<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, 1998
                          ------------------------------------------------------
                                      OR
/ /       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

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

                      Commission file number    0-12950

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


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

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

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

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

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

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

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

                        common stock, par value $0.01.
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                               (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 on September 4, 1998, was $83 million.

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

                     DOCUMENTS INCORPORATED BY REFERENCE

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


                          [COVER PAGE 2 OF 2 PAGES]
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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 COMPANY'S RECENT
REGISTRATION STATEMENT ON FORM S-3 (REGISTRATION NUMBER 333-15905).

ITEM 1.  BUSINESS

     Alliance Pharmaceutical Corp. (the "Company" or "Alliance") is a 
pharmaceutical research and development company that focuses on developing 
scientific discoveries into 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 is in, or is preparing to enter, 
pivotal clinical trials for these products.  The 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); LIQUIVENT-Registered Trademark-, an intrapulmonary agent for use 
in reducing a patient's exposure to the harmful effects of conventional 
mechanical ventilation; and IMAGENT-Registered Trademark-, an intravenous 
contrast agent for enhancement of ultrasound images to assess cardiac 
function, organ lesions and to detect blood flow abnormalities, 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 
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 are currently in late-stage clinical 
development.  These are  OXYGENT, LIQUIVENT, and IMAGENT, which 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.  The 
Company also has two additional products in clinical development, RODA-TM-,  
a device intended to measure the cardiovascular and oxygenation status of 
patients, and FloGel-Registered Trademark-, a thermoreversible agent for 
reduction of surgical adhesions.

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 
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


<PAGE>

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 should delay or reduce 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 large multicenter Phase II clinical studies of 
OXYGENT were completed in general surgery patients in the United States and 
Europe.  In fiscal 1998, three additional Phase II studies were completed in 
which OXYGENT was administered to cardiac surgery patients undergoing 
cardiopulmonary bypass procedures.  Phase III clinical trials in general 
surgery patients are expected to begin before the end of calendar 1998.

     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 provided Ortho with certain development and worldwide 
marketing rights to the Company's injectable PFC emulsions capable of 
transporting oxygen for therapeutic use, including OXYGENT. In May 1998, 
because of disagreements as to the scope and timing of further clinical 
development, including whether to proceed with Phase III trials at that time 
and for which indications, Ortho and Alliance restructured their agreement.  
Under the restructured agreement, Alliance assumed responsibility for 
worldwide development of OXYGENT at its own cost, and Ortho has a limited 
right of first offer to enter into a development or marketing or license 
agreement for OXYGENT, which right may be repurchased by Alliance for $2 
million under certain circumstances.

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 800,000 patients in the United 
States are placed on mechanical gas ventilators 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 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. The 
U.S. Food and Drug Administration ("FDA") has granted Subpart E status 
(expedited review) for the product.

     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 of data from the clinical trial.  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


                                       2
<PAGE>

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.  In 
December 1997, the Company started a small Phase II adult clinical trial 
intended to validate the protocol for a subsequent pivotal trial with adult 
patients.  That trial has been completed and the Company intends to initiate 
a Phase II/III clinical study in adult patients before the end of calendar 
1998.

     In February 1996, the Company entered into a license agreement (the 
"HMRI License Agreement") with Hoechst Marion Roussel, Inc. ("HMRI"), which 
provided HMRI with worldwide marketing and manufacturing rights to the 
intratracheal administration of liquids, including LIQUIVENT, which perform 
bronchoalveolar lavage or liquid ventilation.  The product was being 
developed jointly by Alliance and HMRI.  In June 1997, Alliance announced 
that the parties agreed in principle to adjust certain milestone payments, to 
temporarily revise the method for reimbursing expenses of the development 
work and terms to repurchase clinical supplies sold, in conjunction with the 
April 1997 temporary interruption of the clinical development program.  In 
December 1997, HMRI terminated the HMRI License Agreement and Alliance 
regained all rights to the product.  In connection with the termination the 
Company may acquire approximately $2.3 million of inventory from HMRI.  HMRI 
has also asserted a claim for an amount up to $7.5 million payable in 2002 in 
cash or common stock, at the Company's election.  The Company does not 
believe the claim is meritorious and intends to contest such claim; however, 
no assurances can be given that the Company will prevail on the claim.

IMAGENT.  IMAGENT is an intravenous contrast agent for enhancement of 
ultrasound images to assess cardiac function and organ lesions, 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 is being developed to meet these requirements. 

     IMAGENT 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 is reconstituted with 
water 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 early clinical trials with 
IMAGENT, gray-scale contrast enhancement of cardiac, abdominal, and vascular 
structures has been observed with no serious adverse events.

     In March 1998, the Company initiated two Phase III clinical trials to 
assess cardiac function.  The multicenter trials are designed to demonstrate 
the use of IMAGENT to aid in the evaluation of cardiac function as assessed 
by both ejection fraction and endocardial border definition.  A Phase II 
myocardial perfusion feasibility study is also underway for assessment of 
blood flow defects in the muscle of the heart.  In July 1998, two Phase II 
prostate and breast feasibility studies were initiated.  Enrollment in a 
Phase II clinical trial was completed in 1997 in adults undergoing diagnostic 
procedures for evaluation of space-occupying lesions of the liver and kidney 
and vascular flow abnormalities. 

     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.  The product is being developed jointly by Alliance and Schering.

RODA.  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 provide on-line measurements of the cardiovascular 
and oxygenation status of surgical patients by minimally invasive means. The 
device 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 monitor and other VIA 
technology.  The Company has conducted pilot clinical studies in the U.S. and 
Europe to assess its oxygen dynamics software. VIA is currently developing an 
engineering prototype of the final device to use for clinical testing and 
regulatory submissions.  In August 1998, Alliance and VIA entered into a 
manufacturing, marketing and distribution agreement (the "VIA Marketing 
Agreement") whereby VIA will be responsible for manufacturing and marketing 
RODA, and the parties will share revenues from the sale of products. 

                                       3
<PAGE>

OTHER PRODUCTS

PULMOSPHERES-TM-.  PULMOSPHERES are hollow, porous spheres (in powder form) 
suspended in perflubron or fluorochemical propellants for the purpose of 
pulmonary drug delivery.  Drugs can be stabilized within the wall structure 
of these respirable particles, which are typically 1-3 microns in diameter. 
Laboratory and preclinical testing indicates that PULMOSPHERE formulations 
may provide advantages over current formulation technologies with regard to 
particle suspension stability and flow aerodynamics, which could enhance the 
efficiency of pulmonary drug delivery.

     Over the past year, different types of drugs have been successfully 
formulated in PULMOSPHERES for feasibility testing purposes.  Drugs such as 
bronchodilators and steriodal anti-inflammatory agents could potentially be 
formulated in PULMOSPHERES and delivered to the lung by way of standard 
metered-dose inhaler (MDI) devices for the topical treatment of asthma. 
Alternatively, proteins or peptides intended for systemic distribution and 
treatment of other chronic diseases might be incorporated into PULMOSPHERES 
and be delivered by other commonly used devices such as nebulizers or dry 
powder inhalers, which tend to propel small particles deeper into the lung 
for improved systemic uptake.

     The current business strategy for PULMOSPHERES involves Alliance 
formulating the drugs and subsequently manufacturing bulk powders for 
pharmaceutical company partners.  The partners would be responsible for 
filling the powders in delivery device(s), conducting preclinical and 
clinical trials, and marketing the resultant products.

FLOGEL-Registered Trademark-.   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.  The Company is developing a 
thermo-reversible gel, FLOGEL, intended for use as an anti-adhesion treatment 
for patients 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 a previous formulation 
for the product have been obtained and, during the past year, preclinical 
studies have been performed on additional formulations.  The Company has 
selected a formulation for a pilot clinical trial which is expected to 
commence in the near future.  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.

     In addition to PULMOSPHERES, Alliance is investigating the use of other 
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 $100,000 for fiscal 1998.  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. 


                                       4
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     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 1998, 1997, and 1996, 
the Company incurred research and development expenses of $50.1 million, 
$43.3 million, and $33.7 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.  This product is being developed jointly by 
Alliance and Schering.  Under the Schering License Agreement, Schering paid 
to Alliance an initial license fee of $4 million and agreed to pay further 
milestone payments and royalties on product sales.  Schering also agreed to 
provide funding to Alliance for some of its development expenses.  In 
conjunction with the Schering License Agreement, Schering Berlin Venture 
Corp. ("SBVC"), 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 provided HMRI with worldwide exclusive 
marketing and manufacturing rights to the intratracheal administration of 
liquids, including LIQUIVENT, which perform bronchoalveolar lavage or liquid 
ventilation. This product was being developed jointly by Alliance and HMRI, 
with HMRI responsible for most of the costs of development and marketing.  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 had agreed in principle to modify the 
HMRI License Agreement to (i) adjust certain milestone payments, (ii) 
temporarily revise the method for reimbursing the expenses for portions of 
the development work, and (iii) provide for the Company to repurchase any 
unused clinical trial supplies if the license agreement is terminated before 
January 1, 1998, in conjunction with the temporary interruption of the 
LIQUIVENT clinical development program in April 1997.  In December 1997, HMRI 
terminated the HMRI License Agreement and Alliance regained all rights to the 
product.  In connection with the termination the Company may acquire 
approximately $2.3 million of inventory from HMRI.  HMRI has also asserted a 
claim for an amount up to $7.5 million payable in 2002 in cash or common 
stock, at the Company's election.  The Company does not believe the claim is 
meritorious and intends to contest such claim, however, no assurances can be 
given that the Company will prevail on the claim.

ORTHO BIOTECH, INC.  In August 1994, the Company entered into the Ortho 
License Agreement which provided Ortho with worldwide exclusive marketing and 
manufacturing rights to injectable PFC emulsions capable of transporting 
oxygen for therapeutic use, including OXYGENT.  The product was being 
developed jointly by Alliance and Ortho, with Ortho responsible for 
substantially all of the costs of developing and marketing the product.  In 
May 1998, because of disagreements as to the scope and timing of further 
clinical development, including whether to proceed with Phase III trials at 
that time and for which indications, Ortho and Alliance restructured their 
agreement.  Under the restructured agreement, Alliance assumed responsibility 
for worldwide development of OXYGENT at its own cost, and Ortho has a limited 
right of first offer to enter into a development or marketing or license 
agreement for OXYGENT, which right may be repurchased by Alliance for $2 
million under certain circumstances.

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 the 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 monitor 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.  In August 1998, Alliance and 
VIA entered the VIA Marketing Agreement whereby VIA will be responsible for 
manufacturing and marketing RODA, and the parties will share revenues on the 
sale of products. 

     The Company intends to obtain new collaborative relationships for 
OXYGENT and LIQUIVENT, and to also obtain collaborative relationships for its 
other products.  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. 


                                       5
<PAGE>

MARKETING

     The Company does not have internal marketing and sales capabilities.  
The Company's strategy is for its collaborative partners to market and sell 
any products which it successfully develops for the market.  The Company's 
only commercialized product, SAT PAD, is currently distributed through 
certain distributors of MR imaging equipment and supplies.  Currently, 
Schering will be solely responsible for all activities related to marketing 
and sales of IMAGENT. Under the terms of the restructured Ortho agreement, 
Ortho has a limited right of first offer to enter into a marketing agreement 
for OXYGENT.  The Company intends to obtain appropriate marketing 
relationships for its other products. To the extent that the Company enters 
into co-promotion or other licensing arrangements, any revenues received by 
the Company will be dependent on the efforts of third parties, and there can 
be no assurance that any such efforts will be successful.  Further, there can 
be no assurance that the Company will be able to enter into future marketing 
relationships on acceptable terms.  The termination of any marketing 
relationships may limit the ability of the Company to market its products and 
may have a material adverse effect on the Company's business. 

     Should the Company have to market and sell its products directly, the 
Company would need to develop a marketing and sales force with technical 
expertise and distribution capability.  The creation of infrastructure to 
commercialize pharmaceutical products is an expensive and time-consuming 
process.  There can be no assurance that the Company would be able to 
establish marketing and sales capabilities or be successful in gaining market 
acceptance for its products.

MANUFACTURING

     The Company manufactures all of its products for preclinical testing and 
clinical trials.  OXYGENT is produced at one of Alliance's San Diego 
facilities, 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 
facility may be required in the future. 

     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 Company 
believes the Otisville facility has sufficient capacity for market launch of 
LIQUIVENT, if and when it is approved by the FDA.  However, a larger facility 
may be required in the future.

     IMAGENT is manufactured for clinical studies at one of the San Diego 
facilities, 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.  Alliance is in the process of expanding its market launch 
production capacity in San Diego for IMAGENT.  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.

     Expansion for any of the Company's 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 for such 
expanded facilities and cannot predict the amount it will expend for the 
construction of such facilities.  There can be no assurance as to when or 
whether the FDA will determine that such facilities comply with Good 
Manufacturing Practices.  The projected location and construction of a 
facility will depend on regulatory approvals, product development, and 
capital resources, among other factors.  The Company has not obtained any 
regulatory approvals for its production facilities for these products nor can 
there be any assurance that it will be able to do so.

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. The Company is currently negotiating with a potential supplier to 
secure a long-term supply of perflubron.  The Company also believes it has a 
sufficient supply of the principal raw material for IMAGENT for clinical 
trials and is in the process of negotiating with a potential supplier to 
secure long-term supply of that material.  Although


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some raw materials for its products are available from only one source, the 
Company attempts to acquire a substantial inventory of such materials and to 
negotiate long-term supply arrangements.  The Company believes it will not 
have any raw material supply issues; however, no assurances can be given that 
a long-term supply will be obtained for such materials or that a long-term 
supply agreement for such materials can be obtained on terms acceptable to 
the Company.  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.

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 numerous 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 several issued U.S. patents and patent applications related 
to IMAGENT.  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.  International 
applications directed to the same subject matter have also been filed.  In 
March 1998, the Company received its second U.S. patent covering the use of 
various contrast agents, including IMAGENT, 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 numerous 
issued U.S. patents and 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

                                       7
<PAGE>

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.

     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.  There are 
two primary approaches for temporary oxygen delivery:  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 II clinical trials.

     Although liquid ventilation therapy has been in the research phase for 
the last two decades, the Company is unaware of any potential liquid 
ventilation competitor that has reached the clinical trial stage; however, 
other companies are 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.  Several other 
companies are attempting to develop alternative types of therapies for 
treatment of acute respiratory failure.  One company has started a Phase 
II/III clinical trial for acute respiratory failure with a surfactant, and 
several others have started Phase II clinical trials with various compounds 
for acute respiratory failure.














     Competition in the development of ultrasound imaging contrast agents is 
intense and is expected to increase.  There are currently only two available 
ultrasound contrast agents for certain cardiology applications in the U.S. 
There are currently five (including the two U.S. approved contrast agents) 
that have been approved in Europe, three of which are currently being sold.  
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 is approved for commercial sale, it will be well 
positioned to compete successfully, although there can be no assurance that 
the product will be able to do so.


                                       8
<PAGE>

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. 

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 new drug application ("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. 


                                       9
<PAGE>

EMPLOYEES

     As of September 4, 1998, the Company had 284 full-time employees, of 
whom 247 were engaged in research and development, production and associated 
support, six in business development and market research, and 31 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.

EXECUTIVE OFFICERS OF THE REGISTRANT

     The following are the executive officers of the Company:

DUANE J. ROTH.  Mr. Roth, who is 48, has been 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 President and Chief Operating Officer of the Company. 

THEODORE D. ROTH.  Mr. Roth, who is 47, was Executive Vice President and 
Chief Financial Officer of the Company since November 1987, and  was 
appointed President and Chief Operating Officer in May 1998.  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 and Chief Executive Officer of the 
Company. 

HAROLD W. DELONG.  Mr. DeLong, who is 50, has been Executive Vice President, 
Business Development for the Company since February 1989.  Mr. DeLong has 
been employed for more than 25 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. 

KEITH W. CHAPMAN.  Mr. Chapman, who is 48, 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 53, has been Vice President, Market 
Development for Alliance since January 1991.  He has more than 25 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 58, has been Vice 
President, Medical Affairs Development 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. 


                                      10
<PAGE>

KATHRYN E. FLAIM, PH.D.   Dr. Flaim, who is 48, was appointed Vice President, 
Clinical Research in August 1998, having joined Alliance in 1990 as Director 
of Clinical Research.  Dr. Flaim has over 15 years of experience in clinical 
trial design and regulatory submissions.  For nine years before joining 
Alliance, she was Associate Director of the Division of Clinical Research and 
Development at SmithKline Beecham.  Previously, she was an Assistant 
Professor at the Milton S. Hershey Medical Center at Pennsylvania State 
University.  Dr. Flaim received her Ph.D. at the University of California at 
Davis.

HENRY A. GRAHAM, PH.D.  Dr. Graham, who is 55, is Vice President, Quality. 
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. 

JOERG LIMMER, DVM.  Dr. Limmer, who is 57, was appointed Vice President, 
Clinical Operations and 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 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.

TIMOTHY J. PELURA, PH.D.  Dr. Pelura, who is 44, was appointed Vice 
President, Pharmaceutical Research & Development in July 1997, having joined 
Alliance in 1988 as Director, Product Research. For over 22 years he has 
worked extensively in the field of emulsion research and parenteral product 
development. Prior to joining Alliance, he spent 12 years at Pharmacia and 
KabiVitrum Inc. working in various areas including quality control, 
formulation and process development, project management, and basic research. 
Dr. Pelura received a M.S. and Ph.D. in Chemistry from Rutgers University.

GWEN ROSENBERG.  Ms. Rosenberg, who is 43, was appointed Vice President, 
Corporate Communications in May 1998.  Ms. Rosenberg joined the Company in 
1990 and has served in various capacities, most recently as Director of 
Corporate Communications.  For the previous eleven years, she was a research 
scientist at the University of California, San Diego and at Scripps Clinic 
and Research Foundation, and was concurrently a science reporter for the San 
Diego Daily Transcript.  Ms. Rosenberg has also taught high school chemistry 
and biology in New York. She received her B.A. and M.A. degrees from Adelphi 
University and The State University of New York at Stony Brook, respectively.

GORDON L. SCHOOLEY, PH.D.  Dr. Schooley, who is 51, has been Vice President, 
Clinical and Regulatory Development since January 1989.  Dr. Schooley has 
been employed for over 25 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.

MARK SEEFELD, PH.D., D.A.B.T.  Dr. Seefeld, who is 45, was appointed Vice 
President, Drug Safety in August 1998, having joined Alliance in 1993 as 
Director, Toxicology.  For more than ten years prior to joining the Company, 
he held positions in both general and reproductive toxicology at Parke-Davis, 
Pharmaceutical Research Division of the Warner-Lambert Company, and 3M 
Pharmaceuticals.  Dr. Seefeld received his Ph.D. from the University of 
Wisconsin-Madison and is board certified by the American Board of Toxicology.

TIM T. HART, CPA.  Mr. Hart, who is 41, was appointed Chief Financial Officer 
in August 1998.  He joined the Company in 1991 as Controller and has also 
served as Treasurer since 1994.  Prior to joining Alliance in 1991, he was 
Group Controller of the Cubic Revenue Collection Group, a group of nine 
domestic and international Cubic Corporation companies that design, 
manufacture and service automatic fare-collection systems.  Mr. Hart was 
employed in various financial management positions at Cubic for over eight 
years.  He was also employed by Ernst & Whinney in San Diego, California as a 
C.P.A.  Mr. Hart received a B.S. from San Diego State University.

LLOYD A. ROWLAND, JR.  Mr. Rowland, who is 42, was appointed Secretary of the 
Company in May 1998, having served as General Counsel and Assistant Secretary 
since 1993.  Prior to joining Alliance, Mr. Rowland served as Vice President 
and Senior Counsel, Finance and Securities, at Imperial Savings Association 
for four years.  For the previous eight years, he was engaged in the private 
practice of corporate law with the San Diego, California law firm of Gray 
Cary Ames & Fry, and the Houston, Texas law firm of Bracewell & Patterson.  
He received a J.D. from Emory University.


                                      11
<PAGE>

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 159,000 square feet in four 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 fourth San Diego facility was leased in 1997 and 
consists of manufacturing and development space.  The Otisville site, where 
the Company has established the LIQUIVENT and SAT PAD production facility, 
also includes laboratories and administrative offices.  

     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 1998 was 
approximately $140,000.  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 OXYGENT and IMAGENT at its existing San 
Diego facilities and for LIQUIVENT at its Otisville, New York facility, it 
may need to expand its commercial manufacturing capabilities for its products 
in the future. 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 for such 
expanded facilities and cannot predict the amount it will expend for the 
construction of such facilities.  There can be no assurance as to when or 
whether the FDA will determine that such facilities comply with Good 
Manufacturing Practices.  The projected location and construction of such 
facilities will depend on regulatory approvals, product development, and 
capital resources, among other factors.  The Company has not obtained any 
regulatory approvals for its production facilities for these products nor can 
there be any assurance that it will be able to do so. 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, 1998.


                                      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 under the symbol ALLP.



                                      12
<PAGE>


     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.

<TABLE>
<CAPTION>
                                                       HIGH          LOW
                                                       ----          ---
<S>                                                <C>            <C>
Fiscal 1998

Quarter ended September 30, 1997                   $   13.25      $   8.125

Quarter ended December 31, 1997                    $  12.875      $   6.625

Quarter ended March 31, 1998                       $  11.375      $    6.75

Quarter ended June 30, 1998                        $   8.938      $   3.625

<CAPTION>
                                                       HIGH          LOW
                                                       ----          ---
<S>                                                <C>           <C>
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
</TABLE>


     On September 4, 1998, the closing price of the Company's common stock 
was $3.313.

     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 September 4, 1998, the approximate number of record holders of the 
Company's common stock was 1,420.  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. 

     On September 23, 1997 the Company sold 500,000 shares of its convertible 
Series D Preferred Stock for an aggregate purchase price of $10 million to 
SBVC in connection  with the licensing of IMAGENT to Schering.  The shares 
were sold in reliance on the exemption from registration provided by Section 
4(2) of the Securities Act of 1933, as amended.  The Series D Preferred Stock 
is convertible on the earlier of (i) receipt of written notice from the 
holders of 50% or more of the Series D Preferred Stock, (ii) termination of 
the Schering License Agreement by Schering or, if such agreement is 
terminated by the Company, at Schering's election, or (iii) such time as a 
twenty-day average of the last reported selling price of Company common stock 
equals or exceeds $20 per share.


                                      13
<PAGE>

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,

                                     1998           1997           1996           1995           1994
<S>                               <C>            <C>            <C>            <C>            <C>
Statement of Operations Data:

   Total revenues                 $  21,209      $  44,580      $  17,323      $  11,816      $     409

   Net loss                       $ (33,003)     $ (19,016)     $ (23,172)     $ (29,717)     $ (36,946)

   Net loss per common 
       Basic and diluted          $   (1.04)     $    (.63)     $    (.91)     $   (1.35)     $   (1.83)

<CAPTION>
                                                                 June 30,

                                     1998           1997           1996           1995           1994
<S>                               <C>            <C>            <C>            <C>            <C>
Balance Sheet Data:

   Working capital                $  48,730      $  62,995      $  73,244      $  22,346      $  19,446

   Total assets                   $  93,677      $ 112,013      $ 108,343      $  56,030      $  53,132

   Long-term debt and other       $   8,921      $   2,871      $   1,166      $     843      $     348

   Stockholders' equity           $  76,090      $  91,331      $ 101,467      $  50,077      $  49,825
</TABLE>

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 incur operating losses for at least the next several 
years due to substantial spending on research and development, preclinical 
testing, clinical trials, regulatory activities, and commercial manufacturing 
start-up.  The Company has collaborative research and development agreements 
with companies for IMAGENT and RODA.  Under the arrangement for IMAGENT, 
Schering has agreed to reimburse the Company for some of its development 
expenses.  Schering will also 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 from the sale of products. Due to the termination of the HMRI 
License Agreement in December 1997, and the restructuring of the Ortho 
License Agreement in May 1998, Alliance expects to incur a substantial 
increase in development expenses related to LIQUIVENT and OXYGENT and a 
substantial decrease in related research revenue relative to prior years.  
There can be no assurance that the Company will be able to achieve 
profitability at all or on a sustained basis.  

                                      14
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Through June 1998, 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 August 1998, the Company sold 100,000 shares of Series E-1 Preferred 
Stock ("E-1 Stock") to certain investors pursuant to a preferred stock 
purchase agreement (the "Stock Purchase Agreement") for an aggregate amount 
equal to $6 million.  Pursuant to the  Stock Purchase Agreement, the Company 
has the option to sell preferred shares on substantially similar terms to the 
investors from time to time through early 1999 in an amount not to exceed an 
additional $14 million, subject to certain limitations.  The 100,000 shares 
of E-1 Stock are convertible into common stock at $6 per share through 
January 3, 1999, and thereafter certain adjustments may apply based on the 
market price.  The Company has the right to redeem the preferred shares under 
certain circumstances.  No dividends will accrue to the holders.  In 
connection with the sale of preferred stock, the investors obtained a right 
to receive a royalty on future sales of one of the Company's products under 
development, provided that such product is approved by the FDA by December 
2003.  The royalty amount will be between 0.4% and 1.6%, subject to 
adjustments downward, of net sales of the product for a period of three 
years.  The Company has certain rights to repurchase the royalty right.

     In January 1997, the Company entered into a loan and security agreement 
with a bank under which the Company received $3.5 million and in December 
1997, the amount available under the loan was increased to $15.2 million.  In 
June 1998, the Company restructured the loan to provide for up to $15 
million. Amounts borrowed are secured by certain fixed assets and are to be 
repaid over 4.5 years.  If certain financial covenants are not satisfied, the 
outstanding balance may become due and payable.  On June 30, 1998, the 
balance outstanding on this loan was $10 million.  The Company also has a 
$1.5 million line of credit available with another bank.  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 thermoreversible gel, FLOGEL, intended for 
use as an anti-adhesion treatment for persons undergoing abdominal or pelvic 
surgeries.  The consideration in the MDV Merger consisted of $15.5 million, 
of which $8 million was paid through the delivery of 703,093 shares of common 
stock during 1997, and $7.5 million was paid through the delivery of 706,100 
shares of common stock during 1998.  Additionally, the Company will pay up to 
$20 million if advanced clinical development or licensing milestones are 
achieved in connection with MDV's technology.  The Company will also make 
certain royalty payments on the sales of products, if any, developed from 
such technology.  The Company may buy out its royalty obligation for $10 
million at any time prior to the first anniversary of the approval by U.S. 
regulatory authorities of any products based upon the MDV technology (the 
amount increasing thereafter over time).  All of such payments to the former 
MDV shareholders may be made in cash or, at the Company's option, shares of 
the Company's common stock, except for the royalty obligations which will be 
payable only in cash.  The Company has not determined whether subsequent 
payments (other than royalties) will be made in cash or in common stock or, 
if made in cash, the source of such payments.  There can be no assurance that 
any of the contingent payments will be made because they are dependent on 
future developments that are inherently uncertain.   

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

     From September 1994 until May 1998, under the Ortho License Agreement, 
Ortho was responsible for substantially all the costs of developing and 
marketing OXYGENT.  In June 1996, the convertible Series A Preferred Stock 
held by J&JDC and accrued dividends thereon were converted into 815,625 
shares of common stock of the Company.  In June 1996, J&JDC 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.  In May 1998, Ortho and the Company restructured the Ortho License 
Agreement and Alliance assumed responsibility for worldwide development of 
OXYGENT at its expense.  Under the restructured agreement, Ortho retained 
certain rights to be the exclusive marketing agent for the product. In 1998, 
Ortho reimbursed the Company $10.2 million for research and development 
expenses.  As a result of the restructuring, Alliance expects to incur a 
substantial increase in development expenses related to OXYGENT and a 
substantial decrease in related research revenue over prior years.


                                      15
<PAGE>

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

     In September 1997, the Company entered into 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.  The product is being developed jointly by 
Alliance and Schering. Under the Schering License Agreement, Schering paid to 
Alliance in 1998 an initial license fee of $4 million, and agreed to pay 
further milestone payments and royalties on product sales.  Schering is also 
providing funding to Alliance for some of its development expenses related to 
IMAGENT.  In conjunction with the Schering License Agreement, SBVC purchased 
500,000 shares of the Company's convertible Series D Preferred Stock for $10 
million.

     The Company had net working capital of $48.7 million at June 30, 1998, 
compared to $63 million at June 30, 1997.  The Company's cash, cash 
equivalents, and short-term investments decreased to $49.9 million at June 
30, 1998 from $72.4 million at June 30, 1997.  The decrease resulted 
primarily from cash used in operations of $28.1 million and property, plant, 
and equipment additions of $10.1 million, partially offset by proceeds from a 
loan and security agreement of $6.8 million and by net proceeds from the sale 
to SBVC of convertible Series D Preferred Stock in the amount of $9.6 million 
in conjunction with the Schering License Agreement.  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 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, particularly for LIQUIVENT and OXYGENT 
as they move into pivotal clinical trials.  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 such financing 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.


                                      16
<PAGE>

     Alliance anticipates that its current capital resources, including 
proceeds from the sale of the E-1  Stock in August 1998, expected revenue 
from the Schering License Agreement and investments, and future proceeds from 
the sale of additional preferred stock under the August 1998 Stock Purchase 
Agreement, will be adequate to satisfy its capital requirements for at least 
the next 12 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 OXYGENT and IMAGENT at its existing 
San Diego facilities and for LIQUIVENT at its Otisville, New York facility, 
it may need to expand its commercial manufacturing capabilities for its 
products in the future.  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 
for such expanded facilities and cannot predict the amount it will expend for 
the construction of such facilities.  There can be no assurance as to when or 
whether the FDA will determine that such facilities comply with Good 
Manufacturing Practices.  The projected location and construction of such 
facilities will depend on regulatory approvals, product development, and 
capital resources, among other factors.  The Company has not obtained any 
regulatory approvals for its production facilities for these products, nor 
can there be any assurance that it will be able to do so.  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.

YEAR 2000

     Many currently installed computer systems and software products are 
coded to accept only two-digit entries in the date code field.  Beginning in 
the year 2000, these date code fields will need to accept four-digit entries 
to distinguish the 21st century dates from 20th century dates.  As a result, 
in less than two years, computer systems and/or software used by many 
companies may need to be upgraded to comply with such "Year 2000" 
requirements.  Management has initiated its Year 2000 program, which has 
already identified several systems that are not yet Year 2000 compliant.  The 
Company expects to complete its initial assessment by the end of the year.  
The assessment will include third-party confirmations with respect to their 
computers, software and systems, and a listing of all equipment subject to 
Year 2000 concerns.  The Company has already initiated the removal and 
exchange of some non-compliant systems and expects to continue such 
replacement or other remedial programs to assure that its computers, 
software, and other systems will continue to operate in the Year 2000.  While 
the Company has begun evaluating potential strategies for resolving its Year 
2000 problems, the dollar amount the Company will spend to remediate such 
issues remains uncertain.  The Company believes such costs will not have a 
material effect on the Company's consolidated financial position or results 
of operations.  There can be no assurance, however, that the Company's 
computer systems and applications of other companies on which the Company's 
operations rely, will be timely converted, or that any such failure to 
convert by another company will not have a material adverse effect on the 
Company systems. Moreover, a failure of (i) Company scientific, manufacturing 
and other equipment to operate at all or operate accurately, (ii)  clinical 
trial site medical equipment to perform properly, (iii) necessary materials 
or supplies to be available to the Company when needed, or (iv) other 
equipment, software, or systems as a result of Year 2000 problems could have 
a material adverse effect on the Company's business or financial condition.

     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 1999, 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; possible 
competition from other products; and Year 2000 issues. 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 


                                      17
<PAGE>

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

RESULTS OF OPERATIONS

1998 COMPARED TO 1997
---------------------

     The Company's license and research revenue was $21.2 million for 1998, 
compared to $44.6 million for 1997.  Research revenue in 1997 included a $15 
million milestone payment from Ortho under the Ortho License Agreement.  The 
decrease in revenue is primarily due to decreased milestone payments and the 
decreased development expense reimbursement from HMRI, due to the 
restructuring and eventual termination of the HMRI License Agreement.  The 
Company expects research revenue to significantly decrease in 1999 compared 
to 1998, due to the lack of revenue from the Ortho License Agreement.

     Research and development expenses increased by 16% to $50.1 million for 
1998, compared to $43.3 million for 1997.  The increase in expenses was 
primarily due to a $4.1 million increase in staffing costs for employees 
primarily engaged in research and development activities, a $791,000 increase 
in rent and lease expense, an $833,000 increase in depreciation expense, a 
$487,000 increase in payments to outside researchers for preclinical and 
clinical trials and other product development work, as well as other 
increases related to the Company's research and development activities.  

     General and administrative expenses were $7.9 million for 1998, compared 
to $7.9 million for 1997.

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

     Investment income and other was $3.8 million for 1998, compared to $4.1 
million for 1997.  The decrease was primarily a result of lower average cash 
and short-term investment balances.  

1997 COMPARED TO 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.  

     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.

     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 in December 
1996, the February 1996 HMRI transaction, and the receipt of approximately 
$44 million from the April 1996 public offering by the Company of 2.9 million 
shares of common stock.


                                      18
<PAGE>

     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 1998 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.


                                      19
<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)  A report on Form 8-K was filed with the Commission on June 1, 1998. 
The Company reported that on May 14, 1998, the Company and Ortho Biotech, 
Inc. and The R. W. Johnson Pharmaceutical Research Institute, both 
subsidiaries of Johnson & Johnson, entered into an agreement to restructure 
their collaboration with respect to the development of the Company's OXYGENT 
product.

     (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 to the Certificate of Incorporation 
of the Company filed on September 22, 1997. (Incorporated by reference to 
Exhibit 3(c) of the Company's Annual Report on Form 10-K for the fiscal year 
ended June 30, 1997.)

          (d)  Certificate of Amendment to the Certificate of Incorporation 
filed on August 14, 1998.

          (e)  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 certain research and manufacturing 
facilities in San Diego, California .  (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)  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.)

          (e)  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).

          (f)  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)

          (g)  License Agreement dated September 23, 1997, between the 
Company and Schering AG, Germany.  (Incorporated by reference to Exhibit 2(a) 
to the Current Report on Form 8-K/A filed on February 27, 1998 (the "1997 
8_K/A")(1)


                                      20
<PAGE>

          (h)  Preferred Stock Purchase Agreement dated September 23, 1997, 
between the Company and Schering Berlin Venture Corp.  (Incorporated by 
reference to Exhibit 2(b) to the 1997 8-K/A.)

          (i)  Agreement dated May 14, 1998, between the Company and Ortho 
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute with 
respect to the restructuring of the relationship between the Company and such 
companies.  (Incorporated by reference to Exhibit 10.1 to the Current Report 
on Form 8-K filed on May 14, 1998.)

          (j)  Convertible Preferred Stock Purchase Agreement dated as of 
August 13, 1998 between the Company and certain investors ("E-1 Investors") 
pertaining to the sale of Series E-1 Preferred Stock.

          (k)  Royalty Rights Agreement dated as of August 13, 1998 between 
the Company and the E-1 Investors.

          (l)  Registration Rights Agreement dated as of August 13, 1998 
between the Company and the E-1 Investors.

          (m)  Credit Agreement dated as of June 17, 1998 between the Company 
and Imperial Bank.

          (n)  Promissory Note in the amount $15 million dated June 17, 1998 
executed by the Company in favor of Imperial Bank.

          (o)  Security Agreement dated June 17, 1998 executed by the Company 
in favor of Imperial Bank.

          (p)  Lease Agreement dated November 7, 1998 between the Company and 
WHAMC Real Estate Limited Partnership, a Delaware limited partnership, 
relating to certain manufacturing and development facilities in San Diego, 
California.

     (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.


                                      21
<PAGE>

SIGNATURES

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

                                       ALLIANCE PHARMACEUTICAL CORP.

                                       (Registrant)

Date:  September 7, 1998               By:  /s/  Theodore D. Roth 
                                           -------------------------------------
                                                 Theodore D. 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. 

<TABLE>
<S>                                          <C>                                     <C>
/s/ Duane J. Roth                            Chairman and                            September 7, 1998
-----------------------------------          Chief Executive Officer
Duane J. Roth                                


/s/ Theodore D. Roth                         Director, President, and                September 7, 1998
-----------------------------------          Chief Operating Officer
Theodore D. Roth                             


/s/ Tim T. Hart                              Chief Financial Officer, Treasurer,     September 7, 1998
-----------------------------------          and Chief Accounting Officer
Tim T. Hart                                  


/s/ Pedro Cuatrecasas, M.D.                  Director                                September 7, 1998
-----------------------------------
Pedro Cuatrecasas, M.D.


/s/ Carroll O. Johnson                       Director                                September 7, 1998
-----------------------------------
Carroll O. Johnson


/s/ Stephen M. McGrath                       Director                                September 7, 1998
-----------------------------------
Stephen M. McGrath


/s/ Helen M. Ranney, M.D.                    Director                                September 7, 1998
-----------------------------------
Helen M. Ranney, M.D.


/s/ Donald E. O'Neill                        Director                                September 7, 1998
-----------------------------------
Donald E. O'Neill


/s/ Jean Riess, PH.D.                        Director                                September 7, 1998
-----------------------------------
Jean Riess, Ph.D.


/s/ Thomas F. Zuck, M.D.                     Director                                September 7, 1998
-----------------------------------


Thomas F. Zuck, M.D.
</TABLE>


                                      22
<PAGE>


                ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

            TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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



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


                                      F-1
<PAGE>

                 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS




The Board of Directors and Stockholders
Alliance Pharmaceutical Corp.


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

We conducted our audits in accordance with generally accepted auditing 
standards.  Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement.  An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements.  
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a 
reasonable basis for our opinion.

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

                                                     ERNST & YOUNG LLP



San Diego, California
July 31, 1998, except for Note 8,
    as to which the date is August 14, 1998


                                      F-2
<PAGE>

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

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

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

LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

COMMITMENTS

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

           SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-3
<PAGE>

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

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

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

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

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


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

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

          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-4
<PAGE>

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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-5
<PAGE>

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

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

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

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

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


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-6
<PAGE>

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


1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

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

CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS

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

CONCENTRATION OF CREDIT RISK

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

PROPERTY, PLANT, EQUIPMENT, AND OTHER ASSETS

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

PURCHASED TECHNOLOGY

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


                                      F-7
<PAGE>

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

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

ACQUIRED IN-PROCESS TECHNOLOGY

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

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

LONG-TERM DEBT

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

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

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

REVENUE RECOGNITION

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








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


                                      F-8
<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenditures are charged to expense as incurred.

ACCOUNTING FOR STOCK-BASED COMPENSATION

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

NET INCOME (LOSS) PER SHARE

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

NEW ACCOUNTING STANDARDS

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

2.  FINANCIAL STATEMENT DETAILS

PROPERTY, PLANT AND EQUIPMENT - NET

     Property, plant and equipment consist of the following:

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


                                      F-9
<PAGE>

ACCRUED EXPENSES

     Accrued expenses consist of the following:

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

3.  INVESTMENTS

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

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

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

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

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

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

4.  STOCKHOLDERS' EQUITY


STOCK OPTION PLANS

     The Company has a 1983 Incentive Stock Option Plan (the "1983 Plan"), a 
1983 Non-Qualified Stock Option Program (the "1983 Program"), and a 1991 
Stock Option Plan which provides for both incentive and non-qualified stock 
options (the "1991 Plan").  These plans provide for the granting of options 
to purchase shares of the Company's common stock (up to an aggregate of 
500,000, 2,500,000, and 6,200,000 shares under the 1983 Plan, 1983 Program, 
and 1991 Plan, respectively) to directors, officers, employees, and 
consultants.  The optionees, date of grant, option price (which cannot be 
less than 100% and 80% of the fair market value of the common stock on the 
date of grant for incentive stock options and non-qualified stock options, 
respectively), vesting schedule, and term of options, which cannot exceed ten 
years (five years under the 1983 Plan), are determined by the Compensation
Committee of the Board of Directors. The 1983 Plan has expired and no 
additional options may be granted under such plan.


                                     F-10
<PAGE>

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

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

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

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

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

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


                                     F-11
<PAGE>

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


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

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

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

WARRANTS

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

PREFERRED STOCK

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

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

5.  LICENSE AGREEMENTS

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


                                     F-12
<PAGE>

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

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

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

6.  INCOME TAXES

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

     Deferred tax assets consist of the following:

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

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

     At June 30, 1998, the Company had federal and various state net 
operating loss carryforwards of approximately $206,015,000 and $41,320,000, 
respectively. The difference between the federal and state tax loss 
carryforwards is primarily attributable to the capitalization of research and 
development expenses for California tax purposes and the fifty percent 
limitation on California loss carryforwards.  The federal tax loss 
carryforwards will begin expiring in fiscal 1999, unless previously utilized. 
 The California tax loss carryforwards will continue to expire in fiscal 1999 
unless previously utilized. The Company also has federal and state research 
and development tax credit carryforwards of $8,879,000 and $2,868,000, 
respectively, which will begin expiring in fiscal 1999 unless previously 
utilized.

     Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual 
use of the Company's net operating loss and credit carryforwards may be 
limited because of cumulative changes in ownership of more than 50% which 
have


                                     F-13
<PAGE>

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


7.  COMMITMENTS

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

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

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

</TABLE>

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


8.  SUBSEQUENT EVENT

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

                                F-14

<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:



<TABLE>
<CAPTION>
Number                                  Document
------                                  --------
<S>       <C>
  3(c)    Certificate of Amendment to the Certificate of Incorporation of the
          Company filed August 14, 1998.

 10(j)    Convertible Preferred Stock Purchase Agreement dated as of August 13,
          1998 between the Company and certain investors ("E-1 Investors").

 10(k)    Royalty Rights Agreement dated as of August 13, 1998 between the
          Company and the E-1 Investors.

 10(l)    Registration Rights Agreement dated as of August 13, 1998 between the
          Company and the E-1 Investors.

 10(m)    Credit Agreement dated as of June 17, 1998 between the Company and
          Imperial Bank.

 10(n)    Promissory Note in the amount $15 million dated June 17, 1998 executed
          by the Company in favor of Imperial Bank.

 10(o)    Security Agreement dated June 17, 1998 executed by the Company in
          favor of Imperial Bank.

 10(p)    Lease Agreement dated November 7, 1997 between the Company and WHAMC
          Real Estate Limited Partnership, a Delaware limited partnership,
          relating to certain manufacturing and development facilities in
          San Diego, California.

(23.1)     Consent of Ernst & Young LLP, Independent Auditors 
</TABLE>