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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

                                   (MARK ONE)

[X]        ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2007

[ ]            TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

               FOR THE TRANSITION PERIOD FROM ________ TO ________

                        COMMISSION FILE NUMBER 000-12950

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

                          ALLIANCE PHARMACEUTICAL CORP.
                 (Name of Small Business Issuer in Its Charter)

              NEW YORK                                  14-1644018
  (State or other jurisdiction of                    (I.R.S. Employer
   incorporation or organization)                   Identification No.)

             7590 FAY AVENUE, SUITE 402                  92037
                LA JOLLA, CALIFORNIA
      (Address of Principal Executive Offices)         (Zip Code)

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

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

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

                                      NONE

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

                            Title of each class: NONE

                 Name of each exchange on which registered: NONE

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

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

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

         Check whether the issuer 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. [X]

         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, 2007 were
$573,000. 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 24, 2007 was $2.8 million.

         The number of shares of the Registrant's common stock, $0.01 par value,
outstanding at September 24, 2007 was 50,848,283.

   Transitional Small Business Disclosure Format (check one). Yes [ ] No [X]

<PAGE>

                                   FORM 10-KSB

                                      INDEX

PART I................................................................... - 4 -
   Item 1.  Description of Business...................................... - 4 -
   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.................................................................. - 17 -
   Item 5.  Market for Common Equity, Related Stockholder Matters and
            Small Business Issuer Purchases of Equity Securities......... - 17 -
   Item 6.  Management's Discussion and Analysis or Plan of Operation.... - 19 -
   Item 7.  Financial Statements......................................... - 25 -
   Item 8.  Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure.......................... - 44 -
   Item 8A. Control and Procedures....................................... - 44 -
   Item 8B. Other Information............................................ - 44 -
PART III................................................................. - 45 -
   Item 9.  Directors, Executive Officers, Promoters, Control Persons
            and Corporate Governance; Compliance with Section 16(a) of the
            Exchange Act................................................. - 45 -
   Item 10. Executive Compensation....................................... - 48 -
   Item 11. Security Ownership of Certain Beneficial Owners and
            Management and Related Stockholder Matters................... - 50 -
   Item 12. Certain Relationships and Related Transactions, and
            Director Independence........................................ - 53 -
   Item 13. Exhibits..................................................... - 53 -
   Item 14. Principal Accountant Fees and Services....................... - 58 -

Signatures
Certifications


                                       -2-

<PAGE>

                           FORWARD-LOOKING STATEMENTS

         This document may contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"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 2008 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 under which we are currently in default (the "Senior
              Notes");

         o    our inability to obtain adequate financing for our development
              efforts or to repay the Senior Notes;

         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
              (the "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.


                                      -3-

<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
SECURITIES AND EXCHANGE COMMISSION ("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.  DESCRIPTION OF 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 7590 Fay Avenue, Suite 402, La Jolla, California 92037,
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)

         In over 15 years of intensive clinical development of oxygen carriers,
the only Phase 3 study to show efficacy in reducing allogeneic blood transfusion
is the Phase 3 general surgery study of OXYGENT with aggressive acute
normovolemic hemodilution ("ANH"), a blood conservation technique that typically
involves the collection of two to three units of autologous (the patient's own)
blood immediately prior to surgery. Several products have been tested in a
trauma setting with no success to date, primarily due to imbalances in mortality
endpoints between the treated and control patients. Other products have been
tested in the surgical setting, but have failed to show clinical benefit or have
been associated with an imbalance in side effects. All studies have compared to
red blood cells ("RBCs") as a control with the notable exception of FLUOSOL(R),
a 20% w/v PFC emulsion, for use as an adjunct to high-risk coronary balloon
angioplasty, which was approved for an oxygenation endpoint. (In 1994, Green
Cross Corporation [Osaka, Japan] ceased commercialization of FLUOSOL due to poor
sales as a result of the introduction of auto-perfusion catheters eliminating
the need for the product in this indication.) It can be concluded from the
developmental history of oxygen carriers that, while they are very effective in
the delivery of oxygen, their use in avoiding or reducing transfusion
requirements is difficult to prove in either a surgical or a trauma setting
using RBCs as a control.

         Several conclusions can also be made regarding the benefits of oxygen
carriers as demonstrated in clinical testing:

         (1) they are clearly effective in the delivery of oxygen to tissues and
         preventing hypoxia;

         (2) they eliminate the risk of transfusion error due to blood type
         mismatch caused by clerical error or the transmission of blood-borne
         infectious disease (known and unknown); and,

         (3) if approved for marketing, they would be utilized in any clinical
         setting where it is desirable to maintain physiological stability.

         As a result of the above experience, Alliance has determined that the
best approach for future development of OXYGENT is to focus on the delivery of
oxygen to tissues to prevent or reduce tissue hypoxia.

ORGAN PROTECTION

         The first such indication will be the use of OXYGENT as a therapeutic
for organ support during major elective surgeries to protect vital organs from
hypoxic injury and improve postoperative organ function. In more than 20
preclinical studies, PFC emulsions have been shown to improve oxygenation of
tissues and organs (liver, heart, brain, kidney, muscle). In cardiovascular
surgery, regional hypoperfusion and resulting acute hypoxia of the gut
represents an important trigger event that can lead to increased morbidity,
prolonged hospital stay and even higher mortality. This hypoxic stress may also
contribute to other adverse outcomes following cardiac or vascular surgery,
including renal dysfunction, cardiac muscle injury and central nervous system
("CNS") complications.

                                      -4-

<PAGE>

         The ability of OXYGENT to assist in oxygenation of the gut mucosa in
the context of traumatic shock and other ischemic events is due in part to the
very small diameter of PFC emulsion particles, approximately 0.1 to 0.3 microns,
which is about 40 times smaller than the diameter of a RBC. This small size can
enable PFC particles to traverse capillaries through which RBCs cannot flow. In
addition, oxygenated PFC particles may be able to penetrate into peripheral
ischemic zones and "unstiffen" RBC membranes that have lost their flexibility in
the presence of ischemically induced decreases in pH in the surrounding tissues.
During a major insult to the body, such as major surgery, the body often reacts
by decreasing blood flow to the splanchnic (intra-abdominal) areas, thereby
conserving blood flow and oxygen supply to more vital organs, such as the heart
and the brain. The gut receives less blood (i.e., oxygen) in these instances and
postoperative gut function can be impaired. This may also lead to leakage of
endotoxin into the circulation, resulting in remote organ damage.

         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 Columbia University, New York (FRUMENTO ET AL, ANESTH ANALG 2002,
94:809-14) to evaluate differences between carbon dioxide tensions in the
arterial blood and those in the stomach ("CO2 gap"). Gastric tonometry uses a
semi-permeable balloon at the end of a catheter, which is inserted nasally and
positioned in the stomach. CO2 equilibrates in the balloon and samples are
measured every 10 minutes. This CO2 value is compared to the arterial blood gas
measurement of CO2 and this difference is the P(g-a)CO2 gap. Hypoxia of the gut
manifests itself in delayed tolerance for food and fluid intake and delayed
bowel movement. The occurrence of abnormal tonometric variables during cardiac
surgery is well known and has been repeatedly shown to be associated with delay
in return of normal organ function and increased length of hospital stay.

         During cardiopulmonary bypass ("CPB"), control subjects in this study
exhibited abnormal CO2 gap values and calculated gut wall pH, which were
statistically significantly worse than those obtained in the group of patients
treated with OXYGENT, in which these values were normal. This benefit translated
into significantly shorter postoperative time (mean: 2 vs. 5 days) to first
bowel movement and a very strong trend (p=0.056) to earlier consumption of solid
food.

         Based on the strong evidence demonstrated in the subset of patients at
Columbia University, we have designed a Phase 2b study to obtain confirmation of
the above clinical results showing improvement in CO2 gap in OXYGENT-treated
patients. This Phase 2b postoperative ileus trial will be conducted in six to
eight centers in Europe and will enroll up to 128 patients undergoing primary
coronary artery bypass graft ("CABG") under CPB. In this double-blind,
randomized, placebo-controlled, dose-escalation study, patients will receive
either a dose of saline or a dose of OXYGENT 5-10 minutes before bypass is
commenced. Three dose levels (0.9, 1.8 and 2.7 gr/kg) will be administered and
at the end of each dose level, safety and efficacy will be evaluated. It is
expected that a difference in the CO2 tonometric signals will be observed
between groups. Postoperative time to first bowel movement and first consumption
of liquid and solid food will be recorded. Furthermore, assessment of the
severity of adverse events ("AEs") will be reviewed by an independent Clinical
Events Committee. This study protocol was developed in collaboration with our
partner, LEO Pharma A/S ("LEO") and, if successful, will be the basis for
completing the agreement with LEO and a corresponding milestone payment to
Alliance.

         In May 2007, Alliance received approval from the French Ethics
Committee and the French Competent Authority to commence this Phase 2b clinical
trial in France.

TRANSFUSION AVOIDANCE

         A second indication is being pursued by our partner Beijing
Double-Crane Pharmaceutical Co., Ltd. ("Double-Crane") in China to use OXYGENT
as an intravenous oxygen carrier adjunct to the fluid management and hemodynamic
stability management of patients undergoing major non-cardiac surgery. The
primary endpoint is to avoid or reduce the need for intraoperative RBC
transfusions. Secondary endpoints will include a postoperative composite
morbidity score as well as evaluation of individual organ function (liver,
kidney, heart, gut, brain) and avoidance/reduction of RBC transfusion through
hospital discharge.

                                      -5-

<PAGE>

         Results from the previous Phase 2 and Phase 3 clinical studies were
used to develop the rationale for a new protocol design without autologous
blood-conserving procedures (ANH or intraoperative autologous donation ["IAD"])
used in the previous clinical studies. The efficacy of OXYGENT in terms of drug
activity, i.e., its ability to deliver oxygen and reverse physiological
transfusion triggers, and the ability of OXYGENT to enable patients to maintain
physiologic stability safely at lower intraoperative hemoglobin ("Hb") levels
were demonstrated in both Phase 2 and Phase 3 studies. Intraoperative
hemodynamic instability is often used as an indication of the need for RBC
transfusion; therefore, maintenance of hemodynamic stability should lead to a
reduction of blood transfusions. In clinical studies, OXYGENT has been shown to
correct or improve key physiological parameters such as mean arterial pressure,
heart rate and mixed venous oxygen tension equal to or better than a unit of
RBCs.

         A second critical piece of data incorporated into the design of this
study was gathered from our previous Phase 3 study in general surgery patients.
In this study, control patients who were not transfused in the postoperative
period and, per protocol, had their Hb concentration measurements tracked
routinely in the postoperative period showed higher Hb levels 24 hours post
surgery. In these patients, it was observed that the range of Hb levels taken 24
hours postoperatively were 1.5 to 2.5 g/dL higher than the first immediate
postoperative Hb measurements. The data also demonstrated that the lower the Hb
at which the patients left the operating room, the more this hemoconcentration
was observed. Since it takes several weeks to generate new exogenous RBCs, the
rapid increase in Hb could only be due to a hemoconcentration, which occurs as a
result of normalization in total blood volume following surgery.

         This hemoconcentration phenomenon was unexpected to the degree observed
and would indicate that patients could be "bridged" by use of an oxygen carrier
during surgery and in the early postoperative period until an accurate Hb
measurement can be obtained to determine if a RBC transfusion is truly
warranted. Therefore, the use of OXYGENT to reverse or prevent hemodynamic
instability and postoperative hemoconcentration would allow patients to avoid
blood transfusions that otherwise would have been considered necessary if solely
based on the measured intraoperative Hb levels.

         By providing oxygenation support during subsequent surgical blood loss
after dosing and through the early postoperative period, the use of OXYGENT as
an oxygen therapeutic in this new protocol will allow additional time to
determine if the patients really need transfusions of RBCs. Decision as to the
need to transfuse would be made in the postoperative period after
hemoconcentration has occurred as described above.

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, LLC ("PFC Therapeutics") and 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. The upfront license fee of $500,000 was deferred until the
Company's obligations to perform were satisfied. These obligations (see below)
were completed during this past fiscal year, thus such amount was recognized as
license revenue during the year ended June 30, 2007. Double-Crane will conduct
clinical trials in the PRC, in accordance with international guidelines, to
receive marketing approval for OXYGENT in the PRC. Alliance 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 formed a Joint Development Team to manage the
development of OXYGENT in the PRC. Under the Double-Crane Agreement, Alliance
was 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 PRC (the "sFDA"). To date, Alliance has
provided all such necessary documentation.

                                      -6-

<PAGE>

         In February 2007, Alliance manufactured and released product samples;
however, in accordance with the current regulations of the sFDA, the supplies
for the IND application and clinical development must be manufactured in a
facility in the PRC. As a result, Alliance has agreed to accelerate the
manufacturing technology transfer to Double-Crane, which originally was planned
to occur when Phase 3 trials were initiated in the PRC. Because Double-Crane has
considerable experience in manufacturing large-volume parenteral and IV
solutions, Double-Crane has indicated to Alliance that it believes production of
the relevant clinical supplies can begin in an expeditious manner. Double-Crane
has also expressed a desire to supply Alliance with clinical and commercial
supplies of OXYGENT from its facilities, which would be contingent on
Double-Crane's compliance to Current Good Manufacturing Practices ("cGMP") and
registration with the U.S. FDA.

         Once clinical supplies are manufactured by Double-Crane, Double-Crane
has indicated that it will submit its IND application for initiation of the
agreed-upon clinical development plan. Once the sFDA approves the application,
Double-Crane will start the clinical trials immediately.

         LEO PHARMA A/S. On December 22, 2004, PFC Therapeutics and 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, 2007.

         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 2b
postoperative ileus study discussed above. The first dose-escalation portion of
the Phase 2b study could be completed in early 2008. 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 2b postoperative ileus study.

         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 our
subsidiary 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 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 paid the
balance in four quarterly installments of $250,000 through September 2006,
pursuant to a promissory note that was 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. MultiCell is actively pursuing the sale of Astral Therapeutics'
assets and we will participate in the proceeds of that sale, if any, to the
extent of our percent ownership.

                                      -7-

<PAGE>

         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.

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. In the U.S., Europe, Japan, Canada and other countries, Alliance has
a patent position, dating back to October 1992, on a second generation of stable
fluorocarbon emulsions for any use including IN VIVO oxygen delivery. These
patents will remain in force in the U.S. and other countries until 2012 - 2014.
Alliance has a recent patent application covering the specific formulation of
AF0144 to further protect its position from generic competition.

         The patents covering AF0144 will be subject to a term extension due to
regulatory review by the FDA (35 U.S.C. 156) via the Drug Price Competition and
Patent Term Restoration Act of 1984. Additionally, AF0144 is a new chemical
entity and, once approved, may have an additional five-year extension to the
patents.

         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 active in the development of products to treat postoperative
ileus include Adolor Corporation ("Adolor") and Progenics Pharmaceuticals Inc.
("Progenics"). Both companies are pursuing products designed to prevent
postoperative ileus with products working by a completely different mechanism
than that of OXYGENT. Their products act by blocking the opioid receptors that
relate to the side effect of constipation associated with the use of opioids
analgesic drugs used for pain management following surgery. In addition, these
companies are addressing the large hospice markets for the same indication. Each
company has submitted a New Drug Application ("NDA") to the FDA, establishing
that improvement in postoperative gut function is an approvable clinical
endpoint by the FDA.

         Companies active in the 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 RBCs. 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; however, the UK authorities have questioned
the risk/benefit of its drug. In the U.S., Biopure's Biologic License
Application ("BLA") to market its product in the U.S. is on hold and its IND
submission for a 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, recently announced its Phase 3 pivotal trial failed
to demonstrate a statistical significance in its primary endpoint, mortality.
The third company, Sangart, has announced the initiation of two large-scale
multi-country European Phase 3 clinical trials designed to assess its product's
ability to prevent and treat hemodynamic instability, primarily hypotension,
during orthopedic surgeries.

                                      -8-

<PAGE>

         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 recently
announced positive results in its eight-patient Phase 2 brain trauma study.
Sanguine, still in the early preclinical stages of discovery and formulation
development, has announced it is focusing its development efforts in organ
transplantation. ImaRx has announced the intention to investigate its
micro-bubble technology to deliver 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 PFC-based 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. 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 European Medicines Agency (the "EMEA") in the European
Union, by the sFDA in the PRC 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.

         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 AEs 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 Investigational Review
Board ("IRB") or Ethics Committee at each clinical center at which the study
will be conducted must evaluate and approve each clinical study. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution.

         Following completion of these studies, an 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(R) 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.

                                      -9-

<PAGE>

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 27, 2007, we have one full-time and three part-time
employees. None of our employees is represented by a labor union and we believe
that our employee relations are satisfactory. We also maintain agreements with
nine research and development consultants.

                                  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

AS OF SEPTEMBER 27, 2007, WE ARE IN DEFAULT UNDER THE AMENDED TERMS OF THE
SENIOR NOTES AND WE CURRENTLY DO NOT HAVE THE MEANS TO REPAY THE HOLDERS OF OUR
SENIOR NOTES; THUS THEY MAY FORCE OUR LIQUIDATION.

         In September 2004, we entered into a Senior Note Purchase Agreement and
Registration Rights Agreement with certain investors pursuant to which we issued
our Senior Notes in the approximate principal amount of $10.7 million (the
"Amended Purchase Agreement"). In April 2006, we amended the Amended Purchase
Agreement to reduce the conversion price, increase the interest rate and extend
the maturity date (the "2006 Amendment"). In April 2007, the holders of
substantially all the outstanding principal amount of the Senior Notes agreed to
extend the maturity date, upon certain conditions, to June 30, 2008 (the "2007
Amendment") (see Note 6 to our accompanying consolidated financial statements
for a description of the terms). As of September 27, 2007, we are in default
under the terms of the 2007 Amendment and we owe the holders of our Senior Notes
approximately $12 million in principal and accrued interest. We currently do not
have the resources to repay the Senior Notes. If the holders of our Senior Notes
demand repayment, 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, 2007, we had an accumulated
deficit of $497.8 million. For the years ended June 30, 2007 and 2006, we
incurred net losses of $4.1 million and $9.6 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.

THERE HAVE BEEN DELAYS IN THE CLINICAL DEVELOPMENT OF OUR PRODUCT CANDIDATE
OXYGENT.

         Currently, we have just initiated a Phase 2b clinical trial in France
related to our product candidate OXYGENT. Double-Crane is obligated to initiate
clinical trials in the PRC, but we do not expect that these trials will be
initiated until calendar year 2008 and they will likely be Phase 1 clinical
trials. We expect that at least one Phase 2 and two Phase 3 clinical trials with
positive results will be required before we are able to seek marketing approval
from any regulatory authority with respect to OXYGENT. If the results of our
clinical trials with respect to OXYGENT 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.

                                      -10-

<PAGE>

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 have completed the manufacturing of 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 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.

         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 commercialize OXYGENT in Europe; however, a definitive
collaboration agreement with LEO is subject to the successful completion of our
Phase 2b postoperative ileus study that must validate clinical data from a prior
study. We do not know whether the results of the study 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:

                                      -11-

<PAGE>

         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.

DELAYS, SUSPENSIONS AND TERMINATIONS OF OUR CLINICAL TRIALS COULD RESULT IN
INCREASED COSTS TO US AND DELAY OUR ABILITY TO GENERATE PRODUCT REVENUES.

         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 AEs 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.

         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.


                                      -12-

<PAGE>

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 AEs;
         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
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.

                                      -13-

<PAGE>

         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;
         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.

                   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.


                                      -14-

<PAGE>

         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.

                          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.

                                      -15-

<PAGE>

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 do 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.

                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 24, 2007, 50,848,283 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 shareholders. These shares, upon acquisition, unless held by
"affiliates," will be freely tradable without restriction or further
registration under federal securities laws pursuant to Rule 144.

         Sales of a substantial number of shares of our common stock in the
public markets, or the perception that the 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.

THE APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL THOSE
SHARES.

                                      -16-

<PAGE>

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

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

WE DO NOT INTEND TO PAY CASH DIVIDENDS.

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


ITEM 2.  DESCRIPTION OF PROPERTY

         We have been leasing approximately 3,000 square feet of space within a
facility in San Diego, California. This space was used for research and
development and general administration. At the expiration of this lease, we will
be moving into a space approximately 50% the size in an effort to conserve our
cash resources. We believe the smaller facility is adequate to meet our
near-term space requirements.

ITEM 3.  LEGAL PROCEEDINGS

         None.

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

         No matters were submitted to a vote of the Company's stockholders
during the last quarter of our fiscal year ended June 30, 2007.


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, 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 2007
                Quarter ended June 30, 2007                $0.13       $0.09
                Quarter ended March 31, 2007               $0.15       $0.09
                Quarter ended December 31, 2006            $0.14       $0.09
                Quarter ended September 30, 2006           $0.21       $0.10

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


                                      -17-

<PAGE>

         On September 24, 2007, the closing bid price of the Company's common
stock was $0.055.

         As of September 24, 2007, there were 823 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 Exchange Act, commonly
referred to as the penny stock rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks, and Rule 15g-9(d) incorporates
the definition of penny stock that is found in Rule 3a51-1 of the Exchange Act.
The SEC generally defines penny stock to be any equity security that has a
market price less than $5 per share, subject to certain exceptions. If our
common stock is deemed to be a penny stock, trading in the shares will be
subject to additional sales practice requirements on broker-dealers who sell
penny stock to persons other than established customers and accredited
investors. "Accredited investors" are persons with assets in excess of $1
million or annual income exceeding $200,000 or $300,000 together with their
spouses. For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of such security and must
have the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document, prepared by the SEC, relating to the penny stock market. A
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in an account and information on the
limited market in penny stocks. Consequently, these rules may restrict the
ability of a broker-dealer to trade and/or maintain a market in our common stock
and may affect the ability of our shareholders to sell their shares.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table sets forth information as of June 30, 2007 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)

Plan category                     Number of securities to be     Weighted-average exercise       Number of securities
                                  issued upon exercise of        price of outstanding            remaining available for
                                  outstanding options,           options, warrants and rights    future issuance under
                                  warrants and rights (1)                                        equity compensation plans
                                                                                                 (excluding securities
                                                                                                 reflected in column (a))(1)

Equity compensation plans
approved by security holders      2,414,000                      $4.20                           4,022,610


Equity compensation plans not
approved by security holders (1)  4,634,893                      $0.77                              17,000
                                  ---------                      -----                           ---------
Totals                            7,048,893                      $1.95                           4,039,610
</TABLE>


                                      -18-

<PAGE>

         (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

         During the fiscal year ended June 30, 2007, holders of certain Senior
Notes converted an aggregate of approximately $1.5 million in principal and
$41,000 in accrued interest into an aggregate of 9,324,926 shares of our common
stock at a conversion price of $0.17 per share.

         The offers, sales and issuances of these securities were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act and/or Regulation D promulgated thereunder as transactions by
the issuer not involving a public offering. The recipients of the securities
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, 2007, have an accumulated deficit of $497.8 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.

                                      -19-

<PAGE>

RESEARCH AND DEVELOPMENT

         For the years ended June 30, 2007 and 2006, we incurred research and
development expenses of $1.9 million and $1.8 million, 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 $161 million. While difficult to predict,
we estimate that the completion of clinical trials for OXYGENT will cost at
least an additional $70 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.

         In January 2007, the French Ethics Committee (IRB) and the French
Competent Authority (regulatory agency) granted approval to start the Phase 2b
clinical trial for OXYGENT to prevent postoperative ileus resulting from hypoxia
during major surgery trial. Subsequently, Alliance submitted a clinical trial
protocol revision to the French Ethics Committee and the French Competent
Authority, which modified the dosing regimen to a dose-escalation protocol. This
modification allows for the safety and efficacy to be evaluated in three dose
levels; however, this modification potentially could add additional 30 to 60
patients to the trial, depending upon the evaluation of efficacy at each dosing
level. Alliance has initiated the trial, but will need additional funds to
complete the study.

         On February 6, 2007, we announced the manufacture and release for
shipment of OXYGENT for clinical trials. Alliance has now successfully completed
the contract manufacture of OXYGENT clinical trial material. The clinical
supplies will be used in the Phase 2b trial that will be conducted in Europe as
described above.

         On March 15, 2007, we announced that, in accordance with the current
regulations of the sFDA, the supplies for an IND application and clinical
development must be manufactured in a facility in China. As a result, Alliance
agreed to accelerate the manufacturing technology transfer to Double-Crane,
which originally was planned to occur when Phase 3 trials were initiated in
China. Once clinical supplies are manufactured by Double-Crane, Double-Crane has
indicated that it will submit its IND application for initiation of the agreed
upon clinical development plan. Double-Crane will start a Phase 1 safety trial
in Chinese nationals immediately after the sFDA approves the IND application.

         Double-Crane has considerable experience in manufacturing large-volume
parenteral and IV solutions and has expressed a desire to supply Alliance with
clinical and commercial supplies of OXYGENT from its facilities in China. Supply
of OXYGENT to the U.S. would be contingent on Double-Crane's compliance to
Current Good Manufacturing Practices ("cGMP") and registration with the U.S.
FDA.

RESULTS OF OPERATIONS

YEAR ENDED JUNE 30, 2007 AS COMPARED WITH YEAR ENDED JUNE 30, 2006

         Our revenue increased to $573,000 for the year ended June 30, 2007,
compared to $129,000 for the year ended June 30, 2006. The revenue for this year
was primarily a milestone payment of $500,000 that was recognized as revenue
upon satisfaction of certain obligations under the Double-Crane Agreement. The
revenue for last year was primarily royalties received from sales other than
Imagent.

         Research and development expenses increased by $107,000, or 6%, to $1.9
million for the year ended June 30, 2007, compared to $1.8 million for the year
ended June 30, 2006. The increase in research and development expenses was
primarily due to an increase in activities during the current year in connection
with the initiation of our Phase 2b postoperative ileus clinical study in France
and the production of clinical trial material in an FDA-approved GMP facility.

         General and administrative expenses decreased by $26,000, or 2%, to
$1.17 million for the year ended June 30, 2007, compared to $1.2 million for the
year ended June 30, 2006. The decrease in general and administrative expenses
was primarily the result of a reduction in staff by eliminating a fulltime
patent attorney/corporate counsel position ($129,000) and a decrease in
insurance ($22,000), partially offset by an increase in legal fees ($59,000),
depreciation ($13,000) and the recording of stock-based employee and director
compensation ($51,000).

                                      -20-

<PAGE>

         For the year ended June 30, 2007, we recorded a gain on the disposition
of assets of $659,000. This amount primarily consisted of payments from Imcor
Pharmaceutical Co. ("Imcor"), formerly known as Photogen Technologies, Inc., of
$100,000 and the recognition of approximately $500,000 of deferred royalties
during the year in connection with the IMAGENT asset sale transaction (see Note
5 to our accompanying consolidated financial statements). 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 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, 2007, we recorded a gain on the change in
fair value of derivative liability of $357,000 related to recording derivative
liabilities at fair value in connection with the 2006 Amendment of our Senior
Notes (see Note 6 to our accompanying consolidated financial statements). For
the year ended June 30, 2006, we recorded a gain on the change in fair value of
derivative liability of $2.6 million related to recording derivative liabilities
at fair value in connection with the 2006 Amendment.

         Investment income decreased to $114,000 for the year ended June 30,
2007, compared to $198,000 for the year ended June 30, 2006. The decrease was
primarily a result of a lower cash balance.

         Other income was $82,000 for the year ended June 30, 2006, the result
of proceeds recorded from the sale of raw material inventory (which was
previously written off).

         Interest expense was $922,000 for the year ended June 30, 2007, an
increase of 26% compared to $732,000 for the year ended June 30, 2006. The
increased expense for the current year was primarily the result of recording
accrued interest at a higher interest rate on the Senior Notes per terms of the
2006 Amendment (see Note 6 to our accompanying consolidated financial
statements).

         For the year ended June 30, 2007, we recorded a loss on modification of
debt of $1.8 million resulting from the issuance of additional notes in
connection with the 2007 Amendment (see Note 6 to our accompanying consolidated
financial statements). For the year ended June 30, 2006, we recorded a loss on
extinguishment of debt of $10.1 million resulting from the fair value of the
conversion feature in connection with the 2006 Amendment.

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, 2007, we had received $243 million in net
proceeds from sales of our equity securities, $260.8 million in payments from
collaboration agreements and $74.3 million in debt financing of which $39
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, 2007, we had approximately $873,000 in cash and cash
equivalents compared to $3.6 million at June 30, 2006. The decrease resulted
primarily from the net cash used in operations of $2.8 million, and the purchase
of $74,000 of equipment, partially offset by cash received from Imcor of
$100,000. At June 30, 2007, we had a working capital deficit of $12.1 million,
compared to a working capital deficit of $9.6 million at June 30, 2006. The
deficit increase was principally due to the net cash used in operations, the net
increase in the Senior Note principal amounts and accrued interest of $1.1
million, partially offset by the reclassification of (a) the fair value of the
derivative liability of $841,000 and (b) the deferred license fee revenue of
$500,000. Our operations to date have consumed substantial amounts of cash and
are expected to continue to do so for the foreseeable future.

         Net cash used in operating activities totaled $2.8 million for the year
ended June 30, 2007, compared to $3.3 million for the year ended June 30, 2006.
The decrease in net cash used in operating activities during the year ended June
30, 2007 was primarily due to a litigation award and settlement payment of
$400,000 paid during the prior year.

         There was no cash provided by financing activities for the years ended
June 30, 2007 and June 30, 2006.


                                      -21-

<PAGE>

         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, made cash payments to us in an approximate amount of
$1.9 million, and assumed or we have settled $21.4 million in liabilities in
full satisfaction of $27 million of the foregoing debt. In addition, Alliance
and Imcor were co-plaintiffs in an Amersham litigation. 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
asset purchase agreement, effectively terminating all ongoing obligations and
rights under the agreement. The parties also 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 during fiscal year 2006.

         Imcor announced that it adopted a restructuring plan whereby it is
evaluating alternatives with respect to efforts to sell or otherwise maximize
asset values related to the IMAGENT technology, and is considering the sale or
license of its IMAGENT assets, a merger or other material transaction. Since
such a transaction may include selling the IMAGENT technology, a license or sale
of the patent portfolio underlying the IMAGENT technology, a manufacturing
rights agreement, or another form of transaction, Alliance has determined that
there will be no future IMAGENT earn-out payments and deferred royalties
previously recorded will not be paid; therefore, Alliance recognized $500,000 in
deferred royalties as a gain on disposition of liabilities during the year ended
June 30, 2007.

         In November 2006, Imcor entered into an amended and restated license
agreement with one of its partners (the "Imcor Settlement Agreement"). Pursuant
to the terms of the agreement, an aggregate of $100,000 (approximately $91,000
net, after deducting the Company's allocated share of direct expenses) was paid
to Alliance during the year ended June 30, 2007.

         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, 2007. 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 2b postoperative ileus clinical study in surgery patients being conducted
by us to confirm the results of an earlier study. The first dose-escalation
portion of the Phase 2b study could be completed in early 2008. 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 2b clinical trial.

         On May 16, 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 and they will be obligated to make milestone and royalty
payments to us. In addition, Double-Crane will be responsible for manufacturing
clinical supplies and conducting clinical trials in the PRC, in accordance with
international guidelines, necessary to receive marketing approval for OXYGENT
and Alliance 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.


                                      -22-

<PAGE>

         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
paid the balance in four quarterly installments of $250,000 through September
2006 pursuant to a promissory note that was 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.

         In April 2006, Alliance entered into the 2006 Amendment of its Senior
Notes. Pursuant to the 2006 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
accrued 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 2006 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 until November 14,
2006, when the Company's shareholders at its Annual Meeting approved an
amendment of the Company's Certificate of Incorporation, as amended, to increase
the number of authorized shares of common stock from 125 million to 150 million.
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. During
the 2007 fiscal period ended November 14, 2006, the Company recognized other
income of $357,000 and the derivative liability balance of $484,000 at that date
was reclassified to additional paid-in capital since the increase in the number
of shares approved by the shareholders was sufficient to settle all outstanding
convertible instruments, thus there was no derivative liability at June 30,
2007.

         Since the Company did not have the funds to pay the Senior Notes on
April 1, 2007, in two confidential teleconferences with the holders, Alliance
requested that each holder of a Senior Note execute an amendment to extend the
maturity date of the Senior Note from April 1, 2007 to June 30, 2008.

         On May 15, 2007, Alliance entered into the 2007 Amendment of its Senior
Convertible Promissory Note Purchase Agreement and Registration Rights Agreement
(as amended by the 2006 Amendment) with essentially all of the existing holders
of Alliance's Senior Notes. Pursuant to the 2007 Amendment, the maturity date of
each outstanding Senior Note was extended as follows:

         (a) The maturity date was extended from April 1, 2007 to the date
ninety (90) days after the date of the 2007 Amendment. If the Company received
more than $1.5 million but less than $3 million in connection with a Qualified
Financing (as defined in the 2007 Amendment) prior to the expiration of the
ninety (90) days (which the Company did not receive), the maturity date would
have been automatically extended to the date that is one hundred eighty (180)
days after the date of the 2007 Amendment; and

         (b) If the Company receives at least $3 million in connection with a
Qualified Financing prior to the extended maturity date, the maturity date will
automatically become June 30, 2008.

         The holders of the Senior Notes also agreed to subordinate their rights
to any debt that is issued in a Qualified Financing. Further, any financing that
qualifies as a Qualified Financing will not require additional approval from the
Senior Note holders.

                                      -23-

<PAGE>

         Alliance also agreed to issue to each current holder of a Senior Note
an additional note with principal amount equal to 20% of the outstanding
principal amount of such Senior Note on the date of the 2007 Amendment, which
resulted in Alliance issuing new promissory notes in the aggregate principal
amount of approximately $1.8 million. These new notes bear interest at the rate
of 10% per annum, will mature on June 30, 2008 and may become convertible into
common stock of Alliance on the same terms as the Senior Notes at such time as
Alliance has a sufficient number of authorized and unreserved shares of common
stock to accommodate such conversion and Alliance provides written notice to the
holders of these notes that they are then convertible into common stock.

         The Company also agreed to an increase of 20% to the current
royalty/milestone payment participation amounts set forth in the 2006 Amendment.
Under the 2006 Amendment, Senior Note holders receive 50% of the total amounts
of royalties and milestones received by the Company from third parties until
100% of the payment participation amounts have been received. The Senior Note
holders will now receive payment sharing until 120% of the payment participation
amounts have been received if they continue to hold their Senior Notes through
June 30, 2008.

         As of September 27, 2007, the Company is in default under the Senior
Notes in the aggregate principal and interest amount of approximately $12
million.

         We believe we have working capital to fund our operations through
December 31, 2007; therefore, we are seeking 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, 2007, the following approximate debt obligations were
outstanding:

         (a)  $415,000 owed to various vendors;

         (b)  $151,000 in accrued expenses;

         (c)  $100,000 in deferred revenue;

         (d)  $12.3 million in Senior Notes, including $2.1 million in accrued
              interest;

         (e)  $750,000 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 the fiscal year end, holders of certain Senior Notes
converted an aggregate of approximately $580,000 in principal and $108,000 in
accrued interest into an aggregate of 4,047,054 shares of our common stock at a
conversion price of $0.17 per share.

         As of September 27, 2007, the Company is in default under the Senior
Notes in the aggregate principal and interest amount of approximately $12
million. Alliance is continuing to seek additional financing that would qualify
as a Qualified Financing for the purpose of funding its continuing operations
through June 2008.

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.


                                      -24-

<PAGE>

ITEM 7.  FINANCIAL STATEMENTS

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

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

                                                                        Page No.
                                                                        --------

Report of Independent Registered Public Accounting Firm                    26

Consolidated Balance Sheet at June 30, 2007                                27

Consolidated Statements of Operations for the Years                        28
         Ended June 30, 2007 and 2006

Consolidated Statements of Stockholders' Deficit for the Years             29
         Ended June 30, 2007 and 2006

Consolidated Statements of Cash Flows for the Years                        30
         Ended June 30, 2007 and 2006

Notes to Consolidated Financial Statements                                 31


                                      -25-

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Alliance Pharmaceutical Corp.

We have audited the accompanying consolidated balance sheet of Alliance
Pharmaceutical Corp. (the "Company") as of June 30, 2007, 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
consolidated 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, 2007 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, 2008, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regards
to these matters are also 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.

As discussed in Note 1 to the consolidated financial statements, effective July
1, 2006, the Company changed its method of accounting for share-based
compensation to adopt Statement of Financial Accounting Standards No. 123(R),
SHARE-BASED PAYMENT.


                          /S/ KMJ CORBIN & COMPANY LLP

Irvine, California
September 27, 2007


                                      -26-

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

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

                                                                                YEAR ENDED
                                                                               JUNE 30, 2007
                                                                               -------------
ASSETS
------
CURRENT ASSETS:
    Cash and cash equivalents                                                  $     873,000
    Other current assets                                                              60,000
                                                                               -------------
            Total current assets                                                     933,000

PROPERTY AND EQUIPMENT - NET                                                         126,000
OTHER ASSETS                                                                          10,000
                                                                               -------------
                                                                               $   1,069,000
                                                                               =============

LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------

CURRENT LIABILITIES:
    Accounts payable                                                           $     415,000
    Accrued expenses                                                                 151,000
    Deferred revenue                                                                 100,000
    Senior notes payable and accrued interest                                     12,349,000
                                                                               -------------
            Total current liabilities                                             13,015,000

OTHER LIABILITIES                                                                    750,000
                                                                               -------------

            Total liabilities                                                     13,765,000
                                                                               -------------

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; 150,000,000 shares authorized;
       46,801,229 shares issued and outstanding                                      468,000
    Additional paid-in capital                                                   484,641,000
    Accumulated deficit                                                         (497,813,000)
                                                                               -------------
            Total stockholders' deficit                                          (12,696,000)
                                                                               -------------
                                                                               $   1,069,000
                                                                               =============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      -27-

<PAGE>

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


                                                             Years ended June 30,
                                                             2007            2006
                                                         ------------    ------------

REVENUES:
     Royalty, license and research                       $    573,000    $    129,000
                                                         ------------    ------------

OPERATING EXPENSES:
     Research and development                               1,940,000       1,833,000
     General and administrative                             1,169,000       1,196,000
                                                         ------------    ------------
                                                            3,109,000       3,029,000
                                                         ------------    ------------
LOSS FROM OPERATIONS                                       (2,536,000)     (2,900,000)

INVESTMENT INCOME                                             114,000         198,000
OTHER INCOME                                                       --          82,000
LOSS ON MODIFICATIONT OF DEBT                              (1,765,000)             --
LOSS ON EXTINGUISHMENT OF DEBT                                     --     (10,076,000)
INTEREST EXPENSE                                             (922,000)       (732,000)
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY                  357,000       2,647,000
GAIN ON DISPOSITION OF ASSETS AND LIABILITIES                 659,000       1,206,000
                                                         ------------    ------------
NET LOSS                                                 $ (4,093,000)   $ (9,575,000)
                                                         ============    ============

NET LOSS PER COMMON SHARE, BASIC AND DILUTED             $      (0.10)   $      (0.27)
                                                         ============    ============

WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED     40,501,000      35,320,000
                                                         ============    ============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      -28-

<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, 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)
     Reclassification of fair
         value of non-employee
         options and warrants               --        --           --          --         484,000               --          484,000
     Issuance of common stock upon
         conversion of senior
         notes and accrued interest         --        --    9,325,000      93,000       1,493,000               --        1,586,000
     Compensatory stock options             --        --           --          --          52,000               --           52,000
     Net loss                               --        --           --          --              --       (4,093,000)      (4,093,000)
                                      --------   -------  -----------   ---------   -------------    -------------    -------------
BALANCES AT JUNE 30, 2007              794,000   $ 8,000   46,801,000   $ 468,000   $ 484,641,000    $(497,813,000)   $ (12,696,000)
                                      ========   =======  ===========   =========   =============    =============    =============

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                                              -29-

<PAGE>

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

                                                                        Years ended June 30,
                                                                        2007            2006
                                                                    ------------    ------------
OPERATING ACTIVITIES:
     Net loss                                                       $ (4,093,000)   $ (9,575,000)
     Adjustments to reconcile net loss to net cash
        used in operating activities:
            Depreciation and amortization                                 35,000          22,000
            Loss on modification of debt                               1,765,000              --
            Loss on extinguishment of debt                                    --      10,076,000
            Accrued interest on senior notes                             922,000         732,000
            Compensatory stock options                                    52,000          32,000
            Change in fair value of derivative liability                (357,000)     (2,647,000)
            Gain on disposition of assets and liabilities               (659,000)     (1,206,000)
            Changes in operating assets and liabilities:
               Other assets                                               (6,000)      1,042,000
               Accounts payable, accrued expenses and other             (455,000)     (1,800,000)
                                                                    ------------    ------------
Net cash used in operating activities                                 (2,796,000)     (3,324,000)
                                                                    ------------    ------------

INVESTING ACTIVITIES:
     Purchases of property, plant and equipment                          (74,000)        (15,000)
     Proceeds from disposition of assets                                 100,000         200,000
                                                                    ------------    ------------
Net cash provided by investing activities                                 26,000         185,000
                                                                    ------------    ------------

DECREASE IN CASH AND CASH EQUIVALENTS                                 (2,770,000)     (3,139,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                         3,643,000       6,782,000
                                                                    ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                            $    873,000    $  3,643,000
                                                                    ============    ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
     Issuance of common stock upon conversion of senior
        notes and interest                                          $  1,586,000    $    450,000
                                                                    ============    ============
     Reclassification of derivative liability                       $    484,000    $         --
                                                                    ============    ============
     Reclassification of the estimated fair value of non-employee
        options and warrants to derivative liability                $         --    $  3,488,000
                                                                    ============    ============


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


                                      -30-

<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, 2007 and has negative working capital at that date of approximately
$12.1 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,
the maturity date of the Senior Notes was extended to April 1, 2007; however,
the Company did not have the resources to repay the Senior Notes on April 1,
2007. The Company requested that each holder of a Senior Note execute an
amendment to extend the maturity date of the Senior Note from April 1, 2007 to
June 30, 2008 under certain conditions, which we did not meet in a timely manner
(see Note 6). This amendment was approved by substantially all of the Senior
Note holders. The Company is continuing to seek additional financing to fund its
continuing operations through June 2008. 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"). 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 and equipment and the valuation of deferred tax
assets, stock options 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.

                                      -31-

<PAGE>

CONCENTRATION OF CREDIT RISK
----------------------------

         Cash and cash equivalents are financial instruments that potentially
subject the Company to a 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, 2007, the Company had approximately
$800,000 in these accounts in excess of the FDIC insurance limits.

PROPERTY AND EQUIPMENT
----------------------

         Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
three to five 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 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, 2007, management has determined that there is no
impairment of property and equipment. There can be no assurance, however, that
market conditions will not change, which could result in future property and
equipment impairment.

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

         As a result of the amendment to its Senior Note Amended Purchase
Agreement and Registration Rights Agreement in April 2006 (the "2006 Amendment")
(see Note 6), the Company did not have a sufficient number of authorized shares
to settle outstanding and exercisable options, warrants and convertible
instruments until November 14, 2006, when the Company's shareholders, at its
Annual Meeting, approved an amendment of the Company's Certificate of
Incorporation, as amended, to increase the number of authorized shares of common
stock from 125 million to 150 million. The amendment was filed with the
Secretary of State of the State of New York on December 15, 2006. 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 2006 Amendment, the Company was
required to classify all non-employee options and warrants as derivative
liabilities, with an aggregate fair value totaling $3.5 million as of the 2006
Amendment date, and record them at their fair values at the date of the 2006
Amendment. Any change in fair value was required to be recorded as
non-operating, non-cash income or expense at each subsequent balance sheet date
until the Company had a sufficient number of authorized shares to settle its
convertible instruments and non-employee options and warrants, which date was
November 14, 2006. At the date of the 2006 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. On November 14, 2006, the
date of the approval of the increase in authorized shares, the Company
reclassified the fair value of the derivative liability of $484,000 to
additional paid-in capital. 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. During the year ended June 30, 2007, the Company
recognized other income of $357,000 related to recording the derivative
liability at fair value.

         Warrant-related derivatives were valued using the Black-Scholes Option
Pricing Model with the following assumptions for the year ended June 30, 2006
and for the 2007 fiscal period ended November 14, 2006: annual volatility of
265% and 165%, respectively; dividend yield of 0% for both periods; and risk
free interest rate of 4.95% for both periods.

         The following is a summary of the changes to the derivative liability
during the years ended June 30, 2006 and 2007:

             Derivative liability, June 30, 2005                    $        --
             Derivative liability added during 2006                   3,488,000
             Change in fair value during 2006                        (2,647,000)

             Derivative liability, June 30, 2006                        841,000
             Change in fair value during 2007                          (357,000)
             Derivative liability, November 14, 2006                    484,000
             Reclassification to equity upon approval of increase
                in authorized shares, November 14, 2006                (484,000)
                                                                    -----------
             Derivative liability, June 30, 2007                    $        --
                                                                    ===========

                                      -32-

<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, 2007 and 2006, the Company
incurred research and development expenses of approximately $1.9 million and
$1.8 million, respectively.

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

         The carrying amount of certain of the Company's financial instruments
as of June 30, 2007 approximate their respective fair values because of the
short-term nature of these instruments. Such instruments consist of cash and
cash equivalents, 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 have been excluded from the calculation of
diluted loss per share for the years ended June 30, 2007 and 2006, as their
inclusion would be anti-dilutive. The outstanding potentially dilutive common
shares totaled approximately 73,310,000 and 66,885,000 at June 30, 2007 and
2006, respectively.

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.

                                      -33-

<PAGE>

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

         The convertible feature of the Senior Notes provided 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 for the year
ended June 30, 2006 in accordance with EITF Issue No. 96-19, "DEBTOR'S
ACCOUNTING FOR A MODIFICATION OR EXCHANGE OF DEBT INSTRUMENTS" ("EITF No.
96-19").

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

         At June 30, 2007, the Company has two stock-based employee compensation
plans.

         On July 1, 2006, the Company adopted SFAS No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS No. 123") (revised 2004), "SHARE-BASED PAYMENT"
("SFAS No. 123(R)"), which establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods or
services, primarily focusing on accounting for transactions where an entity
obtains employee services in share-based payment transactions. SFAS No. 123(R)
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments, including stock options, based on
the grant-date fair value of the award and to recognize it as compensation
expense over the period the employee is required to provide service in exchange
for the award, usually the vesting period. SFAS No. 123(R) supersedes the
Company's previous accounting under Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") for periods beginning in
the Company's fiscal 2007. In March 2005, the SEC issued SAB No. 107 relating to
SFAS No. 123(R). The Company has applied the provisions of SAB No. 107 in its
adoption of SFAS No. 123(R).

         The Company adopted SFAS No. 123(R) using the modified prospective
transition method, which required the application of the accounting standard as
of July 1, 2006, the first day of the Company's fiscal year 2007. The Company's
consolidated financial statements as of and for the year ended June 30, 2007
reflect the impact of adopting SFAS No. 123(R). In accordance with the modified
prospective transition method, the Company's consolidated financial statements
for prior years have not been restated to reflect, and do not include, the
impact of SFAS No. 123(R).

         SFAS No. 123(R) requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the Company's
consolidated statement of operations. Prior to the adoption of SFAS No. 123(R),
the Company accounted for stock-based payments to employees and directors using
the intrinsic value method in accordance with APB 25 as allowed under SFAS No.
123 and, as such, generally recognized no compensation cost for employee stock
options. During the year ended June 30, 2006, no stock-based employee
compensation cost was reflected in the accompanying consolidated statement 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.

         Stock-based compensation expense recognized during the period is based
on the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. Stock-based compensation expense recognized
in the Company's consolidated statement of operations for the year ended June
30, 2007 included compensation expense for share-based payment awards granted
prior to, but not yet vested as of June 30, 2006, based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS No. 123 and
compensation expense for the share-based payment awards granted subsequent to
June 30, 2006 based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123(R). As stock-based compensation expense
recognized in the consolidated statement of operations for the year ended June
30, 2007 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The estimated average forfeiture rate
for the year ended June 30, 2007 of approximately 2% was based on historical
forfeiture experience and estimated future employee forfeitures. The estimated
term of option grants for the year ended June 30, 2007 was seven years. In the
Company's pro forma information required under SFAS No. 123 for the periods
prior to fiscal 2007, the Company accounted for forfeitures as they occurred.

                                      -34-

<PAGE>

         SFAS No. 123(R) requires cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
those options to be classified as financing cash flows. Due to the Company's
loss position, there were no such tax benefits during the year ended June 30,
2007. Prior to the adoption of SFAS No. 123(R), those benefits would have been
reported as operating cash flows had the Company received any tax benefits
related to stock option exercises.

DESCRIPTION OF PLANS
--------------------

         The Company's stock option plans provide for grants of options to
employees and directors of the Company to purchase the Company's shares, as
determined by management and the board of directors, at the fair value of such
shares on the grant date. The options generally vest over a four- to five-year
period beginning on the date of grant up to one year after the date of grant and
have a ten-year term. As of June 30, 2007, the Company is authorized to issue up
to 8,100,000 shares under these plans and has 4,039,610 shares available for
future issuance.

SUMMARY OF ASSUMPTIONS AND ACTIVITY
-----------------------------------

         The fair value of stock-based awards to employees and directors is
calculated using the Black-Scholes option pricing model, even though the model
was developed to estimate the fair value of freely tradable, fully transferable
options without vesting restriction, which differ significantly from the
Company's stock options. The Black-Scholes model also requires subjective
assumptions regarding future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The expected term of
options granted is derived from historical data on employee exercises and
post-vesting employment termination behavior. The risk-free rate selected to
value any particular grant is based on the U.S. Treasury rate that corresponds
to the pricing term of the grant effective as of the date of the grant. The
expected volatility is based on the historical volatility of our common stock.
These factors could change in the future, affecting the determination of
stock-based compensation expense in future periods.

         The following table illustrates the effect on net loss and net loss per
share for the year ended June 30, 2006 as if the Company had applied the fair
value recognition provisions of SFAS No. 123 to options granted under the
Company's stock option plans. For purposes of this pro forma disclosure, the
fair value of the options is estimated using the Black Scholes option-pricing
model and amortized on a straight-line basis to expense over the options'
vesting periods:

                                                                       2006
                                                                    -----------

             Net loss as reported                                   $(9,575,000)
                 Total stock-based employee compensation
                     expense determined under fair-value-
                     based method for all awards                       (291,000)
                                                                    -----------
                 Pro forma net loss                                 $(9,866,000)
                                                                    ===========
             Net loss per share, basic and diluted:
                 As reported                                        $     (0.27)
                                                                    ===========
                 Pro forma                                          $     (0.28)
                                                                    ===========

         The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model with the following assumptions for 2007 and
2006, respectively: risk-free interest rate range of 4.78% to 5.05% and 4.95% to
5.05%; dividend yield of 0% for both years; volatility factor of 131% and 267%;
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 2007
and 2006 was $0.13 and $0.11 per option, respectively.

         A summary of option activity as of June 30, 2007 and changes during the
year then ended is presented below:

                                      -35-

<PAGE>

<TABLE>
<S> <C>
                                                                         JUNE 30, 2007
                                                   -----------------------------------------------------
                                                                       WEIGHTED-AVERAGE
                                                                    -----------------------
                                                                                REMAINING
                                                                                CONTRACTUAL    AGGREGATE
                                                                    EXERCISE       TERM        INTRINSIC
                                                      SHARES         PRICE        (YEARS)        VALUE
                                                   -----------------------------------------------------
Options outstanding at July 1, 2006                  2,937,018      $  5.65         7.51
Options granted                                         57,500      $  0.13
Options forfeited/expired                             (177,518)     $ 26.88
Options exercised                                            -
                                                   -------------------------
Options outstanding at June 30, 2007                 2,817,000      $  4.20         6.75         $ -
                                                   -----------------------------------------------------
Unvested options expected to vest at June 30, 2007     573,300      $  0.22         7.93         $ -
                                                   -----------------------------------------------------
Options exercisable at June 30, 2007                 2,232,000      $  5.24         6.44         $ -
                                                   =====================================================
</TABLE>

         There were 57,500 options granted with a weighted average grant date
fair value of $0.13 per share during the year [GRAPHIC OMITTED] ended June 30,
2007.

         As of June 30, 2007, there was approximately $56,000 of total
unrecognized compensation cost related to employee and director stock option
compensation arrangements. That cost is expected to be recognized on a
straight-line basis over the next four years on average. The total fair value of
shares vested during the year ended June 30, 2007 related to employee and
director options and options issued to consultants was approximately $51,000 and
$1,000 respectively, net of an estimated forfeiture rate of 2%.

         As a result of adopting SFAS No. 123(R) on July 1, 2006, the Company's
net loss for the year ended June 30, 2007 was approximately $51,000 higher than
if it had continued to account for share-based compensation under APB 25. Net
loss per share for the year ended June 30, 2007 was the same. The Company
allocated $51,000 of the stock-based compensation expense related to employee
and director stock options to general and administrative expenses and $1,000 of
the stock-based compensation expense related to consultant stock options to
research and development expenses.

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

         In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN
INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN 48"). This interpretation
clarifies the application of SFAS No. 109, "ACCOUNTING FOR INCOME TAXES" by
defining criteria that an individual tax position must meet for any part of the
benefit of that position to be recognized in a company's financial statements
and also provides guidance on measurement, derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company will adopt FIN 48 on July 1, 2007. The Company is currently
assessing the impact the adoption of FIN 48 will have on its financial position
and results of operations.

         In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE
MEASUREMENTS" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accounting principals generally accepted
in the U.S. and expands disclosures about fair value measurements. The statement
does not require new fair value measurements, but is applied to the extent that
other accounting pronouncements require or permit fair value measurements. The
statement emphasizes that fair value is a market-based measurement that should
be determined based on the assumptions that market participants would use in
pricing an asset or liability. Companies that have assets and liabilities
measured at fair value will be required to disclose information that enables the
users of its financial statements to access the inputs used to develop those
measurements. The reporting entity is encouraged, but not required, to combine
the fair value information disclosed under this statement with the fair value
information disclosed under other accounting pronouncements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company
expects to adopt SFAS No. 157 on July 1, 2008. The Company is currently
assessing the impact the adoption of SFAS No. 157 will have on its consolidated
financial statements.

                                      -36-

<PAGE>

         In September 2006, the Securities and Exchange Commission staff issued
SAB No. 108, "CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN
QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS" ("SAB No. 108").
SAB No. 108 was issued in order to eliminate the diversity in practice
surrounding how public companies quantify financial statement misstatements. SAB
No. 108 requires that registrants quantify errors using both a balance sheet and
income statement approach and evaluate whether either approach results in a
misstated amount that, when all relevant quantitative and qualitative factors
are considered, is material. The adoption of this statement did not have a
significant impact on the Company's consolidated financial condition or results
of operations.

         In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION
FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES" ("SFAS No. 159"). SFAS No. 159
permits entities to choose to measure at fair value many financial instruments
and certain other items that are not currently required to be measured at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types of assets and
liabilities. SFAS No. 159 does not affect any existing accounting literature
that requires certain assets and liabilities to be carried at fair value. SFAS
No. 159 does not establish requirements for recognizing and measuring dividend
income, interest income, or interest expense. This statement does not eliminate
disclosure requirements included in other accounting standards. SFAS No. 159 is
effective in fiscal years beginning after November 15, 2007. The Company expects
to adopt SFAS No. 159 on July 1, 2008. The Company is in the process of
evaluating the provisions of the statement, but does not anticipate that the
adoption of SFAS No. 159 will have a material impact on its consolidated
financial statements.


2.  FINANCIAL STATEMENT DETAILS

PROPERTY AND EQUIPMENT - NET
----------------------------

         Property and equipment consist of the following at June 30, 2007:

           Furniture, fixtures and equipment                     $    275,000
           Less accumulated depreciation and amortization            (149,000)
                                                                 -------------
                                                                 $    126,000
                                                                 =============

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

         Other liabilities consist of $750,000 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.


3.  PFC THERAPEUTICS, LLC

         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.

         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, 2007.

                                      -37-

<PAGE>

         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 Phase
2b postoperative ileus clinical study in surgery patients being conducted by the
Company to confirm the results of an earlier study. 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 postoperative ileus clinical trial.

         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 was deferred until the Company's obligations to perform
were satisfied. These obligations included the transfer and translation of all
intellectual property, preclinical, clinical and regulatory data necessary for
Double-Crane's clinical development and Investigational New Drug ("IND")
application to the State Food and Drug Administration PRC (the "sFDA"). This
transfer and all other corresponding obligations were completed during this
fiscal year, thus such amount was recognized as license revenue at June 30,
2007.

         Double-Crane intends to pursue an intraoperative and postoperative
transfusion avoidance endpoint. Double-Crane's clinical development plan
incorporates a new protocol design that is intended to build on the previously
conducted Alliance Phase 2 and Phase 3 clinical trials. In these studies, the
efficacy of OXYGENT in terms of drug activity (i.e., its ability to deliver
oxygen) enabled patients to remain physiologically stable at lower
intraoperative hemoglobin ("Hb") levels. OXYGENT was shown to be statistically
better than blood in reversing, as well as maintaining reversal of,
physiological transfusion triggers. Importantly, the Double-Crane study will not
employ any blood harvesting techniques (i.e., acute normovolemic hemodilution or
intraoperative autologous donation), which were implicated in safety issues in a
previous Alliance Phase 3 clinical trial.

         Double-Crane is obligated pursuant to its agreement with Alliance to
conduct clinical trials in China in accordance with the International Conference
on Harmonization of Technical Requirements for Registration of Pharmaceuticals
for Human Use (the "ICH") Guidelines, which would allow Alliance to use any data
derived from the clinical trials in other countries.

         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.


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 paid the balance in four quarterly installments of $250,000 through
September 2006 pursuant to a promissory note that was 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 owns 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 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"). MultiCell is actively
pursuing the sale of MCTI's assets and we will participate in the proceeds of
that sale, if any, to the extent of our percent ownership.

                                      -38-

<PAGE>

         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 "CONSOLIDATION OF VARIABLE INTEREST ENTITIES" and such
investment is 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 negotiations. 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, approximately
$476,000 during the year ended June 30, 2006 and approximately $659,000 during
the year ended June 30, 2007 related to the disposition of these assets. To
date, Alliance has recorded approximately $27 million as a gain on the
disposition of assets as a result of Imcor issuing shares of its stock valued at
approximately $3.7 million to Alliance creditors, Imcor funding approximately
$1.9 million of Alliance's obligations, and approximately $21.4 million related
to settlement agreements or Imcor's assumed obligations of Alliance.

         In September 2005, Alliance and Imcor entered into a global settlement
agreement (the "Imcor 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 Health Inc.,
Amersham Health AS and Amersham plc (collectively, "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 during
the year ended June 30, 2006.

         Imcor announced that it adopted a restructuring plan whereby it is
evaluating alternatives with respect to efforts to sell or otherwise maximize
asset values related to the IMAGENT technology, and is considering the sale or
license of its IMAGENT assets, a merger or other material transaction. Since
such a transaction may include selling the IMAGENT technology, a license or sale
of the patent portfolio underlying the IMAGENT technology, a manufacturing
rights agreement, or another form of transaction, Alliance has determined that
there will be no future IMAGENT earn-out payments and deferred royalties
previously recorded will not be paid; therefore, Alliance recognized $500,000 in
deferred royalties as a gain on disposition of liabilities during the year ended
June 30, 2007.

         In November 2006, Imcor entered into an amended and restated license
agreement with one of its partners. Pursuant to the terms of the Imcor
Settlement Agreement mentioned above, an aggregate of $100,000 (approximately
$91,000 net, after deducting the Company's allocated share of direct expenses)
was paid to Alliance during the year ended June 30, 2007.


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.


                                      -39-

<PAGE>

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.

         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 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.

         The Senior Notes were due March 24, 2006, and bore interest at 6% per
annum. In April 2006, the Company entered into the 2006 Amendment with each of
the existing holders of Alliance's Senior Notes. Pursuant to the 2006 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 accrued 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 2006 Amendment of the Senior Notes resulted in terms that,
pursuant to EITF No. 96-19, were 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 2006 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 for the year ended June 30,
2006.

         The 2006 Amendment caused the Company to have an insufficient number of
authorized shares to settle all outstanding and options, warrants and
exercisable convertible instruments until shareholders approved an increase in
authorized shares of common stock on November 14, 2006. As a result, under EITF
00-19, all non-employee options and warrants were classified as derivative
liabilities and recorded at their fair values at each balance sheet date (see
Note 1).

         On May 15, 2007, Alliance entered into an amendment (the "2007
Amendment") of its Senior Convertible Promissory Note Purchase Agreement and
Registration Rights Agreement (as amended by the 2006 Amendment) with
essentially all of the existing holders of the Senior Notes. Pursuant to the
2007 Amendment, the maturity date of each outstanding Senior Note was extended
as follows:

         (a) The maturity date was extended from April 1, 2007 to the date
ninety (90) days after the date of the 2007 Amendment. If the Company received
more than $1.5 million but less than $3 million in connection with a Qualified
Financing (as defined in the 2007 Amendment) prior to the expiration of the
ninety (90) days (which the Company did not receive), the maturity date would
have been automatically extended to the date that is one hundred eighty (180)
days after the date of the 2007 Amendment; and

         (b) If the Company receives at least $3 million in connection with a
Qualified Financing prior to the extended maturity date, the maturity date will
automatically become June 30, 2008.

                                      -40-

<PAGE>

         The holders of the Senior Notes also agreed to subordinate their rights
to any debt that is issued in a Qualified Financing. Further, any financing that
qualifies as a Qualified Financing will not require additional approval from the
Senior Note holders.

         Alliance also agreed to issue to each current holder of a Senior Note
an additional note with principal amount equal to 20% of the outstanding
principal amount of such Senior Note on the date of the 2007 Amendment, which
resulted in Alliance issuing new promissory notes in the aggregate principal
amount of approximately $1.8 million, which was recorded as a loss on
modification of debt and has been expensed in the consolidated statement of
operations during the year ended June 30, 2007. These new notes bear interest at
the rate of 10% per annum, will mature on June 30, 2008 and may become
convertible into common stock of Alliance on the same terms as the Senior Notes
at such time as Alliance has a sufficient number of authorized and unreserved
shares of common stock to accommodate such conversion.

         The Company further agreed to an increase of 20% to the current
royalty/milestone payment participation amounts set forth in the 2006 Amendment.
Under the 2006 Amendment, Senior Note holders receive 50% of the total amounts
of royalties and milestones received by the Company from third parties until
100% of the payment participation amounts have been received. The Senior Note
holders will now receive payment sharing until 120% of the payment participation
amounts have been received if they continue to hold their Senior Notes through
June 30, 2008.

         As of September 27, 2007, the Company is in default under the Senior
Notes in the aggregate principal and interest amount of approximately $12
million. Alliance is continuing to seek additional financing that would qualify
as a Qualified Financing for the purpose of funding its continuing operations
through June 2008. Under the current plan, Alliance has enough funds to operate
through December 31, 2007.

         The Senior Notes can be converted at anytime prior to the maturity
date. During the fiscal year ended June 30, 2007, holders of certain Senior
Notes converted an aggregate of approximately $1.5 million in principal and
approximately $41,000 in accrued interest into an aggregate of 9,324,926 shares
of our common stock at a conversion price of $0.17 per share. At June 30, 2007,
the principal and accrued interest balances approximate $10.2 million and $2.1
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."

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

         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


                                      -41-

<PAGE>

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.

         The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 2007:

<TABLE>
<S>     <C>
                                                     Average
                                    Weighted        Remaining                    Weighted
    Range of            Number       Average       Contractual      Number        Average
Exercise Prices      outstanding  Exercise Price      Life        Exercisable  Exercise Price
---------------------------------------------------------------------------------------------
     $0.11              442,500       $0.11           8.31           237,500       $0.11
 $0.13 - $0.25          146,000       $0.16           7.47           108,500       $0.17
     $0.29            1,370,000       $0.29           7.54         1,027,500       $0.29
 $0.41 - $0.44          312,500       $0.41           6.97           312,500       $0.41
 $3.10 - $4.90          226,000       $3.15           4.35           226,000       $3.15
$13.75 - $24.37         164,800      $17.49           2.60           164,800      $17.49
$33.44 - $64.38         155,200      $49.16           2.07           155,200      $49.16

                   -------------                                 ------------
                      2,817,000       $4.20           6.75         2,232,000       $5.24
                   =============                                 ============
</TABLE>

         At June 30, 2006, 2,274,768 options were exercisable at a weighted
average exercise price of $7.05 per share.

WARRANTS
--------

         At June 30, 2007, the Company had warrants outstanding to purchase
4,231,893 shares of common stock at prices ranging from $0.17 to $0.50 per
share. The warrants expire on various dates from October 2007 through June 2009.
During the years ended June 30, 2007 and 2006, the Company did not grant any
warrants and no warrants were exercised. During the year ended June 30, 2007,
10,005,726 warrants with a weighted average exercise price of $0.29 expired.

         The following table summarizes common shares reserved for issuance at
June 30, 2007 on exercise or conversion of:

         Series F convertible preferred stock                            635,000
         Common stock options                                          6,930,128
         Common stock warrants                                         4,231,893
                                                                      ----------
         Total common shares reserved for issuance                    11,797,021
                                                                      ==========


9.  INCOME TAXES

         No provision for income taxes was recorded for the years ended June 30,
2007 and 2006 due to the significant net operating loss carryforwards.

         The significant components of the Company's deferred tax assets as of
June 30, 2007 are shown below. A valuation allowance of $194 million, of which
$1.4 million is related to the year ended June 30, 2007, has been recognized to
offset the deferred tax assets, as realization of such assets is uncertain.


                                      -42-

<PAGE>

         Deferred tax assets consist of the following:

         Net operating loss carryforwards                         $ 165,658,000
         Research and development credits                            27,528,000
         Capitalized research expense                                   610,000
         Other - net                                                    384,000
                                                                  -------------
         Total deferred tax assets                                $ 194,180,000
         Valuation allowance for deferred tax assets               (194,180,000)
                                                                  -------------
         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, 2007, the Company had federal and various state net
operating loss carryforwards of approximately $457 million and $63 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. Approximately $19
million in federal tax loss carryforwards expired in the 2007 fiscal year.
Additional carryforwards will continue to expire in the 2008 fiscal year unless
previously utilized. The Company also has federal and state research and
development tax credit carryforwards of $18 million and $10 million,
respectively. Approximately $1 million in federal research and development tax
credit carryforwards expired in the 2007 fiscal year. Additional carryforwards
will continue to expire in the 2008 fiscal year 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 September 30, 2007. The Company has recently executed a lease
on a different facility.

         Rental expense for operating leases approximated $108,000 and $101,000
for the years ended June 30, 2007 and 2006, respectively. Estimated rental
obligations under the new lease are $66,000 for fiscal 2008 and $12,000 for
fiscal 2009.

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 the fiscal year end, holders of certain Senior Notes
converted an aggregate of approximately $580,000 in principal and approximately
$108,000 in accrued interest into an aggregate of 4,047,054 shares of our common
stock at a conversion price of $0.17 per share.

         As of September 27, 2007, the Company is in default under the Senior
Notes in the aggregate principal and interest amount of approximately $12
million. Alliance is continuing to seek additional financing that would qualify
as a Qualified Financing for the purpose of funding its continuing operations
through June 2008.

                                      -43-

<PAGE>

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

         None.


ITEM 8A.  CONTROL 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, 2007 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 INTERNAL CONTROL OVER FINANCIAL REPORTING

         There were no significant changes made in our internal control over
financial reporting during the year ended June 30, 2007 that have materially
affected or are reasonably likely to materially affect this internal control
system. 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.


                                      -44-

<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH Section 16(a) OF THE EXCHANGE ACT


DIRECTORS OF THE COMPANY

         The following are the directors of the Company:

Name                         Position                                      Age
----                         --------                                      ---

Duane J. Roth                Chairman and Chief Executive Officer          57
Pedro Cuatrecasas, M.D.      Director                                      71
Carroll O. Johnson           Director                                      74
Stephen M. McGrath           Director                                      72
Jean G. Riess, Ph.D.         Director                                      71
Theodore D. Roth             Director                                      56


BIOGRAPHICAL INFORMATION REGARDING DIRECTORS

         DUANE J. ROTH. Mr. D. Roth has served as a director of the Company
since 1985. He has served as Chief Executive Officer of the Company since 1985
and as Chairman since October 1989. Prior to joining the Company, Mr. D. Roth
served as President of Analytab Products, Inc., an American Home Products
company (now Wyeth) 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 with Ortho Diagnostic
Systems, Inc., a Johnson & Johnson company, which is a manufacturer of
diagnostic and pharmaceutical products. Mr. D. Roth also serves as CEO of
CONNECT, a non-profit technology business accelerator in San Diego. Mr. D.
Roth's brother, Theodore D. Roth, is a director of the Company. Mr. D. Roth does
not qualify as an "independent" director within the meaning of Rule 4200(a)(15)
of the Listing Standards of the National Association of Securities Dealers
("NASD") because he is currently employed as our Chief Executive Officer.

         PEDRO CUATRECASAS, M.D. Dr. Cuatrecasas has served as a director of the
Company since August 1996. He has over 35 years of experience in the
pharmaceutical industry. Dr. Cuatrecasas retired from the positions of Vice
President of Warner-Lambert Company and President, Parke-Davis Pharmaceutical
Research on December 31, 1996, positions he had held since 1989. During the
previous four years, he had been Senior Vice President of Research and
Development and Director of Glaxo, Inc. For the prior ten years, he was Vice
President of Research, Development and Medical and Director of Burroughs
Wellcome Company. Dr. Cuatrecasas is a member of the National Academy of
Sciences and the Institute of Medicine. He is currently an independent
consultant in pharmaceutical research and an Adjunct Professor in Medicine and
Pharmacology at the University of California in San Diego. He received his M.D.
from Washington University School of Medicine. Dr. Cuatrecasas qualifies as an
"independent" director within the meaning of Rule 4200(a)(15) of the NASD
Listing Standards.

         CARROLL O. JOHNSON. Mr. Johnson has served as a director of the Company
since 1989. In 2004, he retired as President of Research Management, Inc., an
independent contract research organization that provided services to the
pharmaceutical industry. Previously, he served for 25 years in various research,
sales and marketing positions with several pharmaceutical companies, including
Pharmacia Laboratories, Inc., where he created a national sales force that
introduced three major products. Mr. Johnson qualifies as an "independent"
director within the meaning of Rule 4200(a)(15) of the NASD Listing Standards.

         STEPHEN M. MCGRATH. Mr. McGrath has served as a director of the Company
since 1989. In May 1998, he retired as Executive Vice President of CIBC World
Markets, Inc. and as the Director of its Corporate Finance Department. For the
eleven years prior to his employment by CIBC Oppenheimer in 1983, he held
various executive positions with Warner-Lambert Company. Before joining
Warner-Lambert, Mr. McGrath was Controller and Assistant Treasurer of Sterling
Drug, Inc. and a certified public accountant for Price Waterhouse & Co. Mr.
McGrath qualifies as an "independent" director within the meaning of Rule
4200(a)(15) of the NASD Listing Standards.

                                      -45-

<PAGE>

         JEAN G. RIESS, PH.D. Professor Riess has served as a director of the
Company since 1989. Until his retirement in 1996, he had been the Director of
Laboratoire de Chimie Moleculaire at the University of Nice for over 20 years.
He has been an active researcher since receiving a Ph.D. from the University of
Strasbourg, with numerous patents and over 380 publications. For more than 20
years, Dr. Riess has focused on chemistry related to perfluorochemical emulsions
for medical application. He has directed research in synthesis of tailored
perfluorochemicals, in emulsion technology, in synthesis of fluorinated
surfactants, in the physical chemistry of emulsion stabilization and in
surfactant self-aggregation. Dr. Riess qualifies as an "independent" director
within the meaning of Rule 4200(a)(15) of the NASD Listing Standards.

         THEODORE D. ROTH. Mr. T. Roth has served as a director of the Company
since 1998. He has been a Managing Director of Roth Capital Partners, LLC, an
investment-banking firm, since 2003. For more than 15 years prior, Mr. T. Roth
was employed by the Company, most recently serving as President and Chief
Operating Officer. He received his J.D. from Washburn University and an LL.M. in
Corporate and Commercial Law from the University of Missouri in Kansas City. Mr.
T. Roth also serves on the boards of BioMed Realty, Inc. and Orange 21 Inc. He
is the brother of Duane J. Roth, the Chairman and Chief Executive Officer of the
Company. Mr. T. Roth does not qualify as an "independent" director within the
meaning of Rule 4200(a)(15) of the NASD Listing Standards because he is an
immediate family member of Mr. D. Roth.

COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS

         During the fiscal year ended June 30, 2007, there were four meetings of
the Board of Directors. In addition, during the fiscal year ended June 30, 2007,
each Board member attended 75% or more of the aggregate meetings of the Board
and of the committees on which he served, held during the period for which he
was a director or committee member, respectively. The Company also encourages
all members of the Board to attend the Company's annual meeting of Shareholders
each year. Five members of the Board attended the Company's 2006 Annual Meeting
in person and one member participated by teleconference.

         Shareholders may communicate with members of the Company's Board by
mail addressed to the full Board, a specific member of the Board or to a
particular committee of the Board at 7590 Fay Avenue, Suite 402, La Jolla, CA
92037.

         The Board has also established an Executive Committee, a Compensation
Committee, an Audit Committee and a Nominating Committee.

         EXECUTIVE COMMITTEE

         The Executive Committee was established to act when the full Board of
Directors is unavailable. The Executive Committee held no meetings during fiscal
year 2007. It has all the authority of the Board between meetings of the entire
Board as to matters, which have not been specifically delegated to other
committees of the Board, except the authority that by law cannot be delegated by
the Board of Directors. The members of the Executive Committee are Dr.
Cuatrecasas and Mr. D. Roth.

         COMPENSATION COMMITTEE

         The Compensation Committee advises and makes recommendations to the
Board of Directors regarding matters relating to the compensation of directors,
officers and senior management. The Compensation Committee held no meetings
during fiscal year 2007. The members of the Compensation Committee are Dr.
Cuatrecasas and Messrs. Johnson and McGrath.

         AUDIT COMMITTEE

         The Audit Committee advises and makes recommendations to the Board
concerning our internal controls, our independent auditors and other matters
relating to our financial activities and reporting. The Audit Committee was
established in accordance with Section 3(a)(58)(A) of the Exchange Act. The
Audit Committee held one meeting during fiscal year 2007. The Audit Committee is
composed of Messrs. Johnson and McGrath. Our audit committee financial expert is
Mr. McGrath. All members of the Audit Committee are independent (as that term is
used in Item 7(d)(3) of Schedule 14A under the Exchange Act, as amended, and as
defined in Rule 4200(a)(15) of the NASD Listing Standards). The Audit Committee
has adopted a written Audit Committee Charter, which requires that the Company's
Audit Committee be comprised of three (3) members. Therefore, the Company is
actively searching for an alternative independent director who is willing to
serve on this committee.

         NOMINATING COMMITTEE

         The Nominating Committee interviews, evaluates, nominates and
recommends individuals for membership on the Company's Board of Directors and
committees thereof. The Nominating Committee held no meetings during fiscal year
2007. The Nominating Committee is composed of Dr. Riess and Mr. Johnson. All
members of the Nominating Committee are independent of management (as that term
is defined in Rule 4200(a)(15) of the NASD Listing Standards). The Nominating
Committee has not adopted a written Nominating Committee Charter.

                                      -47-

<PAGE>

         When considering a potential candidate for membership on the Company's
Board of Directors, the Nominating Committee considers relevant business and
industry experience and demonstrated character and judgment. There are no
differences in the manner in which the Nominating Committee evaluates a
candidate that is recommended for nomination for membership on the Company's
Board of Directors by a Shareholder. The Nominating Committee has not received
any recommendations from any of the Company's Shareholders in connection with
the Annual Meeting.

         The Nominating Committee will consider shareholder nominations for
directors submitted in accordance with the following procedure: A notice
relating to the nomination must be timely given in writing to the Secretary of
the Company prior to the meeting. To be timely, the notice must be delivered
within the time permitted for submission of a Shareholder proposal as described
under "Future Proposals by Shareholders." Such notice must be accompanied by the
nominee's written consent, contain information relating to the business,
experience and background of the nominee, and contain information with respect
to the nominating Shareholder and persons acting in concert with the nominating
Shareholder.

CODE OF ETHICS
--------------

         Our Board has adopted a Code of Ethics for the Chief Executive Officer
and senior financial officers to govern their conduct.

EXECUTIVE OFFICERS OF THE COMPANY

         The following are the executive officers of the Company:

         DUANE J. ROTH. Mr. Roth has been our Chief Executive Officer since 1985
(see above).

         B. JACK DEFRANCO. Mr. DeFranco, who is 62, has served as our 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 is also a Partner of Tatum LLC.

COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT

         Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10% of a registered class of the
Company's equity securities to file with the SEC initial reports of ownership
and reports of changes in ownership of common stock and other equity securities
of the Company. Directors, executive officers and greater than 10% shareholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) reports they file. Based solely on its review of the copies of such forms
received by it, or written representation from certain reporting persons that no
Form 5s were required for those persons, the Company believes that all reporting
requirements under Section 16(a) for the 2007 fiscal year were met in a timely
manner by its directors, executive officers and greater than 10% beneficial
owners.

ITEM 10.  EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

         Set forth below is information regarding compensation earned by, paid
or awarded to the following executive officers during the fiscal year ended June
30, 2007: (i) Duane J. Roth, our Chief Executive Officer ("CEO"); and (ii) B.
Jack DeFranco, our President and Chief Operating Officer. The identification of
such named executive officers is determined based on the individual's total
compensation for the fiscal year ended June 30, 2007, as reported below in the
Summary Compensation Table, other than amounts reported as above-market earnings
on deferred compensation and the actuarial increase in pension benefit accruals.
We refer to these executives collectively as the "Named Executive Officers."

                                      -48-

<PAGE>

         The following table sets forth for our Named Executive Officers: (i)
the dollar value of base salary earned during the fiscal year ended June 30,
2007; and (ii) the dollar value of total compensation for the fiscal year. No
compensation in the form of bonuses, stock awards, option awards, non-equity
incentive plan awards or other non-salary compensation was paid or granted to
the Named Executive Officers during the 2007 fiscal year.


                           SUMMARY COMPENSATION TABLE

                       NAME
                        AND
                     PRINCIPAL                SALARY    TOTAL
                     POSITION        YEAR       ($)      ($)
             --------------------- -------- ---------- --------

             Duane J. Roth           2007    $120,000  $120,000
                Chief Executive
                Officer

             B. Jack DeFranco        2007    $235,000  $235,000
                President and
                Chief Operating
                Officer

(a) The Board of Directors has determined that, as in fiscal year 2005 and 2006,
    there will be no executive bonuses for fiscal year 2007.

EMPLOYMENT AGREEMENTS

         None.

                  OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

         The following table sets forth information on outstanding option and
stock awards held by the Named Executive Officers at June 30, 2007, including
the number of shares underlying both exercisable and unexercisable portions of
each stock option as well as the exercise price and expiration date of each
outstanding option.

<TABLE>
<S>     <C>
                                                 OPTION AWARDS
                       ------------------------------------------------------------------
                                      NUMBER OF    EQUITY INCENTIVE
                        NUMBER OF    SECURITIES      PLAN AWARDS:
                        SECURITIES   UNDERLYING       NUMBER OF
                        UNDERLYING   UNEXERCISED      SECURITIES
                       UNEXERCISED     OPTIONS        UNDERLYING      OPTION
                         OPTIONS         (#)          UNEXERCISED    EXERCISE    OPTION
                           (#)      UNEXERCISABLE  UNEARNED OPTIONS   PRICE    EXPIRATION
            NAME       EXERCISABLE       (a)              (#)          ($)        DATE
     ----------------- ------------ ------------- ----------------- --------- -----------

     Duane Roth            30,000         -                -         $46.875   11/12/07
                           30,000         -                -         $24.375   11/11/08
                           16,800         -                -         $13.750   08/11/09
                           22,000         -                -         $38.750   12/28/09
                           22,000         -                -         $64.375   11/08/10
                           22,000         -                -         $13.750   02/21/11
                           85,000         -                -         $ 3.100   11/06/11
                          180,000         -                -         $ 0.410   06/22/14
                          500,000      500,000          500,000      $ 0.290   01/12/15

     B. Jack DeFranco      50,000      150,000          150,000      $ 0.110   10/13/15
</TABLE>

(a) Upon grant, the Board of Directors determined milestones upon which portions
    of these options vest.

                              DIRECTOR COMPENSATION

         The following table provides information concerning all compensation
paid to our directors during the fiscal year ended June 30, 2007.

                                                      OPTION
                                                      AWARDS           TOTAL
                           NAME                        ($)              ($)
                  ------------------------           --------        ---------
                  Pedro Cuatrecasas, MD (1)            $195            $195
                  Carroll O. Johnson (2)               $195            $195
                  Stephen M. McGrath (3)               $195            $195
                  Jean G. Riess, Ph.D. (4)             $195            $195
                  Theodore D. Roth (5)                 $195            $195

                                      -49-

<PAGE>

(1)      Dr. Cuatrecasas holds options to buy 130,500 shares.
(2)      Mr. Johnson holds options to buy 129,000 shares.
(3)      Mr. McGrath holds options to buy 135,000 shares and warrants to
         purchase 339,536 shares.
(4)      Professor Riess holds options to buy 145,000 shares.
(5)      Mr. T. Roth holds options to buy 280,400 shares.

COMPENSATION OF DIRECTORS

         Directors of the Company do not receive cash compensation for
attendance at Board of Directors' meetings or committee meetings. Non-qualified
stock options are awarded to non-employee directors pursuant to the Formula
Stock Option Plan for Non-Employee Directors of the Company (the "Directors'
Formula Option Plan"). Options under the Directors' Formula Option Plan are
granted under and subject to our 1991 Stock Option Plan, 2000 Stock Option Plan
and 2001 Stock Option Plan. The options have a term of ten years from the date
of grant and are exercisable at a price per share equal to the fair market value
of a share of common stock on the date of grant. Each non-employee director (i)
upon his initial election, shall automatically be granted an option to acquire
5,000 shares of common stock which shall be exercisable in four installments of
1,250 shares each with the first installment being at his initial election and
the remaining installments becoming exercisable on the date of each annual
meeting of the Board of Directors thereafter that such person is a director,
until fully exercisable, and (ii) upon the third annual meeting following his
initial election and each annual meeting thereafter that such person remains a
non-employee director, shall automatically be granted an option to acquire 1,500
shares of common stock. Except as otherwise described above, all options are
immediately exercisable in full on the date of grant.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

         The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of September 1, 2007 by:
(i) each person (or group of affiliated persons) known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of the Company's
common stock; (ii) each of the Company's directors; (iii) the Company's Named
Executive Officers; and (iv) all of the Company's directors and the executive
officers as a group:

                                          AMOUNT AND NATURE     PERCENTAGE OF
                                            OF BENEFICIAL     CLASS BENEFICIALLY
           NAME AND ADDRESS (1)           OWNERSHIP (2) (3)       OWNED (3)
 --------------------------------------  ------------------   ------------------

 EXECUTIVE OFFICERS AND DIRECTORS:
   Duane J. Roth                            1,244,542 (4)           2.60%
   Pedro Cuatrecasas, M.D.                    132,600 (5)              *
   Carroll O. Johnson                         121,500 (6)              *
   Stephen M. McGrath                       1,074,337 (7)           2.27%
   Jean G. Riess, Ph.D.                       148,447 (8)              *
   Theodore D. Roth                           272,800 (9)              *
   B. Jack DeFranco                            50,000 (10)             *
   All directors and executive officers     3,059,226               6.23%
    as a group (8 persons)
 5% SHAREHOLDERS:
   MicroCapital Fund LP                     5,194,400 (11)          9.99%
   MicroCapital Fund Ltd.                   4,971,567 (12)          9.60%
   Biomedical Value Fund, L.P.              5,194,400 (13)          9.99%
   Biomedical Offshore Value Fund, Ltd.     5,194,400 (14)          9.99%
   MedCap Partners, L.P.                    5,194,400 (15)          9.99%
   Xmark Opportunity Fund, L.P.             4,797,391 (16)          9.99%
   Xmark Opportunity Fund, Ltd.             4,797,391 (17)          9.99%
   Technology Gateway Partnership, L.P.     4,916,900 (18)          9.99%
   Special Situations Private Equity        5,194,400 (19)          9.99%
   Fund, L.P.
   Jan Dekker                               3,351,058 (20)          6.68%
   Osiris Investment Partners LP            3,320,927 (21)          6.63%
   SB Venture Capital III, LLC              2,486,534 (22)          5.04%

           *  Indicates ownership of less than 1% of outstanding shares.

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

(1)      The address of each of the executive officers and directors is c/o
         Alliance Pharmaceutical Corp., 7590 Fay Avenue, Suite 402, La Jolla,
         California 92037.

(2)      Each person listed or included in the group has sole voting power and
         sole investment power with respect to the shares owned by such person,
         except as indicated below.

                                      -50-

<PAGE>

(3)      Shares subject to options and warrants currently exercisable or
         exercisable within 60 days after September 1, 2007 are deemed
         outstanding for determining the number of shares beneficially owned and
         for computing the percentage ownership of the person holding such
         options, but are not deemed outstanding.

(4)      Consists of (i) 86,742 shares owned by Mr. D. Roth, (ii) 145,800 shares
         subject to options granted by the Company under its 1991 Stock Option
         Plan (the "1991 Plan"), (iii) 262,000 shares subject to options granted
         by the Company under its 2000 Stock Option Plan (the "2000 Plan"), and
         (iv) 750,000 shares subject to options granted by the Company under its
         2001 Stock Option Plan (the "2001 Plan").

(5)      Consists of (i) 14,600 shares owned by Dr. Cuatrecasas, (ii) 13,000
         shares subject to options granted by the Company under the 1991 Plan,
         (iii) 42,500 shares subject to options granted by the Company under the
         2000 Plan, and (iv) 62,500 shares subject to options granted by the
         Company under the 2001 Plan.

(6)      Consists of (i) 5,000 shares owned by Mr. Johnson, (ii) 11,500 shares
         subject to options granted by the Company under the 1991 Plan, (iii)
         42,500 shares subject to options granted by the Company under the 2000
         Plan, and (iv) 62,500 shares subject to options granted by the Company
         under the 2001 Plan.

(7)      Consists of (i) 612,301 shares owned by Mr. McGrath, (ii) 339,536
         shares subject to warrants, (iii) 17,500 shares subject to options
         granted by the Company under the 1991 Plan, (iv) 42,500 shares subject
         to options granted by the Company under the 2000 Plan, and (v) 62,500
         shares subject to options granted by the Company under the 2001 Plan.

(8)      Consists of (i) 15,947 shares owned by Dr. Riess, (ii) 27,500 shares
         subject to options granted by the Company under the 1991 Plan, (iii)
         42,500 shares subject to options granted by the Company under the 2000
         Plan, and (iv) 62,500 shares subject to options granted by the Company
         under the 2001 Plan.

(9)      Consists of (i) 4,900 shares owned by Mr. T. Roth (ii) 174,400 shares
         subject to options granted by the Company under the 1991 Plan, (iii)
         31,000 shares subject to options granted by the Company under the 2000
         Plan, and (iv) 62,500 shares subject to options granted by the Company
         under the 2001 Plan.

(10)     Consists of 50,000 shares subject to options granted by the Company
         under the 2001 Plan.

(11)     Consists of 5,194,400 shares of common stock issuable upon conversion
         of a note. The Shareholder has contractually agreed to restrict its
         ability to convert such that the number of shares of our common stock
         held by it does not exceed 9.99% of our outstanding shares of common
         stock. This restriction may be waived by the Shareholder at its
         election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         7,998,886.

(12)     Consists of 4,971,567 shares of common stock issuable upon conversion
         of a note.

(13)     Consists of 5,194,400 shares of common stock issuable upon conversion
         of a note. The Shareholder has contractually agreed to restrict its
         ability to convert such that the number of shares of our common stock
         held by it does not exceed 9.99% of our outstanding shares of common
         stock. This restriction may be waived by the Shareholder at its
         election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         9,987,752.

(14)     Consists of 5,194,400 shares of common stock issuable upon conversion
         of a note. The Shareholder has contractually agreed to restrict its
         ability to convert such that the number of shares of our common stock
         held by it does not exceed 9.99% of our outstanding shares of common
         stock. This restriction may be waived by the Shareholder at its
         election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         6,658,501.

                                      -51-

<PAGE>

(15)     Consists of 5,194,400 shares of common stock issuable upon conversion
         of a note. The Shareholder has contractually agreed to restrict its
         ability to convert such that the number of shares of our common stock
         held by it does not exceed 9.99% of our outstanding shares of common
         stock. This restriction may be waived by the Shareholder at its
         election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         9,907,659.

(16)     Includes (i) 1,544,247 shares of common stock issuable upon conversion
         of a note held by Xmark Opportunity Fund, L.P. ("Xmark Opportunity
         L.P."); and (ii) 900,203 shares of common stock issuable upon
         conversion of a note held by Xmark Opportunity Fund, Ltd. ("Xmark
         Opportunity Ltd."). Xmark Asset Management, LLC ("XAM"), serves as
         investment manager for each of Xmark Opportunity L.P. and Xmark
         Opportunity Ltd., as well as various other private investment funds.
         Mitchell D. Kaye, whose business address is c/o Xmark Asset Management,
         LLC, 301 Tresser Blvd, Suite 1320, Stamford, Connecticut 06901, is the
         Manager of XAM, and as such, Mr. Kaye possesses the power to vote and
         direct the disposition of all securities held by Xmark Opportunity L.P.
         and Xmark Opportunity Ltd. The Shareholder has contractually agreed to
         restrict its ability to convert such that the number of shares of our
         common stock held by it does not exceed 9.99% of our outstanding shares
         of common stock. This restriction may be waived by the Shareholder at
         its election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         8,423,841.

(17)     Includes (i) 900,203 shares of common stock issuable upon conversion of
         a note held by Xmark Opportunity Ltd.; and (ii) 1,544,247 shares of
         common stock issuable upon conversion of a note held by Xmark
         Opportunity L.P. XAM serves as investment manager for each of Xmark
         Opportunity L.P. and Xmark Opportunity Ltd., as well as various other
         private investment funds. Mitchell D. Kaye, whose business address is
         c/o Xmark Asset Management, LLC, 301 Tresser Blvd, Suite 1320,
         Stamford, Connecticut 06901, is the Manager of XAM, and as such, Mr.
         Kaye possesses the power to vote and direct the disposition of all
         securities held by Xmark Opportunity L.P. and Xmark Opportunity Ltd.
         The Shareholder has contractually agreed to restrict its ability to
         convert such that the number of shares of our common stock held by it
         does not exceed 9.99% of our outstanding shares of common stock. This
         restriction may be waived by the Shareholder at its election upon 61
         days' prior notice to us and in certain other circumstances. If the
         Shareholder waived this restriction, the number of shares of our common
         stock beneficially owned by it would be 8,423,841.

(18)     Includes 2,416,900 shares of common stock issuable upon conversion of a
         note. The Shareholder has contractually agreed to restrict its ability
         to convert such that the number of shares of our common stock held by
         it does not exceed 9.99% of our outstanding shares of common stock.
         This restriction may be waived by the Shareholder at its election upon
         61 days' prior notice to us and in certain other circumstances. If the
         Shareholder waived this restriction, the number of shares of our common
         stock beneficially owned by it would be 6,661,563.

(19)     Consists of 5,194,400 shares of common stock issuable upon conversion
         of a note. The Shareholder has contractually agreed to restrict its
         ability to convert such that the number of shares of our common stock
         held by it does not exceed 9.99% of our outstanding shares of common
         stock. This restriction may be waived by the Shareholder at its
         election upon 61 days' prior notice to us and in certain other
         circumstances. If the Shareholder waived this restriction, the number
         of shares of our common stock beneficially owned by it would be
         8,302,319.

(20)     Includes 3,350,058 shares of common stock issuable upon conversion of a
         note.

(21)     Consists of 3,320,927 shares of common stock issuable upon conversion
         of a note.

(22)     Consists of 2,486,534 shares of common stock issuable upon conversion
         of a note.


                                      -52-

<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

         During fiscal 2005, Dr. Jean Riess was engaged by the Company to assist
in the discussions with Double-Crane and to present at the International
Symposium on Blood Substitutes. The Company paid him $16,000 in compensation for
these services. During fiscal 2006 and 2007, Dr. Riess was not engaged or paid
by the Company.

         Roth Capital Partners, LLC ("Roth Capital") has provided financial
advisory services to the Company from time to time. In June 2004, Roth Capital
functioned as the placement agent in connection with the sale of 31,427,137
shares of common stock and warrants to purchase 23,570,357, resulting in gross
proceeds to the Company of approximately $11 million. During fiscal 2005, Roth
Capital received $768,000 as a fee for its services in connection with this
transaction and a warrant to purchase 1,571,357 shares of the Company's common
stock. During fiscal 2006 and 2007, there were no related transactions. Byron
Roth, Chairman and majority owner of Roth Capital, is the brother of Duane J.
Roth. Theodore D. Roth is the brother of Duane J. Roth and is employed by Roth
Capital.

         Director Independence - see discussion in "Directors of the Company."


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).

    3.4     Certificate of Amendment of the Certificate of Incorporation filed
            on December 11, 2006 (incorporated by reference to Exhibit 3.4 of
            the Company's Quarterly Report on Form 10-QSB for the quarter ended
            December 31, 2006).

    3.5     Certificate of Correction of the Certificate of Amendment filed on
            December 15, 2006 (incorporated by reference to Exhibit 3.5 of the
            Company's Quarterly Report on Form 10-QSB for the quarter ended
            December 31, 2006).

    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 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).

                                      -53-

<PAGE>

    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 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")). #

    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 31, 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")).

                                      -54-

<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")).

    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 10(jjj) of the 2001 10-K).

                                      -55-

<PAGE>

    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).

    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).

                                      -56-

<PAGE>

    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).

    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)

                                      -57-

<PAGE>

    10.78   Amendment to Exclusivity Agreement dated February 25, 2005, between
            PFC Therapeutics, LLC and LEO Pharma S/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 (incorporated
            by reference to Exhibit 10.80 of the Company's Annual Report on Form
            10-KSB for the year ended June 30, 2005). (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).

    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

         KMJ Corbin & Company LLP ("KMJ") served as independent auditors for the
Company for the fiscal years ended June 30, 2007 and 2006. The following table
sets forth the aggregate fees billed by KMJ for services performed during the
fiscal years ended June 30, 2007 and 2006, respectively:

                                FEES BILLED BY KMJ         FEES BILLED BY KMJ
                                  FOR YEAR ENDED             FOR YEAR ENDED
TYPE OF SERVICE                   JUNE 30, 2007               JUNE 30, 2006
---------------                   -------------               -------------

Audit Fees (1)                      $ 67,450                    $ 71,450
Audit-Related Fees                         -                           -
Tax Fees (2)                          31,463                       4,220
All Other Fees (3)                     6,500                       8,740
                                    --------                    --------
Total                               $105,413                    $ 84,410
                                    ========                    ========

(1)  Comprised of the audits of our annual financial statements and reviews of
     our quarterly financial statements, as well as attest services, comfort
     letters and consents to SEC filings.

                                      -58-

<PAGE>

(2)  Comprised of services for tax compliance, which includes services related
     to the preparation and review of our original and amended tax returns for
     the years ended June 30, 2003, 2004, 2005 and 2006.

(3)  Comprised of fees related to the audits of the Company's 401(k) Plan for
     the years ended December 31, 2002, 2003, 2004 and 2005.

POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR

         Our Audit Committee has adopted a policy and procedures for the
pre-approval of audit and permissible non-audit services rendered by our
independent registered public accounting firm, Corbin. The policy generally
pre-approves specific services in the defined categories of audit services,
audit-related services, and tax services up to pre-determined amounts.
Pre-approval may also be given as part of our Audit Committee's approval of the
scope of the engagement of the independent auditor or on an individual explicit
case-by-case basis before the independent registered public accounting firm is
engaged to provide each service. All fees described above were pre-approved by
our Audit Committee.

         The Audit Committee believes that all services rendered to the Company
by Corbin were compatible with maintaining Corbin's independence.

         The Company has not retained Corbin to perform services in connection
with (a) operating or supervising the operation of the Company's financial
information system or managing the Company's local area network, or (b)
designing or implementing a hardware or software system that aggregates source
data underlying the financial statements or generates information that is
significant to the Company's financial statements taken as a whole.

SIGNATURES

         In accordance with 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 28, 2007             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/ Duane J. Roth                             Chairman, Chief Executive Officer
----------------------------------            (PRINCIPAL EXECUTIVE OFFICER)
Duane J. Roth

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

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

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

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

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

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


Date:  September 28, 2007


                                      -59-