<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, 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, 2006

      [   ]  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)

  4660 LA JOLLA VILLAGE DRIVE, SUITE 740
          SAN DIEGO, CALIFORNIA                          92122
(Address of Principal Executive Offices)               (Zip Code)

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

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

                                      NONE
                             _____________________

                            Title of each class: NONE

                 Name of each exchange on which registered: NONE

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

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



<PAGE>

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

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

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

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

         Revenues for the issuer's fiscal year ended June 30, 2006 were
$129,000. The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant, computed by reference to the closing
price of such common equity on the Over-the-Counter Bulletin Board ("OTCBB")
administered by the National Association of Securities Dealers ("NASDAQ") on
September 5, 2006 was $5.4 million.

         The number of shares of the Registrant's common stock, $0.01 par value,
outstanding at September 5, 2006 was 38,464,538.


                       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
2006 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.

         Transitional Small Business Disclosure Format (check one).
Yes |_| No |X|


                                       2


<PAGE>

                                   FORM 10-KSB

                                      INDEX

PART I.........................................................................5
   Item 1.  Business...........................................................5
   Item 2.  Description of Property...........................................17
   Item 3.  Legal Proceedings.................................................17
   Item 4.  Submission of Matters to a Vote of Security Holders...............17
PART II.......................................................................18
   Item 5.  Market for the Registrant's Common Equity and Related Stockholder
            Matters and Small Business Issuer Purchases of Equity
            Securities........................................................18
   Item 6.  Management's Discussion and Analysis or Plan of Operation.........20
   Item 7.  Financial Statements..............................................24
   Item 8.  Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure..............................................42
   Item 8A. Controls and Procedures...........................................42
   Item 8B. Other Information.................................................42
PART III......................................................................43
   Item 9.  Directors, Executive Officers, Promoters and Control Persons;
            Compliance with 16(a) of the Exchange Act ........................43
   Item 10. Executive Compensation............................................43
   Item 11. Security Ownership of Certain Beneficial Owners and Management
            and Related Stockholder Matters...................................43
   Item 12. Certain Relationships and Related Transactions....................43
   Item 13. Exhibits..........................................................44
   Item 14. Principal Accountant Fees and Services............................50

Signatures
Certifications

                                       3


<PAGE>
                           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 2007 and beyond to differ materially from those
expressed in any forward-looking statements made by us or on our behalf. These
risks include, but are not limited to:

     o    demand for the repayment of our senior convertible promissory notes
          (the "Senior Notes");

     o    our inability to obtain adequate financing for our development
          efforts;

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

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

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

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

     o    possible competition from other products;

     o    difficulties in manufacturing our products on a large scale;

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

     o    failure to obtain market acceptance;

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

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

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

                                       4


<PAGE>

                                     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(TM),
(perfluorochemical ("PFC") emulsion) an intravascular oxygen carrier designed to
augment oxygen delivery in surgical patients.

         We were incorporated in New York in 1983. Our principal executive
offices are located at 4660 La Jolla Village Drive, Suite 740, San Diego,
California 92122, and our telephone number is (858) 410-5200.

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

OXYGENT(TM)

         PFCs are biochemically inert compounds and may be employed in a variety
of therapeutic applications. PFC emulsions, first developed over 40 years ago,
possess unique physical and chemical properties that make them ideal temporary
intravenous oxygen carriers for clinical indications where tissues may be at
risk of inadequate oxygenation.

         We have developed certain proprietary technologies for medical
applications based on the use of biochemically inert perfluorooctyl bromide
(perflubron), a brominated PFC that has a high solubility for respiratory gases.
When formulated into an emulsion, OXYGENT can be used to transport respiratory
gases throughout the body. The product is sterile, compatible with all blood
types and is expected to have a "shelf life" of approximately two years. We are
pursuing two separate clinical indications.

TRANSFUSION AVOIDANCE

         The first indication is the use of OXYGENT to provide oxygen to tissues
during elective surgeries where a blood transfusion is anticipated and thereby
eliminating or reducing the need for blood transfusions. It is estimated that
approximately twenty 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 portion of these patients. Each unit of OXYGENT is
expected to provide the equivalent oxygen delivery of approximately one unit of
fresh red blood cells.

         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 2b clinical
studies.

         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 significant 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, due to an unexpected imbalance in certain serious
adverse events ("SAEs"), primarily the incidence of stroke and a higher
incidence of postoperative bleeding. We conducted an extensive integrated review
of the combined safety data from both Phase 3 studies as well as all previous
clinical studies. The conclusion of the review, as well as the conclusions of
independent experts, confirmed that the imbalance in the neurological SAEs was
due to the rapid removal of large volumes of blood during the blood conservation
procedure, Intraoperative Autologous Donation ("IAD"), performed as the patients
were going on CPB creating a brief period of hemodynamic instability, resulting
in a decrease in blood flow and an oxygen deficit. This resulted in serious
neurological complications in a subset of at-risk subjects (e.g., older age,
history or neurological disease). The bleeding SAEs were due to the dilutional
effect on the coagulation factors caused by this withdrawal of blood and
subsequent infusion of fluids during surgery and the later return of
anti-coagulated autologous blood after CPB was completed. This analysis revealed
no evidence to directly link OXYGENT to the observed imbalances in SAEs;
instead, the blood conservation 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.

                                       5


<PAGE>

         Following this analysis, we met with 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.

         In June 2004, we received scientific advice from the European Medicines
Agency (the "EMEA") that it would be necessary to prove in a statistical
demonstration that OXYGENT is not inferior to blood transfusion for serious
adverse events or death, no matter how rare these events are. The EMEA suggested
that such a study would not be practical to conduct as it would require an
enormous number of patients. As an alternative, the EMEA recommended a study
design for initial approval of OXYGENT where blood transfusion is not available.

         The efficacy of OXYGENT in terms of drug activity, i.e., its ability to
deliver oxygen and reverse physiological transfusion triggers, the establishment
of the hemoglobin ("Hb") equivalency of a dose of OXYGENT (a 2.7 g/kg clinical
dose of OXYGENT is equivalent to ~ 4 g/dL [Hb]), and the ability of OXYGENT to
enable patients to be physiologically stable and safe at lower intraoperative Hb
levels were all demonstrated in both Phase 2 and Phase 3 studies. Results from
the previous Phase 2 and Phase 3 clinical trials were used to develop the
rationale for a new protocol design without autologous blood conservation
procedures such as Acute Normovolemic Hemodilution ("ANH") or IAD used in
previous clinical studies. The use of OXYGENT without ANH would avoid the need
to treat patients prophylactically before knowing the extent of surgical blood
loss, and potentially simplify its use and facilitate the acceptance of OXYGENT
in the marketplace.

ORGAN PROTECTION

         The second indication incorporates the use of OXYGENT as a therapeutic
for organ perfusion during major elective surgeries to protect vital organs from
hypoxic injury. During a major insult such as surgery, the body often reacts by
decreasing blood flow to intra-abdominal tissues, thereby conserving blood flow
and oxygen supply to vital organs, such as the heart and brain. As a result,
gastrointestinal organs receive less oxygen and postoperative bowel function may
be impaired. PFC emulsions have been shown to improve oxygenation to organs and
tissues. The ability of OXYGENT to provide oxygenation to intestinal mucosa in
the context of ischemic situations lies partly in the relatively small diameter
of emulsion particles, approximately 0.1-0.3 microns, or 40 times smaller than a
red blood cell. This size enables OXYGENT to flow through small capillaries
inaccessible to red blood cells.

         In cardiovascular surgeries, regional hypoperfusion and resulting acute
hypoxia of gastrointestinal organs manifests itself in delayed tolerance for
food and fluid intake, and delayed bowel movement representing an important
trigger event that can lead to increased morbidity, prolonged hospital stay and
higher mortality.

         Clinical evidence for intestinal mucosal protection was obtained during
an OXYGENT Phase 3 Study in which gastric tonometry was performed in a subset of
patients at one clinical study site by looking at differences between carbon
dioxide tensions in the arterial blood and those in the tonometer balloon (the
"CO2 gap").

         During CPB, control patients had elevated CO2 gaps and calculated
intestinal mucosal pH, statistically significantly higher than patients treated
with OXYGENT, in which these values were normal. This benefit translated into
significantly shorter postoperative time to first bowel movement (2 vs. 5 days;
p < 0.007) and a strong trend to earlier consumption of solid food (1.8 vs. 4.1
days; p = 0.056) (FRUMENTO ET AL. ANESTH ANALG 2002;94 809-14). Abnormal
tonometric variables during cardiac surgery have been associated with delay in
return of normal gastrointestinal function and increased length of hospital
stay.

         Alliance has developed a Phase 2 Proof of Concept Postoperative Ileus
clinical study protocol designed to demonstrate the safety and efficacy of
OXYGENT for improvement of postoperative gastrointestinal function in cardiac
surgery. This design uses clinical endpoints recognized as approvable endpoints
by the FDA, i.e., time to recovery of upper gastrointestinal function
(consumption of solid food) and lower gastrointestinal function (bowel
movement). The proposed study would be a double-blind design allowing unbiased
assessment of safety, which has not been possible in previous OXYGENT clinical
trials. This will effectively eliminate investigator bias, evidence of which was
observed in previous studies.

         Alliance has applied to the Competent Authorities and to the Ethics
Committees (equivalent to Investigational Review Board ("IRB") in the U.S.) in
France and Germany. The French Ethics Committee has approved the protocol and a
response from the French Competent Authority is still pending. The German
Competent Authority has approved the protocol; however, the relevant German
Ethics Committee has responded with a negative vote based upon risk/benefit of
the protocol. Alliance has appealed this ruling.

ASTRAL, INC.

         On September 6, 2005, Alliance and Astral, Inc. ("Astral") entered into
an asset contribution agreement (the "Astral Agreement") with MultiCell
Technologies, Inc. ("MultiCell") and Astral Therapeutics, Inc. ("Astral
Therapeutics") pursuant to which Alliance and Astral contributed all of their
respective assets that related primarily to the business of Astral to Astral
Therapeutics, a new entity formed for the purpose of further developing the
Astral assets. (See MultiCell Technologies, Inc. under Collaborative
Relationships below.)

                                       6


<PAGE>

COLLABORATIVE RELATIONSHIPS

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

         BEIJING DOUBLE-CRANE PHARMACEUTICAL CO., LTD. On May 13, 2005, our
subsidiary PFC Therapeutics, Inc. ("PFC Therapeutics") and Beijing Double-Crane
Pharmaceutical Co., Ltd. ("Double-Crane"), the market leader for IV solutions
and one of the largest pharmaceutical companies in the People's Republic of
China (the "PRC"), entered into a development, license and supply agreement
("the Double-Crane Agreement") for the development of OXYGENT in the PRC.
Pursuant to the Double-Crane Agreement, Double-Crane made an upfront license fee
payment and will make certain milestone and royalty payments to us. Double-Crane
will conduct clinical trials in the PRC, in accordance with international
guidelines, to receive marketing approval for OXYGENT in the PRC. We will have
the right to use in other countries any data derived from the clinical trials.
Double-Crane will have the option to manufacture OXYGENT in the PRC after
obtaining approval from the regulatory authorities in the PRC and will also have
a right of first refusal to add specific additional countries to the
Double-Crane Agreement upon further negotiation with us.

         Alliance and Double-Crane have formed a Joint Development Team to
manage the development of OXYGENT in China. Under the Double-Crane Agreement,
Alliance is also obligated to provide Double-Crane with the documentation
necessary to enable Double-Crane to translate all relevant data and other
information into Chinese prior to the submission of an Investigational New Drug
("IND") application with the State Food and Drug Administration P.R. China (the
"sFDA"). To date, Alliance has provided all such necessary documentation, with
the exception of the manufacturing documentation. Alliance expects that this
documentation will be provided as product samples are released from
manufacturing. Double-Crane has already completed the translation of the
preclinical and clinical documentation.

         LEO PHARMA A/S. On December 22, 2004, PFC Therapeutics and LEO Pharma
A/S ("LEO"), one of the leading Danish research-based pharmaceutical companies
that markets significant products within the fields of dermatology, metabolic
and cardiovascular diseases and ophthalmology and antibiotics, signed an
exclusivity agreement to enter into a license agreement, subject to continued
due diligence by LEO, to develop and commercialize OXYGENT in Europe (EU member
countries, EU membership applicants, Norway and Switzerland) and Canada (the
"LEO Exclusivity Agreement"). The terms of the license agreement, if entered
into, would include certain initial and future payments to PFC Therapeutics upon
the completion of various regulatory and commercial milestones for OXYGENT
development in Europe and royalties on commercial sales of OXYGENT in Europe and
Canada. On January 5, 2005, we received the non-refundable portion of an
exclusivity fee of $100,000 per the terms of the LEO Exclusivity Agreement.
Because the amendment discussed below extends LEO's due diligence time-period,
this amount has been deferred and is included in current liabilities in the
accompanying consolidated balance sheet at June 30, 2006.

         On February 25, 2005, PFC Therapeutics and LEO agreed to amend the LEO
Exclusivity Agreement. The amendment extends the period of time in which LEO may
undertake its due diligence investigation from March 1, 2005 to a date that is
sixty (60) days after submission by us to LEO of the results of the Phase 2
Proof of Concept Postoperative Ileus study discussed above. We anticipate that
the Phase 2 study will be completed in the first half of calendar 2007. The
remaining terms of the LEO Exclusivity Agreement remain in full force and
effect, provided that any definitive license agreement entered into between PFC
Therapeutics and LEO relating to the marketing and commercialization of OXYGENT
will include an additional milestone payment, the amount of which is to be
proposed by us, relating to the Phase 2 Proof of Concept Postoperative Ileus
study described above.

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

         MULTICELL TECHNOLOGIES, INC. On September 6, 2005, Alliance and Astral
entered into the Astral Agreement with MultiCell and Astral Therapeutics
pursuant to which Alliance and Astral contributed all of their respective assets
that relate primarily to the business of Astral to Astral Therapeutics, a new
entity formed for the purpose of further developing the Astral assets. In
return, Alliance received an amount of common stock of Astral Therapeutics equal
to approximately 49% of the outstanding capital stock of Astral Therapeutics. In
addition, in connection with this transaction, Astral Therapeutics assumed
certain obligations and liabilities of Alliance with respect to the Astral
assets. Subsequent to the transfer of the Astral assets, MultiCell purchased $2
million in Series A Preferred Stock of Astral Therapeutics. MultiCell paid $1
million of this amount at the closing of the purchase of the Series A Preferred
Stock and is obligated to pay the balance in four quarterly installments of
$250,000 through September 2006 pursuant to a promissory note that is secured by
a pledge of $1 million in value of Astral Therapeutics Series A Preferred Stock.
After the purchase and sale of the Series A Preferred Stock of Astral
Therapeutics to MultiCell, Alliance owned approximately 33% of the outstanding
capital stock of Astral Therapeutics.

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

                                       7


<PAGE>

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 110 issued patents worldwide. In addition, we hold 8 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 2007 and 2014.

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

COMPETITION

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

         Companies that we know are in active development of a blood substitute
product include Biopure Corporation ("Biopure"), Northfield Laboratories Inc.
("Northfield"), Sangart Inc. ("Sangart"), Synthetic Blood International ("SBI"),
Sanguine Corp. ("Sanguine") and ImaRx Therapeutics ("ImaRx"). 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. There are several companies working on hemoglobin solutions as temporary
oxygen carrier blood substitutes that have advanced into clinical trials.
Biopure, a company developing a bovine-based hemoglobin solution, received
approval in South Africa and initiated selling activities for its product there
in January 2006. It has also applied for a Medical Authorization Approval
("MAA") with the United Kingdom regulatory authority based on Phase 3 studies in
orthopedic and cardiac patients. In the U.S., Biopure is currently addressing
the FDA's questions regarding its product's safety and efficacy that arose
during the regulatory review of the company's Biologic License Application to
market its product in the U.S. for an orthopedic surgery indication. Its trauma
trial, in collaboration with the U.S. Navy, has been placed on hold pending
resolutions of dosing, safety and risk/benefit questions raised by the FDA.
Northfield, a company working on hemoglobin solutions derived from outdated
human blood, has recently announced the completion of its 750-patient Phase 3
urban ambulance trial that was initiated in December 2003. It also announced the
purchase of a building for the construction of a manufacturing facility capable
of producing up to 100,000 units of its product. The third company, Sangart,
completed a 90-patient Phase 2 study in Sweden with patients undergoing
orthopedic surgeries with its human hemoglobin-based product.

         With respect to PFC emulsion development, we are aware of three
early-stage companies in the U.S. developing PFC-based temporary oxygen
carriers; however, only one, SBI, has progressed to clinical trials. It has
recently announced the completion of enrollment in its eight-patient Phase 2
brain trauma study. Its Phase 2 study in orthopedic patients in the U.S has been
suspended. Sanguine, still in the early preclinical stages of discovery and
formulation development, has announced it is engaged in no principal operations.
ImaRx has announced the intention to investigate its micro-bubble technology to
delivery oxygen to ischemic tissues. We are also aware of one product,
PERFTORAN, which is a dilute first-generation PFC-based emulsion that was
developed at the Russian Academy of Sciences and has been approved in 1999 in
Russia and other countries for a variety of clinical indications.

         We believe that OXYGENT and the 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.

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, by the sFDA in China 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.

                                       8


<PAGE>

         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 IND application. Further, an
independent 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 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 5, 2006, we had two full-time employees, one of whom
was engaged in research and development and associated support, and one in
general administration. We also had three part-time employees, one in research
and development and two in administration. None of our employees is represented
by a labor union and we believe that our employee relations are satisfactory. We
also maintain agreements with five research and development consultants.

                                       9


<PAGE>

                                  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

OUR SENIOR NOTES COME DUE IN APRIL 2007, AND WE CURRENTLY DO NOT HAVE THE MEANS
TO REPAY THIS AMOUNT. IF WE ARE UNABLE TO REPAY OUR SENIOR NOTES WHEN THEY COME
DUE, THE HOLDERS OF OUR SENIOR NOTES MAY FORCE OUR LIQUIDATION.

         In September 2004, as amended in April 2006 to reduce the conversion
price, increase the interest rate and extend the maturity date, we entered into
a Senior Note Purchase Agreement with certain investors pursuant to which we
issued our Senior Notes in the approximate principal amount of $10.7 million. As
of September 5, 2006, we owe the holders of our Senior Notes approximately $11.3
million in principal and accrued interest. The Senior Notes come due in April
2007, as amended. We currently do not have the resources to repay the Senior
Notes. If the holders of our Senior Notes demand repayment in April 2007, and we
are unable to do so, the holders of our Senior Notes may be able to force our
liquidation. In the event of our liquidation under these circumstances, it is
highly unlikely the holders of our equity securities will receive any
distribution upon such liquidation.

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

         We are a product development company with no current revenue from
product sales. We have had net operating losses since our inception and we
expect such losses to continue until we receive revenues from product sales, if
such revenues cover our costs. As of June 30, 2006, we had an accumulated
deficit of $493.7 million. For the years ended June 30, 2006 and 2005, we
incurred net losses of $9.6 million and $5.7 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. Double-Crane is obligated to initiate clinical trials
in China, but we do not expect that these trials will be initiated until the
first quarter of calendar 2007 and they will likely be Phase 1 clinical trials.
We expect that it will require at least one additional Phase 2 and 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.
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 DO NOT HAVE MANUFACTURING CAPABILITIES FOR OUR PRODUCTS.

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

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

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

       o      the timing and extent of our late-stage clinical trials for
              OXYGENT;

       o      continued scientific progress in our research and development
              programs;

       o      the time and cost involved in obtaining regulatory approvals for
              our products;

       o      patent costs;

       o      completing technological and market developments; and

       o      the cost of manufacturing scale-up.

                                       10


<PAGE>

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

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

         A key aspect of our strategy is to selectively enter into
collaborations with third parties. We currently rely, and will continue to rely,
on our collaborators for financial resources and for development,
commercialization and regulatory expertise. Currently, we do not have a
collaboration agreement with any third party to develop our product OXYGENT in
the U.S. We have entered into the LEO Exclusivity Agreement that would grant LEO
the right to develop and commercialized OXYGENT in Europe; however, a definitive
collaboration agreement with LEO is subject to the successful completion of a
Phase 2 Proof of Concept study that must validate clinical data from a prior
study. We expect this Phase 2 study to be completed in the first half of
calendar 2007; however, we do not know whether the results will satisfy LEO or
cause them to enter into a definitive collaboration agreement with us. Until
such time as they do, LEO is under no further obligation to us under the LEO
Exclusivity Agreement.

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

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

       o      decide to pursue a competitive potential product developed outside
              of the collaboration; or

       o      cannot obtain the necessary regulatory approvals.

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

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

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

       o      disputes with respect to payments that we believe are due under a
              collaboration agreement;

       o      disagreements with respect to ownership of intellectual property
              rights;

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

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

       o      termination or non-renewal of the collaboration.

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

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

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

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

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

       o      these third parties need to be replaced; or

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

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

                                       11


<PAGE>

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:

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

       o      failure to conduct clinical trials in accordance with regulatory
              requirements;

       o      lower than anticipated enrollment rate of patients in clinical
              trials;

       o      serious adverse events or side effects experienced by
              participants; and

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

         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.

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:

       o      fail to receive the regulatory clearances required to market them;

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

       o      be difficult or expensive to manufacture on a commercial scale; or

       o      fail to compete with products or other treatments commercialized
              by our competitors.

         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:

       o      our ability to provide acceptable evidence of safety and efficacy;

       o      relative convenience and ease of administration;

       o      the prevalence and severity of any adverse side effects;

       o      availability of alternative treatments;

       o      pricing and cost effectiveness, which may be subject to regulatory
              control;

       o      effectiveness of our or our collaborators' sales and marketing
              strategy; and

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

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

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

         We will need to expand and effectively manage our operations and
facilities in order to advance our product development programs, achieve
milestones under our collaboration agreements, facilitate additional
collaborations and pursue other development activities. It is possible that our


                                       12


<PAGE>

human resources and infrastructure may be inadequate to support our future
growth. To manage our growth, we will be required to continue to improve our
operational, financial and management controls, reporting systems and
procedures, and to attract and retain sufficient numbers of talented employees.
In addition, we may have to develop sales, marketing and distribution
capabilities if we decide to market any product that we may successfully develop
without partnering with third parties. We may not successfully manage the
expansion of our operations and, accordingly, may not achieve our research,
development and commercialization goals.

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

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

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

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

       o      the trend toward managed healthcare in the U.S.;

       o      the growth of group purchasing organizations; and

       o      legislative proposals to reform healthcare and government
              insurance programs.

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

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

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

       o      the status of development of OXYGENT and the preclinical and
              clinical development of our other drug candidates;

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

       o      the incurrence of preclinical or clinical expenses that could
              fluctuate significantly from period to period;

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

       o      the timing of our ability to satisfy applicable regulatory
              requirements;

       o      the rate of expansion of our clinical development and other
              internal research and development efforts;

       o      the effect of competing technologies and products and market
              developments; and

       o      general and industry specific economic conditions.

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

                                       13


<PAGE>

                   RISKS RELATED TO OUR INTELLECTUAL PROPERTY

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

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

       o      any of our current or future patent applications will result in
              the issuance of patents;

       o      any of our issued patents will provide significant proprietary
              protection or commercial advantage; or

       o      any of our issued patents will not be circumvented by others.

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

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

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

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

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

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

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

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

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

                                       14


<PAGE>

                          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.

         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. We cannot assure that the cost of our
product will be competitive with the cost of established therapies. We do not
know whether our technology or the technology of a competitor will gain market
acceptance. Our failure to compete could have a material adverse effect on our
business. We cannot assure you that other technologies will not be developed
that would render our product obsolete or more costly.

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

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

                                       15


<PAGE>

                RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES

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

         As of September 5, 2006, 38,464,538 shares of our common stock were
outstanding. On September 30, 2004, we registered, pursuant to an SB-2,
64,178,599 shares of our common stock that are either outstanding or issuable
upon exercise of outstanding warrants or conversion of the Senior Notes held by
certain 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.

         The Amendment to our Senior Notes caused Alliance to have an
insufficient number of authorized shares to settle all outstanding and
exercisable options, warrants and convertible instruments (See Notes 1 and 6 to
the accompanying consolidated financial statements).

         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:

       o      quarterly variations in operating results and overall financial
              condition;

       o      economic and political developments affecting the economy as a
              whole;

       o      results of our clinical trials;

       o      our inability to manufacture products on a large scale;

       o      short-selling programs;

       o      the stock market's perception of the biotechnology industry as a
              whole;

       o      technological innovations by others;

       o      proprietary rights disputes or litigation;

       o      changes in earnings estimates by analysts;

       o      additions or departures of key personnel; and

       o      sales of substantial numbers of shares of our common stock or
              securities convertible into or exercisable for our common stock.

WE DO NOT CURRENTLY HAVE ENOUGH SHARES OF COMMON STOCK AUTHORIZED TO ACCOMMODATE
THE EXERCISE AND/OR CONVERSION OF ALL OF OUR CONVERTIBLE SECURITIES.

         We do not currently have enough shares of common stock authorized to
accommodate the exercise and/or conversion of all of our convertible securities.
If all of our convertible securities were converted into common stock we would
be obligated to issue approximately 91.4 million more shares of common stock, or
approximately 4.9 million more shares than we have authorized. We are seeking
from our shareholders approval of an amendment to our articles of incorporation
to increase the number of authorized common stock by 25 million shares at the
2006 Annual Meeting of Shareholders for the purpose of accommodating the
conversion of all of our outstanding convertible securities. If our shareholders
do not approve this proposal, then we may be obligated to settle the conversion
of any such convertible security in cash which could have a material adverse
effect on our financial condition.

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.

         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

                                       16


<PAGE>

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

         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 and other parties. The suit alleged that the defendants were
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. The suit was for damages in excess of the $779,000
security deposit. Initially, HUB sought in excess of $3.5 million in damages. On
August 21, 2003, Immune Complex filed its cross-complaint for indemnity against
us. The Company filed a cross-complaint against HUB for damages (a refund of all
or some of the security deposit). In June of 2004, Alliance deposited $1 million
into a controlled bank account as security for any liability the Company might
incur as a result of the HUB litigation. Because of certain pre-trial rulings
limiting HUB's claim, the damages HUB sought at trial were roughly $3 million.
In addition, the parties stipulated prior to trial that Alliance owed HUB
approximately $638,000 in damages based on HUB's allegations. On April 27, 2005,
the jury returned a verdict in favor of HUB in the amount of $1,479,000. The
Court signed a judgment incorporating this verdict on April 28, 2005. HUB also
sought inclusion in the judgment of an award of pre- and post-judgment interest,
as well as attorney fees and costs, totaling approximately $1,370,000. The court
ruled that HUB was entitled to attorney fees of $750,000, costs of $60,000 and
pre-judgment interest of $4,000. Both HUB and Alliance filed Notices of Appeal.
Alliance remitted $779,000 of the $2.3 million judgment in the form of a
security deposit. In September 2005, per the controlled bank account agreement,
HUB withdrew the $1 million security amount plus approximately $11,000 in
interest in partial satisfaction of the judgment award. In November 2005,
Alliance and HUB entered into a settlement and mutual release agreement whereby
the award balance of approximately $536,000 was reduced and Alliance paid the
compromised amount of $400,000 in full settlement of the lawsuit.

         On June 13, 2003, we and Imcor Pharmaceutical Co. ("Imcor"), formerly
known as Photogen Technologies, Inc., jointly brought a patent infringement
action against Amersham Health Inc., Amersham Health AS and Amersham plc
(collectively, "Amersham") in the U.S. District Court for the District of New
Jersey, Civil Action No. 03-2853 (the "Amersham Litigation"). The lawsuit
alleged that (1) through the sale of Amersham's OPTISON product, Amersham and
its related entities infringed on eight patents acquired from us by Imcor
through its purchase of the IMAGENT assets; (2) Alliance and Imcor did not
infringe any Amersham patent; (3) Amersham misappropriated confidential trade
secrets from Imcor (then Alliance) when Amersham (then Nycomed) was negotiating
a marketing agreement for IMAGENT; and (4) Amersham was in violation of U.S.
Antitrust laws. Alliance and Imcor were seeking damages and injunctive relief
against Amersham. Amersham counterclaimed for infringement of 12 of its patents
and 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. Imcor paid all
costs in this lawsuit, including attorney fees and Alliance had little financial
risk in the lawsuit. In September 2005, all parties agreed to a settlement of
the Amersham Litigation, in which all parties granted each other fully paid-up,
irrevocable, royalty-free, non-exclusive cross-licenses, with the right to
sublicense, and mutual releases.

         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 other MBI shareholders alleging that our registration statement and
prospectus filed and issued in connection with the acquisition of MBI contained
misrepresentations and omissions of material facts in violation of certain
federal securities laws. On February 15, 2006, the Court approved a settlement
of the lawsuit, which was funded by our insurers, and dismissed the lawsuit with
prejudice.

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, 2006.

                                       17


<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR OUR COMMON STOCK

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

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

                                                         HIGH BID     LOW BID
Fiscal 2006
                Quarter ended June 30, 2006                $0.47       $0.10
                Quarter ended March 31, 2006               $0.13       $0.08
                Quarter ended December 31, 2005            $0.12       $0.09
                Quarter ended September 30, 2005           $0.20       $0.11

Fiscal 2005
                Quarter ended June 30, 2005                $0.26       $0.15
                Quarter ended March 31, 2005               $0.36       $0.15
                Quarter ended December 31, 2004            $0.32       $0.16
                Quarter ended September 30, 2004           $0.40       $0.10

         On September 5, 2006, the closing bid price of the Company's common
stock was $0.14.

         As of September 5, 2006, there were 831 stockholders of record of our
common stock. We believe that, in addition, there are beneficial owners of our
common stock whose shares are held in street name and, consequently, we are
unable to determine the actual number of beneficial holders of our common stock.

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

DIVIDEND POLICY

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

"PENNY STOCK" RULES

         Until our shares re-qualify for inclusion in the NASDAQ system, the
public trading, if any, of our common stock will be on the OTCBB. As a result,
an investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, our common stock. Our common stock is subject to
provisions of Section 15(g) and Rule 15g-9 of the 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.

                                       18


<PAGE>

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table sets forth information as of June 30, 2006 related
to our equity compensation plans (including the potential effect of debt
instruments convertible into common stock) in effect as of that date:

<TABLE>
<S>     <C>
                                  (a)                            (b)                             (c)
                                                                                                 Number of securities
                                                                                                 remaining available for
                                  Number of securities to be                                     future issuance under
                                  issued upon exercise of        Weighted-average exercise       equity compensation plans
                                  outstanding options,           price of outstanding            (excluding securities
Plan category                     warrants and rights (1)        options, warrants and rights    reflected in column (a))(1)
-------------                     -----------------------        ----------------------------    ---------------------------
Equity compensation plans
approved by security holders       2,937,018                     $5.65                           3,993,110

Equity compensation plans not
approved by security holders (1)  14,237,619                     $0.34                           N/A
                                  --------------                 ------                          ----------
Totals                            17,174,637                     $1.24                           3,993,110
</TABLE>

       (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.

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

RECENT SALES OF UNREGISTERED SECURITIES

         On November 20, 2003, PFC Therapeutics sold a Secured Convertible Note
in the principal amount of $500,000 (the "PFC Note") to an investor. Subsequent
to June 30, 2004, the holder of the PFC Note 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.

         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.

         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.

         During the fiscal year ended June 30, 2005, holders of certain Senior
Notes converted an aggregate of $715,000 in principal and approximately $12,000
in accrued interest into an aggregate of 2,907,295 shares of our common stock at
a conversion price of $0.25 per share.

         During the fiscal year ended June 30, 2006, holders of certain Senior
Notes converted an aggregate of $433,000 in principal and approximately $17,000
in accrued interest into an aggregate of 2,646,476 shares of our common stock at
a conversion price of $0.17 per share.

         Subsequent to fiscal year end, holders of certain Senior Notes
converted an aggregate of $168,000 in principal into an aggregate of 988,235
shares of our common stock at a conversion price of $0.17 per share.

                                       19


<PAGE>

         The offers, sales and issuances of these securities were deemed to be
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act") in reliance on Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder as transactions by the issuer not involving
a public offering. The recipients of the securities represented their intention
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates or notes in such transactions. All recipients had
adequate access to information about us.

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

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

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

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

PLAN OF OPERATION

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

         Since our inception in 1983, we have financed our operations primarily
through the sale of equity and debt securities, and we have applied
substantially all of our resources to research and development programs and to
clinical trials. We have incurred operating losses since inception and, as of
June 30, 2006, have an accumulated deficit of $493.7 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, 2006 and 2005, we incurred research and
development expenses of $1.8 million and $856,000, respectively, for OXYGENT, an
intravascular oxygen carrier that we are developing to augment oxygen delivery
in surgical patients at risk of acute oxygen deficit. Research and development
costs to date for our oxygen-therapeutic product candidates, including OXYGENT,
total approximately $159 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 until September 2005, was engaged
in the development of immunoglobulins that are engineered to bear specific
disease-associated peptides. For the years ended June 30, 2006 and 2005, Astral
incurred net research and development expenses of approximately $25,000 and $1.1
million largely due to the $720,000 expense of the assignment of intellectual
property agreement with Mixture Sciences in 2005, respectively. In September
2005, pursuant to the Astral Agreement, $730,000 accrued Astral expenses were
assumed by MultiCell. (See Note 4 to our accompanying consolidated financial
statements.)

                                       20


<PAGE>

RESULTS OF OPERATIONS

YEAR ENDED JUNE 30, 2006 AS COMPARED WITH YEAR ENDED JUNE 30, 2005

         Our revenue decreased to $129,000 for the year ended June 30, 2006,
compared to $1.5 million for the year ended June 30, 2005. This year's revenue
was primarily royalties received from sales other than IMAGENT. The prior year's
revenue was primarily $1.4 million received per the terms of a milestone and
royalty buy-out agreement.

         Research and development expenses decreased by $102,000, or 5%, to $1.8
million for the year ended June 30, 2006, compared to $1.9 million for the year
ended June 30, 2005. The decrease in research and development expenses was
primarily due to the assumption of Astral expenses by MultiCell per the Astral
Agreement in September 2005 (see Note 4 to our accompanying consolidated
financial statements), which expenses totaled $1.1 million during the year ended
June 30, 2005, partially offset by an increase of $953,000 spent on
OXYGENT-related activities during the current year in preparation for a Phase 2
Proof of Concept clinical study in Europe and the transfer of our production
technology to an FDA-approved GMP facility.

         General and administrative expenses decreased by $2.2 million, or 64%,
to $1.2 million for the year ended June 30, 2006, compared to $3.4 million for
the year ended June 30, 2005. The decrease in general and administrative
expenses was primarily due to a $2.1 million decrease in legal fees and
litigation expense, including the reduction of the amount owed to HUB by
Alliance per the settlement and mutual release agreement whereby the award
balance of approximately $536,000 was reduced and Alliance paid the compromised
amount of $400,000 in full settlement of the lawsuit with the difference netted
against litigation expenses. (See "Item 3. Legal Proceedings" above.)

         For the year ended June 30, 2006, we recorded an aggregate gain on the
dispositions of assets and liabilities of $1.2 million. This amount consisted of
$730,000 recorded in connection with the assumption of liabilities per the terms
of the Astral Agreement (see Note 4 to our accompanying consolidated financial
statements) and $476,000 resulting from the recording of payments from Imcor of
$200,000 to fund our obligations, and the assumption by Imcor of certain of our
obligations and settlements with various vendors and creditors of $276,000
during the year in connection with the IMAGENT asset sale transaction. For the
year ended June 30, 2005, we recorded a net gain on the disposition of assets of
$306,000, resulting from the recording of payments of $128,000 from Imcor, and
the assumption by Imcor of obligations and settlements with various vendors and
creditors of $178,000 during the year. (For additional information regarding the
IMAGENT asset sale transaction, see "Liquidity & Capital Resources" below and
Note 5 to our accompanying consolidated financial statements.)

         For the year ended June 30, 2006, we recorded a gain on change in fair
value of derivative liability of $2.6 million related to recording derivative
liabilities at fair value in connection with the amendment to our Senior
Convertible Promissory Note Purchase Agreement and Registration Rights Agreement
(the "Amendment") in April 2006 (see Note 6 to our accompanying consolidated
financial statements).

         Investment income increased to $198,000 for the year ended June 30,
2006, compared to $141,000 for the year ended June 30, 2005. The increase was
primarily a result of higher interest rates.

         Other income was $82,000 for the year ended June 30, 2006, compared to
$378,000 for the year ended June 30, 2005, both of which were the result of
proceeds recorded from sales of raw material inventory (which was previously
written off).

         Interest expense and loss on extinguishment of debt was $10.8 million
in aggregate for the year ended June 30, 2006, an increase of 300% compared to
$2.7 million for the year ended June 30, 2005. The expense for the current year
was primarily the result of the loss on extinguishment of debt resulting from
the fair value of the conversion feature recorded in connection with the
Amendment of the Senior Notes entered into in April 2006 and the accrued
interest on such Senior Notes (see Note 6 to our accompanying consolidated
financial statements). The expense for the prior year was primarily the result
of the beneficial conversion feature ("BCF") expense recorded in connection with
the exchange of our common stock for the Senior Notes in September 2004 and the
accrued interest on such Senior Notes.

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, 2006, we had received $243 million in net
proceeds from sales of our equity securities, $260.5 million in payments from
collaboration agreements and $74.3 million in debt financing of which $37.4
million of such debt has been converted into equity and $25.9 million of such
debt has been retired through the restructuring of various agreements and the
issuance of warrants to purchase our common stock (described more fully below).

         At June 30, 2006, we had approximately $3.6 million in cash and cash
equivalents compared to $6.8 million at June 30, 2005. The decrease resulted
primarily from the net cash used in operations of $3.3 million, and the purchase
of $15,000 of equipment, partially offset by cash received from Imcor of
$200,000. At June 30, 2006, we had a working capital deficit of $9.6 million,
compared to a working capital deficit of $8.1 million at June 30, 2005. The
deficit increase was principally due to the compromise of the HUB litigation
award and settlement (see "Item 3. Legal Proceedings" above), assumption of
certain liabilities by MultiCell per the Astral Agreement (see Note 4 to our
accompanying consolidated financial statements) and settlements with various
vendors partially offset by the fair value of the derivative liability of
$841,000 and the increase in net cash used in operations. Our operations to date
have consumed substantial amounts of cash and are expected to continue to do so
for the foreseeable future.

                                       21


<PAGE>

         Net cash used in operating activities totaled $3.3 million for the year
ended June 30, 2006, compared to $1.7 million for the year ended June 30, 2005.
The increase in net cash used in operating activities during the year ended June
30, 2006 was primarily due to no license fee receipts and a decrease in receipts
from the sale of raw material.

         There was no cash provided by financing activities for the years ended
June 30, 2006 and June 30, 2005.

         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 $1.8 million. In addition, Imcor has assumed or we have settled $20.9 million
in liabilities in full satisfaction of $26.4 million of the foregoing debt. In
addition, Alliance and Imcor were co-plaintiffs in the Amersham Litigation (See
Item 3). On September 19, 2005, Alliance and Imcor entered into a global
settlement agreement pursuant to which each party released the other from any
further obligations under the IMAGENT Purchase Agreement, effectively
terminating all ongoing obligations and rights under the agreement. In addition,
the parties have agreed to a settlement of the Amersham Litigation, in which all
parties granted each other fully paid-up, irrevocable, royalty-free,
non-exclusive cross-licenses, with the right to sublicense, and mutual releases.
Alliance received $200,000 as a result of the above settlement agreements.

         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.

         On December 22, 2004, PFC Therapeutics and LEO signed the LEO
Exclusivity Agreement to enter into a license agreement, subject to continued
due diligence by LEO, to develop and commercialize OXYGENT in Europe and Canada.
The terms of the license agreement, if entered into, will include certain
initial and future payments to PFC Therapeutics upon the completion of various
regulatory and commercial milestones for OXYGENT development in Europe and
royalties on commercial sales of OXYGENT in Europe and Canada. On January 5,
2005, we received the non-refundable portion of an exclusivity fee of $100,000
per the terms of the LEO Exclusivity Agreement, which amount is recorded as
deferred revenue and included in current liabilities in our consolidated balance
sheet at June 30, 2006. On February 25, 2005, PFC Therapeutics and LEO agreed to
amend the LEO Exclusivity Agreement. The amendment extends the period of time in
which LEO may undertake its due diligence investigation from March 1, 2005 to a
date that is sixty (60) days after submission by us to LEO of the results of a
Phase 2 Proof of Concept clinical study in surgery patients to be conducted by
us to confirm the results of an earlier study. We anticipate that the Phase 2
study will be completed in the first half of calendar 2007. The remaining terms
of the LEO Exclusivity Agreement remain in full force and effect, provided that
any definitive license agreement entered into between PFC Therapeutics and LEO
relating to the marketing and commercialization of OXYGENT will include an
additional milestone payment, the amount of which is to be proposed by us,
relating to the Phase 2 clinical trial described above.

         On May 13, 2005, PFC Therapeutics and Double-Crane entered into the
Double-Crane Agreement whereby Double-Crane was granted the right to develop and
commercialize OXYGENT in the PRC. Double-Crane made an upfront license fee
payment of $500,000, which amount is recorded as deferred revenue and included
in current liabilities in our consolidated balance sheet at June 30, 2006, and
they will be obligated to make milestone and royalty payments to us. In
addition, Double-Crane will be responsible for conducting clinical trials in the
PRC, in accordance with international guidelines, necessary to receive marketing
approval for OXYGENT and we will have the right to use any data derived from
these clinical trials in other territories. Double-Crane will have the option to
manufacture OXYGENT in the PRC after obtaining approval from the regulatory
authorities in the PRC. Double-Crane will also have a right of first refusal to
add specific additional countries to the Double-Crane Agreement upon further
negotiation with us.

         On September 6, 2005, Alliance and Astral entered into the Astral
Agreement with MultiCell and Astral Therapeutics pursuant to which Alliance and
Astral contributed all of their respective assets that relate primarily to the
business of Astral to Astral Therapeutics, a new entity formed for the purpose
of further developing the Astral assets. In return, Alliance received an amount
of common stock (490,000 shares) of Astral Therapeutics equal to approximately
49% of the outstanding capital stock of Astral Therapeutics. In addition, in
connection with this transaction, Astral Therapeutics assumed certain
obligations and liabilities of Alliance with respect to the Astral assets.
Subsequent to the transfer of the Astral assets, MultiCell purchased $2 million
in Series A Preferred Stock of Astral Therapeutics. MultiCell paid $1 million of
this amount at the closing of the purchase of the Series A Preferred Stock and
is obligated to pay the balance in four quarterly installments of $250,000
through September 2006 pursuant to a promissory note that is secured by a pledge
of $1 million in value of Astral Therapeutics Series A Preferred Stock. After
the purchase and sale of the Series A Preferred Stock of Astral Therapeutics to
MultiCell, Alliance owned approximately 33% of the fully diluted outstanding
capital stock of Astral Therapeutics. In total, the Company transferred
approximately $730,000 of net liabilities to Astral Therapeutics in exchange for
490,000 shares of common stock of Astral Therapeutics.

                                       22


<PAGE>

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

         As a result of the Amendment of the Senior Notes, the Company did not
have a sufficient number of authorized shares to settle outstanding and
exercisable options, warrants and convertible instruments. The Company was
required to classify all non-employee options and warrants as derivative
liabilities and record them at their fair values at each subsequent balance
sheet date. Any change in fair value was recorded as non-operating, non-cash
income or expense at each balance sheet date. Accordingly, Alliance recognized
$2.6 million in other income and a derivative liability balance of $841,000 at
June 30, 2006 based on the fair value of such instruments.

         If the holders of our Senior Notes do not demand repayment in April
2007, we believe we now have working capital to fund our operations for the next
12 months; however, we currently do not have the resources to repay the Senior
Notes and, if the holders of our Senior Notes demand payment when it is due in
April 2007, they may be able to force our liquidation. 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.

         At June 30, 2006, the following approximate debt obligations were
outstanding:

         (a)      $498,000 owed to various vendors;

         (b)      $82,000 in accrued expenses, primarily consisting of
                  payroll-related expenses;

         (c)      $841,000 in derivative liability in connection with the
                  Amendment to our Senior Notes;

         (d)      $11.2 million in Senior Notes, including $1.2 million in
                  accrued interest;

         (e)      $1.3 million in deferred royalty payments to be paid through
                  future IMAGENT earn-out payments, if any. In the event there
                  are no future IMAGENT earn-out payments, the deferred
                  royalties will not be paid.

SUBSEQUENT EVENTS

         Subsequent to fiscal year end, holders of certain Senior Notes
converted an aggregate of $168,000 in principal into an aggregate of 988,235
shares of our common stock at a conversion price of $0.17 per share.

CRITICAL ACCOUNTING POLICIES

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

INVESTMENT IN JOINT VENTURE

         We had a 50% interest in a joint venture with Baxter Healthcare
Corporation ("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 during fiscal year 2004.

                                       23


<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

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

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


                                                                        Page No.
                                                                        --------

Report of Independent Registered Public Accounting Firm                 25
Consolidated Balance Sheet at June 30, 2006                             26

Consolidated Statements of Operations for the Years
         Ended June 30, 2006 and 2005                                   27

Consolidated Statements of Stockholders' Deficit for the Years
         Ended June 30, 2006 and 2005                                   28

Consolidated Statements of Cash Flows for the Years
         Ended June 30, 2006 and 2005                                   29

Notes to Consolidated Financial Statements                              30



                                       24


<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Alliance Pharmaceutical Corp.

We have audited the accompanying consolidated balance sheet of Alliance
Pharmaceutical Corp. (the "Company") as of June 30, 2006, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the years in the two-year period then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Alliance Pharmaceutical Corp. at June 30, 2006 and the consolidated results of
its operations and its cash flows for each of the years in the two-year period
then ended, in conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company may
lack sufficient working capital to service its debts and to fund its operations
through the fiscal year ending June 30, 2007, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regards
to these matters are described in Note 1. The accompanying consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.

                                                     /S/ CORBIN & COMPANY LLP

Irvine, California
September 6, 2006

                                       25


<PAGE>
<TABLE>
<S>     <C>

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

                                                                                    JUNE 30,
                                                                                      2006
                                                                                  -------------
ASSETS

CURRENT ASSETS:
    Cash and cash equivalents                                                     $   3,643,000
    Other current assets                                                                 54,000
                                                                                  -------------
            Total current assets                                                      3,697,000

PROPERTY, PLANT AND EQUIPMENT - NET                                                      87,000
OTHER ASSETS - NET                                                                       10,000
                                                                                  -------------
                                                                                  $   3,794,000
                                                                                  =============

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
    Accounts payable                                                              $     498,000
    Accrued expenses                                                                     82,000
    Derivative liability                                                                841,000
    Deferred revenue                                                                    600,000
    Senior notes payable and accrued interest                                        11,248,000
                                                                                  -------------
            Total current liabilities                                                13,269,000

OTHER LIABILITIES                                                                     1,250,000
                                                                                  -------------

            Total liabilities                                                        14,519,000
                                                                                  -------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT:
    Preferred stock - $0.01 par value; 5,000,000 shares authorized; Series F
       preferred stock - 793,750 shares issued and outstanding,
       liquidation preference of $31,750,000                                              8,000
    Common stock - $0.01 par value; 125,000,000 shares authorized;
       37,476,303 shares issued and outstanding                                         375,000
    Additional paid-in capital                                                      482,612,000
    Accumulated deficit                                                            (493,720,000)
                                                                                  -------------
            Total stockholders' deficit                                             (10,725,000)
                                                                                  -------------
                                                                                  $   3,794,000
                                                                                  =============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                 26


<PAGE>

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


                                                                                    Years ended June 30,
                                                                          2006                                2005
                                                                   -------------------                 -------------------

REVENUES:
     Royalty, license and research                                 $          129,000                  $        1,477,000
                                                                   -------------------                 -------------------

OPERATING EXPENSES:
     Research and development                                               1,833,000                           1,935,000
     General and administrative                                             1,196,000                           3,365,000
                                                                   -------------------                 -------------------
                                                                            3,029,000                           5,300,000
                                                                   -------------------                 -------------------
LOSS FROM OPERATIONS                                                       (2,900,000)                         (3,823,000)

INVESTMENT INCOME                                                             198,000                             141,000
OTHER INCOME                                                                   82,000                             378,000
LOSS ON EXTINGUISHMENT OF DEBT                                            (10,076,000)                                  -
INTEREST EXPENSE                                                             (732,000)                         (2,745,000)
DECREASE IN FAIR VALUE OF DERIVATIVE LIABILITY                              2,647,000                                   -
GAIN ON DISPOSITION OF LIABILITIES                                            730,000                                   -
GAIN ON DISPOSITION OF ASSETS - NET                                           476,000                             306,000
                                                                   -------------------                 -------------------
NET LOSS                                                           $       (9,575,000)                 $       (5,743,000)
                                                                   ===================                 ===================

NET LOSS PER COMMON SHARE, BASIC AND DILUTED                       $            (0.27)                 $            (0.15)
                                                                   ===================                 ===================

WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED                     35,320,000                          39,276,000
                                                                   ===================                 ===================

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                          27


<PAGE>

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

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

BALANCES AT JULY 1, 2004                        794,000 $8,000    59,969,000  $ 600,000  $ 475,087,000  $(478,402,000) $ (2,707,000)
     Rescission of private placement                 --     --   (30,546,000)  (306,000)   (10,386,000)            --   (10,692,000)
     Reclassification of warrant liability           --     --            --         --      7,942,000             --     7,942,000
     Beneficial conversion feature
         on senior notes                             --     --            --         --      2,238,000             --     2,238,000
     Issuance of common stock in
         exchange for warrant cancellation           --     --     2,500,000     25,000        (25,000)            --            --
     Issuance of common stock upon conversion
         of senior notes and accrued interest        --     --     2,907,000     29,000        698,000             --       727,000
     Compensatory stock options                      --     --            --         --         15,000             --        15,000
     Net loss                                        --     --            --         --             --     (5,743,000)   (5,743,000)
                                              --------- ------ -------------  ---------  -------------  -------------  ------------
BALANCES AT JUNE 30, 2005                       794,000  8,000    34,830,000    348,000    475,569,000   (484,145,000)   (8,220,000)
     Beneficial conversion feature
         on senior notes                             --     --            --         --     10,076,000             --    10,076,000
     Reclassification of fair value of
         non-employee options and warrants           --     --            --         --     (3,488,000)            --    (3,488,000)
     Issuance of common stock upon conversion
         of senior notes and accrued interest        --     --     2,646,000     27,000        423,000             --       450,000
     Compensatory stock options                      --     --            --         --         32,000             --        32,000
     Net loss                                        --     --            --         --             --     (9,575,000)   (9,575,000)
                                              --------- ------ -------------  ---------  -------------  -------------  ------------
BALANCES AT JUNE 30, 2006                       794,000 $8,000    37,476,000  $ 375,000  $ 482,612,000  $(493,720,000) $(10,725,000)
                                              ========= ====== =============  =========  =============  =============  ============


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                                                28


<PAGE>

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

                                                                                     Years ended June 30,
                                                                                   2006                2005
                                                                                ------------       ------------
OPERATING ACTIVITIES:
     Net loss                                                                   $ (9,575,000)      $ (5,743,000)
     Adjustments to reconcile net loss to net cash
        used in operating activities:
            Depreciation and amortization                                             22,000             11,000
            Interest and beneficial conversion expense                            10,076,000          2,238,000
            Accrued interest on senior notes                                         732,000            502,000
            Compensatory stock options and warrant issuance                           32,000             15,000
            Decrease in fair value of derivative liability                        (2,647,000)                --
            Gain on disposition of liabilities                                      (730,000)                --
            Gain on disposition of assets - net                                     (476,000)          (306,000)
            Changes in operating assets and liabilities:
               Restricted cash and other assets                                    1,042,000             49,000
               Accounts payable and accrued expenses and other                    (1,800,000)         1,518,000
                                                                                ------------       ------------
Net cash used in operating activities                                             (3,324,000)        (1,716,000)
                                                                                ------------       ------------

INVESTING ACTIVITIES:
     Purchases of property, plant and equipment                                      (15,000)           (59,000)
     Proceeds from sale of assets                                                    200,000            128,000
                                                                                ------------       ------------
Net cash provided by investing activities                                            185,000             69,000
                                                                                ------------       ------------


DECREASE IN CASH AND CASH EQUIVALENTS                                             (3,139,000)        (1,647,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                     6,782,000          8,429,000
                                                                                ------------       ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                        $  3,643,000       $  6,782,000
                                                                                ============       ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
     Issuance of common stock in exchange for cancellation of warrant$                    --       $     25,000
                                                                                ============       ============
     Issuance of senior convertible notes in connection
        with cancellation of common stock and warrants                          $         --       $ 10,692,000
                                                                                ============       ============
     Issuance of senior convertible notes for secured convertible note          $         --       $    500,000
                                                                                ============       ============
     Issuance of common stock upon conversion of senior notes and interest      $    450,000       $    727,000
                                                                                ============       ============
     Reclassification of warrant liability                                      $         --       $  7,942,000
                                                                                ============       ============
     Reclassification of the estimated fair value of non-employee
        options and warrants to derivative liability                            $  3,488,000       $         --
                                                                                ============       ============
     Beneficial conversion feature on Senior Notes                              $ 10,076,000       $         --
                                                                                ============       ============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                                      29


<PAGE>

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

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

         The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has incurred operating losses through
June 30, 2006 and has negative working capital at that date of approximately
$9.6 million. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern.

         As discussed in Notes 6 and 8, in June 2004, the Company completed a
private placement financing with net proceeds to the Company of approximately
$10 million from the sale of common stock (the "June 2004 Private Placement").
In September 2004, the terms of the June 2004 Private Placement were
renegotiated by mutual agreement of the Company and investors holding
approximately $10.7 million of the original $11 million invested by the various
investors in the June 2004 Private Placement. Concurrently, the investors who
elected to rescind the June 2004 Private Placement were issued senior
convertible promissory notes in like investment amounts (the "Senior Notes"),
which, unless previously converted, were to mature and the unpaid principal,
together with accrued interest, was to become due and payable on March 24, 2006.
Because the holders of the Senior Notes were willing to renegotiate their terms
and did not demand repayment in March 2006 (see Note 6), the Company believes it
has working capital to fund its operations for the next 12 months. The maturity
date of the Senior Notes was extended to April 1, 2007; however, the Company
will not have the resources to repay the Senior Notes on April 1, 2007. The
Company will have to raise additional funds to repay the Senior Notes or
renegotiate their terms. If the Company is unable to do so, it will not have
adequate resources to pay the amount due to the Senior Note holders and such
holders may initiate liquidation proceedings against it. Therefore, the Company
is seeking additional collaborative research and development relationships with
suitable corporate partners for its products. Further, additional equity or debt
financing may be required to fund ongoing operations. Because adequate funds
have not been available to the Company in the past, the Company has already
delayed its OXYGENT development efforts and has delayed, scaled back, and/or
eliminated one or more of its other product development programs. The
accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amount and classification of liabilities that may result from the
outcome of this uncertainty.

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

         The accompanying consolidated financial statements include the accounts
of Alliance Pharmaceutical Corp., the accounts of its wholly owned subsidiaries
Molecular Biosystems, Inc. ("MBI") and Astral, Inc. ("Astral") (until September
6, 2005), and its majority-owned subsidiaries - Talco Pharmaceutical, Inc. and
PFC Therapeutics, LLC ("PFC Therapeutics"). 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 accounting
principles generally accepted in the U.S. 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. Significant estimates made by management include, among others,
recoverability of property, plant and equipment and the valuation of deferred
tax assets and derivative liabilities. Actual results could differ from these
estimates.

CASH AND CASH EQUIVALENTS
-------------------------

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

                                       30


<PAGE>

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. The Company
places its cash with high quality financial institutions and at times may have
deposits which exceed the Federal Deposit Insurance Corporation (the "FDIC")
$100,000 insurance limit. At June 30, 2006, the Company had approximately $3.6
million in these accounts in excess of the FDIC insurance limits.

PROPERTY, PLANT AND EQUIPMENT
-----------------------------

         Property, plant and equipment are stated at cost and depreciated using
the straight-line method over the estimated useful lives of the assets, ranging
from 3 to 5 years. Major betterments and renewals are capitalized, while routine
repairs and maintenance are charged to expense when incurred.

         The Company assesses the recoverability of property, plant and
equipment by determining whether such assets can be recovered through projected
undiscounted cash flows. The amount of impairment, if any, is measured based on
fair value and is charged to operations in the period in which impairment is
determined by management. At June 30, 2006, management has determined that there
is no impairment of property, plant and equipment. There can be no assurance,
however, that market conditions will not change, which could result in future
property, plant and equipment impairment.

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

         As a result of the amendment to its Senior Convertible Promissory Note
Purchase Agreement and Registration Rights Agreement (the "Amendment") in April
2006 (see Note 6), the Company did not have a sufficient number of authorized
shares to settle outstanding and exercisable options, warrants and convertible
instruments. Therefore, under the provisions of Emerging Issues Task Force
("EITF") Issue No. 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS
INDEXED TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," as a result of
the Amendment, the Company was required to classify all non-employee options and
warrants as derivative liabilities, totaling $3.5 million as of the Amendment
date, and record them at their fair values at the date of the Amendment. Any
change in fair value is required to be recorded as non-operating, non-cash
income or expense at each subsequent balance sheet date until the Company has a
sufficient number of authorized shares to settle its convertible instruments and
non-employee options and warrants. If the fair value of the derivatives is
higher at the subsequent balance sheet date, the Company will record a
non-operating, non-cash charge. If the fair value of the derivatives is lower at
the subsequent balance sheet date, the Company will record non-operating,
non-cash income. At the date of the Amendment, the Company reclassified the fair
value of non-employee options and warrants of $3.5 million from additional
paid-in capital to derivative liability. During the year ended June 30, 2006,
the Company recognized other income of $2.6 million related to recording the
derivative liability at fair value. At June 30, 2006, the derivative liability
balance is $841,000.

         Warrant-related derivatives were valued using the Black-Scholes Option
Pricing Model with the following assumptions during the year ended June 30,
2006: dividend yield of 0%; annual volatility of 265%; and risk free interest
rate of 4.95%.

         The following is a summary of the changes to the derivative liability
         during the year ended June 30, 2006:

               Derivative liability, June 30, 2005         $        --

               Derivative liability added during 2006        3,488,000

               Change in fair value                         (2,647,000)
                                                           -----------
               Derivative liability, June 30, 2006         $   841,000
                                                           ===========

                                       31


<PAGE>

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

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

         Revenue is deferred until all contractual obligations have been
satisfied.

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

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

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

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

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

         Research and development expenditures are charged to expense as
incurred. Research and development expenditures include the cost of salaries and
benefits for clinical, scientific, manufacturing, engineering and operations
personnel, payments to outside researchers for preclinical and clinical trials
and other product development work, payments related to facility lease and
utility expenses, depreciation and amortization, patent costs, as well as other
expenditures. During the years ended June 30, 2006 and 2005, the Company
incurred research and development expenses of approximately $1.8 million and
$1.9 million, respectively.

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

         The carrying amount of certain of the Company's financial instruments
as of June 30, 2006 approximate their respective fair values because of the
short-term nature of these instruments. Such instruments consist of cash,
accounts payable, accrued expenses and other liabilities. The carrying value of
debt approximates fair value as the related interest rate approximates a rate
currently available to the Company.

COMPUTATION OF NET LOSS PER COMMON SHARE
----------------------------------------

         Basic loss per share was computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. All
potential dilutive common shares (approximating 85,000 and 34,000 at June 30,
2006 and 2005, respectively) have been excluded from the calculation of diluted
loss per share for the years ended June 30, 2006 and 2005, as their inclusion
would be anti-dilutive.

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

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

BENEFICIAL CONVERSION FEATURE
-----------------------------

         The convertible feature of the Senior Notes provides for a fixed rate
of conversion that is below market value (see Note 6). Such feature is normally
characterized as a "beneficial conversion feature" ("BCF"). Pursuant to EITF No.
98-5, "ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES
OR CONTINGENTLY ADJUSTABLE CONVERSION RATIO," and EITF Issue No. 00-27,
"APPLICATION OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the
relative fair values of the BCFs have been recorded as a discount from the face
amount of the respective debt instrument. Since the BCF was incurred in
connection with the modification of the debt instrument (See Note 6), the entire
amount of $10.1 million was recorded as a loss on extinguishment of debt and is
included in the accompanying consolidated statement of operations.

                                       32


<PAGE>

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

         Stock-based awards to non-employees are accounted for using the fair
value method in accordance with SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," and EITF Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT
ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING
GOODS OR SERVICES." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date used to determine the fair value of the equity instrument issued is the
earlier of the date on which the third-party performance is complete or the date
on which it is probable that performance will occur.

         SFAS No. 123 defines a fair value based method of accounting for
stock-based compensation. However, SFAS No. 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
Under APB 25, compensation cost, if any, is recognized over the respective
vesting period based on the difference, on the date of grant, between the fair
value of the Company's common stock and the grant price. Entities electing to
remain with the accounting method of APB 25 must make pro forma disclosures of
net income (loss) and earnings (loss) per share, as if the fair value method of
accounting defined in SFAS No. 123 had been applied.

         In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "SHARE-BASED PAYMENT" ("SFAS No. 123(R)"),
which is a revision of SFAS No. 123. SFAS 123(R) supersedes APB 25 and amends
SFAS No. 95, "STATEMENT OF CASH FLOWS." Generally, the approach in SFAS No.
123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. The provisions of
this statement are effective for the Company as of July 1, 2006. The Company
expects to adopt SFAS No. 123(R) in the first fiscal quarter of 2007.

         SFAS No. 123(R) requires companies to recognize in the income statement
the grant-date fair value of stock options and other equity-based compensation
issued to employees. SFAS No. 123(R) also establishes accounting requirements
for measuring, recognizing and reporting share-based compensation, including
income tax considerations. Upon adoption of SFAS No. 123(R), the Company will be
required to determine the transition method to be used at the date of adoption.
The allowed transition methods are the modified prospective application and the
modified retrospective application. Under the modified prospective application,
the cost of new awards and awards modified, repurchased or cancelled after the
required effective date and the portion of awards for which the requisite
service has not been rendered (unvested awards) that are outstanding as of the
required effective date will be recognized as the requisite service is rendered
on or after the required effective date. The compensation cost for that portion
of awards shall be based on the grant-date fair value of those awards as
calculated for either recognition or pro forma disclosures under SFAS No. 123.
The modified retrospective application requires companies to record compensation
expense for all unvested stock options and restricted stock beginning with the
first disclosed period restated. The Company plans to adopt SFAS No. 123(R)
using the modified prospective application.

         As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have a
negative impact on the Company's results of operations, although it will have no
impact on its overall financial position. The impact of adopting SFAS No. 123(R)
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future. However, had the Company adopted SFAS No. 123(R)
in prior periods, the impact of that standard would have approximated the impact
of SFAS No. 123 as described in the disclosure of pro forma net loss and loss
per share. SFAS No. 123(R) also requires the benefits of tax deductions in
excess of recognized compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current accounting
literature. The requirement will reduce net operating cash flows and increase
net financing cash flows in periods of adoption.

         At June 30, 2006, the Company has two stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of APB 25, and related interpretations (see Note 7).
During the years ended June 30, 2006 and 2005, no stock-based employee
compensation cost is reflected in the accompanying consolidated statements of
operations, as all options granted under those plans had exercise prices equal
to or greater than the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation:

                                       33


<PAGE>
<TABLE>

                                                      2006                  2005
                                               ------------------   -------------------
<S>                                            <C>                  <C>
Net loss as reported                           $      (9,575,000)   $       (5,743,000)
      Total stock-based employee compensation
          expense determined under fair-value-
          based method for all awards, net
          of tax-related effects                        (291,000)             (693,000)
                                               ------------------   -------------------
      Pro forma net loss                       $      (9,866,000)   $       (6,436,000)
                                               ==================   ===================
Net loss per share, basic and diluted:
      As reported                              $           (0.27)   $            (0.15)
                                               ==================   ===================
      Pro forma                                $           (0.28)   $            (0.16)
                                               ==================   ===================
</TABLE>

         The impact of outstanding non-vested stock options granted prior to
1996 (the effective date of SFAS No. 123) has been excluded from the pro forma
calculations; accordingly, the pro forma adjustments for 2006 and 2005 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 2006 and 2005, respectively: risk-free interest rate range of
4.95% to 5.05% and 3.3% to 4.3%; dividend yield of 0% for both years; volatility
factor of 567% and 365%; 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 2006 and 2005 was $0.11 and $0.29 per option,
respectively.

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

         In June 2006, the FASB issued FASB Interpretation Number 48 ("FIN 48"),
"ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES--AN INTERPRETATION OF FASB STATEMENT
NO. 109." The interpretation contains a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS No. 109.
The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount which is more than 50% likely of being realized upon ultimate
settlement. The provisions are effective for fiscal years beginning after
December 15, 2006 with the cumulative effect of the change in accounting
principle recorded as an adjustment to beginning retained earnings. The adoption
of this statement is not expected to have a material impact on the Company's
consolidated financial position or results of operations.

         Other recent accounting pronouncements issued by the FASB (including
the EITF), the American Institute of Certified Public Accountants and the SEC
did not or are not believed by management to have a material impact on the
Company's present or future financial statements.

COMPREHENSIVE INCOME (LOSS)
---------------------------

         The Company did not have any items of comprehensive income (loss)
during the years ended June 30, 2006 and 2005.

2.  FINANCIAL STATEMENT DETAILS

PROPERTY, PLANT AND EQUIPMENT - NET
-----------------------------------

         Property, plant and equipment consist of the following at June 30,
2006:

           Furniture, fixtures and equipment                  $         201,000
           Less accumulated depreciation and amortization              (114,000)
                                                              ------------------
                                                              $          87,000
                                                              ==================

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

         Other liabilities consist of approximately $1.3 million in deferred
royalty payments to be paid through future IMAGENT earn-out payments, if any
(see Note 5). In the event there are no future IMAGENT earn-out payments, the
deferred royalties will not be paid.

                                       34


<PAGE>

3.  PFC THERAPEUTICS, LLC

         On May 16, 2005, PFC Therapeutics and Beijing Double-Crane
Pharmaceutical Co., Ltd. ("Double-Crane"), the market leader for IV solutions
and one of the largest pharmaceutical companies in the People's Republic of
China (the "PRC"), entered into a development, license and supply agreement
("Double-Crane Agreement") for the development of OXYGENT in the PRC. Pursuant
to the Double-Crane Agreement, Double-Crane made an upfront license fee payment
and will make certain milestone and royalty payments to the Company. The upfront
license fee of $500,000 has been deferred, as the Company's obligations to
perform have not been satisfied, and such amount is included in current
liabilities in the accompanying consolidated balance sheet at June 30, 2006.
Double-Crane will conduct clinical trials in the PRC, in accordance with
international guidelines, to receive marketing approval for OXYGENT in the PRC.
The Company will have the right to use in other countries any data derived from
the clinical trials. Double-Crane will have the option to manufacture OXYGENT in
the PRC after obtaining approval from the regulatory authorities in the PRC and
they will also have a right of first refusal to add specific additional
countries to the Double-Crane Agreement upon further negotiation with the
Company.

         On December 22, 2004, PFC Therapeutics and LEO Pharma A/S ("LEO"), one
of the leading Danish research-based pharmaceutical companies that markets
significant products within the fields of dermatology, metabolic and
cardiovascular diseases and ophthalmology and antibiotics, signed an exclusivity
agreement to enter into a license agreement, subject to continued due diligence
by LEO, to develop and commercialize OXYGENT in Europe (EU member countries, EU
membership applicants, Norway and Switzerland) and Canada (the "LEO Exclusivity
Agreement"). The terms of the license agreement, if entered into, will include
certain initial and future payments to PFC Therapeutics upon the completion of
various regulatory and commercial milestones for OXYGENT development in Europe
and royalties on commercial sales of OXYGENT in Europe and Canada. On January 5,
2005, the Company received the non-refundable portion of an exclusivity fee of
$100,000 per the terms of the LEO Exclusivity Agreement. Because the amendment
discussed below extends LEO's due diligence time-period, this amount has been
deferred and is included in current liabilities in the accompanying consolidated
balance sheet at June 30, 2006.

         On February 25, 2005, PFC Therapeutics and LEO agreed to amend the LEO
Exclusivity Agreement. The amendment extends the period of time in which LEO may
undertake its due diligence investigation from March 1, 2005 to a date that is
sixty (60) days after submission by the Company to LEO of the results of a
"proof of concept" clinical study in surgery patients to be conducted by the
Company to confirm the results of an earlier study. The Company anticipates that
the "proof of concept" study will be completed in the first half of calendar
2007. The remaining terms of the LEO Exclusivity Agreement remain in full force
and effect, provided that any definitive license agreement entered into between
PFC Therapeutics and LEO relating to the marketing and commercialization of
OXYGENT will include an additional milestone payment, the amount of which is to
be proposed by Alliance, relating to the "proof of concept" clinical trial
described above.

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

4.  ASTRAL, INC.

         On September 6, 2005, Alliance and Astral entered into an asset
contribution agreement (the "Astral Agreement") with MultiCell Technologies,
Inc. ("MultiCell") and Astral Therapeutics, Inc. ("Astral Therapeutics")
pursuant to which Alliance and Astral contributed all of their respective assets
(including intellectual property, laboratory equipment and furniture), which had
a net book value of zero at the date of contribution, that relate primarily to
the business of Astral to Astral Therapeutics, a new entity formed for the
purpose of further developing the Astral assets. In return, Alliance received an
amount of common stock (490,000 shares) of Astral Therapeutics equal to
approximately 49% of the outstanding capital stock of Astral Therapeutics. In
addition, in connection with this transaction, Astral Therapeutics assumed
certain obligations and liabilities of Alliance with respect to the Astral
assets. Subsequent to the transfer of the Astral assets, MultiCell purchased $2
million in Series A Preferred Stock of Astral Therapeutics. MultiCell paid $1
million of this amount at the closing of the purchase of the Series A Preferred
Stock and is obligated to pay the balance in four quarterly installments of
$250,000 through September 2006 pursuant to a promissory note that is secured by
a pledge of $1 million in value of Astral Therapeutics Series A Preferred Stock.
After the purchase and sale of the Series A Preferred Stock of Astral
Therapeutics to MultiCell, Alliance owned approximately 33% of the fully diluted
outstanding capital stock of Astral Therapeutics. Pursuant to the Astral
Agreement, MultiCell assumed all of Astral's obligations under Astral's

                                       35


<PAGE>

assignment agreement with Mixture Sciences, Inc. ("Mixture Sciences"). In total,
the Company transferred approximately $730,000 of net liabilities to Astral
Therapeutics (which amount was recorded as a gain on disposition of liabilities
during the year ended June 30, 2006) in exchange for 490,000 shares of common
stock of Astral Therapeutics. Subsequently, Astral Therapeutics' name was
changed to MultiCell Immunotherapeutics, Inc. ("MCTI").

         It was determined by the Company's management that MCTI has sufficient
equity or that MCTI's equity holders have adequate decision-making authority or
the obligation and right as equity holders to absorb MCTI's expected losses or
to receive its expected residual returns. Therefore, MCTI is not subject to FASB
Interpretation No. 46 and such investment will be accounted for under the equity
method.

5.  SALE OF IMAGENT(R) ASSETS

         On June 18, 2003, Imcor Pharmaceutical Co. ("Imcor"), formerly known as
Photogen Technologies, Inc., acquired certain assets and assumed certain
liabilities from Alliance. The assets acquired by Imcor included 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 United States Food & Drug
Administration ("FDA") for marketing in the U.S. in June 2002. The amount of
consideration was determined through arms-length negotiation. To the extent
obligations with certain creditors were completely settled, Alliance recorded a
gain from sale of assets of approximately $10.6 million during the year ended
June 30, 2003, approximately $15 million during the year ended June 30, 2004,
approximately $306,000 during the year ended June 30, 2005 and approximately
$476,000 during the year ended June 30, 2006 related to the disposition of these
assets. To date, Alliance has recorded approximately $26.4 million as a gain on
the disposition of an asset as a result of Imcor issuing shares of its stock
valued at approximately $3.7 million to Alliance creditors, Imcor funding
approximately $1.8 million of Alliance's obligations, and approximately $20.9
million related to settlement agreements or Imcor's assumed obligations of
Alliance. In September 2005, Alliance and Imcor entered into a global settlement
agreement pursuant to which each party released the other from any further
obligation under the IMAGENT Asset Purchase Agreement, effectively terminating
all ongoing obligations and rights under the agreement, and providing for the
allocation between the parties of the proceeds of any future transaction
involving the disposition of the IMAGENT asset. In addition, the parties agreed
to a settlement of the Amersham Litigation, in which all parties granted each
other fully paid-up, irrevocable, royalty-free, non-exclusive cross-licenses,
with the right to sublicense, and mutual releases (see Part II, Item 1).
Alliance received $200,000 as a result of the above settlement agreements during
the year ended June 30, 2006.

         The detail of items comprising the gain on disposition of IMAGENT
assets for the years ended June 30, 2006 and 2005 is calculated as follows (in
thousands):

<TABLE>
                                                                              2006             2005
                                                                           ------------     ------------
<S>                                                                         <C>             <C>
         Cash payments funded by Imcor for liabilities of Alliance         $       200      $       128
         Assumption by Imcor of operating liabilities and other debt
           and settlements with vendors and creditors of Alliance                  276              178
                                                                           ------------     ------------
         Gain on sale of assets of IMAGENT to Imcor                        $       476      $       306
                                                                           ===========      ============
</TABLE>

6.  DEBT OBLIGATIONS

PFC NOTE
--------

         On November 20, 2003, PFC Therapeutics issued 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. In September 2004,
the holder of the PFC Note exchanged such warrant for 2,500,000 shares of common
stock of the Company, which were issued in October 2004, valued at $1 million
based on the estimated fair value on the date of issuance, and the PFC Note for
a Senior Note (described below) in the principal amount of $500,000.

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

         On July 2, 2004, Nycomed Denmark ApS ("Nycomed") notified the Company
that it was unilaterally terminating its Development, Assignment and Supply
Agreement (the "Nycomed Agreement") effective August 16, 2004. Subsequently, a
dispute arose between the Company and some of its investors who participated in
the June 2004 Private Placement (see Note 8). After considering all of the facts
and circumstances relevant to the dispute, the Company's Board of Directors
determined that it was in the Company's and the Company's stockholders' best
interests to offer, as a settlement of the dispute, to rescind the June 2004
Private Placement.

                                       36


<PAGE>

         On September 24, 2004, investors holding 30,546,423 shares of common
stock and warrants to purchase 22,909,821 shares of common stock representing
approximately $10.7 million of the $11 million invested in the June 2004 Private
Placement (see Note 8) elected to rescind the June 2004 Private Placement. In
doing so, each of these investors returned to the Company its stock certificate
representing the number of shares and the warrant that it received in the June
2004 Private Placement for cancellation. Immediately thereafter, these same
investors entered into the Senior Note Purchase Agreement whereby the Company
issued to such investors Senior Notes convertible into common stock at $0.25 per
share, which was subsequently amended (see below), in principal amounts equal to
the amounts such investors invested in the June 2004 Private Placement.

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

         On September 24, 2004, the Company recorded a BCF charge of
approximately $2.2 million (included in interest expense), based on the
difference between the $0.25 conversion rate of the Senior Notes and the closing
price of $0.30 of the Company's common stock on September 24, 2004. Such BCF
charge includes the conversion of the $500,000 PFC Note (see above).

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

         Since the Amendment of the Senior Notes results in terms that, pursuant
to EITF Issue No. 96-19, "DEBTOR'S ACCOUNTING FOR A MODIFICATION OR EXCHANGE OF
DEBT INSTRUMENTS," are substantially different from the terms of the original
Senior Notes, the modification was treated as an extinguishment of debt in the
year ended June 30, 2006. The Company recorded a total debt discount of $10.1
million in connection with the conversion feature of the amended Senior Notes,
based on the difference between the $0.17 amended conversion rate of the Senior
Notes and the closing price of $0.32 of the Company's common stock on the date
of the Amendment. The discount was immediately recorded as an expense in
connection with the extinguishment of debt and is included in the accompanying
consolidated statement of operations.

         The Amendment caused the Company to have an insufficient number of
authorized shares to settle all outstanding and options, warrants and
exercisable convertible instruments (see Note 1). As a result, under EITF 00-19,
all non-employee options and warrants are classified as derivative liabilities
and recorded at their fair values at each balance sheet date. The Company
recognized other income of $2.6 million during the year ended June 30, 2006. At
June 30, 2006, the derivative liability balance is $841,000.

         The Senior Notes can be converted at anytime prior to the maturity
date. During the fiscal year ended June 30, 2006, holders of certain Senior
Notes converted an aggregate of $433,000 in principal and approximately $17,000
in accrued interest into an aggregate of 2,646,476 shares of our common stock at
a conversion price of $0.17 per share. At June 30, 2006, the principal and
accrued interest balance approximates $10 million and $1.2 million,
respectively.

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 $110 per
share; 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 $110 per share over a 20-day
period through May 19, 2004, the conversion price for the Series F Preferred
Stock will be $110 per share; 2) if the license agreement between Alliance and
PFC Therapeutics is terminated, the conversion price will not be less than $50
per share; 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."

                                       37


<PAGE>

         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. 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 2004 PRIVATE PLACEMENT
---------------------------

         In June 2004, the Company completed its June 2004 Private Placement, a
private placement of 31,427,137 shares of its common stock for aggregate gross
proceeds of $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 2004 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 yield, risk-free interest rate of 3.4%, the contractual life of 5 years
and volatility of 139%. In accordance with EITF No. 00-19, 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 was
reclassified to additional paid-in capital as of September 30, 2004, the date of
effectiveness of the registration statement, which is the date the potential for
a cash penalty ceased.

         On July 2, 2004, Nycomed notified the Company that it was unilaterally
terminating the Nycomed Agreement effective August 16, 2004. Subsequently, a
dispute arose between the Company and some of its investors who participated in
the June 2004 Private Placement. After considering all of the facts and
circumstances relevant to the dispute, the Company's Board of Directors
determined that it was in the Company's and the Company's stockholders' best
interests to offer, as a settlement of the dispute, to rescind the June 2004
Private Placement, which resulted in the return of 30,546,423 shares of common
stock and warrants to purchase 22,909,821 shares of common stock representing
approximately $10.7 million and the issuance of Senior Notes (see Note 6) in the
same amount.

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

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

         During the year ended June 30, 2006, the Company granted 467,500
options at an exercise price of $0.11 per share with expiration dates 10 years
from the grant dates and incurred $32,000 in compensatory stock option expense
prior to the date of the Amendment. During the year ended June 30, 2005, the
Company granted 1,617,500 options at an average weighted exercise price of $0.29
per share with expiration dates 10 years from the grant dates and incurred
$15,000 in compensatory stock option expense.

         The following table summarizes stock option activity under all plans
for the two years ended June 30, 2006:

                                       38


<PAGE>
<TABLE>
<S>     <C>
                                                                                  Weighted
                                                               Shares             Average Price
                                                            --------------     ---------------
Balance at July 1, 2004                                         1,600,483      $      13.4
                                Granted                         1,617,500      $      0.29
                                Terminated/Expired               (368,765)     $      11.2
                                                            --------------
Balance at June 30, 2005                                        2,849,218      $      6.22
                                Granted                           467,500      $      0.11
                                Terminated/Expired               (379,700)     $      3.16
                                                            --------------
Balance at June 30, 2006                                        2,937,018      $      5.65
                                                            ==============

Available for future grant under the 2000 Plan                     24,500
Available for future grant under the 2001 Plan                  3,968,610
                                                            --------------
                                                                3,993,110
                                                            ==============

         The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 2006:

                                    Weighted      Average                      Weighted
Range of                            Average      Remaining                     Average
Exercise              Number        Exercise    Contractual      Number        Exercise
Prices              Outstanding       Price         Life       Exercisable       Price
----------------------------------------------------------------------------------------
$0.11                442,500          $0.11      9.31 years      210,000         $0.11
$0.15 - $0.25        138,500          $0.17      7.20 years      107,250         $0.17
$0.29              1,410,000          $0.29      8.43 years    1,017,500         $0.29
$0.30 - $0.44        319,000          $0.41      7.94 years      319,000         $0.41
$3.10 - $4.90        232,000          $3.15      5.35 years      232,000         $3.15
$13.75 - $25.00      169,158         $17.55      3.59 years      169,158        $17.55
$33.44 - $73.75      225,860         $54.35      2.28 years      219,860        $54.04
                 -----------                                 -----------
                   2,937,018          $5.65      7.51 years    2,274,768         $7.05
                 ===========                                 ===========
</TABLE>

         At June 30, 2005, 1,805,598 options were exercisable at a weighted
average exercise price of $9.23 per share.

WARRANTS
--------

         At June 30, 2006, the Company had warrants outstanding to purchase
14,237,619 shares of common stock at prices ranging from $0.17 to $0.50 per
share. The warrants expire on various dates from October 2006 through June 2009.
During the years ended June 30, 2006 and 2005, the Company did not grant any
warrants and no warrants were exercised. During 2005, 260,000 warrants expired
and 22,909,821 warrants were rescinded in connection with the issuance of the
Senior Notes (See Note 6).

         The following table summarizes common shares reserved for issuance at
June 30, 2006 on exercise or conversion of:

         Series F convertible preferred stock                        635,000
         Common stock options                                      6,930,128
         Common stock warrants                                    14,237,619
                                                            -----------------
         Total common shares reserved for issuance                21,802,747
                                                            =================



9.  INCOME TAXES

         No provision for income taxes was recorded for the years ended June 30,
2006 and 2005 due to the significant net operating loss carryforwards.

         The significant components of the Company's deferred tax assets as of
June 30, 2006 are shown below. A valuation allowance of $219 million, of which
$1.1 million is related to the year ended June 30, 2006, has been recognized to
offset the deferred tax assets, as realization of such assets is uncertain.

                                       39


<PAGE>

         Deferred tax assets consist of the following:

         Net operating loss carryforwards                  $       188,545,000
         Research and development credits                           27,000,000
         Capitalized research expense                               17,902,000
         Other - net                                                    20,000
                                                           --------------------
         Total deferred tax assets                         $       233,467,000
         Valuation allowance for deferred tax assets              (233,467,000)
                                                           --------------------
         Net deferred tax assets                           $                 -
                                                           ====================

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

         At June 30, 2006, the Company had federal and various state net
operating loss carryforwards of approximately $520 million and $72 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 2006; however, carryforwards will begin to
expire in fiscal 2009 unless previously utilized. The Company also has federal
and state research and development tax credit carryforwards of $19 million and
$8 million, respectively. No federal research and development tax credit
carryforwards expired in fiscal 2006; however, carryforwards will begin to
expire 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

LEASES
------

         The Company leases the facilities in which it operates under certain
operating leases. Payments for the office facilities approximate $10,000 per
month and expire through September 2007.

         Rental expense for operating leases approximated $101,000 and $95,000
for the years ended June 30, 2006 and 2005, respectively. Estimated rental
obligations under such leases are $120,000 for fiscal 2007 and $30,000 for
fiscal 2008.

LITIGATION
----------

         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 and other parties. The suit alleged that the defendants were
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. The suit was for damages in excess of the $779,000
security deposit. Initially, HUB sought in excess of $3.5 million in damages. On
August 21, 2003, Immune Complex filed its cross-complaint for indemnity against
us. The Company filed a cross-complaint against HUB for damages (a refund of all
or some of the security deposit). In June of 2004, Alliance deposited $1 million
into a controlled bank account as security for any liability the Company might
incur as a result of the HUB litigation. Because of certain pre-trial rulings
limiting HUB's claim, the damages HUB sought at trial were approximately $3
million. In addition, the parties stipulated prior to trial that Alliance owed
HUB approximately $638,000 in damages based on HUB's allegations. On April 27,
2005, the jury returned a verdict in favor of HUB in the amount of $1,479,000.
The Court signed a judgment incorporating this verdict on April 28, 2005. HUB
also sought inclusion in the judgment of an award of pre- and post-judgment
interest, as well as attorney fees and costs, totaling approximately $1,370,000.
The court ruled that HUB was entitled to attorney fees of $750,000, costs of
$60,000 and pre-judgment interest of $4,000. Both HUB and Alliance filed Notices
of Appeal. Alliance remitted $779,000 of the $2.3 million judgment in the form
of a security deposit. In September 2005, per the controlled bank account
agreement, HUB withdrew the $1 million security amount plus approximately
$11,000 in interest in partial satisfaction of the judgment award. In November
2005, Alliance and HUB entered into a settlement and mutual release agreement
whereby the award balance of approximately $536,000 was reduced and Alliance
paid the compromised amount of $400,000 in full settlement of the lawsuit with
the difference netted against litigation expenses. Accordingly, the Company
expensed approximately $(89,000) and $1.8 million related to the HUB litigation
during the years ended June 30, 2006 and 2005, respectively.

         On June 13, 2003, Alliance and Imcor jointly brought a patent
infringement action against Amersham Health Inc., Amersham Health AS and
Amersham plc (collectively, "Amersham") in the U.S. District Court for the
District of New Jersey, Civil Action No. 03-2853 (the "Amersham Litigation").
The lawsuit alleged that (1) through the sale of Amersham's OPTISON product,


                                       40


<PAGE>

Amersham and its related entities infringed on eight patents acquired from
Alliance by Imcor through its purchase of the IMAGENT assets; (2) Alliance and
Imcor did not infringe any Amersham patent; (3) Amersham misappropriated
confidential trade secrets from Imcor (then Alliance) when Amersham (then
Nycomed) was negotiating a marketing agreement for IMAGENT; and (4) Amersham was
in violation of U.S. Antitrust laws. Alliance and Imcor were seeking damages and
injunctive relief against Amersham. Amersham counterclaimed for infringement of
12 of its patents and brought counterclaims against Alliance and our subsidiary
MBI asserting breach of contract, breach of good faith and fair dealing, and
tortious interference with contractual relations. Imcor paid all costs in this
lawsuit, including attorney fees and Alliance had little financial risk in the
lawsuit. In September 2005, all parties agreed to a settlement of the Amersham
Litigation, in which all parties granted each other fully paid-up, irrevocable,
royalty-free, non-exclusive cross-licenses, with the right to sublicense, and
mutual releases.

         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 other MBI shareholders. 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, alleged
that our registration statement and prospectus filed and issued in connection
with the acquisition of MBI contained misrepresentations and omissions of
material facts in violation of certain federal securities laws. In May 2001, the
actions were consolidated. The plaintiffs were 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. On
February 15, 2006, the Court approved a settlement of the lawsuit, which was
funded by our insurers, and dismissed the lawsuit with prejudice.

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

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

11.  SUBSEQUENT EVENTS

         Subsequent to fiscal year end, holders of certain Senior Notes
converted an aggregate of $168,000 in principal into an aggregate of 988,235
shares of our common stock at a conversion price of $0.17 per share.

                                       41


<PAGE>

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

         None.

ITEM 8A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

         The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of the Company's disclosure controls and procedures. Based upon
that evaluation, the CEO and CFO concluded that as of June 30, 2006 our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to the Company (or the Company's consolidated
subsidiaries) required to be included in the Company's periodic filings with the
SEC, subject to the various limitations on effectiveness set forth below under
the heading, "Limitations on the Effectiveness of Internal Controls", such that
the information relating to the Company, required to be disclosed in SEC reports
(i) is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
the Company's management, including our CEO and CFO, as appropriate to allow
timely decisions regarding required disclosure.

CHANGES IN CONTROLS AND PROCEDURES

         There were no significant changes made in our internal controls over
financial reporting during the year ended June 30, 2006 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

         The Company's management, including the CEO and CFO, does not expect
that our disclosure controls and procedures or our internal control over
financial reporting will necessarily prevent all fraud and material error. 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 in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company 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, or by management
override of the internal control. The design of any system of controls also is
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, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.


ITEM 8B.  OTHER INFORMATION

         None.

                                       42



<PAGE>

                                    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 2006 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 56, has been Chief Executive Officer
since 1985 and Chairman since October 1989. Prior to joining Alliance, Mr. Roth
served as President of Analytab Products, Inc., an American Home Products
company involved in manufacturing and marketing medical diagnostics,
pharmaceuticals, and devices. For the previous ten years, he was employed in
various sales, marketing, and general management capacities by Ortho Diagnostic
Systems, Inc., a Johnson & Johnson company, which is a manufacturer of
diagnostic and pharmaceutical products. Mr. Roth also serves as CEO of CONNECT,
a non-profit technology business accelerator in San Diego.

         B. JACK DEFRANCO. Mr. DeFranco, who is 61, has served as President and
Chief Operating Officer since October 2005. From June 2003 to October 2005, Mr.
DeFranco was the Senior Vice President and Chief Operating Officer of Imcor
Pharmaceutical Co. For the ten years prior to that, Mr. DeFranco was Vice
President of Business Development and Marketing with Alliance. Previously, Mr.
DeFranco held various management positions in business development, marketing
and sales with Smith & Nephew and Johnson and Johnson. In his career he has
launched over 20 medical products, many of which were related to blood
transfusion safety. Mr. DeFranco holds a BS in Biology from Stephen F. Austin
University and an MBA and a Masters in Finance from Fairleigh Dickenson
University.

         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. Mr. Hall also
currently serves as Chief Financial Officer of Grubb&Ellis|BRE a commercial real
estate brokerage firm in San Diego and is a Partner of Tatum LLC.

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.

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.

                                       43



<PAGE>

ITEM 13. EXHIBITS

         (a)      Index to Exhibits

EXHIBIT           DESCRIPTION
-------           -----------

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

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

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

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

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

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

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

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

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

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

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

10.3              First Amendment to License Agreement, dated as of December 30,
                  1998, between the Company and Schering AG, Germany
                  (incorporated by reference to Exhibit 10 of the Company's
                  Quarterly Report on Form 10-Q for 3 the quarter ended December
                  1998.)

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

                                       44



<PAGE>

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

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

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

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

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

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

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

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

10.13             Supply Agreement dated as of July 9, 1999, between the Company
                  and Fluoromed L.P. (incorporated by reference to Exhibit 10(d)
                  of the Company's Quarterly Report on Form 10-Q for the quarter
                  ended December 1, 1999).

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

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

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

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

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

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

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

                                       45



<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       46



<PAGE>

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

10.38             Letter Agreement dated as of May 1, 2001, between the Company
                  and Baxter Healthcare Corporation amending the Deferred Stock
                  Purchase Agreement dated May 19, 2000. (3) (incorporated by
                  reference to Exhibit t0(jjj) of the 2001 10-K).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       47



<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       48



<PAGE>

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

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

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

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

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

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

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

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

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

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

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

10.80             Development, License and Supply Agreement dated May 13, 2005,
                  between PFC Therapeutics, LLC and Beijing Double-Crane
                  Pharmaceutical Co., Ltd. and related License Agreement. (1)

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

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

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

                                       49



<PAGE>

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

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

21.1              Subsidiaries *

23.1              Consent of Independent Registered Public Accounting Firm.*

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

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

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

32.2              Statement of our Chief Financial Officer under Section 906 of
                  the Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). *
_________
* Filed Herewith.
# Indicates management contract or compensatory plan or arrangement.
(1) Portions of this agreement have been omitted pursuant to a confidential
treatment request and have been filed separately with the SEC.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         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.

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.


                                       50




<PAGE>


SIGNATURES

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


                                        ALLIANCE PHARMACEUTICAL CORP.

                                        (Registrant)

Date: September 27, 2006                By: /s/ Duane J. Roth
                                            ------------------------------------
                                            Duane J. Roth
                                            Chairman and Chief Executive Officer


                                        By: /s/ Edward C. Hall
                                            ------------------------------------
                                            Edward C. Hall
                                            Chief Financial Officer



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

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

   /s/                                   Chief Financial Officer (PRINCIPAL
--------------------------               FINANCIAL OFFICER)
Edward C. Hall

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

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

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

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

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


                                       51