10-Q 1 alliance_10q-123108.txt -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2008 [ ] TRANSITION REPORT PURSUANT 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. (Exact Name of Registrant as Specified in Its Charter) NEW YORK 14-1644018 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 7590 FAY AVENUE, SUITE 402 92037 LA JOLLA, CALIFORNIA (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING ARE CODE: (858) 410-5200 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of "large accelerated filer," "accelerated file" and "smaller reporting company" in rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company |X| (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Common Stock, $0.01 par value per share, 150,000,000 shares authorized, 63,216,247 shares issued and outstanding at February 11, 2009. ALLIANCE PHARMACEUTICAL CORP. ----------------------------- INDEX ----- Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at December 31, 2008 (unaudited) and June 30, 2008 3 Condensed Consolidated Statements of Operations (unaudited) 4 Condensed Consolidated Statements of Cash Flows (unaudited) 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 4T. Controls and Procedures 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5 Other Information 21 Item 6. Exhibits 21

-2- PART I FINANCIAL INFORMATION: Item 1. Financial Statements ALLIANCE PHARMACEUTICAL CORP. ----------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------------------------- DECEMBER 31, 2008 JUNE 30, 2008 ------------- ------------- ASSETS (UNAUDITED) (AUDITED) ------ CURRENT ASSETS: Cash $ 1,000 $ 6,000 Restricted cash -- 16,000 Other current assets 18,000 39,000 ------------- ------------- Total current assets 19,000 61,000 PROPERTY AND EQUIPMENT - NET 51,000 87,000 ------------- ------------- $ 70,000 $ 148,000 ============= ============= LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- CURRENT LIABILITIES: Accounts payable $ 333,000 $ 252,000 Accrued expenses 377,000 212,000 Deferred revenue 100,000 100,000 Advance from related party 90,000 -- Senior notes payable and accrued interest 10,952,000 11,065,000 ------------- ------------- Total current liabilities 11,852,000 11,629,000 OTHER LIABILITIES 750,000 750,000 ------------- ------------- Total liabilities 12,602,000 12,379,000 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock - $0.01 par value; 150,000,000 shares authorized; 63,216,247 and 60,216,247 shares issued and outstanding, respectively 632,000 602,000 Additional paid-in capital 487,253,000 486,760,000 Accumulated deficit (500,417,000) (499,593,000) ------------- ------------- Total stockholders' deficit (12,532,000) (12,231,000) ------------- ------------- $ 70,000 $ 148,000 ============= ============= SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -3- ALLIANCE PHARMACEUTICAL CORP. ----------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS --------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 2008 2007 2008 2007 ------------------ ------------------ ------------------ ------------------ (UNAUDITED) (UNAUDITED) REVENUES: Royalty, license and research $ -- $ -- $ -- $ 57,000 ------------------ ------------------ ------------------ ------------------ OPERATING EXPENSES: Research and development 102,000 91,000 92,000 260,000 General and administrative 178,000 194,000 369,000 491,000 ------------------ ------------------ ------------------ ------------------ 280,000 285,000 461,000 751,000 ------------------ ------------------ ------------------ ------------------ LOSS FROM OPERATIONS (280,000) (285,000) (461,000) (694,000) INVESTMENT INCOME 1,000 4,000 1,000 14,000 OTHER INCOME -- -- 25,000 163,000 INTEREST EXPENSE (192,000) (222,000) (397,000) (465,000) LOSS ON MODIFICATION OF DEBT -- -- -- (14,000) LOSS ON DISPOSITION OF EQUIPMENT -- -- (17,000) -- GAIN ON DISPOSITION OF ASSETS -- -- 25,000 -- ------------------ ------------------ ------------------ ------------------ NET LOSS $ (471,000) $ (503,000) $ (824,000) $ (996,000) ================== ================== ================== ================== NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.01) $ (0.01) $ (0.01) $ (0.02) ================== ================== ================== ================== WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED 62,531,000 55,156,000 61,380,000 52,236,000 ================== ================== ================== ================== SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -4- ALLIANCE PHARMACEUTICAL CORP. ----------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------------- Six Months Ended December 31, 2008 2007 ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES: Net loss $ (824,000) $ (996,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 18,000 19,000 Loss on modification of debt -- 14,000 Accrued interest on senior notes 397,000 465,000 Stock-based compensation 14,000 24,000 Loss on disposal of equipment 17,000 -- Changes in operating assets and liabilities: Other assets 38,000 (35,000) Accounts payable, accrued expenses and other 245,000 (228,000) ----------- ----------- Net cash used in operating activities (95,000) (737,000) ----------- ----------- FINANCING ACTIVITIES: Advance from related party 90,000 -- ----------- ----------- Net cash provided by financing activities 90,000 -- DECREASE IN CASH (5,000) (737,000) CASH AT BEGINNING OF PERIOD 6,000 873,000 ----------- ----------- CASH AT END OF PERIOD $ 1,000 $ 136,000 =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Issuance of common stock upon conversion of senior notes and interest $ 510,000 $ 2,173,000 =========== =========== SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

-5- ALLIANCE PHARMACEUTICAL CORP. ----------------------------- NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- THREE AND SIX MONTHS ENDED DECEMBER 31, 2008 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. LIQUIDITY AND BASIS OF PRESENTATION ----------------------------------- The accompanying condensed 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 December 31, 2008 and has negative working capital at that date of approximately $11.8 million. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. As discussed in Note 3, 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 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. This amendment was approved by substantially all of the Senior Note holders. The Company is now in default under the Senior Notes. The Company is continuing to seek additional financing of approximately $3 million to fund its continuing operations through June 2011 (see Note 5). We have not yet identified a source of the funds and it is uncertain if we will be able to do so. Failure to obtain such financing would likely result in the liquidation of our Company. It is unlikely that our shareholders would receive any of the proceeds from such liquidation. 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 unaudited condensed 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 unaudited condensed consolidated financial statements include the accounts of Alliance Pharmaceutical Corp., the accounts of its wholly owned subsidiary, Molecular Biosystems, Inc. ("MBI"), and its majority-owned subsidiaries, Talco Pharmaceutical, Inc. and PFC Therapeutics, LLC ("PFC Therapeutics"). All significant intercompany accounts and transactions have been eliminated. INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------- The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information. These principles are consistent in all material respects with those applied in the Company's consolidated financial statements contained in the Company's annual report on Form 10-KSB for the fiscal year ended June 30, 2008, and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC"). Interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of -6- America for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (all of which are of a normal recurring nature, including the elimination of intercompany accounts) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods indicated. Interim results of operations are not necessarily indicative of the results to be expected for the full year or any other interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto contained in the Company's annual report on Form 10-KSB for the year ended June 30, 2008. 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 condensed consolidated financial statements. Significant estimates made by management include, among others, recoverability of property and equipment and the valuation of deferred tax assets and stock options. Actual results could differ from these estimates. 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 December 31, 2008, 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. 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 each 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. -7- RAW MATERIAL REVENUES --------------------- The Company recognizes revenues from the sales of raw material upon shipment, at which time title transfers and the Company has no further obligation. Such sales in the amount of $25,000 and $163,000 were recorded during the six months ended December 31, 2008 and December 31, 2007, respectively, in connection with raw material that the Company does not market. Inventory associated with the sales of these raw materials is carried at zero value. The amounts earned for these sales were recorded as other income in the accompanying condensed consolidated statements of operations. 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 six-month periods ended December 31, 2008 and 2007, the Company incurred research and development expenses of approximately $92,000 and $260,000, respectively. The research and development costs for the current period are primarily costs associated with filing a new patent in certain countries. FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- The carrying amount of certain of the Company's financial instruments as of December 31, 2008 approximates their respective fair values because of the short-term nature of these instruments. Such instruments consist of cash, accounts payable, accrued expenses and other liabilities. The carrying value of debt approximates fair value as the related interest rate approximates a rate currently available to the Company. COMPUTATION OF NET INCOME (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 six months ended December 31, 2008 and 2007, as their inclusion would be anti-dilutive. The outstanding potentially dilutive common shares totaled approximately 64,424,000 and 63,317,000 at December 31, 2008 and 2007, respectively. ACCOUNTING FOR STOCK-BASED COMPENSATION --------------------------------------- At December 31, 2008, the Company has two stock-based employee compensation plans. Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("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. 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 condensed consolidated statement of operations for the six months ended December 31, 2008 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 condensed consolidated statement of operations for the six months ended December 31, 2008 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 was based on historical forfeiture experience and estimated future employee forfeitures. 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 six months ended December 31, 2008. -8- 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 or up to one year after the date of grant and have a ten-year term. As of December 31, 2008, the Company is authorized to issue up to 8,100,000 shares under these plans and has 4,102,110 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. A summary of option activity as of December 31, 2008 and changes during the six months then ended is presented below: 12/31/2008 --------------------------------------------- WEIGHTED-AVERAGE ---------------- REMAINING CONTRACTUAL AGGREGATE EXERCISE TERM INTRINSIC SHARES PRICE (YEARS) VALUE --------------------------------------------- Options outstanding at July 1, 2008 2,703,800 $ 3.49 5.84 Options granted -- Options forfeited/expired (58,100) Options exercised -- --------------------- Options outstanding at December 31, 2008 2,645,700 $ 3.03 5.46 $ -- --------------------------------------------- Unvested options expected to vest at December 31, 2008 465,500 $ 0.23 6.32 $ -- --------------------------------------------- Options exercisable at December 31, 2008 2,170,700 $ 3.64 5.27 $ -- =============================================

There were 58,100 options that expired from an expired plan during the six months ended December 31, 2008. There IC OMITTED][GRAPHIC OMITTED] were no options granted or exercised during the six months ended December 31, 2008. Upon the exercise of options, the Company issues new shares from its authorized shares. As of December 31, 2008, there was approximately $26,000 of total unrecognized compensation costs 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 six months ended December 31, 2008 related to employee and director options and options issued to consultants was approximately $13,000 and $1,000 respectively, net of estimated forfeitures. The Company allocated $13,000 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. -9- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ----------------------------------------- In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS." 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. SFAS No. 157 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. In February 2008, the FASB issued FSP 157-2, "EFFECTIVE DATE OF FASB STATEMENT NO. 157", which delays the effective date of SFAS No. 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. On July 1, 2008, the Company adopted SFAS No. 157 for financial assets and liabilities. The adoption did not have a material effect on the Company's results of operations and financial position. The Company is in the process of evaluating the impact of adoption of SFAS No. 157 for non-financial assets and liabilities, but does not anticipate that the adoption will have a material impact on its condensed consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES." 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 adopted SFAS No. 159 on July 1, 2008. The adoption did not have a material effect on the Company's results of operations and financial position. In December 2007, the FASB issued SFAS No. 141(R), "BUSINESS COMBINATIONS" ("SFAS No. 141(R)"). SFAS No. 141(R) requires acquiring entities in a business combination to recognize the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) is effective in fiscal years beginning after December 15, 2008. The Company expects to adopt SFAS No. 141(R) on July 1, 2009. The Company is currently assessing the impact the adoption of SFAS No. 141(R) will have on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 160, "NONCONTROLLING INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS" ("SFAS No. 160"). SFAS No. 160 requires entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 is effective in fiscal years beginning after December 15, 2008. The Company expects to adopt SFAS No. 160 on July 1, 2009. The Company is currently assessing the impact the adoption of SFAS No. 160 will have on its consolidated financial statements. In June 2008, the FASB ratified EITF No. 07-5, "DETERMINING WHETHER AN INSTRUMENT (OR EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK," ("EITF 07-5"). EITF 07-5 provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity's own stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and will be adopted by the Company in the first quarter of fiscal year 2010. The Company is currently assessing the potential impact, if any, of the adoption of EITF 07-5 on its consolidated results of operations and financial condition. -10- 2. PFC THERAPEUTICS, LLC 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, 2008. 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 study. The postoperative ileus endpoints will be incorporated in the Phase 2 clinical study described below. The remaining terms of the LEO Exclusivity Agreement remain in full force and effect. On May 13, 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 and 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 the PRC 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. 3. DEBT OBLIGATIONS 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. 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 shareholders' best interests to offer, as a settlement of the dispute, to rescind the June 2004 Private Placement. -11- 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 were 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. 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 received at least $3 million in connection with a Qualified Financing prior to the extended maturity date, the maturity date would 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 qualified as a Qualified Financing would 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. These new notes bear interest at the rate of 10% per annum, matured on June 30, 2008 and are 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 who held their Senior Notes through June 30, 2008 will now receive payment sharing until 120% of the payment participation amounts have been received. The Company was unable to complete a Qualified Financing by the requisite dates. As a result, the Company is in default under the Senior Notes in the aggregate principal and interest amount of approximately $11 million. Alliance is continuing to seek additional financing that would qualify as a Qualified Financing for the purpose of funding its support of Double-Crane's development of OXYGENT in the PRC. -12- The Senior Notes can be converted anytime prior to the maturity date. During the six months ended December 31, 2008, holders of certain Senior Notes converted an aggregate of approximately $266,000 in principal and approximately $244,000 in accrued interest into an aggregate of 3,000,000 shares of our common stock at a conversion price of $0.17 per share. During the six months ended December 31, 2007, holders of certain Senior Notes converted an aggregate of approximately $2.1 million in principal and approximately $108,000 in accrued interest into an aggregate of 12,780,018 shares of our common stock at a conversion price of $0.17 per share. Also during the six months ended December 31, 2007, we recorded a loss on modification of debt of $14,000 resulting from the issuance of an additional note in connection with the 2007 Amendment. At December 31, 2008, the principal and accrued interest balances approximate $8 million and $3 million, respectively. The discussion included in this report assumes that we 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. As discussed in Note 1 to the consolidated financial statements, we may lack sufficient working capital to service our debts and to fund our continuing operations through the fiscal year ending June 30, 2009, which raises substantial doubt about our ability to continue as a going concern. As of December 31, 2008, we are in default under the terms of the 2007 Amendment and we owe the holders of our Senior Notes approximately $11 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, it is highly unlikely the holders of our equity securities will receive any of the proceeds of such liquidation. 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 unaudited condensed consolidated balance sheets. 4. RELATED PARTY TRANSACTION During the period ended December 31, 2008, the Company's Chief Executive Officer advanced $90,000 to the Company (the "Advance"). The Company is still negotiating the specific terms of the Advance, including the interest rate and maturity date. The Company anticipates the Advance will be convertible into shares of common stock under the same terms of the Senior Notes payable if the Company completes a Qualified Financing, as discussed in Note 3. 5. EQUITY REVERSE STOCK SPLIT ------------------- On April 3, 2008, the Board adopted, and our shareholders approved at the 2007 Annual Meeting on May 30, 2008, an amendment to our Certificate of Incorporation, as amended (the "Certificate Amendment"), to effect a reverse stock split (the "Reverse Stock Split"). The Certificate Amendment does not reduce the authorized number of shares of common stock so that we will continue to have an adequate number of shares available for future issuance, as discussed below. The Certificate of Amendment will, subject to the discretion of the Board, be filed with the Secretary of State of the State of New York as promptly as practicable, provided that the Board does not anticipate directing the Company to file the Certificate Amendment until such time as a Qualified Financing takes place. The amendment and the proposed Reverse Stock Split will become effective as of the date of such filing (the "Effective Date"). GENERAL The Company is presently authorized to issue 150,000,000 shares of common stock, of which 63,216,247 shares are outstanding, no shares are held in treasury and 73,403,945 shares are reserved for issuance at December 31 2008. Upon the effectiveness of the Reverse Stock Split, the Company will have 150,000,000 shares of common stock authorized, of which, as of the Effective Date, approximately 6,321,625 shares will be outstanding, and 7,340,395 shares will be reserved for issuance. -13- REASONS FOR AND CONSEQUENCES OF THE REVERSE STOCK SPLIT The Company requires additional funding to continue its operations and desires to issue new securities in a future private placement; however, it has become clear to management that investors are unwilling to invest any new money into the Company so long as its existing Senior Notes are outstanding. The Company has reached an agreement with substantially all of the holders of the Senior Notes to convert the outstanding principal amount and accrued but unpaid interest under the Senior Notes into common stock of the Company in accordance with the terms of the Senior Notes if certain conditions are met. To induce the holders of the Senior Notes to convert their Senior Notes into common stock of the Company, the Company agreed to modify the existing royalty and milestone sharing arrangements with the holders of the Senior Notes as follows: o The holders of the Senior Notes will be given the pro rata right to receive 100% of all royalties received by the Company from the sale of OXYGENT products up to the maximum total payment sharing amount of $11.4 million (currently, under our agreement with the holders of the Senior Notes, the holders of the Senior Notes have the right to only receive 50% of such royalties up to the maximum payment amount); and o The holders of the Senior Notes will also be given the pro rata right to receive: (i) 100% of the milestone payment to be paid to the Company by Double-Crane upon sFDA approval of OXYGENT in the PRC (currently, under the Note Purchase Agreement, the holders of the Senior Notes have the contractual right to only receive 50% of such milestone payment), and (ii) 50% of any other milestone payment received from a third party based on the development of an OXYGENT product, in each case subject to the total maximum amount of payments of $11.4 million. At December 31, 2008, prior to the Reverse Stock Split taking effect, the Senior Notes and accrued interest were convertible into 64,424,242 shares of common stock at $0.17 per share. In order to allow for the conversion of all of the Senior Notes, and the subsequent issuance of shares of common stock in connection with a potential private placement (as discussed below), the Company must effect the Reverse Stock Split for the purpose of increasing the authorized but unissued and unreserved shares of common stock. The conversion of the Senior Notes is conditioned on the following: (i) 100% of the Senior Notes being received in escrow by the Company for conversion and cancellation (unless this condition is waived by the Company); (ii) approval of the Reverse Stock Split by the Company's shareholders (which was accomplished at the 2007 Annual Meeting on May 30, 2008); (iii) filing of the Certificate Amendment and acceptance of the same with the Secretary of State of the State of New York; and (iv) receipt by the Company of at least $3 million in new financing from investors (a "Qualified Financing"). We have not yet identified a possible source of funds for a Qualified Financing. The Company has no additional plan, commitment, arrangement, understanding or agreement, either written or oral, to issue additional shares of common stock upon the effectiveness of the Reverse Stock Split, other than for the conversion of the existing Senior Notes and for the potential financing described above. The Reverse Stock Split may also result in an increase in the trading price of our common stock and could therefore create greater investor interest in our common stock and possibly enhance the marketability of our common stock to the financial market. However, although the Reverse Stock Split may increase the market price of our common stock, the actual effect of the Reverse Stock Split on our market price cannot be predicted. The market price of our common stock may not rise in proportion to the reduction in the number of shares outstanding as a result of the Reverse Stock Split. Further, the Company does not know if the Reverse Stock Split will lead to a sustained increase in the market price of our common stock. The market price of our common stock could also change as a result of other unrelated factors, including our operating performance and other factors related to our business as well as general market conditions. PRINCIPAL EFFECTS OF THE REVERSE STOCK SPLIT The following describes the effects of the Reverse Stock Split assuming the Board directs management to complete the Reverse Stock Split. -14- Based upon the 63,216,247 shares of common stock outstanding on December 31, 2008, the proposed Reverse Stock Split would decrease the outstanding shares of Common Stock by 90%, and thereafter 6,321,625 shares of common stock would be outstanding. The proposed Reverse Stock Split will not affect any common shareholder's proportionate equity interest in the Company, subject to the provisions relating to the elimination of fractional shares as described below. At December 31, 2008, there were outstanding options to purchase an aggregate of 2,645,700 shares of common stock under the Company's stock option plans (the "Plans") and an aggregate of 4,102,110 shares were available for grant under two of the Plans. The Company has reserved 6,747,810 shares for issuance upon the exercise of the granted options and upon exercise of options that may be granted in the future. The Plans provide for automatic adjustment in the event of a reverse stock split so that the amount of shares issuable upon exercise of outstanding options, the number of shares available for grant and the number of shares reserved for issuance will be reduced to one-tenth of the amount issuable prior to the Effective Date, and the exercise prices of the granted options would become ten times the present exercise prices. At December 31, 2008, there were outstanding warrants to purchase an aggregate of 2,231,893 shares of common stock and 2,231,893 shares of common stock reserved for issuance at such date for the warrants. The provisions of the relevant instrument pursuant to which the warrants were issued provide for automatic adjustment in the event of a reverse stock split so that the amount of shares issuable upon exercise of the warrants will be reduced to one-tenth of the amount issuable prior to the Effective Date, and the exercise price would become ten times the present exercise price. Accordingly, 223,189 shares of common stock will be reserved for issuance on the Effective Date for the warrants. At December 31, 2008, the Company, in addition to options and warrants, had outstanding $8 million principal amount of the Senior Notes and accrued interest of $3 million on said notes. The Senior Notes and accrued interest are convertible at any time, at the respective holders' option, into shares of common stock at $0.17 per share, subject to adjustment in the case of a reverse stock split. In accordance with the provisions of the relevant instruments pursuant to which the Senior Notes were issued, the number of shares of common stock into which they may be converted is 64,424,242, which amount will be reduced to 6,442,425 shares of common stock as a result of the Reverse Stock Split. The foregoing may be summarized as follows: IF REVERSE STOCK SPLIT NUMBER OF SHARES OF COMMON STOCK AS OF DECEMBER 31, 2008 IS EFFECTED * -------------------------------- ----------------------- ------------- Authorized 150,000,000 150,000,000 Issued and Outstanding** 63,216,247 6,321,625 Reserved for Issuance*** 73,403,945 7,340,395 Available for Future Issuance 13,379,808 136,337,980 Par Value Per Share $0.01 $0.01

---------------- * Without giving effect to fractional shares. ** Includes 635,000 shares of common stock deemed outstanding due to the automatic conversion of the Company's Series F Preferred Stock that occurred in March 2004. The stock certificate representing these shares of common stock has not yet been issued. *** Number of shares reserved for estimated issuance upon exercise of options, warrants and debt. 6. SUBSEQUENT EVENT During January 2009, the Chief Executive Officer increased the Advance to the Company by $10,000 for a total of $100,000 (see Note 4). ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (References to years are to our fiscal years ended June 30.) -15- PLAN OF OPERATION 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 December 31, 2008, have an accumulated deficit of $500.4 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. The Company is continuing to seek additional financing of approximately $3 million to fund its continuing operations through June 2011. 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 (see Note 1 to the accompanying unaudited condensed consolidated financial statements and the "Liquidity and Capital Resources" section below). 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. The discussion included in this report assumes that we 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. As discussed in Note 1 to the condensed consolidated financial statements, we may lack sufficient working capital to service our debts and to fund our continuing operations through the fiscal year ending June 30, 2009, which raises substantial doubt about our ability to continue as a going concern. As of December 31, 2008, we are in default under the terms of the 2007 Amendment and we owe the holders of our Senior Notes approximately $11 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, it is highly unlikely the holders of our equity securities will receive any of the proceeds of such liquidation. FORWARD-LOOKING INFORMATION Except for historical information, the statements made herein and elsewhere are forward-looking. The Company wishes to caution readers that these statements are only predictions and that the Company's business is subject to significant risks. The factors discussed herein and other important factors, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for 2009, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks include, but are not limited to, the inability to obtain adequate financing for the Company's development efforts; the likelihood that our creditors will force our liquidation; the inability to enter into collaborative relationships to further develop, manufacture and commercialize the Company's products; changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company's products; the uncertainties associated with the lengthy regulatory approval process, including uncertainties associated with FDA decisions and timing on product development or approval; and the uncertainties associated with obtaining and enforcing patents important to the Company's business; and possible competition from other products. Furthermore, even if the Company's products appear promising at an early stage of development, they may not reach the market for a number of important reasons. Such reasons include, but are not limited to, the possibilities that the potential products will be found ineffective during clinical trials; failure to receive necessary regulatory approvals; difficulties in manufacturing on a large scale; failure to obtain market acceptance; and the inability to commercialize because of proprietary rights of third parties. The research, development and market introduction of new products will require the application of considerable technical and financial resources, while revenues generated from such products, assuming they are developed successfully, may not be realized for several years. Other material and unpredictable factors which could affect operating results include, without limitation, the uncertainty of the timing of product approvals and introductions and of sales growth; the ability to obtain necessary raw materials at cost-effective prices or at all; the effect of possible technology and/or other business acquisitions or transactions; and the increasing emphasis on controlling healthcare costs and potential legislation or regulation of healthcare pricing. Further cautionary information is contained in documents the Company files with the SEC from time to time, and you are encouraged to read the section entitled "Risk Factors" included in the Company's most recently filed Annual Report on Form 10-KSB filed with the SEC on October 2, 2008. -16- RESEARCH AND DEVELOPMENT For the six months ended December 31, 2008 and 2007, we incurred research and development expenses of $92,000 and $260,000, respectively, for OXYGENT, an intravascular oxygen carrier that we are developing to augment oxygen delivery in surgical patients at risk of acute oxygen deficit. Research and development costs to date for our oxygen-therapeutic product candidates, including Oxygent, total approximately $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 in November 2007, Alliance suspended the clinical trial due to lack of adequate funding. On February 6, 2007, we announced the manufacture and release for shipment of OXYGENT for the clinical trials planned in France and the PRC. Alliance successfully completed the contract manufacture of OXYGENT clinical trial material. However, 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 the PRC. 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 the PRC. This technology transfer is underway with Double-Crane completing the manufacturing facility and purchasing the required equipment for emulsion manufacture. 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 the PRC. Supply of OXYGENT to the U.S. would be contingent on Double-Crane's compliance to cGMP and registration with the U.S. FDA. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2008 AS COMPARED WITH THREE MONTHS ENDED DECEMBER 31, 2007 There was no revenue for the three months ended December 31, 2008, or for the three months ended December 31, 2007. Research and development expenses increased by $11,000, or 13%, to $102,000 for the three months ended December 31, 2008, compared to $91,000 for the three months ended December 31, 2007. The increase in research and development expenses was primarily due to an increase in patent expenses of $40,000 in connection with filing a new patent in certain countries, partially offset by decreases in all other research and development expenses. General and administrative expenses decreased by $16,000, or 8%, to $178,000 for the three months ended December 31, 2008, compared to $194,000 for the three months ended December 31, 2007. The decrease in general and administrative expenses was primarily the result of a decrease in legal and accounting fees. Investment income for the three months ended December 31, 2008 was $1,000, compared to $4,000 for the three months ended December 31, 2007. The decrease was primarily a result of a lower cash balance. Interest expense was $192,000 for the three months ended December 31, 2008, a decrease of 14% compared to $222,000 for the three months ended December 31, 2007. The decreased interest expense for the current quarter was primarily the result of lower Senior Note principal balances because of conversions during fiscal year 2008. -17- SIX MONTHS ENDED DECEMBER 31, 2008 AS COMPARED WITH SIX MONTHS ENDED DECEMBER 31, 2007 There was no revenue for the six months ended December 31, 2008, compared to $57,000 for the six months ended December 31, 2007. The revenue for the prior period was composed of royalties received from sales other than IMAGENT. Research and development expenses decreased by $168,000, or 64%, to $92,000 for the six months ended December 31, 2008, compared to $260,000 for the six months ended December 31, 2007. The decrease in research and development expenses was primarily due to a decrease of $98,000 because of the discontinued clinical trial in France, a refund of $18,000 in clinical trial insurance during the current period, a decrease in contract manufacturing of OXYGENT clinical trial material of $36,000, a decrease of $29,000 in research and development personnel costs, a decrease in preclinical costs of $8,000 and a decrease of $7,000 in archiving and storage costs, partially offset by an increase in patent expenses of $28,000 related to a new patent. General and administrative expenses decreased by $122,000, or 25%, to $369,000 for the six months ended December 31, 2008, compared to $491,000 for the six months ended December 31, 2007. The decrease in general and administrative expenses was primarily a decrease of $68,000 in legal and accounting fees, a decrease of $29,000 in rent and other office-related expenses, a decrease of $12,000 in personnel costs and a decrease of $13,000 in travel expenses. For the six months ended December 31, 2008, we recorded a gain on the sale of an asset of $25,000, which was primarily due to the agreement to terminate all on-going obligations under previous agreements between the Company and Imcor whereby both companies agreed that the continuing rights and obligations of each company under the terms of the previous agreements were terminated and were of no further force or effect. Imcor paid $25,000 to Alliance in satisfaction of all of Imcor's obligations and liabilities under the terms of the previous agreements. In return, Alliance released Imcor from all liabilities, including future royalty payments, if any. For the six months ended December 31, 2008, we recorded a loss on disposal of equipment of $17,000, which was primarily the gift of $31,000 of equipment, less $14,000 of depreciation, to Double-Crane. For the six months ended December 31, 2007, we recorded a loss on modification of debt of $14,000 resulting from the issuance of an additional note in connection with the 2007 Amendment (see Note 3). Investment income decreased by $13,000 to $1,000 for the six months ended December 31, 2008, compared to $14,000 for the six months ended December 31, 2007. The decrease was primarily a result of lower cash balances during the current period. Other income was $25,000 for the six months ended December 31, 2008, compared to $163,000 for the six months ended December 31, 2007, which were both the result of proceeds recorded from the sale of raw material inventory (which was previously written off). Interest expense was $397,000 for the six months ended December 31, 2007, compared to $465,000 for the six months ended December 31, 2006. The decreased interest expense for the current period was the result of lower Senior Note principal balances due to the conversion of certain principal amounts into common stock. 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 December 31, 2008, 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 $41 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. -18- At December 31, 2008, we had approximately $1,000 in cash compared to $6,000 at June 30, 2008. The decrease resulted primarily from the net cash used in operations of $95,000. At December 31, 2008, we had a working capital deficit of $11.8 million, compared to a working capital deficit of $11.6 million at June 30, 2008. The deficit increase was principally due to a net decrease in prepaid expenses and other current assets of $21,000, a net increase in accounts payable and accrued expenses of $84,000, loans from an officer of $90,000, an increase in deferred compensation of $165,000, an increase in the Senior Note accrued interest of $397,000, partially offset by conversion of a Senior Note and accrued interest of $510,000. 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 $95,000 for the six months ended December 31, 2008, compared to net cash used of $737,000 for the six months ended December 31, 2007. The decrease during the six months ended December 31, 2008 was primarily due to a decrease in payments for research and development activities, an increase in deferred compensation and loans received from an officer. At December 31, 2008, the following approximate debt obligations were outstanding: (a) $333,000 owed to various vendors; (b) $377,000 in accrued expenses, including $305,000 in deferred compensation; (c) $100,000 in deferred revenue; (d) $90,000 of advances from an officer; (e) $11 million in Senior Notes, including $3 million in accrued interest; (f) $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. 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. We no longer have working capital to fund our operations; therefore, in addition to seeking to complete a Qualified Financing, we are seeking additional collaborative research and development relationships with suitable corporate partners for our products. 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. The accompanying unaudited condensed 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. We have incurred operating losses through December 31, 2008. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. As of December 31, 2008, we are in default under the terms of the 2007 Amendment and we owe the holders of our Senior Notes approximately $11 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, it is highly unlikely the holders of our equity securities will receive any of the proceeds of such liquidation. The accompanying unaudited condensed consolidated financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty. WHERE YOU CAN FIND MORE INFORMATION We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and must file reports, proxy statements and other information with the SEC. The reports, information statements and other information we file with the Commission can be inspected and copied at the Commission Public Reference Room, 100 F Street, N.E. Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that contains reports, proxy, information statements and other information regarding registrants, like us, which file electronically with the Commission. -19- 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. Our common stock is traded on the OTCBB under the symbol "ALLP.OB." CRITICAL ACCOUNTING POLICIES There were no significant changes in critical accounting policies or estimates from those at June 30, 2008. OFF-BALANCE SHEET FINANCING ARRANGEMENTS As of December 31, 2008, we did not have any off-balance sheet financing arrangements or any equity ownership interests in any variable interest entity or other minority-owned ventures. ITEM 4T. CONTROLS AND PROCEDURES (a) 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, our CEO and CFO concluded that as of December 31, 2008 our disclosure controls and procedures were effective at the reasonable assurance level 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. (b) Changes in internal control over financial reporting. There has been no change in the Company's internal control over financial reporting that occurred during the three-month period ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS The Company's management, including our 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. PART II OTHER INFORMATION: ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the quarter ended December 31, 2008, holders of certain Senior Notes converted an aggregate of approximately $266,000 in principal and approximately $244,000 in accrued interest into an aggregate of 3,000,000 shares of our common stock at a conversion price of $0.17 per share. -20- The offers and sales of these securities were deemed to be exempt from registration under the Securities Act of 1933, as amended, (the "Securities Act") in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder as transactions by us not involving a public offering. The recipients of the securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to share certificates issued in such transactions. All recipients had adequate access to information about us. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company is currently in default with respect to the repayment of all outstanding principal under the Senior Notes, totaling $8 million, and accrued interest under the Senior Notes, totaling $3 million, at December 31, 2008. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS (a) Index to Exhibits EXHIBIT DESCRIPTION 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 Certification of our Chief Executive Officer under Section 906 of the Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). * 32.2 Certification of our Chief Financial Officer under Section 906 of the Sarbanes Oxley Act of 2002. (18 U.S.C. Section 1350). * ---------------- * Filed Herewith. -21- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLIANCE PHARMACEUTICAL CORP. (Registrant) Date: February 16, 2009 By: /s/ Duane J. Roth ----------------------------------------- Duane J. Roth Chairman and Chief Executive Officer By: /s/ Jack DeFranco ----------------------------------------- Jack DeFranco Chief Operating Officer and Chief Financial Officer -22-

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-12950

ALLIANCE PHARMACEUTICAL CORP.
(Exact name of Registrant as specified in its charter)
New York		14-1644018
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
6175 Lusk Boulevard San Diego, California		92121
(Address of principal executive offices)		Zip Code
Registrant’s telephone number, including area code: (858) 410-5200

Indicate by a check whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.

Yes x No o

As of February 10, 2003, Registrant had 19,457,175 shares of its Common Stock, $.01 par value, outstanding.

ALLIANCE PHARMACEUTICAL CORP.

INDEX

		Page No.
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17
Item 4.	Controls And Procedures	17
PART II - OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K	18

Part I Financial Information: Item 1. Financial Statements

	ALLIANCE PHARMACEUTICAL CORP.CONDENSED CONSOLIDATED BALANCE SHEETS
					December 31, 2002			June 30, 2002
					(Unaudited)			(Note )
Assets
Current assets:
	Cash and cash equivalents				$	207,000		$	1,416,000
	Other current assets					121,000			804,000
			Total current assets			328,000			2,220,000
Property, plant and equipment - net						9,159,000			11,198,000
Purchased technology - net						9,399,000			10,540,000
Investment in joint venture						5,000,000			5,000,000
Restricted cash						738,000			940,000
Other assets - net						985,000			1,271,000
					$	25,609,000		$	31,169,000
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
	Accounts payable				$	7,258,000		$	4,254,000
	Accrued expenses					3,151,000			1,858,000
	Deferred revenue					80,000			—
	Current portion of long-term debt					21,424,000			10,480,000
		Total current liabilities				31,913,000			16,592,000
Deferred revenue						10,000,000			10,000,000
Long-term debt						6,225,000			10,960,000
Stockholders’ equity (deficit):
	Preferred stock - $.01 par value; 5,000,000 shares authorized; 793,750 and 787,500 shares of Series F issued and outstanding at December 31, 2002 and June 30, 2002, respectively					8,000			8,000
	Common stock - $.01 par value; 125,000,000 shares authorized; 18,944,919 and 17,368,849 shares issued and outstanding at December 31, 2002 and June 30, 2002, respectively					189,000			174,000
	Additional paid-in capital					462,443,000			461,529,000
	Accumulated comprehensive income (loss)					—			—
	Accumulated deficit					(485,169,000	)		(468,094,000	)
		Total stockholders’ equity (deficit)				(22,529,000	)		(6,383,000	)
					$	25,609,000		$	31,169,000
Note:				The balance sheet at June 30, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

See Accompanying Notes to Condensed Consolidated Financial Statements

	ALLIANCE PHARMACEUTICAL CORP.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		Three months ended December 31,						Six months ended December 31,
		2002			2001			2002			2001
		(Unaudited )						(Unaudited)
Revenues:
	License and research revenue	$	10,000		$	44,000		$	31,000		$	5,067,000
Operating expenses:
	Research and development		4,027,000			8,412,000			10,190,000			17,026,000
	General and administrative		1,917,000			1,869,000			4,797,000			4,545,000
			5,944,000			10,281,000			14,987,000			21,571,000
Loss from operations			(5,934,000	)		(10,237,000	)		(14,956,000	)		(16,504,000	)
Investment income			17,000			72,000			49,000			183,000
Other income			—			—			329,000			—
Loss on investment			(500,000	)		—			(500,000	)		—
Interest expense			(1,234,000	)		(375,000	)		(1,997,000	)		(1,096,000	)
Net loss applicable to common shares		$	(7,651,000	)	$	(10,540,000	)	$	(17,075,000	)	$	(17,417,000	)
Net loss per common share:
	Basic and diluted	$	(0.41	)	$	(0.79	)	$	(0.95	)	$	(1.50	)
Weighted average shares outstanding:
	Basic and diluted		18,702,000			13,268,000			18,035,000			11,588,000

See Accompanying Notes to Condensed Consolidated Financial Statements

	ALLIANCE PHARMACEUTICAL CORP.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
				Six months ended December 31,
				2002			2001
				(Unaudited)
Operating activities:
	Net loss			$	(17,075,000	)	$	(17,417,000	)
	Adjustments to reconcile net loss to net cash used in operations:
		Depreciation and amortization			3,134,000			3,824,000
		Expense associated with warrant issuance			212,000			84,000
		Loss on investment			500,000			—
		Loss on sale of equity securities			—			251,000
		Changes in operating assets and liabilities:
			Restricted cash and other assets		671,000			5,898,000
			Accounts payable and accrued expenses and other		4,297,000			(3,333,000	)
			Deferred revenue		80,000			—
Net cash used in operating activities					(8,181,000	)		(10,693,000	)
Investing activities:
	Sales and maturities of short-term investments				—			49,000
	Property, plant and equipment				45,000			(177,000	)
Net cash provided by (used in) investing activities					45,000			(128,000	)
Financing activities:
	Issuance of common stock - net				—			13,657,000
	Issuance of convertible preferred stock - net				250,000			3,780,000
	Proceeds from long-term debt				5,307,000			—
	Proceeds from revolving line of credit				1,370,000			—
	Principal payments on long-term debt				—			(4,611,000	)
Net cash provided by financing activities					6,927,000			12,826,000
Increase (decrease) in cash and cash equivalents					(1,209,000	)		2,005,000
Cash and cash equivalents at beginning of period					1,416,000			6,185,000
Cash and cash equivalents at end of period				$	207,000		$	8,190,000
Supplemental disclosure of cash flow information:
	Interest paid			$	235,000		$	935,000
Supplemental disclosure of non-cash investing and financing activities:
	Issuance of common stock upon conversion of notes			$	552,000		$	9,500,000

See Accompanying Notes to Condensed Consolidated Financial Statements

ALLIANCE PHARMACEUTICAL CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

Principles of Consolidation

The consolidated financial statements include the accounts of Alliance Pharmaceutical Corp., the accounts of its wholly owned subsidiary Molecular Biosystems, Inc. (“MBI”) from the acquisition date of December 29, 2000, its wholly owned subsidiaries Astral, Inc., MDV Technologies, Inc., Alliance Pharmaceutical GmbH, and its majority-owned subsidiary Talco Pharmaceutical, Inc. All significant intercompany accounts and transactions have been eliminated. Certain amounts in fiscal 2002 have been reclassified to conform to the current year’s presentation.

Interim Condensed Financial Statements

The condensed consolidated balance sheet as of December 31, 2002, the condensed consolidated statements of operations for the three and six months ended December 31, 2002 and 2001, and the condensed consolidated statements of cash flows for the six months ended December 31, 2002 and 2001 are unaudited. In the opinion of management, such unaudited financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of the results to be expected for the full year. The financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended June 30, 2002.

Purchased Technology

The majority of the purchased technology was acquired as a result of the merger of Fluoromed Pharmaceutical, Inc. in 1989. The technology acquired is the Company’s core perfluorochemical (“PFC”) technology and was valued based on an analysis of the future cash flows anticipated from this technology at that time. The Company identified alternative future uses for the PFC technology, including the Oxygent™ (temporary blood substitute) product. Purchased technology also includes $4.5 million for technology capitalized as a result of the acquisition of MBI in December 2000.

The PFC technology is the basis for the Company’s main drug development programs and is being amortized over a 20-year life. The PFC technology has a net book value of $7.2 million and $7.7 million, and is reported net of accumulated amortization of $16.1 million

and $15.5 million at December 31, 2002 and June 30, 2002, respectively. The technology acquired from MBI has a book value of $2.2 million and $2.8 million, net of accumulated amortization of $2.2 million and $1.7 million at December 31, 2002 and June 30, 2002, and is being amortized over four years.

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

Comprehensive Income (Loss)

Effective July 1, 1998, the Company adopted the Financial Accounting Standards Board’s Statement No. 130, Comprehensive Income (“SFAS No. 130”). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the Company’s net loss or stockholders’ equity. SFAS No. 130 requires unrealized gains and losses on the Company’s available-for-sale securities to be included in comprehensive income. During the three months ended December 31, 2002 and 2001, the total comprehensive loss, which includes the unrealized gain or loss on available-for-sale securities, was $7,651,000 and $10,540,000, respectively. During the six months ended December 31, 2002 and 2001, the total comprehensive loss, which includes the unrealized gain or loss on available-for-sale securities, was $17,075,000 and $17,198,000, respectively.

Net Loss Per Share

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

New Accounting Requirements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued FASB Statements Nos. 141 and 142 (“FAS 141” and “FAS 142”), “Business Combinations” and “Goodwill and Other Intangible Assets.” FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are

effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001. The adoption of these standards did not have a material impact on the Company’s results of operations and financial position.

In August 2001, the FASB issued FAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” FAS 144 replaces FAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The FASB issued FAS 144 to establish a single accounting model, based on the framework established in FAS 121, as FAS 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under APB 30, “Reporting The Results of Operations — Reporting The Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions.” FAS 144 also resolves significant implementation issues related to FAS 121. Companies are required to adopt FAS 144 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s results of operations and financial position.

In June 2002, the FASB issued Statement No. 146, or SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between Statement 146 and Issue 94-3 relates to Statement 146’s requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of this Statement 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect that the adoption of SFAS No. 146 will have a material impact on the consolidated financial statements.

2. SALE OF MEDICAL IMAGING ASSETS

In November 2002, Alliance and Photogen Technologies, Inc. (“Photogen”) executed a term sheet for Photogen to acquire certain of the assets of Alliance related to medical imaging, including all manufacturing and marketing rights to Imagent® (formerly Imavist™), Alliance’s ultrasound contrast agent that was approved by the U.S. Food and Drug Administration (“FDA”) for marketing in the United States in June 2002. The transaction is subject to completion of due diligence, negotiation of definitive agreements and other contingencies, including Photogen obtaining financing for the acquisition. Under certain circumstances, if the acquisition does not occur, Alliance may be required to pay a break-up fee to Photogen. The financing structure contemplated by the term sheet includes Photogen providing to Alliance a cash payment at

closing, future payments based on product sales, and bridge financing for Imagent activities prior to the acquisition.

3. FINANCING

As of December 31, 2002, the Company received $2.3 million through the issuance of 8% Convertible Secured Promissory Notes (the “Notes”) to various institutional investors, including Roth Capital Partners, LLC. The Notes mature in two years from the date of issuance and are convertible into shares of Alliance’s common stock at $0.35 per share. Alliance’s obligations under the Notes are secured by certain of its assets, including all of its assets related to and its rights and interests in Imagent and Oxygent. In connection with the issuance of the Notes, Alliance obtained the consent and waiver of anti-dilution rights from a majority of the investors in the Company’s October 2001 private placement. The Company also obtained a similar consent and waiver from the holders of its 5% Convertible Debentures (the “2004 Debentures”) issued in 2000. These consents and waivers apply to any future issuance of notes by the Company on the same terms as the Notes up to an aggregate of $3 million. The Company reduced the exercise price on the warrants issued to the investors in the October 2001 private placement from $3.38 to $0.35 per share, in accordance with the terms of the warrants. Alliance also agreed to issue warrants exercisable for an aggregate of 2,000,000 shares of common stock, at an exercise price of $0.50 per share, to holders of its 2004 Debentures and granted them a junior lien in the assets securing the Note. The Company recorded a charge to finance expense for the warrants, based upon a Black-Scholes valuation, of $80,000 in the second quarter of fiscal year 2003. Subsequent to December 31, 2002, the Company received an additional $693,000 through the issuance of similar 8% Convertible Secured Promissory Notes.

In July and August 2002, the Company entered into two separate loan and security agreements, totaling $3 million, with an investment firm at an effective 100% annualized interest rate. The loans are due at the earlier of 90 days after the date of the loans or the date on which the Company completes and receives the proceeds from a financing with aggregate proceeds of at least $5 million. Amounts borrowed are secured by Imagent intangible assets. In October and November 2002, the Company did not pay the principal and accrued interest on the due dates, which constitutes an event of default under the loan terms. In connection with the transaction, the Company issued warrants to purchase up to 200,000 shares of common stock at an exercise price of $3.38 per share. The Company has recorded deferred interest expense on the warrants, based upon a Black-Scholes valuation, of $48,000.

In March 2002, the Company entered into a five-year exclusive agreement with Cardinal Health, Inc. (“Cardinal”) to assist in the marketing of Imagent. Under the agreement, Cardinal will perform certain packaging, distribution, and sales services for Alliance under a fee-for-service arrangement. Cardinal has extended to Alliance a revolving line of credit, up to $5 million, which will be repaid from product revenues. Amounts due will accrue interest at a rate of 10% and will be repaid over a twelve month period commencing in March 2004 or when the loan payable equals $5 million. The balance outstanding on this line of credit was $1.8 million and $428,000 at December 31, 2002 and June 30, 2002, respectively.

In July 2002, Baxter Healthcare Corporation (“Baxter”) purchased $250,000 of Series F Preferred Stock.

4. LOSS ON INVESTMENT

In July 1997, the Company entered into a development agreement (the “Development Agreement”) with Metracor Technologies, Inc. (“Metracor”) for the joint development of RODA®(Real-time Oxygen Dynamics Analyzer). In June 2001, the Development Agreement was terminated and a new agreement was executed, whereby Metracor obtained an exclusive royalty-free license to all of Alliance’s rights and interest in and to RODA, and an option was granted by Alliance to Metracor to acquire all of Alliance’s rights to RODA in the future upon the occurrence of certain events. Alliance also entered into an agreement to acquire approximately 2.5 million shares of Series B Preferred Stock of Metracor (“Metracor B Stock”) in exchange for approximately $500,000 cash and the Metracor license. During the second quarter of fiscal 2003, the Company determined that the decline in the valuation of its investment in Metracor was “other than temporary.” Accordingly, the Company recorded a loss on investment of $500,000 during the quarter.

5. SUBSEQUENT EVENTS

In January 2003, Alliance signed a letter of intent with Baxter under which Alliance would acquire an option to purchase Baxter’s ownership interest in PFC Therapeutics, LLC (“PFC Therapeutics”), the joint venture established by Alliance and Baxter in May 2000 to commercialize Oxygent, an intravascular oxygen carrier, in North America and Europe. The definitive agreement for the purchase of the option will provide that Alliance would pay Baxter a royalty on the sales of Oxygent by PFC Therapeutics, its licensees, or its assignees following regulatory approval. In addition, Alliance would have six months to exercise its option to purchase Baxter’s ownership interest in PFC Therapeutics. Under the terms of the letter of intent, Baxter would retain a right of first offer to market Oxygent in the U.S. Alliance also retained Burrill & Company, a life sciences merchant bank, to assist Alliance and PFC Therapeutics in seeking strategic and financial partners to provide the resources necessary to conduct pending international Phase 3 clinical studies with Oxygent.

In January 2003, Theodore D. Roth resigned his position as Alliance’s President and Chief Operating Officer, but will remain a member of the Board of Directors and will serve as an unpaid consultant to the Company. Helen M. Ranney, MD, a renowned hematologist, retired from the Board, but will continue to advise the Company regarding scientific and medical matters. In February 2003, Timothy T. Hart, Chief Financial Officer, resigned his positions, but will serve as a consultant to the Company.

Subsequent to December 31, 2002, the Company received $693,000 through the issuance of 8% Convertible Secured Promissory Notes (the “Notes”) to various institutional investors. The Notes mature in two years from the date of issuance and are convertible into shares of Alliance’s common stock at $0.35 per share. Alliance’s obligations under the Notes are secured by certain of its assets, including all of its assets related to and its rights and interests in Imagent and Oxygent.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (References to years are to the Company’s fiscal years ended June 30.)

Since commencing operations in 1983, the Company has applied substantially all of its resources to research and development programs and to clinical trials. The Company has incurred losses since inception and, as of December 31, 2002, has an accumulated deficit of $485.2 million. The Company expects to incur significant losses over at least the next few years as the Company continues its research and product development efforts and attempts to commercialize its products.

The Company’s revenues have come primarily from collaborations with corporate partners, including research and development and milestone payments. The Company’s expenses have consisted primarily of research and development costs and administrative costs. To date, the Company’s revenues from the sale of products have not been significant. The Company believes its 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 the Company or its competitors, and market acceptance of products under development.

Liquidity and Capital Resources

Through December 2002, the Company financed its activities primarily from public and private sales of equity and funding from collaborations with corporate partners.

In July 1997, the Company entered into a Development Agreement with Metracor for the joint development of RODA® (Real-time Oxygen Dynamics Analyzer). In June 2001, the Development Agreement was terminated and a new agreement was executed, whereby Metracor obtained an exclusive royalty-free license to all of Alliance’s rights and interest in and to RODA, and an option was granted by Alliance to Metracor to acquire all of Alliance’s rights to RODA in the future upon the occurrence of certain events. Alliance also entered into an agreement to acquire approximately 2.5 million shares of Metracor B Stock in exchange for approximately $500,000 cash and the Metracor license. During the second quarter of fiscal 2003, the Company determined that the decline in the valuation of its investment in Metracor was “other than temporary.” Accordingly, the Company recorded a loss on investment of $500,000 during the quarter.

In December 2002, Alliance and Mixture Sciences, Inc. (“Mixture Sciences”) entered into an exclusive license agreement for all rights to a proprietary immunotherapy platform technology developed by Astral, Inc., a wholly-owned subsidiary of Alliance. Under the terms of the agreement, Mixture Sciences, as licensee, will provide an undisclosed license fee and future royalties to Alliance. The parties also intend to explore the possibility of combining their entire technologies into a single entity over the next several months.

On October 18, 2002, Alliance’s common stock was delisted from the NASDAQ National Market for failure to meet the National Market continued listing requirements. The Company’s common stock is now trading on NASDAQ’s Over-the-Counter Bulletin Board under the symbol ALLP.OB.

In August and September 2000, the Company sold $12 million of its 2004 Debentures to certain investors. On December 31, 2002, the balance outstanding on these debentures was $10 million. In August 2002, the Company did not pay the accrued interest on the due date, which constitutes an event of default under the debenture terms. Accordingly, the outstanding principal and accrued interest are due and payable and classified in the current liabilities section of the Consolidated Balance Sheet at December 31, 2002. In October 2002, approximately $550,000 of the 2004 Debentures were converted into 1,576,070 shares of Alliance common stock.

In November 2000, the Company sold $7 million of five-year 6% subordinated convertible notes to certain investors. Currently, the Company has other debt in default, which

constitutes an event of default under these convertible note terms. Accordingly, the outstanding principal and accrued interest are due and payable and classified in the current liabilities section of the Consolidated Balance Sheet at December 31, 2002.

The Company had net working deficit of ($31.6 million) at December 31, 2002, compared to ($14.4 million) at June 30, 2002. The Company’s cash, cash equivalents, and short-term investments decreased to $207,000 at December 31, 2002, from $1.4 million at June 30, 2002. The decrease resulted primarily from net cash used in operations of $8.2 million, partially offset by net proceeds of $5.3 million from long-term debt and proceeds of $1.4 million from a revolving line of credit. The Company’s operations to date have consumed substantial amounts of cash and are expected to continue to do so for the foreseeable future.

The Company continually reviews its product development activities in an effort to allocate its resources to those product candidates that the Company believes have the greatest commercial potential. Factors considered by the Company in determining the products to pursue include projected markets and need, potential for regulatory approval and reimbursement under the existing healthcare system, status of its proprietary rights, technical feasibility, expected and known product attributes, and estimated costs to bring the product to market. Based on these and other factors, the Company may from time to time reallocate its resources among its product development activities. Additions to products under development or changes in products being pursued can substantially and rapidly change the Company’s funding requirements.

The Company expects to incur substantial expenditures associated with product development, particularly for Oxygent and Imagent. The Company may seek additional collaborative research and development relationships with suitable corporate partners for its products. There can be no assurance that such relationships, if any, will successfully reduce the Company’s funding requirements. Additional equity or debt financing may be required, and there can be no assurance that such financing will be available on reasonable terms, if at all. Because adequate funds were not available, the Company has delayed its Oxygent development efforts and it may be required to delay, scale back, or eliminate one or more of its other product development programs, or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, or products that the Company would not otherwise relinquish.

The Company believes it lacks sufficient working capital to fund operations for the entire fiscal year ending June 30, 2003 and, without the bridge financing from Photogen, cannot fund its current obligations. Therefore, substantial additional capital resources will be required to fund the ongoing operations related to the Company’s research, development, manufacturing and business development activities. As noted in the report of the Company's independent auditors on the financial statements for the year ended June 30, 2002, the report included a paragraph which noted that the Company's financial condition raises substantial doubt about its ability to continue as a going concern. Assuming the closing of the Photogen transaction for the sale of the medical imaging assets, management believes there are a number of potential alternatives available to meet the continuing capital requirements such as public or private financings or collaborative agreements. As of December 31, 2002, the Company received a total of $2.3 million through the issuance of 8% Convertible Secured Promissory Notes to various institutional investors. The Company is negotiating the issuance of comparable notes to provide additional funding for operations. In November 2002, Alliance and Photogen executed a

term sheet for Photogen to acquire certain of the assets of Alliance related to medical imaging, including all manufacturing and marketing rights to Imagent.. The transaction is subject to completion of due diligence, negotiation of definitive agreements and other contingencies, including Photogen obtaining financing for the acquisition. The financing structure contemplated by the term sheet includes Photogen providing to Alliance a cash payment at closing, future payments based on product sales, and bridge financing for Imagent activities prior to the acquisition. The sale of Imagent has not been finalized; therefore there can be no assurance that these financing arrangements will be consummated in the necessary time frames needed for continuing operations or on terms favorable to the Company.

The Company is taking continuing actions to reduce its ongoing expenses, including the reduction in the number of employees and the consolidation of facilities. If adequate funds are not available, the Company will be required to significantly curtail its operating plans and may have to sell or license out significant portions of the Company’s technology or potential products. The 2003 financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.

The Company’s future capital requirements will depend on many factors, including, but not limited to, continued scientific progress in its research and development programs, progress with preclinical testing and clinical trials, the time and cost involved in obtaining regulatory approvals, patent costs, competing technological and market developments, changes in existing collaborative relationships, the ability of the Company to establish additional collaborative relationships, and the cost of manufacturing scale-up.

While the Company believes that it has material to initiate new clinical trials for Oxygent and that it can produce materials for market launch for Imagent at its existing San Diego facility, it may need to expand its commercial manufacturing capabilities for its products in the future. Any expansion for any of its products may occur in stages, each of which would require regulatory approval, and product demand could at times exceed supply capacity. The Company has not selected a site for such expanded facilities and cannot predict the amount it will expend for the construction of such facilities. There can be no assurance as to when or whether the FDA will determine that such facilities comply with Good Manufacturing Practices. The projected location and construction of such facilities will depend on regulatory approvals, product development, and capital resources, among other factors. The Company has obtained regulatory approval for its Imagent production facility.

Except for historical information, the statements made herein and elsewhere are forward-looking. The Company wishes to caution readers that these statements are only predictions and that the Company’s business is subject to significant risks. The factors discussed herein and other important factors, in some cases have affected, and in the future could affect, the Company’s actual results and could cause the Company’s actual consolidated results for 2003, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks include, but are not limited to, the inability to obtain adequate financing for the Company’s development efforts; the inability to enter into collaborative relationships to further develop and commercialize the Company’s products;

changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company’s products; the uncertainties associated with the lengthy regulatory approval process, including uncertainties associated with FDA decisions and timing on product development or approval; and the uncertainties associated with obtaining and enforcing patents important to the Company’s business; and possible competition from other products. Furthermore, even if the Company’s products appear promising at an early stage of development, they may not reach the market for a number of important reasons. Such reasons include, but are not limited to, the possibilities that the potential products will be found ineffective during clinical trials; failure to receive necessary regulatory approvals; difficulties in manufacturing on a large scale; failure to obtain market acceptance; and the inability to commercialize because of proprietary rights of third parties. The research, development, and market introduction of new products will require the application of considerable technical and financial resources, while revenues generated from such products, assuming they are developed successfully, may not be realized for several years. Other material and unpredictable factors which could affect operating results include, without limitation, the uncertainty of the timing of product approvals and introductions and of sales growth; the ability to obtain necessary raw materials at cost-effective prices or at all; the effect of possible technology and/or other business acquisitions or transactions; and the increasing emphasis on controlling healthcare costs and potential legislation or regulation of healthcare pricing. Further cautionary information is contained in documents the Company files with the Securities and Exchange Commission from time to time, including the last Form 10-K, and those risk factors set forth in the most recent registration statement on Form S-3 (File No. 333-72844) and Form S-4 (File No. 333-49676).

Results of Operations

Six Months ended December 31, 2002 as Compared with Six Months ended December 31, 2001

The Company’s license and research revenue decreased to $31,000 for the six months ended December 31, 2002, compared to $5.1 million for the six months ended December 31, 2001. Fiscal year 2002 revenue included $5 million received from Mallinckrodt in connection with the amendment of the Optison® Product Rights Agreement in August 2001.

Research and development expenses decreased by 40% to $10.2 million for the six months ended December 31, 2002, compared to $17 million for the six months ended December 31, 2001. The decrease in expenses was primarily due to a $2.9 million decrease in staffing costs for employees engaged in research and development activities, a $920,000 decrease in payments to outside researchers for clinical trials and other product development work, a $847,000 decrease in repairs and maintenance expense, a $756,000 decrease in supplies and chemicals, a $675,000 decrease in facility rent expense, as well as other decreases related to the Company’s research and development activities.

General and administrative expenses increased by approximately 7% to $4.8 million for the six months ended December 31, 2002, compared to $4.5 million for the six months ended December 31, 2001. The increase in general and administrative expenses was primarily due to a $1.7 million increase in fees primarily related to Imagent marketing activities. The increase was

offset by a decrease of $1 million related to the fiscal year 2002 non-recurring adjustment of a prepaid royalty as a result of the amendment of the Optison Product Rights Agreement with Mallinckrodt in August 2001, as well as other decreases related to the Company’s general and administrative activities.

Investment income was $49,000 for the six months ended December 31, 2002, compared to $183,000 for the six months ended December 31, 2001. The decrease was primarily a result of a decrease in realized gains from the sale of short-term investments.

Other income was $329,000 for the six months ended December 31, 2002. The increase was primarily a result of proceeds recorded from the settlement of a lawsuit.

Loss on investment of $500,000 was recorded in fiscal year 2003 when the Company determined that the decline in the valuation of its investment in Metracor was “other than temporary.”

Interest expense was $2 million for the six months ended December 31, 2002, compared to $1.1 million for the six months ended December 31, 2001. The increase was primarily a result of higher average long-term debt balances and higher interest rates.

Three Months ended December 31, 2002 as Compared with Three Months ended December 31, 2001

The Company’s license and research revenue decreased to $10,000 for the three months ended December 31, 2002, compared to $44,000 for the three months ended December 31, 2001.

Research and development expenses decreased by 52% to $4 million for the three months ended December 31, 2002, compared to $8.4 million for the three months ended December 31, 2001. The decrease in expenses was primarily due to a $1.8 million decrease in staffing costs for employees engaged in research and development activities, a $646,000 decrease in repairs and maintenance expense, a $572,000 decrease in payments to outside researchers for clinical trials and other product development work, a $445,000 decrease in depreciation expense, a $444,000 decrease in facility rent expense, a $340,000 decrease in supplies and chemicals, as well as other decreases related to the Company’s research and development activities.

General and administrative expenses were $1.9 million for the three months ended December 31, 2002, compared to $1.9 million for the three months ended December 31, 2001.

Investment income was $17,000 for the three months ended December 31, 2002, compared to $72,000 for the three months ended December 31, 2001. The decrease was primarily a result of lower average cash and short-term investment balances.

Loss on investment of $500,000 was recorded in fiscal year 2003 when the Company determined that the decline in the valuation of its investment in Metracor was “other than temporary.”

Interest expense was $1.2 million for the three months ended December 31, 2002, compared to $375,000 for the three months ended December 31, 2001. The increase was primarily a result of higher average long-term debt balances and higher interest rates.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is or has been exposed to changes in interest rates primarily from its long-term debt arrangements and, secondarily, its investments in certain securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company believes that a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company’s interest sensitive financial instruments at December 31, 2002.

Item 4. Controls And Procedures

(a) The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act Filings and Reports is recorded, processed, summarized and reported within the timelines specified in the Security and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow timely disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives.

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective.

(b) There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date it carried out this evaluation.

Part II Other Information:

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

	10.	License Agreement dated as of December 3, 2002 between the Company and Mixture Sciences, Inc. (A request for confidential treatment of certain portions of this exhibit has been filed with the Securities and Exchange Commission.)
	99.1	Certification

(b) Report on Form 8-K

The Company filed a current report on Form 8-K dated November 25, 2002, stating that the Company and Photogen Technologies, Inc. (“Photogen”) executed a term sheet for Photogen to acquire all of the assets of Alliance related to medical imaging, including all manufacturing and marketing rights to Imagent®. The Company filed a current report on Form 8-K dated January 27, 2003, stating that it has signed a letter of intent with Baxter Healthcare Corporation (“Baxter”) under which Alliance would acquire an option to purchase Baxter’s ownership interest in PFC Therapeutics, LLC. In addition, Theodore D. Roth has resigned his position as President and Chief Operating Officer, but will remain a member of the Board of Directors. Helen M. Ranney, M.D. has retired from the Board of Directors.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ALLIANCE PHARMACEUTICAL CORP.
	(Registrant)
	\s\ DUANE J. ROTH
	Duane J. Roth Chairman, Chief Executive Officer and Chief Financial Officer
Date: February 14, 2003

CERTIFICATION

I, Duane J. Roth, Chief Executive Officer and Chief Financial Officer of Alliance Pharmaceutical Corp. (the “Company”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of the Company;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-14 and 15d-14 for the Company and we have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (“Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

5. I have disclosed, based on my most recent evaluation, to the Company’s auditors and the audit committee of the Company’s Board of Directors:

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: February 14, 2003 By: \s\ DUANE J. ROTH Duane J. Roth Chief Executive Officer and Chief Financial Officer

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