UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period ended DECEMBER 31, 2009

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

For the transition period from to

Commission file number 000-12950

ALLIANCE PHARMACEUTICAL CORP.

(Name of Registrant in Its Charter)

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

3550 General Atomics Ct, MS 02/606 San Diego, California		92121
(Address of Principal Executive Offices)		(Zip Code)

Issuer’s telephone number, including are code: (858) 779-1458

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 o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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 definitions of “large accelerated filer,” “accelerated file” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o 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 o No x

Common Stock, $0.01 par value per share, 150,000,000 shares authorized, 67,459,219 shares issued and outstanding at May 20, 2010.

ALLIANCE PHARMACEUTICAL CORP.

INDEX

		Page No.

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets at December 31, 2009 (unaudited) and June 30, 2009	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	12

Item 4.	Controls and Procedures	16

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	[Reserved]	16

Item 5.	Other Information	16

Item 6.	Exhibits	17

Part I FINANCIAL INFORMATION:

Item 1. Financial Statements

ALLIANCE PHARMACEUTICAL CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS



	December 31, 2009			June 30, 2009
Assets	(Unaudited)			(Audited)
Current assets:
Cash	$	-		$	40,000
Other current assets		1,000			8,000
Total current assets		1,000			48,000

Property and equipment - net		9,000			40,000
	$	10,000		$	88,000

Liabilities and Stockholders' Deficit

Current liabilities:
Accounts payable	$	161,000		$	161,000
Accrued expenses		86,000			80,000
Deferred compensation		740,000			560,000
Advance from related party		1,000			-
Deferred revenue		100,000			100,000
Senior notes payable and accrued interest		9,285,000			10,643,000
Total current liabilities		10,373,000			11,544,000

Other liabilities		750,000			750,000
Total liabilities		11,123,000			12,294,000

Commitments and contingencies

Stockholders' deficit:
Common stock - $0.01 par value; 150,000,000 shares authorized;
67,459,219 and 67,316,592 shares issued and outstanding, respectively		675,000			673,000
Additional paid-in capital		487,946,000			487,917,000
Accumulated deficit		(499,734,000	)		(500,796,000	)
Total stockholders' deficit		(11,113,000	)		(12,206,000	)
	$	10,000		$	88,000

See accompanying Notes to Condensed Consolidated Financial Statements.

ALLIANCE PHARMACEUTICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three months ended						Six months ended
	December 31,						December 31,
	2009			2008			2009			2008
	(Unaudited)						(Unaudited)
Revenues:
Royalty, license and research	$	-		$	-		$	-		$	-

Operating expenses:
Research and development		19,000			102,000			20,000			92,000
General and administrative		114,000			178,000			237,000			369,000
		133,000			280,000			257,000			461,000
Loss from operations		(133,000	)		(280,000	)		(257,000	)		(461,000	)

Investment income		-			1,000			-			1,000
Other income		-			-			12,000			25,000
Interest expense		(158,000	)		(192,000	)		(347,000	)		(397,000	)
Gain on extinguishment of debt		1,681,000			-			1,681,000			-
Loss on disposition of equipment		-			-			(27,000	)		(17,000	)
Gain on disposition of assets		-			-			-			25,000
Net income (loss)	$	1,390,000		$	(471,000	)	$	1,062,000		$	(824,000	)

Net income (loss) per common share, basic	$	0.02		$	(0.01	)	$	0.02		$	(0.01	)
Net income (loss) per common share, diluted	$	0.01		$	(0.01	)	$	0.01		$	(0.01	)

Weighted average shares outstanding, basic		67,434,000			62,531,000			67,376,000			61,380,000

Weighted average shares outstanding, diluted		122,054,000			62,531,000			121,996,000			61,380,000

See Accompanying Notes to Condensed Consolidated Financial Statements.

ALLIANCE PHARMACEUTICAL CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended December 31,
	2009			2008
	(Unaudited)
Operating activities:
Net income (loss)	$	1,062,000		$	(824,000	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		4,000			18,000
Gain on extinguishment of debt		(1,681,000	)		-
Accrued interest on senior notes		347,000			397,000
Stock-based compensation		7,000			14,000
Loss on disposal of equipment		27,000			17,000
Changes in operating assets and liabilities:
Other assets		7,000			38,000
Accounts payable, accrued expenses and other		186,000			245,000
Net cash used in operating activities		(41,000	)		(95,000	)


Financing activities:
Advance from related party		1,000			90,000
Net cash provided by financing activities		1,000			90,000

Decrease in cash		(40,000	)		(5,000	)
Cash at beginning of period		40,000			6,000
Cash at end of period	$	-		$	1,000

Supplemental disclosure of non-cash financing activities:
Issuance of common stock upon conversion of senior notes and interest	$	24,000		$	510,000

See accompanying Notes to Condensed Consolidated Financial Statements.

ALLIANCE PHARMACEUTICAL CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED DECEMBER 31, 2009

Organization

Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the “Company,” “Alliance,” “we” or “us”) are engaged in identifying, designing and developing novel medical products. The Company is focused on developing its product, Oxygent™, an intravascular oxygen carrier designed to augment oxygen delivery in surgical patients, with its partner in China (see Note 2).

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, 2009 and has negative working capital at that date of approximately $10.4 million. These factors 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 in the June 2004 Private Placement. Concurrently, the investors who elected to rescind the June 2004 Private Placement were issued senior convertible promissory notes in like investment amounts (the “Senior Notes”), which, unless previously converted, were to mature and the unpaid principal, together with accrued interest, was to become due and payable on March 24, 2006. Because the holders of the Senior Notes were willing to renegotiate their terms, the maturity date of the Senior Notes was extended to April 1, 2007; however, the Company did not have the resources to repay the Senior Notes on April 1, 2007. The Company requested that each holder of a Senior Note execute an amendment to extend the maturity date of the Senior Note from April 1, 2007 to June 30, 2008 under certain conditions, which we did not meet in a timely manner (see Note 3). This amendment was approved by substantially all of the Senior Note holders. The Company is continuing to seek additional financing to fund its continuing operations. We have not yet identified a source of the funds, nor do we know 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 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. The operations of the Company’s subsidiaries have been immaterial.

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-K for the fiscal year ended June 30, 2009, 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 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-K for the year ended June 30, 2009.

The Company has evaluated subsequent events through the filing date of this Form 10-Q, and determined that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes thereto other than as disclosed in the accompanying notes.

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 consolidated 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, 2009, 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 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.

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 $12,000 and $25,000 were recorded during the six months ended December 31, 2009 and December 31, 2008, 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, 2009 and 2008, the Company incurred research and development expenses of approximately $20,000 and $92,000, respectively. The research and development costs for both periods were primarily patent-associated costs, and archiving and storage costs.

Fair Value of Financial Instruments

The carrying amount of certain of the Company’s financial instruments as of December 31, 2009 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

Net income (loss) per share was computed by dividing the net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income per share for the three months and six months ended December 31, 2009 reflect the potential dilution that could occur if net income were divided by the weighted average number of common shares, plus common shares from the exercise of outstanding stock options and the conversion of Senior Notes and accrued interest where the effect of those securities is dilutive. All potential dilutive common shares have been excluded from the calculation of diluted loss per share for the three and six months ended December 31, 2008, as their inclusion would be anti-dilutive. The outstanding potentially dilutive common shares totaled approximately 63,718,000 and 64,424,000 for the three and six months ended December 31, 2008. The computations for basic and diluted income per share are as follows:

	Income		Shares		Income
	(Numerator)		(Denominator)		per share
Three Months ended December 31, 2009
Basic income per share:
Net income	$	1,390,000		67,434,000	$	0.02
Diluted income per share:
Dilutive stock options		-		-
Senior Notes and accrued interest		-		54,620,000
Net income plus assumed conversions	$	1,390,000		122,054,000	$	0.01

Six Months ended December 31, 2009
Basic income per share:
Net income	$	1,062,000		67,376,000	$	0.02
Diluted income per share:
Dilutive stock options		-		-
Senior Notes and accrued interest		-		54,620,000
Net income plus assumed conversions	$	1,062,000		121,996,000	$	0.01

Stock–Based Compensation

At December 31, 2009, the Company has two stock-based employee compensation plans.

The Company estimates 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 condensed 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. As stock-based compensation expense recognized in the condensed consolidated statement of operations for the six months ended December 31, 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are 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.

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, 2009, the Company is authorized to issue up to 6,555,110 shares under these plans and has 4,524,110 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, 2009 and changes during the six months then ended is presented below:

	December 31, 2009
				Weighted-Average
	Shares			Exercise Price		Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Options outstanding at July 1, 2009		2,635,700		$	3.04		4.96
Options granted		-
Options forfeited/expired		(604,700	)	$	7.49
Options exercised		-
Options outstanding at December 31, 2009		2,031,000		$	1.72		4.71	$	-
Unvested options expected to vest at December 31, 2009		441,000		$	0.23		5.29	$	-
Options exercisable at December 31, 2009		1,581,000		$	2.14		4.54	$	-

There were no options granted or exercised during the six months ended December 31, 2009 and 2008 respectively. Upon the exercise of options, the Company issues new shares from its authorized shares.

As of December 31, 2009, there was approximately $21,000 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, 2009 related to employee and director options was approximately $7,000 net of estimated forfeitures, which expense was allocated to general and administrative expenses.

2. PFC THERAPEUTICS, LLC

On December 22, 2004, PFC Therapeutics and LEO Pharma A/S (“LEO”) 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”). 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. This amount has been deferred and is included in current liabilities in the accompanying condensed consolidated balance sheets at June 30, 2009 and December 31, 2009.

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. Subsequently, in November 2007, the Company suspended the clinical trial due to lack of adequate funding.

On May 13, 2005, PFC Therapeutics and Beijing Double-Crane Pharmaceutical Co., Ltd. ("Double-Crane") entered into a development, license and supply agreement (the "Double-Crane Agreement") for the development of Oxygent in the People’s Republic of China (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 recognized as license revenue at June 30, 2007.

Double-Crane intends to pursue an intraoperative and postoperative transfusion avoidance endpoint. It 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 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.

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 Convertible Promissory Note Purchase and Registration Rights Agreement (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 Note Purchase 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 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.

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 lack sufficient working capital to service our debts and to fund our continuing operations through the fiscal year ending June 30, 2010, which raises substantial doubt about our ability to continue as a going concern. We are in default under the terms of the 2007 Amendment, and we owe the holders of our Senior Notes approximately $9.3 million in principal and accrued interest. We currently do not have the resources to repay the Senior Notes, and we do not expect to be able to repay the Senior Notes. We have severely curtailed our operations and are not currently pursuing our business plan because we do not have the financial resources to do so. Rather, we are exploring potential alternatives for winding up our operations or selling our assets or business to one or more third parties. 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. If we are liquidated, voluntarily declare bankruptcy or enter into some other strategic transaction with a third party for the sale of our assets or business, it is highly unlikely the holders of our common stock will receive any distribution or consideration upon such liquidation, bankruptcy or other transaction. In this case, your investment in our common stock would have no value.

During October 2009, holders of certain Senior Notes converted an aggregate of approximately $20,000 in principal and approximately $4,000 in accrued interest into an aggregate of 142,627 shares of our common stock at a conversion price of $0.17 per share.

In December 2009, we recorded a gain on the extinguishment of debt of approximately $1.7 million as a result of the Company issuing a check in the amount of $100 in full payment of a Senior Note and all other agreements, amendments, extensions and restatements issued in connection with such Senior Note, including the additional note issued in connection with the amendment to the Senior Note Purchase Agreement, an aggregate of approximately $1.2 million in principal, all interest accrued on both Notes, an aggregate of approximately $484,000, and all future rights set forth in all included agreements.

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 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 sheet.

4. RELATED PARTY TRANSACTION

During the period ended December 31, 2009, the Company’s Chief Executive Officer advanced $1,000 to the Company, which was repaid during the fiscal quarter ended March 31, 2010.

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.)

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, 2009, have an accumulated deficit of $499.7 million. We expect to incur significant operating losses over at least the next few years as we continue our research and product development efforts.

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 lack sufficient working capital to service our debts and to fund our continuing operations through the fiscal year ending June 30, 2010, which raises substantial doubt about our ability to continue as a going concern. We are in default under the terms of the 2007 Amendment, and we owe the holders of our Senior Notes approximately $9.3 million in principal and accrued interest. We currently do not have the resources to repay the Senior Notes, and we do not expect to be able 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. If we are liquidated, voluntarily declare bankruptcy or enter into some other strategic transaction with a third party for the sale of our assets or business, it is highly unlikely the holders of our common stock will receive any distribution or consideration upon such liquidation, bankruptcy or other transaction. In this case, your investment in our common stock would have no value.

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 2010, 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-K, filed with the SEC on May 21, 2010.

Research and Development

For the six months ended December 31, 2009 and 2008, we incurred research and development expenses of $20,000 and $92,000 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.

Our partner, Double-Crane, is the market leader for IV solutions and one of the largest pharmaceutical companies in the PRC. Alliance provided Double-Crane with the documentation necessary to enable Double-Crane to translate all relevant data and other information into Chinese prior to the submission of an Investigational New Drug (“IND”) application with the State Food and Drug Administration PRC (the “sFDA”) and Double-Crane made an upfront license fee payment and will make certain milestone and royalty payments to us. The upfront license fee of $500,000 was recognized as license revenue during the year ended June 30, 2007. Double-Crane will conduct clinical trials in the PRC, in accordance with international guidelines, to receive marketing approval for Oxygent in the PRC. Alliance will have the right to use in other countries any data derived from the clinical trials. Double-Crane will manufacture Oxygent in the PRC after obtaining approval from the regulatory authorities in the PRC and will also have a right of first refusal to add specific additional countries to the Double-Crane Agreement upon further negotiation with us.

In February 2007, Alliance manufactured and released product samples; however, in accordance with the current regulations of the sFDA, the supplies for the IND application and clinical development must be manufactured in a facility in the PRC. The manufacturing technology transfer for Oxygent is underway with Double-Crane building the manufacturing facility and purchasing the required equipment for emulsion manufacture. Double-Crane has successfully made pilot scale API quantities and is in the process of scale-up activities. 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, 2009 as Compared with Three Months Ended December 31, 2008

There was no revenue for the three months ended December 31, 2009, or for the three months ended December 31, 2008.

Research and development expenses decreased by $83,000, or 81%, to $19,000 for the three months ended December 31, 2009, compared to $102,000 for the three months ended December 31, 2008. The decrease in research and development expenses was primarily due to a decrease in patent-related costs of $70,000 as we failed to pay annuities on certain patents about to expire, a decrease of $13,000 in travel primarily due to a visit in fiscal 2009 to Double-Crane in China and a decrease of $6,000 in contract services.

General and administrative expenses decreased by $64,000, or 36%, to $114,000 for the three months ended December 31, 2009, compared to $178,000 for the three months ended December 31, 2008. The decrease in general and administrative expenses was primarily the result of a decrease in legal and accounting fees of $31,000 due to a decrease in all activities because of a lack of funds, a decrease in office-related expenses of $13,000 primarily due to our relocation to a smaller office space, a decrease in personnel-related expenses of $8,000 primarily due to our discontinuance of benefits and payroll services, and a decrease in depreciation of $6,000 primarily due to our disposal of office furniture and equipment.

There was no investment income for the three months ended December 31, 2009, compared to $1,000 for the three months ended December 31, 2008. The decrease was primarily a result of a lower average cash balance.

Interest expense was $158,000 for the three months ended December 31, 2009, a decrease of 18% compared to $192,000 for the three months ended December 31, 2008. The decreased interest expense for the current quarter was primarily the result of lower Senior Note principal balances because of our buyout of certain notes and accrued interest on such notes as described below and conversions during fiscal year 2009.

We reported a gain on the extinguishment of debt of approximately $1.7 million for the three months ended December 31, 2009. The Company issued a check in the amount of $100 in full payment of a Senior Note and all other agreements, amendments, extensions and restatements issued in connection with such Senior Note, including the additional note issued in connection with the amendment to the Senior Convertible Promissory Note Purchase Agreement, an aggregate of approximately $1.2 million in principal, all interest accrued on both Notes, an aggregate of approximately $484,000, and all future rights set forth in all included agreements.

Six Months Ended December 31, 2009 as Compared with Six Months Ended December 31, 2008

There was no revenue for the six months ended December 31, 2009, or for the six months ended December 31, 2008.

Research and development expenses decreased by $72,000, or 78%, to $20,000 for the six months ended December 31, 2009, compared to $92,000 for the six months ended December 31, 2008. The decrease in research and development expenses was primarily due to a decrease of $69,000 in patent-related costs as we failed to pay annuities on certain patents about to expire, a decrease of $15,000 in travel primarily due to a visit in fiscal 2009 to Double-Crane in China, partially offset by the refund of the balance of clinical trial insurance of $18,000 during the prior period ended September 30, 2008.

General and administrative expenses decreased by $132,000, or 36%, to $237,000 for the six months ended December 31, 2009, compared to $369,000 for the six months ended December 31, 2008. The decrease in general and administrative expenses was primarily a decrease of $78,000 in legal and accounting fees due to a decrease in all activities because of a lack of funds, a decrease of $29,000 in rent and other office-related expenses primarily due to our relocation to a smaller office space, a decrease of $14,000 in depreciation expense primarily due to our disposal of office furniture and equipment and decreases in public company expenses since we did not have funds available to hold an annual meeting and personnel expenses primarily due to our discontinuance of benefits and payroll services.

There was no investment income for the six months ended December 31, 2009, compared to $1,000 for the six months ended December 31, 2008. The decrease was primarily a result of a lower average cash balance

Other income was $12,000 for the six months ended December 31, 2009, compared to $25,000 for the six months ended December 31, 2008, which were both the result of proceeds recorded from the sale of raw material inventory (which was previously written off).

Interest expense was $347,000 for the six months ended December 31, 2009, compared to $397,000 for the six months ended December 31, 2008. The decreased interest expense for the current period was the result of lower Senior Note principal balances due to our buyout of certain notes and accrued interest on such notes and conversion of certain principal amounts into common stock.

For the six months ended December 31, 2009, we recorded a gain on extinguishment of debt of approximately $1.7 million. The Company issued a check in the amount of $100 in full payment of a Senior Note and all other agreements, amendments, extensions and restatements issued in connection with such Senior Note, including the additional note issued in connection with the amendment to the Senior Convertible Promissory Note Purchase Agreement, an aggregate of approximately $1.2 million in principal, all interest accrued on both Notes, an aggregate of approximately $484,000, and all future rights set forth in all included agreements.

For the six months ended December 31, 2009, we recorded a loss on disposal of equipment of $27,000, which was ultimately sold as scrap metal for no proceeds. 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 $17,000 of depreciation, to Double-Crane.

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.

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, 2009, 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 $42 million of such debt has been converted into equity and $27.6 million of such debt has been retired through the restructuring of various agreements and the issuance of warrants to purchase our common stock.

At December 31, 2009, we had no cash compared to $40,000 at June 30, 2009. The decrease resulted primarily from the net cash used in operations of $41,000, partially offset by an advance from related party of $1,000. At December 31, 2009, we had a working capital deficit of $10.4 million, compared to a working capital deficit of $11.5 million at June 30, 2009. The deficit decrease was principally due to the Company buying back certain notes and accrued interest on such notes in the aggregate amount of $1.7 million, partially offset by increases in payroll and interest accruals. 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 $41,000 for the six months ended December 31, 2009, compared to net cash used in operations of $95,000 for the six months ended December 31, 2008. The decrease during the six months ended December 31, 2009 was primarily due to a decrease in activities.

At December 31, 2009, the following approximate debt obligations were outstanding:

(a) $161,000 owed to various vendors;

(b) $740,000 in deferred compensation;

(d) $100,000 in deferred revenue;

(e) $9.3 million in Senior Notes, including $2.9 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. Because adequate funds have not been available to us in the past, we have already delayed our Oxygent development efforts and have eliminated 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, 2009. We are in default under the terms of the 2007 Amendment, and we owe the holders of our Senior Notes approximately $9.3 million in principal and accrued interest. We currently do not have the resources to repay the Senior Notes, and we do not expect to be able 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. If we are liquidated, voluntarily declare bankruptcy or enter into some other strategic transaction with a third party for the sale of our assets or business, it is highly unlikely the holders of our common stock will receive any distribution or consideration upon such liquidation, bankruptcy or other transaction. In this case, your investment in our common stock would have no value. These factors raise substantial doubt about the Company’s ability to continue as a going concern. 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 SEC.

We were incorporated in New York in 1983. Our principal executive offices are located at 3550 General Atomics Ct, MS02/606, San Diego, CA 92121, and our telephone number is (858) 779-1458.

Our common stock is currently traded in the over-the-counter market, and prices therefore are quoted on the Pink Sheets under the symbol ALLP.PK. Our common stock was previously quoted on the over-the-counter bulletin board (“OTCBB”) through November 17, 2009 under the symbol ALLP.OB.

Critical Accounting Policies

There were no significant changes in critical accounting policies or estimates from those at June 30, 2009.

Off-Balance Sheet Financing Arrangements

As of December 31, 2009, 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 4. 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, 2009 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, 2009 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

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 $6.4 million, and accrued interest under the Senior Notes, totaling $2.9 million, at December 31, 2009.

Item 4. [Reserved]

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.

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: June 3, 2010	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

Filing Compare · ALLIANCE PHARMACEUTICAL CORP.