<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                -------------
                                 FORM 10-K/A
                              (Amendment No. 1)

 (MARK ONE)

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

For the fiscal year ended            JUNE 30, 1998
                          ------------------------------------------------------
                                      OR
/ /       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

For the transition period from                        to
                               --------- ------------    -----------------------

                      Commission file number    0-12950

                        ALLIANCE PHARMACEUTICAL CORP.
--------------------------------------------------------------------------------
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


               New York                               14-1644018
----------------------------------------  --------------------------------------
   (STATE OR OTHER JURISDICTION OF                 (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)                IDENTIFICATION NO.)

3040 Science Park Road, San Diego, CA                    92121
----------------------------------------  --------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)               (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE    619-558-4300
                                                     ---------------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                      NAME OF EACH
          TITLE OF EACH CLASS                  EXCHANGE ON WHICH REGISTERED
          -------------------                  ----------------------------

               NONE
----------------------------------------  --------------------------------------
----------------------------------------  --------------------------------------

Securities registered pursuant to Section 12(g) of the Act:

                        common stock, par value $0.01.
--------------------------------------------------------------------------------
                               (TITLE OF CLASS)

--------------------------------------------------------------------------------
                               (TITLE OF CLASS)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to 
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.  [ ]
                             [COVER PAGE 1 OF 2 PAGES]
<PAGE>

     The aggregate market value of the voting stock held by non-affiliates of 
the Registrant, computed by reference to the closing price of such stock on 
the Nasdaq National Market on September 4, 1998, was $83 million.

The number of shares of the Registrant's common stock, $.01 par value,
outstanding at September 4, 1998 was 32,042,482.

                     DOCUMENTS INCORPORATED BY REFERENCE

     The information required by Part III of this report on Form 10-K is 
incorporated by reference to the definitive Proxy Statement with respect to 
the 1998 Annual Meeting of Shareholders, which the Registrant intends to file 
with the Securities and Exchange Commission no later than 120 days after the 
end of the fiscal year covered by this report.


                          [COVER PAGE 2 OF 2 PAGES]
<PAGE>

     The undersigned registrant hereby amends Item 8 of its Form 10-K for the 
fiscal year ended June 30, 1998, as filed with the Securities and Exchange 
Commission on September 11, 1998, to add additional information regarding 
anticipated capital requirements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See Table of Contents to Consolidated Financial Statements on page F-1 
below for a list of the Financial Statements being filed herein.


                                       1
<PAGE>

SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the registrant has duly caused this report to be signed 
on its behalf by the undersigned, thereunto duly authorized.

                                       ALLIANCE PHARMACEUTICAL CORP.

                                       (Registrant)
 

Date:  April 13, 1999                  By: /s/ THEODORE D. ROTH
                                          --------------------------------------
                                          Theodore D. Roth
                                          President


                                       2
<PAGE>

                ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

            TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                    Page No.
                                                                   --------
<S>                                                                <C>
Report of Ernst & Young LLP, Independent Auditors                     F-2

Consolidated Balance Sheets at June 30, 1998 and 1997                 F-3

Consolidated Statements of Operations for the Years 
Ended June 30, 1998, 1997 and 1996                                    F-4

Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996                                    F-5

Consolidated Statements of Cash Flows for the Years
Ended June 30, 1998, 1997 and 1996                                    F-6

Notes to Consolidated Financial Statements                         F-7 - F-14
</TABLE>



No consolidated financial statement schedules are filed herewith because they 
are not required or are not applicable, or because the required information 
is included in the consolidated financial statements or notes thereto.


                                      F-1
<PAGE>

                 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS




The Board of Directors and Stockholders
Alliance Pharmaceutical Corp.


We have audited the accompanying consolidated balance sheets of Alliance 
Pharmaceutical Corp. and subsidiaries as of June 30, 1998 and 1997, and the 
related consolidated statements of operations, stockholders' equity, and cash 
flows for each of the three years in the period ended June 30, 1998.  These 
financial statements are the responsibility of the Company's management.  Our 
responsibility is to express an opinion on these financial statements based 
on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards.  Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement.  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.

Since the date of completion of our audit of the accompanying financial 
statements and initial issuance of our report thereon dated July 31, 1998, 
the Company, as discussed in Note 1 has experienced a substantial reduction 
in revenues and increased costs that adversely affect the Company's current 
results of operations and liquidity. Note 1 describes management's plans to 
address these issues.

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the consolidated financial position of Alliance 
Pharmaceutical Corp. and subsidiaries at June 30, 1998 and 1997, and the 
consolidated results of their operations and their cash flows for each of the 
three years in the period ended June 30, 1998, in conformity with generally 
accepted accounting principles.




                                                     ERNST & YOUNG LLP



San Diego, California
July 31, 1998, except for Note 8,
    as to which the date is August 14, 1998 and
    the second paragraph of Note 1, 
    as to which the date is April 12, 1999


                                      F-2
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                  JUNE 30,

                                                                             1998           1997 
                                                                        -------------- --------------
<S>                                                                      <C>            <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                              $  11,809,000  $  15,368,000
  Short-term investments                                                    38,046,000     57,041,000
  Research revenue receivable                                                6,847,000      7,250,000
  Other current assets                                                         694,000      1,147,000
                                                                        -------------- --------------
            Total current assets                                            57,396,000     80,806,000

PROPERTY, PLANT AND EQUIPMENT - NET                                         23,087,000     16,574,000
PURCHASED TECHNOLOGY - NET                                                  12,880,000     14,400,000
OTHER ASSETS - NET                                                             314,000        233,000
                                                                        -------------- --------------
                                                                         $  93,677,000  $ 112,013,000
                                                                        -------------- --------------
                                                                        -------------- --------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                       $   2,191,000  $   2,807,000
  Accrued expenses                                                           3,121,000      3,439,000
  Deferred revenue                                                           2,286,000      2,500,000
  Payable for acquired in-process technology                                         -      7,557,000
  Current portion of long-term debt                                          1,068,000      1,508,000
                                                                        -------------- --------------
            Total current liabilities                                        8,666,000     17,811,000

LONG-TERM DEBT                                                               8,882,000      2,742,000
OTHER                                                                           39,000        129,000

COMMITMENTS

STOCKHOLDERS' EQUITY:
  Preferred stock - $.01 par value; 5,000,000 shares authorized;
    500,000 and 0 shares of Series D issued and outstanding at
    June 30, 1998 and 1997, respectively; liquidation preference of
    $10,000,000 and $0 at June 30, 1998 and 1997, respectively                    5,000              -
  Common stock - $.01 par value; 50,000,000 shares authorized;
    31,994,338 and 31,164,935 shares issued and outstanding at
    June 30, 1998 and 1997, respectively                                       320,000        311,000
  Additional paid-in capital                                               340,016,000    322,268,000
  Accumulated deficit                                                     (264,251,000)  (231,248,000)
                                                                        -------------- --------------
            Total stockholders' equity                                      76,090,000     91,331,000
                                                                        -------------- --------------
                                                                         $  93,677,000  $ 112,013,000
                                                                        -------------- --------------
                                                                        -------------- --------------
</TABLE>

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-3
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                           Years ended June 30,

                                                                 1998             1997             1996
                                                            --------------   --------------   --------------
<S>                                                         <C>              <C>              <C>
REVENUES:
   License and research revenue                             $   21,209,000   $   44,580,000   $   17,323,000               

OPERATING EXPENSES:
   Research and development                                     50,084,000       43,278,000       33,730,000
   General and administrative                                    7,886,000        7,932,000        7,214,000
   Acquired in-process technology                                        -       16,450,000                -
                                                            --------------   --------------   --------------
                                                                57,970,000       67,660,000       40,944,000
                                                            --------------   --------------   --------------
LOSS FROM OPERATIONS                                           (36,761,000)     (23,080,000)     (23,621,000)

INVESTMENT INCOME AND OTHER - NET                                3,758,000        4,064,000        1,355,000
                                                            --------------   --------------   --------------
NET LOSS                                                       (33,003,000)     (19,016,000)     (22,266,000)

DIVIDENDS ON PREFERRED STOCK                                             -                -         (906,000)
                                                            --------------   --------------   --------------
NET LOSS APPLICABLE TO COMMON SHARES                        $  (33,003,000)  $  (19,016,000)  $  (23,172,000)
                                                            --------------   --------------   --------------
                                                            --------------   --------------   --------------


NET LOSS PER COMMON SHARE:
   Basic and diluted                                        $        (1.04)  $        (0.63)  $        (0.91)
                                                            --------------   --------------   --------------
                                                            --------------   --------------   --------------

WEIGHTED AVERAGE SHARES OUTSTANDING:
   Basic and diluted                                            31,749,000       30,302,000       25,504,000
                                                            --------------   --------------   --------------
                                                            --------------   --------------   --------------
</TABLE>

          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-4
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                         CONVERTIBLE
                                                        PREFERRED STOCK           COMMON STOCK         ADDITIONAL
                                                     ---------------------   ----------------------      PAID-IN      ACCUMULATED
                                                       SHARES      AMOUNT      SHARES       AMOUNT       CAPITAL        DEFICIT
                                                     ----------  ----------  ----------   ----------   ------------  -------------
<S>                                                  <C>         <C>         <C>          <C>          <C>           <C>
BALANCES AT JUNE 30, 1995                             1,500,000  $   15,000  24,759,000   $  248,000   $238,874,000  $(189,060,000)
  Sale of convertible Series B and Series C 
   Preferred Stock                                      950,000       9,500                              21,530,000
  Sale of common stock                                                        2,865,000       29,000     43,925,000
  Exercise of stock options and warrants                                        745,000        7,000      6,548,000
  Conversion of convertible Series A Preferred
   Stock to common shares                            (1,500,000)    (15,000)    750,000        7,500          8,000
  Conversion of convertible Series B Preferred
   Stock to common shares                              (750,000)     (7,500)    750,000        7,500
  Conversion of convertible preferred
   stock dividend to common shares                                               75,000        1,000      1,499,000
  Payment related to acquisition of technology
   rights                                                                        50,000                     757,000
  Issuance of stock in satisfaction of employer
   matching contribution to 401(k) savings plan                                   8,000                     114,000
  Net unrealized gain on available-for-sale
   securities                                                                                               142,000
  Dividends on preferred stock                                                                                            (906,000)
  Net loss                                                                                                             (22,266,000)
                                                     ----------  ----------  ----------   ----------   ------------  -------------
BALANCES AT JUNE 30, 1996                               200,000       2,000  30,002,000      300,000    313,397,000   (212,232,000)
  Exercise of stock options and warrants                                        105,000        1,000        654,000
  Conversion of convertible Series C Preferred
   Stock to common shares                              (200,000)     (2,000)    345,000        3,000        (1,000)
  Payment related to acquired in-process technology                             703,000        7,000     7,840,000
  Issuance of stock in satisfaction of employer
   matching contribution to 401(k) savings plan                                  10,000                    133,000
  Net unrealized gain on available-for-sale securities                                                     245,000
  Net loss                                                                                                             (19,016,000)
                                                     ----------  ----------  ----------   ----------   ------------  -------------
BALANCES AT JUNE 30, 1997                                     -           -  31,165,000      311,000   322,268,000    (231,248,000)
  Exercise of stock options and warrants                                        104,000        1,000       741,000
  Sale of convertible Series D Preferred Stock          500,000       5,000                              9,595,000
  Payment related to acquired in-process technology                             706,000        8,000     7,492,000
  Issuance of stock in satisfaction of employer
   matching contribution to 401(k) savings plan                                  19,000                    141,000
  Net unrealized loss on available-for-sale securities                                                    (221,000)
  Net loss                                                                                                             (33,003,000)
                                                     ----------  ----------  ----------   ----------   ------------  -------------
BALANCES AT JUNE 30, 1998                               500,000  $    5,000  31,994,000   $  320,000   $340,016,000  $(264,251,000)
                                                     ----------  ----------  ----------   ----------   ------------  -------------
                                                     ----------  ----------  ----------   ----------   ------------  -------------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-5
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                       Years ended June 30,
                                                                             1998             1997              1996
                                                                       ---------------   ---------------   ---------------
<S>                                                                     <C>               <C>               <C>
OPERATING ACTIVITIES:
  Net loss                                                              $ (33,003,000)    $ (19,016,000)    $ (22,266,000)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operations:
      Depreciation and amortization                                         5,064,000         3,997,000         3,086,000
      Charge for acquired in-process technology                                     -        16,450,000           757,000
      Non-cash compensation - net                                             320,000           133,000           277,000
      Changes in operating assets and liabilities:
        Research revenue receivable                                           403,000        (1,500,000)       (3,690,000)
        Other assets                                                          372,000           888,000           219,000
        Accounts payable and accrued
          expenses and other                                               (1,024,000)        1,162,000          (263,000)
        Deferred revenue                                                     (214,000)        2,500,000                 -
                                                                       ---------------   ---------------   ---------------
Net cash provided by (used in) operating activities                       (28,082,000)        4,614,000       (21,880,000)
                                                                       ---------------   ---------------   ---------------

INVESTING ACTIVITIES:
  Short-term investments                                                   18,775,000         5,183,000       (50,815,000)
  Property, plant and equipment                                           (10,057,000)       (6,823,000)       (4,010,000)
  Payment for acquired in-process technology                                  (57,000)       (1,046,000)                -
                                                                       ---------------   ---------------   ---------------
Net cash provided by (used in) investing activities                         8,661,000        (2,686,000)      (54,825,000)
                                                                       ---------------   ---------------   ---------------

FINANCING ACTIVITIES:
  Issuance of common stock
    and warrants                                                              562,000           597,000        50,461,000
  Issuance of convertible preferred stock - net                             9,600,000                 -        21,540,000
  Proceeds from long-term debt                                              6,800,000         3,493,000         2,208,000
  Principal payments on long-term debt                                     (1,100,000)         (908,000)         (543,000)
                                                                       ---------------   ---------------   ---------------
Net cash provided by financing activities                                  15,862,000         3,182,000        73,666,000
                                                                       ---------------   ---------------   ---------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           (3,559,000)        5,110,000        (3,039,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                             15,368,000        10,258,000        13,297,000
                                                                       ---------------   ---------------   ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                $  11,809,000     $  15,368,000     $  10,258,000
                                                                       ---------------   ---------------   ---------------
                                                                       ---------------   ---------------   ---------------

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Payable for acquired in-process technology                                                $   7,557,000
Issuance of common stock in connection with
  acquired in-process technology                                        $   7,500,000     $   7,847,000
Issuance of common stock and warrants in connection with
  acquisition of patent rights and related documents                                                        $     757,000
Preferred stock dividends                                                                                   $     906,000
</TABLE>


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-6
<PAGE>

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


1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

LIQUIDITY

     Since July 1, 1998, the Company has experienced a substantial reduction 
in revenues and increased costs and believes its available cash, cash 
equivalents and short-term investments are sufficient to meet its anticipated 
capital requirements through August 1999 which raises substantial doubt about 
its ability to continue as a going concern. Additionally, the Company is 
currently in violation of one of its debt covenants. Substantial additional 
capital resources will be required to fund continuing operations related to 
the Company's research, development, manufacturing and business development 
activities. The Company believes there may be a number of alternatives 
available to meet the continuing capital requirements of its operations, such 
as additional public or private equity financings and collaborative 
arrangements. There can be no assurance that any of these potential 
financings will be consummated in the necessary time frames needed for 
continuing operations or on terms favorable to the Company. If adequate funds 
are not available, the Company will be required to significantly curtail its 
operating plans and may have to sell or license our significant portions of 
the Company's technology or potential products.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of Alliance 
Pharmaceutical Corp., the accounts of its wholly owned subsidiary Astral, 
Inc., its wholly owned subsidiary MDV Technologies, Inc. ("MDV") from the 
acquisition date of November 1996, and its majority-owned subsidiaries, Talco 
Pharmaceutical, Inc. and Applications et Transferts de Technologies Avancees 
("ATTA").  ATTA was dissolved in 1997.  All significant intercompany accounts 
and transactions have been eliminated.  Certain amounts in 1997 and 1996 have 
been reclassified to conform to the current year's presentation.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally 
accepted accounting principles requires management to make estimates and 
assumptions that affect the amounts reported in the financial statements and 
disclosures made in the accompanying notes to the consolidated financial 
statements.  Actual results could differ from those estimates.

CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS

     Short-term investments consist of highly liquid debt instruments. 
Management has classified the Company's short-term investments as 
available-for-sale securities in the accompanying financial statements.  
Available-for-sale securities are carried at fair value, with the unrealized 
gains and losses, net of tax, reported as a separate component of 
stockholders' equity.  The Company considers instruments purchased with an 
original maturity of three months or less to be cash equivalents.

CONCENTRATION OF CREDIT RISK

     Cash, cash equivalents, and short-term investments are financial 
instruments which potentially subject the Company to concentration of credit 
risk.  The Company invests its excess cash primarily in U.S. government 
securities and debt instruments of financial institutions and corporations 
with strong credit ratings.  The Company has established guidelines relative 
to diversification and maturities to maintain safety and liquidity.  These 
guidelines are reviewed periodically and modified to take advantage of trends 
in yields and interest rates.  The Company has not experienced any material 
losses on its short-term investments.

PROPERTY, PLANT, EQUIPMENT, AND OTHER ASSETS

     Buildings, furniture, and equipment are stated at cost and depreciation 
is computed using the straight-line method over the estimated useful lives of 
3 to 25 years.  Leasehold improvements are amortized using the straight-line 
method over the shorter of the estimated useful lives of the assets or the 
lease term. Technology and patent rights are amortized using the 
straight-line method over 5 to 20 years.

PURCHASED TECHNOLOGY

     The purchased technology was primarily acquired as a result of the 
merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in 
1989.  The technology acquired is the Company's core perfluorochemical 
("PFC") technology and was valued based on an analysis of the present value 
of future earnings anticipated from this technology at that time.  The 
Company identified alternative future uses for the PFC technology, including 
the OXYGENT-TM-(temporary blood substitute) and LIQUIVENT-Registered 
Trademark- (intrapulmonary oxygen carrier) products. Purchased technology 
also includes $2 million for technology capitalized as a result of the 
acquisition of BioPulmonics, Inc. ("BioPulmonics") in December 1991.  Since 
the acquisition, an alternative future use of the acquired technology has 
been pursued by the Company.  An intrapulmonary drug delivery system using 
the PFC-based liquid as a carrier (or dispersing agent) is being developed by 
Alliance from the liquid ventilation technology.


                                      F-7
<PAGE>

     The PFC technology is the basis for the Company's main drug development 
programs and is being amortized over a 20-year life.  The PFC technology has 
a book value of $12.4 million and $13.5 million net of accumulated 
amortization of $10.8 million and $9.7 million at June 30, 1998 and 1997, 
respectively.  The technology acquired from BioPulmonics has a book value of 
approximately $480,000 and $850,000 and is being amortized over five to seven 
years and is net of accumulated amortization of $1.5 million and $1.2 million 
at June 30, 1998 and 1997, respectively.

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

ACQUIRED IN-PROCESS TECHNOLOGY

     In November 1996, the Company acquired MDV by a merger (the "MDV 
Merger") of a wholly owned subsidiary of the Company into MDV.  MDV is 
engaged in the development of a thermoreversible gel, FLOGEL-Registered 
Trademark-, intended for use as an anti-adhesion treatment for persons 
undergoing abdominal or pelvic surgeries.  The consideration payable in the 
MDV Merger consisted of $15.5 million, payable in common stock or cash, of 
which $8 million was paid through the delivery of 703,093 shares of common 
stock during fiscal 1997, and $7.5 million was paid through the delivery of 
706,100 shares of common stock during fiscal 1998.  Additionally, the Company 
will pay up to $20 million if advanced clinical development or licensing 
milestones are achieved in connection with MDV's technology.  The Company 
will also make certain royalty payments on the sales of products, if any, 
developed from such technology.  The Company may buy out its royalty 
obligation for $10 million at any time prior to the first anniversary of the 
approval by U.S. regulatory authorities of any products based upon the MDV 
technology (the amount increasing thereafter over time).  All of such 
payments to the former MDV shareholders may be made in cash or, at the 
Company's option, shares of the Company's common stock, except for the 
royalty obligations which will be payable only in cash.  The Company has not 
determined whether subsequent payments (other than royalties) will be made in 
cash or in common stock or, if made in cash, the source of such payments.  
There can be no assurance that any of the contingent payments will be made 
because they are dependent on future developments which are inherently 
uncertain.

     The Company has accounted for the MDV Merger as a purchase, and recorded 
a one-time charge in fiscal 1997 of $16.5 million, including the $15.5 
million payments described above and related transaction costs.

LONG-TERM DEBT

     The Company entered into a loan and security agreement in August 1995 
under which the Company received $2.2 million at an interest rate of 10.84%.  
The loan was paid in full during fiscal 1998.

     In January 1997, the Company entered into a loan and security agreement 
with a bank under which the Company received $3.5 million and in December 
1997, the amount available under the loan was increased to $15.2 million.  In 
June 1998, the Company restructured the loan to provide for up to $15 million 
at the bank's prime rate plus .5% (9% at June 30, 1998).  Amounts borrowed 
are secured by certain fixed assets and are to be repaid over 4.5 years.  If 
certain financial covenants are not satisfied, the outstanding balance may 
become due and payable.  On June 30, 1998, the balance outstanding on this 
loan was approximately $10 million.

     The Company's principal payments for the long-term debt for the years 
ending June 30, 1999, 2000, 2001, 2002 and 2003 are $1.1 million, $1.4 
million, $1.4 million, $1.4 million and $4.6 million, respectively.

REVENUE RECOGNITION

     Revenue under collaborative research agreements is recognized as 
services are provided and milestone payments are recognized upon the 
completion of the milestone event or requirement under such agreements.  
Revenue from product sales is recognized as products are shipped.








     Non-refundable contract fees that reimburse the Company for previously 
incurred research and development are recorded as revenue upon contract 
"execution."


                                      F-8
<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenditures are charged to expense as incurred.

ACCOUNTING FOR STOCK-BASED COMPENSATION

     As permitted by Statement of Financial Accounting Standards No. 123, 
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has 
elected to retain its current intrinsic value-based method and will disclose 
the pro forma effect of using the fair value-based method to account for its 
stock-based compensation in its financial statements.

NET INCOME (LOSS) PER SHARE

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

NEW ACCOUNTING STANDARDS

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about 
Segments of an Enterprise and Related Information."  Both of these standards 
are effective for fiscal years beginning after December 15, 1997.  SFAS No. 
130 requires that all components of comprehensive income, including net 
income, be reported in the financial statements in the period in which they 
are recognized. The Company believes that comprehensive income or loss will 
not be materially different than net income or loss.  SFAS No. 131 amends the 
requirements for public enterprises to report financial and descriptive 
information about its reportable operating segments.  Operating segments, as 
defined in SFAS No. 131, are components of an enterprise for which separate 
financial information is available regularly by the Company in deciding how 
to allocate resources in assessing performance.  The financial information is 
required to be reported on the basis that is used internally for evaluating 
the segment performance.  The Company is in the process of evaluating the 
effect and believes that adoption of these standards will not have a material 
impact on the Company's financial statements.

2.  FINANCIAL STATEMENT DETAILS

PROPERTY, PLANT AND EQUIPMENT - NET

     Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
                                                            June 30,
                                                      1998             1997
                                                  ------------     ------------
<S>                                               <C>              <C>
Land                                              $    225,000     $    225,000
Buildings                                              300,000          300,000
Building improvements                                2,193,000        1,657,000
Furniture, fixtures, and equipment                  18,825,000       15,446,000
Leasehold improvements                              15,542,000        9,402,000
                                                  ------------     ------------
                                                    37,085,000       27,030,000
Less accumulated depreciation and amortization     (13,998,000)     (10,456,000)
                                                  ------------     ------------
                                                  $ 23,087,000     $ 16,574,000
                                                  ------------     ------------
                                                  ------------     ------------
</TABLE>


                                      F-9
<PAGE>

ACCRUED EXPENSES

     Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                            June 30,
                                                      1998             1997
                                                  ------------     ------------
<S>                                               <C>              <C>
       Payroll and related expenses               $  2,786,000     $  2,569,000
       Rent and related operating expenses             205,000          206,000
       Other                                           130,000          664,000
                                                  ------------     ------------
                                                  $  3,121,000     $  3,439,000
                                                  ------------     ------------
                                                  ------------     ------------
</TABLE>

3.  INVESTMENTS

     The Company classifies its investment securities as available-for-sale 
and records holding gains or losses in stockholders' equity.

     The following is a summary of available-for-sale securities:

<TABLE>
<CAPTION>
                                           June 30, 1998                                    June 30, 1997
                          --------------------------------------------     --------------------------------------------
                                       Gross Unrealized    Estimated                    Gross Unrealized    Estimated
                             Cost       Gains (Losses)    Fair Value          Cost       Gains (Losses)    Fair Value
                          --------------------------------------------     --------------------------------------------
<S>                       <C>              <C>          <C>                <C>              <C>          <C>
U.S. Government
 Securities               $ 12,785,000     $ 10,000     $ 12,795,000       $ 32,700,000     $ 242,000    $ 32,942,000
Corporate Securities        25,240,000       11,000       25,251,000         24,099,000            --      24,099,000
                          --------------------------------------------     --------------------------------------------
                          $ 38,025,000     $ 21,000     $ 38,046,000       $ 56,799,000     $ 242,000    $ 57,041,000
                          --------------------------------------------     --------------------------------------------
                          --------------------------------------------     --------------------------------------------
</TABLE>

     The gross realized gains on sales of available-for-sale securities 
totaled $357,000 and $65,000, in 1998 and 1997, respectively.  The gross 
unrealized gains  of $21,000 and $242,000, in 1998 and 1997, respectively, 
are recorded as components of additional paid-in capital.  The unrealized 
gains  had no cash effect and therefore are not reflected in the consolidated 
statements of cash flows.

     The amortized cost and estimated fair value of available-for-sale debt 
securities at June 30, 1998 and 1997, by contractual maturity, are shown 
below. Expected maturities may differ from contractual maturities because the 
issuers of the securities may have the right to prepay obligations.

<TABLE>
<CAPTION>
                                                            June 30, 1998                     June 30, 1997
                                                   --------------------------------  ------------------------------
                                                                         Estimated                       Estimated
                                                        Cost            Fair Value        Cost          Fair Value
                                                   --------------    --------------  --------------  --------------
<S>                                                 <C>               <C>             <C>             <C>
        Due in one year or less                     $ 23,885,000      $ 23,885,000    $ 34,517,000    $ 34,759,000
        Due after one year through three years        12,221,000        12,227,000      22,282,000      22,282,000
        Due after three years                          1,919,000         1,934,000               -               -
                                                   --------------    --------------  --------------  --------------
                                                    $ 38,025,000      $ 38,046,000    $ 56,799,000    $ 57,041,000
                                                   --------------    --------------  --------------  --------------
                                                   --------------    --------------  --------------  --------------
</TABLE>

4.  STOCKHOLDERS' EQUITY


STOCK OPTION PLANS

     The Company has a 1983 Incentive Stock Option Plan (the "1983 Plan"), a 
1983 Non-Qualified Stock Option Program (the "1983 Program"), and a 1991 
Stock Option Plan which provides for both incentive and non-qualified stock 
options (the "1991 Plan").  These plans provide for the granting of options 
to purchase shares of the Company's common stock (up to an aggregate of 
500,000, 2,500,000, and 6,200,000 shares under the 1983 Plan, 1983 Program, 
and 1991 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 (five years under the 1983 Plan), are determined by the Compensation
Committee of the Board of Directors. The 1983 Plan has expired and no 
additional options may be granted under such plan.


                                     F-10
<PAGE>

     The following table summarizes stock option activity through June 30, 1998:

<TABLE>
<CAPTION>
                                                                                   Weighted
                                                                    Shares       Average Price
                                                               -----------------------------------
<S>                                                               <C>              <C>
     Balance at June 30, 1995                                     3,043,988        $  9.02
       Granted                                                      288,600        $ 13.62
       Exercised                                                   (469,078)       $  7.73
       Terminated/Expired                                          (122,937)       $ 13.47
                                                               --------------
     Balance at June 30, 1996                                     2,740,573        $  9.53
       Granted                                                    1,403,100        $ 13.07
       Exercised                                                   (108,830)       $  6.67
       Terminated/Expired                                          (236,239)       $ 13.65
                                                               --------------
     Balance at June 30, 1997                                     3,798,604        $ 10.66
       Granted                                                    1,814,750        $  8.89
       Exercised                                                   (135,660)       $  5.44
       Terminated/Expired                                          (391,771)       $ 11.47
                                                               --------------
     Balance at June 30, 1998                                     5,085,923        $ 10.11
                                                               --------------
                                                               --------------

     Available for future grant under the 1983 Program               37,185
                                                               --------------
                                                               --------------

     Available for future grant under the 1991 Plan               1,375,520
                                                               --------------
                                                               --------------
</TABLE>

     The following table summarizes information concerning outstanding and 
exercisable stock options at June 30, 1998:

<TABLE>
<CAPTION>
                                                      Weighted
                                          Weighted     Average                   Weighted
     Range of Exercise       Number       Average     Remaining      Number       Average
           Prices          Outstanding    Exercise   Contractual   Exercisable   Exercise
                                           Price         Life                      Price
    ---------------------------------------------------------------------------------------
<S>                         <C>            <C>         <C>         <C>            <C>
           $0.01              129,918       $0.01      0.4 years     129,918       $0.01
      $  3.25-$6.94           976,270       $5.28      6.4 years     680,920       $5.34
      $  7.00-$9.25           818,340       $8.40      5.5 years     535,630       $8.47
      $  9.38-$9.88         1,389,725       $9.41      9.1 years     151,975       $9.60
      $10.00-$13.63         1,180,620      $12.70      7.6 years     437,575      $12.37
      $14.00-$28.00           591,050      $19.13      5.2 years     455,375      $20.14
                          -------------                          -------------
                            5,085,923      $10.11      7.0 years   2,391,393      $10.13
                          -------------                          -------------
                          -------------                          -------------
</TABLE>


                                     F-11
<PAGE>

     The Company has adopted the disclosure-only provisions of SFAS No. 123.  
In accordance with its provisions, the Company applies Accounting Principles 
Board Opinion No. 25 and related interpretations in accounting for its stock 
option plans, and accordingly, no compensation cost has been recognized for 
stock options in 1998, 1997 or 1996.  If the Company had elected to recognize 
compensation cost based on the fair value of the options granted at grant 
date amortized to expense over their vesting period as prescribed by SFAS No. 
123, the Company's net loss and net loss per share would have been increased 
to the pro forma amounts indicated below for the years ended June 30:


<TABLE>
<CAPTION>
                                        1998             1997            1996
                                   -------------    -------------    -------------
<S>                                <C>              <C>              <C>
       Net loss
         As reported               $(33,003,000)    $(19,016,000)    $(23,172,000)
         Pro forma                  (34,708,000)     (21,453,000)     (23,958,000)

       Net loss per share
         As reported               $      (1.04)    $       (.63)    $       (.91)
         Pro forma                        (1.09)            (.71)            (.94)
</TABLE>

     The impact of outstanding non-vested stock options granted prior to 1996 
has been excluded from the pro forma calculations; accordingly, the 1998, 
1997 and 1996 pro forma adjustments are not indicative of future period pro 
forma adjustments when the calculation will reflect all applicable stock 
options.  The fair value of options at date of grant was estimated using the 
Black-Scholes option-pricing model with the following assumptions for 1998, 
1997 and 1996, respectively:  risk-free interest rate range of 5.63% to 
6.63%, 5.25% to 6.5%, and 5.25% to 6.5%; dividend yield of 0% (for all 
years); volatility factor of 66%, 63%, and 63%; and a weighted-average 
expected term of 6 years, 4 years, and 4 years.  The estimated weighted 
average fair value at grant date for the options granted during 1998, 1997 
and 1996 was $5.85, $6.90 and $7.02 per option, respectively.

WARRANTS

     At June 30, 1998, the Company had warrants outstanding to purchase 
573,835 shares of common stock at prices ranging from $6.67 to $20 per share. 
 The warrants expire on various dates from August 1998 through February 2001.

PREFERRED STOCK

     In fiscal 1996, in conjunction with a license agreement, Hoechst Marion 
Roussel, Inc. ("HMRI") purchased 750,000 shares of the Company's convertible 
Series B Preferred Stock and 200,000 shares of its convertible Series C 
Preferred Stock for an aggregate of $22 million.  In June 1996, all 
outstanding shares of convertible Series A Preferred Stock (issued to Johnson 
& Johnson Development Corp. ("J&JDC") in 1995) and Series B Preferred Stock 
and accrued dividends thereon were converted into 815,625 and 759,375 shares 
of Alliance common stock, respectively.  In June 1997, all outstanding shares 
of Series C Preferred Stock were converted into 345,327 shares of Alliance 
common stock (see Note 5).  In September 1997, in conjunction with a license 
agreement, Schering Berlin Venture Corp. ("SBVC"), an affiliate of Schering 
AG, Germany ("Schering"), purchased 500,000 shares of the Company's 
convertible Series D Preferred Stock for $10 million.  The Series D Preferred 
Stock is convertible into Alliance common stock upon certain events at a rate 
based upon a 20 day average of the closing market prices of the common stock 
at the time of conversion.  The Series D Preferred Stock is entitled to one 
vote per share and has no annual dividend.

     The Series A Preferred Stock carried a cumulative annual dividend of 
$0.50 per share.  The Series B Preferred Stock carried a cumulative annual 
dividend of $1.00 per share.  The dividends were payable in cash or common 
stock.  In June 1996, these dividends were paid by issuing 75,000 shares of 
Alliance common stock.

5.  LICENSE AGREEMENTS

     In August 1994, the Company executed a license agreement (the "Ortho 
License Agreement") with Ortho Biotech Inc. and The R.W. Johnson 
Pharmaceutical Research Institute, a division of Ortho Pharmaceutical 
Corporation (collectively referred to as "Ortho"), which provided Ortho with 
worldwide marketing and, at its election, manufacturing rights to the 
Company's injectable perfluorochemical emulsions capable of transporting 
oxygen for therapeutic use, including OXYGENT. Ortho agreed to pay to 
Alliance a royalty based upon sales of products after commercialization.  In 
addition, Ortho paid to Alliance an initial license fee of $4 million and 
agreed to make other payments upon the achievement of certain milestones.  
Under the agreement, Ortho was responsible for substantially all of the costs 
of developing and marketing the products.  In December 1996, Ortho paid the 
Company a $15 million milestone payment.  In conjunction with the Ortho 
License Agreement, J&JDC purchased 1.5 million shares of Alliance Series A 
Preferred Stock for $15 million and obtained a three-year warrant to purchase 
300,000 shares of Alliance common stock at $15 per share.  In June 1996, the 
preferred stock and warrant were converted into common stock (see Note 4).  
In May 1998, Ortho and the Company restructured the agreement.


                                     F-12
<PAGE>

Under the restructured agreement, Alliance assumed responsibility for 
worldwide development of OXYGENT at its own cost, and Ortho retained certain 
rights to be the exclusive marketing agent for the product.

     In February 1996, the Company entered into a license agreement (the 
"HMRI License Agreement") with HMRI, which provided HMRI with worldwide 
marketing and manufacturing rights to the intratracheal administration of 
liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid 
ventilation.  Under the agreement, HMRI was responsible for most of the costs 
of development and marketing of LIQUIVENT.  On June 30, 1997, HMRI paid the 
Company a $2.5 million milestone payment and $2.5 million for the purchase of 
clinical trial supplies. The Company also announced in June 1997 that the 
parties agreed in principle to modify the HMRI License Agreement to (i) 
adjust certain milestone payments, (ii) temporarily revise the method for 
reimbursing the expenses for portions of the development work and (iii) 
provide for the Company to repurchase any unused clinical trial supplies if 
the license agreement is terminated before January 1, 1998. The Company 
recorded the $2.5 million in clinical trial supplies as deferred revenue and 
at June 30, 1998 the unused supplies were approximately $2.3 million.  In 
December 1997, the HMRI License Agreement was terminated.  Therefore, 
Alliance has not been reimbursed for its LIQUIVENT development expenses since 
July 1, 1997, and it will be responsible for all future LIQUIVENT development 
expenses worldwide.  HMRI has no continuing rights to the development or 
marketing of LIQUIVENT.  The parties are considering a repurchase by Alliance of
clinical trial supplies from HMRI. In May 1998, HMRI asserted a claim for an 
amount up to $7.5 million, payable in 2002 in cash or common stock, at the 
Company's election.  The Company does not believe that the claim is 
meritorious and intends to vigorously contest such claim.

     In September 1997, the Company entered into a license agreement (the 
"Schering License Agreement") with Schering, which provides Schering with 
worldwide exclusive marketing and manufacturing rights to Alliance's drug 
compounds, drug compositions, and medical devices and systems related to 
perfluorocarbon ultrasound imaging products, including IMAGENTS.  The product 
will be developed jointly by Alliance and Schering.  Under the Schering 
License Agreement, Schering paid to Alliance an up-front, non-refundable 
initial license fee of $4 million and agreed to pay further milestone 
payments and royalties on product sales.  Schering also agreed to provide 
funding to Alliance for some of its development expenses.  In conjunction 
with the Schering License Agreement, SBVC purchased 500,000 shares of the 
Company's convertible Series D Preferred stock for $10 million.

6.  INCOME TAXES

     Significant components of the Company's deferred tax assets as of June 
30, 1998 are shown below.  A valuation allowance of $96,202,000, of which 
$9,111,000 is related to 1998, has been recognized to offset the deferred tax 
assets as realization of such assets is uncertain.

     Deferred tax assets consist of the following:

<TABLE>
<CAPTION>
                                                                       June 30,
                                                                 1998            1997
                                                            -------------   -------------
<S>                                                         <C>             <C>
        Net operating loss carryforwards                    $  74,481,000   $  69,360,000
        Research and development credits                        8,571,000       8,220,000
        Capitalized research expense                           10,744,000       7,286,000
        Other - net                                             2,406,000       2,225,000
                                                            -------------   -------------
        Total deferred tax assets                              96,202,000      87,091,000
        Valuation allowance for deferred tax assets           (96,202,000)    (87,091,000)
                                                            -------------   -------------
        Net deferred tax assets                             $         --    $          --
                                                            -------------   -------------
                                                            -------------   -------------
</TABLE>

     Approximately $3,580,000 of the valuation allowance for deferred tax 
assets relates to stock option deductions which, when recognized, will be 
allocated to contributed capital.

     At June 30, 1998, the Company had federal and various state net 
operating loss carryforwards of approximately $206,015,000 and $41,320,000, 
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 fifty percent 
limitation on California loss carryforwards.  The federal tax loss 
carryforwards will begin expiring in fiscal 1999, unless previously utilized. 
 The California tax loss carryforwards will continue to expire in fiscal 1999 
unless previously utilized. The Company also has federal and state research 
and development tax credit carryforwards of $8,879,000 and $2,868,000, 
respectively, which will begin expiring in fiscal 1999 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 may be 
limited because of cumulative changes in ownership of more than 50% which 
have


                                     F-13
<PAGE>

occurred; however, the Company does not believe such limitation will have a 
material impact upon the utilization of these carryforwards.


7.  COMMITMENTS

     The Company leases certain office and research facilities in San Diego 
and certain equipment under operating leases.  Provisions of the facilities 
lease provide for abatement of rent during certain periods and escalating 
rent payments during the lease terms based on changes in the Consumer Price 
Index. Rent expense is recognized on a straight-line basis over the term of 
the leases.

     Minimum annual commitments related to operating lease payments at June 
30, 1998 are as follows:

<TABLE>
<CAPTION>
        Years ending June 30,
        ---------------------
<S>                                                        <C>
            1999                                             $  3,389,000
            2000                                                2,406,000
            2001                                                2,262,000
            2002                                                2,331,000
            2003                                                1,617,000
            Thereafter                                          4,306,000
                                                             ------------
            Total                                            $ 16,311,000
                                                             ------------
                                                             ------------

</TABLE>

     Rent expense for fiscal 1998, 1997, and 1996 was $3.4 million, $2.6 
million, and $2.1 million, respectively.


8.  SUBSEQUENT EVENT

     In August 1998, the Company sold 100,000 shares of its convertible 
Series E-1 Preferred Stock to certain investors for $6 million and retained 
the right to sell similar preferred stock periodically through early 1999 in 
an amount not to exceed an additional $14 million.  The preferred shares are 
convertible at the option of the holder into common stock at $6 per share 
through January 3, 1999, and thereafter certain adjustments may apply based 
on the market price.  These adjustments to the market price could potentially 
result in a conversion price below the then trading market price of the 
stock. In recognition of this beneficial conversion feature, the Company will 
recognize an imputed dividend of approximately $450,000 on these preferred 
shares.  At the option of the Company, beginning in 2003, the Company can 
either force the conversion of any remaining unconverted shares into common 
stock, or can redeem the stock at the then prevailing conversion price.  The 
Company may be liable for penalties if certain conditions are not met.  The 
Series E-1 Preferred Stock has the same voting rights as common stock and has 
a liquidation preference of $60 per share.  No dividends will accrue to the 
holders of the preferred stock, however, the investors obtained a right to 
receive a royalty on future sales of one of the Company's products under 
development, provided that the product is approved by the U.S. Food and Drug 
Administration by December 2003.  The royalty amount will be between 0.4% and 
1.6%, subject to adjustments downward, of net sales of the product for a 
period of three years.  The Company has certain rights to repurchase the 
royalty right.

                                F-14