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 December 31, 2003

or

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

For the transition
period from to

Commission File Number
0-12950

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

|New York                                           | 14-1644018            
|-------------------------------------------------- | ----------------------
|(State or other jurisdiction                       | (I.R.S. Employer      
|of incorporation or organization)                  | Identification Number)
|6175 Lusk Boulevard                               
|San Diego, California                              | 92121                 
|(Address of principal                              | Zip Code              
|executive offices)                                
|Registrant's telephone number,including area code: | (858) 410-5200        

Indicate by a check whether the
registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.

|Yes  X | No
|------ | --

As of February 13, 2004, Registrant
had 28,398,961 shares of its Common Stock, $.01 par value, outstanding.

Transitional Small
Business Form (check one):

|Yes | No  X
|--- | -----

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# ALLIANCE PHARMACEUTICAL
CORP.

INDEX

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

2

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# Part I Financial
Information:Item 1.  Financial Statements

# ALLIANCE PHARMACEUTICAL
CORP. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

---

|                                                              
|--------------------------------------------------------------
|Assets                                                        
|Current assets:                                               
|Cash and cash equivalents                                     
|Other current assets                                          
|                                                              
|Total current assets                                          
|Restricted cash                                               
|Other assets - net                                            
|                                                              
|                                                              
|                                                              
|Liabilities and Stockholders' Deficit                         
|Current liabilities:                                          
|Accounts payable                                              
|Accrued expenses                                              
|Short-term debt                                               
|                                                              
|Total current liabilities                                     
|Other liabilities                                             
|Stockholders' deficit:                                        
|Preferred stock - $.01 par value; 5,000,000 shares authorized;
|793,750 shares of Series F issued and outstanding at          
|December 31, 2003 and June 30, 2003                           
|Common stock - $.01 par value; 125,000,000 shares authorized; 
|28,397,461 and 27,973,961 shares issued and outstanding at    
|December 31, 2003 and June 30, 2003, respectively             
|Additional paid-in capital                                    
|Accumulated deficit                                           
|                                                              
|Total stockholders' deficit                                   
|                                                              
|                                                              
|                                                              

|Note: | The
balance sheet at June 30, 2003 has been derived from the audited consolidated 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

---

|                                            
|--------------------------------------------
|2003                                        
|(Unaudited)                                 
|Revenues:                                   
|Royalty, license and research revenue       
|Operating expenses:                         
|Research and development                    
|General and administrative                  
|                                            
|                                            
|                                            
|Loss from operations                        
|Investment income                           
|Other income                                
|Loss on investment                          
|Interest expense                            
|Gain on disposition of asset                
|                                            
|Net loss                                    
|                                            
|Net loss per common share, basic and diluted
|                                            
|Weighted average shares outstanding,        
|basic and diluted                           
|                                            

See Accompanying Notes to
Condensed Consolidated Financial Statements

4

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

---

|                                                                          
|--------------------------------------------------------------------------
|2003                                                                      
|(Unaudited)                                                               
|Operating activities:                                                     
|Net 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 assets                                             
|Changes in operating assets and liabilities:                              
|Restricted cash and other assets                                          
|Accounts payable and accrued expenses and other                           
|                                                                          
|Net cash used in operating activities                                     
|                                                                          
|Investing activities:                                                     
|Property, plant and equipment                                             
|Proceeds from disposition of assets                                       
|                                                                          
|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 for the entire fiscal
year ending 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., MDV Technologies, Inc., 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 December 31, 2003, the condensed consolidated
statements of operations for the three months and six months ended December 31, 2003 and
2002, and the condensed consolidated statements of cash flows for the six months ended
December 31, 2003 and 2002 are unaudited. In the opinion of management, such unaudited
financial statements include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for the periods presented.
Interim results are not necessarily indicative of the results to be expected for the full
year. The financial statements should be read in conjunction with the Companys
consolidated financial statements and footnotes thereto included in the Companys
annual report on Form 10-K for the year ended June 30, 2003.

# 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.

6

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# 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.

# 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 Net Loss
Per Common Share

Basic
loss per share was computed by dividing the net loss by the weighted average number of
common shares outstanding during the period. All potential dilutive common shares have
been excluded from the calculation of diluted loss per share for the three months and six
months ended December 31, 2002 and 2003, as their inclusion would be anti-dilutive.

7

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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
six-month periods ended December 31, 2003 and 2002. 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 loss and net loss per share would have been increased to the pro forma
amounts indicated below for the three months and six months ended December 31:

|                                      | Three Months Ended
December 31 | Three Months Ended
December 31 | Six Months Ended
December 31 | Six Months Ended
December 31
|------------------------------------- | ------------------------------ | ------------------------------ | ---------------------------- | ----------------------------
|
|Net loss                              |                                |                                |                              |                             
|As reported                           |                                |                                | $                            | (2,050,000                  
|Fair value of stock-based             |                                |                               
|employee compensation                 |                                |                                |                              | (198,000                    
|                                      |                                |                                |                              |                             
|Pro forma                             |                                |                                | $                            | (2,248,000                  
|                                      |                                |                                |                              |                             
|Net loss per share, basic and diluted |                                |                               
|As reported                           |                                |                                | $                            | (0.07                       
|Pro forma                             |                                |                                | $                            | (0.08                       

The
impact of outstanding non-vested stock options granted prior to 1996 (the effective date
of SFAS 123) has been excluded from the pro forma calculations; accordingly, the pro forma
adjustments for the three-month and six-month periods ended December 31, 2003 and 2002 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 six-month period ended
December 31, 2003 was $0.16 per option. (No options were granted during the three-month
period ended December 31, 2003.) The estimated weighted average fair value at grant date
for the options granted during the three-month and six-month periods ended December 31,
2002 was $0.08 and $0.26 per option, respectively.

# 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 six months ended December 31, 2003, the total
comprehensive income (loss) was the same as the reported net income. During the three
months and six months ended December 31, 2002, the total comprehensive loss, which
includes the unrealized gain or loss on available-for-sale securities, was $7.7 million
and $17.1 million, respectively.

8

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# 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 the 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 and losses resulting
in 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 shall 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.

# 3.  SALE OF
Imagent® BUSINESS

On
June 18, 2003, Photogen Technologies, Inc. (Photogen) acquired certain assets
and assumed certain liabilities from Alliance for approximately $1.1 million in cash and
$3.5 million of Photogen common stock. During the period between 90 and 365 days after the
closing, Photogen is obligated to pay up to $3 million and deliver up to an aggregate of
1,985,522 shares of its common stock to certain creditors of Alliance. The amount of
consideration was determined through arms-length negotiation. 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. During the second fiscal quarter ended December 31, 2003,
Alliance recorded $513,000 as a gain on the disposition of an asset as a result of
Photogen funding $498,000 of Alliances obligations and $15,000 related to settlement
agreements entered into with creditors to reduce its obligations. For the six-month period
ended December 31, 2003, Alliance recorded $2.4 million as a gain on the disposition of an
asset as a result of Photogen funding $760,000 of Alliances obligations and $1.7
million related to creditor settlements. To date, Alliance has recorded $13 million as a
gain on the disposition of an asset as a result of Photogen funding $1.4 million of
Alliances obligations, and $11.6 million related to settlement agreements.

The
remaining required cash payments and issuances of common stock by Photogen 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 assets at the time that Alliance is legally released from the liabilities.

In
addition, subsequent to the closing and through 2010, Photogen 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 Photogen 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.

9

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The
amount of the earn-out will equal, for each year of the earn-out: (i) 7.5% of
Imagent revenue up to $20,000,000; (ii) 10% of Imagent revenue between
$20,000,000 and $30,000,000; (iii) 15% of Imagent revenue between $30,000,000; and
(iv) $40,000,000 and 20% of Imagent revenue above $40,000,000. The earn-out will be
reduced by amounts Photogen must pay pursuant to a license agreement with Schering
Aktiengesellschaft (Schering), net of payments they receive from Schering
under the license, and amounts of any indemnification claims Photogen 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 Photogen (the Asset Purchase Agreement) that entitle Photogen to
retain portions of the earn-out otherwise payable to Alliance:

| |  | Up
to approximately $1,600,000 for a fixed price offset, depending on the satisfaction of
certain conditions;
| | - | -------------------------------------------------------------------------------------------------------------

| |  | The
amount of any payments not committed to at closing Photogen makes after the closing to
Alliances creditors plus up to $1,000,000 of litigation expenses for certain patent
and other litigation; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Between
$4,000,000 and $5,000,000, which is the principal and accrued interest under Photogens
bridge loans to Alliance, depending on the satisfaction of certain conditions.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
gain on disposition of Imagentassets of $2.4 million for the six months ended
December 31, 2003 is calculated as follows (in thousands):

|Photogen funding of Alliance's obligations                             |  |  | $ | 760   | 
|---------------------------------------------------------------------- |  |  | - | ----- | 
|Settlement agreements entered into with vendors and creditors          |  |  |   | 1,652 | 
|                                                                       |  | 
|Gain on dispostion of Imagent assets for the six months ended 12/31/03 |  |  | $ | 2,412 | 
|                                                                       |  | 

The
gain on disposition of Imagentassets of $13 million from the date of the sale to
December 31, 2003 is calculated as follows (in thousands):

|Photogen 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 Photogen                |  |  | $ | 4,811  |  
|Cash payments by Photogen for operating expenses on behalf of Alliance |  |  |   | 1,417  |  
|Assumption by Photogen of operating liabilities and other debt         |  | 
|and settlements with vendors and creditors of Alliance                 |  |  |   | 6,040  |  
|Assumption by Photogen of Cardinal Health Agreement and related        |  | 
|line of credit                                                         |  |  |   | 2,460  |  
|Assumption by Photogen of secured debentures, which held an effective  |  | 
|100% annualized interest rate (Photogen has made payments of           |  | 
|$1.25 million as of June 30, 2003)                                     |  |  |   | 5,541  |  
|Carrying value of fixed assets of Alliance acquired by Photogen        |  |  |   | (7,240 | )
|                                                                       |  | 
|Gain on sale of assets of Imagent to Photogen                          |  |  | $ | 13,029 |  
|                                                                       |  | 

10

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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 shall, at the option of the investor, 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 is defined as any financing pursuant to which the Company
receives gross proceeds of $10 million. In the event the PFC Note is not converted in
connection with a financing, Alliance shall 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
Photogen). The investor also received a warrant to purchase a number of units of
membership 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 December 31, 2003.
The Company recorded imputed interest expense of $1 million and a beneficial conversion
feature charge of $1 million (included in interest expense) during the three months ended
December 31, 2003 based on the valuation of the warrant issued in connection with the PFC
Note.

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 Photogen ($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 Photogen) 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 Photogen
agreed to deliver certain consideration to each as described in the Asset Purchase
Agreement and summarized below. The outstanding balance of the Notes is $1.2 million,
including accrued interest, at December 31, 2003, and is classified in the current
liabilities section of the Consolidated Balance Sheet at December 31, 2003. The debt of
$4.8 million, including accrued interest, due to Photogen has been forgiven by Photogen
and will be repaid through a reduction of future Imagentroyalty payments, if any.
In the event there are no future Imagent royalty payments, the value of the
Notes will remain forgiven.

11

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Upon
delivery of the specified consideration, Alliances obligations under the Notes and
the 2004 Debentures shall be terminated and satisfied in full, and each of the loan
documents shall be deemed terminated and of no further effect. The obligation of Photogen
to the debt holders to deliver the consideration contemplated in the Asset Purchase
Agreement is a direct obligation of Photogen for the benefit of Alliance, fully
enforceable against Photogen irrespective of any actions, financial condition or other
circumstances relating to Photogen. The Company will reduce the carrying value of the
short-term debt totaling $12.1 million and accrued interest of $0.9 million at December
31, 2003 upon Photogen providing the remaining required cash payments and as the common
stock is distributed to the debt holders. The Company will not receive a formal legal
release of the outstanding obligations from the related debt holders until the payments
are made and/or the shares are distributed; therefore, the Company will maintain these
liabilities until settled by Photogen, at which time the Company will record a
corresponding gain on disposition of assets.

Alliances
specified consideration includes the issuance of an aggregate of 4,555,000 shares of
common stock, which were issued on June 19, 2003, to certain secured creditors; cash
payments funded by Photogen made at closing and to be made during the period between 90
and 365 days after the closing; and up to an aggregate of 14.84% interest of
Oxygent technology. If Photogen meets its obligation in funding the cash payments
to Alliances debt holders and creditors, Alliances short-term debt as recorded
at December 31, 2003, will be decreased by $12.1 million, along with reductions in
accounts payable and accrued expenses; however, the Company will value the interest in
Oxygent technology provided to certain creditors and record this value as deferred
royalty payments. As of December 31, 2003, the Company has recorded deferred royalty
payments of $750,000. Reductions to accounts payable and accrued expenses totaled $760,000
due to cash payments, which were funded by Photogen, to vendors and creditors and $1.7
million due to settlements with vendors and creditors during the six-month period ended
December 31, 2003. For settlement agreements with vendors and creditors 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,
Photogen assumed Alliances obligation 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 quarter ended September 30,
2003. The outstanding principal balance of $6.5 million is due and payable and classified
in the current liabilities section of the Consolidated Balance Sheet at December 31, 2003.
Photogen is responsible for the remaining balance of the liabilities; however, if Photogen
is unable to make the necessary payments, the convertible note holders have recourse
against the Company. Pursuant to the agreement, the investors will also receive shares of
Photogen common stock.

12

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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. As of December 31, 2003, the outstanding
principal balance is $4.5 million and accrued interest is $733,000. The outstanding
principal balance and accrued interest are due and payable and classified in the current
liabilities section of the Consolidated Balance Sheet at December 31, 2003. Photogen is
responsible for the remaining balance of the liabilities; however, if Photogen is unable
to make the necessary payments, the convertible debenture holders have recourse against
the Company. Pursuant to the agreement, the investors will also receive shares of Photogen
common stock.

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 made its
first payment of $15,000 and has included the balance of the compromised amount in accrued
expenses in the Consolidated Balance Sheet at December 31, 2003.

# 5.  PREFERRED STOCK

In
May 2000, the Company entered into a joint venture with Baxter and sold 500,000
shares of its convertible Series F Preferred Stock for $20 million. For the
2003, 2002 and 2001 fiscal years, the Company sold to Baxter 6,250, 187,500 and 100,000
additional shares of its convertible Series F Preferred Stock for $250,000, $7.5
million and $4 million, respectively. The shares are convertible at Baxters
option on or after May 14, 2004. If Alliances common stock price averages $22 per
share over a 20-day period within the next two years, the conversion price for the
Series F Preferred Stock will be $22 (prior to effect of reverse-stock split) per
share. If the stock does not reach that price, the conversion price will be based on the
market value of Alliances common stock at the time of conversion, subject to certain
limitations. The Series F Preferred Stock has no annual dividend and is not entitled
to any voting rights except as otherwise required by law. There are currently no shares of
Series G Preferred Stock or Series H Preferred Stock outstanding.

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, Series G
Preferred Stock or Series H Preferred Stock (the shares of the three series collectively,
the Preferred Shares) would, when taken together with the conversion of any
other Preferred Shares, result in the issuance by the Company of a number of shares (the
Additional Shares) of its Common Stock greater than the Issuance
Limit, 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 reverse-stock split) 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 event or
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.

13

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# 6.  SUBSEQUENT EVENTS

IMCOR
Pharmaceutical Co. (IMCOR), formerly known as Photogen Technologies, Inc.,
held a special meeting of its stockholders on February 5, 2004, where its stockholders
approved the issuance of more than 20% of the Companys voting stock to certain
creditors of Alliance and IMCOR in connection with IMCORs acquisition of
Alliances assets related to its imaging and diagnostic imaging business, which
closed on June 18, 2003. When such stock is issued to Alliances creditors,
short-term debt will be reduced by approximately $8.4 million.

The
Company reached an agreement on February 13, 2004 pursuant to which the PFC Note will be
converted into equity in PFC Therapeutics, and the warrant issued to the holder of the PFC
Note will be cancelled.

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

Since
commencing operations in 1983, the Company has applied substantially all of its resources
to research and development programs and to clinical trials. The Company has incurred
operating losses since inception and, as of December 31, 2003, has an accumulated deficit
of $488.9 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.

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 latest Form 10-K.

14

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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 will cost at least an additional $60 million. We do
not anticipate that Oxygent will reach the market for at least a few years, 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
Inc. 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, Inc. 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 December
31, 2003, 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.

15

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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

# Six Months ended
December 31, 2003 as Compared with Six Months ended December 31, 2002

For
the six months ended December 31, 2003, the Company recorded a gain on the disposition of
assets of $2.4 million resulting from payments (totaling $760,000) from Photogen to fund
Alliances obligations and settlements (totaling $1.7 million) with various vendors
and creditors during the period in connection with the Imagent asset sale
transaction. For settlement agreements with vendors and creditors 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s revenue increased to $64,000 for the six months ended December 31,
2003, compared to $31,000 for the six months ended December 31, 2002. This
increase is due to an increase in royalties received.

Research
and development expenses decreased by 96% to $383,000 for the six months ended
December 31, 2003, compared to $10.2 million for the six months ended
December 31, 2002. The decrease in expenses was primarily due to the downsizing,
consolidation of facilities and no manufacturing, 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 90% to $465,000 for the six months
ended December 31, 2003, compared to $4.8 million for the six months ended
December 31, 2002. The decrease in general and administrative expenses was primarily
due to a $1.7 million decrease in professional fees related to marketing activities,
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 was $6,000 for the six months ended December 31, 2003, compared to $49,000 for
the six months ended December 31, 2002. The decrease was primarily a result of lower
average cash balances.

Other
income was $84,000 for the six months ended December 31, 2003, primarily a result of
proceeds recorded from insurance dividends and distributions, compared to $329,000 for the
six months ended December 31, 2002, which was primarily a result of proceeds recorded from
the settlement of a lawsuit.

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 was other than
temporary.

16

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Interest
expense was $2.2 million for the six months ended December 31, 2003, compared to
$2 million for the six months ended December 31, 2002. The increase was
primarily a result of imputed interest and beneficial conversion expenses of $2 million
recorded in connection with the terms of the PFC Note, partially offset by debt
settlements connected with the sale of the Imagent assets.

# Three Months ended
December 31, 2003 as Compared with Three Months ended December 31, 2002

For
the three months ended December 31, 2003, the Company recorded a gain on the disposition
of assets of $513,000 resulting from payments (totaling $498,000) from Photogen to fund
Alliances obligations and settlements (totaling $15,000) with various vendors and
creditors during the period in connection with the Imagent asset sale transaction. For
settlement agreements with vendors and creditors 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s revenue increased to $47,000 for the three months ended December 31,
2003, compared to $10,000 for the three months ended December 31, 2002. This increase
is due to an increase in royalties received.

Research
and development expenses decreased by 95% to $209,000 for the three months ended
December 31, 2003, compared to $4 million for the three months ended
December 31, 2002. During the quarter, as a result of the PFC Note, the Company was
able to make payments for the initiation of certain Oxygentdevelopment activities.
The decrease in expenses was primarily due to the downsizing, consolidation of facilities
and no manufacturing, 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 82% to $337,000 for the three months ended
December 31, 2003, compared to $1.9 million for the three months ended
December 31, 2002. General and administrative expenses recorded for the quarter were
primarily legal and accounting fees, and SEC-related expenses (i.e., proxy, annual report,
etc.) The decrease in general and administrative expenses was primarily due to no
marketing activities 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 was $2,000 for the three months ended December 31, 2003, compared to $17,000
for the three months ended December 31, 2002. The decrease was primarily a result of
lower average cash balances.

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 was other than
temporary.

Interest
expense was $2.1 million for the three months ended December 31, 2003, compared to
$1.2 million for the three months ended December 31, 2002. The increase was primarily
the result of imputed interest and beneficial conversion expenses of $2 million recorded
in connection with the terms of the PFC Note, partially offset by 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.

17

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# Liquidity and Capital
Resources

Through
December 31, 2003, 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, Photogen acquired the Imagent assets and assumed certain liabilities
from Alliance for approximately $1.1 million in cash and $3.5 million of Photogen common
stock. During the period between 90 and 365 days after the closing, Photogen is obligated
to pay up to $3 million and deliver up to an aggregate of 1,985,522 shares of its common
stock to certain creditors. The amount of consideration was determined through arms-length
negotiation. In addition, subsequent to the closing and through 2010, Photogen 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 2 to the
Unaudited Condensed Consolidated Financial Statements above.

As
part of Photogens purchase of the Imagent assets, Photogen 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. Photogen assumed a total of $3.8 million
plus unpaid accrued interest.

The
rights Alliance was entitled to under the Schering License Agreement were transferred to
Photogen at the consummation of its acquisition of the Imagent assets. Photogen
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 Photogen. In connection with the sale of the
Imagent assets, the holders of the Notes (excluding Photogen) 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 Photogen agreed to deliver certain consideration to each as described in the
Asset Purchase Agreement. Upon delivery of the specified consideration, Alliances
obligations shall be terminated and satisfied in full, and each of the loan documents
shall be deemed terminated and of no further effect. It is understood that the obligation
of Photogen to the debt holders to deliver the consideration contemplated in the Asset
Purchase Agreement is a direct obligation of Photogen for the benefit of Alliance, fully
enforceable against Photogen irrespective of any actions, financial condition or other
circumstances relating to Photogen hereafter. The outstanding principal balance on the
Notes of $1.1 million and accrued interest of $146,000 are due and payable and classified
as short-term debt in the Consolidated Balance Sheet at December 31, 2003. Pursuant to the
agreement, the investors will also receive shares of Photogen common stock.

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 quarter ended September 30, 2003. The outstanding principal balance
of $6.5 million is due and payable and classified as short-term debt in the Consolidated
Balance Sheet at December 31, 2003. Pursuant to the agreement, the investors will also
receive shares of Photogen common stock.

18

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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. The outstanding principal balance of $4.5 million and accrued interest are due
and payable and classified as short-term debt in the Consolidated Balance Sheet at
December 31, 2003. Pursuant to the agreement, the investors will also receive shares of
Photogen common stock.

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 $17.8 million at December 31, 2003, compared to $20.9
million at June 30, 2003. The Companys cash and cash equivalents decreased
to $421,000 at December 31, 2003, from $763,000 at June 30, 2003. The decrease
resulted primarily from net cash used in operations of $1.7 million, partially offset by
cash received from Photogen of $760,000 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 $145,000 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.

The
Company lacks sufficient working capital to fund operations for the entire fiscal year
ending 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 Imagent assets, the following debt was either assumed
by Photogen 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, $2.5 million in accounts
payable and accrued expenses, and $12.1 million in secured convertible debt (which is
still included in liabilities as of December 31, 2003). Also, as part of the agreement,
the Photogen 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 2 to
the Unaudited Condensed Consolidated Financial Statements above.

19

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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

We
prepare our financial statements in conformity with generally accepted accounting
principles in the United States of America. As such, we are required to make certain
estimates, judgments and assumptions that we believe are reasonable, based upon the
information available to us. These estimates and assumptions affect the reported balances
and amounts within our financial statements and supporting notes thereto. The significant
accounting policies, which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results, include the following:

Basis
of Presentation

The
accompanying financial statements have been prepared assuming the Company is a going
concern. The Company lacks sufficient working capital to fund operations for the entire
fiscal year ending June 30, 2004. The fiscal 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 this
uncertainty.

Revenue
Recognition

Revenue
is generally recognized when all contracted obligations have been satisfied and collection
of the resulting receivables has occurred or is reasonably assured. Licensing and royalty
agreements where we have no future obligations include the Amended Optison Product
Rights Agreement dated as of August 6, 2001 and the Supplemental Agreement with
Inhale Therapeutic Systems, Inc. dated as of May 15, 2002.

# Item 3.  Controls And
Procedures

(a)                 Evaluation
of Disclosure Controls and Procedures. Our Chief Executive Officer           and Chief
Financial Officer have evaluated the effectiveness of our disclosure           controls
and procedures (as such term is defined in Rules 13a-15 and 15d-15           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 officers have           concluded that, as of
the Evaluation Date, our disclosure controls and           procedures are effective in
alerting them 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.

20

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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
September 2003, Mt. Sinai School of Medicine of New York University (Mt.
Sinai) sued Alliance in a New York state court for alleged breach of two license and
research agreements dating back to 1987 and 2001. The suit alleges that Alliance breached
both the 1987 and 2001 agreements and demands $326,502.95 in damages plus interest. The
suit also seeks a declaratory judgment that both the 1987 and 2001 agreements are void and
of no effect. In answering the lawsuit, Alliance brought counterclaims of its own against
Mt. Sinai alleging breach of the 1987 and 2001 agreements, a breach of good faith and fair
dealing as to the 1987 agreement, a declaratory judgment that the 1987 agreement was still
in effect and for an accounting of money spent by Alliance under both the 1987 and 2001
agreements. Alliance believes the suit lacks merit and plans a vigorous defense of its
rights under both agreements; however, there can be no assurances that Alliance will
ultimately prevail or that the outcome will not have a material adverse effect on the
Companys future financial position or results of operations.

On
June 13, 2003, Alliance and Photogen 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 Photogen through
its purchase of the Imagent assets. Alliance and Photogen 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. Alliance and MBI believe that Amershams counterclaims are completely
without merit; however, there can be no assurances that Alliance and MBI will ultimately
prevail or that the outcome will not have a material adverse effect on the Companys
future financial position or results of operations.

On
July 2, 2003, Hub Properties Trust (Hub) filed a lawsuit against Alliance,
Immune Complex Corporation, Immune Complex, LLC (collectively Immune Complex),
and Vaccine Research Institute of San Diego (Vaccine). Hub alleges that the
defendants are liable for slightly less than $3.5 million of damages Hub suffered because
Hub was unable to lease two properties due to defendants failure to timely
deactivate the radiological materials licenses on the properties. Alliance was the primary
tenant, Immune Complex was Alliances subtenant, and Vaccine was Immune
Complexs sub-subtenant. Immune Complex tendered its defense to Alliance. Alliance
did not accept the tender of defense. On August 21, 2003, Immune Complex filed its
cross-complaint for indemnity against Alliance. The dispute revolves primarily around
Hubs contention that Alliance and Vaccine did not obtain decommissioning of the
Radioactive Material Licenses from the State of California prior to expiration of the
leases, and should therefore pay for a holdover tenancy for the period between the time
that Alliance, Immune Complex, and Vaccine vacated the property and the time of
decommissioning.  Alliance disputes Hubs theory, and plans to file a
cross-complaint against Hub for return of the Security Deposit funds remaining,
approximately $500,000. A settlement conference has been scheduled for March of
2004.

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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. No trial date 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.

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 an accounting, damages, 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. Plaintiff has indicated that it intends to appeal the courts
judgment. The Company believes that an appeal is without merit; however, there can be no
assurances that MBI 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.

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

None.

# Item 5.  Other Information

None.

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

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

| | 4.1 | Secured
Convertible Note Purchase Agreement dated November 20, 2003 by and among PFC Therapeutics
and Technology Gateway Partnership, L.P.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2 | Security
Agreement dated November 20, 2003 by and among PFC Therapeutics and Technology Gateway
Partnership, L.P.
| | --- | -----------------------------------------------------------------------------------------------------------------

| | 4.3 | Secured
Convertible Note in the Principal Amount of $500,000, issued November 20, 2003 by PFC
Therapeutics in favor of Technology Gateway Partnership, L.P.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

22

---

| | 4.4 | Warrant
issued November 20, 2003 by PFC Therapeutics to Technology Gateway Partnership, L.P.
| | --- | --------------------------------------------------------------------------------------------

| | 4.5 | Guaranty
and Security Agreement dated November 20, 2003 by and among the Company and Technology
Gateway Partnership, L.P.
| | --- | -------------------------------------------------------------------------------------------------------------------------

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

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

| | 32. | Chief
Executive and Chief Accounting Officers' Certificate Pursuant to Section 906 of the
                   Sarbanes-Oxley Act of 2002.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

|(b) | Reports
on Form 8-K
|--- | -------------------

| | None
| | ----

23

---

SIGNATURES

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

| | ALLIANCE PHARMACEUTICAL CORP.             
| | ------------------------------------------
| | (Registrant)                              
| | /s/ DUANE J. ROTH                         
| | Duane J. Roth                             
| | Chairman, CEO, and Chief Financial Officer

Date: February 19, 2004

24