<PAGE>

================================================================================

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

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

                                   FORM 10-KSB

                                   (MARK ONE)

    -----
      X       ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
    -----
                              EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2008

    -----
               TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
    -----
                         SECURITIES EXCHANGE ACT OF 1934

            FOR THE TRANSITION PERIOD FROM ___________ TO ___________

                        COMMISSION FILE NUMBER 000-12950

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

                          ALLIANCE PHARMACEUTICAL CORP.
                 (Name of Small Business Issuer in Its Charter)

                  NEW YORK                             14-1644018
      (State or other jurisdiction of      (I.R.S. Employer Identification No.)
      incorporation or organization)

             7590 FAY AVENUE, SUITE 402                         92037
                LA JOLLA, CALIFORNIA
      (Address of Principal Executive Offices)                (Zip Code)

          Issuer's telephone number, including are code: (858) 410-5200

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

              Securities registered under Section 12(b) of the Act:

                                      NONE

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

                            Title of each class: NONE

                 Name of each exchange on which registered: NONE

         Securities registered under Section 12(g) of the Exchange Act:

                          COMMON STOCK, PAR VALUE $0.01
                                (TITLE OF CLASS)

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


<PAGE>


         Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

         Revenues for the issuer's fiscal year ended June 30, 2008 were
$106,000. The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant, computed by reference to the closing
price of such common equity on the Over-the-Counter Bulletin Board ("OTCBB")
administered by the National Association of Securities Dealers ("NASDAQ") on
September 26, 2008 was $1 million.

The number of shares of the Registrant's common stock, $0.01 par value,
outstanding at September 26, 2008 was 60,216,247.

         Transitional Small Business Disclosure Format (check one).
Yes [ ] No [X]

                                      -2-

<PAGE>

                                   FORM 10-KSB

                                      INDEX

PART I.....................................................................- 5 -
   Item 1.  Description of Business........................................- 5 -
   Item 2.  Description of Property.......................................- 16 -
   Item 3.  Legal Proceedings.............................................- 16 -
   Item 4.  Submission of Matters to a Vote of Security Holders...........- 16 -

PART II...................................................................- 19 -
   Item 5.  Market for Common Equity, Related Stockholder Matters and
                Small Business Issuer Purchases of Equity Securities......- 19 -
   Item 6.  Management's Discussion and Analysis or Plan of Operation.....- 21 -
   Item 7.  Financial Statements..........................................- 26 -
   Item 8.  Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure..................................- 42 -
   Item 8A. Control and Procedures........................................- 42 -
   Item 8B. Other Information.............................................- 43 -

PART III..................................................................- 44 -
   Item 9.  Directors, Executive Officers, Promoters, Control Persons
                and Corporate Governance; Compliance with Section 16(a)
                of the Exchange Act.......................................- 44 -
   Item 10. Executive Compensation........................................- 46 -
   Item 11. Security Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters................- 48 -
   Item 12. Certain Relationships and Related Transactions, and
                Director Independence.....................................- 50 -
   Item 13. Exhibits......................................................- 50 -
   Item 14. Principal Accountant Fees and Services........................- 56 -

Signatures
Certifications


                                      -3-

<PAGE>

                           FORWARD-LOOKING STATEMENTS

         This document may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Forward-looking statements are identified by words such as
"believe," "anticipate," "expect," "intend," "plan," "will," "may" and other
similar expressions. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements.

         We wish to caution readers that these forward-looking statements are
only predictions and that our 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, our actual results and could cause our
actual consolidated results for 2009 and beyond to differ materially from those
expressed in any forward-looking statements made by us or on our behalf. These
risks include, but are not limited to:

    o    demand for the repayment of our senior convertible promissory notes
         under which we are currently in default (the "Senior Notes");

    o    our inability to obtain adequate financing for our development efforts
         or to repay the Senior Notes;

    o    our inability to enter into collaborative relationships to further
         develop and commercialize our products;

    o    changes in any of our existing relationships or the inability of any
         collaborative partner to adequately commercialize our products;

    o    the uncertainties associated with the lengthy regulatory approval
         process in the U.S. and foreign countries, including o uncertainties
         associated with the United States Food and Drug Administration (the
         "FDA") decisions and timing of product development or approval;

    o    the uncertainties associated with obtaining and enforcing patents
         important to our business;

    o    possible competition from other products;

    o    difficulties in manufacturing our products on a large scale;

    o    the ability to obtain necessary raw materials at cost-effective prices
         or at all;

    o    failure to obtain market acceptance;

    o    the uncertainty of the timing of product approvals and introductions
         and of sales growth; and

    o    the increasing emphasis on controlling healthcare costs and potential
         legislation or regulation of healthcare pricing.

         You should read this report, including the Section entitled "Risk
Factors," with the understanding that our actual future results may be
materially different from what we expect. We qualify all of the forward-looking
statements in this report by these cautionary statements and the risk factors
set forth in this report.



                                      -4-

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                                     PART I

         EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS SET FORTH IN THIS REPORT
ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH HEREIN.
ALLIANCE PHARMACEUTICAL CORP. REFERS YOU TO CAUTIONARY INFORMATION AND RISK
FACTORS CONTAINED ELSEWHERE HEREIN AND IN OTHER DOCUMENTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC") FROM TIME TO TIME. AS USED HEREIN,
THE TERMS "WE," "OUR," "US," "COMPANY" OR "ALLIANCE" REFER TO ALLIANCE
PHARMACEUTICAL CORP. AND ITS SUBSIDIARIES.

ITEM 1.  DESCRIPTION OF BUSINESS

OVERVIEW

         We are a pharmaceutical research and development company that is
currently focused on developing our lead product, OXYGENT(TM),
(perfluorochemical ("PFC") emulsion) an intravascular oxygen carrier designed to
augment oxygen delivery in surgical patients.

         We were incorporated in New York in 1983. Our principal executive
offices are located at 7590 Fay Avenue, Suite 402, La Jolla, California 92037,
and our telephone number is (858) 410-5200.

         You can view our filings with the SEC online at the SEC's Web site,
http://www.sec.gov. See "Where You Can Find More Information" for additional
information regarding us.

OXYGENT (TM)

BACKGROUND

         For several decades scientists have pursued the development of a so
called "artificial blood" - seeking a product that would be safe, universally
compatible with all blood types and readily available. Though the safety of
allogeneic (donor) blood with regard to reducing the risk of transmission of
certain infectious diseases (i.e., hepatitis, HIV, West Nile) has improved
significantly, it is virtually impossible to achieve a zero-risk blood supply.
Currently, the major risks include documented cases of additional blood
transmissible diseases such as Chagas disease, a deleterious effect on the
recipient's immune function, acute or fatal hemolytic transfusion reactions due
to donor/recipient incompatibility and mismatched blood type (ABO) because of
clerical errors.

         There is a growing body of evidence in the literature that associates
blood transfusion with a significant risk for morbidity and mortality,
including, among others, impairment of the immune system leading to higher
infection rates and an increase in recurrence of cancer in surgical oncology
patients. Other recent publications report significantly decreased survival
rates in cardiovascular patients who received blood versus those who did not and
there is a similar finding showing significantly increased risk of postoperative
complications and reduced survival in cardiovascular surgery patients who
received fresh blood stored for more than two weeks compared to those who
received blood that was stored less than two weeks.

         Frequent shortages in the blood supply have also become prevalent
worldwide, due in part to the elimination of financial incentives to donate
blood (i.e., paid donors), progressively more restrictive eligibility
requirements for donors, an aging demographic, which increases overall demand
while requiring more need for younger donors to donate more often. As a result,
many countries are experiencing chronic shortages of blood.

         Artificial oxygen carriers (commonly referred to as "blood substitutes"
or, more appropriately, oxygen therapeutics) have the potential to play a
pivotal role in easing the increasingly frequent blood shortages, avoiding
transfusion-related safety issues and, in the process, profoundly changing
patient care and the practice of transfusion medicine.

         In over 15 years of intensive clinical development of oxygen carriers,
the only Phase 3 study to show efficacy in reducing allogeneic blood transfusion
is the Phase 3 general surgery study of OXYGENT with aggressive acute
normovolemic hemodilution ("ANH"), a blood conservation technique that typically
involves the collection of two to three units of autologous (the patient's own)
blood immediately prior to surgery. Several products have been tested in a
trauma setting with no success to date, primarily due to imbalances in mortality
endpoints between the treated and control patients. Other products have been
tested in the surgical setting, but have failed to show clinical benefit or have
been associated with an imbalance in side effects. All studies have used red
blood cells ("RBCs") as a control with the notable exception of FLUOSOL(R), a
20% w/v PFC emulsion, for use as an adjunct to high-risK coronary balloon
angioplasty, which was approved for an oxygenation endpoint. (In 1994, Green
Cross Corporation [Osaka, Japan] ceased commercialization of FLUOSOL due to poor
sales as a result of the introduction of auto-perfusion catheters eliminating
the need for the product in this indication.) It can be concluded from the
developmental history of oxygen carriers that, while they are very effective in
the delivery of oxygen, their use in avoiding or reducing transfusion
requirements is difficult to prove in either a surgical or a trauma setting
using RBCs as a control.


                                      -5-

<PAGE>

DEVELOPMENT

         Results from our previous Phase 2 and Phase 3 clinical studies were
used to develop the rationale for a new protocol design without autologous
blood-conserving procedures (ANH or intraoperative autologous donation ["IAD"])
used in the previous clinical studies. The efficacy of OXYGENT in terms of drug
activity, i.e., its ability to deliver oxygen and reverse physiological
transfusion triggers, and the ability of OXYGENT to enable patients to maintain
physiologic stability safely at lower intraoperative hemoglobin ("Hb") levels
were demonstrated in both of our Phase 2 and Phase 3 studies. Intraoperative
hemodynamic instability is often used as an indication of the need for RBC
transfusion; therefore, maintenance of hemodynamic stability should lead to a
reduction of blood transfusions. In clinical studies, OXYGENT has been shown to
correct or improve key physiological parameters such as mean arterial pressure,
heart rate and mixed venous oxygen tension equal to or better than a unit of
RBCs.

         A second critical piece of data incorporated into the design of this
new protocol was gathered from our previous Phase 3 study in general surgery
patients. In this study, control patients who were not transfused in the
postoperative period and, per protocol, had their Hb concentration measurements
tracked routinely in the postoperative period showed higher Hb levels 24 hours
post surgery. In these patients, it was observed that the range of Hb levels
taken 24 hours postoperatively were 1.5 to 2.5 g/dL higher than the first
immediate postoperative Hb measurements. The data also demonstrated that the
lower the Hb at which the patients left the operating room, the more this
hemoconcentration was observed. Since it takes several weeks to generate new
exogenous RBCs, the rapid increase in Hb could only be due to a
hemoconcentration, which occurs as a result of normalization in total blood
volume following surgery.

         This hemoconcentration phenomenon was unexpected to the degree observed
and would indicate that patients could be "bridged" by use of an oxygen carrier
during surgery and in the early postoperative period until an accurate Hb
measurement can be obtained to determine if an RBC transfusion is truly
warranted. Therefore, the use of OXYGENT to reverse or prevent intraoperative
hemodynamic instability and postoperative hemoconcentration would allow patients
to avoid blood transfusions that otherwise would have been considered necessary
if solely based on the measured intraoperative Hb levels. The decision as to the
need to transfuse would be made in the postoperative period after
hemoconcentration has occurred as described above.

COLLABORATIVE RELATIONSHIPS

         A key aspect of our business strategy is to selectively enter into
collaborations with third parties. We currently rely, and will continue to rely,
on our collaborators for financial resources and for development,
commercialization and regulatory expertise. The following is a brief description
of our material collaboration agreements.

BEIJING DOUBLE-CRANE PHARMACEUTICAL CO., LTD. ("DOUBLE-CRANE") On May 13, 2005,
our subsidiary PFC Therapeutics, LLC ("PFC Therapeutics") and Double-Crane, the
market leader for IV solutions and one of the largest pharmaceutical companies
in the People's Republic of China (the "PRC"), entered into a development,
license and supply agreement ("the Double-Crane Agreement") for the development
of OXYGENT in the PRC. Alliance and Double-Crane formed a Joint Development Team
to manage the development of OXYGENT in the PRC. Under the Double-Crane
Agreement, Alliance provided Double-Crane with the documentation necessary to
enable Double-Crane to translate all relevant data and other information into
Chinese prior to the submission of an Investigational New Drug ("IND")
application with the State Food and Drug Administration PRC (the "sFDA") and
Double-Crane made an upfront license fee payment and will make certain milestone
and royalty payments to us. The upfront license fee of $500,000 was recognized
as license revenue during the year ended June 30, 2007. Double-Crane will
conduct clinical trials in the PRC, in accordance with international guidelines,
to receive marketing approval for OXYGENT in the PRC. Alliance will have the
right to use in other countries any data derived from the clinical trials.
Double-Crane will have the option to manufacture OXYGENT in the PRC after
obtaining approval from the regulatory authorities in the PRC and will also have
a right of first refusal to add specific additional countries to the
Double-Crane Agreement upon further negotiation with us.

         In February 2007, Alliance manufactured and released product samples;
however, in accordance with the current regulations of the sFDA, the supplies
for the IND application and clinical development must be manufactured in a
facility in the PRC. As a result, Alliance agreed to accelerate the
manufacturing technology transfer to Double-Crane, which originally was planned
to occur when Phase 3 trials were initiated in the PRC. Double-Crane has begun
construction of an emulsion manufacturing facility and has purchased equipment
and instrumentation for installation. Double-Crane has also expressed a desire
to supply Alliance with clinical and commercial supplies of OXYGENT from its
facilities, which would be contingent on Double-Crane's compliance to Current
Good Manufacturing Practices ("cGMP") and registration with the U.S. FDA.

         Once clinical supplies are manufactured by Double-Crane, Double-Crane
has indicated that it will submit its IND application for initiation of the
agreed-upon clinical development plan. Once the sFDA approves the application,
Double-Crane will start the clinical trials immediately.


                                      -6-

<PAGE>

         LEO PHARMA A/S. ("LEO") On December 22, 2004, PFC Therapeutics and LEO,
one of the leading Danish research-based pharmaceutical companies that markets
significant products within the fields of dermatology, metabolic and
cardiovascular diseases and ophthalmology and antibiotics, signed an exclusivity
agreement to enter into a license agreement, subject to continued due diligence
by LEO, to develop and commercialize OXYGENT in Europe (EU member countries, EU
membership applicants, Norway and Switzerland) and Canada (the "LEO Exclusivity
Agreement"). The terms of the license agreement, if entered into, would include
certain initial and future payments to PFC Therapeutics upon the completion of
various regulatory and commercial milestones for OXYGENT development in Europe
and royalties on commercial sales of OXYGENT in Europe and Canada. On January 5,
2005, we received the non-refundable portion of an exclusivity fee of $100,000
per the terms of the LEO Exclusivity Agreement. Because the amendment discussed
below extends LEO's due diligence time-period, this amount has been deferred and
is included in current liabilities in the accompanying consolidated balance
sheet at June 30, 2008.

         On February 25, 2005, PFC Therapeutics and LEO agreed to amend the LEO
Exclusivity Agreement. The amendment extends the period of time in which LEO may
undertake its due diligence investigation from March 1, 2005 to a date that is
sixty (60) days after submission by us to LEO of the results of a Phase 2b
postoperative ileus study. In November 2007, we suspended a Phase 2b trial in
France, specifically designed to observe postoperative ileus; however, the
postoperative ileus endpoints will be incorporated in the Phase 2 clinical study
conducted by Double-Crane in the PRC. The remaining terms of the LEO Exclusivity
Agreement remain in full force and effect.

         IL YANG PHARM. CO., LTD. ("IL YANG") On April 19, 2004, PFC
Therapeutics and Il Yang signed an agreement granting Il Yang exclusive rights
to promote, market, distribute and sell OXYGENT for any approved clinical use,
including all future approved uses, in South Korea (the "Il Yang Agreement").
Under the terms of the Il Yang Agreement, PFC Therapeutics will be initially
responsible for the commercial supply of OXYGENT to Il Yang and will receive a
royalty on OXYGENT sales following commercialization. Il Yang will also make
certain future payments on the completion of various regulatory milestones for
development in Europe and the U.S.

         We intend to obtain other collaborative relationships, but we do not
know if we will be able to enter into future collaborative relationships on
acceptable terms. Furthermore, the termination of any of our existing
collaborative relationships or failure to enter into such future relationships
may limit our ability to develop our technology and may harm our business.
Please see the Section entitled "Risk Factors" for a more complete discussion of
the risks related to our collaborative relationships.

INTELLECTUAL PROPERTY

         Patents and other proprietary rights are an essential part of our
business. We seek proprietary protection for our products, processes,
technologies and ongoing improvements. We continue to pursue patent protection
in the U.S. and in foreign countries that we regard as important for future
endeavors. In the U.S., Europe, Japan, Canada and other countries, Alliance has
a patent position, dating back to October 1992, on a second generation of stable
fluorocarbon emulsions for any use, including IN VIVO oxygen delivery. These
patents will remain in force in the U.S. and other countries until 2012 - 2014.
Alliance has received notice from the U.S. Patent Office that all claims have
been allowed on its recent patent application covering the specific formulation
of AF0144.

         The patents covering AF0144 will be subject to a term extension due to
regulatory review by the FDA (35 U.S.C. 156) via the Drug Price Competition and
Patent Term Restoration Act of 1984. Additionally, AF0144 is a new chemical
entity and, once approved, may have an additional five-year extension to the
patents.

         We also attempt to protect our proprietary products, processes and
other information by relying on trade secret laws and non-disclosure and
confidentiality agreements with our employees, consultants and certain other
persons who have access to such products, processes and information. The
agreements affirm that all inventions conceived by our employees are our
exclusive property, with the exception of inventions unrelated to our business
and developed entirely on the employee's own time.

COMPETITION

         Biotechnology and pharmaceutical companies are highly competitive.
There are several pharmaceutical companies, biotechnology companies, public and
private universities and research organizations actively engaged in research and
development of products that may be similar to our products.

         Companies active in the development of a blood substitute product
include Biopure Corporation ("Biopure"), Northfield Laboratories Inc.
("Northfield"), Sangart Inc. ("Sangart"), HemoBioTech Inc. ("Hemobiotech"),
Oxygen Biotherapeutics Inc., formerly Synthetic Blood International, ("Oxygen
Biotherapeutics"), Sanguine Corp. ("Sanguine") and ImaRx Therapeutics, Inc.
("ImaRx"). There are two primary approaches for oxygen delivery used in blood
substitute products: PFC emulsions, the approach used in OXYGENT, and hemoglobin
solutions.


                                      -7-

<PAGE>

         Hemoglobin solution development efforts typically employ chemical
modification of stroma-free hemoglobin derived from human or bovine RBCs. There
are several companies working on hemoglobin solutions as temporary oxygen
carrier blood substitutes that have advanced into clinical trials. Biopure, a
company developing a bovine-based hemoglobin solution, is developing a protocol
for FDA submission for a new indication to treat patients with acute myelogenous
anemia and has postponed its approval activities with the Medicines and
Healthcare products Regulatory Agency ("MHRA"). Biopure's submission for a
trauma trial, in collaboration with the U.S. Navy, has been placed on hold by
the FDA pending resolutions to questions of dosing, safety and risk/benefit.
Northfield, a company working on hemoglobin solutions derived from outdated
human blood, recently announced its Phase 3 pivotal trial failed to demonstrate
a statistical significance in its primary endpoint, mortality. The third
company, Sangart, has announced the completion of two large-scale multi-country
European Phase 3 clinical trials designed to assess its product's ability to
prevent and treat hemodynamic instability, primarily hypotension, during
orthopedic surgeries. Hemobiotech has licensed a bovine-based technology from
Texas Tech University and is in the research phase of development.

         With respect to PFC emulsion development, we are aware of three
early-stage companies in the U.S. developing PFC-based temporary oxygen
carriers; however, only one, Oxygen Biotherapeutics, has progressed to clinical
trials. It recently announced it plans to meet with the FDA to discuss a Phase
2b trial in patients with brain trauma. Sanguine, still in the early preclinical
stages of discovery and formulation development, has announced it is focusing
its development efforts for use in angioplasty. ImaRx has announced the
intention to investigate its micro-bubble technology to deliver oxygen to
ischemic tissues. We are also aware of one product, PERFTORAN, which is a dilute
first-generation PFC-based emulsion that was developed at the Russian Academy of
Sciences and has been approved in 1999 in Russia and other countries for a
variety of clinical indications.

         We believe that OXYGENT and the PFC-based approach may have several
advantages compared to the hemoglobin-based oxygen carriers, including the
potential availability of highly purified raw materials in commercial-scale
quantities, as well as the relatively low cost and ease of production for
OXYGENT. See the Section entitled "Risk Factors" for a complete discussion of
the risks related to our competition.

GOVERNMENT REGULATION

         Our products require governmental approval before production and
marketing can commence. The regulatory approval process is administered by the
FDA in the U.S., by the European Medicines Agency (the "EMEA") in the European
Union, by the sFDA in the PRC and by similar agencies in other countries. The
process of obtaining regulatory clearances or approvals is costly and
time-consuming, and we cannot predict how long the necessary clearances or
approvals will take or whether we will be successful in obtaining them.

         Generally, all potential pharmaceutical products must successfully
complete two major stages of development (preclinical and clinical testing)
prior to receiving marketing approval by the governing regulatory agency. In
preclinical testing, potential compounds are tested both IN VITRO and in animal
studies to gain important safety information prior to administration in humans.
Knowledge is obtained regarding the effects of the compound on bodily functions
as well as its absorption, distribution, metabolism and elimination.

         Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase 1, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound is tested for safety and dosage
tolerance. Phase 2 typically involves studies in a larger patient population to
identify possible adverse events ("AEs") and safety risks, to begin gathering
preliminary efficacy data, and to investigate potential dose sizes and
schedules. Phase 3 trials are undertaken to further evaluate clinical efficacy
and to further test for safety within an expanded patient population that will
represent the intended clinical indication that is being pursued. Each trial is
conducted in accordance with current Good Clinical Practice ("cGCP") standards
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND application. Further, an
independent Investigational Review Board ("IRB") or Ethics Committee at each
clinical center at which the study will be conducted must evaluate and approve
each clinical study. The IRB will consider, among other things, ethical factors,
the safety of human subjects and the possible liability of the institution.

         Following completion of these studies, a New Drug Application (an
"NDA") must be submitted to and approved by the FDA in order to market the
product in the U.S., while a Marketing Authorization Application ("MAA") is
submitted to the EMEA in Europe. Similar applications, generally based upon data
already collected for an NDA or MAA, are then used to file for marketing
approval in foreign countries. If and when approval is obtained to market a
product, the FDA's (or applicable foreign agency's) regulations will then govern
manufacturing and commercialization activities.


                                      -8-

<PAGE>

         Perfluorooctylbromide ("Perflubron") is an eight-carbon halogenated
fluorocarbon liquid. Certain halogenated fluorocarbons (primarily the lower
molecular weight gaseous chlorofluorocarbons) have been implicated in
stratospheric ozone depletion. The FDA issued a Finding of No Significant Impact
under the National Environmental Protection Act in connection with the approval
for marketing of IMAGENT(R) GI, a perflubron-based drug we previously developed;
however, all materials contained in our products remain subject to regulation by
governmental agencies.

         In addition to FDA regulation, we are subject to regulation by various
governmental agencies including, without limitation, the Drug Enforcement
Administration, the U.S. Department of Agriculture, the Environmental Protection
Agency, the Occupational Safety and Health Administration, and the California
State Department of Health Services, Food and Drug Branch. Such regulation by
governmental authorities in the U.S. and other countries may impede or limit our
ability to develop and market our products.

RAW MATERIALS

         We need sufficient supplies of raw materials to develop and market our
products successfully. The raw materials in products that are approved by the
FDA cannot be changed without equivalency testing of the new material by us and
approval by the FDA. Some of the raw materials for our products are expected to
be qualified from only one supplier. At times, one or more of these qualified
materials may not be available or may be available only in limited quantities.
If we are unable to obtain the necessary raw materials from our existing
sources, we could incur significant delays in marketing and selling our products
until an alternate vendor can be qualified and approved for use.

EMPLOYEES

         As of September 26, 2008, we have one full-time and two part-time
employees. None of our employees are represented by a labor union and we believe
that our employee relations are satisfactory. We also maintain agreements with
nine research and development consultants.

                                  RISK FACTORS

         INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW TOGETHER WITH ALL OF THE
OTHER INFORMATION INCLUDED IN THIS REPORT BEFORE MAKING AN INVESTMENT DECISION.
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS COULD SUFFER. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.

                          RISKS RELATED TO OUR BUSINESS

AS OF SEPTEMBER 26, 2008, WE ARE IN DEFAULT UNDER THE AMENDED TERMS OF THE
SENIOR NOTES AND WE CURRENTLY DO NOT HAVE THE MEANS TO REPAY THE HOLDERS OF OUR
SENIOR NOTES; THUS THEY MAY FORCE OUR LIQUIDATION.

         In September 2004, we entered into a Senior Note Purchase Agreement and
Registration Rights Agreement with certain investors pursuant to which we issued
our Senior Notes in the approximate principal amount of $10.7 million (the
"Amended Purchase Agreement"). In April 2006, we amended the Amended Purchase
Agreement to reduce the conversion price, increase the interest rate and extend
the maturity date (the "2006 Amendment"). In April 2007, the holders of
substantially all the outstanding principal amount of the Senior Notes agreed to
extend the maturity date, upon certain conditions, to June 30, 2008 (the "2007
Amendment") (see Note 4 to our accompanying consolidated financial statements
for a description of the terms). As of September 26, 2008, we are in default
under the terms of the 2007 Amendment and we owe the holders of our Senior Notes
approximately $11.1 million in principal and accrued interest. We currently do
not have the resources to repay the Senior Notes. If the holders of our Senior
Notes demand repayment, and we are unable to do so, the holders of our Senior
Notes may be able to force our liquidation. In the event of our liquidation
under these circumstances, it is highly unlikely the holders of our equity
securities will receive any distribution upon such liquidation.

WE HAVE A HISTORY OF OPERATING LOSSES AND LIMITED PRODUCT REVENUES AND WE MAY
NEVER BECOME PROFITABLE.

         We are a product development company with no current revenue from
product sales. We have had net operating losses since our inception and we
expect such losses to continue until we receive revenues from product sales, if
such revenues cover our costs. As of June 30, 2008, we had an accumulated
deficit of $499.6 million. For the years ended June 30, 2008 and 2007, we
incurred net losses of $1.8 million and $4.1 million, respectively.
Substantially all of our revenues to date have come from sources other than
product sales, such as licensing fees, milestone payments, and payments to fund
research and development activities under joint development and license
agreements. To obtain revenues from our products, we must succeed, either alone
or with others, in developing, obtaining regulatory approval for, and
manufacturing and marketing products with significant market potential. We may
never succeed in these activities and may never generate revenues that are
significant enough to achieve profitability.

                                      -9-

<PAGE>

THERE HAVE BEEN DELAYS IN THE CLINICAL DEVELOPMENT OF OUR PRODUCT CANDIDATE
OXYGENT.

         Due to lack of funding, we announced in November 2007 that the Phase 2b
clinical trial in France was suspended. Double-Crane is obligated to initiate
clinical trials in the PRC, but we do not expect that these trials will be
initiated until calendar year 2009 and they will be Phase 1 clinical trials. We
expect that at least one Phase 2 and two Phase 3 clinical trials with positive
results will be required before we are able to seek marketing approval from any
regulatory authority with respect to OXYGENT. If the results of our clinical
trials with respect to OXYGENT are not positive, we may never be able to seek
marketing approval for OXYGENT from any regulatory authority or to generate
significant revenue from product sales.

WE DO NOT HAVE MANUFACTURING CAPABILITIES FOR OUR PRODUCTS.

         We no longer have manufacturing capabilities for any of our products
since our downsizing in 2002. We have completed the manufacturing of clinical
material with a third party in order to provide the product for our development
activities. We do not know if we will be able to enter into a long-term
manufacturing agreement with a third party on commercially reasonable terms, or
at all. As a result, we do not know whether a third party will be successful in
manufacturing clinical material to our specifications. All facilities and
manufacturing techniques used in the manufacture of products for clinical use or
for sale in the U.S. must be operated in conformity with cGMP guidelines as
established by the FDA. We do not know whether the FDA will determine that any
such third-party facilities maintain compliance with cGMP. A delay in FDA
approval of our manufacturing facilities or the manufacturing facilities of any
third-party collaborator would delay the marketing of our products and
negatively impact our revenue and profitability.

WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FUNDING WE WILL NEED TO COMPLETE
DEVELOPMENT AND TO INTRODUCE PRODUCTS TO THE MARKET.

         We need substantial additional funding for our business. Our future
capital requirements will depend on many factors, including:

    o    the timing and extent of our late-stage clinical trials for OXYGENT;
    o    continued scientific progress in our research and development programs;
    o    the time and cost involved in obtaining regulatory approvals for our
         products;
    o    patent costs;
    o    completing technological and market developments; and
    o    the cost of manufacturing scale-up.

         Accordingly, we cannot estimate the amount of additional funding that
we will require, but we know that it will be substantial. We cannot be certain
that additional funding will be available to us on acceptable terms, or at all.
If funds are not available, we may be required to delay, reduce the scope of, or
eliminate one or more of our research or development programs or our
commercialization. Further, additional funding may significantly dilute our
existing stockholders.

WE DEPEND ON COLLABORATIONS WITH THIRD PARTIES TO DEVELOP AND COMMERCIALIZE OUR
PRODUCTS AND TO PROVIDE THE MAJORITY OF OUR REVENUES.

         A key aspect of our strategy is to selectively enter into
collaborations with third parties. We currently rely, and will continue to rely,
on our collaborators for financial resources and for development,
commercialization and regulatory expertise. Currently, we do not have a
collaboration agreement with any third party to develop our product OXYGENT in
the U.S. We have entered into the LEO Exclusivity Agreement that would grant LEO
an option to develop and commercialize OXYGENT in Europe; however, a definitive
collaboration agreement with LEO is subject to the successful demonstration of
improvement in postoperative ileus in a Phase 2 study to validate clinical data
from a prior study. We do not know whether the results will satisfy LEO or cause
them to enter into a definitive collaboration agreement with us. Until such time
as they do, LEO is under no further obligation to us under the LEO Exclusivity
Agreement.

         Further, our existing and future collaborators may fail to develop or
effectively commercialize our products or technologies because they:

    o    do not have sufficient resources or decide not to devote the necessary
         resources due to internal constraints such as limited cash or human
         resources;
    o    decide to pursue a competitive potential product developed outside of
         the collaboration; or
    o    cannot obtain the necessary regulatory approvals.

         The continuation of our collaborations is dependent on our
collaborators' periodic renewal of the governing agreements. Therefore, we may
not be able to renew these collaborations on acceptable terms, if at all. We
also face competition in our search for new collaborators.


                                      -10-

<PAGE>

IF CONFLICTS ARISE WITH OUR COLLABORATORS, THEY MAY ACT IN THEIR SELF-INTERESTS,
WHICH MAY BE ADVERSE TO OUR INTERESTS.

         Conflicts may arise in our collaborations due to one or more of the
following:

    o    disputes with respect to payments that we believe are due under a
         collaboration agreement;
    o    disagreements with respect to ownership of intellectual property
         rights;
    o    unwillingness on the part of a collaborator to keep us informed
         regarding the progress of its development and commercialization
         activities, or to permit public disclosure of these activities;
    o    delay of a collaborator's development or commercialization efforts with
         respect to our drug candidates; or
    o    termination or non-renewal of the collaboration.

         Conflicts arising with our collaborators could harm our reputation,
result in a loss of revenues, reduce our cash position and cause a decline in
our stock price.

WE RELY ON THIRD PARTIES TO CONDUCT OUR CLINICAL TRIALS AND PERFORM DATA
COLLECTION AND ANALYSIS, WHICH MAY RESULT IN COSTS AND DELAYS THAT PREVENT US
FROM SUCCESSFULLY COMMERCIALIZING DRUG CANDIDATES.

         Although we design and manage our preclinical studies and clinical
trials, we currently do not have the resources to conduct preclinical studies or
clinical trials for our product candidates. We rely on contract research
organizations, medical institutions, clinical investigators and contract
laboratories to perform data collection and analysis and other aspects of our
clinical trials. We also rely on third parties to assist with our preclinical
studies, including studies regarding biological activity, safety, absorption,
metabolism and excretion of drug candidates.

         Our preclinical development activities or clinical trials may be
delayed, suspended or terminated if:

    o    these third parties do not successfully carry out their contractual
         duties or regulatory obligations or meet expected deadlines;
    o    these third parties need to be replaced; or
    o    the quality or accuracy of the data obtained by third parties is
         compromised due to their failure to adhere to our clinical protocols or
         regulatory requirements or for other reasons.

         Failure to perform by these third parties may increase our development
costs, delay our ability to obtain regulatory approval and prevent the
commercialization of our drug candidates.

DELAYS, SUSPENSIONS AND TERMINATIONS OF OUR CLINICAL TRIALS COULD RESULT IN
INCREASED COSTS TO US AND DELAY OUR ABILITY TO GENERATE PRODUCT REVENUES.

         Our clinical trials may be delayed, suspended or terminated due to a
number of factors, including:

    o    ongoing discussions with regulatory authorities regarding the scope or
         design of our clinical trials or requests by them for supplemental
         information with respect to our clinical trial results;
    o    failure to conduct clinical trials in accordance with regulatory
         requirements;
    o    lower than anticipated enrollment rate of patients in clinical trials;
    o    serious AEs or side effects experienced by participants; and
    o    insufficient supply or deficient quality of drug supply or other
         materials necessary for the conduct of our clinical trials.

         Many of these factors described above may also ultimately lead to
denial of regulatory approval of a current or potential drug candidate. If we
experience delays in our clinical trials, the commercial prospects for our
product candidates will be harmed and our ability to generate product revenues
will be delayed.

EVEN IF WE SUCCESSFULLY COMPLETE CLINICAL TRIALS OF OUR PRODUCT CANDIDATES, THEY
MAY FAIL FOR OTHER REASONS.

         Even if we successfully complete clinical trials of our product
candidates, they may fail for other reasons, including the possibility that the
product candidates will:

    o    fail to receive the regulatory clearances required to market them;
    o    be subject to proprietary rights held by others requiring the
         negotiation of a license agreement prior to marketing;
    o    be difficult or expensive to manufacture on a commercial scale; or
    o    fail to compete with products or other treatments commercialized by our
         competitors.


                                      -11-

<PAGE>

         If we are unable to effectively market and sell our products, we may
never generate revenues that are significant enough to achieve profitability.

OUR PRODUCT CANDIDATES MAY NOT GAIN ACCEPTANCE AMONG PHYSICIANS, PATIENTS AND
THE MEDICAL COMMUNITY, THEREBY LIMITING OUR POTENTIAL TO GENERATE REVENUES.

         Even if our product candidates are approved for commercial sale by the
FDA, European or other foreign regulatory authorities, the degree of market
acceptance of any approved product candidate by physicians, healthcare
professionals and third-party payors, and our profitability and growth will
depend on a number of factors, including:

    o    our ability to provide acceptable evidence of safety and efficacy;
    o    relative convenience and ease of administration;
    o    the prevalence and severity of any AEs;
    o    availability of alternative treatments;
    o    pricing and cost effectiveness, which may be subject to regulatory
         control;
    o    effectiveness of our or our collaborators' sales and marketing
         strategy; and
    o    our ability to obtain sufficient third-party insurance coverage or
         reimbursement.

         If any product candidate that we discover and develop does not provide
a treatment regimen that is as beneficial as the current standard of care or
otherwise does not provide patient benefit, that product likely will not achieve
market acceptance and we will not generate sufficient revenues to achieve or
maintain profitability.


WE WILL NEED TO INCREASE THE SIZE OF OUR ORGANIZATION AND WE MAY ENCOUNTER
DIFFICULTIES MANAGING OUR GROWTH, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.

         We will need to expand and effectively manage our operations and
facilities in order to advance our product development programs, achieve
milestones under our collaboration agreements, facilitate additional
collaborations and pursue other development activities. It is possible that our
human resources and infrastructure may be inadequate to support our future
growth. To manage our growth, we will be required to continue to improve our
operational, financial and management controls, reporting systems and
procedures, and to attract and retain sufficient numbers of talented employees.
In addition, we may have to develop sales, marketing and distribution
capabilities if we decide to market any product that we may successfully develop
without partnering with third parties. We may not successfully manage the
expansion of our operations and, accordingly, may not achieve our research,
development and commercialization goals.

WE COULD INCUR SIGNIFICANT DELAYS IN MARKETING OUR PRODUCTS IF WE ARE UNABLE TO
OBTAIN THE NECESSARY RAW MATERIALS FROM OUR EXISTING SOURCES.

         We need sufficient supplies of raw materials to develop and market our
products successfully. The raw materials in products that are approved by the
FDA cannot be changed without equivalency testing of the new material by us and
approval by the FDA. Some of the raw materials for our products are expected to
be qualified from only one supplier. At times, one or more of these qualified
materials may not be available or may be available only in limited quantities.
If we are unable to obtain the necessary raw materials from our existing
sources, we could incur significant delays in marketing and selling our
products.

THE LACK OR INADEQUACY OF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS WOULD MAKE
IT MORE DIFFICULT TO MARKET ANY PRODUCTS WE DEVELOP.

         Our ability to commercialize our products successfully depends in part
on the extent to which the cost of the products and related treatment will be
reimbursed by government authorities, private health insurers and other group
purchasing organizations. Third-party payors are increasingly challenging the
prices charged for medical products and services. The purchase of healthcare
services and products could be significantly affected by:

    o    the trend toward managed healthcare in the U.S.;
    o    the growth of group purchasing organizations; and
    o    legislative proposals to reform healthcare and government insurance
         programs.

         These factors could result in lower prices and reduced demand for our
products. Healthcare providers are instituting cost-containment measures. Any
cost-containment measures as well as any healthcare reform could reduce or
eliminate any profit to us on sales of our products. We also cannot assure you
that full or partial reimbursement in the U.S. or foreign countries will be
available for any of our products. If reimbursements are not available or
sufficient, we may not be able to sell our products. We cannot forecast what
additional legislation or regulation relating to the healthcare industry or
third-party coverage and reimbursement may be enacted in the future, or what
effect the legislation or regulation would have on our business.


                                      -12-

<PAGE>

WE EXPECT THAT OUR RESULTS OF OPERATIONS WILL FLUCTUATE, WHICH MAY MAKE IT
DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE FROM PERIOD TO PERIOD.

         Our quarterly operating results have fluctuated in the past and are
likely to do so in the future. Some of the factors that could cause our
operating results to fluctuate from period to period include:

    o    the status of development of OXYGENT;
    o    whether we generate revenues by achieving specified research and
         development or commercialization milestones under any agreements;
    o    the incurrence of preclinical or clinical expenses that could fluctuate
         significantly from period to period;
    o    the initiation, termination or reduction in the scope of our
         collaborations during these periods or any disputes regarding these
         collaborations;
    o    the timing of our ability to satisfy applicable regulatory
         requirements;
    o    the rate of expansion of our clinical development and other internal
         research and development efforts;
    o    the effect of competing technologies and products and market
         developments; and
    o    general and industry specific economic conditions.

         We believe that quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of our
future performance.

OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING MAY NOT BE EFFECTIVE, WHICH COULD
HAVE A SIGNIFICANT AND ADVERSE EFFECT ON OUR BUSINESS.

         Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and
regulations of the SEC, which we collectively refer to as Section 404, require
us to evaluate our internal controls over financial reporting to allow
management to report on those internal controls as of the end of each year
beginning in fiscal 2008. Section 404 will also require our independent
registered public accounting firm to attest to the effectiveness of our internal
controls over financial reporting in future periods. Effective internal controls
are necessary for us to produce reliable financial reports and are important in
our effort to prevent financial fraud. In the course of our Section 404
evaluations, we may identify conditions that may result in significant
deficiencies or material weaknesses and we may conclude that enhancements,
modifications or changes to our internal controls are necessary or desirable.
Implementing any such matters would divert the attention of our management,
could involve significant costs, and may negatively impact our results of
operations.

         We note that there are inherent limitations on the effectiveness of
internal controls, as they cannot prevent collusion, management override or
failure of human judgment. If we fail to maintain an effective system of
internal controls or if management or our independent registered public
accounting firm were to discover material weaknesses in our internal controls,
we may be unable to produce reliable financial reports or prevent fraud, and it
could harm our financial condition and results of operations, result in a loss
of investor confidence and negatively impact our share price.

                   RISKS RELATED TO OUR INTELLECTUAL PROPERTY

OUR ABILITY TO COMPETE MAY DECLINE IF WE DO NOT ADEQUATELY PROTECT OUR
PROPRIETARY RIGHTS.

         We believe that our success will depend largely on our ability to
obtain and maintain patent protection for our own inventions, to license the use
of patents owned by third parties when necessary, to protect trade secrets and
to conduct our business without infringing the proprietary rights of others. We
have obtained patents covering intermediate- and high-concentration PFC
emulsions, stabilized PFC-emulsion formulations, as well as other patents. In
addition, we have filed, and when appropriate will file, other patent
applications with respect to our products and processes in the U.S. and in
foreign countries. We do not know, however, whether:

    o    any of our current or future patent applications will result in the
         issuance of patents;
    o    any of our issued patents will provide significant proprietary
         protection or commercial advantage; or
    o    any of our issued patents will not be circumvented by others.

         The patent positions of pharmaceutical medical products and
biotechnology firms can be uncertain and involve complex legal and factual
questions. It is possible that a third party may successfully challenge any of
our patents or any of the patents licensed to us. If that were to happen, we
would lose the right to prevent others from using the technology.


                                      -13-

<PAGE>

CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT
DISCLOSURE OF OUR TRADE SECRETS AND OTHER PROPRIETARY INFORMATION AND MAY NOT
ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD LIMIT OUR ABILITY TO
COMPETE.

         Because we operate in a highly technical field, we rely in part on
trade secret protection in order to protect our proprietary technology and
processes; however, trade secrets are difficult to protect. We enter into
confidentiality and intellectual property assignment agreements with our
corporate partners, employees, consultants, outside scientific collaborators,
sponsored researchers and other advisors. These agreements generally require
that the other party keep confidential and not disclose to third parties all
confidential information developed by the party or made known to the party by us
during the course of the party's relationship with us. These agreements also
generally provide that inventions conceived by the party in the course of
rendering services to us will be our exclusive property. However, these
agreements may not be honored and may not effectively assign intellectual
property rights to us. Enforcing a claim that a party illegally obtained and is
using our trade secrets is difficult, expensive and time consuming, and the
outcome is unpredictable. In addition, courts outside the U.S. may be less
willing to protect trade secrets. The failure to obtain or maintain trade secret
protection could adversely affect our competitive position.

A DISPUTE CONCERNING THE INFRINGEMENT OR MISAPPROPRIATION OF OUR PROPRIETARY
RIGHTS OR THE PROPRIETARY RIGHTS OF OTHERS COULD BE TIME CONSUMING AND COSTLY,
AND AN UNFAVORABLE OUTCOME COULD HARM OUR BUSINESS.

         There is significant litigation in our industry regarding patent and
other intellectual property rights. If our product development activities are
found to infringe any such intellectual property rights of others, we may have
to pay significant damages. We may need to resort to litigation to enforce a
patent issued to us, protect our trade secrets, or determine the scope and
validity of third-party proprietary rights. From time to time, we may hire
scientific personnel formerly employed by other companies involved in one or
more areas similar to the activities conducted by us. Either we or these
individuals may be subject to allegations of trade secret misappropriation or
other similar claims as a result of their prior affiliations. If we become
involved in litigation, it could consume a substantial portion of our managerial
and financial resources, regardless of whether we win or lose. We may not be
able to afford the costs of litigation. Any legal action against our company or
our collaborators could lead to:

    o    payment of damages, potentially treble damages, if we are found to have
         willfully infringed a party's patent rights;
    o    injunctive or other equitable relief that may effectively block our
         ability to further develop, commercialize and sell products; or
    o    we or our collaborators having to enter into license arrangements that
         may not be available on commercially acceptable terms, if at all.

         As a result, we could be prevented from commercializing current or
future products.

                          RISKS RELATED TO OUR INDUSTRY

WE WILL BE SUBJECT TO STRINGENT REGULATION IN CONNECTION WITH THE MARKETING OF
ANY PRODUCTS DERIVED FROM OUR DRUG CANDIDATES, WHICH COULD DELAY THE DEVELOPMENT
AND COMMERCIALIZATION OF OUR PRODUCTS.

         The pharmaceutical industry is subject to stringent regulation by the
FDA and other regulatory agencies in the U.S. and by comparable authorities in
other countries. Neither we nor our collaborators can market a pharmaceutical
product in the U.S. until it has completed rigorous preclinical testing and
clinical trials and an extensive regulatory clearance process implemented by the
FDA. Satisfaction of regulatory requirements typically takes many years, depends
upon the type or complexity and novelty of the product, and requires substantial
resources. Even if regulatory approval is obtained, it may impose significant
restrictions on the indicated uses, conditions for use, labeling, advertising,
promotion and/or marketing of such products, and requirements for post-approval
studies, including additional research and development and clinical trials.
These limitations may limit the size of the market for the product or result in
the incurrence of additional costs. Any delay or failure in obtaining required
approvals could have a material adverse effect on our ability to generate
revenues from the particular product candidate.

         Outside the U.S., the ability to market a product is contingent upon
receiving approval from the appropriate regulatory authorities. The requirements
governing the conduct of clinical trials, marketing authorization, pricing and
reimbursement vary widely from country to country. Only after the appropriate
regulatory authority is satisfied that adequate evidence of safety, quality and
efficacy has been presented will it grant a marketing authorization. Approval by
the FDA does not automatically lead to the approval by regulatory authorities
outside the U.S. and, similarly, approval by regulatory authorities outside the
U.S. will not automatically lead to FDA approval.


                                      -14-

<PAGE>

IF OUR COMPETITORS DEVELOP AND MARKET PRODUCTS THAT ARE MORE EFFECTIVE THAN OUR
PRODUCT CANDIDATES, THEY MAY REDUCE OR ELIMINATE OUR COMMERCIAL OPPORTUNITY.

         We may be unable to compete successfully in developing and marketing
our products. Several pharmaceutical companies, biotechnology companies, public
and private universities, and research organizations are actively engaged in the
research and development of products that may compete with our products. Some of
these companies, particularly the large worldwide pharmaceutical companies, have
more resources than we do and may develop and introduce products and processes
competitive with or superior to ours. We cannot assure that the cost of our
product will be competitive with the cost of established therapies. We do not
know whether our technology or the technology of a competitor will gain market
acceptance. Our failure to compete could have a material adverse effect on our
business. We cannot assure you that other technologies will not be developed
that would render our product obsolete or more costly.

CONSUMERS MAY SUE US FOR PRODUCT LIABILITY, WHICH COULD RESULT IN SUBSTANTIAL
LIABILITIES THAT EXCEED OUR AVAILABLE RESOURCES AND DAMAGE OUR REPUTATION.

         Researching, developing and commercializing products entail significant
product liability risks. Liability claims may arise from our and our
collaborators' use of products in clinical trials and the commercial sale of
those products. Consumers may make these claims directly and our collaborators
or others selling these products may seek contribution from us if they receive
claims from consumers. We will need to increase and expand our product liability
insurance that covers our clinical trials as we commence larger scale trials and
if our drug candidates are approved for commercial sale. This insurance may be
prohibitively expensive or may not fully cover our potential liabilities.
Inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
inhibit the commercialization of products that we or our collaborators develop.
Product liability claims could have a material adverse effect on our business
and results of operations. Our liability could exceed our total assets if we do
not prevail in a lawsuit from any injury caused by our drug products.

                RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES

THERE IS A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET AS A RESULT OF
AN OFFERING, WHICH MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.

         As of September 26, 2008, 60,216,247 shares of our common stock were
outstanding. On September 30, 2004, we registered, pursuant to an SB-2,
64,178,599 shares of our common stock that are either outstanding or issuable
upon exercise of outstanding warrants or conversion of the Senior Notes held by
certain shareholders. These shares, upon acquisition, unless held by
"affiliates," will be freely tradable without restriction or further
registration under federal securities laws pursuant to Rule 144.

         Sales of a substantial number of shares of our common stock in the
public markets, or the perception that the sales may occur, could cause the
market price of our stock to decline and could materially impair our ability to
raise capital through the sale of additional equity securities.

THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE AND YOUR INVESTMENT COULD
SUFFER A DECLINE IN VALUE.

         The market price for our common stock is likely to be volatile and
could be susceptible to wide price fluctuations due to a number of internal and
external factors, many of which are beyond our control, including:

    o    quarterly variations in operating results and overall financial
         condition;
    o    economic and political developments affecting the economy as a whole;
    o    results of our clinical trials;
    o    our inability to manufacture products on a large scale;
    o    short-selling programs;
    o    the stock market's perception of the biotechnology industry as a whole;
    o    technological innovations by others;
    o    proprietary rights disputes or litigation;
    o    changes in earnings estimates by analysts;
    o    additions or departures of key personnel; and
    o    sales of substantial numbers of shares of our common stock or
         securities convertible into or exercisable for our common stock.

THE APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL THOSE
SHARES.


                                      -15-

<PAGE>

         As long as the trading price of our common shares is below $5 per
share, the open-market trading of our common shares will be subject to the penny
stock rules. The penny stock rules impose additional sales practice requirements
on broker-dealers who sell securities to persons other than established
customers and accredited investors (generally those with assets in excess of $1
million or annual income exceeding $200,000 or $300,000 together with their
spouses). For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of securities and have
received the purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the SEC relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information on the
limited market in penny stocks. These additional burdens imposed on
broker-dealers may restrict the ability or decrease the willingness of
broker-dealers to sell our common stock, and may result in decreased liquidity
for our common stock and increased transaction costs for sales and purchases of
our common stock as compared to other securities.

         These and other factors may make it difficult for our stockholders to
sell their shares in the open market if and when eligible to do so. In addition,
stock prices for many biotechnology companies fluctuate widely for reasons that
may be unrelated to operating results. These fluctuations, as well as general
economic, market and political conditions such as interest rate increases,
recessions or military or political conflicts, may materially and adversely
affect the market price of our common stock, thereby causing you to lose some or
all of your investment.

WE DO NOT INTEND TO PAY CASH DIVIDENDS.

         We have never paid cash dividends on our stock and do not anticipate
paying any cash dividends in the foreseeable future. In addition, certain
restrictive covenants in the Senior Notes restrict our ability to pay dividends.

ITEM 2.  DESCRIPTION OF PROPERTY

         We are leasing approximately 1,500 square feet of space within a
facility in San Diego, California. This space is used for research and
development and general administration.

ITEM 3.  LEGAL PROCEEDINGS

         None.

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

         The 2007 Annual Meeting of the shareholders of the Company was held on
May 30, 2008, and the following matters were submitted to and approved by the
Company's shareholders:

PROPOSAL 1 - ELECTION OF DIRECTORS
----------------------------------

         The following directors were re-elected for the following year and
until the election and qualification of their respective successors:
                                                                         Broker
        Director               For          Against      Withheld      Non-Votes
        --------               ---          -------      --------      ---------
Pedro Cuatrecasas, M.D.     44,207,804        0          1,257,033        0
Carroll O. Johnson          44,208,370        0          1,256,467        0
Stephen M. McGrath          43,896,529        0          1,568,308        0
Jean G. Riess, Ph.D.        44,328,086        0          1,136,751        0
Duane J. Roth               44,214,199        0          1,250,638        0
Theodore D. Roth            44,115,965        0          1,348,872        0

PROPOSAL 2 - AMENDMENT OF THE CERTIFICATE OF INCORPORATION TO EFFECT A REVERSE
------------------------------------------------------------------------------
STOCK SPLIT
-----------

         The amended Certificate of Incorporation was amended to effect a
reverse stock split in a ratio of ten (10) shares to one (1) share (the "Reverse
Stock Split") of our Common Stock:


                                      -16-

<PAGE>

                   For                Against            Abstain
                   ---                -------            -------
                38,890,194           6,564,805            9,838

         On April 3, 2008, the Board adopted, and our shareholders approved at
the 2007 Annual Meeting on May 30, 2008, an amendment to our Certificate of
Incorporation, as amended (the "Certificate Amendment"), to effect the Reverse
Stock Split. The Company did not reduce the authorized number of shares of
common stock so that it will continue to have an adequate number of shares
available for future issuance, as discussed below. The Certificate of Amendment
will, subject to the discretion of the Board, be filed with the Secretary of
State of the State of New York as promptly as practicable. The amendment and the
proposed Reverse Stock Split will become effective as of the date of such filing
(the "Effective Date").

GENERAL

         The Company is presently authorized to issue 150,000,000 shares of
common stock, of which 60,216,247 shares are outstanding, no shares are held in
treasury and 74,124,743 shares are reserved for issuance at September 26, 2008.
Upon the effectiveness of the Reverse Stock Split, the Company will have
150,000,000 shares of common stock authorized, of which, as of the Effective
Date, approximately 6,021,625 shares will be outstanding, and 7,412,475 shares
will be reserved for issuance.

REASONS FOR AND CONSEQUENCES OF THE REVERSE STOCK SPLIT

         The Company requires additional funding to continue its operations and
desires to issue new securities in a future private placement; however, it has
become clear to management that investors are unwilling to invest any new money
into the Company so long as its existing Senior Notes are outstanding.

         The Company has reached an agreement with substantially all of the
holders of the Senior Notes to convert the outstanding principal amount and
accrued but unpaid interest under the Senior Notes into common stock of the
Company in accordance with the terms of the Senior Notes.

         To induce the holders of the Senior Notes to convert their Senior Notes
into common stock of the Company, the Company agreed to modify the existing
royalty and milestone sharing arrangements with the holders of the Senior Notes
as follows:

    o    The holders of the Senior Notes will be given the pro rata right to
         receive 100% of all royalties received by the Company from the sale of
         OXYGENT products up to the maximum total payment sharing amount of
         $11.4 million (currently, under our agreement with the holders of the
         Senior Notes, the holders of the Senior Notes, have the right to only
         receive 50% of such royalties up to the maximum payment amount); and

    o    The holders of the Senior Notes will also be given the pro rata right
         to receive: (i) 100% of the milestone payment to be paid to the Company
         by Double-Crane upon sFDA approval of OXYGENT in the PRC (currently,
         under the Note Purchase Agreement, the holders of the Senior Notes,
         have the contractual right to only receive 50% of such milestone
         payment), and (ii) 50% of any other milestone payment received from a
         third party based on the development of an OXYGENT product, in each
         case subject to the total maximum amount of payments of $11.4 million.

         At June 30, 2008, prior to the Reverse Stock Split taking effect, the
Senior Notes and accrued interest were convertible into 65,086,940 shares of
common stock at $0.17 per share.

         In order to allow for the conversion of all of the Senior Notes, and
the subsequent issuance of shares of common stock in connection with a potential
private placement (as discussed below), the Company must effect the Reverse
Stock Split for the purpose of increasing the authorized but unissued and
unreserved shares of common stock.

         The conversion of the Senior Notes is conditioned on the following: (i)
100% of the Senior Notes being received in escrow by the Company for conversion
and cancellation (unless this condition is waived by the Company); (ii) approval
of the Reverse Stock Split by the Company's shareholders (which was accomplished
at the 2007 Annual Meeting on May 30, 2008); (iii) filing of the Certificate
Amendment and acceptance of the same with the Secretary of State of the State of
New York; and (iv) receipt by the Company of at least $3 million in new
financing from investors. The Company has no additional plan, commitment,
arrangement, understanding or agreement, either written or oral, to issue
additional shares of common stock upon the effectiveness of the Reverse Stock
Split, other than for the conversion of the existing Senior Notes and for the
potential financing described above.


                                      -17-

<PAGE>

         The Reverse Stock Split may also result in an increase in the trading
price of our common stock and could therefore create greater investor interest
in our common stock and possibly enhance the marketability of our common stock
to the financial market. However, although the Reverse Stock Split may increase
the market price of our common stock, the actual effect of the Reverse Stock
Split on our market price cannot be predicted. The market price of our common
stock may not rise in proportion to the reduction in the number of shares
outstanding as a result of the Reverse Stock Split. Further, the Company does
not know if the Reverse Stock Split will lead to a sustained increase in the
market price of our common stock. The market price of our common stock could
also change as a result of other unrelated factors, including our operating
performance and other factors related to our business as well as general market
conditions.

PRINCIPAL EFFECTS OF THE REVERSE STOCK SPLIT

         Based upon the 60,216,247 shares of common stock outstanding on
September 26, 2008, the proposed Reverse Stock Split would decrease the
outstanding shares of Common Stock by 90%, and thereafter 6,021,625 shares of
common stock would be outstanding. The proposed Reverse Stock Split will not
affect any common shareholder's proportionate equity interest in the Company,
subject to the provisions relating to the elimination of fractional shares as
described below.

         At June 30, 2008, there were outstanding options to purchase an
aggregate of 2,703,800 shares of common stock under the Company's stock option
plans (the "Plans") and an aggregate of 4,102,110 shares were available for
grant under two of the Plans. The Company has reserved 6,805,910 shares for
issuance upon the exercise of the granted options and upon exercise of options
that may be granted in the future. The Plans provide for automatic adjustment in
the event of a reverse stock split so that the amount of shares issuable upon
exercise of outstanding options, the number of shares available for grant and
the number of shares reserved for issuance will be reduced to one-tenth of the
amount issuable prior to the Effective Date, and the exercise prices of the
granted options would become ten times the present exercise prices.

         At June 30, 2008, there were outstanding warrants to purchase an
aggregate of 2,231,893 shares of common stock and 2,231,893 shares of common
stock reserved for issuance at such date for the warrants. The provisions of the
relevant instrument pursuant to which the warrants were issued provide for
automatic adjustment in the event of a reverse stock split so that the amount of
shares issuable upon exercise of the warrants will be reduced to one-tenth of
the amount issuable prior to the Effective Date, and the exercise price would
become ten times the present exercise price. Accordingly, 223,189 shares of
common stock will be reserved for issuance on the Effective Date for the
warrants.

         At June 30, 2008, the Company, in addition to options and warrants, had
outstanding $8.2 million principal amount of the Senior Notes and accrued
interest of $2.9 million on said notes. The Senior Notes and accrued interest
are convertible at any time, at the respective holders' option, into shares of
common stock at $0.17 per share, subject to adjustment in the case of a reverse
stock split. In accordance with the provisions of the relevant instruments
pursuant to which the Senior Notes were issued, the number of shares of common
stock into which they may be converted is 65,086,940, which amount will be
reduced to 6,508,694 shares of common stock as a result of the Reverse Stock
Split.

         The foregoing may be summarized as follows:

                                                                  IF PROPOSAL 2
NUMBER OF SHARES OF COMMON STOCK        AS OF JUNE 30, 2008       IS EFFECTED *
--------------------------------        -------------------       -------------
Authorized                              150,000,000               150,000,000
Issued and Outstanding**                60,216,247                6,021,625
Reserved for Issuance***                74,124,743                7,412,475
Available for Future Issuance           15,659,010                136,565,900
Par Value Per Share                     $0.01                     $0.01

----------------
*        Without giving effect to fractional shares.
**       Includes 635,000 shares of common stock deemed outstanding due to the
automatic conversion of the Company's Series F Preferred Stock that occurred in
March 2004. The stock certificate representing these shares of common stock has
not yet been issued.
***      Number of shares reserved for estimated issuance upon exercise of
options, warrants and debt.


                                      -18-

<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR OUR COMMON STOCK

         Our common stock is traded in the over-the-counter market, and prices
therefore are quoted on the NASDAQ OTCBB under the symbol ALLP.OB.

         The following table sets forth for the periods indicated the high and
low bid prices per share for our common stock as reported by the OTCBB. The
prices represent quotations between dealers, without adjustment for retail
markup, mark down or commission, and do not necessarily represent actual
transactions.

                                                          HIGH BID     LOW BID
                                                          --------     -------
Fiscal 2008
                Quarter ended June 30, 2008                $0.03       $0.02
                Quarter ended March 31, 2008               $0.03       $0.01
                Quarter ended December 31, 2007            $0.06       $0.01
                Quarter ended September 30, 2007           $0.09       $0.04

Fiscal 2007
                Quarter ended June 30, 2007                $0.13       $0.09
                Quarter ended March 31, 2007               $0.15       $0.09
                Quarter ended December 31, 2006            $0.14       $0.09
                Quarter ended September 30, 2006           $0.21       $0.10


         On September 26, 2008, the closing bid price of the Company's common
stock was $0.016.

         As of September 26, 2008, there were 812 stockholders of record of our
common stock. We believe that, in addition, there are beneficial owners of our
common stock whose shares are held in street name and, consequently, we are
unable to determine the actual number of beneficial holders of our common stock.

         The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.

DIVIDEND POLICY

         Since our incorporation, we have never declared or paid any dividends
on our capital stock. We currently expect to retain our future earnings, if any,
for use in the operation and expansion of our business and do not anticipate
paying any dividends in the foreseeable future. Pursuant to the Senior Note
purchase agreement we entered into with certain of our investors, we are
restricted from declaring or paying dividends on our capital stock for so long
as the Senior Notes we issued pursuant to the Senior Note purchase agreement
remain outstanding.

"PENNY STOCK" RULES

         Until our shares re-qualify for inclusion in the NASDAQ system, the
public trading, if any, of our common stock will be on the OTCBB. As a result,
an investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, our common stock. Our common stock is subject to
provisions of Section 15(g) and Rule 15g-9 of the Exchange Act, commonly
referred to as the penny stock rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks, and Rule 15g-9(d) incorporates
the definition of penny stock that is found in Rule 3a51-1 of the Exchange Act.
The SEC generally defines penny stock to be any equity security that has a
market price less than $5 per share, subject to certain exceptions. If our
common stock is deemed to be a penny stock, trading in the shares will be
subject to additional sales practice requirements on broker-dealers who sell
penny stock to persons other than established customers and accredited
investors. "Accredited investors" are persons with assets in excess of $1
million or annual income exceeding $200,000 or $300,000 together with their
spouses. For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of such security and must
have the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document, prepared by the SEC, relating to the penny stock market. A
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in an account and information on the
limited market in penny stocks. Consequently, these rules may restrict the
ability of a broker-dealer to trade and/or maintain a market in our common stock
and may affect the ability of our shareholders to sell their shares.


                                      -19-

<PAGE>

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table sets forth information as of June 30, 2008 related
to our equity compensation plans (including the potential effect of debt
instruments convertible into common stock) in effect as of that date:

<TABLE>
<S>     <C>
                                  (a)                            (b)                             (c)

Plan category                     Number of securities to be     Weighted-average exercise       Number of securities
                                  issued upon exercise of        price of outstanding            remaining available for
                                  outstanding options,           options, warrants and rights    future issuance under
                                  warrants and rights (1)                                        equity compensation plans
                                                                                                 (excluding securities
                                                                                                 reflected in column (a))(1)

Equity compensation plans
approved by security holders      2,293,300                      $3.39                           4,092,610

Equity compensation plans
not approved by security
holders (1)                       2,642,393                      $0.97                               9,500

                                  ---------                      -----                           ---------
Totals                            4,935,693                      $2.09                           4,102,110
</TABLE>

         (1)  The description of the material terms of non-plan issuances of
              equity instruments is discussed in Note 6 to the accompanying
              consolidated financial statements.

         We have a 2000 Stock Option Plan and a 2001 Stock Option Plan, which
provide for both incentive and non-qualified stock options (the "2000 Plan" and
the "2001 Plan"). The 2001 Plan was adopted and approved by our shareholders.
The 2000 Plan was not adopted or approved by our shareholders. These plans
provide for the granting of options to purchase shares of our common stock (up
to an aggregate of 2,100,000 and 6,000,000 shares under the 2000 Plan and 2001
Plan, respectively) to directors, officers, employees and consultants. The
optionees, date of grant, option price (which cannot be less than 100% and 80%
of the fair market value of the common stock on the date of grant for incentive
stock options and non-qualified stock options, respectively), vesting schedule,
and term of options, which cannot exceed ten years, are determined by the
Compensation Committee of our Board of Directors.

RECENT SALES OF UNREGISTERED SECURITIES

         During the fiscal year ended June 30, 2008, holders of certain Senior
Notes converted an aggregate of approximately $2.1 million in principal and
$108,000 in accrued interest into an aggregate of 12,780,018 shares of our
common stock at a conversion price of $0.17 per share.

         The offers, sales and issuances of these securities were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act and/or Regulation D promulgated thereunder as transactions by
the issuer not involving a public offering. The recipients of the securities
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates or notes in such
transactions. All recipients had adequate access to information about us.

         Our ability to declare or pay a dividend on our capital stock is
restricted for so long as the Senior Notes remain outstanding.


                                      -20-

<PAGE>

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The following discussion and analysis should be read in conjunction
with the Audited Consolidated Financial Statements and Notes thereto appearing
elsewhere in this report.

         CERTAIN STATEMENTS CONTAINED HEREIN THAT ARE NOT RELATED TO HISTORICAL
RESULTS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR BUSINESS
STRATEGY AND OBJECTIVES, FUTURE FINANCIAL POSITION, EXPECTATIONS ABOUT PENDING
LITIGATION AND ESTIMATED COST SAVINGS, ARE FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT
AND INVOLVE RISKS AND UNCERTAINTIES. ALTHOUGH WE BELIEVE THAT THE ASSUMPTIONS ON
WHICH THESE FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE, THERE CAN BE NO
ASSURANCE THAT SUCH ASSUMPTIONS WILL PROVE TO BE ACCURATE AND ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, REGULATORY POLICIES, COMPETITION FROM OTHER SIMILAR BUSINESSES, AND
MARKET AND GENERAL ECONOMIC FACTORS. ALL FORWARD-LOOKING STATEMENTS CONTAINED IN
THIS FORM 10-KSB ARE QUALIFIED IN THEIR ENTIRETY BY THIS STATEMENT.

PLAN OF OPERATION

(References to years are to our fiscal years ended June 30.)

         Since our inception in 1983, we have financed our operations primarily
through the sale of equity and debt securities, and we have applied
substantially all of our resources to research and development programs and to
clinical trials. We have incurred operating losses since inception and, as of
June 30, 2008, have an accumulated deficit of $499.6 million. We expect to incur
significant operating losses over at least the next few years as we continue our
research and product development efforts and attempt to commercialize our
products.

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

         The discussion included in this report assumes that we will continue as
a going concern, which contemplates, among other things, the realization of
assets and satisfaction of liabilities in the ordinary course of business. As
discussed in Note 1 to the consolidated financial statements, we may lack
sufficient working capital to service our debts and to fund our continuing
operations through the fiscal year ending June 30, 2009, which raises
substantial doubt about our ability to continue as a going concern. As of
September 26, 2008, we are in default under the terms of the 2007 Amendment and
we owe the holders of our Senior Notes approximately $11.1 million in principal
and accrued interest. We currently do not have the resources to repay the Senior
Notes. If the holders of our Senior Notes demand repayment, and we are unable to
do so, the holders of our Senior Notes may be able to force our liquidation. In
the event of our liquidation, it is highly unlikely the holders of our equity
securities will receive any of the proceeds of such liquidation.

RESEARCH AND DEVELOPMENT

         For the years ended June 30, 2008 and 2007, we incurred research and
development expenses of $363,000 and $1.9 million, respectively, for OXYGENT, an
intravascular oxygen carrier that we are developing to augment oxygen delivery
in surgical patients at risk of acute oxygen deficit. Research and development
costs to date for our oxygen-therapeutic product candidates, including OXYGENT,
total approximately $161 million. While difficult to predict, we estimate that
the completion of clinical trials for OXYGENT will cost at least an additional
$70 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.


                                      -21-

<PAGE>

         In January 2007, the French IRB and the French Competent Authority
(regulatory agency) granted approval to start the Phase 2b clinical trial for
OXYGENT to prevent postoperative ileus resulting from hypoxia during major
surgery trial. Subsequently in November 2007, Alliance suspended the clinical
trial due to lack of adequate funding.

         On February 6, 2007, we announced the manufacture and release for
shipment of OXYGENT for the clinical trials planned in France and the PRC.
Alliance successfully completed the contract manufacture of OXYGENT clinical
trial material. However, on March 15, 2007, we announced that, in accordance
with the current regulations of the sFDA, the supplies for an IND application
and clinical development must be manufactured in a facility in the PRC. As a
result, Alliance agreed to accelerate the manufacturing technology transfer to
Double-Crane, which originally was planned to occur when Phase 3 trials were
initiated in the PRC. This technology transfer is underway with Double-Crane
completing the manufacturing facility and purchasing the required equipment for
emulsion manufacture. Once clinical supplies are manufactured by Double-Crane,
Double-Crane has indicated that it will submit its IND application for
initiation of the agreed upon clinical development plan. Double-Crane will start
a Phase 1 safety trial in Chinese nationals immediately after the sFDA approves
the IND application.

         Double-Crane has considerable experience in manufacturing large-volume
parenteral and IV solutions and has expressed a desire to supply Alliance with
clinical and commercial supplies of OXYGENT from its facilities in the PRC.
Supply of OXYGENT to the U.S. would be contingent on Double-Crane's compliance
to cGMP and registration with the U.S. FDA.

RESULTS OF OPERATIONS

YEAR ENDED JUNE 30, 2008 AS COMPARED WITH YEAR ENDED JUNE 30, 2007

         Our revenue decreased to $106,000 for the year ended June 30, 2008,
compared to $573,000 for the year ended June 30, 2007. The revenue for this year
was primarily royalties. The revenue for last year was primarily a milestone
payment of $500,000 that was recognized as revenue upon satisfaction of certain
obligations under the Double-Crane Agreement.

         Research and development expenses decreased by $1.6 million, or 81%, to
$363,000 for the year ended June 30, 2008, compared to $1.9 million for the year
ended June 30, 2007. The decrease in research and development expenses was
primarily due to the suspension of the clinical study in France in November
2007.

         General and administrative expenses decreased by $325,000, or 28%, to
$844,000 for the year ended June 30, 2008, compared to $1.2 million for the year
ended June 30, 2007. The decrease in general and administrative expenses was
primarily the result of a decrease in legal and accounting fees ($126,000), a
net decrease in rent and office-related expenses ($81,000), a reduction in
personnel ($75,000), a decrease in public company expenses ($29,000) and a
decrease in insurance ($15,000).

         For the year ended June 30, 2007, we recorded a gain on the disposition
of assets of $659,000. This amount primarily consisted of payments from Imcor
Pharmaceutical Co. ("Imcor"), formerly known as Photogen Technologies, Inc., of
$100,000 and the recognition of approximately $500,000 of deferred royalties
during the year in connection with the IMAGENT(R) asset sale transaction (see
"Liquidity and Capital Resources" below).

         For the year ended June 30, 2007, we recorded a gain on the change in
fair value of derivative liability of $357,000 related to recording derivative
liabilities at fair value in connection with the 2006 Amendment of our Senior
Notes.

         Investment income decreased to $20,000 for the year ended June 30,
2008, compared to $114,000 for the year ended June 30, 2007. The decrease was
primarily a result of a lower cash balance.

         Other income was $188,000 for the year ended June 30, 2008, primarily
the result of proceeds recorded from the sale of raw material inventory (which
was previously written off).


                                      -22-

<PAGE>

         Interest expense was $874,000 for the year ended June 30, 2008, a
decrease of 5% compared to $922,000 for the year ended June 30, 2007. The
decreased expense for the current year was primarily the result of Senior Note
conversions during the year.

         For the year ended June 30, 2008, we recorded a loss on modification of
debt of $14,000 and for the year ended June 30, 2007, we recorded a loss on
modification of debt of $1.8 million resulting from the issuance of additional
notes during both years in connection with the 2007 Amendment.

LIQUIDITY AND CAPITAL RESOURCES

         Since inception, we have funded our operations primarily through the
sale of equity securities, payments under our collaboration agreements and debt
financing. From inception to June 30, 2008, we had received $243 million in net
proceeds from sales of our equity securities, $260.8 million in payments from
collaboration agreements and $74.3 million in debt financing of which $41
million of such debt has been converted into equity and $25.9 million of such
debt has been retired through the restructuring of various agreements and the
issuance of warrants to purchase our common stock (described more fully below).

         At June 30, 2008, we had approximately $6,000 in cash compared to
$873,000 at June 30, 2007. The decrease resulted primarily from the net cash
used in operations of $868,000. At June 30, 2008, we had a working capital
deficit of $11.6 million, compared to a working capital deficit of $12.1 million
at June 30, 2007. The deficit decrease was principally due to the net decrease
in the Senior Note principal amounts of $2.1 million, a net decrease in accounts
payable and accrued expenses of $230,000, partially offset with an increase in
accrued interest of $874,000, deferred compensation of $138,000 and net cash
used in operations. Our operations to date have consumed substantial amounts of
cash and are expected to continue to do so for the foreseeable future.

         The discussion included in this report assumes that we will continue as
a going concern, which contemplates, among other things, the realization of
assets and satisfaction of liabilities in the ordinary course of business. As
discussed in Note 1 to the consolidated financial statements, we may lack
sufficient working capital to service our debts and to fund our continuing
operations through the fiscal year ending June 30, 2009, which raises
substantial doubt about our ability to continue as a going concern. As of
September 26, 2008, we are in default under the terms of the 2007 Amendment and
we owe the holders of our Senior Notes approximately $11.1 million in principal
and accrued interest. We currently do not have the resources to repay the Senior
Notes. If the holders of our Senior Notes demand repayment, and we are unable to
do so, the holders of our Senior Notes may be able to force our liquidation. In
the event of our liquidation, it is highly unlikely the holders of our equity
securities will receive any of the proceeds of such liquidation.

         Net cash used in operating activities totaled $868,000 for the year
ended June 30, 2008, compared to $2.8 million for the year ended June 30, 2007.
The decrease in net cash used in operating activities during the year ended June
30, 2008 was primarily due to the suspension of the clinical trial in France in
November 2007, the completion of production of clinical trial material in an
FDA-approved GMP facility during fiscal year 2007, and a decrease in rent,
personnel and other cost-cutting steps.

         There was no cash provided by financing activities for the years ended
June 30, 2008 and June 30, 2007.

         On June 18, 2003, we sold all of our assets related to our IMAGENT
product to Imcor. During the year ended June 30, 2007, Imcor announced that it
adopted a restructuring plan whereby it was evaluating alternatives with respect
to efforts to sell or otherwise maximize asset values related to the IMAGENT
technology, and was considering the sale or license of its IMAGENT assets, a
merger or other material transaction. Since such a transaction may include
selling the IMAGENT technology, a license or sale of the patent portfolio
underlying the IMAGENT technology, a manufacturing rights agreement, or another
form of transaction, Alliance determined that there will be no future IMAGENT
earn-out payments and deferred royalties previously recorded will not be paid;
therefore, Alliance recognized $500,000 in deferred royalties as a gain on
disposition of liabilities during the year ended June 30, 2007.

         In November 2006, Imcor entered into an amended and restated license
agreement with one of its partners (the "Imcor Settlement Agreement"). Pursuant
to the terms of the agreement, an aggregate of $100,000 (approximately $91,000
net, after deducting the Company's allocated share of direct expenses) was paid
to Alliance during the year ended June 30, 2007.


                                      -23-

<PAGE>

         On May 16, 2005, PFC Therapeutics and Double-Crane entered into the
Double-Crane Agreement whereby Double-Crane was granted the right to develop and
commercialize OXYGENT in the PRC. Double-Crane made an upfront license fee
payment of $500,000 and they will be obligated to make milestone and royalty
payments to us. In addition, Double-Crane will be responsible for manufacturing
clinical supplies and conducting clinical trials in the PRC, in accordance with
international guidelines, necessary to receive marketing approval for OXYGENT
and Alliance will have the right to use any data derived from these clinical
trials in other territories. Double-Crane will have the option to manufacture
OXYGENT in the PRC after obtaining approval from the regulatory authorities in
the PRC. Double-Crane will also have a right of first refusal to add specific
additional countries to the Double-Crane Agreement upon further negotiation with
us.

         In April 2006, Alliance entered into the 2006 Amendment of its Senior
Notes. Pursuant to the 2006 Amendment, the maturity date of each outstanding
Senior Note was extended from March 24, 2006 to April 1, 2007. The conversion
price of each Senior Note was reduced from $0.25 to $0.17 and the interest
accrued on each Senior Note was increased from 6% to 10% per annum.

         As a result of the 2006 Amendment of the Senior Notes, the Company did
not have a sufficient number of authorized shares to settle outstanding and
exercisable options, warrants and convertible instruments until November 14,
2006, when the Company's shareholders at its 2006 Annual Meeting approved an
amendment of the Company's Certificate of Incorporation, as amended, to increase
the number of authorized shares of common stock from 125 million to 150 million.
The Company was required to classify all non-employee options and warrants as
derivative liabilities and record them at their fair values at each subsequent
balance sheet date. Any change in fair value was recorded as non-operating,
non-cash income or expense at each balance sheet date. Accordingly, Alliance
recognized $2.6 million in other income and a derivative liability balance of
$841,000 at June 30, 2006 based on the fair value of such instruments. During
the 2007 fiscal period ended November 14, 2006, the Company recognized other
income of $357,000 and the derivative liability balance of $484,000 at that date
was reclassified to additional paid-in capital since the increase in the number
of shares approved by the shareholders was sufficient to settle all outstanding
convertible instruments, thus there was no derivative liability at June 30,
2007.

         On May 15, 2007, Alliance entered into the 2007 Amendment of its Senior
Convertible Promissory Note Purchase Agreement and Registration Rights Agreement
(as amended by the 2006 Amendment) with essentially all of the existing holders
of Alliance's Senior Notes. Pursuant to the 2007 Amendment, the maturity date of
each outstanding Senior Note was extended as follows:

         (a) The maturity date was extended from April 1, 2007 to the date
ninety (90) days after the date of the 2007 Amendment. If the Company received
more than $1.5 million but less than $3 million in connection with a Qualified
Financing (as defined in the 2007 Amendment) prior to the expiration of the
ninety (90) days (which the Company did not receive), the maturity date would
have been automatically extended to the date that is one hundred eighty (180)
days after the date of the 2007 Amendment; and

         (b) If the Company received at least $3 million in connection with a
Qualified Financing prior to the extended maturity date, the maturity date would
have automatically become June 30, 2008.

         The holders of the Senior Notes also agreed to subordinate their rights
to any debt that is issued in a Qualified Financing. Further, any financing that
qualifies as a Qualified Financing will not require additional approval from the
Senior Note holders.

         Alliance also agreed to issue to each current holder of a Senior Note
an additional note with principal amount equal to 20% of the outstanding
principal amount of such Senior Note on the date of the 2007 Amendment, which
resulted in Alliance issuing new promissory notes in the aggregate principal
amount of approximately $1.8 million. These new notes bear interest at the rate
of 10% per annum, matured on June 30, 2008 and are convertible into common stock
of Alliance on the same terms as the Senior Notes at such time as Alliance has a
sufficient number of authorized and unreserved shares of common stock to
accommodate such conversion and Alliance provides written notice to the holders
of these notes that they are then convertible into common stock.

         The Company also agreed to an increase of 20% to the current
royalty/milestone payment participation amounts set forth in the 2006 Amendment.
Under the 2006 Amendment, Senior Note holders received 50% of the total amounts
of royalties and milestones received by the Company from third parties until
100% of the payment participation amounts have been received. The Senior Note
holders who held their Senior Notes through June 30, 2008 will now receive
payment sharing until 120% of the payment participation amounts have been
received.


                                      -24-

<PAGE>

         The Company was unable to complete a Qualified Financing by the
requisite dates. As a result, the Company is in default under the Senior Notes
in the aggregate principal and interest amount of approximately $11.1 million.
Alliance is continuing to seek additional financing that would qualify as a
Qualified Financing for the purpose of funding its support of Double-Crane's
development of OXYGENT in the PRC.

         We have not yet identified a source of the funds, nor do we know if we
will be able to do so. Failure to obtain such financing would likely result in
the liquidation of our Company. It is unlikely that our shareholders would
receive any of the proceeds from such liquidation.

         We no longer have working capital to fund our operations; therefore, in
addition to seeking to complete a Qualified Financing, we are seeking additional
collaborative research and development relationships with suitable corporate
partners for our products. Because adequate funds have not been available to us
in the past, we have already delayed our OXYGENT development efforts and have
delayed, scaled back, and/or eliminated one or more of our other product
development programs.

         At June 30, 2008, the following approximate debt obligations were
outstanding:

         (a)       $252,000 owed to various vendors;
         (b)       $212,000 in accrued expenses, including $138,000 in deferred
compensation;
         (c)       $100,000 in deferred revenue;
         (d)       $11.1 million in Senior Notes, including $2.9 million in
accrued interest;
         (e)       $750,000 in deferred royalty payments to be paid through
future IMAGENT earn-out payments. In September 2008, we entered into a
settlement agreement that terminated any future IMAGENT royalty payments to us
and, therefore, we determined that there will be no future deferred royalty
earn-out payments (see "Subsequent Events" below).

SUBSEQUENT EVENTS

         During September 2008, our Board of Directors determined that it was in
the best interests of our shareholders to terminate all on-going obligations
under previous agreements between the Company and Imcor (mentioned above in
sections "Results of Operations" for fiscal year 2007 and "Liquidity and Capital
Resources"); therefore, the Company entered into a settlement agreement with
Imcor (the "2008 Imcor Agreement") and, as of the effective date, both companies
agreed that the continuing rights and obligations of each company under the
terms of the previous agreements were terminated and were of no further force or
effect. Imcor paid $25,000 to Alliance in satisfaction of all of Imcor's
obligations and liabilities under the terms of the previous agreements and
$1,000 in legal fees incurred in connection with the Company's negotiation and
execution of the 2008 Imcor Agreement. In return, Alliance released Imcor from
all liabilities, including future royalty payments, if any. As a result of the
2008 Imcor Agreement, the Company determined that there will be no future
IMAGENT earn-out payments and deferred royalties will not be paid; therefore the
Company will reclassify the $750,000 in deferred royalty payments to a gain on
the disposition of a liability in the first fiscal 2009 quarter ending September
30, 2008.

CRITICAL ACCOUNTING POLICIES

         We prepare our financial statements in conformity with 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 consolidated financial
statements and supporting notes thereto. Our critical accounting policies are
disclosed in Note 1 to our accompanying consolidated financial statements.

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

         As of June 30, 2008, we did not have any off-balance sheet financing
arrangements or any equity ownership interests in any variable interest entity
or other minority-owned ventures.


                                      -25-

<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

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

             TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS
             ------------------------------------------------------

                                                                        Page No.
                                                                        --------

Report of Independent Registered Public Accounting Firm                 27

Consolidated Balance Sheet at June 30, 2008                             28

Consolidated Statements of Operations for the Years                     29
         Ended June 30, 2008 and 2007

Consolidated Statements of Stockholders' Deficit for the Years          30
         Ended June 30, 2008 and 2007

Consolidated Statements of Cash Flows for the Years                     31
         Ended June 30, 2008 and 2007

Notes to Consolidated Financial Statements                              32


                                      -26-

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Alliance Pharmaceutical Corp.

We have audited the accompanying consolidated balance sheet of Alliance
Pharmaceutical Corp. (the "Company") as of June 30, 2008, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the years in the two-year period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Alliance Pharmaceutical Corp. at June 30, 2008 and the consolidated results of
its operations and its cash flows for each of the years in the two-year period
then ended, in conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company may
lack sufficient working capital to service its debts and to fund its operations
through the fiscal year ending June 30, 2009, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regards
to these matters are also described in Note 1. The accompanying consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.



                          /S/ KMJ CORBIN & COMPANY LLP

Irvine, California
September 30, 2008



                                      -27-

<PAGE>


<TABLE>
<S>     <C>

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


                                                                  JUNE 30, 2008
                                                                  -------------
ASSETS
------
CURRENT ASSETS:
    Cash                                                          $       6,000
    Restricted cash                                                      16,000
    Other current assets                                                 39,000
                                                                  -------------
            Total current assets                                         61,000

PROPERTY AND EQUIPMENT - NET                                             87,000
                                                                  -------------
                                                                  $     148,000
                                                                  =============

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

CURRENT LIABILITIES:
    Accounts payable                                              $     252,000
    Accrued expenses                                                    212,000
    Deferred revenue                                                    100,000
    Senior notes payable and accrued interest                        11,065,000
                                                                  -------------
            Total current liabilities                                11,629,000

OTHER LIABILITIES                                                       750,000
                                                                  -------------

            Total liabilities                                        12,379,000
                                                                  -------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
    Preferred stock - $0.01 par value; 5,000,000 shares
      authorized;                                                            --
    Common stock - $0.01 par value; 150,000,000 shares
      authorized; 60,216,247 shares issued and outstanding              602,000
    Additional paid-in capital                                      486,760,000
    Accumulated deficit                                            (499,593,000)
                                                                  -------------
            Total stockholders' deficit                             (12,231,000)
                                                                  -------------
                                                                  $     148,000
                                                                  =============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      -28-

<PAGE>

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


                                                              Years ended June 30,
                                                             2008             2007
                                                         ------------    ------------

REVENUES:
     Royalty, license and research                       $    106,000    $    573,000
                                                         ------------    ------------

OPERATING EXPENSES:
     Research and development                                 363,000       1,940,000
     General and administrative                               844,000       1,169,000
                                                         ------------    ------------
                                                            1,207,000       3,109,000
                                                         ------------    ------------
LOSS FROM OPERATIONS                                       (1,101,000)     (2,536,000)

INVESTMENT INCOME                                              20,000         114,000
OTHER INCOME                                                  188,000              --
LOSS ON MODIFICATION OF DEBT                                  (14,000)     (1,765,000)
INTEREST EXPENSE                                             (874,000)       (922,000)
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY                       --         357,000
GAIN ON DISPOSITION OF ASSETS AND LIABILITIES                   1,000         659,000
                                                         ------------    ------------
NET LOSS                                                 $ (1,780,000)   $ (4,093,000)
                                                         ============    ============

NET LOSS PER COMMON SHARE, BASIC AND DILUTED             $      (0.03)   $      (0.10)
                                                         ============    ============

WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED     56,543,000      40,501,000
                                                         ============    ============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      -29-

<PAGE>

    ALLIANCE PHARMACEUTICAL CORP.
    -----------------------------
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
-----------------------------------------------------------------------------------------------------------------------------------

                                          CONVERTIBLE
                                        PREFERRED STOCK          COMMON STOCK         ADDITIONAL                          TOTAL
                                       ------------------   ----------------------     PAID-IN        ACCUMULATED      STOCKHOLDERS'
                                        SHARES     AMOUNT     SHARES      AMOUNT       CAPITAL          DEFICIT           DEFICIT
                                       --------   -------   ----------   ---------   -------------   -------------    -------------

BALANCES AT JULY 1, 2006                794,000   $ 8,000   37,476,000   $ 375,000   $ 482,612,000   $(493,720,000)   $ (10,725,000)
     Reclassification of fair value of
         non-employee options and
         warrants                            --        --           --          --         484,000              --          484,000
     Issuance of common stock upon
         conversion of senior notes
         and accrued interest                --        --    9,325,000      93,000       1,493,000              --        1,586,000
     Compensatory stock options              --        --           --          --          52,000              --           52,000
     Net loss                                --        --           --          --              --      (4,093,000)      (4,093,000)
                                       --------   -------   ----------   ---------   -------------   -------------    -------------
BALANCES AT JUNE 30, 2007               794,000     8,000   46,801,000     468,000     484,641,000    (497,813,000)     (12,696,000)
     Issuance of common stock upon
         conversion of preferred stock (794,000)   (8,000)     635,000       6,000           2,000              --               --
     Issuance of common stock upon
         conversion of senior notes
         and accrued interest                --        --   12,780,000     128,000       2,044,000              --        2,172,000
     Reversal of accrued costs
         related to the June 2004
         Private Placement                   --        --           --          --          32,000              --           32,000
     Compensatory stock options              --        --           --          --          41,000              --           41,000
     Net loss                                --        --           --          --              --      (1,780,000)      (1,780,000)
                                       --------   -------   ----------   ---------   -------------   -------------    -------------
BALANCES AT JUNE 30, 2008                    --   $    --   60,216,000   $ 602,000   $ 486,760,000   $(499,593,000)   $ (12,231,000)
                                       ========   =======   ==========   =========   =============   =============    =============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      -30-

<PAGE>

    ALLIANCE PHARMACEUTICAL CORP.
    -----------------------------
    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------

                                                                               Years Ended June 30,
                                                                               2008            2007
                                                                            -----------    -----------

OPERATING ACTIVITIES:
    Net loss                                                                $(1,780,000)   $(4,093,000)
    Adjustments to reconcile net loss to net cash
       used in operating activities:
           Depreciation and amortization                                         39,000         35,000
           Loss on modification of debt                                          14,000      1,765,000
           Accrued interest on senior notes                                     874,000        922,000
           Compensatory stock options                                            41,000         52,000
           Change in fair value of derivative liability                              --       (357,000)
           Gain on disposition of assets                                             --       (659,000)
           Changes in operating assets and liabilities:
               Other assets                                                      14,000         (6,000)
               Accounts payable, accrued expenses and other                     (70,000)      (455,000)
                                                                            -----------    -----------
Net cash used in operating activities                                          (868,000)    (2,796,000)
                                                                            -----------    -----------

INVESTING ACTIVITIES:
    Purchases of property and equipment                                              --        (74,000)
    Proceeds from disposition of assets                                           1,000        100,000
                                                                            -----------    -----------
Net cash provided by investing activities                                         1,000         26,000
                                                                            -----------    -----------


DECREASE IN CASH AND CASH EQUIVALENTS                                          (867,000)    (2,770,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                873,000      3,643,000
                                                                            -----------    -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $     6,000    $   873,000
                                                                            ===========    ===========

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
    Issuance of common stock upon conversion of senior notes and interest   $ 2,172,000    $ 1,586,000
                                                                            ===========    ===========
    Reclassification of derivative liability                                $        --    $   484,000
                                                                            ===========    ===========
    Reversal of accrued costs related to the June 2004 Private Placement    $    32,000    $        --
                                                                            ===========    ===========

     SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      -31-
</TABLE>

<PAGE>

ALLIANCE PHARMACEUTICAL CORP.
-----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION
------------

         Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the
"Company," "Alliance," "we" or "us") are engaged in identifying, designing and
developing novel medical products. Currently, the Company is focused on
developing its lead product, OXYGENT(TM), an intravascular oxygen carrier
designed to augment oxygen delivery in surgical patients.

LIQUIDITY AND BASIS OF PRESENTATION
-----------------------------------

         The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has incurred operating losses through
June 30, 2008 and has negative working capital at that date of approximately
$11.6 million. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern.

         As discussed in Notes 4 and 6, in June 2004, the Company completed a
private placement financing with net proceeds to the Company of approximately
$10 million from the sale of common stock (the "June 2004 Private Placement").
In September 2004, the terms of the June 2004 Private Placement were
renegotiated by mutual agreement of the Company and investors holding
approximately $10.7 million of the original $11 million invested by the various
investors in the June 2004 Private Placement. Concurrently, the investors who
elected to rescind the June 2004 Private Placement were issued senior
convertible promissory notes in like investment amounts (the "Senior Notes"),
which, unless previously converted, were to mature and the unpaid principal,
together with accrued interest, was to become due and payable on March 24, 2006.
Because the holders of the Senior Notes were willing to renegotiate their terms,
the maturity date of the Senior Notes was extended to April 1, 2007; however,
the Company did not have the resources to repay the Senior Notes on April 1,
2007. The Company requested that each holder of a Senior Note execute an
amendment to extend the maturity date of the Senior Note from April 1, 2007 to
June 30, 2008 under certain conditions, which we did not meet in a timely manner
(see Note 4). This amendment was approved by substantially all of the Senior
Note holders. The Company is continuing to seek additional financing to fund its
continuing operations through June 2011. We have not yet identified a source of
the funds, nor do we know if we will be able to do so. Failure to obtain such
financing would likely result in the liquidation of our Company. It is unlikely
that our shareholders would receive any of the proceeds from such liquidation.
Because adequate funds have not been available to the Company in the past, the
Company has already delayed its OXYGENT development efforts and has delayed,
scaled back, and/or eliminated one or more of its other product development
programs. The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amount and classification of liabilities that
may result from the outcome of this uncertainty.

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

         The accompanying consolidated financial statements include the accounts
of Alliance Pharmaceutical Corp., the accounts of its wholly owned subsidiaries
- Molecular Biosystems, Inc. ("MBI") and its majority-owned subsidiaries - Talco
Pharmaceutical, Inc. and PFC Therapeutics, LLC ("PFC Therapeutics"). All
significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES
----------------

         The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and disclosures made in the accompanying notes to the consolidated
financial statements. Significant estimates made by management include, among
others, recoverability of property and equipment and the valuation of deferred
tax assets, stock options and derivative liabilities. Actual results could
differ from these estimates.

PROPERTY AND EQUIPMENT
----------------------

         Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
three to five years. Major betterments and renewals are capitalized, while
routine repairs and maintenance are charged to expense when incurred.


                                      -32-

<PAGE>

         The Company assesses the recoverability of property and equipment by
determining whether such assets can be recovered through projected undiscounted
cash flows. The amount of impairment, if any, is measured based on fair value
and is charged to operations in the period in which impairment is determined by
management. At June 30, 2008, management has determined that there is no
impairment of property and equipment. There can be no assurance, however, that
market conditions will not change, which could result in future property and
equipment impairment.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS
-------------------------------------

         As a result of the amendment to its Senior Note Amended Purchase
Agreement and Registration Rights Agreement in April 2006 (the "2006 Amendment")
(see Note 4), the Company did not have a sufficient number of authorized shares
to settle outstanding and exercisable options, warrants and convertible
instruments until November 14, 2006, when the Company's shareholders, at its
2006 Annual Meeting, approved an amendment of the Company's Certificate of
Incorporation, as amended, to increase the number of authorized shares of common
stock from 125 million to 150 million. The amendment was filed with the
Secretary of State of the State of New York on December 15, 2006. Under the
provisions of Emerging Issues Task Force Issue No. ("EITF") 00-19, "ACCOUNTING
FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, A
COMPANY'S OWN STOCK," as a result of the 2006 Amendment, the Company was
required to classify all non-employee options and warrants as derivative
liabilities, with an aggregate fair value totaling $3.5 million as of the 2006
Amendment date, and record them at their fair values at the date of the 2006
Amendment. Any change in fair value was required to be recorded as
non-operating, non-cash income or expense at each subsequent balance sheet date
until the Company had a sufficient number of authorized shares to settle its
convertible instruments and non-employee options and warrants, which date was
November 14, 2006. At the date of the 2006 Amendment, the Company reclassified
the fair value of non-employee options and warrants of $3.5 million from
additional paid-in capital to derivative liability. On November 14, 2006, the
date of the approval of the increase in authorized shares, the Company
reclassified the fair value of the derivative liability of $484,000 to
additional paid-in capital. During the year ended June 30, 2007, the Company
recognized other income of $357,000 related to recording the derivative
liability at fair value.

REVENUE RECOGNITION
-------------------

         The Company recognizes revenue in accordance with Staff Accounting
Bulletin ("SAB") No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS," as
revised by SAB No. 104. As such, the Company recognizes revenue when persuasive
evidence of an arrangement exists, title transfer has occurred, or services have
been performed, the price is fixed or readily determinable and collectibility is
probable.

         Revenue is deferred until all contractual obligations have been
satisfied.

         RESEARCH AND DEVELOPMENT REVENUES UNDER COLLABORATIVE AGREEMENTS
         ----------------------------------------------------------------

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

         LICENSING AND ROYALTY REVENUES
         ------------------------------

         Licensing and royalty revenues for which no services are required to be
performed in the future are recognized immediately, if collectibility is
reasonably assured.

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

         Research and development expenditures are charged to expense as
incurred. Research and development expenditures include the cost of salaries and
benefits for clinical, scientific, manufacturing, engineering and operations
personnel, payments to outside researchers for preclinical and clinical trials
and other product development work, payments related to facility lease and
utility expenses, depreciation and amortization, patent costs, as well as other
expenditures. During the years ended June 30, 2008 and 2007, the Company
incurred research and development expenses of approximately $363,000 and $1.9
million, respectively.


                                      -33-

<PAGE>

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

         The carrying amount of certain of the Company's financial instruments
as of June 30, 2008 approximate their respective fair values because of the
short-term nature of these instruments. Such instruments consist of cash,
accounts payable, accrued expenses and other liabilities. The carrying value of
debt approximates fair value as the related interest rate approximates a rate
currently available to the Company.

COMPUTATION OF NET 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 years ended June 30, 2008 and 2007, as their
inclusion would be anti-dilutive. The outstanding potentially dilutive common
shares totaled approximately 65,088,000 and 73,310,000 at June 30, 2008 and
2007, respectively.

INCOME TAXES
------------

         The Company accounts for income taxes in accordance with the asset and
liability method for financial accounting and reporting purposes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and the tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. A valuation allowance is provided for
certain deferred tax assets if it is more likely than not that the Company will
not realize tax assets through future operations.

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

         At June 30, 2008, the Company has two stock-based employee compensation
plans.

         On July 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), "SHARE-BASED PAYMENT" ("SFAS No.
123(R)"), which establishes standards for the accounting of transactions in
which an entity exchanges its equity instruments for goods or services,
primarily focusing on accounting for transactions where an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments, including stock options, based on the
grant-date fair value of the award and to recognize it as compensation expense
over the period the employee is required to provide service in exchange for the
award, usually the vesting period. SFAS No. 123(R) supersedes the Company's
previous accounting under Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") for periods beginning in
the Company's fiscal year 2007. In March 2005, the SEC issued SAB No. 107
relating to SFAS No. 123(R). The Company has applied the provisions of SAB No.
107 in its adoption of SFAS No. 123(R).

         The Company adopted SFAS No. 123(R) using the modified prospective
transition method, which required the application of the accounting standard as
of July 1, 2006, the first day of the Company's fiscal year 2007. The Company's
consolidated financial statements as of and for the years ended June 30, 2007
and 2008 reflect the impact of adopting SFAS No. 123(R). In accordance with the
modified prospective transition method, the Company's consolidated financial
statements for prior years have not been restated to reflect, and do not
include, the impact of SFAS No. 123(R).

         SFAS No. 123(R) requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the Company's
consolidated statement of operations. Prior to the adoption of SFAS No. 123(R),
the Company accounted for stock-based payments to employees and directors using
the intrinsic value method in accordance with APB 25 as allowed under SFAS No.
123 and, as such, generally recognized no compensation cost for employee stock
options.

                                      -34-

<PAGE>

         Stock-based compensation expense recognized during the period is based
on the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. Stock-based compensation expense recognized
in the Company's consolidated statement of operations for the year ended June
30, 2008 included compensation expense for share-based payment awards granted
prior to, but not yet vested as of June 30, 2006, based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS No. 123 and
compensation expense for the share-based payment awards granted subsequent to
June 30, 2006 based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123(R). As stock-based compensation expense
recognized in the consolidated statement of operations for the year ended June
30, 2008 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The estimated average forfeiture rate
for the year ended June 30, 2008 of approximately 2% was based on historical
forfeiture experience and estimated future employee forfeitures. The estimated
term of option grants for the year ended June 30, 2008 was seven years. In the
Company's pro forma information required under SFAS No. 123 for the periods
prior to fiscal year 2007, the Company accounted for forfeitures as they
occurred.

         SFAS No. 123(R) requires cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options to be classified as financing cash flows. Due to the Company's
loss position, there were no such tax benefits during the year ended June 30,
2008. Prior to the adoption of SFAS No. 123(R), those benefits would have been
reported as operating cash flows had the Company received any tax benefits
related to stock option exercises.

DESCRIPTION OF PLANS
--------------------

         The Company's stock option plans provide for grants of options to
employees and directors of the Company to purchase the Company's shares, as
determined by management and the board of directors, at the fair value of such
shares on the grant date. The options generally vest over a four- to five-year
period beginning on the date of grant up to one year after the date of grant and
have a ten-year term. As of June 30, 2008, the Company is authorized to issue up
to 8,100,000 shares under these plans and has 4,102,110 shares available for
future issuance.

SUMMARY OF ASSUMPTIONS AND ACTIVITY
-----------------------------------

         The fair value of stock-based awards to employees and directors is
calculated using the Black-Scholes option pricing model, even though the model
was developed to estimate the fair value of freely tradable, fully transferable
options without vesting restriction, which differ significantly from the
Company's stock options. The Black-Scholes model also requires subjective
assumptions regarding future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The expected term of
options granted is derived from historical data on employee exercises and
post-vesting employment termination behavior. The risk-free rate selected to
value any particular grant is based on the U.S. Treasury rate that corresponds
to the pricing term of the grant effective as of the date of the grant. The
expected volatility is based on the historical volatility of our common stock.
These factors could change in the future, affecting the determination of
stock-based compensation expense in future periods.

         The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model with the following assumptions for 2008 and
2007, respectively: risk-free interest rate range of 1.83% to 4.05% and 4.78% to
5.05%; dividend yield of 0% for both years; volatility factor of 264% and 131%;
and a weighted-average expected term of 7 years for both years. The estimated
weighted average fair value at grant date for the options granted during 2008
and 2007 was $0.03 and $0.13 per option, respectively.

         A summary of option activity as of June 30, 2008 and changes during the
year then ended is presented below:

                                      -35-

<PAGE>

<TABLE>
<S> <C>
                                                                             JUNE 30, 2008
                                                      -------------------------------------------------------------
                                                                                  WEIGHTED-AVERAGE
                                                                              -------------------------
                                                                                             REMAINING
                                                                                            CONTRACTUAL   AGGREGATE
                                                                              EXERCISE         TERM       INTRINSIC
                                                           SHARES               PRICE         (YEARS)       VALUE
                                                      -------------------------------------------------------------
Options outstanding at July 1, 2007                      2,817,000            $  4.20          6.75
Options granted                                              7,500            $  0.03
Options forfeited/expired                                 (120,700)           $ 19.77
Options exercised                                               --
                                                      -------------------------------
Options outstanding at June 30, 2008                     2,703,800            $  3.49          5.84       $      --
                                                      -------------------------------------------------------------
Unvested options expected to vest at June 30, 2008         492,450            $  0.22          6.88       $      --
                                                      -------------------------------------------------------------
Options exercisable at June 30, 2008                     2,201,300            $  4.24          5.61       $      --
                                                      =============================================================
</TABLE>


         There were 57,500 options granted with a weighted average grant date
fair value of $0.13 per share during the year ended June 30, 2007.

         As of June 30, 2008 and June 30, 2007, there was approximately $15,000
and $56,000, respectively, net of estimated forfeitures, of total unrecognized
compensation cost related to employee and director stock option compensation
arrangements. That cost is expected to be recognized on a straight-line basis
over the next four years on average. The total fair value of shares vested
during the year ended June 30, 2008 related to employee and director options and
options issued to consultants was approximately $35,000 and $6,000 respectively,
net of estimated forfeitures. The total fair value of shares vested during the
year ended June 30, 2007 related to employee and director options and options
issued to consultants was approximately $51,000 and $1,000 respectively, net of
estimated forfeitures.

         During the year ended June 30, 2008, the Company allocated $35,000 of
the stock-based compensation expense related to employee and director stock
options to general and administrative expenses and $6,000 of the stock-based
compensation expense related to consultant stock options to research and
development expenses. During the year ended June 30, 2008, the Company allocated
$51,000 of the stock-based compensation expense related to employee and director
stock options to general and administrative expenses and $1,000 of the
stock-based compensation expense related to consultant stock options to research
and development expenses.

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

         In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN 48"). This interpretation
clarifies the application of SFAS No. 109, "ACCOUNTING FOR INCOME TAXES" by
defining criteria that an individual tax position must meet for any part of the
benefit of that position to be recognized in a company's financial statements
and also provides guidance on measurement, derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company adopted FIN 48 on July 1, 2007. The adoption of FIN 48 did not
have a material impact on its financial position and results of operations.

         In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE
MEASUREMENTS." SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accounting principals generally accepted in the U.S. and
expands disclosures about fair value measurements. The statement does not
require new fair value measurements, but is applied to the extent that other
accounting pronouncements require or permit fair value measurements. SFAS No.
157 emphasizes that fair value is a market-based measurement that should be
determined based on the assumptions that market participants would use in
pricing an asset or liability. Companies that have assets and liabilities
measured at fair value will be required to disclose information that enables the
users of its financial statements to access the inputs used to develop those


                                      -36-

<PAGE>

measurements. The reporting entity is encouraged, but not required, to combine
the fair value information disclosed under this statement with the fair value
information disclosed under other accounting pronouncements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. In February 2008,
the FASB issued FSP 157-2, "EFFECTIVE DATE OF FASB STATEMENT NO. 157", which
delays the effective date of SFAS No. 157 for non-financial assets and
liabilities to fiscal years beginning after November 15, 2008. The Company
expects to adopt SFAS No. 157 on July 1, 2009. The Company is currently
assessing the impact the adoption of SFAS No. 157 will have on its consolidated
financial statements.

         In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES." SFAS No. 159 permits entities
to choose to measure at fair value many financial instruments and certain other
items that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 does not affect any existing accounting literature that requires
certain assets and liabilities to be carried at fair value. SFAS No. 159 does
not establish requirements for recognizing and measuring dividend income,
interest income, or interest expense. This statement does not eliminate
disclosure requirements included in other accounting standards. SFAS No. 159 is
effective in fiscal years beginning after November 15, 2007. The Company expects
to adopt SFAS No. 159 on July 1, 2008. The Company is in the process of
evaluating the provisions of the statement, but does not anticipate that the
adoption of SFAS No. 159 will have a material impact on its consolidated
financial statements.

         In December 2007, the FASB issued SFAS No. 141(R), "BUSINESS
COMBINATIONS" ("SFAS No. 141(R)"). SFAS No. 141(R) requires acquiring entities
in a business combination to recognize the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors the information they need to
evaluate and understand the nature and financial effect of the business
combination. SFAS No. 141(R) is effective in fiscal years beginning after
December 15, 2008. The Company expects to adopt SFAS No. 141(R) on July 1, 2009.
The Company is currently assessing the impact the adoption of SFAS No. 141(R)
will have on its consolidated financial statements.

         In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING
INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS" ("SFAS No. 160"). SFAS No. 160
requires entities to report noncontrolling (minority) interests in subsidiaries
as equity in the consolidated financial statements. SFAS No. 160 is effective in
fiscal years beginning after December 15, 2008. The Company expects to adopt
SFAS No. 160 on July 1, 2009. The Company is currently assessing the impact the
adoption of SFAS No. 160 will have on its consolidated financial statements.

2.  FINANCIAL STATEMENT DETAILS

PROPERTY AND EQUIPMENT - NET
----------------------------

         Property and equipment consist of the following at June 30, 2008:


           Furniture, fixtures and equipment                     $      274,000
           Less accumulated depreciation and amortization              (187,000)
                                                                 --------------
                                                                 $       87,000
                                                                 ==============

OTHER LIABILITIES
-----------------

         Other liabilities consist of $750,000 in deferred royalty payments to
be paid through future IMAGENT earn-out payments. In September 2008, we entered
into a settlement agreement that terminated any future IMAGENT royalty payments
to us and, therefore, we determined that there will be no future deferred
royalty earn-out payments (see Note 9).

3.  PFC THERAPEUTICS, LLC

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

                                      -37-

<PAGE>

         On December 22, 2004, PFC Therapeutics and LEO Pharma A/S ("LEO"), one
of the leading Danish research-based pharmaceutical companies that markets
significant products within the fields of dermatology, metabolic and
cardiovascular diseases and ophthalmology and antibiotics, signed an exclusivity
agreement to enter into a license agreement, subject to continued due diligence
by LEO, to develop and commercialize OXYGENT in Europe (EU member countries, EU
membership applicants, Norway and Switzerland) and Canada (the "LEO Exclusivity
Agreement"). The terms of the license agreement, if entered into, will include
certain initial and future payments to PFC Therapeutics upon the completion of
various regulatory and commercial milestones for OXYGENT development in Europe
and royalties on commercial sales of OXYGENT in Europe and Canada. On January 5,
2005, the Company received the non-refundable portion of an exclusivity fee of
$100,000 per the terms of the LEO Exclusivity Agreement. Because the amendment
discussed below extends LEO's due diligence time-period, this amount has been
deferred and is included in current liabilities in the accompanying consolidated
balance sheet at June 30, 2008.

         On February 25, 2005, PFC Therapeutics and LEO agreed to amend the LEO
Exclusivity Agreement. The amendment extends the period of time in which LEO may
undertake its due diligence investigation from March 1, 2005 to a date that is
sixty (60) days after submission by us to LEO of the results of a Phase 2b
postoperative ileus study. The postoperative ileus endpoints will be
incorporated in the Phase 2 clinical study described below. The remaining terms
of the LEO Exclusivity Agreement remain in full force and effect.

         On May 13, 2005, PFC Therapeutics and Beijing Double-Crane
Pharmaceutical Co., Ltd. ("Double-Crane"), the market leader for IV solutions
and one of the largest pharmaceutical companies in the People's Republic of
China (the "PRC"), entered into a development, license and supply agreement
("Double-Crane Agreement") for the development of OXYGENT in the PRC. Pursuant
to the Double-Crane Agreement, Double-Crane made an upfront license fee payment
and will make certain milestone and royalty payments to the Company. The upfront
license fee of $500,000 was deferred until the Company's obligations to perform
were satisfied. These obligations included the transfer and translation of all
intellectual property, preclinical, clinical and regulatory data necessary for
Double-Crane's clinical development and Investigational New Drug ("IND")
application to the State Food and Drug Administration PRC (the "sFDA"). This
transfer and all other corresponding obligations were completed during last
fiscal year, thus such amount was recognized as license revenue at June 30,
2007.

         Double-Crane intends to pursue an intraoperative and postoperative
transfusion avoidance endpoint. Double-Crane's clinical development plan
incorporates a new protocol design that is intended to build on the previously
conducted Alliance Phase 2 and Phase 3 clinical trials. In these studies, the
efficacy of OXYGENT in terms of drug activity (i.e., its ability to deliver
oxygen) enabled patients to remain physiologically stable at lower
intraoperative hemoglobin ("Hb") levels. OXYGENT was shown to be statistically
better than blood in reversing, as well as maintaining reversal of,
physiological transfusion triggers. Importantly, the Double-Crane study will not
employ any blood harvesting techniques (i.e., acute normovolemic hemodilution or
intraoperative autologous donation), which were implicated in safety issues in a
previous Alliance Phase 3 clinical trial.

         Double-Crane is obligated pursuant to its agreement with Alliance to
conduct clinical trials in the PRC in accordance with the International
Conference on Harmonization of Technical Requirements for Registration of
Pharmaceuticals for Human Use (the "ICH") Guidelines, which would allow Alliance
to use any data derived from the clinical trials in other countries.

         Double-Crane will have the option to manufacture OXYGENT in the PRC
after obtaining approval from the regulatory authorities in the PRC and they
will also have a right of first refusal to add specific additional countries to
the Double-Crane Agreement upon further negotiation with the Company.

4.  DEBT OBLIGATIONS

SENIOR NOTES PAYABLE
--------------------

         On July 2, 2004, Nycomed Denmark ApS ("Nycomed") notified the Company
that it was unilaterally terminating its Development, Assignment and Supply
Agreement (the "Nycomed Agreement") effective August 16, 2004. Subsequently, a
dispute arose between the Company and some of its investors who participated in
the June 2004 Private Placement. After considering all of the facts and
circumstances relevant to the dispute, the Company's Board of Directors
determined that it was in the Company's and the Company's stockholders' best
interests to offer, as a settlement of the dispute, to rescind the June 2004
Private Placement.

                                      -38-

<PAGE>

         On September 24, 2004, investors holding 30,546,423 shares of common
stock and warrants to purchase 22,909,821 shares of common stock representing
approximately $10.7 million of the $11 million invested in the June 2004 Private
Placement elected to rescind the June 2004 Private Placement. In doing so, each
of these investors returned to the Company its stock certificate representing
the number of shares and the warrant that it received in the June 2004 Private
Placement for cancellation. Immediately thereafter, these same investors entered
into the Senior Note Purchase Agreement whereby the Company issued to such
investors Senior Notes convertible into common stock at $0.25 per share, which
was subsequently amended (see below), in principal amounts equal to the amounts
such investors invested in the June 2004 Private Placement.

         After giving effect to both transactions, the Company issued 880,714
shares of common stock and warrants to purchase 660,536 shares of common stock
in the June 2004 Private Placement, and the Company issued Senior Notes in an
aggregate principal amount of approximately $10.7 million.

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

         The 2006 Amendment caused the Company to have an insufficient number of
authorized shares to settle all outstanding and options, warrants and
exercisable convertible instruments until shareholders approved an increase in
authorized shares of common stock on November 14, 2006. As a result, under EITF
00-19, all non-employee options and warrants were classified as derivative
liabilities and recorded at their fair values at each balance sheet date (see
Note 1).

         On May 15, 2007, Alliance entered into an amendment (the "2007
Amendment") of its Senior Convertible Promissory Note Purchase Agreement and
Registration Rights Agreement (as amended by the 2006 Amendment) with
essentially all of the existing holders of the Senior Notes. Pursuant to the
2007 Amendment, the maturity date of each outstanding Senior Note was extended
as follows:

         (a) The maturity date was extended from April 1, 2007 to the date
ninety (90) days after the date of the 2007 Amendment. If the Company received
more than $1.5 million but less than $3 million in connection with a Qualified
Financing (as defined in the 2007 Amendment) prior to the expiration of the
ninety (90) days (which the Company did not receive), the maturity date would
have been automatically extended to the date that is one hundred eighty (180)
days after the date of the 2007 Amendment; and

         (b) If the Company received at least $3 million in connection with a
Qualified Financing prior to the extended maturity date, the maturity date would
automatically become June 30, 2008.

         The holders of the Senior Notes also agreed to subordinate their rights
to any debt that is issued in a Qualified Financing. Further, any financing that
qualified as a Qualified Financing would not require additional approval from
the Senior Note holders.

         Alliance also agreed to issue to each current holder of a Senior Note
an additional note with principal amount equal to 20% of the outstanding
principal amount of such Senior Note on the date of the 2007 Amendment, which
resulted in Alliance issuing new promissory notes in the aggregate principal
amount of approximately $1.8 million, which was recorded as a loss on
modification of debt and was expensed in the consolidated statement of
operations during the year ended June 30, 2007. These new notes bear interest at
the rate of 10% per annum, matured on June 30, 2008 and are convertible into
common stock of Alliance on the same terms as the Senior Notes at such time as
Alliance has a sufficient number of authorized and unreserved shares of common
stock to accommodate such conversion.

         The Company further agreed to an increase of 20% to the current
royalty/milestone payment participation amounts set forth in the 2006 Amendment.
Under the 2006 Amendment, Senior Note holders receive 50% of the total amounts
of royalties and milestones received by the Company from third parties until
100% of the payment participation amounts have been received. The Senior Note
holders who held their Senior Notes through June 30, 2008 will now receive
payment sharing until 120% of the payment participation amounts have been
received.

                                      -39-

<PAGE>

         The Company was unable to complete a Qualified Financing by the
requisite dates. As a result, the Company is in default under the Senior Notes
in the aggregate principal and interest amount of approximately $11.1 million.
Alliance is continuing to seek additional financing that would qualify as a
Qualified Financing for the purpose of funding its support of Double-Crane's
development of OXYGENT in the PRC.

         The discussion included in this report assumes that we will continue as
a going concern, which contemplates, among other things, the realization of
assets and satisfaction of liabilities in the ordinary course of business. As
discussed in Note 1 to the consolidated financial statements, we may lack
sufficient working capital to service our debts and to fund our continuing
operations through the fiscal year ending June 30, 2009, which raises
substantial doubt about our ability to continue as a going concern. As of
September 26, 2008, we are in default under the terms of the 2007 Amendment and
we owe the holders of our Senior Notes approximately $11.1 million in principal
and accrued interest. We currently do not have the resources to repay the Senior
Notes. If the holders of our Senior Notes demand repayment, and we are unable to
do so, the holders of our Senior Notes may be able to force our liquidation. In
the event of our liquidation, it is highly unlikely the holders of our equity
securities will receive any of the proceeds of such liquidation.

         During the fiscal year ended June 30, 2008, holders of certain Senior
Notes converted an aggregate of approximately $2.1 million in principal and
approximately $108,000 in accrued interest into an aggregate of 12,780,018
shares of our common stock at a conversion price of $0.17 per share. At June 30,
2008, the principal and accrued interest balances approximate $8.2 million and
$2.9 million, respectively.

5.  PREFERRED STOCK

         In May 2000, Alliance entered into a joint venture with Baxter and sold
them 793,750 shares of its Series F Preferred Stock. The Series F Preferred
Stock had no annual dividend and was not entitled to any voting rights except as
otherwise required by law.

         In March 2004, Alliance terminated its license agreement with PFC
Therapeutics and therefore, per the terms of the joint venture with Baxter, the
conversion price of the Series F Preferred Stock to common stock was fixed at
$50 per common share. Based on this conversion price, the outstanding shares of
Series F Preferred Stock were automatically converted into 635,000 shares of
common stock on such date. The certificates representing these shares of common
stock otherwise required by law.

         Based on the Company's analysis, the reclassification from preferred to
common stock did not have a material effect on its consolidated financial
statements. Because the Series F Preferred Stock certificates now represent only
the right to receive 635,000 shares of common stock, such shares have been
included as common stock in the accompanying consolidated balance sheet at June
30, 2008.


6.  STOCKHOLDERS' DEFICIT

JUNE 2004 PRIVATE PLACEMENT
---------------------------

         On July 2, 2004, Nycomed notified the Company that it was unilaterally
terminating the Nycomed Agreement effective August 16, 2004. Subsequently, a
dispute arose between the Company and some of its investors who participated in
the June 2004 Private Placement. After considering all of the facts and
circumstances relevant to the dispute, the Company's Board of Directors
determined that it was in the Company's and the Company's stockholders' best
interests to offer, as a settlement of the dispute, to rescind the June 2004
Private Placement, which resulted in the return of 30,546,423 shares of common
stock and warrants to purchase 22,909,821 shares of common stock representing
approximately $10.7 million and the issuance of Senior Notes (see Note 4) in the
same amount.

         Also in connection with the June 2004 Private Placement, it was
determined in June 2008 that the accrued placement fees were overstated by
$32,000, which amount was reclassified from additional paid in capital in the
accompanying statements of stockholders' deficit at June 30, 2008.

                                      -40-

<PAGE>

STOCK OPTION PLANS
------------------

         The Company has a 2000 Stock Option Plan and a 2001 Stock Option Plan,
which provide for both incentive and non-qualified stock options (the "2000
Plan" and the "2001 Plan"). These plans provide for the granting of options to
purchase shares of the Company's common stock (up to an aggregate of 2,100,000
and 6,000,000 shares under the 2000 Plan and 2001 Plan, respectively) to
directors, officers, employees and consultants. The optionees, date of grant,
option price (which cannot be less than 100% and 80% of the fair market value of
the common stock on the date of grant for incentive stock options and
non-qualified stock options, respectively), vesting schedule, and term of
options, which cannot exceed ten years, are determined by the Compensation
Committee of the Board of Directors.

         The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 2008:

                                 Weighted    Average                    Weighted
                                 Average    Remaining                   Average
    Range of        Number       Exercise  Contractual     Number       Exercise
Exercise Prices   outstanding     Price       Life      Exercisable      Price
--------------------------------------------------------------------------------
     $0.03              7,500    $0.03        9.92           7,500       $0.03
     $0.11            392,500    $0.11        7.31         227,500       $0.11
 $0.13 - $0.25        146,000    $0.16        6.47         121,000       $0.16
     $0.29          1,350,000    $0.29        6.54       1,037,500       $0.29
 $0.41 - $0.44        312,500    $0.41        5.97         312,500       $0.41
 $3.10 - $4.90        226,000    $3.15        3.35         226,000       $3.15
 $13.75 - $24.37      164,800    $17.50       1.60         164,800      $17.50
 $33.44 - $64.38      104,500    $50.29       1.89         104,500      $50.29

                  -----------                           ----------
                    2,703,800    $3.49        5.84       2,201,300       $4.24
                  ===========                           ==========

         At June 30, 2007, 2,232,000 options were exercisable at a weighted
average exercise price of $5.24 per share.

WARRANTS
--------

         At June 30, 2008, the Company had warrants outstanding to purchase
2,231,893 shares of common stock at prices ranging from $0.17 to $0.50 per
share. The warrants expire on June 8, 2009. During the years ended June 30, 2008
and 2007, the Company did not grant any warrants and no warrants were exercised.
During the year ended June 30, 2008, 2 million warrants with an exercise price
of $0.50 expired.

         The following table summarizes common shares reserved for issuance at
June 30, 2008 on exercise or conversion of:

         Senior Notes and accrued interest                            65,086,940
         Common stock options (1)                                      6,805,910
         Common stock warrants                                         2,231,893
                                                                      ----------
         Total common shares reserved for issuance                    74,124,743
                                                                      ==========
         (1) Includes 4,102,110 options available to be issued.


7.  INCOME TAXES

         No provision for income taxes was recorded for the years ended June 30,
2008 and 2007 due to the significant net operating loss carryforwards.

         The significant components of the Company's deferred tax assets as of
June 30, 2008 are shown below. A valuation allowance of $184 million, of which
$0.6 million is related to the year ended June 30, 2008, has been recognized to
offset the deferred tax assets, as realization of such assets is uncertain.

         Deferred tax assets consist of the following:

         Net operating loss carryforwards                         $ 157,137,000
         Research and development credits                            26,405,000
         Capitalized research expense                                   396,000
         Other - net                                                   (135,000)
                                                                  -------------
         Total deferred tax assets                                $ 183,803,000
         Valuation allowance for deferred tax assets               (183,803,000)
                                                                  -------------
         Net deferred tax assets                                  $          --
                                                                  =============

                                      -41-

<PAGE>

         At June 30, 2008, the Company had federal and various state net
operating loss carryforwards of approximately $441 million and $49 million,
respectively. The difference between the federal and state tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the approximate fifty to
sixty percent limitation on California loss carryforwards. Approximately $38
million in federal tax loss carryforwards expired in the 2008 fiscal year.
Additional carryforwards will continue to expire in the 2009 fiscal year unless
previously utilized. The Company also has federal and state research and
development tax credit carryforwards of $16 million and $10 million,
respectively. Approximately $3 million in federal research and development tax
credit carryforwards expired in the 2008 fiscal year. Additional carryforwards
will continue to expire in the 2009 fiscal year unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the
Company's net operating loss and credit carryforwards will be limited because of
cumulative changes in ownership of more than 50%; therefore, a significant
portion will expire prior to being fully utilized.

8.  COMMITMENTS AND CONTINGENCIES

LEASES
------

         The Company leases the facilities in which it operates under certain
operating leases. Payments for the office facilities approximate $4,000 per
month and expire September 30, 2008. The Company has extended the lease on a
month to month basis.

         Rental expense for operating leases approximated $55,000 and $108,000
for the years ended June 30, 2008 and 2007, respectively. Estimated rental
obligations under a new month-by-month lease would be $12,000 for fiscal 2009.

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

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

9.  SUBSEQUENT EVENTS

         During September 2008, our Board of Directors determined that it was in
the best interests of our shareholders to terminate all on-going obligations
under previous agreements between the Company and Imcor Pharmaceutical Co.
("Imcor"), formerly known as Photogen Technologies, Inc. (mentioned in sections
"Results of Operations" for fiscal year 2007 and "Liquidity and Capital
Resources") and, as of the effective date, both companies agreed that the
continuing rights and obligations of each company under the terms of the
previous agreements were terminated and were of no further force or effect.
Imcor paid $25,000 to Alliance in satisfaction of all of Imcor's obligations and
liabilities under the terms of the previous agreements and $1,000 in legal fees
incurred in connection with the Company's negotiation and execution of the 2008
Imcor Agreement. In return, Alliance released Imcor from all liabilities,
including future royalty payments, if any. As a result of the 2008 Imcor
Agreement, the Company determined that there will be no future earn-out payments
and deferred royalties will not be paid; therefore the Company will reclassify
$750,000 in deferred royalty payments to a gain on the disposition of a
liability in the first fiscal 2009 quarter ending September 30, 2008.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         None.

ITEM 8A.  CONTROL AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

                                      -42-

<PAGE>

         The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the Company's disclosure controls and procedures. Based upon
that evaluation, the CEO and CFO concluded that as of June 30, 2008 our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company (or the Company's consolidated
subsidiaries) required to be included in the Company's periodic filings with the
SEC, subject to the various limitations on effectiveness set forth below under
the heading, "Limitations on the Effectiveness of Internal Controls", such that
the information relating to the Company, required to be disclosed in SEC reports
(i) is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
the Company's management, including our CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         Under Section 404 of the Sarbanes-Oxley Act of 2002, management is
required to assess the effectiveness of the Company's internal control over
financial reporting as of the end of the fiscal year and report, based on that
assessment, whether the Company's internal control over financial reporting is
effective.

         Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. The Company's
internal control over financial reporting is designed to provide reasonable
assurance as to the reliability of the Company's financial reporting and the
preparation of financial statements in accordance with generally accepted
accounting principles in the U.S.

         Internal controls over financial reporting, no matter how well
designed, have inherent limitations. Therefore, internal controls over financial
reporting determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and may not prevent or detect all
misstatements. Moreover, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

         The Company's management has assessed the effectiveness of the
Company's internal control over financial reporting as of June 30, 2008. Based
on this evaluation, management concluded that our internal control over
financial reporting was effective as of June 30, 2008. In making this
assessment, the Company used the criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO") in "Internal
Control-Integrated Framework." These criteria are in the areas of control
environment, risk assessment, control activities, information and communication,
and monitoring. The Company's assessment included extensive documenting,
evaluating and testing of the design and operating effectiveness of its internal
controls over financial reporting.

         This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
SEC that permit us to provide only management's report in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

         There were no significant changes made in our internal control over
financial reporting during the year ended June 30, 2008 that have materially
affected or are reasonably likely to materially affect this internal control
system. Thus, no corrective actions with regard to significant deficiencies or
material weaknesses were necessary.

ITEM 8B.  OTHER INFORMATION

         None.


                                      -43-

<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

DIRECTORS OF THE COMPANY

         The following are the directors of the Company:

Name                             Position                                 Age
----                             --------                                 ---
Duane J. Roth                    Chairman and Chief Executive Officer     58
Pedro Cuatrecasas, M.D.          Director                                 72
Carroll O. Johnson               Director                                 75
Stephen M. McGrath               Director                                 73
Jean G. Riess, Ph.D.             Director                                 72
Theodore D. Roth                 Director                                 57

BIOGRAPHICAL INFORMATION REGARDING DIRECTORS

         DUANE J. ROTH. Mr. D. Roth has served as a director of the Company
since 1985. He has served as Chief Executive Officer of the Company since 1985
and as Chairman since October 1989. Prior to joining the Company, Mr. D. Roth
served as President of Analytab Products, Inc., an American Home Products
company (now Wyeth) involved in manufacturing and marketing medical diagnostics,
pharmaceuticals and devices. For the previous ten years, he was employed in
various sales, marketing and general management capacities with Ortho Diagnostic
Systems, Inc., a Johnson & Johnson company, which is a manufacturer of
diagnostic and pharmaceutical products. Mr. D. Roth also serves as CEO of
CONNECT, a non-profit technology business accelerator in San Diego. Mr. D.
Roth's brother, Theodore D. Roth, is a director of the Company. Mr. D. Roth does
not qualify as an "independent" director within the meaning of Rule 4200(a)(15)
of the Listing Standards of the National Association of Securities Dealers
("NASD") because he is currently employed as our Chief Executive Officer.

         PEDRO CUATRECASAS, M.D. Dr. Cuatrecasas was elected as a director of
the Company in August 1996. He has over 35 years of experience in the
pharmaceutical industry. Dr. Cuatrecasas retired from the positions of Vice
President of Warner-Lambert Company and President, Parke-Davis Pharmaceutical
Research on December 31, 1996, positions he had held since 1989. During the
previous four years, he had been Senior Vice President of Research and
Development and Director of Glaxo, Inc. For the prior ten years, he was Vice
President of Research, Development and Medical and Director of Burroughs
Wellcome Company. Dr. Cuatrecasas is a member of the National Academy of
Sciences and the Institute of Medicine. He is currently an independent
consultant in pharmaceutical research, an Adjunct Professor in Medicine and
Pharmacology at the University of California in San Diego. He received his M.D.
from Washington University School of Medicine. Dr. Cuatrecasas qualifies as an
"independent" director within the meaning of Rule 4200(a)(15) of the NASD
Listing Standards.

         CARROLL O. JOHNSON. Mr. Johnson has served as a director of the Company
since 1989. In 2004, he retired as President of Research Management, Inc., an
independent contract research organization that provided services to the
pharmaceutical industry. Previously, he served for 25 years in various research,
sales and marketing positions with several pharmaceutical companies, including
Pharmacia Laboratories, Inc., where he created a national sales force that
introduced three major products. Mr. Johnson qualifies as an "independent"
director within the meaning of Rule 4200(a)(15) of the NASD Listing Standards.

         STEPHEN M. MCGRATH. Mr. McGrath has served as a director of the Company
since 1989. In May 1998, he retired as Executive Vice President of CIBC World
Markets, Inc. and as the Director of its Corporate Finance Department. For the
eleven years prior to his employment by CIBC Oppenheimer in 1983, he held
various executive positions with Warner-Lambert Company. Before joining
Warner-Lambert, Mr. McGrath was Controller and Assistant Treasurer of Sterling
Drug, Inc. and a certified public accountant for Price Waterhouse & Co. Mr.
McGrath qualifies as an "independent" director within the meaning of Rule
4200(a)(15) of the NASD Listing Standards.

         JEAN G. RIESS, PH.D. Professor Riess has served as a director of the
Company since 1989. Until his retirement in 1996, he had been the Director of
Laboratoire de Chimie Moleculaire at the University of Nice for over 20 years.
He has been an active researcher since receiving a Ph.D. from the University of
Strasbourg, with numerous patents and over 380 publications. For more than 20
years, Dr. Riess has focused on chemistry related to perfluorochemical emulsions
for medical application. He has directed research in synthesis of tailored
perfluorochemicals, in emulsion technology, in synthesis of fluorinated
surfactants, in the physical chemistry of emulsion stabilization and in
surfactant self-aggregation. Dr. Riess qualifies as an "independent" director
within the meaning of Rule 4200(a)(15) of the NASD Listing Standards.

                                      -44-

<PAGE>

         THEODORE D. ROTH. Mr. T. Roth has served as a director of the Company
since 1998. He has been a Managing Director of Roth Capital Partners, LLC, an
investment-banking firm, since 2003. For more than 15 years prior, Mr. T. Roth
was employed by the Company, most recently serving as President and Chief
Operating Officer. He received his J.D. from Washburn University and an LL.M. in
Corporate and Commercial Law from the University of Missouri in Kansas City. Mr.
T. Roth also serves on the boards of BioMed Realty, Inc. and Orange 21 Inc. He
is the brother of Duane J. Roth, the Chairman and Chief Executive Officer of the
Company. Mr. T. Roth does not qualify as an "independent" director within the
meaning of Rule 4200(a)(15) of the NASD Listing Standards because he is an
immediate family member of Mr. D. Roth.

COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS

         During the fiscal year ended June 30, 2008, there were five meetings of
the Board of Directors. In addition, during the fiscal year ended June 30, 2008,
each Board member attended 75% or more of the aggregate meetings of the Board
and of the committees on which he served, held during the period for which he
was a director or committee member, respectively.

         Shareholders may communicate with members of the Company's Board by
mail addressed to the full Board, a specific member of the Board or to a
particular committee of the Board at 7590 Fay Avenue, Suite 402, La Jolla, CA
92037.

         The Board has also established an Executive Committee, a Compensation
Committee, an Audit Committee and a Nominating Committee.

         EXECUTIVE COMMITTEE

         The Executive Committee was established to act when the full Board of
Directors is unavailable. The Executive Committee held no meetings during fiscal
year 2008. It has all the authority of the Board between meetings of the entire
Board as to matters, which have not been specifically delegated to other
committees of the Board, except the authority that by law cannot be delegated by
the Board of Directors. The members of the Executive Committee are Dr.
Cuatrecasas and Mr. D. Roth.

         COMPENSATION COMMITTEE

         The Compensation Committee advises and makes recommendations to the
Board of Directors regarding matters relating to the compensation of directors,
officers and senior management. The Compensation Committee held no meetings
during fiscal year 2008. The members of the Compensation Committee are Dr.
Cuatrecasas and Messrs. Johnson and McGrath. The Compensation Committee has not
adopted a written charter.

         AUDIT COMMITTEE

         The Audit Committee advises and makes recommendations to the Board
concerning our internal controls, our independent auditors and other matters
relating to our financial activities and reporting. The Audit Committee was
established in accordance with Section 3(a)(58)(A) of the Exchange Act. The
Audit Committee held one meeting during fiscal year 2008. The Audit Committee is
composed of Messrs. Johnson and McGrath. Our audit committee financial expert is
Mr. McGrath. All members of the Audit Committee are independent (as that term is
used in Item 7(d)(3) of Schedule 14A under the Exchange Act, as amended, and as
defined in Rule 4200(a)(15) of the NASD Listing Standards). The Audit Committee
has adopted a written Audit Committee Charter, which requires that the Company's
Audit Committee be comprised of three (3) members. Therefore, the Company is
actively searching for an alternative independent director who is willing to
serve on this committee.

         NOMINATING COMMITTEE

         The Nominating Committee interviews, evaluates, nominates and
recommends individuals for membership on the Company's Board of Directors and
committees thereof. The Nominating Committee held no meetings during fiscal year
2008. The Nominating Committee is composed of Dr. Riess and Mr. Johnson. All
members of the Nominating Committee are independent of management (as that term
is defined in Rule 4200(a)(15) of the NASD Listing Standards). The Nominating
Committee has not adopted a written Nominating Committee Charter.

         When considering a potential candidate for membership on the Company's
Board of Directors, the Nominating Committee considers relevant business and
industry experience and demonstrated character and judgment. There are no
differences in the manner in which the Nominating Committee evaluates a
candidate that is recommended for nomination for membership on the Company's
Board of Directors by a Shareholder. The Nominating Committee has not received
any recommendations from any of the Company's Shareholders in connection with
the 2008 Annual Meeting.

                                      -45-

<PAGE>

         The Nominating Committee will consider shareholder nominations for
directors submitted in accordance with the following procedure: A notice
relating to the nomination must be timely given in writing to the Secretary of
the Company prior to the meeting. To be timely, the notice must be delivered
within the time permitted for submission of a Shareholder proposal as described
under "Future Proposals by Shareholders." Such notice must be accompanied by the
nominee's written consent, contain information relating to the business,
experience and background of the nominee, and contain information with respect
to the nominating Shareholder and persons acting in concert with the nominating
Shareholder.

CODE OF ETHICS
--------------

         Our Board has adopted a Code of Ethics for the Chief Executive Officer
and senior financial officers to govern their conduct.

EXECUTIVE OFFICERS OF THE COMPANY

         The following are the executive officers of the Company:

         DUANE J. ROTH. Mr. Roth has been our Chief Executive Officer since 1985
(see above).

         B. JACK DEFRANCO. Mr. DeFranco, who is 63, has served as our President
and Chief Operating Officer since October 2005. From June 2003 to October 2005,
Mr. DeFranco was the Senior Vice President and Chief Operating Officer of Imcor
Pharmaceutical Co. For the ten years prior to that, Mr. DeFranco was Vice
President of Business Development and Marketing with Alliance. Previously, Mr.
DeFranco held various management positions in business development, marketing
and sales with Smith & Nephew and Johnson and Johnson. In his career he has
launched over 20 medical products, many of which were related to blood
transfusion safety. Mr. DeFranco holds a BS in Biology from Stephen F. Austin
University and an MBA and a Masters in Finance from Fairleigh Dickenson
University.

COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT

         Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10% of a registered class of the
Company's equity securities to file with the SEC initial reports of ownership
and reports of changes in ownership of common stock and other equity securities
of the Company. Directors, executive officers and greater than 10% shareholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) reports they file. Based solely on its review of the copies of such forms
received by it, or written representation from certain reporting persons that no
Form 5s were required for those persons, the Company believes that all reporting
requirements under Section 16(a) for the 2008 fiscal year were met in a timely
manner by its directors, executive officers and greater than 10% beneficial
owners.

ITEM 10. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

         Set forth below is information regarding compensation earned by, paid
or awarded to the following executive officers during the fiscal year ended June
30, 2008: (i) Duane J. Roth, our Chief Executive Officer ("CEO"); and (ii) B.
Jack DeFranco, our President, Chief Operating Officer and Chief Financial
Officer ("CFO"). The identification of such named executive officers is
determined based on the individual's total compensation for the fiscal year
ended June 30, 2008, as reported below in the Summary Compensation Table, other
than amounts reported as above-market earnings on deferred compensation and the
actuarial increase in pension benefit accruals. We refer to these executives
collectively as the "Named Executive Officers."

         The following table sets forth for our Named Executive Officers: (i)
the dollar value of base salary earned during the fiscal year ended June 30,
2008; and (ii) the dollar value of total compensation for the fiscal year. No
compensation in the form of bonuses, stock awards, option awards, non-equity
incentive plan awards or other non-salary compensation was paid or granted to
the Named Executive Officers during the 2008 fiscal year.


                                      -46-

<PAGE>

                           SUMMARY COMPENSATION TABLE


                                                  SALARY      TOTAL
NAME AND PRINCIPAL POSITION            YEAR        ($)      ($)(a)(b)
---------------------------------   ----------   --------   ---------

Duane J. Roth                         2008       $120,000   $ 60,000
   Chief Executive Officer

B. Jack DeFranco                      2008       $235,000   $157,000
   President and Chief Operating
   Officer

(a)      The Board of Directors has determined that, as in fiscal year 2005,
         2006 and 2007, there will be no executive bonuses for fiscal year 2008.

(b)      Difference between salary and total has been deferred until the
         completion of the Qualified Financing.

EMPLOYMENT AGREEMENTS

         None.

                  OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

         The following table sets forth information on outstanding option and
stock awards held by the Named Executive Officers at June 30, 2008, including
the number of shares underlying both exercisable and unexercisable portions of
each stock option as well as the exercise price and expiration date of each
outstanding option.

<TABLE>
<S>     <C>
                                              OPTION AWARDS
                 -----------------------------------------------------------------
                                 NUMBER OF     EQUITY INCENTIVE
                  NUMBER OF     SECURITIES      PLAN AWARDS:
                 SECURITIES     UNDERLYING       NUMBER OF
                 UNDERLYING     UNEXERCISED     SECURITIES
                 UNEXERCISED     OPTIONS        UNDERLYING      OPTION
                   OPTIONS          (#)         UNEXERCISED    EXERCISE    OPTION
                     (#)       UNEXERCISABLE  UNEARNED OPTIONS  PRICE    EXPIRATION
      NAME       EXERCISABLE        (a)             (#)          ($)        DATE
---------------- ------------ --------------- ---------------- --------- ----------
Duane Roth           30,000          -               -         $24.375   11/11/08
                     16,800          -               -         $13.750   08/11/09
                     22,000          -               -         $38.750   12/28/09
                     22,000          -               -         $64.375   11/08/10
                     22,000          -               -         $13.750   02/21/11
                     85,000          -               -         $ 3.100   11/06/11
                    180,000          -               -         $ 0.410   06/22/14
                    500,000       500,000         500,000      $ 0.290   01/12/15

B. Jack DeFranco     50,000       150,000         150,000      $ 0.110   10/13/15
</TABLE>

(a)      Upon grant, the Board of Directors determined milestones upon which
         portions of these options vest.

                              DIRECTOR COMPENSATION

         The following table provides information concerning all compensation
paid to our directors during the fiscal year ended June 30, 2008.

                                              OPTION
                                              AWARDS          TOTAL
                    NAME                        ($)            ($)
           ------------------------           ------          -----
           Pedro Cuatrecasas, MD (1)            $45            $45
           Carroll O. Johnson (2)               $45            $45
           Stephen M. McGrath (3)               $45            $45
           Jean G. Riess, Ph.D.                 $45            $45
           (4)
           Theodore D. Roth (5)                 $45            $45

(1)      Dr. Cuatrecasas holds options to buy 132,000 shares.
(2)      Mr. Johnson holds options to buy 129,000 shares.
(3)      Mr. McGrath holds options to buy 135,000 shares and warrants to
         purchase 339,536 shares.
(4)      Professor Riess holds options to buy 145,000 shares.
(5)      Mr. T. Roth holds options to buy 266,900 shares.

                                      -47-

<PAGE>

COMPENSATION OF DIRECTORS

         Directors of the Company do not receive cash compensation for
attendance at Board of Directors' meetings or committee meetings. Non-qualified
stock options are awarded to non-employee directors pursuant to the Formula
Stock Option Plan for Non-Employee Directors of the Company (the "Directors'
Formula Option Plan"). Options under the Directors' Formula Option Plan are
granted under and subject to our 1991 Stock Option Plan, 2000 Stock Option Plan
and 2001 Stock Option Plan. The options have a term of ten years from the date
of grant and are exercisable at a price per share equal to the fair market value
of a share of common stock on the date of grant. Each non-employee director (i)
upon his initial election, shall automatically be granted an option to acquire
5,000 shares of common stock which shall be exercisable in four installments of
1,250 shares each with the first installment being at his initial election and
the remaining installments becoming exercisable on the date of each annual
meeting of the Board of Directors thereafter that such person is a director,
until fully exercisable, and (ii) upon the third annual meeting following his
initial election and each annual meeting thereafter that such person remains a
non-employee director, shall automatically be granted an option to acquire 1,500
shares of common stock. Except as otherwise described above, all options are
immediately exercisable in full on the date of grant.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

         The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of September 1, 2008 by:
(i) each person (or group of affiliated persons) known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of the Company's
common stock; (ii) each of the Company's directors; (iii) the Company's Named
Executive Officers; and (iv) all of the Company's directors and the executive
officers as a group:


<TABLE>
<S>     <C>
                                                  AMOUNT AND NATURE OF BENEFICIAL    PERCENTAGE OF CLASS
           NAME AND ADDRESS (1)                          OWNERSHIP (2) (3)            BENEFICIALLY OWNED
----------------------------------------------    -------------------------------    ---------------------

EXECUTIVE OFFICERS AND DIRECTORS:
  Duane J. Roth                                            1,214,542 (4)                    1.98%
  Pedro Cuatrecasas, M.D.                                    134,100 (5)                      *
  Carroll O. Johnson                                         121,500 (6)                      *
  Stephen M. McGrath                                       1,074,337 (7)                    1.77%
  Jean G. Riess, Ph.D.                                       148,447 (8)                      *
  Theodore D. Roth                                           259,300 (9)                      *
  B. Jack DeFranco                                            50,000 (10)                     *
  All directors and executive officers as                  3,002,226                        4.81%
   a group (7 persons)
5% SHAREHOLDERS:
  MicroCapital Fund LP                                     3,223,845 (11)                   5.08%
  MicroCapital Fund Ltd.                                   3,556,962 (12)                   5.58%
  Biomedical Value Fund, L.P.                              6,683,600 (13)                   9.99%
  Biomedical Offshore Value Fund, Ltd.                     6,683,600 (14)                   9.99%
  MedCap Partners, L.P.                                    6,683,600 (15)                   9.99%
  Special Situations Private Equity Fund, L.P.             6,683,600 (16)                   9.99%
  Technology Gateway Partnership, L.P.                     4,514,504 (17)                   6.97%
  Jan Dekker                                               3,634,176 (18)                   5.69%
  Osiris Investment Partners LP                            3,602,575 (19)                   5.65%

         *   Indicates ownership of less
             than 1% of outstanding shares.
</TABLE>

------------
(1)      The address of each of the executive officers, directors and nominees
         for director is c/o Alliance Pharmaceutical Corp., 7590 Fay Avenue,
         Suite 402, La Jolla, California 92037.

(2)      Each person listed or included in the group has sole voting power and
         sole investment power with respect to the shares owned by such person,
         except as indicated below.

(3)      Shares subject to options and warrants currently exercisable or
         exercisable within 60 days after September 1, 2008 are deemed
         outstanding for determining the number of shares beneficially owned and
         for computing the percentage ownership of the person holding such
         options, but are not deemed outstanding.

                                      -48-

<PAGE>

(4)      Consists of (i) 86,742 shares owned by Mr. D. Roth, (ii) 115,800 shares
         subject to options granted by the Company under its 1991 Stock Option
         Plan (the "1991 Plan"), (iii) 262,000 shares subject to options granted
         by the Company under its 2000 Stock Option Plan (the "2000 Plan"), and
         (iv) 750,000 shares subject to options granted by the Company under its
         2001 Stock Option Plan (the "2001 Plan").

(5)      Consists of (i) 14,600 shares owned by Dr. Cuatrecasas, (ii) 13,000
         shares subject to options granted by the Company under the 1991 Plan,
         (iii) 44,000 shares subject to options granted by the Company under the
         2000 Plan, and (iv) 62,500 shares subject to options granted by the
         Company under the 2001 Plan.

(6)      Consists of (i) 5,000 shares owned by Mr. Johnson, (ii) 10,000 shares
         subject to options granted by the Company under the 1991 Plan, (iii)
         44,000 shares subject to options granted by the Company under the 2000
         Plan, and (iv) 62,500 shares subject to options granted by the Company
         under the 2001 Plan.

(7)      Consists of (i) 612,301 shares owned by Mr. McGrath, (ii) 339,536
         shares subject to warrants, (iii) 16,000 shares subject to options
         granted by the Company under the 1991 Plan, (iv) 44,000 shares subject
         to options granted by the Company under the 2000 Plan, and (v) 62,500
         shares subject to options granted by the Company under the 2001 Plan.

(8)      Consists of (i) 15,947 shares owned by Dr. Riess, (ii) 27,500 shares
         subject to options granted by the Company under the 1991 Plan, (iii)
         42,500 shares subject to options granted by the Company under the 2000
         Plan, and (iv) 62,500 shares subject to options granted by the Company
         under the 2001 Plan.

(9)      Consists of (i) 4,900 shares owned by Mr. T. Roth (ii) 159,400 shares
         subject to options granted by the Company under the 1991 Plan, (iii)
         32,500 shares subject to options granted by the Company under the 2000
         Plan, and (iv) 62,500 shares subject to options granted by the Company
         under the 2001 Plan.

(10)     Consists of 50,000 shares subject to options granted by the Company
         under the 2001 Plan.

(11)     Consists of 3,223,845 shares of common stock issuable upon conversion
         of a note.

(12)     Consists of 3,556,962 shares of common stock issuable upon conversion
         of a note.

(13)     Consists of 6,683,600 shares of common stock issuable upon conversion
         of a note. The Shareholder has contractually agreed to restrict its
         ability to convert such that the number of shares of our common stock
         held by it does not exceed 9.99% of our outstanding shares of common
         stock. This restriction may be waived by the Shareholder at its
         election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         10,834,811.

(14)     Consists of 6,683,600 shares of common stock issuable upon conversion
         of a note. The Shareholder has contractually agreed to restrict its
         ability to convert such that the number of shares of our common stock
         held by it does not exceed 9.99% of our outstanding shares of common
         stock. This restriction may be waived by the Shareholder at its
         election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         7,223,207.

(15)     Consists of 6,683,600 shares of common stock issuable upon conversion
         of a note. The Shareholder has contractually agreed to restrict its
         ability to convert such that the number of shares of our common stock
         held by it does not exceed 9.99% of our outstanding shares of common
         stock. This restriction may be waived by the Shareholder at its
         election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         10,427,907.

                                      -49-

<PAGE>

(16)     Consists of 6,683,600 shares of common stock issuable upon conversion
         of a note. The Shareholder has contractually agreed to restrict its
         ability to convert such that the number of shares of our common stock
         held by it does not exceed 9.99% of our outstanding shares of common
         stock. This restriction may be waived by the Shareholder at its
         election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         9,006,436.

(17)     Consists of 4,514,504 shares of common stock issuable upon conversion
         of a note.

(18)     Consists of 3,634,176 shares of common stock issuable upon conversion
         of a note.

(19)     Consists of 3,602,575 shares of common stock issuable upon conversion
         of a note.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

         Roth Capital Partners, LLC ("Roth Capital") has provided financial
advisory services to the Company from time to time. During fiscal years 2007 and
2008, there were no related transactions. Byron Roth, Chairman and majority
owner of Roth Capital, is the brother of Duane J. Roth. Theodore D. Roth is the
brother of Duane J. Roth and is employed by Roth Capital.

         Director Independence - see discussion in "Directors of the Company."

ITEM 13. EXHIBITS

         (a)  Index to Exhibits

EXHIBIT       DESCRIPTION

    2.7       Asset Contribution Agreement dated September 7, 2005 by and among
              Alliance Pharmaceutical Corp. MultiCell Technologies, Inc.,
              Astral, Inc. and Astral Therapeutics, Inc. (incorporated by
              reference to the Company's Current Report on Form 8-K filed on
              September 8, 2005).

    3.1       Restated Certificate of Incorporation of the Company, filed on May
              7, 2001 (incorporated by reference to Exhibit 3 of the Company's
              Quarterly Report on Form 10-Q for the quarterly period ended March
              30, 2001 (the "March 2001 10-Q")).

    3.2       Certificate of Amendment of Certificate of Incorporation
              (incorporated by reference to Exhibit 99.2 of the Company's Report
              on Form 8-K dated October 18, 2001).

    3.3       By-Laws of the Company, as amended (incorporated by reference to
              Exhibit 3(b) of the Company's Annual Report on Form 10-K for the
              fiscal year ended June 30, 1989).

    3.4       Certificate of Amendment of the Certificate of Incorporation filed
              on December 11, 2006 (incorporated by reference to Exhibit 3.4 of
              the Company's Quarterly Report on Form 10-QSB for the quarter
              ended December 31, 2006).

    3.5       Certificate of Correction of the Certificate of Amendment filed on
              December 15, 2006 (incorporated by reference to Exhibit 3.5 of the
              Company's Quarterly Report on Form 10-QSB for the quarter ended
              December 31, 2006).

    4.1       Specimen Common Stock Certificate (incorporated by reference to
              Exhibit 4 of the Company's registration statement on Form S-2
              dated April 19, 1989 (File No. 033-28259)).

    4.2       Form of Warrant issued on June 8, 2004, to certain investors and
              Roth Capital Partners, LLC, (incorporated by reference to the
              Company's Annual Report on Form 10-KSB for the year ended June 30
              2004).

    4.3       Warrant issued to SDS Merchant Fund L.P. (incorporated by
              reference to Exhibit 4.2 of the Company's Quarterly Report on Form
              10-QSB for the quarter ended March 31, 2004).

    4.4       Warrant issued to Stroock & Stroock & Lavan, LLP (incorporated by
              reference to Exhibit 4.3 of the Company's Quarterly Report on Form
              10-QSB for the quarter ended March 31, 2004).

                                      -50-

<PAGE>

    4.5       Warrant issued to Brown Simpson Partners I, Ltd. (incorporated by
              reference to Exhibit 4.1 of the Company's Quarterly Report on Form
              10-QSB for the quarter ended March 31, 2004).

    4.6       Form of Senior Convertible Promissory Note (incorporated by
              reference to the Company's Annual Report on Form 10-KSB for the
              year ended June 30, 2004).

    10.1      Formula Award of Stock Options for Non-employee Members of the
              Board of Directors as approved by shareholders of the Company
              (incorporated by reference to Exhibit 10(e) of the Company's
              Annual Report on Form 10-K for the fiscal year ended June 30,
              1994). #

    10.2      License Agreement dated September 23, 1997, between the Company
              and Schering AG, Germany (incorporated by reference to Exhibit
              2(a) of the Company's Report on Form 8-K/A filed on February 27,
              1998).

    10.3      First Amendment to License Agreement, dated as of December 30,
              1998, between the Company and Schering AG, Germany (incorporated
              by reference to Exhibit 10 of the Company's Quarterly Report on
              Form 10-Q for the quarter ended December 1998).

    10.4      Split Dollar Life Insurance Agreement between the Company and
              Duane J. Roth dated November 12, 1998 (incorporated by reference
              to Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
              for the quarter ended September 31, 1999 (the "September 1999
              10-Q")). #

    10.5      Collateral Assignment of Life Insurance Policy between the Company
              and Duane J. Roth dated November 25, 1998 (incorporated by
              reference to Exhibit 10(b) of the September 1999 10-Q). #

    10.6      Eleventh Amendment to Lease Agreement dated September 1, 1999,
              between the Company and HUB Properties Trust (incorporated by
              reference to Exhibit 10(e) of the September 1999 10-Q).

    10.7      Asset Purchase Agreement between Alliance and Inhale Therapeutic
              Systems, Inc. dated October 4, 1999 (incorporated by reference to
              Exhibit 2(a) of the Company's Report on Form 8-K dated November 4,
              1999 (the "November 1999 8-K")).

    10.8      Product Development Rights Agreement between Alliance and Inhale
              Therapeutic Systems, Inc. dated November 4, 1999 (incorporated by
              reference to Exhibit 2(b) of the November 1999 8-K).

    10.9      License Agreement (License to Inhale) between Alliance and Inhale
              Therapeutic Systems, Inc. dated November 4, 1999 (incorporated by
              reference to Exhibit 2(c) to the November 1999 8-K).

    10.10     License Agreement (License to Alliance) between Alliance and
              Inhale Therapeutic Systems, Inc. dated November 4, 1999
              (incorporated by reference to Exhibit 2(d) of the November 1999
              8-K).

    10.11     Inhale Common Stock Purchase Agreement between Alliance and Inhale
              Therapeutic Systems, Inc. dated November 4, 1999 (incorporated by
              reference to Exhibit 2(e) of the November 1999 8-K).

    10.12     Alliance Common Stock Purchase Agreement between Alliance and
              Inhale Therapeutic Systems, Inc. dated November 4, 1999
              (incorporated by reference to Exhibit 2(f) of the November 1999
              8-K).

    10.13     Supply Agreement dated as of July 9, 1999, between the Company and
              Fluoromed L.P. (incorporated by reference to Exhibit 10(d) of the
              Company's Quarterly Report on Form 10-Q for the quarter ended
              December 31, 1999).

    10.14     Form of 5% Subordinated Convertible Debenture dated February 11,
              2000 (incorporated by reference to Exhibit 4.1 of the Company's
              Report on Form 8-K dated February 11, 2000 (the "February 2000
              8-K")).

    10.15     Form of Securities Purchase Agreement dated February 11, 2000
              (incorporated by reference to Exhibit 4.2 of the February 2000
              8-K).

    10.16     Form of Registration Rights Agreement dated February 11, 2000
              (incorporated by reference to Exhibit 4.3 of the February 2000
              8-K).

                                      -51-

<PAGE>

    10.17     Form of 5% Subordinated Convertible Debenture dated August 22,
              2000 (incorporated by reference to Exhibit 4.1 of the Company's
              Report on Form 8-K dated August 22, 2000 (the "August 2000 8-K")).

    10.18     Form of Securities Purchase Agreement dated August 22, 2000
              (incorporated by reference to Exhibit 4.2 of the August 2000 8-K).

    10.19     Form of Registration Rights Agreement dated August 22, 2000
              (incorporated by reference to Exhibit 4.3 of the August 2000 8-K).

    10.20     License Agreement dated May 19, 2000, between the Company and PFC
              Therapeutics, LLC (incorporated by reference to Exhibit 10(pp) of
              the Company's Annual Report on Form 10-K for the fiscal year ended
              June 30, 2000 (the "2000 10-K")).

    10.21     Marketing and Distribution Agreement executed May 19, 2000,
              effective June 1, 2000, between the Company, Baxter Healthcare
              Corporation and PFC Therapeutics, LLC (incorporated by reference
              to Exhibit 10(qq) of the 2000 10-K).

    10.22     Alliance Manufacturing and Supplier Agreement dated May 19, 2000,
              between the Company and PFC Therapeutics, LLC (incorporated by
              reference to Exhibit 10(rr) of the 2000 10-K).

    10.23     Baxter Manufacturing and Supplier Agreement dated May 19, 2000,
              between Baxter Healthcare Corporation and PFC Therapeutics, LLC
              (incorporated by reference to Exhibit 10(ss) of the 2000 10-K).

    10.24     Operating Agreement dated May 17, 2000, between the Company and
              Baxter Healthcare Corporation (incorporated by reference to
              Exhibit 10(tt) of the 2000 10-K).

    10.25     Preferred Stock Purchase Agreement dated May 19, 2000, between the
              Company and Baxter Healthcare Corporation (incorporated by
              reference to Exhibit 10(uu) of the 2000 10-K).

    10.26     Deferred Stock Purchase Agreement dated May 19, 2000, between the
              Company and Baxter Healthcare Corporation (incorporated by
              reference to Exhibit 10(vv) of the 2000 10-K).

    10.27     Security Agreement dated May 19, 2000, between the Company and PFC
              Therapeutics, LLC (incorporated by reference to Exhibit 10(ww) of
              the 2000 10-K).

    10.28     Form of 6% Convertible Note dated as of November 15, 2000
              (incorporated by reference to Exhibit 4(i) of the Company's
              Quarterly Report on Form 10-Q for the quarterly period ended
              December 31, 2000 (the "December 2000 10-Q")).

    10.29     Form of Option Agreement and Zero Coupon Convertible Note dated as
              of November 8, 2000 (incorporated by reference to Exhibit 4(ii) of
              the December 2000 10-Q).

    10.30     Form of Collateral Pledge and Security Agreement dated as of
              November 15, 2000 (incorporated by reference to Exhibit 4(iii) of
              the December 2000 10-Q).

    10.31     Amendment No. 2 to the License Agreement dated as of September 23,
              1997, between the Company and Schering Aktiengesellschaft
              (incorporated by reference to Exhibit 10(a) of the December 2000
              10-Q).

    10.32     1991 Stock Option Plan of the Company as amended through May 8,
              2001 (incorporated by reference to Exhibit 10(c) of the Company's
              Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
              (the "March 2001 10-Q")). #

    10.33     2000 Stock Option Plan of the Company as amended through May 8,
              2001 (incorporated by reference to Exhibit 10(d) of the March 2001
              10-Q). #

    10.34     2001 Stock Option Plan of the Company as amended through May 8,
              2001 (incorporated by reference to Exhibit 10(e) of the March 2001
              10-Q). #

    10.35     Form of Option Agreement dated June 22, 2001, between the
              Registrant and certain holders of Series B Preferred Stock of
              Metracor Technologies, Inc. (incorporated by reference to Exhibit
              4.1 of the Company's Report on Form 8-K dated June 22, 2001).

                                      -52-

<PAGE>

    10.36     Consulting Agreement dated July 31, 2001, between the Company and
              Harold W. DeLong. (incorporated by reference to Exhibit 10(hhh) of
              the Company's Annual Report on Form 10-K for the fiscal year ended
              June 30, 2001 (the "2001 10-K")).

    10.37     Agreement and Plan of Merger dated as of October 11, 2000, by and
              between the Company, Alliance Merger Subsidiary, Inc. and
              Molecular Biosystems, Inc. (incorporated by reference to Exhibit
              2.1 to Company's registration statement on Form S-4, filed on
              November 9, 2000).

    10.38     Letter Agreement dated as of May 1, 2001, between the Company and
              Baxter Healthcare Corporation amending the Deferred Stock Purchase
              Agreement dated May 19, 2000. (3) (incorporated by reference to
              Exhibit 10(jjj) of the 2001 10-K).

    10.39     Term Sheet dated August 1, 2001, between the Company and Baxter
              Healthcare Corporation amending the Deferred Stock Purchase
              Agreement dated May 19, 2000. (3) (incorporated by reference to
              Exhibit 10(jjj) of the 2001 10-K).

    10.40     Third Amendment to OPTISON Products Rights Agreement dated as of
              August 6, 2001, between the Company, Molecular Biosystems, Inc.
              and Mallinckrodt Inc. (incorporated by reference to Exhibit
              10(jjj) of the 2001 10-K).

    10.41     Form of Amendment to the 1991, 2000 and 2001 Stock Option Plans of
              the Company adopted May 8, 2001 (incorporated by reference to
              Exhibit 10(jjj) of the 2001 10-K).

    10.42     Form of Purchase Agreement dated October 30, 2001 (incorporated by
              reference to Exhibit 99.2 of the Company's Report on Form 8-K
              dated October 31, 2001 (the "October 2001 8-K")).

    10.43     Form of Registration Rights Agreement dated October 30, 2001
              (incorporated by reference to Exhibit 99.3 of the October 2001
              8-K).

    10.44     Form of Warrant dated October 30, 2001 (incorporated by reference
              to Exhibit 99.4 of the October 2001 8-K).

    10.45     Supplemental Agreement dated March 15, 2002, between the Company
              and Inhale Therapeutic Systems, Inc. (incorporated by reference to
              Exhibit 10.1 of the Current Report on Form 8-K dated March 15,
              2001). (1)

    10.46     Form of Contribution Agreement dated October 23, 2001
              (incorporated by reference to Exhibit 99.2 of the Company's Report
              on Form 8-K dated November 30, 2001).

    10.47     Amended and Restated License Agreement dated as of February 22,
              2002, between the Company and Schering Aktiengesellschaft
              (incorporated by reference to Exhibit 10(b) of the Company's
              Quarterly Report on Form 10-Q for the quarterly period ended March
              31, 2002 (the "March 2002 10-Q")).

    10.48     Agreement dated as of February 28, 2002, between the Company and
              RedKey, Inc., dba Cardinal Health Sales and Marketing Services
              (incorporated by reference to Exhibit 10(a) of the March 2002
              10-Q).

    10.49     Form of Purchase Agreement dated October 4, 2002 (incorporated by
              reference to Exhibit 99.1 of the October 4, 2001 8-K (the "October
              2001 8-K")).

    10.50     Form of Promissory Note dated October 4, 2002 (incorporated by
              reference to Exhibit 99.2 of the October 2001 8-K).

    10.51     Form of IMAGENT Security Agreement dated October 4, 2002
              (incorporated by reference to Exhibit 99.3 of the October 2001
              8-K).

    10.52     Form of IMAGENT and OXYGENT Trademark Security Agreement dated
              October 4, 2002 (incorporated by reference to Exhibit 99.4 of the
              October 2001 8-K).

    10.53     Form of General Collateral Security Agreement dated October 4,
              2002 (incorporated by reference to Exhibit 99.5 of the October
              2001 8-K).

    10.54     Form of Warrant dated October 4, 2002 (incorporated by reference
              to Exhibit 99.6 of the October 2001 8-K).

                                      -53-

<PAGE>

    10.55     Form of IMAGENT Collateral Security Agreement dated October 4,
              2002 (incorporated by reference to Exhibit 99.7 of the October
              2001 8-K).

    10.56     Form of General Collateral Security Agreement dated October 4,
              2002 (incorporated by reference to Exhibit 99.8 of the October
              2001 8-K).

    10.57     IMAGENT and OXYGENT Patent and Trademark Security Agreement dated
              October 4, 2002 (incorporated by reference to Exhibit 99.9 of the
              October 2001 8-K).

    10.58     Form of Asset Purchase Agreement dated June 10, 2003 (incorporated
              by reference to Exhibit 2.1 of the June 20, 2003 8-K).

    10.59     License Agreement dated as of December 3, 2002, between the
              Company and Mixture Sciences, Inc. (incorporated by reference to
              Exhibit 10 of the February 14, 2003 10-Q).

    10.60     Asset Purchase Agreement dated June 10, 2003, by and between the
              Company and Photogen Technologies, Inc. (incorporated by reference
              to the Company's Report on Form 8-K dated June 23, 2003).

    10.61     Guaranty and Security Agreement dated November 20, 2003, by and
              between PFC Therapeutics LLC and Technology Gateway Partners, L.P.
              (incorporated by reference to Exhibit 4.5 of the Company's
              Quarterly Report on Form 10-QSB for the quarter ended December 31,
              2003).

    10.62     Warrant issued November 20, 2003, by PFC Therapeutics LLC to
              Technology Gateway Partnership, L.P. (incorporated by reference to
              Exhibit 4.4 of the Company's Quarterly Report on Form 10-QSB for
              the quarter ended December 31, 2003).

    10.63     Secured Convertible Note dated November 20, 2003, by and between
              PFC Therapeutics LLC and Technology Gateway Partners, L.P.
              (incorporated by reference to Exhibit 4.3 of the Company's
              Quarterly Report on Form 10-QSB for the quarter ended December 31,
              2003).

    10.64     Security Agreement dated November 20, 2003, by and between PFC
              Therapeutics LLC and Technology Gateway Partners, L.P.
              (incorporated by reference to Exhibit 4.2 of the Company's
              Quarterly Report on Form 10-QSB for the quarter ended December 31,
              2003).

    10.65     Secured Convertible Note Purchase Agreement dated November 20,
              2003, by and between PFC Therapeutics LLC and Technology Gateway
              Partners, L.P. (incorporated by reference to Exhibit 4.1 of the
              Company's Quarterly Report on Form 10-QSB for the quarter ended
              December 31, 2003).

    10.66     Assignment dated April 7, 2004, by and between the Company and
              Stroock & Stroock & Lavan, LLP (incorporated by reference to
              Exhibit 10.6 of the Company's Quarterly Report on Form 10-QSB for
              the quarter ended March 31, 2004).

    10.67     Assignment dated April 7, 2004, by and between the Company and SDS
              Merchant Fund, L.P. (incorporated by reference to Exhibit 10.5 of
              the Company's Quarterly Report on Form 10-QSB for the quarter
              ended March 31, 2004).

    10.68     Assignment dated April 7, 2004, by and between the Company and
              Brown Simpson Partners I, Ltd. (incorporated by reference to
              Exhibit 10.4 of the Company's Quarterly Report on Form 10-QSB for
              the quarter ended March 31, 2004).

    10.69     Licensing, Development and Marketing Agreement dated April 19,
              2004, by and between PFC Therapeutics, LLC and Il Yang Pharm. Co.
              Ltd. (incorporated by reference to Exhibit 10.3 of the Company's
              Quarterly Report on 10-QSB for the quarter ended March 31, 2004).
              (1)

    10.70     Development, Assignment and Supply Agreement dated April 1, 2004,
              by and between PFC Therapeutics, LLC, and Nycomed Denmark ApS
              (incorporated by reference to Exhibit 10.2 of the Company's
              Quarterly Report on Form 10-QSB for the quarter ended March 31,
              2004). (1)

    10.71     Registration Rights Agreement dated May 27, 2004, by and among the
              Company and certain investors (incorporated by reference to the
              Company's Annual Report on Form 10-KSB for the year ended June 30,
              2004).

                                      -54-

<PAGE>

    10.72     Securities Purchase Agreement dated May 27, 2004, by and among the
              Company and certain investors (incorporated by reference to the
              Company's Annual Report on Form 10-KSB for the year ended June 30,
              2004).

    10.73     Rescission and Settlement Agreement dated September 21, 2004, by
              and among the Company and certain investors (incorporated by
              reference to the Company's Annual Report on Form 10-KSB for the
              year ended June 30, 2004).

    10.74     Senior Convertible Promissory Note Purchase Agreement dated
              September 21, 2004, by and among the Company and certain investors
              (incorporated by reference to the Company's Annual Report on Form
              10-KSB for the year ended June 30, 2004).

    10.75     Registration Rights Agreement dated September 21, 2004, by and
              among the Company and certain investors (incorporated by reference
              to the Company's Annual Report on Form 10-KSB for the year ended
              June 30, 2004).

    10.76     2001 Stock Option Plan, as amended to date (incorporated by
              reference to Exhibit 99.1 of the Company's Report on Form 8-K
              filed on January 14, 2005).

    10.77     Exclusivity Agreement dated December 22, 2004, between PFC
              Therapeutics, LLC and LEO Pharma S/A (incorporated by reference to
              Exhibit 10.77 of the Company's Quarterly Report on Form 10-QSB for
              the quarter ended December 31, 2004). (1)

    10.78     Amendment to Exclusivity Agreement dated February 25, 2005,
              between PFC Therapeutics, LLC and LEO Pharma S/A (incorporated by
              reference to Exhibit 10.78 of the Company's Quarterly Report on
              Form 10-QSB for the quarter ended March 31, 2005). (1)

    10.79     Amendment to Supplemental Agreement dated February 7, 2005,
              between the Company and Nektar Therapeutics (incorporated by
              reference to Exhibit 10.79 of the Company's Quarterly Report on
              Form 10-QSB for the quarter ended March 31, 2005). (1)

    10.80     Development, License and Supply Agreement dated May 13, 2005,
              between PFC Therapeutics, LLC and Beijing Double-Crane
              Pharmaceutical Co., Ltd. and related License Agreement
              (incorporated by reference to Exhibit 10.80 of the Company's
              Annual Report on Form 10-KSB for the year ended June 30, 2005).
              (1)

    10.81     Settlement Agreement and License dated as of September 19, 2005 by
              and among Imcor Pharmaceutical Co., GE Healthcare Ltd. (f/k/a
              Amersham plc, Amersham Health, Inc. and Amersham Health AS),
              Alliance Pharmaceutical Corp. and Molecular Biosystems, Inc.
              (incorporated by reference to the Company's Current Report on Form
              8-K filed on September 23, 2005).

    10.82     Settlement Agreement dated as of September 19, 2005 by and between
              Imcor Pharmaceutical Co. and Alliance Pharmaceutical Corp.
              (incorporated by reference to the Company's Current Report on Form
              8-K filed on September 23, 2005).

    10.83     Omnibus Amendment to Senior Convertible Promissory Note Purchase
              Agreement and Registration Rights Agreement (incorporated by
              reference to the Company's Current Report on Form 8-K filed on
              April 20, 2006).

    10.84     Form of Amended and Restated Note (incorporated by reference to
              the Company's Current Report on Form 8-K filed on April 20, 2006).

    14.1      Code of Ethics (incorporated by reference to the Company's Annual
              Report on Form 10-KSB for the year ended June 30, 2004).

    21.1      Subsidiaries *

    23.1      Consent of Independent Registered Public Accounting Firm.*

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

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

                                      -55-

<PAGE>

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

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


--------------
* Filed Herewith.
# Indicates management contract or compensatory plan or arrangement.
(1) Portions of this agreement have been omitted pursuant to a confidential
treatment request and have been filed separately with the SEC.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         KMJ Corbin & Company LLP ("KMJ") served as independent registered
public accounting firm for the Company for the fiscal years ended June 30, 2008
and 2007. The following table sets forth the aggregate fees billed or expected
to be billed by KMJ for services performed during the fiscal years ended June
30, 2008 and 2007, respectively:

<TABLE>
<S>     <C>
TYPE OF SERVICE          FEES BILLED BY KMJ FOR YEAR ENDED      FEES BILLED BY KMJ FOR YEAR ENDED
---------------                    JUNE 30, 2008                          JUNE 30, 2007
                                   -------------                          -------------

Audit Fees (1)                       $ 65,450                               $ 67,450
Audit-Related Fees                         --                                     --
Tax Fees (2)                           13,500                                 31,463
All Other Fees (3)                         --                                  6,500
                                     --------                               --------
Total                                $ 78,950                               $105,413
                                     ========                               ========
</TABLE>

(1)  Composed of the audits of our annual financial  statements and reviews of
     our quarterly financial statements, as well as attest services, comfort
     letters and consents to SEC filings.

(2)  Composed of services for tax compliance, which includes services related to
     the preparation tax returns for the years ended June 30, 2004, 2005 and
     2006.

(3)  Composed of fees related to the audit of the Company's 401(k) Plan for the
     year ended December 31, 2005.

POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR

         Our Audit Committee has adopted a policy and procedures for the
pre-approval of audit and permissible non-audit services rendered by our
independent registered public accounting firm, KMJ. The policy generally
pre-approves specific services in the defined categories of audit services,
audit-related services, and tax services up to pre-determined amounts.
Pre-approval may also be given as part of our Audit Committee's approval of the
scope of the engagement of the independent auditor or on an individual explicit
case-by-case basis before the independent registered public accounting firm is
engaged to provide each service. All fees described above were pre-approved by
our Audit Committee.

         The Audit Committee believes that all services rendered to the Company
by KMJ were compatible with maintaining KMJ's independence.

         The Company has not retained KMJ to perform services in connection with
(a) operating or supervising the operation of the Company's financial
information system or managing the Company's local area network, or (b)
designing or implementing a hardware or software system that aggregates source
data underlying the financial statements or generates information that is
significant to the Company's financial statements taken as a whole.

                                      -56-

<PAGE>


SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.


                                           ALLIANCE PHARMACEUTICAL CORP.
                                           (Registrant)

Date:    October 2, 2008                   By: /s/  Duane J. Roth
                                               -----------------------
                                                    Duane J. Roth
                                                    Chairman and Chief Executive
                                                    Officer


                                           By: /s/  B. Jack DeFranco
                                               -----------------------
                                                    B. Jack DeFranco
                                                    President, Chief Operating &
                                                    Financial Officer


         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

          /s/ Duane J. Roth                  Chairman, Chief Executive Officer
-----------------------------------------        (PRINCIPAL EXECUTIVE OFFICER)
Duane J. Roth

         /s/ B. Jack DeFranco                Chief Operating Officer
-----------------------------------------        (PRINCIPAL FINANCIAL OFFICER)
B. Jack DeFranco

         /s/ Theodore D. Roth                Director
-----------------------------------------
Theodore D. Roth

         /s/ Pedro Cuatrecasas, M.D.         Director
-----------------------------------------
Pedro Cuatrecasas, M.D.

         /s/ Carroll O. Johnson              Director
-----------------------------------------
Carroll O. Johnson

         /s/ Stephen M. McGrath              Director
-----------------------------------------
Stephen M. McGrath

         /s/ Jean G. Riess, Ph.D.            Director
-----------------------------------------
Jean G. Riess, Ph.D.


Date:    October 2, 2008


                                      -57-