<PAGE>



                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549

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

                                      FORM 10-K

(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, 1997
                         ------------------------------------------------

                                          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      0-12900
                                                  --------

                            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:

            Title of each class       Name of each 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]

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    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 System on August 29, 1997, was $315.4 million.

    The number of shares of the Registrant's common stock, $.01 par value,
outstanding at August 29, 1997 was 31,432,314.

                         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
1997 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]

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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.
THE COMPANY REFERS YOU TO CAUTIONARY INFORMATION CONTAINED ELSEWHERE HEREIN, IN
OTHER DOCUMENTS THE COMPANY FILES WITH THE SECURITIES AND EXCHANGE COMMISSION
FROM TIME TO TIME, AND THOSE RISK FACTORS SET FORTH IN THE RECENT REGISTRATION
STATEMENT ON FORM S-3 (REGISTRATION NUMBER 333-06739).

ITEM 1.  BUSINESS

    Alliance Pharmaceutical Corp. (the "Company" or "Alliance") is a
pharmaceutical research and development company that focuses on developing
scientific discoveries into potential medical products and licensing these
products to multinational pharmaceutical companies in exchange for fixed
payments and royalties.  To date, the Company has developed three innovative
products through initial clinical (human) trials, and has entered into
collaborative relationships for such products with multinational pharmaceutical
companies for the final stages of development and worldwide marketing.  These
products are OXYGENT-TM-, an intravascular oxygen carrier to temporarily augment
oxygen delivery in surgical and other patients at risk of acute tissue hypoxia
(oxygen deficiency), which is licensed to affiliates of Johnson & Johnson; 
LIQUIVENT-Registered Trademark-, an intrapulmonary agent for use in reducing a 
patient's exposure to the harmful effects of conventional mechanical 
ventilation, which is licensed to Hoechst Marion Roussel, Inc., an affiliate of
Hoechst AG; and IMAGENT-Registered Trademark-US, an intravenous contrast agent 
for enhancement of ultrasound images to assess cardiac function and myocardial 
perfusion and to detect blood flow abnormalities (perfusion defects), which is 
licensed to Schering AG, Germany.

    The Company's strategy is to identify potential new medical products
through scientific collaborations with researchers and clinicians in
universities and medical centers where many of the basic causes of disease and
potential targets for new therapies are discovered.  Using its experience in
defining pharmaceutical formulations, designing manufacturing processes,
conducting preclinical pharmacology and toxicology studies, and conducting
early-phase human testing, Alliance endeavors to advance such discoveries into
clinical development.  The Company seeks collaborative relationships for the
final stages of product development, including completing late-phase human
testing, obtaining worldwide regulatory approvals, building large-scale
manufacturing capacities, and marketing.

    The Company was incorporated in New York in 1983.  Its principal executive
offices are located at 3040 Science Park Road, San Diego, California 92121, and
its telephone number is (619) 558-4300.

PRODUCTS IN CLINICAL DEVELOPMENT

    Three of Alliance's products currently in clinical development  - OXYGENT,
LIQUIVENT, and IMAGENT US  - are based upon perfluorochemical ("PFC") and
emulsion technologies.  PFCs are biochemically inert compounds and may be
employed in a variety of therapeutic and diagnostic applications.  The Company's
primary drug substance is perflubron, a brominated PFC that has a high
solubility for respiratory gases and can be used to transport these gases safely
throughout the body.

OXYGENT.  OXYGENT (perflubron emulsion) is an intravascular oxygen delivery
system to temporarily augment oxygen delivery in surgical and other patients at
risk of acute tissue oxygen deficit.  It will be used as a temporary oxygen
carrier to provide oxygen to tissues during elective surgeries where substantial
blood loss is anticipated.  It is estimated that in excess of three million
patients annually in the United States may receive one or more units of blood
during elective surgeries, including, for example, cardiovascular, orthopedic,
and general surgical procedures.  An oxygen carrier could be used instead of
blood for a portion of these patients.  The OXYGENT dose for surgical
applications is expected to provide the equivalent oxygen delivery of at least
two units of red blood cells.


    OXYGENT has several potential advantages over the use of allogeneic (donor)
blood: there is no risk of infectious disease transmission; it is compatible
with all blood types; it has a shelf-life of approximately two years; and it can
be sterilized.  According to the 1995 estimates in the American Journal of
Surgery, the risks per unit of blood transfused in the


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United States are 1:2,500 for bacterial infections, 1:5,000 for hepatitis,
1:600,000 for fatal hemolytic reactions, primarily due to clerical error, and
1:420,000 for HIV infection (AIDS).  To minimize the use of allogeneic blood and
to avoid these risks, certain techniques can be employed that allow use of the
patient's own (autologous) blood during surgery.  These techniques include
(i) predonation, in which the patient donates several units of his or her  blood
in the six weeks preceding surgery, (ii) perioperative hemodilution, in which
several units of the patient's blood are removed just prior to surgery and are
replaced with a plasma expander, and (iii) blood salvage, wherein a device (cell
saver) is used to collect blood lost during the surgical procedure.  OXYGENT can
be used with any of these autologous blood collection techniques to enhance
safety, by reducing the need for allogeneic blood.  When a blood transfusion is
indicated during surgery, one or more doses of OXYGENT would be used in place of
allogeneic blood to maintain an adequate level of oxygen delivery despite a
lower red blood cell concentration.  This use of OXYGENT delays or reduces the
need for the transfusion of donor blood, thereby avoiding its associated risks.
OXYGENT may also be advantageous during emergency situations such as trauma,
acute myocardial infarctions (heart attacks), or transient ischemia (oxygen
deprivation) in specific organs where there is an immediate need to augment
oxygen delivery to the tissues.

    In fiscal 1997, two Phase II clinical studies of OXYGENT were completed in
surgical patients in the United States and Europe.  Additional Phase II studies
in which OXYGENT is administered to patients undergoing cardiopulmonary bypass
procedures are nearing completion.  Phase III clinical trials are expected to
begin before the end of 1997.

    In August 1994, the Company entered into 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, both affiliates of Johnson & Johnson (collectively referred to as
"Ortho"), which provides Ortho with worldwide marketing rights to the Company's
injectable PFC emulsions capable of transporting oxygen for therapeutic use,
including OXYGENT.  The product is being developed jointly by Alliance and
Ortho.  In December 1996, Alliance received a $15 million milestone payment when
Ortho decided that it would conduct Phase III clinical studies of OXYGENT.


LIQUIVENT.  LIQUIVENT (neat perflubron) is an intrapulmonary agent for use in
reducing a patient's exposure to the harmful effects of conventional mechanical
ventilation.  Each year, more than 200,000 patients in the United States are
placed on mechanical gas ventilators for at least four days for treatment of
lung dysfunction.  Many of these patients suffer from acute respiratory failure,
a disorder that can result from many causes, including serious infections,
traumatic shock, severe burns, or inhalation of toxic substances.  Acute
respiratory failure is generally characterized by an excessive inflammatory
response, which leads to blockage of the small airways and collapse of alveoli,
resulting in inadequate gas exchange and impairment of normal lung function.
The most urgent need for these patients is to improve their blood oxygenation.
However, the prolonged use of high ventilatory pressures or high continuous
concentrations of inspired oxygen can further damage the patient's lungs.  Some
of these patients may benefit from treatment with LIQUIVENT.

    LIQUIVENT is intended to be used in a technique called partial liquid
ventilation ("PLV").  In this procedure, the drug is administered through an
endotracheal tube into the lungs of a patient being supported by a mechanical
ventilator.  The initial goal of LIQUIVENT/PLV therapy is to open collapsed
alveoli to improve gas exchange.  Once this has been accomplished, ventilator
pressure and oxygen concentration may be lowered to minimize ventilator-induced
lung trauma.  Published results from initial clinical trials have indicated that
LIQUIVENT improved lung oxygenation, without clinically significant side
effects. In clinical studies, LIQUIVENT has also been observed to promote the
migration of mucus and alveolar debris to the central airways, where suctioning
is easier.  The ability to remove such debris may significantly reduce the
excessive inflammatory response associated with acute respiratory failure and
enhance the effectiveness of other therapeutic interventions, all serving
potentially to reduce patient recovery time. In addition, preclinical studies
indicate LIQUIVENT may mitigate inflammation and oxygen toxicity.  The U.S. Food
and Drug Administration ("FDA") has granted Subpart E status (expedited review)
for the product.

    In February 1997, the Company reported that a Phase II clinical trial of
LIQUIVENT in adults with acute hypoxemic respiratory failure demonstrated that,
compared to conventional mechanical ventilation, PLV with LIQUIVENT resulted in
an increase in survival and a significant improvement in "ventilator-free-days"
for patients who were 55 years of age or younger.  In April 1997, the Company
temporarily suspended enrollment in its ongoing Phase III LIQUIVENT trial in
pediatric patients to analyze an unexplained, substantial decrease in the
mortality rate for the control group which occurred after a protocol amendment
in December 1996.  The decision was not prompted by any LIQUIVENT-related
adverse events.  In August 1997, the Company completed its analysis, and
clinical trials are expected to be re-initiated before the end of the


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year.  The Company found that after the protocol amendment, patients in the
post-amendment control group were younger and had different disease etiologies
compared to the pre-amendment control group.  Additionally, post-amendment
control group patients received additional therapies such as extracorporeal
membrane oxygenation, high frequency oscillatory ventilation, nitric oxide or
surfactants more frequently, earlier, and for a longer duration compared to both
the pre-amendment control group and the LIQUIVENT-treated patients.  The study
analysis also supported previous reports that PLV therapy with LIQUIVENT is a
safe procedure.  Based on the results of the Phase II adult trial and the
analysis of the suspended Phase III clinical trial, the Company intends to
initiate a clinical study in adult patients before the end of the year.

    In February 1996, the Company entered into a license agreement (the "HMRI
License Agreement") with Hoechst Marion Roussel, Inc. ("HMRI"), which provides
HMRI with worldwide marketing and manufacturing rights to the intratracheal
administration of liquids, including LIQUIVENT, which perform bronchoalveolar
lavage or liquid ventilation.  The product is being developed jointly by
Alliance and HMRI.  In June 1997, HMRI made a $2.5 million milestone payment to
the Company.  Alliance  also announced in June 1997 that the parties have agreed
in principle to adjust certain milestone payments and to temporarily revise the
method for reimbursing expenses of the development work, in conjunction with the
April 1997 temporary interruption of the clinical development program.

IMAGENT US.  IMAGENT US is an intravenous contrast agent for enhancement of
ultrasound images to assess cardiac function and myocardial perfusion, and to
detect solid organ lesions and blood flow abnormalities.  More than 30 million
scans of the heart, vasculature, and abdominal organs are performed annually in
the United States, some of which may potentially benefit from a cost-effective
contrast agent.  To be successful in the marketplace, ultrasound contrast agents
should provide enhanced diagnostic images during several minutes of scanning, be
easy to use, be stable during transportation, and have a long shelf-life.
IMAGENT US is being developed to meet these requirements.

    IMAGENT US is a powder comprising hollow microspheres containing a mixture
of PFC vapor and gas and water-soluble components that are known to be
acceptable for parenteral use.  Prior to use, IMAGENT US is reconstituted with a
sterile aqueous solution to form microbubbles that are then injected into the
patient.  The gas microbubbles are highly echogenic and, when delivered
intravenously, reflect signals that enhance ultrasound images.  In preclinical
studies, IMAGENT US has been found to enhance the ultrasound signal from
perfused tissues and blood vessels using traditional gray-scale and color
Doppler technologies, as well as emerging harmonic ultrasound imaging
techniques.  In early clinical trials with IMAGENT US gray-scale contrast
enhancement of cardiac, abdominal, and vascular structures has been observed
with no serious  adverse events.

    A Phase II clinical trial was completed in 1997 in adult patients
undergoing diagnostic procedures for the evaluation of myocardial perfusion
abnormalities (subsequent to myocardial infarction).  A second Phase II clinical
trial is ongoing in adults undergoing diagnostic procedures for evaluation of
space-occupying lesions of the liver (or other organs), and vascular flow
abnormalities.  In these studies, each subject serves as his/her own control
through the blinded evaluation of non-contrast and contrast ultrasound images.
In addition, the diagnostic utility of the contrast ultrasound evaluation with
IMAGENT US is compared to that of other technologies used to diagnose anatomic,
functional, and flow abnormalities (e.g., nuclear perfusion scintigraphy,
angiography, computed tomography, and magnetic resonance imaging).  The Company
intends to initiate a Phase III clinical trial before the end of 1997.

    In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering AG, Germany ("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 IMAGENT US.
The product will be developed jointly by Alliance and Schering.

RODA-TM-.  In July 1997, the Company entered into a development agreement (the
"VIA Development Agreement") with Via Medical Corporation ("VIA") for the joint
development of RODA (Real-time Oxygen Dynamics Analyzer).  RODA is an EX VIVO
device intended to measure cardiovascular and oxygenation status of patients by
minimally invasive means.  The device is intended to provide on-line information
pertaining to oxygenation and other physiological parameters which could assist
physicians in their decisions regarding transfusions and other interventions.
RODA will combine oxygen dynamics software designed by the Company with VIA's
EX VIVO blood gas and chemistry measurement device and other VIA technology.
The Company has conducted a pilot clinical study in Europe to assess its oxygen
dynamics software and is currently conducting a clinical trial in the U.S.
Alliance and VIA are currently negotiating an agreement whereby VIA will


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market RODA and the parties will share revenues on the sale of products.  The
agreement is expected to be executed in the near future; however, there can be
no assurance that the parties will be able to negotiate an agreement on
acceptable terms.

OTHER PRODUCTS

    In November 1996, Alliance acquired all of the stock of MDV Technologies,
Inc. ("MDV") for initial payments of $15.5 million over a one-year period, with
additional payments and royalties to the former MDV shareholders upon the
occurrence of certain clinical development, licensing, or commercialization
events.  MDV is developing a thermo-reversible gel, FLOGEL-Registered
Trademark-, intended for use as an anti-adhesion treatment for persons
undergoing abdominal or pelvic surgeries.  FLOGEL is applied in a cold liquid
form and becomes a gel at body temperature, forming a barrier between tissues.
Preliminary human safety data with the product's current formulation has been
obtained and pre-clinical studies have been performed on additional
formulations.  In addition to the anti-adhesion product, MDV also has patents
covering the use of gels for drug delivery and ophthalmic indications.

    Alliance is also supporting internal research efforts to expand the
applicability of its core technologies.  The Company has patented fluorinated
surfactants that are potentially useful in the preparation of therapeutic or
diagnostic emulsions and other formulations.

    Alliance is investigating the use of PFC-containing reverse emulsions,
microemulsions, gels, foams, and other compositions as drug delivery agents.
These compositions are either aqueous or oil-based, and may be administered via
oral, intravenous, intrapulmonary, or topical routes to distribute antibiotics,
chemotherapy agents, gene therapies, or other medicaments systemically or to
selected areas of the body.

    The Company has certain agreements with research institutions to develop
discoveries that the Company believes may be the basis of new products.
Antigenized antibodies that could potentially stimulate or down-regulate
antibody production are being developed in conjunction with Mt. Sinai Medical
Center in New York City.  A prototype vaccine for infectious disease and a
prototype tolerogen for an autoimmune disease are also under development.  In
addition, Alliance is working with researchers at Temple University to develop
an apoptotic factor for regulating the death of certain cancer cells.

    Alliance has developed and is marketing SAT PAD-Registered Trademark-, a
re-usable magnetic resonance ("MR") imaging accessory that improves the quality
of images obtained by certain MR imaging techniques.  SAT PAD is distributed by
dealers specializing in radiology products.  Sales of SAT PAD were approximately
$14,000 for fiscal 1997.  Alliance expects that the sales volume of SAT PAD will
be limited and does not anticipate significant revenue from the product.

    The Company intends to consider other technologies that may be available
for licensing and research agreements with other institutions or inventors.
Alliance intends, where appropriate, to seek outside sources of funding.  If new
license and research agreements are added and the Company is not able to obtain
outside sources of funding, the Company's losses from research and development
activities are expected to increase significantly.

    The Company's products require substantial development efforts.  The
Company may encounter unforeseen technical and other problems which may force
delay, abandonment, or substantial change in the development of a specific
product or process, or technological change, or product development by others,
any of which may have a material adverse effect on the Company.  The Company
expends substantial amounts of money on research and development and expects to
do so for the foreseeable future.  In fiscal 1997, 1996, and 1995 the Company
incurred research and development expenses of $43.3 million, $33.7 million, and
$35.3 million, respectively.

COLLABORATIVE RELATIONSHIPS

SCHERING AG .  In September 1997, the Company entered into the Schering License
Agreement, 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 IMAGENT US.  The product will be developed jointly by Alliance and
Schering.  Under the Schering License Agreement, Schering paid to Alliance an


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initial license fee 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, Schering Berlin Venture Corp., an affiliate of Schering, purchased
500,000 shares of the Company's convertible Series D Preferred Stock for $10
million.

HOECHST MARION ROUSSEL, INC.  In February 1996, the Company entered into the 
HMRI License Agreement, which provides HMRI with worldwide exclusive 
marketing and manufacturing rights to the intratracheal administration of 
liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid 
ventilation. The product is being developed jointly by Alliance and HMRI, 
with HMRI responsible for most of the costs of development and marketing.  In 
conjunction with the HMRI License Agreement, 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 
addition, HMRI paid Alliance an initial license fee of $5 million and agreed 
to pay milestone payments and royalties on product sales. HMRI also received 
a five-year warrant to acquire 300,000 shares of common stock at $20 per 
share.  On June 6, 1996, the Series B Preferred Stock and accrued dividends 
thereon were converted into 759,375 shares of the Company's common stock.  On 
June 30, 1997, the Series C Preferred Stock converted into 345,327 shares of 
common stock of the Company. 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. In June 1997, the Company also announced that the parties have 
agreed in principle to modify the HMRI License Agreement to (i) adjust 
certain milestone payments and (ii) temporarily revise the method for 
reimbursing the expenses for portions of the development work, in conjunction 
with the temporary interruption of the LIQUIVENT clinical development program 
in April 1997.  The modification is being formalized by an amendment which is 
expected to be executed in the near future.  Prior to the modification, the 
HMRI License Agreement required HMRI to reimburse Alliance for approved 
worldwide development expenses incurred by Alliance on a quarterly basis.  
Under the modified agreement, from July 1997 Alliance will conduct and be 
responsible for funding development activities in North America through 
December 1997.  HMRI will reimburse Alliance for approved expenses for such 
activities in the form of payments which will be made upon the occurrence of 
specified events subsequent to December 1997.  HMRI will continue to be 
responsible for conducting and funding any activities outside of North 
America.  Beginning in January 1998, HMRI will resume funding for 
substantially all LIQUIVENT development expenses worldwide.  The agreement in 
principle also provides for the establishment of a mechanism for HMRI to 
recoup from Alliance certain reimbursed development expenses if HMRI 
terminates the License Agreement prior to January 1998.

ORTHO BIOTECH, INC.  In August 1994, the Company entered into the Ortho License
Agreement which provides Ortho with worldwide exclusive marketing and
manufacturing rights to injectable PFC emulsions capable of transporting oxygen
for therapeutic use, including OXYGENT.  The product is being developed jointly
by Alliance and Ortho, with Ortho responsible for substantially all of the costs
of developing and marketing the product.  Under the Ortho License Agreement,
Ortho paid to Alliance an initial license fee of $4 million and, in
December 1996, paid the Company a $15 million milestone payment due upon a
decision by Ortho to conduct a Phase III trial with OXYGENT.  Ortho will make
other payments upon the achievement of certain milestones and will pay Alliance
a royalty based upon sales of products after commercialization.  In conjunction
with the Ortho License Agreement, Johnson & Johnson Development Corp. ("J&JDC")
purchased 1.5 million shares of the Company's convertible Series A Preferred
Stock for $15 million and acquired a three-year warrant to purchase 300,000
shares of common stock.  On June 6, 1996, the Series A Preferred Stock and
accrued dividends thereon were converted into 815,625 shares of common stock of
the Company and Ortho exercised its warrant to purchase 300,000 shares of common
stock.

VIA MEDICAL CORPORATION.  In July 1997, the Company entered into the VIA
Development Agreement for the joint development of RODA, an EX VIVO device
intended to measure cardiovascular and oxygenation status of patients by
minimally invasive means.  Pursuant to the VIA Development Agreement, VIA will
combine Alliance's oxygen dynamics software with VIA's EX VIVO blood gas and
chemistry measurement device and other technology.  Alliance will reimburse VIA
for substantially all of its development costs and will be responsible for
obtaining regulatory approval of the product.  Alliance and VIA are currently
negotiating an agreement whereby VIA will market RODA and the parties will share
revenues on the sale of products.  The agreement is expected to be executed in
the near future; however, there can be no assurances that the parties will be
able to negotiate an agreement on acceptable terms.


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    There can be no assurances that the Company will be able to enter into
future collaborative relationships on acceptable terms.  The termination of any
collaborative relationship or failure to enter into such relationships may limit
the ability of the Company to develop its technology and may have a material
adverse effect on the Company's business.

MARKETING

    Under the terms of the Ortho License Agreement, Ortho has exclusive
worldwide marketing rights to OXYGENT and any other injectable PFC emulsion
products capable of transporting oxygen for therapeutic use.  Under the terms of
the HMRI License Agreement, HMRI has exclusive worldwide marketing rights to the
intratracheal administration of liquids, including LIQUIVENT, which perform
bronchoalveolar lavage or liquid ventilation.  Under the terms of the Schering
License Agreement, Schering has exclusive worldwide marketing rights to
IMAGENT US and drug compounds, drug compositions and medical devices and systems
relating to perfluorocarbon-containing ultrasound imaging products.  The
Company's only commercialized product, SAT PAD, is currently distributed through
certain distributors of MR imaging equipment and supplies.

MANUFACTURING

    The Company manufactures all of its products for preclinical testing and
clinical trials.  OXYGENT is produced in Alliance's San Diego facility, which
includes both a pilot plant and a production-scale manufacturing facility.  The
Company believes that this production facility will provide sufficient capacity
for future clinical trials and market launch of OXYGENT, if and when it is
approved by the FDA.  However, a larger commercial-scale facility will be
required in the future. Under the terms of the Ortho License Agreement, Ortho
has the right to elect to manufacture OXYGENT itself or have the Company
continue to do so, which election must be made at or prior to the filing of a
new drug application ("NDA").  If Alliance manufactures OXYGENT for Ortho, the
transfer price, which will not be less than Alliance's fully burdened cost, will
be determined by Ortho's net sales price for the product.  The Company has not
selected a site for the commercial-scale facility or obtained any regulatory
approvals.  Construction of such a facility will depend upon Ortho's decision
regarding manufacturing, product development, capital resources, and regulatory
approvals, among other things.

    LIQUIVENT is manufactured for clinical trials at the Company's Otisville,
New York facility.  LIQUIVENT is the same drug substance as IMAGENT GI, for
which Alliance obtained FDA approval in August 1993 as an oral contrast agent
for MR imaging.  As a result, certain chemistry, manufacturing, and control
requirements have been accepted by the FDA, which may benefit the Company in the
regulatory review process.  The HMRI License Agreement requires the Company to
manufacture LIQUIVENT at its Otisville facility for a period of time after
market launch at a negotiated price.  HMRI will be responsible for establishing
production capacity beyond the maximum capacity of the Otisville facility.

    IMAGENT US is manufactured for clinical studies at the San Diego facility,
using a proprietary process to form dry, PFC vapor-containing spheres which are
reconstituted with an aqueous solution to form microbubbles just prior to use.
The Schering License Agreement requires the Company to manufacture products at
its San Diego facility for a period of time after market launch at a negotiated
price.  Schering will be responsible for establishing production capacity beyond
the maximum capacity of the San Diego facility.  Alliance is in the process of
expanding its market launch production capacity in San Diego for IMAGENT US.

SOURCES AND AVAILABILITY OF RAW MATERIALS

    The Company has obtained a sufficient inventory of perflubron, the
principal raw material utilized in OXYGENT and LIQUIVENT, for clinical trials.
HMRI and Ortho are currently negotiating with a potential supplier to secure a
long-term supply of perflubron.  The Company also believes it has a sufficient
supply of raw materials for IMAGENT US for clinical trials.  Although some raw
materials for its products are available from only one source, the Company has
attempted to acquire a long-term supply of materials in inventory.  The Company
believes it will not have any raw material supply issues; however, the Company's
business could be materially and adversely affected if it or its collaborative
partners are unable to obtain necessary raw materials on a timely basis and at a
cost-effective price.


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PATENTS

    The Company seeks proprietary protection for its products, processes,
technologies, and ongoing improvements.  The Company is pursuing patent
protection in the United States and in foreign countries that it regards as
important for future endeavors.  Numerous patent applications have been filed in
the European Patent Office, Australia, Canada, Israel, Japan, Norway, and South
Africa, and patents have been granted in many of these countries.

    Alliance has eighteen issued U.S. patents related to or covering PFC
emulsions with corresponding patents and applications in Europe and Japan.  Such
emulsions are the basis of the Company's OXYGENT products.  The issued patents
and pending patent applications cover specific details of emulsified PFCs
through product-by-process claims, composition claims, and method claims
describing their manufacture and use.  In addition to the specific OXYGENT
formulation, issued patents broadly cover concentrated PFC emulsions, as well as
methods for their manufacture and use.

    In September 1994, Alliance received a U.S. patent for its preferred method
of using blood substitutes to facilitate oxygen delivery. A related U.S. patent
was issued in September 1995. Corresponding patents are pending in Europe,
Japan, and other countries.  The issued claims cover methods for facilitating
autologous blood use in conjunction with administering oxygen-enriched gas and
oxygen carriers that contain fluorochemicals, as well as those derived from
human, animal, plant, or recombinant hemoglobin, in order to reduce or eliminate
the need for allogeneic blood transfusions during surgery.

    The Company has filed U.S. and foreign patent applications on its method of
using oxygen-carrying PFCs to enhance respiratory gas exchange utilizing
conventional gas ventilators.  In August 1995, a U.S. patent licensed to the
Company issued covering methods of administering liquids, including
LIQUIVENT, to patients.  Other U.S. patents, covering additional methods of
enhancing respiratory gas exchange by administering liquids to patients,
including LIQUIVENT, have subsequently issued.  The Company also has issued
patents and pending patent applications which seek to cover the use of PFCs to
deliver drugs to the lungs and to wash debris from, and open, collapsed lungs.
In November 1995, the Company received a U.S. patent covering the use of
fluorochemicals to treat localized and systemic inflammation.  Additionally, the
Company has issued patents and pending applications that cover apparatus for
liquid ventilation using PFCs.

    Alliance has three issued U.S. patents and several U.S. patent applications
related to IMAGENT US.  The issued patents and pending applications contain
claims directed to the manufacture and use of novel stabilized microbubble
compositions based on the discovery that PFC gases, in combination with
appropriate surfactants or other non-PFC gases, can stabilize microbubbles for
use in ultrasonic imaging.  The patents further contain claims directed to
formulations and compositions that cover IMAGENT US.  International applications
directed to the same subject matter have also been filed.  In July 1996, the
Company received another U.S. patent covering the use of various contrast
agents, including IMAGENT US, in harmonic imaging.

    The Company also has issued patents and pending patent applications
covering its novel fluorinated surfactants.  These compounds may be useful in
oxygen-carrying or drug transport compositions, and in liposomal formulations
that have therapeutic and diagnostic applications.  Additionally, the
fluorinated compounds may be employed in cosmetics, protective creams, and
lubricating agents, as well as being incorporated in emulsions, microemulsions,
and gels that may be useful as drug delivery vehicles or contrast agents.  The
Company also has pending applications relating to various types of emulsions and
microstructures (tubules, helixes, fibers) that may have uses in the fields of
medicine, biomolecular engineering, microelectronics, and electro-optics.

    The Company, through its wholly owned subsidiary, MDV, has eighteen issued
U.S. patents and several pending applications related to the use, manufacture
and composition of FLOGEL.  Corresponding patents have issued, or applications
have been filed, in Europe, Japan and certain other foreign countries.  MDV also
has issued claims in the United States and Europe covering the use of poloxamer
gels for the prevention of adhesion formation, delivery of drugs and ophthalmic
applications.

    Aside from the issued patents and allowed applications referred to above,
however, no assurance can be given that any of these applications will result in
issued U.S. or foreign patents.  Although patents are issued with a presumption
of validity and require a challenge with a high degree of proof to establish
invalidity, no assurance can be given that any issued patents would survive such
a challenge and would be valid and enforceable.


                                          7
<PAGE>

    The Company also attempts to protect its proprietary products, processes,
and other information by relying on trade secret laws and non disclosure and
confidentiality agreements with its employees, consultants, and certain other
persons who have access to such products, processes, and information.  The
agreements affirm that all inventions conceived by employees are the exclusive
property of the Company, with the exception of inventions unrelated to the
Company's business and developed entirely on the employee's own time.
Nevertheless, there can be no assurance that these agreements will afford
significant protection against or adequate compensation for misappropriation or
unauthorized disclosure of the Company's trade secrets.

COMPETITION

    Biotechnology and pharmaceutical companies are highly competitive.  There
are many pharmaceutical companies, biotechnology companies, public and private
universities, and research organizations actively engaged in research and
development of products that may be similar to Alliance's products.  Many of the
Company's existing or potential competitors have substantially greater
financial, technical, and human resources than the Company and may be better
equipped to develop, manufacture, and market products.  These companies may
develop and introduce products and processes competitive with or superior to
those of the Company.  In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing the
intended purposes of the Company's products, which might render the Company's
technology and products uncompetitive or obsolete.  There can be no assurance
that the Company will be able to compete successfully.

    Well-publicized side effects associated with the transfusion of human donor
blood have spurred efforts to develop a blood substitute.  Two primary
approaches have shown promise as temporary oxygen carriers:  PFC emulsions and
hemoglobin solutions.  Hemoglobin development efforts include chemically
modified, stroma-free hemoglobin from human or bovine red blood cells, and the
use of genetic engineering to produce recombinant hemoglobin.  There are several
companies working on hemoglobin solutions as a temporary oxygen carrier "blood
substitute", two of which are in  Phase III clinical trials. The Company
believes that the relatively low cost and ease of production of OXYGENT provide
advantages over hemoglobin-based products.  Alliance is aware of two other
companies developing PFC-based temporary oxygen carriers, one of which has
entered Phase I clinical trials.

    Although liquid ventilation therapy has been in the research phase for the
last two decades, the Company is unaware of any potential competitor that has
reached the clinical trial stage; however, other companies may be evaluating
compounds with the possibility of entering this field.  If major manufacturers
of PFCs entered the field, the Company could face competition from companies
with substantially greater resources.  The Company believes that its patent
position and stage of research and development give it an advantage over
potential competitors.  Other companies are attempting to develop alternative
types of therapies for treatment of acute respiratory failure.

    Competition in the development of ultrasound imaging contrast agents is
intense and is expected to increase.  There is currently only one commercially
available ultrasound contrast agent for certain cardiology applications in the
U.S. and another has been approved in Europe.  However, there are two other
products that have had applications submitted for approval for certain
ultrasound contrast agent indications.  In addition, certain companies are in
advanced clinical trials for the use of ultrasound contrast agents for assessing
certain organs and vascular structures.  The Company expects that competition in
the ultrasound contrast imaging agent field will be based primarily on each
product's safety profile, efficacy, stability, ease of administration, breadth
of approved indications, and physician, healthcare payor and patient acceptance.
The Company believes if and when IMAGENT US is approved for commercial sale,
that it will be well positioned to compete successfully, although there can be
no assurance that the product will be able to do so.

PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS

    The sale or use of the Company's present products and any other products or
processes that may be developed or sold by the Company may expose the Company to
potential liability from claims by end-users of such products or by
manufacturers or others selling such products, either directly or as a component
of other products.  While the Company has product liability insurance, there can
be no assurance that the Company will continue to maintain such insurance or
that it will provide adequate coverage.  If the Company is held responsible for
damages in a product liability suit, the Company's financial condition could be
materially and adversely affected.


                                          8
<PAGE>

GOVERNMENT REGULATION

    The Company's products require governmental approval before production and
marketing can commence.  The regulatory approval process is administered by the
FDA in the United States and by similar agencies in foreign countries.  The
process of obtaining regulatory clearances or approvals is costly and time
consuming.  The Company cannot predict how long the necessary clearances or
approvals will take or whether it 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 animals to gain
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 I, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound will be tested for safety and dosage
tolerance.  Phase II typically involves studies in a larger patient population
to identify possible adverse effects and safety risks, to begin gathering
preliminary efficacy data, and to investigate potential dose sizes and
schedules.  Phase III trials are undertaken to further evaluate clinical
efficacy and to further test for safety within an expanded patient population.
Each trial is conducted in accordance with certain 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 investigational new drug application.
Further, each clinical study must be evaluated by an independent review board at
the institution at which the study will be conducted.  The review board 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 NDA must be submitted to and
approved by the FDA in order to market the product in the United States.
Similar applications are required in foreign countries.  There can be no
assurance that, upon completion of the foregoing trials, the results will be
considered adequate for government approval.  If and when approval is obtained
to market a product, the FDA's (or applicable foreign agency's) regulations will
govern manufacturing and marketing activities.

    The FDA has established a designation to speed the availability of new
therapies for life-threatening or severely debilitating diseases.  This
designation, defined in Subpart E of the FDA's investigational new drug
regulations, may expedite clinical evaluation and regulatory review of some new
drugs, such as LIQUIVENT, which has been so designated.

    Perflubron is an eight-carbon halogenated fluorocarbon liquid.  Certain
halogenated fluorocarbons (primarily the 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 GI, a perflubron-based drug
previously developed by the Company.  However, all materials contained in the
Company's products remain subject to regulation by governmental agencies.

    In addition to FDA regulation, the Company is 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 United States
and other countries, may impede or limit the Company's ability to develop and
market its products.

EMPLOYEES

    As of August 29, 1997, the Company had 213 full-time employees, of whom 176
were engaged in research and development, production and associated support, 5
in business development, sales and marketing, and 32 in general administration.
There can be no assurance that the Company will be able to continue attracting
and retaining sufficient qualified personnel in order to meet its needs.  None
of the Company's employees is represented by a labor union.  The Company
believes that its employee relations are satisfactory.


                                          9
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

    The following are the executive officers of the Company:

DUANE J. ROTH.  Mr. Roth, who is 47, has been President and Chief Executive
Officer since 1985 and Chairman since October 1989.  Prior to joining Alliance,
Mr. Roth served as President of Analytab Products, Inc., an American Home
Products company 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 by Ortho Diagnostic
Systems, Inc., a Johnson & Johnson company, which is a manufacturer of
diagnostic and pharmaceutical products.  Mr. Roth's brother, Theodore D. Roth,
is an Executive Vice President of the Company.

HAROLD W. DELONG.  Mr. DeLong, who is 49, has been Executive Vice President,
Business Development for the Company since February 1989.  Mr. DeLong has been
employed for more than 20 years in the medical diagnostics and pharmaceutical
industry in various sales, marketing, and management positions.  Prior to
joining Alliance, Mr. DeLong was Vice President, Sales and Marketing for Murex
Corporation, a company participating in the infectious disease diagnostics
market.  He previously served as Director, Sales and Marketing for Becton
Dickinson's Immunocytometry Systems division.  Mr. DeLong was also employed
previously by Ortho Diagnostic Systems, Inc. for over ten years, where his last
position was Director of the Hemostasis and Chemistry Products business units.

THEODORE D. ROTH.  Mr. Roth, who is 46, has been Executive Vice President and
Chief Financial Officer of the Company since November 1987, and Secretary since
1990.  For more than ten years prior to joining the Company, he was General
Counsel of SAI Corporation, a company in the business of operating manufacturing
concerns, and General Manager of Holland Industries, Inc., a manufacturing
company.  Mr. Roth received his J.D. from Washburn University and an LL.M. in
Corporate and Commercial Law from the University of Missouri in Kansas City.  He
is the brother of Duane J. Roth, the Chairman of the Company.

KEITH W. CHAPMAN.  Mr. Chapman, who is 47, was appointed Vice President
Operations in July 1997, having joined the Company in 1992 as Director, Transfer
Operations.  For 14 years prior to joining Alliance, he was responsible for
scale-up development and production of modified hemoglobins for the Army's Blood
Substitute Program.  He received training as a research associate in
dermatology, tropical medicine, and blood cell preservation at the Letterman
Army Institute of Research, Presidio of San Francisco, California.

B. JACK DEFRANCO.  Mr. DeFranco, who is 52, has been Vice President, Market
Planning for Alliance since January 1991.  He has more than 20 years experience
in sales and marketing in the medical products industry.  He was President of
Orthoconcept Inc., a private firm marketing orthopedic and urological devices
from 1986 through 1990. Prior to 1986, he was Director of Marketing and New
Business Development for Smith and Nephew Inc., which markets orthopedic and
general wound-care products, and he served in various sales and marketing
positions with Ortho Diagnostic Systems, Inc.  Mr. DeFranco received his M.B.A.
from Fairleigh Dickinson University.

N. SIMON FAITHFULL, M.D., PH.D.  Dr. Faithfull, who is 57, has been Vice
President, Medical Research for the Company since September 1990.  Dr. Faithfull
joined Alliance after serving as Director of Medical Research for Delta
Biotechnology Ltd. from 1989 to 1990.  He has also served as Senior Lecturer in
Anesthesia at the University of Manchester (UK), and has held various academic
appointments and clinical anesthesia positions at Erasmus University
(Netherlands), Tulane University and the University of Alabama (Birmingham) for
more than 15 years.  He has served as Secretary of the International Society on
Oxygen Transport to Tissue.  He received his Ph.D. from Erasmus University,
Rotterdam and his M.D. from London University.

STEPHEN F. FLAIM, PH.D.  Dr. Flaim, who is 49,  was appointed Vice President,
Biological Sciences in May 1996, having joined the Company in 1990 as Division
Director of Pharmacology and Toxicology. Prior to joining Alliance, he was the
Associate Director of Pharmacology at The Bristol-Meyers Squibb Institute for
Medical Research.  Dr. Flaim was also employed for five years at McNeil
Pharmaceutical, an affiliate of Johnson & Johnson, where he directed an
antianginal drug discovery program.  Dr. Flaim was also on the faculty of
Pennsylvania State University College of Medicine for seven years.  He received
his Ph.D. from the University of California at Davis.


                                          10
<PAGE>

HENRY A. GRAHAM, PH.D.  Dr. Graham, who is 54, is Vice President, Quality
Assurance.  Prior to joining Alliance in January 1990, he worked for Johnson &
Johnson for 17 years on a broad range of projects including injectable human
biologicals, immunohematology reagents, immunoassay reagents and instrument
systems.  Dr. Graham was Director of Product Development for Ortho Diagnostic
Systems, Inc. for over five years prior to 1990.  During his tenure at Johnson &
Johnson, he was the recipient of several awards, including the Corporate Medal
for Outstanding Research.  Dr. Graham received his Ph.D. in immunology from
Rutgers University.

RONALD M. HOPKINS, PH.D.  Dr. Hopkins, who is 55, is Vice President, Project
Planning and Development.  Prior to joining Alliance in May 1990, Dr. Hopkins
spent 20 years with Mallinckrodt Medical, Inc.  As Vice President at
Mallinckrodt his responsibilities primarily involved identification and
development of various diagnostic x-ray, magnetic resonance, ultrasound and
radiopharmaceutical imaging agents, as well as angiographic catheters.  In
addition to product and business development experience, Dr. Hopkins has an
extensive background in cardiovascular pharmacology and toxicology research, as
well as sterile pharmaceutical formulation and production.  Dr. Hopkins received
his Ph.D. in pharmacology from the University of Maryland.

JOERG LIMMER, DVM.  Dr. Limmer, who is 56, was appointed Vice President, New
Technology Assessment in September 1996.  Prior to joining Alliance, Dr. Limmer
worked six years for Boehringer Ingelheim Pharma as Regional Director and Vice
President where he was responsible for medical and marketing affairs for 26
Eastern European countries.  For the previous 20 years he was Director of
Clinical Research at Dr. Karl Thomae GmbH, a subsidiary of Boehringer Ingelheim
GmbH in Germany.  His primary focus was in the area of diabetes mellitus, fat
metabolism, atherosclerosis, and intensive care products.  Dr. Limmer received
his DVM from the Freie Universitaet of Berlin, Germany.

GORDON L. SCHOOLEY, PH.D.  Dr. Schooley, who is 50, has been Vice President,
Clinical Research and Regulatory Affairs since January 1989.  Dr. Schooley has
been employed for over 20 years in research and development in the
pharmaceutical industry.  Prior to joining Alliance in 1989, Dr. Schooley was
Vice President of Clinical Research and Regulatory Affairs for Newport
Pharmaceuticals, a company developing antiviral drugs.  For the previous eight
years he was Director of Clinical Research and Biostatistics for Allergan
Pharmaceuticals, a division of SmithKline Beecham, developing ophthalmologic and
dermatologic drugs and devices.  He was also employed by McGaw Laboratories as
Manager of Biostatistics for parenteral products and by The Upjohn Company as a
senior biostatistician for analgesic and CNS drugs.  Dr. Schooley received his
Ph.D. from the University of Michigan School of Public Health.

ITEM 2.  PROPERTIES

FACILITIES

    The Company has principal facilities in two locations: San Diego,
California and Otisville, New York.  In San Diego, California, where the Company
has approximately 100,000 square feet in three leased facilities, the Company
maintains its principal executive offices, performs research and development on
its PFC-based products, and has its emulsion products manufacturing facility.
The third San Diego facility was leased in 1996 and consists of general office
space.  The Otisville site, where the Company has established the LIQUIVENT and
SAT PAD production facility, also includes laboratories and administrative
offices.  The Company is considering additional facilities in San Diego to meet
its projected needs for the next several years.

    The Company purchased the Otisville site from the New York City Public
Development Corporation ("PDC") in June 1983.  In connection with the
acquisition, the Company entered into a land use agreement (the "Land Use
Agreement") with New York City and the PDC.  The Company estimates that the cost
of complying with the Land Use Agreement for fiscal 1997 was approximately
$100,000.  The provisions of the Land Use Agreement are "covenants running with
the land," which may bind the Company and subsequent owners of the Otisville
site for a substantial period of time.

    While the Company believes that it can produce materials for clinical
trials and initial market launch for its emulsion products at its existing San
Diego facility and for LIQUIVENT at its Otisville, New York facility, it may
need to expand its commercial manufacturing capabilities for its products in the
future.  The Company's existing San Diego facility currently produces material
for clinical trials for IMAGENT US.  The Company is in the process of expanding
its market launch production capacity in San Diego for IMAGENT US and is
determining whether to expand within existing or additional


                                          11
<PAGE>

facilities.  Any expansion for any of its products may occur in stages, each of
which would require regulatory approval, and product demand could at times
exceed supply capacity.  The Company has not selected a site or obtained any
regulatory approvals for construction of a commercial production facility for
its products. The Company cannot predict the amount that it will expend for the
construction of such production facility, and there can be no assurance as to
when or whether the FDA will determine that such facility conforms with Good
Manufacturing Practices.  The projected location and construction of any
production facility will depend upon regulatory and development activities and
other factors.  The Ortho License Agreement grants an option to Ortho to elect
to manufacture the emulsion products referred to therein, or to require the
Company to manufacture such products at a negotiated price.  The HMRI License
Agreement requires the Company to manufacture LIQUIVENT at its Otisville
facility for a period of time after market launch and to sell the product to
HMRI at a negotiated price.  HMRI will be responsible for establishing
production capacity beyond the maximum capacity of the Otisville facility.  The
Schering License Agreement requires the Company to manufacture products at its
San Diego facility for a period of time after market launch at a negotiated
price.  Schering will be responsible for establishing production capacity beyond
the maximum capacity of the San Diego facility.

ITEM 3.  LEGAL PROCEEDINGS

    None.

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

    No matters were submitted to a vote of the Company's stockholders during
the last quarter of Alliance's fiscal year ended June 30, 1997.


                                       PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

    The common stock is traded in the over-the-counter market, and prices
therefor are quoted on the NASDAQ National Market System under the symbol ALLP.

    The following table sets forth, for the periods indicated, the high and low
sale prices of the common stock as reported on NASDAQ, without retail mark-up,
markdown or commission.

                                                        High             Low
                                                        ----             ---
Fiscal 1997

Quarter ended September 30, 1996                      $ 18.125       $ 12.25

Quarter ended December 31, 1996                       $ 17.375       $ 10.50

Quarter ended March 31, 1997                          $ 15.75        $ 11.875

Quarter ended June 30, 1997                           $ 12.00        $  5.875


                                          12
<PAGE>

                                                        High             Low
                                                        ----             ---
Fiscal 1996

Quarter ended September 30, 1995                      $ 12.625       $  7.875

Quarter ended December 31, 1995                       $ 14.25        $ 10.50

Quarter ended March 31, 1996                          $ 19.75        $ 12.625

Quarter ended June 30, 1996                           $ 22.875       $ 15.25

    On August 29, 1997, the closing price of the Company's common stock was
$10.188.

    The Company has not paid dividends on its common stock and the Board of
Directors does not anticipate paying cash dividends in the foreseeable future.

    On August 29, 1997, the approximate number of record holders of the
Company's common stock was 1,670.  The Company believes that, in addition, there
are in excess of 14,000 beneficial owners of its common stock whose shares are
held in street name and, consequently, the Company is unable to determine the
actual number of beneficial holders thereof.

ITEM 6.  SELECTED FINANCIAL DATA

    The following information has been summarized from the financial statements
included elsewhere herein and should be read in conjunction with such financial
statements and the related notes thereto (in thousands except per share
amounts):
<TABLE>
<CAPTION>

                                                            Years ended June 30,

                                      1997           1996            1995           1994          1993
Statement of Operations Data:
<S>                                <C>            <C>            <C>            <C>            <C>
  Total revenues                   $  44,580      $  17,323      $  11,816      $     409      $   2,370

  Net loss                         $ (19,016)     $ (23,172)     $ (29,717)     $ (36,946)     $ (26,380)

  Net loss per common share        $    (.63)     $    (.91)     $   (1.35)     $   (1.83)     $   (1.39)

<CAPTION>
                                                                   June 30,

                                      1997           1996            1995           1994          1993
Balance Sheet Data:
<S>                                <C>            <C>            <C>            <C>            <C>
  Working capital                  $  62,217      $  73,244      $  22,346      $  19,446      $  39,745

  Total assets                     $ 112,013      $ 108,343      $  56,030      $  53,132      $  72,537

  Long-term debt and other         $   2,871      $   1,166      $     843      $     348      $     447

  Stockholders' equity             $  91,331      $ 101,467      $  50,077      $  49,825      $  69,144
</TABLE>
 

                                          13
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

(References to years are to the Company's fiscal years ended June 30.)

    Alliance has devoted substantial resources to research and development
related to its medical products.  The Company has been unprofitable since
inception and expects to continue to spend substantial amounts on research and
development, preclinical testing and clinical trials, regulatory activities, and
commercial manufacturing start-up. The Company has entered into collaborative
research and development agreements with companies for OXYGENT, LIQUIVENT,
IMAGENT US, and RODA.  The arrangements with its existing partners for OXYGENT,
LIQUIVENT, AND IMAGENT US require them to reimburse the Company for certain
approved development expenses incurred for the respective products.  All three
partners for such products will make milestone payments to the Company upon the
achievement of certain product development events, followed by royalties on
sales at commercialization.  With respect to RODA, the Company has agreed to
reimburse VIA for substantially all of its development expenses and to share
revenues on the sale of products.  If some of the development events under its
existing agreements are achieved and the relevant payments made by partners, the
Company could become profitable on a periodic basis over the next two years,
prior to the commercialization of products.  However, the timing and amounts of
such payments, if any, cannot be predicted with certainty and may not occur if
product development events are not achieved.  There can be no assurance that the
Company will be able to achieve profitability at all or on a sustained basis.

LIQUIDITY AND CAPITAL RESOURCES

    Through June 1997, the Company financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners.  To date, the Company's revenue from the sale of products
has not been significant.

    In January 1997, the Company entered into a loan and security agreement
with a bank under which the Company received $3.5 million.  Amounts borrowed
under the agreement are secured by certain fixed assets, and pursuant to two
promissory notes are to be repaid over three and four years, respectively.  If
certain financial covenants are not satisfied, the outstanding balance may
become due and payable.  On June 30, 1997, the balance outstanding on these
loans was $3.3 million.  The Company has another loan with an outstanding
balance of $944,000 on June 30, 1997.  The Company has financed substantially
all of its office and research facilities and related leasehold improvements
under operating lease arrangements and loan and security agreements.

    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 thermo-reversible gel, FLOGEL, intended for use as an
anti-adhesion treatment for persons undergoing abdominal or pelvic surgeries.
FLOGEL is applied in a cold, liquid form and becomes a gel at body temperature.
MDV has obtained preliminary human safety data with the product's current
formulation, and has performed preclinical studies on additional formulations.

    The consideration payable in the MDV Merger consists of $15.5 million,
payable in common stock or cash, of which $8 million was paid during fiscal
1997, $2.5 million was paid on August 13, 1997, and $5 million will be paid on
November 13, 1997.  The $8 million payments made in fiscal 1997 and the
$2.5 million payment made in August of 1997 were made through the delivery of
703,093 and 248,879 shares of the Company's common stock, respectively.
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.


                                          14
<PAGE>

    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
scheduled payments described above and related transaction costs.

    Under the Ortho License Agreement, Ortho paid to Alliance in 1995 an
initial fee of $4 million and agreed to make other payments upon the achievement
of certain milestones.  Ortho is responsible for substantially all the remaining
costs of developing and marketing the products and will pay Alliance a royalty
based upon sales of products after commercialization.  In June 1996, the
convertible Series A Preferred Stock and accrued dividends thereon were
converted into 815,625 shares of common stock of the Company.  In June 1996,
Johnson & Johnson Development Corp. also exercised its warrant for 300,000
shares, resulting in proceeds to the Company of $4.5 million.  In December 1996,
Ortho paid to Alliance a $15 million milestone payment pursuant to the Ortho
License Agreement.

    In February 1996, the Company entered into the HMRI License Agreement, 
which provides HMRI with worldwide marketing and manufacturing rights to the 
intratracheal administration of liquids, including LIQUIVENT, which perform 
bronchoalveolar lavage or liquid ventilation.  The product is being developed 
jointly by Alliance and HMRI, with HMRI responsible for most of the costs of 
development and marketing.  In conjunction with the HMRI License Agreement, 
HMRI purchased shares of convertible Series B Preferred Stock and shares of 
convertible Series C Preferred Stock for an aggregate of $22 million.  In 
addition, HMRI paid Alliance an initial license fee of $5 million and agreed 
to pay milestone payments and royalties on product sales. HMRI also received 
a five-year warrant to acquire 300,000 shares of common stock at $20 per 
share. On June 6, 1996, the Series B Preferred Stock and accrued dividends 
thereon were converted into 759,375 shares of common stock of the Company.  
On June 30, 1997, the Series C Preferred Stock was converted into 345,327 
shares of common stock of the Company.  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 have agreed in principle to modify the HMRI License Agreement to (i) 
adjust certain milestone payments and (ii) temporarily revise the method for 
reimbursing the expenses for portions of the development work, in conjunction 
with the temporary interruption of the LIQUIVENT clinical development program 
in April 1997.  The modification is being formalized by an amendment which is 
expected to be executed in the near future. Prior to the modification, the 
HMRI License Agreement required HMRI to reimburse Alliance for approved 
worldwide development expenses incurred by Alliance on a quarterly basis.  
Under the modified agreement, from July 1997 Alliance will conduct and be 
responsible for funding development activities in North America through 
December 1997.  HMRI will reimburse Alliance for approved expenses for such 
activities in the form of payments which will be made upon the occurrence of 
specified events subsequent to December 1997.  HMRI will continue to be 
responsible for conducting and funding any activities outside of North 
America. Beginning in January 1998, HMRI will resume funding for 
substantially all LIQUIVENT development expenses worldwide.  The agreement in 
principle provides for the establishment of a mechanism for HMRI to recoup 
from Alliance certain reimbursed development expenses if HMRI terminates the 
HMRI License Agreement prior to January 1998.

    In September 1997, the Company entered into the Schering License Agreement,
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
IMAGENT US.  The product will be developed jointly by Alliance and Schering.
Under the Schering License Agreement, Schering paid to Alliance an initial
license fee 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,
Schering Berlin Venture Corp., an affiliate of Schering, purchased 500,000
shares of the Company's convertible Series D Preferred Stock for $10 million.

    The Company had net working capital of $62.2 million at June 30, 1997
compared to $73.2 million at June 30, 1996.  The Company's cash, cash
equivalents, and short-term investments increased to $71.6 million at
June 30, 1997 from $71.4 million at June 30, 1996.  The increase resulted
primarily from cash provided by operations of $4.6 million and proceeds under
the January 1997 loan and security agreement of $3.5 million, net of property
additions of $6.8 million and payments for acquired in-process technology of
$1 million.  The Company's operations to date have consumed substantial amounts
of cash, and are expected to continue to do so for the foreseeable future.

    The Company continually reviews its product development activities in an
effort to allocate its resources to those product candidates that the Company
believes have the greatest commercial potential.  Factors considered by the
Company in determining the products to pursue include projected markets and
need, potential for regulatory approval and reimbursement under the existing
healthcare system, status of its proprietary rights, technical feasibility,
expected and


                                          15
<PAGE>

known product attributes, and estimated costs to bring the product to market.
Based on these and other factors, the Company may from time to time reallocate
its resources among its product development activities.  Additions to products
under development or changes in products being pursued can substantially and
rapidly change the Company's funding requirements.

    The Company expects to incur substantial additional expenditures associated
with product development.  The Company will seek additional collaborative
research and development relationships with suitable corporate partners for its
non-licensed products.  There can be no assurance that such relationships, if
any, will successfully reduce the Company's funding requirements.  Additional
equity or debt financing may be required, and there can be no assurance that
funds from these sources will be available on reasonable terms, if at all. If
adequate funds are not available, the Company may be required to delay, scale
back, or eliminate one or more of its product development programs, or obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates, or products that the Company would not otherwise relinquish.

    Alliance anticipates that its current capital resources, expected revenues
from the Ortho License Agreement, HMRI License Agreement, and Schering License
Agreement and investments, will be adequate to satisfy its capital requirements
for at least the next 24 months.  The Company's future capital requirements will
depend on many factors, including, but not limited to, continued scientific
progress in its research and development programs, progress with preclinical
testing and clinical trials, the time and cost involved in obtaining regulatory
approvals, patent costs, competing technological and market developments,
changes in existing collaborative relationships, the ability of the Company to
establish additional collaborative relationships, and the cost of manufacturing
scale-up.

    While the Company believes that it can produce materials for clinical
trials and the initial market launch for its emulsion products at its existing
San Diego facility and for LIQUIVENT at its Otisville, New York facility, it may
need to expand its commercial manufacturing capabilities for its products in the
future.  The Company's existing  San Diego facility currently produces material
for clinical trials for IMAGENT US.  The Company is in the process of expanding
its market launch production capacity in San Diego for IMAGENT US and is
determining whether to expand within existing or additional facilities.  Any
expansion for any of its products may occur in stages, each of which would
require regulatory approval, and product demand could at times exceed supply
capacity.  The Company has not selected a site or obtained any regulatory
approvals for construction of a commercial production facility for its products,
nor can there be any assurance that it will be able to do so.  The Company
cannot predict the amount that it will expend for the construction of such a
production facility, and there can be no assurance as to when or whether the FDA
will determine that such facility complies with Good Manufacturing Practices.
The projected location and construction of a facility will depend on regulatory
approvals, product development, and capital resources, among other things.  The
Ortho License Agreement provides an option for Ortho to elect to manufacture the
emulsion products referred to therein, or to require the Company to manufacture
such products at a negotiated price.  The HMRI License Agreement requires the
Company to manufacture LIQUIVENT at its Otisville facility for a period of time
after market launch and to sell the product to HMRI at a negotiated price.  HMRI
will be responsible for establishing production capacity beyond the maximum
capacity of the Otisville facility.  The Schering License Agreement requires the
Company to manufacture products at its San Diego facility for a period of time
after market launch at a negotiated price.  Schering will be responsible for
establishing production capacity beyond the maximum capacity of the San Diego
facility.

    Except for historical information, the statements made herein and elsewhere
are forward-looking.  The Company wishes to caution readers that these
statements are only predictions and that the Company's business is subject to
significant risks.  The factors discussed herein and other important factors, in
some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 1998, and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.  These risks include the
inability to enter into collaborative relationships to further develop and
commercialize the Company's products; changes in any such relationships, or the
inability of any collaborative partner to adequately commercialize any of the
Company's products; the uncertainties associated with the lengthy regulatory
approval process; obtaining and enforcing patents important to the Company's
business; and possible competition from other products.  Furthermore, even if
the Company's products appear promising at an early stage of development, they
may not reach the market for a number of important reasons.  Such reasons
include, but are not limited to, the possibilities that the potential products
will be found ineffective during clinical trials; failure to receive necessary
regulatory approvals; difficulties in manufacturing on a large


                                          16
<PAGE>

scale; failure to obtain market acceptance; and the inability to commercialize
because of proprietary rights of third parties.  The research, development, and
market introduction of new products will require the application of considerable
technical and financial resources, while revenues generated from such products,
assuming they are developed successfully, may not be realized for several years.
Other material and unpredictable factors which could affect operating results
include, without limitation, the uncertainty of the timing of product approvals
and introductions and of sales growth; the ability to obtain necessary raw
materials at cost-effective prices or at all; the effect of possible technology
and/or other business acquisitions or transactions; and the increasing emphasis
on controlling healthcare costs and potential legislation or regulation of
healthcare pricing.

RESULTS OF OPERATIONS

1997 AS COMPARED WITH 1996
--------------------------

    The Company's license and research revenue was $44.6 million for 1997,
compared to $17.3 million for 1996.  The increase was primarily a result of the
$15 million milestone payment from Ortho under the Ortho License Agreement, and
the $2.5 million milestone payment and increased research revenue from HMRI
under the HMRI License Agreement.  The Company expects research revenue to
continue at comparable levels in 1998 compared to 1997, but expects milestone
payments to diminish.

    Research and development expenses increased by 28% to $43.3 million for
1997, compared to $33.7 million for 1996.  The increase in expenses was
primarily due to a $4.7 million increase in payments to universities and outside
consultants for preclinical and clinical trials and other product development
work, a $2.3 million increase in staffing costs, a $1 million increase in
depreciation expense, a $414,000 increase in rent and lease expense, and a
$369,000 increase in repairs and maintenance expense, as well as other increases
related to the Company's research and development activities.  The expenses for
1996 included a $757,000 charge arising from the acquisition of certain PFC
patents, patent rights, and related documents.

    General and administrative expenses increased by 10% to $7.9 million for
1997, compared to $7.2 million for 1996.  The increase in general and
administrative expenses was primarily due to increased professional fees.

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

    Investment income and other was $4.1 million for 1997, compared to
$1.4 million for 1996.  The increase was primarily a result of higher average
cash balances as a result of the Ortho milestone payment received, the
February 1996 HMRI transaction and the April 1996 stock offering.

1996 AS COMPARED WITH 1995
--------------------------

    The Company's license and research revenue was $17.3 million for 1996,
compared to $11.8 million for 1995.  License revenue included $5 million from
the HMRI License Agreement for 1996, compared to $4 million from the Ortho
License Agreement for 1995.  Research revenue increased from $7.1 million to
$11.9 million in 1996 primarily as a result of amounts received from the HMRI
License Agreement.

    Research and development expenses decreased by 4% to $33.7 million for
1996, compared to $35.3 million for 1995. The decrease in expenses was primarily
the result of a $4 million reduction in purchases of raw materials, and a
$929,000 net reduction in acquired research and development expense.  These
reductions were partially offset by a $2.5 million increase in payments to
universities and outside consultants. The expenses for 1995 included a one-time
$1.7 million charge to research and development expense which arose when the
Company licensed product rights to Ortho.  The expenses for 1996 included a
$757,000 charge arising from the acquisition of certain PFC patents, patent
rights, and related documents in exchange for 50,000 shares of the Company's
common stock and a five-year warrant to purchase up to an additional 100,000
shares of the Company's common stock at $10 per share.

    General and administrative expenses increased by 4% to $7.2 million for
1996, compared to $6.9 million for 1995.  The increase in general and
administrative expenses was primarily due to increased salaries and wages.


                                          17
<PAGE>

    Investment income and other was $1.4 million for 1996, compared to
$1.2 million for 1995.  The increase was primarily a result of higher average
cash balances as a result of the February 1996 HMRI transaction and the
April 1996 stock offering.

    Alliance expects to continue to incur substantial and increasing expenses
associated with its research and development programs.  Operating results may
fluctuate from quarter to quarter as a result of the differences in the timing
of revenues earned and expenses incurred and such fluctuations may be
substantial.  The Company's historical results are not necessarily indicative of
future results.

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.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    None.

                                      PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Information concerning the executive officers of the Company is contained
in Part I of this Annual Report on Form 10-K under the caption "Executive
Officers of the Registrant."  Information concerning the directors of the
Company is incorporated by reference to the section entitled "Election of
Directors" that the Company intends to include in its definitive proxy statement
for Alliance's November 1997 Annual Meeting of Shareholders (the "Proxy
Statement").  Copies of the Proxy Statement will be duly filed with the
commission pursuant to Rule 14a-6(c) promulgated under the Securities Exchange
Act of 1934, as amended, not later than 120 days after the end of the fiscal
year covered by its Annual Report on Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION

    The sections labeled "Executive Compensation" and "Election of Directors"
to appear in the Company's Proxy Statement are incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The section labeled "Ownership of Voting Securities by Certain Beneficial
Owners and Management" to appear in the Company's Proxy Statement is
incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The sections labeled "Election of Directors" and "Executive Compensation"
to appear in the Company's Proxy Statement are incorporated herein by reference.

                                       PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

    (a)  Documents Filed as Part of the Report.


                                          18
<PAGE>

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

         2.   See Page F-2 for the Report of Ernst & Young LLP, Independent
Auditors, being filed herein.

         3.   See Exhibits below for a list of all Exhibits being filed or
incorporated by reference herein.

    (b)  None.

    (c)  Exhibits.

    (3)  (a)  Restated Certificate of Incorporation of the Company, as amended
through August 31, 1994.  (Incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994
(the "1994 10-K").)

         (b)  Certificate of Amendment to the Certificate of Incorporation of
the Company filed on March 25, 1996.  (Incorporated by reference to Exhibit 3 to
Amendment No. 1 of the S-3 Registration Statement of the Company filed on
March 28, 1996 (the "1996 S-3")).

         (c)  Certificate of Amendment of Certificate of Incorporation of
the Company filed on September 22, 1997.

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

    (10) (a)  Lease Agreement, as amended, between the Company and Hartford
Accident and Indemnity Company relating to the Company's San Diego, California
facilities.  (Incorporated by reference to Exhibit 10(x) to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1993.)

         (b)  Loan Modification Agreement between the Company and Theodore
Roth, dated May 24, 1994 - Management contract or compensatory plan or
arrangement required to be filed.  (Incorporated by reference to Exhibit 10(d)
to the 1994 10-K.)

         (c)  Formula Award of Stock Options for Non-employee Members of the
Board of Directors as approved by shareholders of the Company - Management
contract or compensatory plan or arrangement required to be filed.
(Incorporated by reference to Exhibit 10(e) to the 1994 10-K.)

         (d)  License Agreement dated August 16, 1994 among the Company, Ortho
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute.
(Incorporated by reference to Exhibit 10(f) to the 1994 10-K.)(1)

         (e)  Stock and Warrant Purchase Agreement dated August 16, 1994
between the Company and Johnson & Johnson Development Corporation.
(Incorporated by reference to Exhibit 10(g) to the 1994 10-K.)

         (f)  License Agreement dated February 28, 1996 between the Company and
Hoechst Marion Roussel, Inc.  (Incorporated by reference to Exhibit 10 (a) to
the 1996 S-3). (1)

         (g)  Stock and Warrant Purchase Agreement dated February 28, 1996
between the Company and Hoechst Marion Roussel, Inc.  (Incorporated by reference
to Exhibit 10 (b) to the 1996 S-3).

         (h)  Supply and Technology Transfer Agreement dated February 28, 1996
between the Company and Hoechst Marion Roussel, Inc.  (Incorporated by reference
to Exhibit 10 (c) to the 1996 S-3). (1)

         (i)  Agreement and Plan of Merger by and among the Company, MDV
Acquisition Corp. and MDV Technologies, Inc. dated October 8, 1996.
(Incorporated by reference to Exhibit 1 to the Current Report on Form 8-K filed
on November 20, 1996)


                                          19
<PAGE>

    (23.1)    Consent of Ernst & Young LLP, Independent Auditors

    (1)  Certain confidential portions of this exhibit have been deleted
pursuant to an order granted by the Securities and Exchange Commission under the
Securities Exchange Act of 1934.

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:    September 23, 1997            By: \s\ Duane J. Roth
                                           -----------------------------

                                                Duane J. Roth

                                                President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
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            President, Chief Executive      September 23, 1997
----------------------------

Duane J. Roth                Officer and a Director


\s\ Theodore D. Roth         Executive Vice President        September 23, 1997
----------------------------

Theodore D. Roth             and Chief Financial Officer


\s\ Tim T. Hart              Controller and Chief            September 23, 1997
----------------------------

Tim T. Hart                  Accounting Officer


\s\ Pedro Cuatrecasas, M.D.  Director                        September 23, 1997
----------------------------

Pedro Cuatrecasas, M.D.


\s\ Carroll O. Johnson       Director                        September 23, 1997
----------------------------

Carroll O. Johnson


\s\ Stephen M. McGrath       Director                        September 23, 1997
----------------------------


                                          20
<PAGE>

Stephen M. McGrath


\s\ Helen M. Ranney, M.D.    Director                        September 23, 1997
----------------------------

Helen M. Ranney, M.D.


\s\ Donald E. O'Neill        Director                        September 23, 1997
----------------------------

Donald E. O'Neill


\s\ Jean Riess, Ph.D.        Director                        September 23, 1997
----------------------------

Jean Riess, Ph.D.


\s\ Thomas F. Zuck, M.D.     Director                        September 23, 1997
----------------------------

Thomas F. Zuck, M.D.








                                          21





<PAGE>

                    ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

                TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                     Page No.
                                                                     --------

Report of Ernst & Young LLP, Independent Auditors                      F-2

Consolidated Balance Sheets at June 30, 1997 and 1996                  F-3

Consolidated Statements of Operations for the Years
Ended June 30, 1997, 1996 and 1995                                     F-4

Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1997, 1996 and 1995                                     F-5

Consolidated Statements of Cash Flows for the Years
Ended June 30, 1997, 1996 and 1995                                     F-6

Notes to Consolidated Financial Statements                          F-7 - F-14




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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1997.  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.

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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.



                                                 ERNST & YOUNG LLP


San Diego, California
July 24, 1997, except for Note 8,
  as to which the date is September 23, 1997


                                        F -  2
<PAGE>

   ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
   ----------------------------------------------
   CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                                           JUNE 30,
                                                                                     1997             1996
                                                                               ---------------   --------------
   ASSETS
   <S>                                                                         <C>               <C>
   CURRENT ASSETS:

      Cash and cash equivalents                                                $   14,590,000    $   9,480,000
      Short-term investments                                                       57,041,000       61,921,000
      Research revenue receivable                                                   7,250,000        5,750,000
      Other current assets                                                          1,147,000        1,803,000
                                                                               ---------------   --------------
               Total current assets                                                80,028,000       78,954,000

   PROPERTY, PLANT AND EQUIPMENT - NET                                             16,574,000       12,390,000
   PURCHASED TECHNOLOGY - NET                                                      14,400,000       15,966,000
   OTHER ASSETS - NET                                                               1,011,000        1,033,000
                                                                               ---------------   --------------
                                                                               $  112,013,000    $ 108,343,000
                                                                               ---------------   --------------
                                                                               ---------------   --------------

   LIABILITIES AND STOCKHOLDERS' EQUITY

   CURRENT LIABILITIES:
      Accounts payable                                                         $    2,807,000    $   2,189,000
      Accrued expenses                                                              3,439,000        2,801,000
      Deferred revenue                                                              2,500,000                -
      Payable for acquired in-process technology                                    7,557,000                -
      Current portion of long-term debt                                             1,508,000          720,000
                                                                               ---------------   --------------
               Total current liabilities                                           17,811,000        5,710,000

   LONG-TERM DEBT                                                                   2,742,000          945,000
   OTHER                                                                              129,000          221,000

   COMMITMENTS AND CONTINGENCIES

   STOCKHOLDERS' EQUITY:
      Preferred stock - $.01 par value; 5,000,000 shares authorized;
          0 and 200,000 shares of Series C issued and outstanding at
          June 30, 1997 and 1996, respectively                                              -            2,000
      Common stock - $.01 par value; 50,000,000 shares authorized;
          31,164,935 and 30,001,918 shares issued and outstanding at
          June 30, 1997 and 1996, respectively                                        311,000          300,000
      Additional paid-in capital                                                  322,268,000      313,397,000
      Accumulated deficit                                                        (231,248,000)    (212,232,000)
                                                                               ---------------   --------------
               Total stockholders' equity                                          91,331,000      101,467,000
                                                                               ---------------   --------------
                                                                               $  112,013,000    $ 108,343,000
                                                                               ---------------   --------------
                                                                               ---------------   --------------
</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,
                                                    1997             1996              1995
                                               --------------   --------------    --------------
   <S>                                        <C>               <C>               <C>
   REVENUES:
      License and research revenue            $  44,580,000     $  17,323,000     $  11,816,000

   OPERATING EXPENSES:
      Research and development                   43,278,000        33,730,000        35,257,000
      General and administrative                  7,932,000         7,214,000         6,891,000
      Acquired in-process technology             16,450,000                 -                 -
                                               --------------   --------------    --------------
                                                 67,660,000        40,944,000        42,148,000
                                               --------------   --------------    --------------
   LOSS FROM OPERATIONS                         (23,080,000)      (23,621,000)      (30,332,000)


   INVESTMENT INCOME AND OTHER - NET              4,064,000         1,355,000         1,209,000
                                               --------------   --------------    --------------
   NET LOSS                                     (19,016,000)      (22,266,000)      (29,123,000)


   DIVIDENDS ON PREFERRED STOCK                           -          (906,000)         (594,000)
                                               --------------   --------------    --------------
   NET LOSS APPLICABLE TO COMMON SHARES       $ (19,016,000)    $ (23,172,000)    $ (29,717,000)
                                               --------------   --------------    --------------
                                               --------------   --------------    --------------


   NET LOSS PER COMMON SHARE                  $       (0.63)    $       (0.91)    $       (1.35)
                                               --------------   --------------    --------------
                                               --------------   --------------    --------------


   WEIGHTED AVERAGE NUMBER OF
    SHARES OUTSTANDING                           30,302,000        25,504,000        21,959,000
                                               --------------   --------------    --------------
                                               --------------   --------------    --------------
</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
                                                                    ---------------------------  --------------------------
                                                                        SHARES        AMOUNT        SHARES         AMOUNT
                                                                    -------------- ------------  ------------  ------------
<S>                                                                 <C>            <C>           <C>           <C>
BALANCES AT JUNE 30, 1994                                                                         21,372,000    $  214,000
   Sale of convertible Series A Preferred Stock                         1,500,000  $     15,000                            
   Sale of common stock                                                                            3,175,000        32,000 
   Exercise of stock options and warrants                                                             56,000         1,000 
   Installment payment related to acquisition of BioPulmonics, Inc.                                  131,000         1,000 
   Issuance of stock in satisfaction of employer
       matching contribution to 401(k) savings plan                                                   25,000               
   Net unrealized loss on available-for-sale securities                                                                    
   Dividends on preferred stock                                                                                            
   Net loss                                                                                                                
                                                                    -------------- ------------  ------------  ------------
BALANCES AT JUNE 30, 1995                                               1,500,000       15,000    24,759,000       248,000 
   Sale of convertible Series B and Series C Preferred Stock              950,000        9,500                             
   Sale of common stock                                                                            2,865,000        29,000 
   Exercise of stock options and warrants                                                            745,000         7,000 
   Conversion of convertible Series A Preferred
       Stock to common shares                                          (1,500,000)     (15,000)      750,000         7,500 
   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 
   Payment related to acquisition of technology rights                                                50,000               
   Issuance of stock in satisfaction of employer
       matching contribution to 401(k) savings plan                                                    8,000               
   Net unrealized gain on available-for-sale securities                                                                    
   Dividends on preferred stock                                                                                            
   Net loss                                                                                                                
                                                                    -------------- ------------  ------------  ------------
BALANCES AT JUNE 30, 1996                                                 200,000        2,000    30,002,000       300,000 
   Exercise of stock options and warrants                                                            105,000         1,000 
   Conversion of convertible Series C Preferred
       Stock to common shares                                            (200,000)      (2,000)      345,000         3,000 
   Payment related to acquired in-process technology                                                 703,000         7,000 
   Issuance of stock in satisfaction of employer
       matching contribution to 401(k) savings plan                                                   10,000               
   Net unrealized gain on available-for-sale securities                                                                    
   Net loss                                                                                                                
                                                                    -------------- ------------  ------------  ------------
BALANCES AT JUNE 30, 1997                                                       -   $        -    31,165,000    $  311,000 
                                                                    -------------- ------------  ------------  ------------
                                                                    -------------- ------------  ------------  ------------


                                                                            ADDITIONAL
                                                                             PAID-IN          ACCUMULATED
                                                                             CAPITAL            DEFICIT
                                                                       ------------------ ------------------
<S>                                                                    <C>                <C>
BALANCES AT JUNE 30, 1994                                               $    208,954,000   $   (159,343,000)
   Sale of convertible Series A Preferred Stock                               14,618,000                 
   Sale of common stock                                                       14,262,000                 
   Exercise of stock options and warrants                                         36,000                 
   Installment payment related to acquisition of BioPulmonics, Inc.              999,000                 
   Issuance of stock in satisfaction of employer                                                         
       matching contribution to 401(k) savings plan                              150,000                 
   Net unrealized loss on available-for-sale securities                         (145,000)                
   Dividends on preferred stock                                                                    (594,000)
   Net loss                                                                                     (29,123,000)
                                                                       ------------------ ------------------
BALANCES AT JUNE 30, 1995                                                    238,874,000       (189,060,000)
   Sale of convertible Series B and Series C Preferred Stock                  21,530,000                 
   Sale of common stock                                                       43,925,000                 
   Exercise of stock options and warrants                                      6,548,000                 
   Conversion of convertible Series A Preferred                                                          
       Stock to common shares                                                      8,000                 
   Conversion of convertible Series B Preferred                                                          
       Stock to common shares                                                                            
   Conversion of convertible preferred                                                                   
       stock dividend to common shares                                         1,499,000                 
   Payment related to acquisition of technology rights                           757,000                 
   Issuance of stock in satisfaction of employer                                                         
       matching contribution to 401(k) savings plan                              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                                                    313,397,000       (212,232,000)
   Exercise of stock options and warrants                                        654,000                 
   Conversion of convertible Series C Preferred                                                          
       Stock to common shares                                                     (1,000)                
   Payment related to acquired in-process technology                           7,840,000                 
   Issuance of stock in satisfaction of employer                                                         
       matching contribution to 401(k) savings plan                              133,000                 
   Net unrealized gain on available-for-sale securities                          245,000                 
   Net loss                                                                                     (19,016,000)
                                                                       ------------------ ------------------
BALANCES AT JUNE 30, 1997                                               $    322,268,000   $   (231,248,000)
                                                                       ------------------ ------------------
                                                                       ------------------ ------------------
</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,
                                                                       1997                 1996                1995
                                                                 ----------------     ---------------     ---------------
<S>                                                             <C>                  <C>                 <C>
OPERATING ACTIVITIES:
   Net loss                                                     $   (19,016,000)     $  (22,266,000)     $  (29,123,000)
   Adjustments to reconcile net loss to net cash
     provided by (used in) operations:
        Depreciation and amortization                                 3,997,000           3,086,000           2,859,000
        Charge for acquired in-process technology                    16,450,000             757,000           1,686,000
        Non-cash compensation - net                                     133,000             277,000             150,000
        Changes in operating assets and liabilities:
          Research revenue receivable                                (1,500,000)         (3,690,000)         (2,060,000)
          Other assets                                                  888,000             219,000            (668,000)
          Accounts payable and accrued
             expenses and other                                       1,162,000            (263,000)          1,459,000
          Deferred revenue                                            2,500,000                   -                   -
                                                                 ----------------     ---------------     ---------------
Net cash provided by (used in) operating activities                   4,614,000         (21,880,000)        (25,697,000)
                                                                 ----------------     ---------------     ---------------

INVESTING ACTIVITIES:
   Short-term investments                                             5,183,000         (50,815,000)          8,045,000
   Property, plant and equipment                                     (6,823,000)         (4,010,000)         (1,288,000)
   Payment for acquired in-process technology                        (1,046,000)                  -                   -
                                                                 ----------------     ---------------     ---------------
Net cash provided by (used in) investing activities                  (2,686,000)        (54,825,000)          6,757,000
                                                                 ----------------     ---------------     ---------------

FINANCING ACTIVITIES:
   Issuance of common stock
     and warrants                                                       597,000          50,461,000          14,924,000
   Issuance of convertible preferred stock                                    -          21,540,000          14,633,000
   Proceeds from long-term debt                                       3,493,000           2,208,000                   -
   Principal payments on long-term debt                                (908,000)           (543,000)                  -
                                                                 ----------------     ---------------     ---------------
Net cash provided by financing activities                             3,182,000          73,666,000          29,557,000
                                                                 ----------------     ---------------     ---------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      5,110,000          (3,039,000)         10,617,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                        9,480,000          12,519,000           1,902,000
                                                                 ----------------     ---------------     ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                        $    14,590,000      $    9,480,000      $   12,519,000
                                                                 ----------------     ---------------     ---------------
                                                                 ----------------     ---------------     ---------------

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                               $     7,847,000
Issuance of common stock and warrants in connection with
   acquisition of patent rights and related documents                                $      757,000
Issuance of common stock for BioPulmonics, Inc.
   installment payment                                                                                   $    1,000,000
Preferred stock dividends                                                            $      906,000      $      594,000
</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.

PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of Alliance
Pharmaceutical Corp., its wholly owned subsidiary Astral, Inc., its recently
acquired 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 Avances ("ATTA").  ATTA was
dissolved in 1997.  All significant intercompany accounts and transactions have
been eliminated.  Certain amounts in 1996 and 1995 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.  Accumulated amortization
for this PFC technology was $9.7 million and $8.5 million at June 30, 1997 and
1996, respectively.  The technology acquired from BioPulmonics is being
amortized over five to seven years and accumulated amortization was $1.2 million
and $843,000 at June 30, 1997 and 1996, 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 thermo-reversible gel, FLOGEL-Registered Trademark-, intended
for use as an anti-adhesion treatment for persons undergoing abdominal or pelvic
surgeries.  FLOGEL is applied in a cold, liquid form and becomes a gel at body
temperature.  MDV has obtained preliminary human safety data with the product's
current formulation, and has performed preclinical studies on additional
formulations.

    The consideration payable in the MDV Merger consists of $15.5 million, of
which $8 million was paid during fiscal 1997, $2.5 million was paid on
August 13, 1997, and $5 million which will be paid on November 13, 1997.  The
$8 million payments made in fiscal 1997 and the $2.5 million payment made in
August of 1997 were made through the delivery of 703,093 and 248,879 shares of
the Company's common stock, respectively.  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
scheduled 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%.  Amounts
borrowed under the agreement are secured by certain fixed assets, and are being
repaid over three years.  If certain financial covenants are not satisfied, the
note may become due and payable.  On June 30, 1997, the balance outstanding on
this loan was $944,000.

    The Company entered into a loan and security agreement with a bank in
January 1997 under which the Company received $3.5 million at the bank's prime
rate plus 1.5% (10% at June 30, 1997).  Amounts borrowed under the agreement are
secured by certain fixed assets, and pursuant to two promissory notes are to be
repaid over three and four years, respectively.  If certain financial covenants
are not satisfied, the outstanding balance may become due and payable.  On
June 30, 1997, the balance outstanding on these loans was $3.3 million.

    The Company's principal payments for the long-term debt for the years
ending June 30, 1998, 1999, 2000 and 2001 are $1.5 million, $1.2 million,
$1 million and $520,000, respectively.

DEFERRED REVENUE

    In fiscal 1997, the Company sold clinical trial supplies which had no
carrying value for $2.5 million to a collaborator.  The Company may be required
to repurchase any unused supplies upon the occurrence of certain events, and has
recorded the $2.5 million as deferred revenue.  Such amounts will be recognized
as income as the supplies are used or upon the expiration of any repurchase
obligation.


                                        F -  8
<PAGE>

REVENUE RECOGNITION

    Revenue under collaborative license and 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.

RESEARCH AND DEVELOPMENT EXPENSES

    Research and development expenditures are charged to expense as incurred.

NET LOSS PER COMMON SHARE

    Net loss per common share is based on the weighted average number of shares
outstanding during the respective years and does not include common stock
equivalents since their effect on the net loss per share would be anti-dilutive.

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 implicit 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.

NEW ACCOUNTING STANDARDS

    In February 1997, the Financial Accounting Standards Board issued Statement
of 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.  SFAS No. 128 is effective for periods ending
after December 15, 1997.  The Company does not expect SFAS No. 128 to have a
material impact on its calculations of earnings per share.

2.  FINANCIAL STATEMENT DETAILS

PROPERTY, PLANT AND EQUIPMENT - NET

    Property, plant and equipment consist of the following:


                                                             June 30,
                                                        1997           1996
                                                   -------------- -------------
  Land                                             $    225,000   $    225,000
  Buildings                                             300,000        300,000
  Building improvements                               4,286,000      1,574,000
  Furniture, fixtures, and equipment                 15,446,000     11,981,000
  Leasehold improvements                              6,773,000      6,126,000
                                                   -------------- -------------
                                                     27,030,000     20,206,000
  Less accumulated depreciation and amortization    (10,456,000)    (7,816,000)
                                                   -------------- -------------
                                                   $ 16,574,000   $ 12,390,000
                                                   -------------- -------------
                                                   -------------- -------------

ACCRUED EXPENSES

  Accrued expenses consist of the following:

                                                             June 30,
                                                        1997           1996
                                                   -------------- -------------
  Payroll and related expenses                     $  2,569,000   $  2,173,000
  Rent and related operating expenses                   206,000        354,000
  Other                                                 664,000        274,000
                                                   -------------- -------------
                                                   $  3,439,000   $  2,801,000
                                                   -------------- -------------
                                                   -------------- -------------


                                        F -  9
<PAGE>

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, 1997                                     June 30, 1996

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

                                             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              $  32,700,000        $  242,000    $  32,942,000     $  60,924,000    $  (3,000)    $  60,921,000
Corporate Securities         24,099,000                --       24,099,000         5,364,000           --         5,364,000
                           --------------------------------------------------  ---------------------------------------------
                          $  56,799,000        $  242,000    $  57,041,000     $  66,288,000    $  (3,000)    $  66,285,000
                           --------------------------------------------------  ---------------------------------------------
                           --------------------------------------------------  ---------------------------------------------
</TABLE>

    The gross realized gains (losses) on sales of available-for-sale securities
totaled $65,000 and $(13,000), in 1997 and 1996, respectively.  The gross
unrealized gains (losses) of $242,000 and $(3,000), in 1997 and 1996,
respectively (which reflect a net unrealized gain of $245,000 in 1997), are
recorded as components of additional paid-in capital.  The unrealized gains
(losses) 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, 1997 and 1996, 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, 1997                June 30, 1996
                                          ----------------------------  ----------------------------
                                                           Estimated                     Estimated
                                               Cost        Fair Value       Cost        Fair Value
                                          -------------  -------------  -------------  -------------
   <S>                                    <C>            <C>            <C>            <C>
   Due in one year or less                $ 34,517,000   $ 34,759,000   $ 65,788,000   $ 65,785,000
   Due in one year through three years      22,282,000     22,282,000        500,000        500,000
                                          -------------  -------------  -------------  -------------
                                          $ 56,799,000   $ 57,041,000   $ 66,288,000   $ 66,285,000
                                          -------------  -------------  -------------  -------------
                                          -------------  -------------  -------------  -------------
</TABLE>

    As of June 30, 1997 and 1996, $0 and $4.4 million, respectively, of
available-for-sale securities were classified as cash equivalents.

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 4,700,000 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 Stock Option Committee of the Board of Directors.
The 1983 Plan has expired and no additional options may be granted under such
plan.  In September 1997, the Board of Directors approved an amendment to the
1991 Plan, subject to stockholder approval, to increase the number of shares
authorized for issuance under the 1991 Plan from 4,700,000 to 6,200,000 shares.


                                       F -  10
<PAGE>

    The following table summarizes stock option activity through June 30, 1997:

                                                                    Weighted
                                                      Shares      Average Price
                                                   -----------------------------
   Balance at June 30, 1994                          2,248,572     $  10.42
       Granted                                         967,050     $   5.50
       Exercised                                       (56,103)    $   3.98
       Terminated/Expired                             (115,531)    $  11.14
                                                   --------------
   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
                                                   --------------
                                                   --------------
   Available for future grant under the 1983
       Program                                          26,485
                                                   --------------
                                                   --------------

   Available for future grant under the 1991
       Plan, as amended, subject to stockholder
       approval                                      2,837,160
                                                   --------------
                                                   --------------

    The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 1997:


<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>
             $.01              145,418          $.01       1.4 years        145,418         $.01
     $  5.25  -   7.00         974,745         $5.39       6.3 years        676,570        $5.39
     $  7.25  -  10.63         803,825         $8.93       5.5 years        557,915        $8.94
     $ 10.75  -  14.00       1,234,330        $12.94       8.7 years        203,760       $12.49
     $ 14.50  -  20.88         451,786        $15.90       6.8 years        225,496       $16.02
     $ 21.13  -  28.00         188,500        $26.01       4.7 years        188,500       $26.01
                            --------------                               ---------------
                             3,798,604        $10.66       6.7 years      1,997,659        $9.86
                            --------------                               ---------------
                            --------------                               ---------------
</TABLE>

    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 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:


                                       F -  11
<PAGE>

                                                     June 30,
                                              1997              1996
                                         ---------------  ---------------
    Net loss
       As reported                      $  (19,016,000)   $  (23,172,000)
       Pro forma                           (21,453,000)      (23,958,000)

    Net loss per share
       As reported                             $  (.63)          $  (.91)
       Pro forma                                  (.71)             (.94)

     The impact of outstanding non-vested stock options granted prior to 1996
has been excluded from the pro forma calculations; accordingly, the 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 both 1997 and 1996:
risk-free interest rate range of 5.25% to 6.5%; dividend yield of 0%; volatility
factor of 63%; and a weighted-average expected term of 4 years.  The estimated
weighted average fair value at grant date for the options granted during 1997
and 1996 was $6.90 and $7.02 per option, respectively.

WARRANTS

     In July 1995, the Company issued a warrant to purchase 100,000 shares of
the Company's common stock through June 2000 at $10 per share.  The warrant and
50,000 shares of common stock were issued in exchange for certain PFC patents,
patent rights, and related documents which resulted in a $757,000 charge in
fiscal 1996.  In March 1996, the Company issued a warrant to purchase 300,000
shares of common stock through February 2001 at an exercise price of $20 per
share.  The warrant was issued in conjunction with the license agreement and
sale of convertible preferred stock discussed in Note 5.  At June 30, 1997, the
Company had warrants outstanding to purchase 576,414 shares of common stock at
prices ranging from $6.95 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).

     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 provides 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.  Ortho is 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 under the Ortho License Agreement.  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


                                       F -  12
<PAGE>

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 February 1996, the Company entered into a license agreement (the 
"HMRI License Agreement") with HMRI, which provides HMRI with worldwide 
exclusive marketing and manufacturing rights to the intratracheal 
administration of liquids, including LIQUIVENT, which perform bronchoalveolar 
lavage or liquid ventilation.  The product is being developed jointly by 
Alliance and HMRI, with HMRI responsible for most of the costs of development 
and marketing.  In conjunction with the HMRI License Agreement, 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 addition, HMRI paid Alliance an initial license 
fee of $5 million and agreed to pay milestone payments and royalties on 
product sales. HMRI also received a five-year warrant to acquire 300,000 
shares of common stock at $20 per share. On June 6, 1996, the Series B 
Preferred Stock and accrued dividends thereon were converted into 759,375 
shares of the Company's common stock.  On June 30, 1997, the Series C 
Preferred Stock converted into 345,327 shares of common stock of the Company. 
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.  In June 1997, 
the Company also announced that the parties have agreed in principle to 
modify the HMRI License Agreement to (i) adjust certain milestone payments 
and (ii) temporarily revise the method for reimbursing the expenses for 
portions of the development work, in conjunction with the temporary 
interruption of the LIQUIVENT clinical development program in April 1997.  
The modification is being formalized by an amendment which is expected to be 
executed in the near future. Prior to the modification, the HMRI License 
Agreement required HMRI to reimburse Alliance for approved worldwide 
development expenses incurred by Alliance on a quarterly basis.  Under the 
modified agreement, from July 1997, Alliance will conduct and be responsible 
for funding development activities in North America through December 1997.  
HMRI will reimburse Alliance for approved expenses for such activities in the 
form of payments which will be made upon the occurrence of specified events 
subsequent to December 1997.  HMRI will continue to be responsible for 
conducting and funding any activities outside of North America. Beginning in 
January 1998, HMRI will resume funding for substantially all LIQUIVENT 
development expenses worldwide.  The agreement in principle also provides for 
the establishment of a mechanism for HMRI to recoup from Alliance certain 
reimbursed development expenses if HMRI terminates the HMRI License Agreement 
prior to January 1998.

6.  INCOME TAXES

     Significant components of the Company's deferred tax assets as of
June 30, 1997 are shown below.  A valuation allowance of $87,091,000, of which
$6,124,000 is related to 1997, has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.

     Deferred tax assets consist of the following:

                                                             June 30,
                                                       1997            1996
                                                   -------------  --------------
       Net operating loss carryforwards            $ 69,360,000   $ 64,706,000
       Research and development credits               8,220,000      8,176,000
       Capitalized research expense                   7,286,000      6,040,000
       Other - net                                    2,225,000      2,045,000
                                                   -------------  --------------
       Total deferred tax assets                     87,091,000     80,967,000
       Valuation allowance for deferred tax assets  (87,091,000)   (80,967,000)
                                                   -------------  --------------
       Net deferred tax assets                     $         --   $         --
                                                   -------------  --------------
                                                   -------------  --------------

    Approximately $3,327,000 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, 1997, the Company had federal and various state net operating
loss carryforwards of approximately $187,474,000 and $62,406,000, 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 and other state tax loss carryforwards will begin
expiring in fiscal 1998 unless previously utilized.  The California tax loss
carryforward began expiring in fiscal 1995.  The Company also has federal and
state research and development tax credit carryforwards of $6,594,000 and
$2,501,000, respectively, which will begin expiring in fiscal 1998 unless
previously utilized.


                                       F -  13
<PAGE>

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

7.  COMMITMENTS AND CONTINGENCIES

    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, 1997 are as follows:

        Years ending June 30,
        ---------------------

         1998                                           $   2,667,000
         1999                                               2,743,000
         2000                                               1,749,000
         2001                                               1,571,000
         2002                                               1,616,000
         Thereafter                                         1,303,000
                                                        -------------
         Total                                          $  11,649,000
                                                        -------------
                                                        -------------

    Rent expense for fiscal 1997, 1996, and 1995 was $2.6 million,
$2.1 million, and $2 million, respectively.

8.  SUBSEQUENT EVENT

    In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering AG, Germany ("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
IMAGENT-Registered Trademark-US.  The product will be developed jointly by
Alliance and Schering.  Under the Schering License Agreement, Schering paid to
Alliance an initial license fee 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, Schering Berlin Venture Corp., an affiliate of Schering, purchased
500,000 shares of the Company's convertible Series D Preferred Stock for $10
million.



                                         F -  14
<PAGE>

                                    EXHIBIT INDEX

    Certain exhibits to this Report on Form 10-K have been incorporated by
reference.  For a list of exhibits, see Item 14 hereof.

    The following exhibits are being filed herewith:


                                                                    Sequential

                                                                       Page

                                                                     Numbering

Number                        Document                                System
------      ----------------------------------------------        --------------
3(c)        Certificate of Amendment of Certificate of
            Incorporation of the Company filed September
            22, 1997



(23.1)      Consent of Ernst & Young LLP, Independent Auditors