years, if at
all.

In
December 2002, Alliance entered into an exclusive license agreement with Mixture Sciences,
Inc. (Mixture Sciences) for Mixture Sciences to acquire all rights to a
proprietary immunotherapy platform technology developed by Astral. Mixture Sciences
provided financing to support the overhead and salaries of key employees involved with
this technology for a secured position in the technology subject to a royalty-bearing
license. Alliance has certain rights to repurchase the technology by paying Mixture
Sciences a break-up fee. Alliance has recorded the funds, totaling $285,000 at March 31,
2004, from Mixture Sciences as a current liability.

In
fiscal 2003, 2002 and 2001, the Company incurred research and development expenses for
Imagent (an ultrasound contrast agent that was approved by the Federal Food and Drug
Administration for marketing in the United States in June 2002) of $11 million,
$12.9 million, and $12.4 million, respectively. Research and development costs
to June 18, 2003 for Imagent, totaled approximately $159 million.

In
fiscal 2003, 2002 and 2001, Alliance incurred research and development expenses of $0.6
million, $3.8 million, and $13.8 million, respectively, associated with
identifying and developing new product candidates from proprietary technology platforms.
Research and development costs to date for these early-stage efforts total approximately
$165 million. Because of the numerous risks and uncertainties associated with early-stage
technology platform research efforts, we are unable to estimate with any certainty the
costs of continued development of any product candidates for commercialization.
Alliances development programs will depend upon our ability to fund them. We do not
anticipate that any of our early-stage product candidates will reach the market for at
least several years, if at all.

18

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The
Company may encounter unforeseen technical or other problems that may force delay,
abandonment or substantial change in the development of a specific product or process,
technological change, or product development by others, any of which may materially
adversely affect its business.

Results of Operations

Nine Months ended March 31, 2004
as Compared with Nine Months ended March 31, 2003

For
the nine months ended March 31, 2004, the Company recorded a gain on the disposition of
assets of $15.7 million resulting from the issuance of IMCOR stock, payments from IMCOR to
fund Alliances obligations, the assumption by IMCOR of certain Alliance obligations,
and settlements with various vendors and creditors during the period in connection with
the Imagent asset sale transaction. (For additional information regarding the
Imagent asset sale transaction, see Liquidity & Capital Resources
below and Note 3 to the Unaudited Condensed Consolidated Financial Statements.) For
settlement agreements with vendors that provide for extended repayment terms, the Company
has recorded the entire outstanding obligation less payments to date, as the Company will
not be released from the full liability until completing the repayment terms. Upon
repaying the agreed-upon settlement amount, the Company will reduce the outstanding
obligation to zero and will record a gain on settlement with creditors. The balance of
such vendor agreements that provide for extended repayment, which will be recorded as a
gain upon the last payment by IMCOR, is $767,000 at March 31, 2004.

The
Companys revenue increased by approximately 21% to $64,000 for the nine months ended
March 31, 2004, compared to $53,000 for the nine months ended March 31, 2003. This
increase is due to an increase in royalties received from sales other than Imagent.

Research
and development expenses decreased by approximately 95% to $588,000 for the nine months
ended March 31, 2004, compared to $13 million for the nine months ended March 31,
2003. The decrease in expenses was primarily due to the downsizing, consolidation of
facilities and no manufacturing expenses, all of which are connected with the sale of the
Imagent assets, as well as to decreases related to the Companys other
research and development activities.

General
and administrative expenses decreased by approximately 87% to $791,000 for the nine months
ended March 31, 2004, compared to $6 million for the nine months ended March 31,
2003. The decrease in general and administrative expenses was primarily due to a
$2.6 million decrease in professional fees related to marketing activities and other
sales and marketing costs, as well as to decreases in other expenses due to the downsizing
and consolidation of facilities connected with the sale of the Imagent assets.

Investment
income decreased by approximately 88% to $7,000 for the nine months ended March 31, 2004,
compared to $60,000 for the nine months ended March 31, 2003. The decrease was primarily a
result of lower average cash balances.

Other
income was $84,000 for the nine months ended March 31, 2004, primarily a result of
proceeds recorded from insurance dividends and distributions, a decrease of approximately
74% compared to $329,000 for the nine months ended March 31, 2003, which was primarily a
result of proceeds recorded from the settlement of a lawsuit.

19

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Loss
on investment of $500,000 was recorded in fiscal year 2003 when the Company determined
that the decline in the valuation of its investment in Metracor Technologies, Inc. was
other than temporary.

Interest
expense was $2.2 million for the nine months ended March 31, 2004, a decrease of
approximately 29% compared to $3.1 million for the nine months ended March 31, 2003.
The decrease was primarily a result of debt settlements connected with the sale of the
Imagent assets in June 2003, partially offset by imputed interest and beneficial
conversion expenses of $2 million recorded in connection with the terms of the PFC Note
issued in the second quarter of fiscal 2004.

Three Months ended March 31, 2004
as Compared with Three Months ended March 31, 2003

For
the three months ended March 31, 2004, the Company recorded a gain on the disposition of
assets of $13.3 million resulting from the issuance of IMCOR stock, payments from IMCOR to
fund Alliances obligations, the assumption by IMCOR of certain Alliance obligations,
and settlements with various vendors and creditors during the period in connection with
the Imagent asset sale transaction. (For additional information regarding the
Imagent asset sale transaction, see Liquidity & Capital Resources
below and Note 3 to the Unaudited Condensed Consolidated Financial Statements.) For
settlement agreements with vendors that provide for extended repayment terms, the Company
has recorded the entire outstanding obligation less payments to date, as the Company will
not be released from the full liability until completing the repayment terms. Upon
repaying the agreed-upon settlement amount, the Company will reduce the outstanding
obligation to zero and will record a gain on settlement with creditors.

The
Company received no revenue during the three months ended March 31, 2004, compared to
$22,000 royalty revenue during the three months ended March 31, 2003.

Research
and development expenses decreased by approximately 93% to $205,000 for the three months
ended March 31, 2004, compared to $2.8 million for the three months ended
March 31, 2003. The decrease in expenses was primarily due to the downsizing,
consolidation of facilities and no manufacturing expenses, all of which are connected with
the sale of the Imagent assets, as well as to decreases related to the
Companys other research and development activities.

General
and administrative expenses decreased by approximately 73% to $326,000 for the three
months ended March 31, 2004, compared to $1.2 million for the three months ended
March 31, 2003. General and administrative expenses recorded for the quarter were
primarily legal fees. The decrease in general and administrative expenses was primarily
due to no marketing activities costs (approximately one half of the general and
administrative costs for the three months ended March 31, 2003), as well as to decreases
in other expenses due to the downsizing and consolidation of facilities connected with the
sale of the Imagent assets.

20

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Investment
income was $1,000 for the three months ended March 31, 2004, compared to $11,000 for the
three months ended March 31, 2003, a decrease of approximately 91%. The decrease was
primarily a result of lower average cash balances.

No
interest expense was recorded for the three months ended March 31, 2004, compared to
$1.1 million for the three months ended March 31, 2003. This was primarily the result
of debt settlements connected with the sale of the Imagent assets.

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.

Liquidity and Capital
Resources

Through
March 31, 2004, the Company has financed its activities primarily from public and private
sales of equity, debt issuance, and funding from collaborations with corporate partners.

On
June 18, 2003, IMCOR acquired the Imagent assets and assumed certain liabilities
from Alliance for approximately $1.1 million in cash and $3.5 million of IMCOR common
stock. During the period between 90 and 365 days after the closing, IMCOR is obligated to
pay up to $3 million and deliver up to an aggregate of 1,985,522 shares of its common
stock to completely settle certain obligations of Alliance. The amount of consideration
was determined through arms-length negotiation. In addition, subsequent to the closing and
through 2010, IMCOR is obligated to pay Alliance further consideration in the form of an
earn-out based on Imagent revenue invoiced (subject to certain reductions). See
Note 3 to the Unaudited Condensed Consolidated Financial Statements above for additional information on the Imagent Asset sale transaction.

As
part of IMCORs purchase of the Imagent assets, IMCOR assumed certain debt
obligations that Alliance entered into in July and August 2002, which included two
separate loan and security agreements that totaled $3 million with an investment firm
at an effective 100% annualized interest rate. IMCOR assumed a total of $3.8 million of obligations plus
unpaid accrued interest.

The
rights Alliance was entitled to under a license agreement with Schering were transferred
to IMCOR at the consummation of its acquisition of the Imagent assets. IMCOR also
assumed a marketing agreement and line of credit totaling $2.5 million in connection with
its acquisition of the Imagent assets.

As
of June 18, 2003, the Company had received $5.8 million through the issuance of the
Notes to various institutional investors and IMCOR. In connection with the sale of the
Imagent assets, the holders of the Notes (excluding IMCOR) and the holders of the
2004 Debentures agreed to accept a Payout Amount (as defined in the Asset Purchase
Agreement) in full satisfaction of Alliances obligations and liabilities under such
Notes and 2004 Debentures. To induce the debt holders to enter into this agreement,
Alliance and IMCOR agreed to deliver certain consideration to each as described in the
Asset Purchase Agreement. Upon delivery of the specified consideration, Alliances
obligations were terminated and satisfied in full, and each of the loan documents was
deemed terminated and of no further effect. It is understood that the obligation of IMCOR
to the debt holders to deliver the consideration contemplated in the Asset Purchase
Agreement is a direct obligation of IMCOR for the benefit of Alliance, fully enforceable
against IMCOR irrespective of any actions, financial condition or other circumstances
relating to IMCOR hereafter. Upon IMCOR issuing shares of common stock, the outstanding
balance, including interest, of $1.2 million was eliminated and a corresponding gain on
disposition of asset was recorded at March 31, 2004.

21

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In
November 2000, the Company sold $7 million of five-year 6% subordinated convertible
notes to certain investors. 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. The balance of the restricted cash account of $532,000 was withdrawn by the
investors during the first quarter of fiscal 2004. Upon IMCOR issuing shares of common
stock, the outstanding balance $6.5 million was eliminated and a corresponding gain on
sale of asset was recorded at March 31, 2004.

In
August and September 2000, the Company sold $12 million of four-year 5% subordinated
convertible debentures to certain investors. On June 18, 2003, the balance
outstanding on these debentures was $5.9 million. Pursuant to the payout agreement, the
Company issued 1,250,000 shares of common stock and paid $100,000 in cash to one of the
investors. Upon IMCOR issuing shares of common stock, the outstanding balance, including
accrued interest, of $5.2 million was eliminated and a corresponding gain on sale of asset
was recorded at March 31, 2004.

On
October 18, 2002, Alliances common stock was delisted from the Nasdaq National
Market for failure to meet the continued listing requirements. The Companys common
stock is now trading on the Over-the-Counter Bulletin Board under the symbol ALLP.OB.

The
Company had a net working deficit of $4.5 million at March 31, 2004, compared to $20.9
million at June 30, 2003. The Companys cash and cash equivalents decreased
to $116,000 at March 31, 2004, from $763,000 at June 30, 2003. The decrease
resulted primarily from net cash used in operations of $2.3 million, partially offset by
cash received from IMCOR of $963,000 for payments to creditors in connection with the sale
of the Imagent assets, the $500,000 received from the sale of the PFC Note, and
$195,000 received from the exercise of warrants and stock options. The Companys
operations to date have consumed substantial amounts of cash and are expected to continue
to do so for the foreseeable future.

If
the Company is successful in securing additional financing, the Company expects to incur
substantial expenditures associated with product development. The Company may seek
additional collaborative research and development relationships with suitable corporate
partners for its products. There can be no assurance that such relationships, if any, will
successfully reduce the Companys funding requirements. Additional equity or debt
financing may be required, and there can be no assurance that such financing will be
available on reasonable terms, if at all. Because adequate funds were not available, the
Company has delayed its Oxygent development efforts and it has delayed, scaled
back, and eliminated one or more of its other product development programs, and it may be
required to 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.

22

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The
Company lacks sufficient working capital to fund operations beyond June 30, 2004.
Therefore, substantial additional capital resources will be required to fund the ongoing
operations related to the Companys research, development, and business development
activities. The report of the Companys independent auditors on the Companys
fiscal 2003 financial statements includes a paragraph that notes that the Companys
financial condition raises substantial doubt about its ability to continue as a going
concern. Management believes there are a number of potential alternatives available to
meet the continuing capital requirements such as public or private financings or
collaborative agreements. Under the Asset Purchase Agreement of the sale of the Imagentassets, the following debt was either assumed by IMCOR or settled through payout
agreements: $5.5 million of secured debt, $2.5 million drawn on a line of credit, a $2.4
million capital lease, $3.8 million in accounts payable and accrued expenses, and $12.1
million in secured convertible debt. Also, as part of the agreement, the IMCOR portion of
the 8% convertible debt of $4.8 million has been forgiven and will be repaid by a
reduction of future Imagent royalty payments, if any. See Note 3 to the Unaudited
Condensed Consolidated Financial Statements above.

The
Company is taking continuing actions to reduce its ongoing expenses. If adequate funds are
not available, the Company will be required to significantly curtail its plans and may
have to sell or license out significant portions of the Companys remaining
technologies or potential products. The quarterly 2004 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.

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 collaborative relationships, and the ability of the Company to
establish additional collaborative relationships.

Critical Accounting
Policies

There
were no significant changes in critical accounting policies or estimates from those in place at
June 30, 2003.

# Item 3.   Controls And
Procedures

(a)      
          Evaluation of Disclosure Controls and Procedures.
          Our Chief Executive Officer and Chief Financial Officer, which is the same
          person, has evaluated the effectiveness of our disclosure controls and
          procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
          Securities Exchange Act of 1934, as amended (the Exchange Act)) as
          of the end of the period covered by this quarterly report (the Evaluation
          Date). Based on such evaluation, such officer has concluded that, as of
          the Evaluation Date, our disclosure controls and procedures are effective in
          alerting him on a timely basis to material information relating to our Company
          (including our consolidated subsidiaries) required to be included in our reports
          filed or submitted under the Exchange Act.

23

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(b)      
          Changes in Internal Controls over Financial
          Reporting. During the most recent fiscal quarter, there have
          not been any significant changes in our internal controls over financial
          reporting or in other factors that have materially affected, or are reasonably
          likely to materially affect, our internal controls over financial reporting.

# Part II Other
Information:

# Item 1.   Legal Proceedings

In
April 2004, Mt. Sinai School of Medicine of New York University and Alliance settled a
lawsuit concerning breach of two license agreements. The settlement agreement does not
require any payments by either party to the other.

On
July 2, 2003, Hub Properties Trust (Hub) filed a lawsuit in the Superior Court
of the State of California for the County of San Diego against Alliance, Immune Complex
Corporation, Immune Complex, LLC (collectively Immune Complex), and other
parties. The suit alleges that the defendants are liable for damages Hub suffered because
it was unable to lease two properties due to defendants failure to timely deactivate
the radiological materials licenses on the properties. On August 21, 2003, Immune Complex
filed its cross-complaint for indemnity against Alliance. Alliance has filed a
cross-complaint against Hub for damages. Alliance has also filed a motion for summary
adjudication of its claim that the delay in decommissioning the radioactive material
license cannot constitute a holdover tenancy under the lease as a matter of law.
Opposition to such motion has not yet been filed. Alliance believes that Hubs claims are completely
without merit or subject to defenses; however, there can be no assurances that Alliance
will ultimately prevail or that the outcome of the action will not have a material adverse
effect on the Companys future financial position or results of operations.

On
June 13, 2003, Alliance and IMCOR jointly brought a patent infringement action against
Amersham Health Inc., Amersham Health AS and Amersham Health plc (collectively,
Amersham) in the United States District Court for the District of New Jersey.
The lawsuit alleges that through the sale of Amershams Optison product,
Amersham and its related entities infringe on seven patents acquired by IMCOR through its
purchase of the Imagentassets. Alliance and IMCOR are seeking damages and
injunctive relief against Amersham. Amersham brought counterclaims against Alliance and
Alliances subsidiary MBI asserting breach of contract claims, breach of good faith
and fair dealing, and tortious interference with contractual relations against Alliance
and MBI. The Company believes that Amershams counterclaims are completely without
merit; however, there can be no assurances that the Company will ultimately prevail or
that the outcome of the action will not have a material adverse effect on the
Companys future financial position or results of operations.

24

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In
December 2001, a lawsuit was filed against MBI in the U.S. District Court for the Northern
District of Illinois. The plaintiff in the action alleged that MBI breached a license
agreement and sought damages and a declaratory judgment terminating the license agreement,
and payment of fees and expenses. In December 2003, the court entered a judgment in favor
of MBI. On January 29, 2004, the court denied plaintiffs motion to amend the
judgment. On February 25, 2004, the plaintiff appealed the courts judgment. A
settlement conference has been scheduled for June 11, 2004. The Company believes that the
appeal is without merit; however, there can be no assurances that MBI will ultimately
prevail or that the outcome of the action will not have a material adverse effect on the
Companys future financial position or results of operations.

On
February 23, 2001, a lawsuit was filed by two former shareholders of MBI purportedly on
behalf of themselves and others against the Company 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 that the Companys registration statement filed in
connection with the acquisition of MBI contains misrepresentations and omissions of
material facts in violation of certain federal securities laws. In May 2001, the actions
were consolidated. The plaintiffs are 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 the Company 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. A trial date of November 8, 2004 has been set in the lawsuit. The Company believes
that the lawsuit is completely without merit; however, there can be no assurances that the
Company will ultimately prevail or that the outcome will not have a material adverse
effect on Companys future financial position or results of operations.

# Item 2.   Changes in
Securities

None.

# Item 3.   Defaults Upon
Senior Securities

None.

25

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

An
annual meeting of shareholders of the Company was held on March 2, 2004. The following
directors were re-elected for the following year and until the election and qualification
of their respective successors:

|Director               | For | Against | Withheld | Broker
Non-Votes
|---------------------- | --- | ------- | -------- | ----------------
|Pedro Cuatrecasas, M.D |     |         |          | 21,338,799      
|Carroll O. Johnson     |     |         |          | 21,336,436      
|Stephen M. McGrath     |     |         |          | 21,338,258      
|Donald E. O'Neill      |     |         |          | 21,337,086      
|Jean G. Riess, Ph.D    |     |         |          | 21,339,166      
|Duane J. Roth          |     |         |          | 21,292,596      
|Theodore D. Roth       |     |         |          | 21,285,348      

# Item 5.   Other Information

None.

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

| | (a) | Exhibits
| | --- | --------

| | 4.1 | Warrant
to Purchase 4,500,000 Shares of Common Stock, $.01 Par Value Per Share issued to Brown
Simpson Partners I, Ltd. (Included in Exhibit 10.4 to this Form 10-QSB).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2 | Warrant
to Purchase 540,000 Shares of Common Stock, $.01 Par Value Per Share issued to SDS
Merchant Fund, L.P. (Included in Exhibit 10.5 to this Form 10-QSB).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.3 | Warrant
to Purchase 675,000 Shares of Common Stock, $.01 Par Value Per Share issued to Stroock
& Stroock & Lavan, LLP (Included in Exhibit 10.6 to this Form 10-QSB).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1 | Letter
Agreement between Technology Gateway Partnership, L.P., and PFC Therapeutics, LLC,
                     dated February 13, 2004.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | Development,
Assignment and Supply Agreement dated April 1, 2004 between PFC Therapeutics, LLC, and
Nycomed Danmark ApS (a portion of this exhibit has been omitted pursuant to a request for
confidential treatment being filed with the Securities and Exchange Commission).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 | Licensing,
Development and Marketing Agreement dated April 19, 2004 by and between PFC
                     Therapeutics, LLC, and Ilyang Pharm. Co., Ltd. (a portion of this
exhibit has been omitted                      pursuant to a request for confidential
treatment being filed with the Securities and Exchange                      Commission).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.4 | Assignment
dated April 7, 2004 by and between Brown Simpson Partners I, Ltd., and Alliance Pharmaceutical
Corp.
| | ---- | ---------------------------------------------------------------------------------------------------------------

| | 10.5 | Assignment
dated April 7, 2004 by and between SDS Merchant Fund, L.P., and Alliance Pharmaceutical
Corp.
| | ---- | --------------------------------------------------------------------------------------------------------

| | 10.6 | Assignment
dated April 7, 2004 by and between Stroock & Stroock & Lavan, LLP, and Alliance
Pharmaceutical Corp.
| | ---- | ---------------------------------------------------------------------------------------------------------------

| | 31.1 | Chief
Financial Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------------------------------

| | 31.2 | Chief
Financial Officer's Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | ------------------------------------------------------------------------------------------------

| | 32 | Chief
Executive Officer's and Chief Financial Officer's Certificate Pursuant to Section 906 of
                     the Sarbanes-Oxley Act of 2002.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------

27

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# SIGNATURES

In
accordance with the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

| | ALLIANCE PHARMACEUTICAL CORP.
| | -----------------------------
| | By:                          
| |                              

Date:   May 17, 2004

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