---

# SECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 10-KSB

_____________________

# (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, 2004

||_| | 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.                 
|----------------------------------------------
|(Name of Small Business Issuer in Its Charter)

|                                |                                     
|------------------------------- | ------------------------------------
|New York                        | 14-1644018                          
|(State or other jurisdiction of | (I.R.S. Employer Identification No.)
|incorporation or organization) 

|                                         |           
|---------------------------------------- | ----------
|6175 Lusk Boulevard, San Diego,          | 92121     
|California                              
|(Address of Principal Executive Offices) | (Zip Code)

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

_____________________

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

# NONE

_____________________

Title of each class:
None

Name of each exchange
on which registered: None

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

# Common Stock, par
value $0.01(Title of Class)

_____________________

---

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

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

Revenues
for the issuers fiscal year ended June 30, 2004 were $549,000. 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 Over-the-Counter Bulletin Board
(OTCBB) administered by the National Association of Securities Dealers
(Nasdaq) on September 24, 2004 was $8.6 million.

The
number of shares of the Registrants common stock, $0.01 par value, outstanding at
September 24, 2004 was 29,422,532.

# DOCUMENTS INCORPORATED
BY REFERENCE

The
information required by Part III of this report on Form 10-KSB is incorporated by
reference to the definitive Proxy Statement with respect to the 2004 Annual Meeting of
Shareholders, which the Registrant intends to file with the Securities and Exchange
Commission (SEC) no later than 120 days after the end of the fiscal year
covered by this report.

---

# FORM 10-KSB

# INDEX

|                                                                                                                   |   
|------------------------------------------------------------------------------------------------------------------ | --
|PART I                                                                                                             | 3 
|Item 1.    Business                                                                                                | 3 
|Item 2.    Description of Property                                                                                 | 17
|Item 3.    Legal Proceedings                                                                                       | 17
|Item 4.    Submission of Matters to a Vote of Security Holders                                                     | 18
|PART II                                                                                                            | 18
|Item 5.    Market for the Registrant's Common Equity and Related Stockholder Matters                               | 18
|Item 6.    Management's Discussion and Analysis or Plan of Operation                                               | 20
|Item 7.    Financial Statements                                                                                    | 26
|Item 8.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                    | 46
|Item 8A.  Controls and Procedures                                                                                  | 46
|PART III                                                                                                           | 47
|Item 9.    Directors, Executive Officers, Promoters and Control Persons; Compliance with 16(a) of the Exchange Act | 47
|Item 10.  Executive Compensation                                                                                   | 47
|Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters           | 48
|Item 12.  Certain Relationships and Related Transactions                                                           | 48
|Item 13.  Exhibits and Reports on Form 8-K                                                                         | 48
|Item 14.  Principal Accountant Fees and Services                                                                   | 53
|Signatures                                                                                                        
|Certifications                                                                                                    

---

# Forward-Looking
Statements

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

We
wish to caution readers that these forward-looking statements are only predictions and
that our business is subject to significant risks. The factors discussed herein, and other
important factors, in some cases have affected, and in the future could affect, our actual
results and could cause our actual consolidated results for 2005 and beyond to differ
materially from those expressed in any forward-looking statements made by us or on our
behalf. These risks include, but are not limited to:

| |  | our
inability to obtain adequate financing for our development efforts;
| | - | -----------------------------------------------------------------------

| |  | our
inability to enter into collaborative relationships to further develop and commercialize
our products;
| | - | ----------------------------------------------------------------------------------------------------------

| |  | changes
in any of our existing relationships, or the inability of any collaborative partner to
adequately         commercialize our products;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
uncertainties associated with the lengthy regulatory approval process, including
uncertainties associated with the United States Food and Drug Administration (FDA)
decisions and timing of product development or approval;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
uncertainties associated with obtaining and enforcing patents important to our business;
| | - | --------------------------------------------------------------------------------------------

| |  | possible
competition from other products;
| | - | -----------------------------------------

| |  | difficulties
in manufacturing on a large scale;
| | - | -----------------------------------------------

| |  | failure
to obtain market acceptance;
| | - | ------------------------------------

| |  | 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; and
| | - | -------------------------------------------------------------------------------------

| |  | the
increasing emphasis on controlling healthcare costs and potential legislation or
regulation of healthcare pricing.
| | - | ----------------------------------------------------------------------------------------------------------------------

You
should read this report with the understanding that our actual future results may be
materially different from what we expect. We qualify all of the forward-looking statements
in this report by these cautionary statements.

-2-

---

# PART I

Except
for historical information, the matters set forth in this report are forwardlooking
statements that are subject to risks and uncertainties that could cause actual results to
differ materially from those set forth herein. Alliance Pharmaceutical Corp. refers you to
cautionary information and risk factors contained elsewhere herein and in other documents
filed with the SEC from time to time. As used herein, the terms We,
Our, Us, Company or Alliance refer to
Alliance Pharmaceutical Corp. and its subsidiaries.

# Item 1.  Business

# Overview

We
are a pharmaceutical research and development company that is currently focused on
developing our lead product, Oxygent,an intravascular oxygen carrier
designed to reduce the need for donor blood in surgical and other patients at risk of
acute tissue hypoxia (oxygen deficiency). In addition, through our subsidiary Astral, Inc.
(Astral), we are developing intellectual property and know-how for potential
products to treat immune disorders, including autoimmune disease, cancer and infectious
disease.

We
were incorporated in New York in 1983. Our principal executive offices are located at 6175
Lusk Boulevard, San Diego, California 92121, and our telephone number is (858) 410-5200.

Our
website is currently under construction; however, you can view our filings with the Securities and Exchange Commission (the "SEC")
online at the SECs Web site, http://www.sec.gov. See Where You Can Find
More Information for additional information regarding us.

# OxygentTM

We
have developed certain proprietary technologies based on the use of perfluorochemical
(PFC). PFCs are biochemically inert compounds and may be employed in a variety
of therapeutic applications. Our primary drug substance is perflubron, a brominated PFC
that has a high solubility for respiratory gases, which, when formulated into an emulsion,
can be used to transport these gases throughout the body.

Oxygent
(perflubron emulsion) is an intravascular oxygen carrier being developed to augment oxygen
delivery in surgical and other patients at risk of acute tissue oxygen deficit. It is
intended to provide oxygen to tissues during elective surgeries where a blood transfusion
is anticipated. It is estimated that approximately eight to ten million patients worldwide
annually receive one or more units of donor blood during elective surgeries, including
cardiovascular, orthopedic and general surgical procedures. An oxygen carrier could be
used instead of donor blood for a substantial portion of these patients. Each single unit
of Oxygent is expected to provide the equivalent oxygen delivery of approximately
one to two units of red blood cells.

Transfusion
of donor blood is associated with well-publicized risks of known infectious disease
transmission including HIV and hepatitis. Additional safety concerns include new emerging
viruses (e.g., West Nile Virus, SARS) and potential immune suppression effects of blood
transfusions. Donor blood also carries the risk of being contaminated with parasites
associated with diseases including Chagas disease, Lyme disease, malaria, etc. While the
need for donor blood is expected to increase over the next several years, more frequent
blood shortages are expected due to increased donor restrictions (e.g., people potentially
exposed to infected beef in Europe and the U.K. that may be linked to new variant
Creutzfeldt-Jakob disease). However, human error (incorrect labeling, miscollected
samples, and testing mistakes) and mistransfusion still represent the most frequent cause
of serious morbidity and mortality related to transfusion, and occur at a rate that is at
least 1,000-fold more frequent than the risk of viral infection.

These
issues have heightened the search for alternatives that reduce or eliminate the need for
donor blood in elective surgeries. Oxygentis a sterile PFC emulsion that is
compatible with all blood types and is expected to have a shelf life of approximately two
years. The efficacy and safety of Oxygent have been demonstrated in more than 250
preclinical pharmacology and toxicology studies. To date, approximately 1,500 human
patients and volunteers have been enrolled in 20 Oxygent clinical studies,
including Phase 1 healthy volunteer studies, and Phase 2 and 3 studies in surgical
patients. More than 800 subjects have been dosed with Oxygent in these studies. The
ability of Oxygent to enhance oxygenation and delay the need for blood transfusion
was demonstrated in two previous Phase 2 studies.

-3-

---

In
December 2002, results of the Companys Phase 3 general surgery clinical trial in
Europe were published in Anesthesiology. The results established that the product
provided a statistically significant reduction in the need for donor blood in patients
undergoing a variety of general surgery procedures. Additionally, a greater percentage of
patients in the Oxygent-treated group were able to avoid the need for any donor
blood transfusion as compared to the control group.

A
second Phase 3 study conducted mainly in the U.S. in cardiac surgery patients undergoing
cardiopulmonary bypass (CPB) procedures, was suspended voluntarily in January
2001 after more than 400 patients had been enrolled, due to an unexpected imbalance in
certain adverse events, primarily the incidence of stroke. While the overall frequency of
these adverse events in this study was consistent with published data for patients
undergoing cardiac bypass surgery, the control group frequency was remarkably lower than
normal, causing a disparity in the proportion between the treatment and control patients.

We
conducted an extensive integrated review of the combined safety data from both Phase 3
studies and all previous clinical trials, and we believe that this analysis revealed no
evidence to directly link the product to the observed imbalances in adverse events;
instead, the protocol-mandated blood harvesting procedure and hemodilution techniques used
in the Oxygent-treated group (but not in the control group) appeared to be the main
factor contributing to the imbalance in adverse events.

In
July 2001, we met with the U.S Food and Drug Administration (the "FDA") regarding the continuing clinical development of
Oxygent and presented a data analysis that explained reasons for the imbalance. The
FDA requested that we provide additional preclinical supporting data before submitting a
new Phase 3 study plan.

We
also met with several European regulatory authorities to review the safety findings from
the Phase 3 cardiac surgery study and to propose a new Phase 3 protocol design for a study
in general surgery. In 2002, we developed a new protocol for a pivotal Phase 3 program and
received approval to initiate such a program in several countries. This protocol was
intended to support future regulatory filings in various countries for a product
indication to avoid and reduce allogeneic blood transfusion during general surgery.
However, on September 20, 2004, we received a letter from the European Medicines Agency
(the EMEA) clarifying certain information contained in a Scientific Advice issued
to us by EMEA on June 4, 2004. EMEA has determined that evidence that the safety of
Oxygent is at least as comparable to blood transfusion would require a statistical
demonstration that Oxygent is not inferior to blood transfusion for serious adverse
events, or death, no matter how rare these events are. We have determined that such a
study would not be practical to conduct at this time. As an alternative, EMEA has
recommended a study design that utilizes Oxygent where blood is not readily
available. We are currently evaluating such study designs as a path toward regulatory
approval in the European Union.

In
May 2000, Alliance and Baxter Healthcare Corporation (Baxter) established a
joint venture PFC Therapeutics, LLC (PFC Therapeutics), which obtained a
license from Alliance for the development, manufacturing, marketing, sales, and
distribution of Oxygent in the U. S., Canada and countries in the European Union
(the Baxter Territory). In late 2002, the activities to initiate the new Phase
3 protocol in Europe and all Oxygent development activities including manufacturing
had to be put on hold when we were forced to downsize due to lack of finances and the
termination of our collaboration with Baxter. In June 2003, in connection with the sale of
the Imagent® assets to Imcor Pharmaceutical Co. (formerly, Photogen
Technologies, Inc.) (Imcor), we acquired Baxters ownership interest in
PFC Therapeutics. Currently, we own approximately 98% of PFC Therapeutics, which holds all
rights to Oxygent development in the U.S., Canada and Europe. We continue to hold
all rights to Oxygentdevelopment in Asia and rest-of-world with the exception of
South Korea.

-4-

---

On
April 5, 2004, PFC Therapeutics and Nycomed Denmark ApS (Nycomed), a leading
European pharmaceutical company, signed a collaboration agreement for Nycomed to develop
and commercialize Oxygent in Europe (the Nycomed Agreement). Under the
terms of the agreement, Nycomed was to be responsible for the remaining clinical and
regulatory development, and future marketing of Oxygent within a broad European
territory. The agreement also included an option for Nycomed to acquire Oxygent
rights for China. On July 2, 2004, Nycomed notified us that it was terminating the
agreement effective August 16, 2004. Therefore, the rights to Oxygent in Europe and
China have reverted back to PFC Therapeutics, and we are actively looking for a new
partner or partners to develop and commercialize Oxygent in both of these regions

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

# Astral, Inc.

Astral
is engaged in the development of immunoglobulins that are engineered to bear specific
disease-associated peptides. These immunoglobulins will be used to generate
biopharmaceutical products intended to regulate the immune system in individuals with
various disorders, in particular autoimmune disease, cancer and infectious disease.

Astral
has developed a proprietary technology platform, Epitope-based T-cell Immunotherapy
(E.T.I.), which uses Immunoglobulin-Peptides (IgPs) to control the
profile of immune reactions in a selective manner. Unlike general immunosuppressive
therapies, E.T.I. is intended to selectively affect the T-cell response to
disease-associated epitopes by specifically targeting the autoaggressive T-lymphocytes,
while leaving the rest of the immune system functional. The uniqueness of the E.T.I.
platform is related to the use of the IgPs to greatly improve the pharmacokinetics of
delivered epitope peptides to target antigen-presenting cells (APCs) and to
regulate the profile of the immune response.

The
E.T.I. platform has the potential to be effective in autoimmune disease by incorporating
self peptides and, when combined with the companys proprietary immunomodulatory
double stranded Ribonucleic Acid (dsRNA) as reported in the October 15, 2002
issue of The Journal of Clinical Investigation, can be used as effectively against
cancer and infectious disease.

Astral
is developing two programs, The Autoimmune Disease Program and the Cancer and Infectious
Disease Program. The Autoimmune Disease Program encompasses the E.T.I. platform and
engineered IgPs, incorporated with disease-associated peptide(s) of interest, to create
effective therapeutics against autoimmune deficiencies. Astral has demonstrated proof of
concept in several animal models and it is anticipated that these positive results will be
mirrored in the clinic. The Cancer and Infectious Disease Program encompasses the E.T.I.
platform along with Astrals proprietary use of immunomodulatory dsRNA. Astral has
demonstrated through various studies that E.T.I. in conjunction with dsRNA can trigger
substantial levels of MHC class I-restricted immunity that is important for defense
against viruses and for rejection of tumors.

In
December 2002, we entered into an exclusive license agreement with Mixture Sciences, Inc.
(Mixture Sciences) whereby Mixture Sciences acquired all rights to a
proprietary immunotherapy platform technology developed by Astral. Mixture Sciences
provided financing to support the overhead and salaries of key employees involved with
this technology in exchange for a secured position in the technology, subject to a
royalty-bearing license. We have certain rights to repurchase the technology by paying
Mixture Sciences a break-up fee. Astral failed to meet a deadline to pay Mixture Sciences
the break-up fee of $600,000 plus approximately 18 months of interest. In satisfaction of
the $600,000 plus interest owed to Mixture Sciences, Astral assigned two Patent
Cooperation Treaty (PCT) applications to Mixture Sciences. Astral is currently
in negotiations with Mixture Sciences to reacquire the two PCT applications.

-5-

---

# Collaborative
Relationships

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

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

Nektar
Therapeutics (Nektar). In November 1999, we transferred to Nektar
(formerly, Inhale Therapeutic Systems, Inc.) certain rights to our
PulmoSpheres® technology and other assets for use in respiratory drug delivery.
In March 2002, a supplemental agreement modified and expanded this original agreement. We
will receive milestone payments based on the achievement of future defined events, plus
additional royalty payments based on eventual sales of a defined number of products
commercialized using the technology. Nektar has agreed that we can commercialize two
respiratory products that will be formulated by Nektar utilizing the PulmoSpherestechnology on a royalty-free basis. We have retained the right to use the technology
to develop products for drug delivery in conjunction with liquid ventilation.

University
of Missouri  Columbia. In October 2001, Astral entered into a research agreement
with the University of Missouri to undertake a program of research for the development of
immunoglobulin constructs and methods to prevent certain autoimmune diseases. Under this
agreement, Astral will pay a research fee in return for certain rights to any inventions
or discoveries made by the University of Missouri.

University
of Tennessee Research Corporation (UTRC). In February 2003, Astral entered
into a license agreement with UTRC for exclusive worldwide rights to utilize certain
technology and patents developed under a previous research agreement with UTRC. Astral
will pay UTRC milestone payments based on defined events, plus royalty payments based on
eventual sales of products commercialized using the technology.

We
intend to obtain new collaborative relationships for our other products, but we dont
know if we will be able to enter into future collaborative relationships on acceptable
terms. Furthermore, the termination of any of our existing collaborative relationships or
failure to enter into such future relationships may limit our ability to develop our
technology and may harm our business. Please see the Section entitled Risk
Factors for a more complete discussion of the risks related to our collaborative
relationships.

# Intellectual Property

Patents
and other proprietary rights are an essential part of our business. We seek proprietary
protection for our products, processes, technologies and ongoing improvements. We continue
to pursue patent protection in the U.S. and in foreign countries that we regard as
important for future endeavors. We have filed numerous patent applications in the U.S.,
European Patent Office, Japan, Canada, Australia, Israel, Norway, South Africa, China and
other countries, and we have been issued patents in many of these countries. We currently
hold 120 issued patents worldwide. In addition, we hold 46 patent applications worldwide.
Of our issued patents, 61 relate to PFC emulsions and their manufacture and methods of
using blood substitutes to facilitate oxygen delivery and 13 more are pending. These
PFC-related patents expire at various times between 2006 and 2014. In addition, we have
filed and/or have licensed rights to both U.S. and foreign patents covering certain
aspects of Astrals E.T.I. and dsRNA immunomodulatory technologies. One U.S. and one
foreign patent have issued on Astrals E.T.I. technology. These patents are expected
to protect the compounds, compositions and methods surrounding Astrals technologies.
We plan to continue building our intellectual property around certain areas of interest to
Astral. These patents expire at various times between 2017 and 2022.

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

-6-

---

# Competition

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

Companies
that we know are in active development of a blood substitute product include Biopure
Corporation, Northfield Laboratories Inc., Hemosol, Inc., Sangart Inc. and Synthetic Blood
International (SBI). There are two primary approaches for oxygen delivery used
in blood substitute products: PFC emulsions, the approach used in Oxygent, and
hemoglobin solutions. Hemoglobin solution development efforts typically employ chemical
modification of stroma-free hemoglobin derived from human or bovine red blood cells. An
alternative approach using genetic engineering to produce recombinant hemoglobin was
previously being pursued by Baxter, but this effort was abandoned when Baxter terminated
their hemoglobin therapeutics program in 2002. There are several companies working on
hemoglobin solutions as temporary oxygen carrier blood substitutes that have advanced into
clinical trials. One of these companies, Hemosol, Inc., had to suspend clinical trials in
2003 and is working on determining a path forward for its hemoglobin-based product.
Northfield Laboratories Inc., another company working on hemoglobin solutions derived from
outdated human blood, has recently initiated a Phase 3 urban ambulance trial. A third
company developing a bovine-based hemoglobin solution, Biopure Corporation, has an
approval for its product in South Africa and is currently addressing the FDAs
questions regarding its products safety and efficacy arising during the regulatory
review of the companys Biologic License Application (BLA) to market its
product in the U.S. for an orthopedic surgery indication. The fourth company, Sangart
Inc., has recently completed two small early-stage clinical studies in Sweden with its
human hemoglobin-based product and is preparing to start a larger Phase 2 study in
orthopedic surgery patients in Sweden. With respect to PFC emulsion development, we are
aware of two early-stage companies in the U.S. developing PFC-based temporary oxygen
carriers; however, only one, SBI, has progressed to clinical trials. SBI has recently
completed a small Phase 1 study in healthy volunteers and is planning preliminary Phase 2
studies to evaluate different potential surgical indications. The only other company,
Sanguine Corp., is still in the early preclinical stages of discovery and formulation
development. We are also aware of one product, Perftoran, which is a dilute
first-generation PFC-based emulsion that was developed at the Russian Academy of Sciences
and has been approved in 1999 in Russia only for a variety of clinical indications.

We
believe that Oxygentand the perfluorochemical approach may have several advantages
compared to the hemoglobin-based oxygen carriers, including the potential availability of
highly purified raw materials in commercial-scale quantities, as well as the relatively
low cost and ease of production for Oxygent. However, you should see the Section
entitled Risk Factors for a complete discussion of the risks related to our
competition.

With
regard to Astral, there are currently a variety of companies with programs in clinical
development that target the same disease categories that are of interest to Astral.
Therefore, we expect that our products will have significant competition in the
marketplace.

# Government Regulation

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

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

-7-

---

Clinical
trials are typically conducted in three sequential phases, although the phases may
overlap. In Phase 1, which frequently begins with the initial introduction of the drug
into healthy human subjects prior to introduction into patients, the compound is tested
for safety and dosage tolerance. Phase 2 typically involves studies in a larger patient
population to identify possible adverse effects and safety risks, to begin gathering
preliminary efficacy data, and to investigate potential dose sizes and schedules. Phase 3
trials are undertaken to further evaluate clinical efficacy and to further test for safety
within an expanded patient population that will represent the intended clinical indication
that is being pursued. Each trial is conducted in accordance with current Good Clinical
Practice (cGCP) standards under protocols that detail the objectives of the
study, the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the Investigational New
Drug (IND) application. Further, an independent Institutional Review Board
(IRB) or Ethics Committee at each clinical center at which the study will be
conducted must evaluate and approve each clinical study. The 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 U.S., while a Marketing
Authorization Application (MAA) is submitted to the EMEA in Europe. Similar
applications, generally based upon data already collected for an NDA or MAA, are then used
to file for marketing approval in foreign countries. If and when approval is obtained to
market a product, the FDAs (or applicable foreign agencys) regulations will
then govern manufacturing and commercialization activities.

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

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

# Raw Materials

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

# Employees

As
of September 24, 2004, we had seven full-time employees, of whom four were engaged in
research and development and associated support, and three in general administration. None
of our employees is represented by a labor union and we believe that our employee
relations are satisfactory.

-8-

---

# RISK FACTORS

Investment
in our common stock involves a high degree of risk. You should carefully consider the
risks described below together with all of the other information included in this report
before making an investment decision. The risks and uncertainties described below are not
the only ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations could suffer. In that case, the trading price
of our common stock could decline and you may lose all or part of your investment.

# Risks Related to Our
Business

We have a history of operating
losses and limited product revenues and we may never become profitable.

We
are a product development company with no current revenue from product sales. We have had
net operating losses since our inception and we expect such losses to continue until we
receive revenues from product sales, if such revenues cover our costs. As of June 30,
2004, we had an accumulated deficit of $478 million. For the years ended June 30, 2004 and
2003, we incurred net income (losses) of $10 million and ($20.3 million), respectively.
Substantially all of our revenues to date have come from sources other than product sales,
such as licensing fees, milestone payments, and payments to fund research and development
activities under joint development and license agreements. To obtain revenues from our
products, we must succeed, either alone or with others, in developing, obtaining
regulatory approval for, and manufacturing and marketing products with significant market
potential. We may never succeed in these activities and may never generate revenues that
are significant enough to achieve profitability.

Currently, we are not conducting
any clinical trials related to our product candidate Oxygent.

Currently,
we are not conducting any clinical trials related to our product candidate Oxygent.
We expect that it will require at least one additional Phase 3 clinical trial with
positive results before we are able to seek marketing approval from any regulatory
authority with respect to Oxygent. In addition, on September 20, 2004, we received
a letter from the EMEA clarifying certain information contained in a Scientific Advice
issued to us by EMEA on June 4, 2004. EMEA has determined that evidence that the safety of
Oxygent is at least as comparable to blood transfusion would require a statistical
demonstration that Oxygent is not inferior to blood transfusion for serious adverse
events, or death, no matter how rare these events are. We have determined that such a
study would not be practical to conduct at this time. As an alternative, EMEA has
recommended a study design that utilizes Oxygent where blood is not readily
available. We are currently evaluating such study designs as a path toward regulatory
approval in the European Union. If we are unable to reinitiate clinical trials with
respect to Oxygent, or the results of any such clinical trials are not positive, we
may never be able to seek marketing approval for Oxygent from any regulatory
authority or to generate significant revenue from product sales.

We depend on collaborations with
third parties to develop and commercialize our products and to provide the majority of our
revenues.

A
key aspect of our strategy is to selectively enter into collaborations with third parties.
We currently rely, and will continue to rely, on our collaborators for financial resources
and for development, commercialization and regulatory expertise. Currently, we do not have
a collaboration agreement with any third party to develop our product Oxygent in
either Europe or the U.S.

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

| |  | do
not have sufficient resources or decide not to devote the necessary resources due to
internal constraints           such as limited cash or human resources;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | decide
to pursue a competitive potential product developed outside of the collaboration; or
| | - | -------------------------------------------------------------------------------------------

| |  | cannot
obtain the necessary regulatory approvals.
| | - | -------------------------------------------------

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

If conflicts arise with our
collaborators, they may act in their self-interests, which may be adverse to our
interests.

-9-

---

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

| |  | disputes
with respect to payments that we believe are due under a collaboration agreement;
| | - | ------------------------------------------------------------------------------------------

| |  | disagreements
with respect to ownership of intellectual property rights;
| | - | ------------------------------------------------------------------------

| |  | unwillingness
on the part of a collaborator to keep us informed regarding the progress of its
development and           commercialization activities, or to permit public disclosure of
these activities;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | delay
of a collaborator's development or commercialization efforts with respect to our drug
candidates; or
| | - | ----------------------------------------------------------------------------------------------------------

| |  | termination
or non-renewal of the collaboration.
| | - | ------------------------------------------------

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

We rely on third parties to
coordinate our clinical trials and perform data collection and analysis, which may result
in costs and delays that prevent us from successfully commercializing drug candidates.

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

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

| |  | these
third parties do not successfully carry out their contractual duties or regulatory
obligations or meet           expected deadlines;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | these
third parties need to be replaced; or
| | - | -------------------------------------------

| |  | the
quality or accuracy of the data obtained by third parties is compromised due to their
failure to adhere to our clinical protocols or regulatory requirements or for other
reasons.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Delays, suspensions and
terminations of our clinical trials could result in increased costs to us and delay our
ability to generate product revenues.

If
we are able to reinitiate clinical trials, our clinical trials may be delayed, suspended
or terminated due to a number of factors, including:

| |  | ongoing
discussions with regulatory authorities regarding the scope or design of our clinical
trials or requests by them for supplemental information with respect to our clinical
trial results;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | failure
to conduct clinical trials in accordance with regulatory requirements;
| | - | ------------------------------------------------------------------------------

| |  | lower
than anticipated enrollment rate of patients in clinical trials;
| | - | ----------------------------------------------------------------------

| |  | serious
adverse events or side effects experienced by participants; and
| | - | -----------------------------------------------------------------------

| |  | insufficient
supply or deficient quality of drug supply or other materials necessary for the conduct
of our clinical trials.
| | - | ----------------------------------------------------------------------------------------------------------------------------

For
example, in January 2001, we voluntarily suspended enrollment in an on-going Phase 3
cardiac surgery study in the U.S. for Oxygent due to an imbalance in certain
adverse events, primarily the incidence of stroke.

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

-10-

---

We may not be able to obtain the
additional funding we will need to complete development and to introduce products to the
market.

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

| |  | the
timing and extent of our late-stage clinical trials for Oxygent;
| | - | --------------------------------------------------------------------

| |  | continued
scientific progress in our research and development programs;
| | - | -----------------------------------------------------------------------

| |  | the
time and cost involved in obtaining regulatory approvals for our products;
| | - | ------------------------------------------------------------------------------

| |  | patent
costs;
| | - | -------------

| |  | completing
technological and market developments; and
| | - | -----------------------------------------------------

| |  | the
cost of manufacturing scale-up.
| | - | -----------------------------------

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

Even if we successfully complete
the clinical trials of our product candidates, they may fail for other reasons.

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

| |  | fail
to receive the regulatory clearances required to market them;
| | - | ------------------------------------------------------------------

| |  | be
subject to proprietary rights held by others requiring the negotiation of a license
agreement prior to           marketing;
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | be
difficult or expensive to manufacture on a commercial scale; or
| | - | ------------------------------------------------------------------

| |  | fail
to compete with products or other treatments commercialized by our competitors.
| | - | ------------------------------------------------------------------------------------

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

Our product candidates may not
gain acceptance among physicians, patients and the medical community, thereby limiting our
potential to generate revenues.

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

| |  | our
ability to provide acceptable evidence of safety and efficacy;
| | - | ------------------------------------------------------------------

| |  | relative
convenience and ease of administration;
| | - | ------------------------------------------------

| |  | the
prevalence and severity of any adverse side effects;
| | - | --------------------------------------------------------

| |  | availability
of alternative treatments;
| | - | ---------------------------------------

| |  | pricing
and cost effectiveness, which may be subject to regulatory control;
| | - | ---------------------------------------------------------------------------

| |  | effectiveness
of our or our collaborators' sales and marketing strategy; and
| | - | ----------------------------------------------------------------------------

| |  | our
ability to obtain sufficient third-party insurance coverage or reimbursement.
| | - | ---------------------------------------------------------------------------------

-11-

---

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

We do not have manufacturing or
marketing capabilities for our products.

We
no longer have manufacturing capabilities for any of our products since our downsizing in
2002. We intend to negotiate contract manufacturing agreements with third parties to
provide the products for our development activities, but we do not know if we will be able
to enter into such agreements on commercially reasonable terms, or at all. All facilities
and manufacturing techniques used in the manufacture of products for clinical use or for
sale in the U.S. must be operated in conformity with current Good Manufacturing Practices
(cGMP) guidelines as established by the FDA. We do not know whether the FDA
will determine that any such third-party facilities comply with good manufacturing
practices. A delay in FDA approval of our manufacturing facilities or the manufacturing
facilities of any third party collaborator would delay the marketing of our products and
negatively impact or revenue and profitability.

We depend on our Chief Executive
Officer, Duane J. Roth, and other key personnel to execute our strategic plan.

Our
success largely depends on the skills, experience and efforts of our key personnel,
including Chief Executive Officer, Duane J. Roth. We have not entered into a written
employment agreement with Mr. Roth. We do not maintain key person life
insurance policies covering Mr. Roth. The loss of Mr. Roth, or our failure to retain other
key personnel, would jeopardize our ability to execute our strategic plan and materially
harm our business.

We will need to increase the size
of our organization, and we may encounter difficulties managing our growth, which could
adversely affect our results of operations.

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

We could incur significant delays
in marketing our products if we are unable to obtain the necessary raw materials from our
existing sources.

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

The lack or inadequacy of
third-party reimbursement for our products would make it more difficult to market any
products we develop.

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

| |  | the
trend toward managed healthcare in the U.S.;
| | - | ------------------------------------------------

| |  | the
growth of healthcare organizations such as HMOs; and
| | - | --------------------------------------------------------

| |  | legislative
proposals to reform healthcare and government insurance programs.
| | - | -----------------------------------------------------------------------------

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

-12-

---

We expect that our results of
operations will fluctuate, which may make it difficult to predict our future performance
from period to period.

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

| |  | the
status of development of Oxygent and the preclinical and clinical development of our
other drug candidates;
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | whether
we generate revenues by achieving specified research and development or commercialization
milestones           under any agreements;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
incurrence of preclinical or clinical expenses that could fluctuate significantly from
period to period;
| | - | ------------------------------------------------------------------------------------------------------------

| |  | the
initiation, termination or reduction in the scope of our collaborations during these
periods or any disputes           regarding these collaborations;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
timing of our ability to satisfy applicable regulatory requirements;
| | - | ------------------------------------------------------------------------

| |  | the
rate of expansion of our clinical development and other internal research and development
efforts;
| | - | ------------------------------------------------------------------------------------------------------

| |  | the
effect of competing technologies and products and market developments; and
| | - | ------------------------------------------------------------------------------

| |  | general
and industry specific economic conditions.
| | - | --------------------------------------------------

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

# Risks Related to Our
Intellectual Property

Our ability to compete may decline
if we do not adequately protect our proprietary rights.

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

| |  | any
of our current or future patent applications will result in the issuance of patents;
| | - | ----------------------------------------------------------------------------------------

| |  | any
of our issued patents will provide significant proprietary protection or commercial
advantage; or
| | - | -----------------------------------------------------------------------------------------------------

| |  | any
of our issued patents will not be circumvented by others.
| | - | -------------------------------------------------------------

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

Confidentiality agreements with
employees and others may not adequately prevent disclosure of our trade secrets and other
proprietary information and may not adequately protect our intellectual property, which
could limit our ability to compete.

-13-

---

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

A dispute concerning the
infringement or misappropriation of our proprietary rights or the proprietary rights of
others could be time consuming and costly, and an unfavorable outcome could harm our
business.

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

| |  | payment
of damages, potentially treble damages, if we are found to have willfully infringed a
party's patent           rights;
| | - | ------------------------------------------------------------------------------------------------------------------------------

| |  | injunctive
or other equitable relief that may effectively block our ability to further develop,
commercialize           and sell products; or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | we
or our collaborators having to enter into license arrangements that may not be available
on commercially acceptable terms, if at all.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

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

# Risks Related to Our
Industry

We will be subject to stringent
regulation in connection with the marketing of any products derived from our drug
candidates, which could delay the development and commercialization of our products.

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

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

If our competitors develop and
market products that are more effective than our product candidates, they may reduce or
eliminate our commercial opportunity.

-14-

---

We
may be unable to compete successfully in developing and marketing our products. Several
pharmaceutical companies, biotechnology companies, public and private universities, and
research organizations are actively engaged in the research and development of products
that may compete with our products. Some of these companies, particularly the large
worldwide pharmaceutical companies, have more resources than we and may develop and
introduce products and processes competitive with or superior to ours.

Other
companies that we know are engaged in clinical development of blood substitute products
include Biopure Corporation, Northfield Laboratories Inc., Hemosol, Inc., Sangart Inc. and
SBI. There are two primary approaches for oxygen delivery used in blood substitute
products: PFC emulsions, the approach used in Oxygent, 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 temporary
oxygen carrier blood substitutes. One of these companies, Hemosol, Inc., had to suspend
clinical trials in 2003 due to adverse cardiac events and is working on determining a path
forward for its product. Northfield Laboratories Inc., another company working on human
hemoglobin solutions, has recently initiated an urban ambulance trial. A third company
developing a bovine hemoglobin solution, Biopure Corporation, has an approval for its
product in South Africa in orthopedic surgery and is currently addressing the FDAs
questions regarding its products safety and efficacy arising from the regulatory
review of the companys BLA to market its product in the U.S. for an indication in
orthopedic surgery patients. A fourth company, Sangart Inc., has recently entered into
early-stage clinical studies in healthy volunteers and orthopedic surgery patients in
Sweden. In addition, we are aware of two early-stage companies developing PFC-based
temporary oxygen carriers; however, only one, SBI, has progressed to early-stage Phase 1
clinical trials in healthy volunteers. We are also aware of one product, Perftoran,
which is a dilute first-generation PFC emulsion that has been developed in Russia and has
been approved for clinical use in Russia only.

We
do not know whether our technology or the technology of a competitor will gain market
acceptance. Our failure to compete could have a material adverse effect on our business.

Any claims relating to improper
handling, storage or disposal of biological, hazardous and radioactive materials used in
our business could be costly and delay our research and development efforts.

Our
research and development activities involve the controlled use of potentially harmful
hazardous materials, including volatile solvents, biological materials such as blood from
patients that has the potential to transmit disease, chemicals that cause cancer and
various radioactive compounds. Our operations also produce hazardous waste products. We
face the risk of contamination or injury from the use, storage, handling or disposal of
these materials. We are subject to federal, state and local laws and regulations governing
the use, storage, handling and disposal of these materials and specified waste products.
The cost of compliance with these laws and regulations could be significant, and current
or future environmental regulations may impair our research, development or production
efforts. If one of our employees was accidentally injured from the use, storage, handling
or disposal of these materials, the medical costs related to his or her treatment would be
covered by our workers compensation insurance policy. However, we do not carry
specific biological or hazardous waste insurance coverage. Accordingly, in the event of
contamination or injury, we could be subject to criminal sanctions or fines or held liable
for damages, our operating licenses could be revoked, or we could be required to suspend
or modify our operations and our research and development efforts.

Consumers may sue us for product
liability, which could result in substantial liabilities that exceed our available
resources and damage our reputation.

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

-15-

---

# Risks Related to an
Investment in Our Securities

We must maintain a minimum cash
balance of $5.5 million. If we do not maintain this minimum cash balance, we will be in
default under the terms of our senior convertible promissory notes (the Senior
Notes).

We
have agreed with the holders of our Senior Notes to maintain a minimum cash balance of at
least $5.5 million while the Senior Notes remain outstanding. This covenant terminates
when we have entered into a binding agreement with a qualified third party who is
obligated to invest at least $5.5 million toward the development and commercialization of
Oxygent. This covenant may be waived by a Lender Committee consisting of three
individuals appointed by the holders of Senior Notes. If our cash and cash equivalents on
hand are less than $5.5 million at any time when this minimum cash covenant is in force,
we will be in default under the Senior Notes. If we are in default under the Senior
Notes, the holders of the Senior Notes have the right to accelerate the payment of all
outstanding principal and accrued interest under the Senior Notes, which would render us
insolvent and could cause you to lose some or all of your investment. As of June 30, 2004,
we had approximately $8.4 million cash and cash equivalents on hand.

There is a large number of shares
that may be sold in the market as a result of an offering, which may cause the price of
our common stock to decline.

As
of September 24, 2004, 29,422,532 shares of our common stock were outstanding. We are
registering pursuant to an SB-2 64,178,599 shares of our common stock that are either
outstanding or issuable upon exercise of outstanding warrants or conversion of the Senior
Notes held by certain stockholders. These shares, upon acquisition, unless held by
affiliates, will be freely tradable without restriction or further
registration under federal securities laws immediately following this registration.

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

The market price of our common
stock could be volatile and your investment could suffer a decline in value.

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

| |  | quarterly
variations in operating results and overall financial condition;
| | - | --------------------------------------------------------------------------

| |  | economic
and political developments affecting the economy as a whole;
| | - | ---------------------------------------------------------------------

| |  | results
of our clinical trials;
| | - | -------------------------------

| |  | short-selling
programs;
| | - | -----------------------

| |  | the
stock market's perception of the biotechnology industry as a whole;
| | - | -----------------------------------------------------------------------

| |  | technological
innovations by others;
| | - | ------------------------------------

| |  | proprietary
rights disputes or litigation;
| | - | ------------------------------------------

| |  | changes
in earnings estimates by analysts;
| | - | ------------------------------------------

| |  | additions
or departures of key personnel; and
| | - | ---------------------------------------------

| |  | sales
of substantial numbers of shares of our common stock or securities convertible into or
exercisable for our common stock.
| | - | ------------------------------------------------------------------------------------------------------------------------------

The application of the
penny stock rules could adversely affect the market price of our
common shares and increase your transaction costs to sell those shares.

-16-

---

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

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

# We do not intend to pay
cash dividends.

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

# Item 2.  Description of
Property

We
lease approximately 3,000 square feet of space within a facility in San Diego, California.
This space is used for research and development and general administration. We believe our
current facility is adequate to meet our near-term space requirements.

# Item 3.  Legal Proceedings

In
April 2004, we settled a lawsuit concerning breach of two license agreements with Mt.
Sinai School of Medicine of New York University. The settlement agreement did not require
any payments by either party to the other.

On
July 2, 2003, Hub Properties Trust (Hub) filed a lawsuit in the Superior Court
of the State of California for the County of San Diego against us, Immune Complex
Corporation, Immune Complex, LLC (collectively Immune Complex), and other
parties. The suit alleges that the defendants are liable to Hub for damages stemming from
Hubs inability to lease two properties due to defendants failure to timely
deactivate the radiological materials licenses on the properties. On August 21, 2003,
Immune Complex filed its cross-complaint for indemnity against us. We have filed a
cross-complaint against Hub for damages. In June of 2004, we deposited $1 million into a
controlled bank account as security for any liability we may incur as a result of the Hub
litigation. If Hub prevails in the litigation, it will be entitled to the funds in the
controlled account up to the amount of the judgment. If the judgment exceeds the amount of
money in the account, Hub may pursue other of our assets. If we prevail or the judgment is
less than $1 million then any money remaining in the controlled account will be returned
to us. We believe that Hubs claims are without merit or subject to defenses;
however, we do not know if we will ultimately prevail or if the outcome of the action will
harm our business, financial position or results of operations.

On
June 13, 2003, we jointly brought a patent infringement action with Imcor against Amersham
Health Inc., Amersham Health AS and Amersham Health plc (collectively,
Amersham) in the U.S. District Court for the District of New Jersey. The
lawsuit alleges that through the sale of Amershams Optison® product,
Amersham and its related entities infringe on seven patents acquired from us by Imcor
through its purchase of the Imagentassets. We and Imcor are seeking damages and
injunctive relief against Amersham. Amersham brought counterclaims against us and our
subsidiary Molecular Biosystems, Inc. (MBI) asserting breach of contract,
breach of good faith and fair dealing, and tortious interference with contractual
relations. We believe that Amershams counterclaims are without merit; however, we do
not know if we will ultimately prevail or if the outcome of the action will harm our
business, financial position or results of operations.

In
December 2001, a lawsuit was filed against MBI in the U.S. District Court for the Northern
District of Illinois. The plaintiff in the action alleged that MBI breached a license
agreement and sought damages and a declaratory judgment terminating the license agreement,
and payment of fees and expenses. In December 2003, the court entered a judgment in favor
of MBI. On January 29, 2004, the court denied plaintiffs motion to amend the
judgment. On February 25, 2004, the plaintiff appealed the courts judgment.

-17-

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On
February 23, 2001, a lawsuit was filed against us and some of our officers by two former
shareholders of MBI purportedly on behalf of themselves and others. On March 1, 2001 and
March 19, 2001, two additional similar lawsuits were filed by other former shareholders of
MBI. The lawsuits, filed in the U.S. District Court for the Southern District of New York,
allege that our registration statement filed in connection with the acquisition of MBI
contains misrepresentations and omissions of material facts in violation of certain
federal securities laws. In May 2001, the actions were consolidated. The plaintiffs are
seeking rescission or compensatory damages, payment of fees and expenses, and further
relief. In January 2002, the plaintiffs filed a second amended complaint adding an
additional securities claim against us and the named officers. In August 2003, the court
granted summary judgment as to certain securities claims and dismissed the claims, and
denied summary judgment as to other securities claims. A trial date of November 8, 2004
has been set in the lawsuit. We believe that the lawsuit is completely without merit;
however, we do not know if we will ultimately prevail or if the outcome of the action will
harm our business, financial position or results of operations.

# 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 our fiscal year ended June 30, 2004.

# PART II

# Item 5.  Market for the
Registrants Common Equity and Related Stockholder Matters

# Market For Our Common
Stock

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

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

|Fiscal 2004                      |       |      
|-------------------------------- | ----- | -----
|Quarter ended September 30, 2003 | $0.76 | $0.14
|Quarter ended December 31, 2003  | $0.65 | $0.31
|Quarter ended March 31, 2004     | $0.51 | $0.34
|Quarter ended June 30, 2004      | $0.60 | $0.30
|Fiscal 2003                     
|Quarter ended September 30, 2002 | $1.59 | $0.20
|Quarter ended December 31, 2002  | $0.27 | $0.05
|Quarter ended March 31, 2003     | $0.49 | $0.12
|Quarter ended June 30, 2003      | $0.34 | $0.14

On
September 24, 2004, the closing bid price of the Companys common stock was
$.30.

As
of September 24, 2004, there were 2,315 stockholders of record of our common stock. We
believe that, in addition, there are beneficial owners of our common stock whose shares
are held in street name and, consequently, we are unable to determine the actual number of
beneficial holders of our common stock.

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

-18-

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# Dividend Policy

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

# Penny Stock Rules

Until
our shares re-qualify for inclusion in the Nasdaq system, the public trading, if any, of
our common stock will be on the OTCBB. As a result, an investor may find it more difficult
to dispose of, or to obtain accurate quotations as to the price of, our common stock. Our
common stock is subject to provisions of Section 15(g) and Rule 15g-9 of the Securities
Exchange Act of 1934, as amended (the Exchange Act), commonly referred to as
the penny stock rule. Section 15(g) sets forth certain requirements for
transactions in penny stocks, and Rule 15g-9(d) incorporates the definition of penny stock
that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines penny stock to
be any equity security that has a market price less than $5 per share, subject to certain
exceptions. If our common stock is deemed to be a penny stock, trading in the shares will
be subject to additional sales practice requirements on broker-dealers who sell penny
stock to persons other than established customers and accredited investors.
Accredited investors are persons with assets in excess of $1 million or annual
income exceeding $200,000 or $300,000 together with their spouses. For transactions
covered by these rules, broker-dealers must make a special suitability determination for
the purchase of such security and must have the purchasers written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document, prepared by the SEC, relating to the penny stock market. A
broker-dealer also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information for the penny stocks held in
an account and information on the limited market in penny stocks. Consequently, these
rules may restrict the ability of a broker-dealer to trade and/or maintain a market in our
common stock and may affect the ability of our shareholders to sell their shares.

# Securities Authorized
for Issuance under Equity Compensation Plans

The
following table sets forth information as of June 30, 2004 related to our equity
compensation plans (including the potential effect of debt instruments convertible into
common stock) in effect as of that date:

|                                                  
|--------------------------------------------------
|Plan category                                     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                  
|Equity compensation plans                         
|approved by security holders                      
|Equity compensation plans not approved by security
|holders (1)                                       
|Totals                                            

| | (1) | The
description of the material terms of non-plan issuances of equity           instruments
is discussed in Note 8 to the accompanying consolidated financial           statements.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-19-

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The
Company has a 2000 Stock Option Plan and a 2001 Stock Option Plan, which provide for both
incentive and non-qualified stock options (the 2000 Plan and the 2001
Plan). The 2001 Plan was adopted and approved by our stockholders. The 2000 Plan was
not adopted or approved by our shareholders. These plans provide for the granting of
options to purchase shares of the Companys common stock (up to an aggregate of
2,100,000 and 2,000,000 shares under the 2000 Plan and 2001 Plan, respectively) to
directors, officers, employees and consultants. The optionees, date of grant, option price
(which cannot be less than 100% and 80% of the fair market value of the common stock on
the date of grant for incentive stock options and non-qualified stock options,
respectively), vesting schedule, and term of options, which cannot exceed ten years, are
determined by the Compensation Committee of the Board of Directors. Our 1983 Plan, the
1983 Program and the 1991 Plan have expired and no additional options may be granted under
such plans.

# Recent Sales of
Unregistered Securities

In
June of 2004, we issued 31,427,137 shares of our common stock and five-year warrants to
purchase at $0.50 per share 23,570,357 shares of our common stock to various
institutional investors for aggregate gross proceeds of $11 million (the June
Private Placement). Roth Capital Partners LLC (Roth Capital) received a
commission based on the sale of such shares in the total aggregate amount of $768,000. In
addition, Roth Capital was issued a warrant to purchase 1,571,357 shares of our common
stock. In September 2004, the terms of the June Private Placement were renegotiated and
the majority of the issued shares of common stock and warrants were cancelled and
replaced by the Senior Notes.  See Note 11 to our Audited Consolidated Financial
Statements.

In
April 2004, we issued warrants to purchase an aggregate of 5,715,000 shares of our common
stock to Brown Simpson Partners I, Ltd., Stroock & Stroock & Lavan, LLP and SDS
Merchant Fund, L.P. in connection with the assignment of their rights under a
Participation Agreement in PFC Therapeutics to us.

On
November 20, 2003, PFC Therapeutics sold a Secured Convertible Note in the principal
amount of $500,000 (the PFC Note) to an investor. The investor also received a
warrant to purchase a number of units of ownership interests of PFC Therapeutics
representing 10% of its issued and outstanding units (determined on a fully-diluted basis
on the date of exercise of the warrant) at an exercise price of $0.01 per unit, at any
time or from time to time from January 31, 2004 to and including January 31, 2009. The
principal amount of the PFC Note is classified in the other liabilities section of the
Consolidated Balance Sheet at June 30, 2004. We recorded interest expense of $1 million
and a beneficial conversion feature charge of $1 million (included in interest expense)
during fiscal 2004 based on the valuation of the warrant issued in connection with the PFC
Note. Subsequent to June 30, 2004, the holder of the PFC Note has agreed to return the PFC
Note for cancellation in exchange for a Senior Note in the same principal amount to be
owed directly to the holder by us.

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

# Item 6.  
Managements Discussion and Analysis or Plan of Operation

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

Certain
statements contained herein that are not related to historical results, including, without
limitation, statements regarding the Companys business strategy and objectives,
future financial position, expectations about pending litigation and estimated cost
savings, are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
Securities Exchange Act) and involve risks and uncertainties. Although we
believe that the assumptions on which these forward-looking statements are based are
reasonable, there can be no assurance that such assumptions will prove to be accurate and
actual results could differ materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include, but are
not limited to, regulatory policies, competition from other similar businesses, and market
and general economic factors. All forward-looking statements contained in this Form 10-KSB
are qualified in their entirety by this statement.

-20-

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# Plan of Operation

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

Since
our inception in 1983, we have financed our operations primarily through the sale of
equity and debt securities, and we have applied substantially all of our resources to
research and development programs and to clinical trials. We have incurred operating
losses since inception and, as of June 30, 2004, have an accumulated deficit of $478
million. We expect to incur significant operating losses over at least the next few years
as we continue our research and product development efforts and attempt to commercialize
our products.

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

# Research and Development

For
the years ended June 30, 2004 and 2003 we incurred research and development expenses of
$912,000 and $3.1 million, respectively, for Oxygent, an intravascular oxygen
carrier that we are developing to augment oxygen delivery in surgical and other patients
at risk of acute oxygen deficit. Research and development costs to date for our
oxygen-therapeutic product candidates, including Oxygent, total approximately $156
million. While difficult to predict, we estimate that the completion of clinical trials
for Oxygent will cost at least an additional $60 million. We do not anticipate that
Oxygent will reach the market for at least a few years, if at all, and, because of
the numerous risks and uncertainties associated with product development efforts, we are
unable to predict the extent of any future expenditures or when material net cash inflows
from Oxygent may commence, if at all.

Astral,
our wholly owned subsidiary, is engaged in the development of immunoglobulins that are
engineered to bear specific disease-associated peptides. For the years ended June 30, 2004
and 2003, Astral incurred research and development expenses of $487,000 and $1.5 million,,
respectively. Astrals research and development costs to date total approximately $11
million. Because of the numerous risks and uncertainties associated with early-stage
technology platform research efforts, we are unable to estimate with any certainty the
costs of continued development of Astrals product candidates for commercialization.
We do not anticipate that any of Astrals early-stage product candidates will reach
the market for at least several years, if at all.

In
December 2002, we entered into an exclusive license agreement with Mixture Sciences for
Mixture Sciences to acquire all rights to a proprietary immunotherapy platform technology
developed by Astral. Mixture Sciences provided financing to support the overhead and
salaries of key employees involved with this technology for a secured position in the
technology subject to a royalty-bearing license. We have certain rights to repurchase the
technology by paying Mixture Sciences a break-up fee. In satisfaction of the break-up fee,
Astral assigned two PCT applications to Mixture Sciences. We have recorded the funds
received from Mixture Sciences totaling $285,000 as license revenues during the last
quarter of the year ended June 30, 2004. Astral is currently in negotiations with Mixture Sciences to
reacquire the two PCT applications.

For
the year ended June 30, 2003, we incurred research and development expenses of $11 million
for Imagent (an ultrasound contrast agent that was approved by the FDA for
marketing in the U.S. in June 2002). Research and development costs to June 18, 2003 for
Imagent, totaled approximately $159 million. In June 2003, we sold all of assets
that related to the Imagent technology to Imcor and are no longer developing that
technology. (For additional information regarding the Imagent asset sale
transaction, see Liquidity & Capital Resources below, and Note 5 to the
Audited Consolidated Financial Statements).

In
the year ended June 30, 2004, we incurred no research and development expenses associated
with identifying and developing new product candidates from proprietary technology
platforms. In the year ended June 30, 2003, we incurred research and development expenses
of $0.6 million, associated with identifying and developing new product candidates from
proprietary technology platforms. Research and development costs to date for these
early-stage efforts total approximately $165 million. Because of the numerous risks and
uncertainties associated with early-stage technology platform research efforts, we are
unable to estimate with any certainty the costs of continued development of any product
candidates for commercialization. Our development programs will depend upon our ability to
fund them. We do not anticipate that any of our early-stage product candidates will reach
the market for at least several years, if at all.

-21-

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# Results of Operations

# Year Ended June 30, 2004
as Compared with Year Ended June 30, 2003

For
the year ended June 30, 2004, we recorded a net gain on the disposition of assets of $14.7
million, primarily due to the gain on the sale of the Imagent assets of $15 million
resulting from the issuance of Imcor stock to some of our creditors, payments from Imcor
to fund our obligations, the assumption by Imcor of certain of our obligations, and
settlements with various vendors and creditors during the period in connection with the
Imagent asset sale transaction. (For additional information regarding the
Imagent asset sale transaction, see Liquidity & Capital Resources
below, and Note 5 to the Audited Consolidated Financial Statements). For settlement
agreements with vendors that provided for extended repayment terms, we had recorded the
entire outstanding obligation less payments to date, as we were not released from the full
liability until completing the repayment terms. Since the last payment repaying the
agreed-upon settlement amount was made on July 15, 2004, we reduced the outstanding
obligation to that last payment amount at June 30, 2004 and recorded a gain on disposition
of asset. The balance of such vendor agreements that provided for extended repayment,
which was recorded as a gain, was $767,000 at June 30, 2004. We also recorded a loss on
the disposition of assets of $318,000 in connection with an August 12, 2004 amendment to
the June 29, 2001 Technology Purchase and License Agreement and Promissory Note between us
and Breonics, Inc. (Breonics) whereby Breonics will buy out the remaining
royalties and the residual rights to one of our technologies for $30,000, and will pay us
$52,500 and issue a convertible note for $347,000 convertible into shares of Breonics
stock in satisfaction of the $400,000 Promissory Note. We did not place a value on the
note.

Our
revenue was $549,000 for the year ended June 30, 2004, compared to $53,000 for the year
ended June 30, 2003. This increase is primarily due to the license fee payment received
from Il Yang upon the signing of our agreement with them and the recognition of deferred
revenue from Mixture Sciences.

Research
and development expenses decreased by approximately 91% to $1.4 million for the year ended
June 30, 2004, compared to $16.2 million for the year ended June 30, 2003. The decrease in
expenses was primarily due to the downsizing, consolidation of facilities and no
manufacturing expenses, all of which are connected with the sale of the Imagent
assets, as well as to decreases related to our other research and development activities.

General
and administrative expenses decreased by approximately 79% to $1.5 million for the year
ended June 30, 2004, compared to $7.5 million for the year ended June 30, 2003. The
decrease in general and administrative expenses was primarily due to a $3.1 million
decrease in professional fees related to marketing activities and other sales and
marketing costs, as well as to decreases in other expenses due to the downsizing and
consolidation of facilities connected with the sale of the Imagent assets.

Investment
income decreased by approximately 76% to $12,000 for the year ended June 30, 2004,
compared to $51,000 for the year ended June 30, 2003. The decrease was primarily the
result of lower average cash balances during the year until the receipt of funds from the
June Private Placement.

Other
income was $10,000 for the year ended June 30, 2004, primarily a result of proceeds
recorded from the sale of raw material, a decrease of approximately 97% compared to
$329,000 for the year ended June 30, 2003, which was primarily the result of proceeds
recorded from the settlement of a lawsuit.

Loss
on investment of $500,000 was recorded in the year ended June 30, 2003 when we determined
that the decline in the valuation of our investment in Metracor Technologies, Inc.
(Metracor) was other than temporary.

Interest
expense was $2.3 million for the year ended June 30, 2004, a decrease of approximately 41%
compared to $3.9 million for the year ended June 30, 2003. The expense was primarily the
result of interest and beneficial conversion expenses of $2 million recorded in connection
with the terms of PFC Note issued in the second quarter of fiscal 2004.

# Liquidity and Capital
Resources

Since
inception, we have funded our operations primarily through the sale of equity securities,
payments under our collaboration agreements and debt financing. From inception to June 30,
2004, we had received $254 million in net proceeds from sales of our equity securities,
$258 million in payments from collaboration agreements and $63.3 million in debt financing
of which $36.1 million of such debt has been converted into equity and $24.6 million of
such debt has been retired through the restructuring of various agreements and the
issuance of warrants to purchase our common stock (described more fully below).

-22-

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At
June 30, 2004, we had approximately $8.4 million in cash, cash equivalents and investment
securities compared to $763,000 at June 30, 2003. The increase resulted primarily from the
June Private Placement, which netted us approximately $10 million in cash, cash
received from Imcor in the amount of $848,000 for payments to creditors in connection
with the sale of the Imagent assets (described below), $500,000 received from the
PFC Note, and $195,000 received from the exercise of warrants and stock options, partially
offset by net cash used in operations of $3.4 million, and the purchase of $46,000 of
office equipment. At June 30, 2004, we had net working capital of $5.9 million, compared
to a working capital deficit of $20.9 million at June 30, 2003. Our operations to date
have consumed substantial amounts of cash and are expected to continue to do so for the
foreseeable future.

Net
cash used in operating activities totaled $3.4 million for the year ended June 30, 2004,
compared to $12.5 million for the year ended June 30, 2003. The decrease in net cash used
in operating activities during the year ended June 30, 2004 was primarily due to downsizing, the
consolidation of facilities and no manufacturing or marketing expenses, all of which are
connected to the sale of the Imagent assets, as well as to decreased expenses
related to our operations overall.

Net
cash provided by financing activities totaled $10.7 million for the year ended June 30,
2004, primarily due to net proceeds of $10 million received from the June 2004 private
offering, $195,000 received from the exercise of warrants and stock options, and $500,000
from the PFC Note. Net cash provided by financing activities totaled $11.2 million for the
year ended June 30, 2003, consisting of net proceeds of $8.8 million from issued debt, $2
million from a revolving line of credit, net proceeds of $250,000 from the sale of
preferred stock, net proceeds of $130,000 from the exercise of warrants and $657,000 cash
proceeds from the sale of the Imagent assets.

At
June 18, 2003, the following approximate debt obligations were outstanding:

(a)              $5.8
million owed to various institutional investors and Imcor pursuant to 8%
          Convertible Secured Promissory Notes issued from October 2002 through June
2003;

(b)              $5.9
million owed to various investors pursuant to 5% Subordinated Convertible
          Debentures issued in August and September 2000;

(c)              $3
million owed to an investment firm pursuant to two separate loan and security
          agreements at an effective annualized 100% interest rate entered into in July
          and August 2002;

(d)              $7
million owed to various investors pursuant to 6% Subordinated Convertible
          Debentures issued in November 2000;

(e)              $2.5
million owed to Cardinal Health, Inc. pursuant to a revolving line of           credit
entered into in March 2002; and

(f)              $3
million owed to Baxter pursuant to an equipment lease agreement entered into           in
May 2001.

On
June 18, 2003, we sold all of our assets related to our Imagent product to Imcor.
To date, Imcor has issued $3.7 million of its common stock to certain of our creditors and
made cash payments to us in an approximate amount of $1.5 million. In addition, Imcor has
assumed or we have settled $20.4 million in liabilities in full satisfaction of $25.6
million of the foregoing debt. However, $568,000 of such debt is still outstanding and to
be paid by Imcor or settled in accordance with agreements with the various debt holders.
If Imcor is unable to make the necessary payments, these debt holders will have recourse
against us. (For additional information regarding the Imagent asset transaction see
Note 5 to the Audited Consolidated Financial Statements).

Until
we can generate significant continuing revenues, we expect to satisfy our future cash
needs through strategic collaborations, private or public sales of our securities, debt
financings or by licensing all or a portion of our product candidates or technology. We
cannot be certain that additional funding will be available to us on acceptable terms, or
at all. If funds are not available, we may be required to delay, reduce the scope of, or
eliminate one or more of our research and development programs or our commercialization
efforts.

In
June 2004, we completed the June Private Placement, a private placement of 31,427,137
shares of our common stock and warrants to purchase an additional 25,141,714 shares of
our common stock at $0.50 per share. The net proceeds to us was approximately $10
million. We believe we now have working capital to fund our operations for the next 18
months; however, we expect to continue to incur substantial expenditures associated with
product development. Therefore, we may seek additional collaborative research and
development relationships with suitable corporate partners for our products. Further,
additional equity or debt financing may be required to fund our ongoing operations.
Because adequate funds have not been available to us in the past, we have already delayed
our Oxygent development efforts and have delayed, scaled back, and/or eliminated
one or more of our other product development programs.

-23-

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

Also
in April 2004, certain secured creditors that accepted an ownership interest in PFC
Therapeutics in satisfaction of Alliances obligations and liabilities to such
creditors agreed to exchange their ownership interest in PFC Therapeutics for warrants to
purchase shares of Alliances common stock.

At
June 30, 2004, the following approximate debt obligations were outstanding:

(a)    
$1.6 million owed to various vendors, approximately, $568,000 of which is subject to
settlements or reimbursement from Imcor;

(b)    
$953,000 in accrued expenses, primarily consisting of $750,000 in rent and related expenses,
and $171,000 in payroll and related expenses;

(c)    
$9.7 million in other liabilities, primarily consisting of accrued warrant expense of
$7.9 million (see Note 8 to our Audited Consolidated Financial Statements) and deferred
royalty payments of $1.8 million (see Note 6 to our Audited Consolidated Financial
Statements).

# Subsequent Events

On July 2, 2004,
Nycomed notified us that it was unilaterally terminating the Nycomed Agreement effective
August 16, 2004. As a result, the rights to Oxygentin Europe and China have
reverted back to PFC Therapeutics, and we are actively looking for a new partner or
partners to develop and commercialize Oxygent in both of these regions.
Subsequently, in July 2004, a dispute arose between us and some of the investors who
participated in the June Private Placement. After considering all of the facts and
circumstances relevant to the dispute, our board of directors determined that it was in
our and our stockholders best interests to offer, as a settlement of the dispute, to
rescind the June Private Placement.

On
September 24, 2004, investors holding 30,546,423 shares of common stock and warrants to
purchase 22,909,821 shares of common stock representing approximately $10.7 million of the
approximately $11 million invested in the June Private Placement elected to rescind the
June Private Placement. In doing so, each of these investors returned to us its stock
certificate and warrant representing the number of shares it received in the June Private
Placement for cancellation.

Immediately
thereafter, these same investors entered into the Senior Note Purchase Agreement whereby
we issued to such investors Senior Notes in principal amounts equal to the amounts such
investors invested in the June Private Placement. These Senior Notes are convertible into common stock at
$0.25 per share. The Senior Note Purchase Agreement has restrictive covenants including
limitations on cash expenditures, issuances of debt and dividends as well as other
restrictive covenants, including a minimum cash balance.

After
giving effect to both transactions, we issued 880,714 shares of common stock and warrants
to purchase 660,536 shares of common stock for gross proceeds to us of approximately
$300,000, and we issued Senior Notes in an aggregate principal amount of
approximately $10.7 million.

Also
in September 2004, the holder of the PFC Note exchanged such promissory note for a Senior
Note in the principal amount of $500,000 payable directly by us.

# Collaborative
Relationships

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

-24-

---

In
December 2002, we entered into an exclusive license agreement with Mixture Sciences for
Mixture Sciences to acquire all rights to a proprietary immunotherapy platform technology
developed by Astral. Mixture Sciences provided financing to support the overhead and
salaries of key employees involved with this technology for a secured position in the
technology subject to a royalty-bearing license. We have certain rights to repurchase the
technology by paying Mixture Sciences a break-up fee. Astral failed to meet a deadline to
pay Mixture Sciences the break-up fee of $600,000 plus approximately 18 months of
interest. In satisfaction of the $600,000 plus interest owed to Mixture Sciences, Astral
assigned two PCT applications to Mixture Sciences. Astral is currently in negotiations
with Mixture Sciences to reacquire the two PCT applications.

In
May 2000, we and Baxter entered into a joint venture for the manufacture, marketing,
sales, and distribution of Oxygent in the Baxter Territory as defined in the
agreement. The companies formed PFC Therapeutics to oversee the further development,
manufacture, marketing, sales, and distribution of Oxygent; and each party invested
$5 million in PFC Therapeutics. In connection with the transaction, PFC Therapeutics
obtained an exclusive license in the Baxter Territory to manufacture, market, sell, and
distribute all of our injectable PFC emulsions capable of transporting oxygen in
therapeutic effective amounts in the bloodstream, including Oxygent. PFC
Therapeutics paid us a prepaid royalty of $10 million. In connection with this
arrangement, Baxter purchased 500,000 shares of our convertible Series F Preferred Stock
for $20 million. In May 2001, because of a revised product development schedule, Baxter
purchased an additional $4 million of preferred stock and $3 million of certain
Oxygent-related equipment in lieu of purchasing the same amount of preferred stock.
In August 2001, Baxter purchased another $4 million of the Companys preferred stock,
and from January to June 2002, Baxter made an additional investment of $3.5 million in our
preferred stock. In July 2002, Baxter purchased another $250,000 worth of the preferred
stock. In June 2003, in connection with the sale of the Imagentassets, Imcor
assumed our equipment lease for Imagent-related items from Baxter. All remaining
equipment was returned to Baxter. Concurrent with this transaction, we acquired
Baxters ownership interest in PFC Therapeutics. We will pay Baxter a royalty on the
sales of Oxygent by PFC Therapeutics, following regulatory approval. Accordingly,
we wrote off the deferred revenue against our investment in PFC Therapeutics and the
carrying value of the PFC technology and charged $1.6 million to impairment of an asset.

# Critical Accounting
Policies

We
prepare our financial statements in conformity with accounting principles in the United
States of America. As such, we are required to make certain estimates, judgments and
assumptions that we believe are reasonable, based upon the information available to us.
These estimates and assumptions affect the reported balances and amounts within our
financial statements and supporting notes thereto. Our critical accounting policies are
disclosed in Note 1 to our Consolidated Financial Statements.

# Investment in Joint
Venture

We
had a 50% interest in a joint venture with Baxter. In compliance with current accounting
rules, we periodically reviewed the value of the joint venture based upon the projected
cash flows to be received from license fees, milestone payments, royalties and other
product revenue. In June 2003, we acquired the balance of ownership interest in the joint
venture. We will pay Baxter a royalty on the sales of Oxygent by the joint venture,
following regulatory approval. Concurrent with this acquisition, we offset the balance of
the deferred revenue against our investment in PFC Therapeutics and the carrying value of
the PFC technology and charged $1.6 million to impairment of an asset.

# Metracor Technologies,
Inc.

In
July 1997, we entered into a development agreement with Metracor for the joint development
a minimally invasive, point-of-care patient monitoring system. In June 2001, we entered
into an agreement to acquire approximately 2.5 million shares of Series B Preferred Stock
of Metracor in exchange for approximately $500,000 cash and the Metracor license. During
the second quarter of fiscal 2003, we determined that the decline in the valuation of our
investment in Metracor was other than temporary. Accordingly, we recorded a
loss on investment of $500,000.

# Molecular Biosystems,
Inc.

On
December 29, 2000, we acquired MBI, which became a wholly owned subsidiary of the Company,
in exchange for 770,000 shares of our common stock. MBI is the developer of
Optison, the only intravenous ultrasound contrast agent for the heart being
marketed in both the U.S. and Europe. During the fourth quarter of fiscal 2003, MBI
determined that Chugai Pharmaceutical Co., Ltd. was no longer developing Optison
for marketing in Japan, South Korea and Taiwan per their agreement. Accordingly, MBI
recorded an impairment of purchased technology asset of $1.8 million.

-25-

---

# Item 7.  Financial
Statements

ALLIANCE
PHARMACEUTICAL CORP.

TABLE OF CONTENTS TO
CONSOLIDATED FINANCIAL STATEMENTS

|                                                                          
|--------------------------------------------------------------------------
|Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
|Consolidated Balance Sheet at June 30, 2004                               
|Consolidated Statements of Operations for the Years                       
|Ended June 30, 2004 and 2003                                              
|Consolidated Statements of Stockholders' Deficit for the Years            
|Ended June 30, 2004 and 2003                                              
|Consolidated Statements of Cash Flows for the Years                       
|Ended June 30, 2004 and 2003                                              
|Notes to Consolidated Financial Statements                                

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.

-26-

---

REPORT OF ERNST & YOUNG
LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
and StockholdersAlliance Pharmaceutical Corp.

We have audited the accompanying
consolidated balance sheet of Alliance Pharmaceutical Corp. as of June 30, 2004, and
the related consolidated statements of operations, stockholders deficit, and cash
flows for the years ended June 30, 2004 and 2003. 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 the standards of the Public Company Accounting Oversight Board (United States). 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. at June 30, 2004 and the
consolidated results of its operations and its cash flows for the years ended
June 30, 2004 and 2003, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 1 and 11
to the financial statements, Alliance Pharmaceutical Corp. may lack sufficient working
capital to service its debts and to fund its operations through the fiscal year ending
June 30, 2005, which raises substantial doubt about its ability to continue as a
going concern. The accompanying financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome of this
uncertainty.

/S/ ERNST & YOUNG LLP

San Diego,
CaliforniaAugust 23, 2004, except for Note 11, as to which the date isSeptember 24, 2004

-27-

---

# ALLIANCE PHARMACEUTICAL
CORP.     CONSOLIDATED BALANCE SHEET

---

|                                                                
|----------------------------------------------------------------
|Assets                                                          
|Current assets:                                                 
|Cash and cash equivalents                                       
|Other current assets                                            
|                                                                
|Total current assets                                            
|Property, plant and equipment - net                             
|Restricted cash                                                 
|Other assets - net                                              
|                                                                
|                                                                
|                                                                
|Liabilities and Stockholders' Deficit                           
|Current liabilities:                                            
|Accounts payable                                                
|Accrued expenses                                                
|                                                                
|Total current liabilities                                       
|Other liabilities                                               
|Commitments and contingencies                                   
|Stockholders' deficit (Note 11):                                
|Preferred stock - $0.01 par value; 5,000,000 shares authorized; 
|Series F preferred stock - 793,750 shares issued and outstanding
|at June 30, 2004; liquidation preference of $31,750,000         
|Common stock - $0.01 par value; 125,000,000 shares authorized;  
|59,968,955 issued and outstanding at June 30, 2004              
|Additional paid-in capital                                      
|Accumulated deficit                                             
|                                                                
|Total stockholders' deficit (Note 11)                           
|                                                                
|                                                                
|                                                                

See accompanying Notes to
Consolidated Financial Statements.

-28-

---

# ALLIANCE PHARMACEUTICAL
CORP.     CONSOLIDATED STATEMENTS OF OPERATIONS

---

|                                            
|--------------------------------------------
|2004                                        
|Revenues:                                   
|License, research and royalty revenues      
|Operating expenses:                         
|Research and development                    
|General and administrative                  
|Impairment of assets                        
|                                            
|                                            
|                                            
|Loss from operations                        
|Investment income                           
|Other income                                
|Loss on investment                          
|Interest expense                            
|Gain on disposition of assets - net         
|                                            
|Net income (loss)                           
|                                            
|Net income (loss) per common share, basic   
|                                            
|Net income (loss) per common share, diluted 
|                                            
|Weighted average shares outstanding, basic  
|                                            
|Weighted average shares outstanding, diluted
|                                            

See accompanying Notes to
Consolidated Financial Statements.

-29-

---

# ALLIANCE PHARMACEUTICAL
CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

---

|                                                                              
|------------------------------------------------------------------------------
|Shares                                                                        
|Balances at June 30, 2002                                                     
|Exercise of warrants for cash                                                 
|Sale of convertible Series F Preferred Stock                                  
|Conversion of convertible notes and accrued interest                          
|Issuance of stock in exchange for release of debt obligation                  
|Issuance of warrants to secured creditors                                     
|Net loss                                                                      
|                                                                              
|Balances at June 30, 2003                                                     
|Exercise of stock options and warrants for cash                               
|Issuance of common stock for cash                                             
|Issuance of warrants in connection with a private placement                   
|Interest and beneficial conversion feature on convertible debt                
|Compensatory stock options                                                    
|Issuance of warrants to certain creditors in exchange for participation rights
|Net income                                                                    
|                                                                              
|Balances at June 30, 2004                                                     
|                                                                              

See accompanying Notes to
Consolidated Financial Statements.

-30-

---

# ALLIANCE PHARMACEUTICAL
CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS

---

|                                                                       
|-----------------------------------------------------------------------
|2004                                                                   
|Operating activities:                                                  
|Net income (loss)                                                      
|Adjustments to reconcile net loss to net cash                          
|used in operations:                                                    
|Depreciation and amortization                                          
|Interest and beneficial conversion expense                             
|Compensatory stock options and warrant issuance                        
|Gain on sale of assets - net                                           
|Loss on investment                                                     
|Loss on impairment of assets                                           
|Changes in operating assets and liabilities:                           
|Other assets                                                           
|Accounts payable and accrued expenses and other                        
|                                                                       
|Net cash used in operating activities                                  
|Investing activities:                                                  
|Property, plant and equipment                                          
|Restricted cash                                                        
|Proceeds from sale of assets                                           
|                                                                       
|Net cash provided by investing activities                              
|Financing activities:                                                  
|Issuance of common stock and warrants                                  
|Issuance of convertible preferred stock - net                          
|Proceeds from debt obligations                                         
|Proceeds from revolving line of credit                                 
|                                                                       
|Net cash provided by financing activities                              
|Increase (decrease) in cash and cash equivalents                       
|Cash and cash equivalents at beginning of year                         
|                                                                       
|Cash and cash equivalents at end of year                               
|                                                                       
|Supplemental disclosure of cash flow information:                      
|Interest paid                                                          
|Supplemental disclosure of non-cash investing and financing activities:
|Issuance of common stock upon conversion of notes                      
|Issuance of common stock in exchange for release of debt obligation    

See accompanying Notes to
Consolidated Financial Statements.

-31-

---

# ALLIANCE PHARMACEUTICAL
CORP.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

# 1.  ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

# Organization

Alliance
Pharmaceutical Corp. and its subsidiaries (collectively, the Company or
Alliance) are engaged in identifying, designing, and developing novel medical
products. Currently, the Company is focused on developing its lead product,
Oxygent,an intravascular oxygen carrier designed to reduce the need for
donor blood in surgical and other patients at risk of acute tissue hypoxia (oxygen
deficiency). In addition, Alliance is developing intellectual property and know-how for
potential products to treat immune disorders, including autoimmune disease, cancer and
infectious disease.

# Liquidity and Basis of
Presentation

The
accompanying financial statements are prepared assuming the Company is a going concern.
The Company believes it has sufficient working capital to fund its operations for the
next 18 months. As discussed in Note 8, in June 2004, the Company completed its June
Private Placement financing (the June Private Placement) that netted $10
million from the sale of common stock. In September 2004, the terms of the financing were
renegotiated (see Note 11) and approximately $10.7 million of the $11 million of the
issued shares of common stock were cancelled and replaced by senior convertible notes
(the Senior Notes), which could become current prior to June 30, 2005. In
this event the Company would have to raise additional funds to repay the Senior Notes or
renegotiate their terms. The 2004 financial statements do not include any adjustment to
reflect the possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of this
uncertainty.

# Principles of
Consolidation

The
consolidated financial statements include the accounts of Alliance Pharmaceutical Corp.,
the accounts of its wholly owned subsidiaries Molecular Biosystems, Inc.
(MBI), Astral, Inc. (Astral), MDV Technologies, Inc., Alliance
Pharmaceutical GmbH, its majority-owned subsidiary Talco Pharmaceutical, Inc., and its
majority-owned subsidiary PFC Therapeutics, LLC (PFC Therapeutics) from June
18, 2003, when Alliance acquired Baxter Healthcare Corporations (Baxter)
ownership interest. The Companys subsidiaries have minimal operations and all
significant intercompany accounts and transactions have been eliminated.

# 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 and Cash
Equivalents

The
Company considers instruments purchased with an original maturity of three months or less
to be cash equivalents.

# Concentration of Credit
Risk

Cash
and cash equivalents are financial instruments that potentially subject the Company to
concentration of credit risk. The Company invests its excess cash primarily in U.S.
government securities and debt instruments of financial institutions and corporations with
strong credit ratings. The Company has established guidelines relative to diversification
and maturities to maintain safety and liquidity. These guidelines are reviewed
periodically and modified to take advantage of trends in yields and interest rates.

-32-

---

# Revenue Recognition

Revenue
is generally recognized when all contractual obligations have been satisfied and
collection of the resulting receivable is reasonably assured.

Research
and Development Revenues Under Collaborative Agreements

Research
and development revenues under collaborative agreements are recognized as the related
expenses are incurred, up to contractual limits. Payments received under these agreements
that are related to future performance are deferred and recorded as revenue as they are
earned over the specified future performance period. Revenue related to nonrefundable,
upfront fees are recognized over the period of the contractual arrangements as performance
obligations related to the services to be provided have been satisfied. Revenue related to
milestones is recognized upon completion of the milestones performance requirement.
Revenue from product sales is recognized upon the transfer of title, which is generally
when products are shipped. No revenues under these types of agreements were recognized
during the years ended June 30, 2004 and 2003.

Licensing
and Royalty Revenues

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

# Research and Development
Expenses

Research
and development expenditures are charged to expense as incurred. Research and development
expenditures include the cost of salaries and benefits for clinical, scientific,
manufacturing, engineering and operations personnel, payments to outside researchers for
preclinical and clinical trials and other product development work, payments related to
facility lease and utility expenses, depreciation and amortization, patent costs, as well
as other expenditures. In the years ended June 30, 2004 and 2003, the Company incurred research and
development expenses of $1.4 million, and $16.2 million, respectively.

# Computation of Earnings
Per Common Share

Basic
earnings (loss) per share was computed by dividing the net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted earnings (loss) per
share for the years ended June 30, 2004 and 2003 reflect the potential dilution that could
occur if net income was divided by the weighted average number of common shares, plus
common shares from the exercise of outstanding stock options and warrants and the
conversion of preferred stock where the effect of those securities is dilutive. The
debentures outstanding during a portion of the year ended June 30, 2004 have not been
included in the diluted earnings per share calculation as the debentures were no longer
convertible following the consummation of the settlement agreements with the creditors at
the time of the sale of the Imagent assets (see Note 5). All potential dilutive
common shares have been excluded from the calculation of diluted loss per share for the
year ended June 30, 2003, as their inclusion would be anti-dilutive. The computations for
basic and diluted earnings per share are as follows:

-33-

---

|                                    | Income/(Loss)
(Numerator) | Shares
(Denominator) | Income/(Loss)
per share
|----------------------------------- | ------------------------- | -------------------- | -----------------------
|Year ended June 30, 2004            |                           |                      |                        
|Basic earnings per share:           |                           |                     
|Net income                          |                           |                      | $                      
|Diluted earnings per share:         |                           |                     
|Dilutive stock options and warrants |                           |                      |                        
|Series F preferred stock            |                           |                      |                        
|                                    |                           |                      |                        
|Net income plus assumed conversions |                           |                      | $                      
|                                    |                           |                      |                        
|Year ended June 30, 2003            |                           |                     
|Basic and diluted loss per share    |                           |                      | $                      
|                                    |                           |                      |                        

# Accounting for StockBased
Compensation

The
Company has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. The Company in its financial statements 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 2004
or 2003. If the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date and amortized to expense over their vesting period as
prescribed by SFAS No. 123, the Companys net income (loss) and net income
(loss) per share would have been adjusted to the pro forma amounts indicated below for the
years ended June 30:

|                                    
|------------------------------------
|Net income (loss)                   
|As reported                         
|Fair value of stock-based           
|employee compensation               
|Pro forma                           
|Net income (loss) per share, basic  
|As reported                         
|Pro forma                           
|Net income (loss) per share, diluted
|As reported                         
|Pro forma                           

The
impact of outstanding non-vested stock options granted prior to 1996 has been excluded
from the pro forma calculations; accordingly, the pro forma adjustments for 2004 and 2003
are not indicative of future period pro forma adjustments if the calculation reflected all
applicable stock options. The fair value of options at date of grant was estimated using
the Black-Scholes option-pricing model with the following assumptions for 2004 and 2003,
respectively: risk-free interest rate range of 1.7% to 4.6% and 3.25% to 6.5%; dividend
yield of 0% for both years; volatility factor of 139% and 135%; and a
weightedaverage expected term of 7 years for both years. The estimated weighted
average fair value at grant date for the options granted during 2004 and 2003 was $0.26
and $0.26 per option, respectively.

-34-

---

# Comprehensive Income
(Loss)

SFAS
No. 130, Comprehensive Income requires unrealized gains and losses on the
Companys available-for-sale securities to be included in accumulated comprehensive
income (loss). During the fiscal years ended June 30, 2004 and 2003, the total
comprehensive income (loss) was not materially different than the net income (loss) as
reported. The Company has reported the total comprehensive income (loss) in the
Consolidated Statements of Stockholders Deficit.

# 2.  FINANCIAL STATEMENT
DETAILS

# Property, Plant and
Equipment  Net

Property,
plant and equipment consist of the following:

|                                              
|----------------------------------------------
|2004                                          
|Furniture, fixtures, and equipment            
|Leasehold improvements                        
|                                              
|                                              
|Less accumulated depreciation and amortization
|                                              
|                                              
|                                              

# Accrued Expenses

Accrued
expenses consist of the following:

|                                    
|------------------------------------
|2004                                
|Payroll and related expenses        
|Accrued interest on convertible debt
|Rent and related operating expenses 
|Other                               
|                                    
|                                    
|                                    

# Other Liabilities

Other
liabilities consist of the following:

|                                  
|----------------------------------
|2004                              
|Long-term debt                    
|Deferred revenue                  
|Deferred royalty payments (Note 6)
|Accrued warrant liability (Note 8)
|                                  
|                                  
|                                  

-35-

---

# 3.  INVESTMENTS

In
July 1997, the Company entered into a development agreement with Metracor
Technologies, Inc. (Metracor) for the joint development of a patientmonitoring system. In June 2001, Alliance entered into an agreement to
acquire approximately 2.5 million shares of Series B Preferred Stock of Metracor
in exchange for $500,000 cash and the Metracor license. During the second quarter of
fiscal year 2003, the Company determined that the decline in the valuation of its
investment in Metracor was other than temporary and recorded a loss on
investment of $500,000 during the fiscal year ended June 30, 2003.

# 4.  PFC THERAPEUTICS, LLC

In
May 2000, Alliance and Baxter entered into a joint venture for the manufacture,
marketing, sales and distribution of Oxygent in Europe and North America. The
companies formed PFC Therapeutics to oversee the further development, manufacture,
marketing, sales and distribution of Oxygent. The Company accounted for its
investment through the year ended June 30, 2003 using the equity method of accounting.
There was no operating activity within the joint venture from May 2000 through the year
ended June 30, 2003 and therefore there were no gains or losses resulting from the joint
venture.

In
June 2003, Alliance acquired Baxters 50% interest in PFC Therapeutics in exchange
for contingent payments to Baxter based on the future commercial sales of Oxygent
and other products. The fee to Baxter is 2% of all of Alliances or PFC
Therapeutics future gross sales, if any, of the products, with a maximum fee of $30
million. In accordance with FASB No. 141, Business Combinations, the Company has
not recorded the value of the potential consideration to be issued to Baxter for
Baxters ownership interest in PFC Therapeutics as the future payments are contingent
on future commercial sales of an undeveloped product.

PFC
Therapeutics has had no operating activity (except the purchase of the prepaid royalty of
$10 million from Alliance in 2000) since inception of the joint venture.

In
June 2003, Alliance and certain of its creditors entered into an agreement (the
Participation Agreement), which, among other things, granted each creditor an
ownership interest in the OxygentBusiness (as defined in the Participation
Agreement). In April 2004, Alliance agreed to issue each of these creditors a warrant to
purchase a certain number of shares of Alliances common stock. In exchange for the
issuance of the warrants, these creditors have agreed to assign all of their rights under
the Participation Agreement to Alliance. The fair value of the warrants issued as
determined using Black-Scholes was $2.3 million. The total ownership interest the
creditors assigned back to Alliance was 11.2%.

On
April 5, 2004, PFC Therapeutics, and Nycomed Denmark ApS (Nycomed), a leading
European pharmaceutical company, signed a collaboration agreement for Nycomed to develop
and commercialize Oxygent in Europe (the Nycomed Agreement). Under the
terms of the agreement, Nycomed was to be responsible for the remaining clinical and
regulatory development, and future marketing of Oxygent within a broad European
territory. The agreement also included an option for Nycomed to acquire Oxygent
rights for China. On July 2, 2004, Nycomed notified Alliance that it was terminating the
agreement effective August 16, 2004. Therefore, the rights to Oxygent in Europe and
China have reverted back to PFC Therapeutics, and the Company is actively looking for a
new partner or partners to develop and commercialize Oxygent in both of these
regions

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

-36-

---

# 5.  SALE OF
Imagent® ASSETS

On
June 18, 2003, Imcor Pharmaceutical Co. (Imcor), formerly known as Photogen
Technologies, Inc., acquired certain assets and assumed certain liabilities from Alliance
for approximately $1.1 million in cash and $3.5 million of Imcor common stock. During the
period between 90 and 365 days after the closing, Imcor agreed to pay up to $3 million and
deliver up to an aggregate of 1,985,522 shares of its common stock to completely settle
certain obligations of Alliance. The amount of consideration was determined through
arms-length negotiation. To the extent these obligations with certain creditors were
completely settled, Alliance recorded a gain from sale of assets of $10.6 million during
the year ended June 30, 2003 related to this disposition of an asset.

On
February 5, 2004, Imcor held a special meeting of its stockholders, where its stockholders
approved the issuance of more than 20% of Imcors voting stock to certain creditors
of Alliance in connection with Imcors assumed obligations of Alliance. For the year
ended June 30, 2004, Alliance recorded $15 million as a gain on the disposition of an
asset as a result of Imcor issuing shares of its stock valued at $3.7 million to Alliance
creditors, Imcor funding $848,000 of Alliances obligations, and $10.5 million
related to creditor settlements or Imcors assumed obligations of Alliance. To date,
Alliance has recorded $25.6 million as a gain on the disposition of an asset as a result
of Imcor issuing shares of its stock valued at $3.7 million to Alliance creditors, Imcor
funding $1.5 million of Alliances obligations, and $20.4 million related to
settlement agreements or Imcors assumed obligations of Alliance. The remaining
required cash payments by Imcor will not be applied against the corresponding liabilities
of Alliance until Alliance is legally released from the associated liabilities. Alliance
will record an additional gain on disposition of asset at the time that Alliance is
legally released from the liabilities. The balance owed by Imcor to Alliance to settle
remaining liabilities at June 30, 2004 was approximately $460,000.

In
addition, subsequent to the closing and through 2010, Imcor is obligated to pay Alliance
further consideration in the form of an earn-out based on Imagent revenue invoiced
(subject to certain reductions). The assets acquired by Imcor include all of
Alliances assets related to designing, developing, manufacturing, marketing,
selling, licensing, supporting and maintaining its Imagent product, an ultrasound
contrast agent that was approved by the Federal Food & Drug Administration
(FDA) for marketing in the U.S. in June 2002.

The
amount of the earn-out will equal, for each year of the earn-out: (i) 7.5% of
Imagent revenue up to $20 million; (ii) 10% of Imagent revenue between $20
million and $30 million; (iii) 15% of Imagent revenue between $30 million and $40
million; and (iv) 20% of Imagent revenue above $40 million. The earn-out will be
reduced by amounts Imcor must pay pursuant to a license agreement with Schering
Aktiengesellschaft (Schering), net of payments they receive from Schering
under the license, and amounts of any indemnification claims Imcor has against Alliance.
The earn-out is subject to three additional offsets (which are to be applied in the manner
described in the Asset Purchase Agreement dated June 18, 2003 by and between Alliance and
Imcor (the Asset Purchase Agreement)) that entitle Imcor to retain portions of
the earn-out otherwise payable to Alliance:

| |  | Up
to approximately $1.6 million for an earn-out reduction, depending on the satisfaction of
certain conditions;
| | - | ----------------------------------------------------------------------------------------------------------------

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

-37-

---

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

The
detail of items comprising the gain on disposition of Imagentassets for the years
ended June 30, 2004 and 2003 is calculated as follows (in thousands):

|                                                                  
|------------------------------------------------------------------
|Imcor bridge loan to Alliance of $4,725 and accrued               
|interest of $86, which was converted into a requirement by        
|Alliance to provide future earnout offsets to Imcor               
|Imcor issuance of common stock to Alliance's creditors            
|Cash payments funded by Imcor for liabilities of Alliance         
|Assumption by Imcor of operating liabilities and other debt       
|and settlements with vendors and creditors of Alliance            
|Assumption by Imcor of Cardinal Health Agreement and related      
|line of credit                                                    
|Assumption by Imcor of secured debentures, which held an effective
|100% annualized interest rate                                     
|Carrying value of fixed assets of Alliance acquired by Imcor      
|                                                                  
|Gain on sale of assets of Imagent to Imcor                        
|                                                                  

# 6.  DEBT OBLIGATIONS

On
November 20, 2003, PFC Therapeutics sold a Secured Convertible Note in the principal
amount of $500,000 (the PFC Note) to an investor. The investor also received a
warrant to purchase a number of units of ownership interests of PFC Therapeutics
representing 10% of its issued and outstanding units (determined on a fully-diluted basis
on the date of exercise of the warrant) at an exercise price of $0.01 per unit, at any
time or from time to time from January 31, 2004 to and including January 31, 2009. The
principal amount of the PFC Note is classified in the other liabilities section of the
Consolidated Balance Sheet at June 30, 2004. The Company recorded interest expense of $1
million and a beneficial conversion feature charge of $1 million (included in interest
expense) during the second quarter of the fiscal year ended June 30, 2004 based on the
valuation of the warrant issued in connection with the PFC Note.

As
of June 18, 2003, the Company had received $5.8 million through the issuance of 8%
Convertible Secured Promissory Notes (the Notes) to various institutional
investors ($1.1 million) and Imcor ($4.7 million). Alliance also agreed to issue warrants
exercisable for an aggregate of 2 million shares of common stock, at an exercise price of
$0.50 per share, to holders of its 2004 Debentures. In connection with the sale of all of
the assets related to Imagent, the holders of the Notes (excluding Imcor) and the
holders of the $4.8 million of the Companys previously issued 2004 Debentures agreed
to accept a Payout Amount (as defined in the Asset Purchase Agreement) in full
satisfaction of Alliances obligations and liabilities under such Notes and 2004
Debentures. To induce the debt holders to enter into this agreement, Alliance and Imcor
agreed to deliver certain consideration to each as described in the Asset Purchase
Agreement and summarized below. The debt of $4.8 million, including accrued interest, due
to Imcor was forgiven by Imcor in 2003 and will be repaid through a reduction of future
Imagentearn-out payments, if any. In the event there are no future
Imagent earn-out payments, the value of the Notes will remain forgiven.

Upon
delivery of the specified consideration, Alliances obligations under the Notes and
the 2004 Debentures were terminated and satisfied in full, and each of the loan documents
was deemed terminated and of no further effect. The obligation of Imcor to the debt
holders to deliver the consideration contemplated in the Asset Purchase Agreement is a
direct obligation of Imcor for the benefit of Alliance, fully enforceable against Imcor
irrespective of any actions, financial condition or other circumstances relating to Imcor.
During the fiscal year ended June 30, 2004, upon Imcor issuing common stock as part of its
outstanding obligation to certain debt holders, the Company eliminated the carrying value
of the short-term debt totaling $12.1 million and recorded a corresponding gain on
disposition of asset. During the fiscal year ended June 30, 2004, the Company also reduced
accrued interest by $913,000.

-38-

---

Alliances
specified consideration included the issuance of an aggregate of 4,555,000 shares of
common stock, which were issued on June 19, 2003, to certain secured creditors and up to
an aggregate of 14.84% interest of Oxygenttechnology. The Company will value the
interest in Oxygent technology provided to certain creditors and record this value
as deferred royalty payments. As of June 30, 2004, the Company has recorded deferred
royalty payments of $1.75 million. Reductions to liabilities totaled $15 million due to
Imcor issuance of stock to creditors, cash payments funded by Imcor to vendors and
creditors, and settlements with vendors and creditors during the year ended June 30, 2004.
For settlement agreements with vendors that provided for extended repayment terms, the
Company has recorded the entire outstanding obligation, less payments to date, since the
Company is not released from the full liability until the entire settlement amount is
paid. Since the last payment of the agreed-upon settlement amount was paid on July 15,
2004, the Company has recorded a gain on disposition of assets for the outstanding
obligation at June 30, 2004, less the payments made in July 2004.

In
July and August 2002, the Company entered into two separate loan and security
agreements, totaling $3 million, with an investment firm. In connection with these
transactions, the Company issued warrants to purchase up to 200,000 shares of common stock
at an exercise price of $3.38 per share. As part of the sale of the Imagent assets
in June 2003, Imcor assumed Alliances obligation under these two loan and security
agreements.

In
November 2000, the Company sold $7 million of five-year 6% subordinated convertible
notes. Upon Imcors issuance of common stock, the outstanding balance was eliminated
and a corresponding gain on sale of asset was recorded at June 30, 2004.

In
August and September 2000, the Company sold $12 million of four-year 5% subordinated
convertible debentures to certain investors. On June 18, 2003, the balance outstanding on
these debentures was $5.9 million. Pursuant to a payout agreement, the Company issued
1,250,000 shares of common stock and paid $100,000 in cash to one of the investors. Upon
Imcors issuance of common stock, the outstanding balance, including accrued
interest, of $5.2 million was eliminated and a corresponding gain on sale of asset was
recorded at June 30, 2004.

Pursuant
to a settlement agreement with a former landlord, the Company has a commitment to pay
$420,000 over the next 15 months. Accordingly, Alliance has made payments totaling $65,000
and has included the balance of the compromised amount in liabilities in the Consolidated
Balance Sheet at June 30, 2004.

# 7.  PREFERRED STOCK

In
May 2000, Alliance entered into a joint venture with Baxter and sold 500,000 shares of its
Series F Preferred Stock for $20 million. Subsequently, the Company sold 293,750
additional shares for $11.75 million. The shares are convertible based on the following
provisions: 1) at the option of Baxter on or after May 19, 2004; 2) termination of the
license agreement between Alliance and PFC Therapeutics; 3) at the option of Baxter on or
after the period of time in which the price of Alliances common stock is equal to or
greater than $22 per share ($110 per share based on a post-reverse split of 5:1); or 4) at
the option of Baxter upon a change of control at Alliance. The Series F Preferred Stock
has no annual dividend and is not entitled to any voting rights except as otherwise
required by law.

The
Series F Preferred Stock is convertible at the following conversion rates: 1) if
Alliances common stock price averages $22 ($110 per share on a post-reverse split
basis) per share over a 20-day period through May 19, 2004, the conversion price for the
Series F Preferred Stock will be $22 per share ($110 per share on a post-reverse split
basis); 2) if the license agreement between Alliance and PFC Therapeutics is terminated,
the conversion price will not be less than $10 per share ($50 per share on a post reverse
split basis); or 3) if the events discussed above do not occur, the conversion price will
be based on the market value of Alliances common stock at the time of conversion,
subject to Certain Limitations.

-39-

---

Certain
Limitations refers to the situation where if a conversion event occurs or a
conversion election is made and conversion of shares of Series F Preferred Stock would
result in the issuance by the Company of a number of shares (the Additional
Shares) of its common stock greater than the Issuance Limit, then the
Company need not issue the Additional Shares, unless it first obtains shareholder approval
of the issuance of the Additional Shares. Issuance Limit means 9,389,477
shares (before the reverse stock split of 1:5) of common stock (that is, 19.9% of the
shares of common stock issuance and outstanding as of May 16, 2000). If the Company does
not obtain shareholder approval for the issuance of the Additional Shares or in any event,
does not, prior to the expiration of 120 days after such conversion election, issue the
Additional Shares required to be issued as a result of such conversion event or conversion
election, the Company shall pay to each person entitled to receive such Additional Shares
an amount in cash equal to the aggregate market price of such Additional Shares on the day
that the conversion event occurred or the conversion election was made. The market price
for such day shall be the last reported sales price on the principal exchange on which the
common stock is listed, or if it is not so listed, the Nasdaq National Market or, if it is
not so listed, on the over-the-counter market.

In
March 2004, Alliance terminated its license agreement with PFC Therapeutics and therefore,
the conversion price of the Series F Preferred Stock to common stock is fixed at $50 per
common share (post-reverse split of 5:1). Based on this conversion price, the outstanding
shares of Series F Preferred Stock are convertible into 635,000 shares of common stock.
The Company has accounted for the Series F Preferred Stock as a component of
stockholders equity.

# 8.  STOCKHOLDERS
DEFICIT

# June Private Placement

In
June 2004, the Company completed its June Private Placement, a private placement of
31,427,137 shares of its common stock for aggregate gross proceeds of approximately $11
million. Net proceeds from the transaction, after issuance costs and placement fees, were
approximately $10 million. In connection with this transaction, the Company also issued
five-year warrants to purchase an additional 23,570,357 shares of its common stock at an
exercise price of $0.50 per share. The Company also issued warrants to the placement agent
to purchase 1,571,357 shares of its common stock. Pursuant to the terms of the
registration rights agreements entered into in connection with the June Private Placement,
the Company was required to pay a cash penalty if it failed to file with the SEC a
registration statement under the Securities Act of 1933, as amended, covering the resale
of all of the common stock purchased and the common stock underlying the issued warrants,
including the common stock underlying the placement agents warrants. The fair value
of the warrants was estimated using the Black-Scholes option pricing model with the
following assumptions: no dividend, risk-free interest rate of 3.4%, the contractual life
of 5 years and volatility of 139%. In accordance with Emerging Issues Task Force
(EITF) No. 00-19, Accounting for Derivative Financial Instruments
Indexed To and Potentially Settled In a Companys Own Common Stock, the
estimated fair value in the amount of $7.9 million was recorded as a liability, with an
offsetting charge to additional paid-in capital. The warrant liability will be
reclassified to additional paid-in capital as of the date of effectiveness of the
registration statement, which is the date the potential for a cash penalty ceases.

On
July 2, 2004, Nycomed notified the Company that it was unilaterally terminating the
Nycomed Agreement effective August 16, 2004. Subsequently, a dispute arose between the
Company and some of its investors who participated in June Private Placement. After
considering all of the facts and circumstances relevant to the dispute, the Companys
board of directors determined that it was in the Companys and the Companys
stockholders best interests to offer, as a settlement of the dispute, to rescind the
June Private Placement. (See Note 11.)

-40-

---

# 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), a 1991 Stock Option
Plan, a 2000 Stock Option Plan and a 2001 Stock Option Plan, which provide for both
incentive and non-qualified stock options (the 1991 Plan, the 2000
Plan and the 2001 Plan). These plans provide for the granting of options
to purchase shares of the Companys common stock (up to an aggregate of 500,000,
2,500,000, 8,300,000, 2,100,000 and 2,000,000 shares under the 1983 Plan, 1983 Program,
1991 Plan, 2000 Plan and 2001 Plan, respectively) to directors, officers, employees and
consultants. The optionees, date of grant, option price (which cannot be less than 100%
and 80% of the fair market value of the common stock on the date of grant for incentive
stock options and non-qualified stock options, respectively), vesting schedule, and term
of options, which cannot exceed ten years (five years under the 1983 Plan), are determined
by the Compensation Committee of the Board of Directors. The 1983 Plan, the 1983 Program
and the 1991 Plan have expired and no additional options may be granted under such plans.

The
following table summarizes stock option activity for the two years ended
June 30, 2004:

|                                              
|----------------------------------------------
|Balance at June 30, 2002                      
|Granted                                       
|Terminated/Expired                            
|                                              
|Balance at June 30, 2003                      
|Granted                                       
|Exercised                                     
|Terminated/Expired                            
|                                              
|Balance at June 30, 2004                      
|                                              
|Available for future grant under the 2000 Plan
|Available for future grant under the 2001 Plan
|                                              
|                                              
|                                              

The
following table summarizes information concerning outstanding and exercisable stock
options at June 30, 2004:

-41-

---

|Range of Exercise
Prices | Number
Outstanding | Weighted
Average
Exercise
Price | WeightedAverage
Remaining
Contractual
Life | Number
Exercisable | Weighted
Average
Exercise
Price
|------------------------ | ------------------ | ------------------------------- | ------------------------------------------ | ------------------ | -------------------------------
|$0.15 - $0.17            | 392,500            | $0.17                           | 9.16 years                                 | 103,750            | $0.17                          
|$0.30 - $0.41            | 366,000            | $0.40                           | 9.81 years                                 | 354,250            | $0.40                          
|$0.44 - $4.90            | 296,525            | $3.06                           | 7.42 years                                 | 259,075            | $3.06                          
|$13.75 - $21.565         | 144,540            | $14.05                          | 6.24 years                                 | 143,140            | $13.99                         
|$24.375 - $36.875        | 129,558            | $25.45                          | 3.24 years                                 | 129,558            | $25.45                         
|$38.15 - $43.75          | 64,100             | $39.04                          | 5.13 years                                 | 58,600             | $39.06                         
|$46.875 - $82.50         | 207,260            | $59.97                          | 3.75 years                                 | 189,820            | $59.56                         
|                         |                    |                                 |                                            |                    |                                
|                         | 1,600,483          | $13.36                          | 7.38 years                                 | 1,238,193          | $16.03                         
|                         |                    |                                 |                                            |                    |                                

The
following table summarizes common shares reserved for issuance at June 30, 2004 on
exercise or conversion of:

|Series F convertible preferred stock      |  |  |  | 635,000    | 
|----------------------------------------- |  |  |  | ---------- | 
|Common stock options                      |  |  |  | 2,071,268  | 
|Common stock warrants                     |  |  |  | 37,407,440 | 
|                                          |  | 
|Total common shares reserved for issuance |  |  |  | 40,113,708 | 
|                                          |  | 

# Warrants

At
June 30, 2004, the Company had warrants outstanding to purchase
37,407,440 shares of common stock at prices ranging from $0.35 to $30.00 per share.
The warrants expire on various dates from July 2004 through June 2009.

# 9.  INCOME TAXES

No
provision for income taxes was recorded for the year ended June 30, 2004 due to the
utilization of net operating loss carryforwards.

The
significant components of the Company's deferred tax assets as of June 30, 2004 and 2003,
respectively, are shown below.  A valuation allowance of $222.6 million, of which $4.4
million is related to the year ended June 30,2004, has been recognized to offset the
deferred tax assets, as realization of such assets is uncertain.

Deferred
tax assets consist of the following:

-42-

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|                                           
|-------------------------------------------
|2004                                       
|Net operating loss carryforwards           
|Research and development credits           
|Capitalized research expense               
|Other - net                                
|                                           
|Total deferred tax assets                  
|Valuation allowance for deferred tax assets
|                                           
|Net deferred tax assets                    
|                                           

Approximately
$4 million of the valuation allowance for deferred tax assets relates to stock option
deductions, which, if recognized, will be allocated to contributed capital.

At
June 30, 2004, the Company had federal and various state net operating loss
carryforwards of approximately $494.5 million and $42.7 million, respectively. The
difference between the federal and state tax loss carryforwards is primarily attributable
to the capitalization of research and development expenses for California tax purposes and
the approximate fifty to sixty percent limitation on California loss carryforwards. No
federal tax loss carryforwards expired in fiscal 2004; however, carryforwards will
continue to expire (beginning in fiscal 2009) unless previously utilized. The Company also
has federal and state research and development tax credit carryforwards of $20.8 million
and $8.6 million, respectively. No federal research and development tax credit
carryforwards expired in fiscal 2004; however, carryforwards will continue to expire
(beginning in fiscal 2009) unless previously utilized. Pursuant to Sections 382 and 383 of
the Internal Revenue Code, annual use of the Companys net operating loss and credit
carryforwards will be limited because of cumulative changes in ownership of more
than 50%; therefore, a significant portion will expire prior to being fully utilized.

# 10.  COMMITMENTS AND
CONTINGENCIES

# Imagent

On
June 18, 2003, the Company sold its Imagent assets and transferred certain
liabilities to Imcor for approximately $1.1 million in cash and $3.5 million of Imcor
common stock that was issued directly to certain secured creditors of Alliance. During the
period between 90 and 365 days after the closing, Imcor is obligated to pay up to an
additional $3 million and deliver up to an additional aggregate of 1,985,522 shares of its
common stock to certain creditors. The amount of consideration was determined through
arms-length negotiation. In addition, subsequent to the closing and through 2010, IMCOR
is obligated to pay Alliance further consideration in the form of an earn-out based on
Imagent revenue invoiced (subject to certain reductions).

In
connection with the sale of the Imagent assets, the holders of the 8% Notes
(excluding Imcor) and the holders of the 5% Debentures agreed to accept a Payout Amount
(as defined in the Asset Purchase Agreement) in full satisfaction of Alliances
obligations and liabilities under such Notes and Debentures. To induce the debt holders to
enter into this agreement, Alliance agreed to deliver set considerations and Imcor agreed
to deliver its considerations as described in the Asset Purchase Agreement, in each case
in the manner and the dates specified thereon.

Upon
delivery of the specified considerations, Alliances obligations will be terminated
and satisfied in full, and each of the loan documents shall be deemed terminated and of no
further effect. It is understood that the obligation of Imcor to the debt holders to
deliver the consideration contemplated in the Asset Purchase Agreement is a direct
obligation of Imcor for the benefit of Alliance, fully enforceable against Imcor
irrespective of any actions, financial condition or other circumstances relating to Imcor
hereafter.

-43-

---

Alliance's
specified considerations included the issuance of an aggregate of 4,555,000 shares of
common stock, which were issued on June 19, 2003, to certain secured creditors; cash
payments funded by Imcor made at closing and to be made during the period between 90 and
365 days after the closing; and up to an aggregate of 13.34% of PFC Therapeutics.  If
Imcor meets its obligation in funding the cash payments, Alliance's accounts payable and
accrued expenses as recorded at June 30, 2004, will be decreased by $568,000.

# Litigation

In
April 2004, we settled a lawsuit concerning breach of two license agreements with Mt.
Sinai School of Medicine of New York University.  The settlement agreement did not
require any payments by either party to the other.

On
July 2, 2003,  Hub  Properties  Trust (Hub) filed a lawsuit in the Superior  Court of
the State of California for the County of San Diego against us, Immune Complex
Corporation,  Immune Complex,  LLC (collectively  Immune Complex), and other  parties.
 The suit alleges that the defendants  are liable to Hub for damages  stemming from Hubs
 inability to lease  two  properties  due to  defendants  failure  to timely  deactivate
 the  radiological  materials  licenses  on the properties.  On August 21,  2003,  Immune
 Complex  filed its  cross-complaint  for  indemnity  against us. We have filed a
cross-complaint  against Hub for damages.  In June of 2004,  we  deposited  $1 million
 into a  controlled  bank account as security for any liability we may incur as a result
of the Hub litigation.  If Hub prevails in the  litigation,  it will be entitled to the
funds in the  controlled  account up to the amount of the judgment.  If the judgment
 exceeds the amount of money in the account,  Hub may pursue  other of our assets.  If we
prevail or the judgment is less than $1 million then any money  remaining  in the
 controlled  account  will be returned to us. We believe  that Hubs  claims are without
 merit or subject to defenses;  however,  we do not know if we will ultimately  prevail
or if the outcome of the action will harm our business, financial position or results of
operations.

On
June 13, 2003, we jointly brought a patent infringement action with Imcor against
Amersham Health Inc., Amersham Health AS and Amersham Health plc (collectively, Amersham)
in the U.S. District Court for the District of New Jersey. The lawsuit alleges that
through the sale of Amershams Optison® product, Amersham and its related entities
infringe on seven patents acquired from us by Imcor through its purchase of the Imagent
assets.  We and Imcor are seeking damages and injunctive relief against Amersham.
 Amersham brought counterclaims against us and our subsidiary Molecular Biosystems, Inc. (MBI)
asserting breach of contract, breach of good faith and fair dealing, and tortious
interference with contractual relations.  We believe that Amershams counterclaims are
without merit; however, we do not know if we will ultimately prevail or if the outcome of
the action will harm our business, financial position or results of operations.

In
 December  2001,  a lawsuit was filed  against  MBI in the U.S.  District  Court for the
 Northern  District of Illinois.  The plaintiff in the action  alleged that MBI breached
a license  agreement and sought damages and a declaratory judgment  terminating  the
license  agreement,  and payment of fees and  expenses.  In December  2003,  the court
entered a judgment in favor of MBI. On January 29,  2004,  the court denied  plaintiffs
 motion to amend the  judgment.  On February 25, 2004, the plaintiff appealed the courts
judgment.

On
February 23, 2001, a lawsuit was filed against us and some of our officers by two former
shareholders of MBI purportedly on behalf of themselves and others.  On March 1, 2001 and
March 19, 2001, two additional similar lawsuits were filed by other former shareholders
of MBI.  The lawsuits, filed in the U.S. District Court for the Southern District of New
York, allege that our registration statement filed in connection with the acquisition of
MBI contains misrepresentations and omissions of material facts in violation of certain
federal securities laws.  In May 2001, the actions were consolidated. The plaintiffs are
seeking rescission or compensatory damages, payment of fees and expenses, and further
relief.  In January 2002, the plaintiffs filed a second amended complaint adding an
additional securities claim against us and the named officers. In August 2003, the court
granted summary judgment as to certain securities claims and dismissed the claims, and
denied summary judgment as to other securities claims.  A trial date of November 8, 2004
has been set in the lawsuit.  We believe that the lawsuit is completely without merit;
however, we do not know if we will ultimately prevail or if the outcome of the action
will harm our business, financial position or results of operations.

-44-

---

# 11.  SUBSEQUENT EVENTS

On
July 2, 2004, Nycomed notified the Company that it was unilaterally terminating the
Nycomed Agreement effective August 16, 2004. Subsequently, a dispute arose between the
Company and some of its investors who participated in the June Private Placement. After
considering all of the facts and circumstances relevant to the dispute, the Companys
board of directors determined that it was in the Companys and the Companys
stockholders best interests to offer, as a settlement of the dispute, to rescind
the June Private Placement.

On
September 24, 2004, investors holding 30,546,423 shares of common stock and warrants to
purchase 22,909,821 shares of common stock representing approximately $10.7 million of the
approximately $11 million invested in the June Private Placement elected to rescind the
June Private Placement. In doing so, each of these investors returned to the Company its
stock certificate representing the number of shares and the warrant it received in the
June Private Placement for cancellation.

Immediately
thereafter, these same investors entered into the Senior Note Purchase Agreement whereby
the Company issued to such investors the Senior Notes, convertible at $0.25 per share
into common stock in principal amounts equal to the amounts such investors invested in
the June Private Placement.

After
giving effect to both transactions, the Company issued 880,714 shares of common stock and
warrants to purchase 660,536 shares of common stock for gross proceeds to the Company of
approximately $300,000, and the Company issued Senior Notes in an aggregate principal
amount of approximately$10.7 million.

Also
in September 2004, the holder of the PFC Note exchanged such promissory note for a Senior
Note in the principal amount of $500,000 payable directly by the Company.

The
Senior Notes are due the earlier of March 24, 2006, or an event of default (as defined).
The Senior Notes can be converted at anytime prior to the maturity date. Based on these
covenants, the Company has recorded the Senior Notes as current. The following pro forma
balance sheet information reflects the effects of the exchange of common shares and
warrants for Senior Notes as if it had occurred as of June 30, 2004 (in thousands):

-45-

---

|                                     
|-------------------------------------
|Actual                               
|Current liabilities:                 
|Accounts payable and accrued expenses
|Senior convertible notes             
|                                     
|Total current liabilities            
|Other liabilities                    
|Long-term debt                       
|Deferred royalty payments            
|Accrued warrant liability            
|Stockholders' deficit:               
|Preferred stock                      
|Common stock                         
|Additional paid-in capital           
|Accumulated deficit                  
|                                     
|Total stockholders' deficit          
|                                     
|                                     
|                                     

# Item 8.  Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure

None.

# Item 8A.  Controls and
Procedures

Under
the supervision and with the participation of our management, including our Chief
Executive Officer (CEO), we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) of the Exchange Act as of a date within 90 days prior to filing the
Companys June 30, 2004 Form 10-KSB (the Evaluation Date). Based upon
that evaluation, our CEO concluded that, as of June 30, 2004, our disclosure controls and
procedures were effective in timely alerting management to the material information
relating to us (or our consolidated subsidiaries) required to be included in our periodic
filings with the SEC. Based on his most recent evaluation as of the Evaluation Date, our
CEO has also concluded that there are no significant deficiencies in the design or
operation of internal controls over financial reporting which are reasonably likely to
adversely affect our ability to record, process, summarize and report financial
information, and such officer has identified no material weaknesses in our internal
controls over financial reporting.

Changes in Controls and
Procedures

There
were no significant changes made in our internal controls over financial reporting during
the quarter ended June 30, 2004 that have materially affected or are reasonably likely to
materially affect these controls. Thus, no corrective actions with regard to significant
deficiencies or material weaknesses were necessary.

Limitations on
Effectiveness of Internal Control

-46-

---

Our
management, including our CEO, does not expect that our disclosure controls and procedures
or our internal control over financial reporting will necessarily prevent all fraud and
material errors. An internal control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations on all internal control systems, no
evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within Alliance Pharmaceutical Corp. have been detected. These
inherent limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two
or more people, and/or by management override of the control. The design of any system of
internal control is also based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may become
inadequate because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in a
cost-effective internal control system, financial reporting misstatements due to error or
fraud may occur and not be detected on a timely basis.

# PART III

# Item 9.  Directors,
Executive Officers, Promoters and Control Persons; Compliance with 16(a) of the Exchange
Act

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 11, 2004 Annual Meeting of
Shareholders (the Proxy Statement). Copies of the Proxy Statement will be duly
filed with the SEC 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-KSB.

# Executive Officers of
the Registrant

The
following are the executive officers of the Company:

Duane
J. Roth. Mr. Roth, who is 54, 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.

John
E. Wurst. Mr. Wurst, who is 38, has served as our corporate Secretary and General
Counsel since March 2004. He has been an employee of ours since 1999. Mr. Wurst received
his J.D. from Creighton University School of Law and an L.L.M. in Intellectual Property
from the George Washington University School of Law.

Edward
C. Hall. Mr. Hall has been our Chief Financial Officer since July 2004, on a part-time
basis. Mr. Hall has held senior financial executive positions with both public and
privately held life sciences and technology companies for over 25 years. Prior to his
appointment as our Chief Financial Officer, he served as Vice President and Chief
Financial Officer of Chromagen, Inc, a private biotech tools company that develops
proteomic and genomic assays for use in drug discovery. Prior to that Mr. Hall was Vice
President, Finance and Chief Financial Officer of Cytel Corporation, a public biotech
company and developer of anti-inflammatory drugs.  Prior to that, Mr. Hall was Vice
President, Finance and Chief Financial Officer of Medical Device Technologies, a public
medical device company. He also serves as part-time Chief Financial Officer of Aethlon
Medical, Inc., a development-stage public company. Mr. Hall is a Partner of Tatum CFO
Partners, LLP.

# Item 10.  Executive
Compensation

Information
concerning Executive Compensation is incorporated by reference to
the section labeled Executive Compensation that the Company intends to include
in the Proxy Statement.

-47-

---

# Item 11.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information
concerning Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters is incorporated by reference to the section entitled
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters that the Company intends to include in the Proxy Statement.

# Item 12.  Certain
Relationships and Related Transactions

Information
concerning Certain Relationships and Related Transactions is incorporated by
reference to the section entitled Certain Relationships and Related
Transactions that the Company intends to include in the Proxy Statement.

# Item 13.  Exhibits and
Reports on Form 8-K

| | (a) | Index
to Exhibits
| | --- | -----------------

| | Exhibit | Description
| | ------- | -----------

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

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

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

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

| | 4.2 | Form
of Warrant issued on June 8, 2004 to certain investors and Roth Capital Partners, LLC.
| | --- | -------------------------------------------------------------------------------------------

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

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

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

| | 4.6 | Form
of Senior Convertible Promissory Note.
| | --- | -------------------------------------------

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

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

-48-

---

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

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

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

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

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

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

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

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

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

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

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

| | 10.14 | Form
of 5% Subordinated Convertible Debenture dated February 11, 2000 (incorporated by
reference to               Exhibit 4.1 of the Current Report on Form 8-K dated February
11, 2000 (the February 2000 8-K)).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 10.17 | Form
of 5% Subordinated Convertible Debenture dated August 22, 2000 (incorporated by reference
to Exhibit               4.1 of the Current Report on Form 8-K dated August 22, 2000 (the
August 2000 8-K)).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

-49-

---

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

| | 10.36 | Consulting
Agreement dated July 31, 2001 between the Company and Harold W. DeLong. (1) (incorporated
by               reference to Exhibit 10(hhh) of the Companys annual report on Form 10-K
for the fiscal year ended June               30, 2001 (the 2001 10-K)).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

-50-

---

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

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

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

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

| | 10.42 | Form
of Purchase Agreement dated October 30, 2001 (incorporated by reference to Exhibit 99.2
of the               Current Report on Form 8-K dated October 31, 2001 (the October 2001
8-K)).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

| | 10.47 | Amended
and Restated License Agreement dated as of February 22, 2002 between the Company and
Schering               Aktiengesellschaft (1) (incorporated by reference to Exhibit 10(b)
of the March 2002 10-Q).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.48 | Agreement
dated as of February 28, 2002 between the Company and RedKey, Inc., dba Cardinal Health
Sales               and Marketing Services (1) (incorporated by reference to Exhibit
10(a) of the Companys Quarterly report               on Form 10-Q for the quarterly
period ended March 31, 2002 (the March 2002 10-Q)).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

-51-

---

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

-52-

---

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

| | 10.71 | Registration
Rights Agreement dated May 27, 2004 by and among the Company and certain investors. *
| | ----- | --------------------------------------------------------------------------------------------------

| | 10.72 | Securities
Purchase Agreement dated May 27, 2004 by and among the Company and certain investors. *
| | ----- | --------------------------------------------------------------------------------------------------

| | 10.73 | Rescission
and Settlement Agreement dated September 21, 2004 by and among the Company and certain
              investors. *
| | ----- | ----------------------------------------------------------------------------------------------------------------------------

| | 10.74 | Senior
Convertible Promissory Note Purchase Agreement dated September 21, 2004 by and among the
Company               and certain investors. *
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 10.75 | Registration
Rights Agreement dated September 21, 2004 by and among the Company and certain investors.
*
| | ----- | --------------------------------------------------------------------------------------------------------

| | 14.1 | Code
of Ethics. *
| | ---- | -----------------

| | 23.1 | Consent
of Ernst & Young LLP, Independent Registered Public Accounting Firm.*
| | ---- | -----------------------------------------------------------------------------

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

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

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

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

---

* Filed Herewith. # Indicates management contract or
compensatory plan or arrangement.

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

| | None.
| | -----

# Item 14.  Principal
Accountant Fees and Services

Information
concerning Principal Accountant Fees and Services is incorporated by reference
to the section entitled Principal Accountant Fees and Services that the
Company intends to include in the Proxy Statement.

-53-

---

# Policy on Audit
Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor

Information
concerning Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditor is incorporated by reference to the section entitled
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
of Independent Auditor that the Company intends to include in the Proxy Statement.

-54-

---

# 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 28, 2004 | By:  /s/ Duane J. Roth              
|                          | Duane J. Roth                       
|                          | Chairman and Chief Executive Officer
|                          | By:  /s/ Edward C. Hall             
|                          | Edward C. Hall                      
|                          | Chief Financial Officer             

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|/s/                    | Chairman, Chief Executive Officer
|---------------------- | ---------------------------------
|Duane J. Roth         
|/s/                    | Director                         
|Theodore D. Roth      
|/s/                    | Director                         
|Pedro Cuatrecasas, M.D
|/s/                    | Director                         
|Carroll O. Johnson    
|/s/                    | Director                         
|Stephen M. McGrath    
|/s/                    | Director                         
|Donald E. O'Neill     
|/s/                    | Director                         
|Jean Riess, Ph.D      

-55-