ALLIANCE PHARMACEUTICAL CORP, 10-K, 1995-09-22

ALLIANCE PHARMACEUTICAL CORP
10-K, 1995-09-22
IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended JUNE 30, 1995
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to
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Commission file number 0-12900
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ALLIANCE PHARMACEUTICAL CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

New York 14-1644018
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

3040 Science Park Road, San Diego, CA 92121
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 619-558-4300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class Name of each exchange on which registered
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NONE
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Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01.
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(TITLE OF CLASS)

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(TITLE OF CLASS)

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

[COVER PAGE 1 OF 2 PAGES]
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The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing price of such stock on
the NASDAQ National Market System on August 31, 1995, was $183,387,441.

The number of shares of the Registrant's common stock, $.01 par value,
outstanding at August 31, 1995 was 24,831,660.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report on Form 10-K is
incorporated by reference to the definitive Proxy Statement with respect to the
1995 Annual Meeting of Shareholders, which the Registrant intends to file with
the Securities and Exchange Commission no later than 120 days after the end of
the fiscal year covered by this report.

[COVER PAGE 2 OF 2 PAGES]
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PART I

ITEM 1. BUSINESS

Alliance Pharmaceutical Corp. (the "Company" or "Alliance") is a
pharmaceutical research and development company that focuses on the application
of scientific discoveries which can be developed into innovative drug products.
Based on its perfluorochemical ("PFC") technologies, the Company has two drug
products in clinical trials: Oxygent(TM), an intravascular agent for use as a
temporary oxygen carrier ("blood substitute") to reduce or eliminate the
requirement for allogeneic (donor) blood transfusions during elective surgery;
and LiquiVent(R), an intrapulmonary drug for use in treating patients with
acute respiratory failure to reduce the morbidity associated with conventional
mechanical ventilation therapy. In addition, Imagent(R) US, a PFC-based
contrast agent for enhancement of ultrasound images of blood flow abnormalities
(perfusion defects) is in the preclinical phase. The Company is also in early
research and development of antigenized antibody technology for potential use
in producing novel vaccines directed against infectious diseases and for use in
regulating autoimmune disorders.

Over the past several years, the health care industry has experienced
significant and rapid change. One of these changes is the rapid pace at which
scientific discoveries are being made. These discoveries often occur in the
universities and medical centers where the researchers and clinicians work
toward identifying the basic causes of disease and potential targets for new
therapies. The Company believes that research and development companies such as
Alliance are in a position to collaborate with inventors to develop innovative
pharmaceutical products based on the intellectual property arising from these
discoveries. Alliance has developed significant experience defining
pharmaceutical formulations, designing manufacturing processes, conducting
preclinical pharmacology and toxicology studies, and conducting early-phase
human testing in accordance with regulatory guidelines. The final phase of drug
development requires greater resources and involves the completion of late-
phase human testing, obtaining worldwide regulatory approvals, building large-
scale manufacturing capacity, and implementing marketing strategies.
Multinational pharmaceutical companies with established capabilities and
expertise are in a stronger position to perform these tasks.

Alliance has entered into agreements with institutions and inventors for
the rights to their discoveries and is adding value to these discoveries by
defining the product, market and regulatory strategies prior to seeking
collaborative relationships with multinational pharmaceutical companies for the
delivery of these products to the market. Alliance intends to seek additional
similar agreements and, through this approach, Alliance believes it can play an
important role in the development of innovative pharmaceutical products.

The Company was incorporated in New York in 1983. Its principal executive
offices are located at 3040 Science Park Road, San Diego, California 92121.

PRODUCTS

Three of the products currently under development by Alliance are based
upon PFC technologies. PFCs are clear, colorless and non-flammable liquids, are
twice as dense as water, and are biochemically inert. Alliance's primary drug
substance is perflubron (perfluorooctyl bromide), an eight-carbon brominated
PFC that, along with other attributes, produces a stable emulsion.

OXYGENT. Oxygent (an emulsion containing perflubron) is an intravascular
oxygen carrier for use as a temporary "blood substitute" to provide oxygen to
tissues during elective surgeries where substantial blood

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loss is anticipated. Oxygent has several potential advantages over the use of
allogeneic (donor) blood: it does not transmit infectious disease, is
compatible with all blood types, and has a shelf life exceeding one year.

According to the 1994 estimates of The National Institutes of Health, the
risks per unit of blood transfused in the U.S. are 1:2,500 for bacterial
infections; 1:3,000 for hepatitis; 1:100,000 for fatal hemolytic reactions
(clerical error); and 1:250,000 for HIV infections (AIDS). To avoid these
risks, certain techniques can be employed that allow use of the patient's own
(autologous) blood. These techniques include (1) predonation, in which patients
donate several units of their blood in the six weeks leading up to surgery, (2)
perioperative hemodilution, in which several units of their blood are removed
just prior to surgery and are replaced with a plasma expander, and (3) salvage,
where a "cell saver" is used to collect blood lost during the surgical
procedure. In the future, drugs such as erythropoietin, serine protease
inhibitors, and oxygen-carrying drugs may increase the utilization of these
techniques by improving both their safety and effectiveness. Oxygent is
intended for use with any of the above-mentioned autologous blood collection
techniques. During surgery, when a blood transfusion is indicated, Oxygent
would be given instead to maintain an adequate level of oxygen delivery despite
a lower red blood cell concentration, thereby delaying the need for
transfusion. This delay allows the majority of the previously removed
autologous blood to be reinfused at the end of the procedure, providing a safe
red blood cell concentration level for recovery while avoiding donor blood.

The Oxygent dose for surgical applications is expected to provide the
equivalent oxygen delivery of approximately two units of red blood cells. It is
estimated that approximately three million patients are at risk of receiving
one or more units of blood during elective surgeries annually in the United
States.

In August 1994, the Company entered into a license agreement (the "License
Agreement") with Ortho Biotech, Inc. and The R.W. Johnson Pharmaceutical
Research Institute, a division of Ortho Pharmaceutical Corporation,
subsidiaries of Johnson & Johnson (collectively referred to as "Ortho"), which
provides Ortho with worldwide marketing rights to the Company's injectable PFC
emulsions capable of transporting oxygen for therapeutic use, including
Oxygent. The product is being developed jointly by Alliance and Ortho, with
Ortho being responsible for substantially all of the remaining costs of
development.

In April 1995, the Company completed two clinical studies with healthy
volunteers using Oxygent. The purpose of these studies was to obtain
supplemental safety information and pharmacokinetic data regarding the
administration, distribution, metabolism and excretion (ADME study) of the
product. The results of these studies indicate that both the incidence and the
magnitude of certain transient side effects seen previously in some patients
have been diminished.

LIQUIVENT. LiquiVent (sterile perflubron) is in clinical development for
use as an intrapulmonary agent to treat acute respiratory failure, a disorder
that can result from many causes, including serious infections, traumatic
shock, severe burns, or inhalation of toxic substances. Acute respiratory
failure is generally characterized by an excessive inflammatory response, which
leads to blockage of the small airways and collapse of alveoli, resulting in
inadequate gas exchange and impairment of normal lung function.

Approximately 700,000 patients in the United States are placed on
mechanical gas ventilators each year for treatment of lung dysfunction due to
acute injuries or exacerbations of chronic lung diseases. The most urgent need
for these patients is to improve their blood oxygenation; however, the
prolonged use of high ventilatory pressures or high concentrations of inspired
oxygen can be damaging to the lungs. Each year, approximately 150,000 patients
in the United States suffering from respiratory failure progress to the most
severe form, referred to as acute respiratory distress syndrome ("ARDS"), where
the risk of death is 40-60%.

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LiquiVent is intended to be used in a technique called partial liquid
ventilation ("PLV"). In this procedure, the drug is administered through an
endotracheal tube into the lungs of a patient being supported by a mechanical
ventilator. The initial goal of LiquiVent/PLV therapy is to open collapsed
alveoli to improve pulmonary function and gas exchange. Once this has been
accomplished, ventilator pressure and oxygen concentration may be lowered to
minimize ventilator-induced lung trauma. In clinical studies, LiquiVent has
also been observed to encourage the migration of mucus and alveolar debris to
the central airways, where suctioning is easier. In conjunction with a possible
direct LiquiVent anti-inflammatory effect, the ability to remove such debris
may significantly reduce the excessive inflammatory response associated with
acute respiratory failure and enhance the effectiveness of other therapeutic
interventions, all serving to potentially reduce patient recovery time.

In May 1995, the Company completed Phase I/II clinical trials in which
adults, children and premature infants with ARDS who were treated with
LiquiVent showed improvement in both respiratory gas exchange and lung
mechanics. In July 1995, the Company commenced a Phase II clinical trial with
adult patients for LiquiVent in several academic medical centers throughout the
United States. The U.S. Food and Drug Administration ("FDA") has granted the
Company Subpart E status (expedited review) for the product in connection with
the treatment of ARDS.

IMAGENT US. Imagent US is a contrast agent that is an aqueous dispersion
of PFC vapor-containing microbubbles. The gas bubbles are highly echogenic and,
when delivered intravenously, generate signals that enhance ultrasonic images.
Imagent US is intended to be used to enhance ultrasound images of blood flow
abnormalities (perfusion defects), which can occur as a result of myocardial
infarctions, blood clots or solid tumors. Approximately 18 million scans of the
heart, vasculature, and abdominal organs are performed annually in the United
States. More than 50% of these procedures may potentially benefit from a cost-
effective contrast agent. In preclinical studies, Imagent US has been found to
enhance the ultrasound signal from perfused tissues and blood vessels using
both gray-scale and color Doppler imaging techniques.

To be successful in the marketplace, ultrasound contrast agents should
provide enhanced diagnostic images during several minutes of scanning, be easy
to use, and have a shelf life exceeding one year. Imagent US is being developed
to meet these requirements. It has the potential for assessing general vascular
disease, cardiac (ventricular) function and, most importantly, myocardial
perfusion. The agent may also be useful in detecting space-occupying lesions
(such as solid tumors) in organs such as the liver.

The Company has evaluated multiple formulations for Imagent US, each of
which has advantages for certain applications. Imagent US is in the preclinical
phase.

IMAGENT GI. In August 1993, the Company received FDA approval to market
Imagent GI, an oral contrast agent for use with magnetic resonance ("MR")
imaging. In September 1994, the Company discontinued promotion of Imagent GI.
The emphasis on cost containment in the delivery of health care services has
contributed to a reduction in the use of many medical products and diagnostic
procedures. MR imaging procedures, in particular, have come under increased
pricing pressure. Capitated MR procedure reimbursement and the lack of
specific reimbursement for oral contrast agents have limited the market
acceptance of Imagent GI.

IMAGENT LN AND IMAGENT BP. The formulations for Imagent LN, the Company's
contrast agent for imaging lymph nodes with computed tomography ("CT"), and
Imagent BP, an intravenous blood pool contrast agent for use with CT, are
similar to Oxygent. Because of the similarities, these products fall within
the scope of the License Agreement. Following discussions with Ortho, it was
determined in September

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1994, that development activities would focus on the oxygen-carrying uses of
the PFC emulsions and that development efforts on Imagent LN and Imagent BP
would be suspended.

SAT PAD(R). Sat Pad (MR imaging accessory) is a re-usable product
developed and marketed by Alliance that improves the quality of images obtained
by certain MR imaging techniques. Sat Pad kits contain conformable, PFC-filled
pads that are positioned externally over musculoskeletal areas, such as the
neck or ankle. Current MR imaging technology is, at times, limited in its
ability to detail musculoskeletal anatomy in the presence of fatty tissues.
Sat Pad can be used in conjunction with the approximately 2,200 MR scanners
which have "fat saturation" software in operation in the United States. When
used with such software, Sat Pad improves the ability of MR to suppress signals
generated by fat and, as a result, can improve the quality of MR images. Sat
Pad is distributed by dealers specializing in radiology products. Sales of Sat
Pad were approximately $176,000 for fiscal 1995. The Company expects that the
sales volume of Sat Pad will be limited and does not anticipate significant
revenue from the product.

The Company's products require substantial development efforts. The
Company may encounter unforeseen technical problems which may force abandonment
or substantial change in the development of a specific product or process, or
technological change or product development by others, any of which may have a
material adverse effect on the Company. The Company expends substantial
amounts of money on research and development and expects to do so for the
foreseeable future. In fiscal 1995, 1994, and 1993 the Company incurred
research and development expenses of $35,063,000, $31,605,000, and $24,767,000,
respectively.

COLLABORATIVE RELATIONSHIPS

In August 1994, the Company entered into the License Agreement, which
provides Ortho with worldwide marketing rights to the Company's injectable PFC
emulsions capable of transporting oxygen for therapeutic use, including
Oxygent. The product is being developed jointly by Alliance and Ortho, with
Ortho being responsible for substantially all of the remaining costs of
development. Ortho paid Alliance an initial license fee of $4.0 million and
will make other payments upon the achievement of certain milestones. In
addition, Ortho will pay to Alliance a royalty based upon its sales of the
product after commercialization. In conjunction with the License Agreement,
Johnson & Johnson Development Corporation purchased 1.5 million shares of
Alliance convertible preferred stock for $15.0 million and obtained a three
year warrant to purchase 300,000 shares of Common Stock at $15 per share.

In November 1994, the Company entered into a license agreement with Glaxo
for the use of the Company's fluorinated surfactants in certain metered dose
inhalers ("MDIs") which deliver Glaxo's respiratory drug formulations. Glaxo is
responsible for the development and marketing of MDI products incorporating the
Company's surfactant. The agreement provides for an initial license fee and
milestone payments to Alliance, which are not expected to exceed $2.5 million
in the aggregate, with royalties to Alliance following commercialization.

The Company is seeking collaborative relationships for the marketing of
LiquiVent and Imagent US on terms conceptually similar to those contained in
the License Agreement.

There can be no assurances that the Company will be able to enter into
future collaborative relationships on acceptable terms. The termination of any
collaborative relationship or failure to enter into such relationships may
limit the ability of the Company to develop its technology and may have a
material adverse effect on the Company's business.

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MARKETING

Sat Pad is currently distributed through certain distributors of MR
equipment and imaging products. Under the terms of the License Agreement,
Ortho has exclusive worldwide marketing rights to Oxygent and any other
injectable PFC emulsion products capable of transporting oxygen for therapeutic
use. The Company has not yet selected its marketing partners for LiquiVent or
Imagent US.

MANUFACTURING

The Company manufactures all of its products for preclinical and clinical
trials. Oxygent is produced in Alliance's San Diego facility, which includes
both pilot-scale (18 liter) and intermediate-scale (250 liter) production
capability. The Company believes that, if and when approved by the FDA, the
intermediate scale-up facility will provide sufficient production capacity for
future clinical trials and market launch. A larger commercial-scale facility
will be required for products in the future. Under the terms of the License
Agreement, Ortho has the right to elect to manufacture Oxygent itself or have
the Company continue to do so, which election must be made at or prior to the
filing of a new drug application. If Alliance manufactures Oxygent for Ortho,
the transfer price will be determined by Ortho's net sales price for the
product, provided that Alliance will not transfer it for less than Alliance's
burdened cost. The Company has not selected a commercial-scale site or obtained
any regulatory approvals. Construction of such a facility will depend upon
regulatory approvals, product development, and capital resources, among other
things.

LiquiVent is manufactured for clinical trials at the Company's Otisville,
New York facility. It is the same drug substance for which Alliance obtained
FDA approval in August 1993 as an oral contrast agent for MR imaging (Imagent
GI). As a result, certain chemistry, manufacturing, and control requirements
for perflubron have been accepted by the FDA, which may benefit the Company in
the regulatory review process for certain other products.

Imagent US is manufactured for preclinical studies at the San Diego
facility, using a proprietary process to form PFC vapor-containing dry
microbubbles, which are reconstituted with sterile water just prior to use. The
existing process is satisfactory for production of quantities of Imagent US for
clinical trials and to support introductory marketing after commercialization.

SOURCES AND AVAILABILITY OF RAW MATERIALS

The Company has obtained perflubron, the principal raw material utilized
in Oxygent and LiquiVent, from several large chemical suppliers, and believes
that it has sufficient inventory of the drug substance for clinical trials.

SUBSIDIARY ACTIVITIES

Antigenized antibodies utilize human immunoglobulin as a platform to carry
specific peptides to modulate the immune system. The presentation of the
peptide is accomplished by use of genetic engineering techniques to make a
substitution in the complementarity determining regions (CDR) of the antibody.
Depending on the disease and the antigen, antigenized antibodies may be used to
either stimulate antibody production (as in a vaccine) to prevent disease or to
down-regulate antibody production (as in a tolerogen) to treat certain
autoimmune disorders. Antigenized antibodies provide for a delivery system with
advantages over the free peptide, including its half-life in blood circulation
and the ability of the peptide to stimulate both a cellular and a humoral
antibody response. In this manner a cost-effective combination vaccine or
vaccine/tolerogen therapy may be engineered by using a common platform and a
common manufacturing

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process. Further chemical modification of these molecules may obviate the
requirement for adjuvants during immunization or tolerization. The Company,
through its Astral, Inc. ("Astral") subsidiary, is developing a prototype
vaccine for an infectious disease and a prototype tolerogen for an autoimmune
disease.

For strategic business reasons, in January 1995 Astral terminated
licensing and research agreements which it initiated with the University of
Pennsylvania in September 1993.

In June 1995, the Company formed a subsidiary, Talco Pharmaceutical, Inc.
("Talco"), which entered into licensing and research agreements with Temple
University, whereby Talco agreed to make payments to Temple in exchange for
certain technology rights, and Temple and others received an initial seven
percent ownership interest in Talco.

The Company intends to consider other technologies that may be available
for licensing and research agreements with other institutions or inventors.
Alliance intends, where appropriate, to seek outside sources of funding for the
operation of its subsidiaries. There can be no assurance that such funding
will be available on terms favorable to the subsidiaries, if at all. If new
license and research agreements are added and the Company is not able to obtain
outside sources of funding for its subsidiaries, research support by the
Company to its subsidiaries is expected to increase significantly.

COMPETITION

The biotechnology and pharmaceutical industries are highly competitive.
There are many pharmaceutical companies, biotechnology companies, public and
private universities and research organizations actively engaged in research
and development of products which may be similar to Alliance's products. Many
of the Company's existing or potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market products. These companies may
develop and introduce products and processes competitive with or superior to
those of the Company. There can be no assurance that the Company will be able
to compete successfully.

Well-publicized side effects associated with the transfusion of human
donor blood have spurred efforts to develop a blood substitute. Two primary
approaches have shown promise as temporary oxygen carriers: PFC emulsions and
hemoglobin solutions. Hemoglobin development efforts include: stroma-free,
chemically modified hemoglobin from human or bovine red blood cells, and the
use of genetic engineering to produce recombinant hemoglobin. There are
several companies working on hemoglobin solutions as a blood substitute, some
of which have entered clinical trials. One major U.S. pharmaceutical company
is collaborating with a company developing a recombinant hemoglobin-based blood
substitute. Alliance is aware of two other companies developing PFC-based
temporary oxygen carriers, one of which has entered clinical trials.

Although liquid ventilation therapy has been in the research phase for the
last two decades, the Company is unaware of any potential competition which has
reached the clinical trial stage. However, other companies may be evaluating
compounds with the possibility of entering this field. If major manufacturers
of PFCs entered the field, the Company could face competition from companies
with substantially greater resources. The Company believes that its patent
position and stage of research and development give it an advantage over these
potential competitors.

A number of larger companies currently market a broad range of contrast
agents. One U.S. pharmaceutical company has recently gained FDA approval to
market an ultrasound contrast agent and other

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companies are known to be developing similar products. One of these companies
is believed to have a product in Phase III clinical trials, another has
reported that it has completed a Phase II clinical trial, and a third is
believed to be in Phase II clinical trials.

GOVERNMENT REGULATIONS

The Company's products require governmental approval before production and
marketing can commence. The regulatory approval process is administered in the
United States by the FDA and by similar agencies in foreign countries. The
process of obtaining regulatory clearances or approvals is costly and time
consuming. The Company cannot predict how long the necessary clearances or
approvals will take or whether it will be successful in obtaining them.

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

In clinical testing, a three-phase progression of studies includes:
<TABLE>
<CAPTION>

PHASE DESCRIPTION PURPOSE
----- ----------- -------
<S> <C> <C>
I The first trials of a new drug To gain preliminary human
in humans; the drug is given for pharmacology and safety
a short period to a small number of information concerning the drug
healthy volunteers or patients
suffering from the disease for
which the drug is intended

II Pilot studies on a small number of To determine if the drug has the intended
patients in the population for effect and to approximate the
which the drug is intended therapeutic range

III Expanded trials in the target Pivotal studies to determine the safety,
patient population optimal dosages, and efficacy of the drug
</TABLE>

Following completion of these studies, a new drug application must be
submitted to and approved by the FDA in order to market the product in the
United States. Similar applications are required in foreign countries. There
can be no assurance that, upon completion of the foregoing trials, the results
will be considered adequate for government approval. If and when approval is
obtained to market a product, the FDA's (or applicable foreign agency's)
regulations will govern manufacturing and marketing activities.

The FDA has established a designation to speed the availability of new
therapies for life-threatening or severely debilitating diseases. This
designation, defined in Subpart E of the FDA's investigational new drug
regulations, may expedite clinical evaluation and regulatory review of some new
drugs.

Perflubron is an eight-carbon halogenated fluorocarbon liquid. Certain
halogenated fluorocarbons (primarily the gaseous chlorofluorocarbons) have been
implicated in stratospheric ozone depletion. The FDA issued a Finding of No
Significant Impact under the National Environmental Protection Act in
connection

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with the approval for marketing Imagent GI, a perflubron-based drug;
however, perflubron remains subject to regulation by governmental agencies.

In addition to FDA regulation, the Company is subject to regulation by
various governmental agencies including, without limitation, the Drug
Enforcement Administration, the United States Department of Agriculture, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and the California State Department of Health Services, Food
and Drug Branch. Such regulation, by governmental authorities in the United
States and other countries, may impede or limit the Company's ability to
develop and market its products.

PATENTS AND PROPRIETARY RIGHTS

The Company is diligent in seeking protection for its products, processes,
technologies, and ongoing improvements. The Company is pursuing patent
protection in the United States and in foreign countries that it regards as
important for future endeavors. Numerous patent applications have been filed
in the European Patent Office, Australia, Canada, Ireland, Israel, Japan,
Norway, and South Africa, and patents have been granted in some of these
countries.

The Company has six issued U.S. patents related to or covering PFC
emulsions which are the basis for its Oxygent product. The issued patents and
other pending patent applications cover specific details of emulsified PFCs
which are covered by product-by-process claims, method claims describing their
manufacture, and some composition claims. These broadly cover high
concentration PFC emulsions, typically 40-125% weight per volume (although some
are limited to 75-125% weight per volume), and manufacturing methods.

In September 1994, Alliance received a United States patent for its
preferred method of using blood substitutes to facilitate oxygen delivery. The
patent is pending in Europe, Japan, and other countries. The issued claims
cover a method for facilitating autologous blood use in conjunction with
administering oxygen enriched gas and oxygen carriers that contain
fluorochemicals, as well as those derived from human, plant, or recombinant
hemoglobin, in order to reduce or eliminate the need for allogeneic blood
transfusions during surgery.

The Company has filed U.S. and foreign patent applications on its method
of using oxygen-carrying PFCs to enhance respiratory gas exchange utilizing
conventional gas ventilators. In August 1995, Alliance received a U.S. patent
covering its method of administering LiquiVent to patients. The Company has
patent applications pending which cover the use of PFCs to deliver drugs to the
lungs and to wash debris from, and open, collapsed lungs. The Company also has
patent applications pending which cover apparatus for liquid ventilation using
PFCs.

The Company has filed four patent applications concerning the composition,
manufacture and use of novel stabilized microbubble compositions, which are
based on its discovery that PFC gases, in combination with appropriate
surfactants, can stabilize microbubbles that are effective for ultrasonic
imaging.

The Company has patents that have issued in the U.S. and abroad, and
additional pending patents, covering its novel fluorinated surfactants. These
compounds may be useful in oxygen-carrying or drug-transport compositions, and
in liposomal formulations that have therapeutic and diagnostic applications.
Additional fluorinated compounds disclosed in pending applications may be
employed in cosmetics, protective creams, and lubricating agents. Compositions
that can be structured as emulsions, microemulsions, and gels

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may be useful as contrast enhancement agents for radiography and scintigraphy.
The Company also has pending applications relating to microstructures (tubules,
helixes, fibers) that may have uses in the fields of medicine, biomolecular
engineering, microelectronics, and electro-optics.

Aside from the issued patents and allowed applications referred to above,
however, no assurance can be given that any of these applications will result
in issued U.S. or foreign patents. Although patents are issued with a
presumption of validity and require a challenge with a high degree of proof to
establish invalidity, no assurance can be given that any issued patents would
survive such a challenge and would be enforceable.

The Company also attempts to protect its proprietary products, processes,
and other information by relying on trade secret laws and non-disclosure and
confidentiality agreements with its employees, consultants and certain other
persons who have access to such products, processes, and information. The
agreements affirm that all inventions conceived by employees are the exclusive
property of the Company, with the exception of inventions unrelated to the
Company's business and developed entirely on the employee's own time.
Nevertheless, there can be no assurance that these agreements will afford
significant protection against or adequate compensation for misappropriation or
unauthorized disclosure of the Company's trade secrets.

PRODUCT LIABILITY CLAIMS AND UNINSURED RISKS

The sale or use of the Company's present products and any other products
or processes that may be developed or sold by the Company may expose the
Company to potential liability from claims by end-users of such products or by
manufacturers or others selling such products, either directly or as a
component of other products. While the Company has product liability
insurance, there can be no assurance that the Company will continue to maintain
such insurance or that it will provide adequate coverage. If the Company is
held responsible for damages in a product liability suit, the Company's
financial condition could be materially and adversely affected.

EMPLOYEES

As of August 31, 1995, the Company had 186 full-time employees, of whom
150 were engaged in research and development, production and associated
support, five in business development, sales and marketing, and 31 in general
administration. There can be no assurance that the Company will be able to
continue attracting and retaining sufficient qualified personnel in order to
meet its needs. None of the Company's employees is represented by a labor
union. The Company believes that its employee relations are satisfactory.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following are the executive officers of the Company:

DUANE J. ROTH. Mr. Roth, who is 45, has been President and Chief
Executive Officer since 1985 and Chairman since October 1989. Prior to joining
Alliance, Mr. Roth served as President of Analytab Products, Inc., an American
Home Products company involved in manufacturing and marketing medical
diagnostics, pharmaceuticals and devices. For the previous ten years, he was
employed in various sales, marketing and general management capacities by Ortho
Diagnostic Systems, Inc., a Johnson & Johnson company, which is a manufacturer
of diagnostic and pharmaceutical products. Mr. Roth's brother, Theodore D.
Roth, is an Executive Vice President of the Company.

11
<PAGE>

HAROLD W. DELONG. Mr. DeLong, who is 47, has been Executive Vice
President - Business Development and Marketing for the Company since February
1989. Mr. DeLong has been employed for more than 20 years in the medical
diagnostics and pharmaceutical industry in various sales, marketing and
management positions. Prior to joining Alliance, Mr. DeLong was Vice
President, Sales and Marketing for Murex Corporation, a company participating
in the infectious disease diagnostics market. He previously served as
Director, Sales and Marketing for Becton Dickinson's Immunocytometry Systems
division. Mr. DeLong was also previously employed by Ortho Diagnostic Systems,
Inc., for over ten years, where his last position was Director of the
Hemostasis and Chemistry Products business units.

THEODORE D. ROTH. Mr. Roth, who is 44, has been Executive Vice President
and Chief Financial Officer of the Company since November 1987 and Secretary
since 1990. For more than ten years prior to joining the Company, he was
General Counsel of SAI Corporation, a company in the business of operating
manufacturing concerns, and General Manager of Holland Industries, Inc., a
manufacturing company. Mr. Roth received his J.D. from Washburn University and
an LL.M. in Corporate and Commercial Law from the University of Missouri in
Kansas City. He is the brother of Mr. Duane J. Roth, the Chairman of the
Company.

B. JACK DEFRANCO. Mr. DeFranco, who is 50, has been Vice President -
Marketing for Alliance since January 1991. He has more than 20 years
experience in sales and marketing in the medical products industry. He was
President of Orthoconcept Inc., a private firm marketing orthopedic and
urological devices from 1986 through 1990. Prior to 1986, he was Director of
Marketing and New Business Development for Smith and Nephew Inc., which markets
orthopedic and general wound-care products and he served in various sales and
marketing positions with Ortho Diagnostic Systems, Inc. Mr. DeFranco received
an M.B.A. from Fairleigh Dickinson University.

N. SIMON FAITHFULL, M.D., PH.D. Dr. Faithfull, who is 55, has been Vice
President - Medical Research for the Company since September 1990. Dr.
Faithfull joined Alliance after serving as Director of Medical Research for
Delta Biotechnology Ltd. from 1989 to 1990. He has also served as Senior
Lecturer in Anesthesia at the University of Manchester (UK), and has held
various academic appointments and clinical anesthesia positions at Erasmus
University (Netherlands), Tulane University and the University of Alabama
(Birmingham) for more than 15 years. He has served as Secretary of the
International Society on Oxygen Transport to Tissue. He received his Ph.D.
from Erasmus University, Rotterdam and his M.D. from London University.

HENRY A. GRAHAM, PH.D. Dr. Graham, who is 52, has been Vice President -
Technology Development since January 1990. In his more than 20 years in
industrial research, he has directed groups involved in the development of
biological and immunodiagnostic products. Prior to joining Alliance, he worked
for Johnson & Johnson for 17 years on a broad range of projects including
injectable human biologicals, immunohematology reagents, immunoassay reagents
and instrument systems. Dr. Graham was Director of Product Development for
Ortho Diagnostic Systems, Inc. for at least five years prior to 1990. During
his tenure at Johnson & Johnson, he was the recipient of several awards,
including the Corporate Medal for Outstanding Research. Dr. Graham received a
Ph.D. in immunology from Rutgers University.

RONALD M. HOPKINS, PH.D. Dr. Hopkins, who is 53, has been Vice President
- Research and Development since May 1990. Prior to joining Alliance, Dr.
Hopkins spent 20 years with Mallinckrodt Medical, Inc. As Vice President at
Mallinckrodt his responsibilities primarily involved identification and
development of various diagnostic x-ray, magnetic resonance, ultrasound and
radiopharmaceutical imaging agents as well as angiographic catheters. In
addition to product and business development experience, Dr.

12
<PAGE>

Hopkins has an extensive background in cardiovascular pharmacology and
toxicology research, as well as sterile pharmaceutical formulation and
production. Dr. Hopkins received a Ph.D. in pharmacology from the University of
Maryland.

GORDON L. SCHOOLEY, PH.D. Dr. Schooley, who is 48, has been Vice
President - Clinical Research and Regulatory Affairs since January 1989. Dr.
Schooley has been employed for over 20 years in research and development in the
pharmaceutical industry. Prior to joining Alliance in 1989, Dr. Schooley was
Vice President of Clinical Research and Regulatory Affairs for Newport
Pharmaceuticals, a company developing antiviral drugs. For the previous eight
years, he was Director of Clinical Research and Biostatistics for Allergan
Pharmaceuticals, a division of SmithKline Beecham, developing ophthalmologic
and dermatologic drugs and devices. He was also employed by McGaw Laboratories
as Manger of Biostatistics for parenteral products and by The Upjohn Company as
a senior biostatistician for analgesic and CNS drugs. Dr. Schooley received a
Ph.D. from the University of Michigan School of Public Health.

ITEM 2. PROPERTIES

FACILITIES

The Company has facilities in two locations: Otisville, New York and San
Diego, California. The Otisville site, where the Company has established the
Imagent GI and Sat Pad production facility, includes laboratories and
administrative offices. In San Diego, California, where the Company maintains
its principal executive offices, performs research and development on its PFC-
based products and has its emulsion products manufacturing facility, the
Company has approximately 70,000 square feet of laboratory, manufacturing and
office space in two leased facilities. The Company believes its existing
facilities will be adequate to meet its needs for the next twelve months.

The Company purchased the Otisville site from the New York City Public
Development Corporation ("PDC") in June 1983. In connection with the
acquisition, the Company entered into a land use agreement ("Land Use
Agreement") with New York City and the PDC. The Company estimates that the
cost of complying with the Land Use Agreement for fiscal 1995 was approximately
$100,000. The provisions of the Land Use Agreement are "covenants running with
the land," which may bind the Company and subsequent owners of the Otisville
site for a substantial period of time.

While the Company believes that it can produce materials for clinical
trials and initial market launch for its emulsion products at its existing San
Diego facility and for LiquiVent at its Otisville, New York facility, it may
need to expand its commercial manufacturing capabilities for its products in
the future. This expansion 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 or obtained any regulatory approvals for
construction of a commercial production facility for its products. The
projected location and completion date of any production facility will depend
upon regulatory and development activities and other factors. The Company
cannot predict the amount that it will expend for the construction of such
production facility, and there can be no assurance as to when or whether the
FDA will determine that such facility conforms with Good Manufacturing
Practices. The License Agreement grants an option to Ortho to elect to
manufacture the emulsion products referred to therein, or to require the
Company to manufacture such products at a negotiated price.

13
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

During September 1992, the Company and certain of its officers and
directors were named as defendants in several lawsuits filed in the U.S.
District Court for the Southern District of California by certain shareholders.
The actions were consolidated into one class action lawsuit titled "In re
Alliance Pharmaceutical Securities Litigation." The complaint claimed, among
other things, that the defendants failed to disclose certain problems with two
of the Company's products under development, which conduct is alleged to have
portrayed falsely the Company's financial condition. On May 25, 1995, summary
judgment was granted in favor of the Company and its officers and directors.
Attorneys for the plaintiffs have filed a notice of appeal. The Company
believes the eventual outcome of the litigation will not have a material
adverse effect on the Company's financial condition.

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

No matters were submitted to a vote of the Company's stockholders during
the last quarter of Alliance's fiscal year ended June 30, 1995.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The common stock is traded in the over-the-counter market, and prices
therefor are quoted on the NASDAQ National Market System under the symbol ALLP.

The following table sets forth, for the periods indicated, the high and
low sale prices of the common stock as reported on NASDAQ, without retail mark-
up, markdown or commission.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 1995
Quarter ended September 30, 1994 $12.00 $ 8.00
Quarter ended December 31, 1994 $ 8.75 $5.625
Quarter ended March 31, 1995 $7.625 $ 4.25
Quarter ended June 30, 1995 $8.625 $ 4.75
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal 1994
Quarter ended September 30, 1993 $14.00 $ 8.50
Quarter ended December 31, 1993 $10.75 $ 7.75
Quarter ended March 31, 1994 $10.50 $ 8.00
Quarter ended June 30, 1994 $12.25 $ 8.25
</TABLE>

On August 31, 1995, the closing price of the Company's common stock was
$8.50.

14
<PAGE>

The Company has not paid dividends on its common stock and the Board of
Directors does not anticipate paying cash dividends in the foreseeable future.

On August 31, 1995, the approximate number of record holders of the
Company's common stock was 2,200. The Company believes that, in addition,
there are in excess of 20,000 beneficial owners of its common stock whose
shares are held in street name and, consequently, the Company is unable to
determine the actual number of beneficial holders thereof.

ITEM 6. SELECTED FINANCIAL DATA

The following information has been summarized from the financial
statements included elsewhere herein and should be read in conjunction with
such financial statements and the related notes thereto (in thousands except
per share amounts):
<TABLE>
<CAPTION>
Years ended June 30,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $ 11,816 $ 409 $ 2,370 $ 1,805 $ 1,582
Net loss $(29,717) $(36,946) $(26,380) $(21,766) $(17,702)
Net loss per common share $ (1.35) $ (1.83) $ (1.39) $ (1.25) $ (1.24)
<CAPTION>
June 30,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 22,346 $ 19,446 $ 39,745 $ 65,578 $ 15,643
Total assets $ 56,030 $ 53,132 $ 72,537 $ 97,976 $ 44,848
Long-term debt and other $ 843 $ 348 $ 447 $ 756 $ 8,967
Stockholders' equity $ 50,077 $ 49,825 $ 69,144 $ 94,553 $ 33,855
</TABLE>

ITEM 7. 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.)

Alliance has devoted substantial resources to research and development
related to its pharmaceutical products based upon PFC and emulsion
technologies. The Company has been unprofitable since inception and expects to
incur operating losses for at least the next several years due to continued
requirements for research and development, preclinical testing and clinical
trials, regulatory activities, and commercial manufacturing start-up. The
amount of net losses and the time required by the Company to achieve
profitability are highly uncertain. There can be no assurance that the Company
will be able to achieve profitability at all or on a sustained basis.

15
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Through June 1995, the Company financed its activities primarily from
public and private sales of equity and funding from collaborations with
corporate partners. In April 1995, the Company completed offerings of 3.2
million shares of newly issued common stock, resulting in net proceeds to the
Company of approximately $14.3 million. In August 1994, the Company and Ortho
entered into the License Agreement for injectable PFC emulsions capable of
transporting oxygen for therapeutic use, including Oxygent. Under the License
Agreement, Ortho paid to Alliance an initial fee of $4.0 million and will make
other payments upon the achievement of certain milestones. Ortho is
responsible for substantially all the remaining costs of developing the
products and will pay Alliance a royalty based upon sales of products after
commercialization. As of June 30, 1995, the Company had received research
revenue payments of $5.1 million from Ortho, and had recorded a receivable of
$2.0 million, representing funding due from Ortho for development costs
incurred. In conjunction with the License Agreement, Johnson & Johnson
Development Corp. ("J&JDC") purchased 1.5 million shares of Alliance
convertible preferred stock for $15.0 million and obtained a three-year warrant
to purchase 300,000 shares of Alliance common stock at $15 per share.

In August 1995, the Company entered into a loan and security agreement
under which the Company received $2.2 million, and the Company may borrow up to
an additional $800,000 if certain conditions are met. Amounts borrowed under
the agreement are secured by fixed assets, and are to be repaid over three
years commencing in September 1995. If certain financial covenants are not
satisfied, the note or notes may become due and payable. The Company has
financed substantially all of its office and research facilities and related
leasehold improvements under operating lease arrangements.

The Company had net working capital of $22.3 million at June 30, 1995
compared to $19.4 million at June 30, 1994. The Company's cash, cash
equivalents, and short-term investments increased to $23.5 million at June 30,
1995 from $21.1 million at June 30, 1994. The increase resulted primarily from
$15.0 million received from the sale of convertible preferred stock to J&JDC,
$14.3 million received from the April 1995 offerings, and from receipts of $4.5
million of license revenue and $5.1 million of research revenue. These cash
receipts were offset by cash used for operating expenses of $35.4 million and
from property, plant, and equipment additions of $1.3 million. Capital
expenditures for 1996 are expected to increase compared to 1995. The Company's
operations to date have consumed substantial amounts of cash, and are expected
to continue to do so over 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
health care system, 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.

In December 1993, in order to obtain a commitment for a long-term supply
of raw material for both clinical trials and anticipated future production
requirements, the Company entered into an agreement with a supplier under which
the Company was obligated to make payments to the vendor through May 1997
based, in part, upon the achievement of certain milestones. Some or all of the
payments may be reimbursed to the Company by existing and future collaborative
partners.

16
<PAGE>

The Company expects to incur substantial additional expenditures
associated with product development. The Company will seek additional
collaborative research and development relationships with suitable corporate
partners for its non-licensed 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 funds from these sources will be available on
favorable terms, if at all. If adequate funds are not available, the Company
may be required to delay, scale back, or eliminate one or more of its 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.

Alliance anticipates that its current capital resources, expected revenues
from the License Agreement, cash proceeds from the loan and security agreement,
its investments, and product sales, will be adequate to satisfy its capital
requirements and fund current and planned operations for approximately one
year. The Company's future capital requirements will depend on many factors,
including 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 can produce materials for clinical
trials and the initial market launch for its emulsion products at its existing
San Diego facility and for LiquiVent at its Otisville facility, it may need to
expand its commercial manufacturing capabilities for its products in the
future. This expansion 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 or obtained any regulatory approvals for
construction of a commercial production facility for its products. The
projected location and completion date of any production facility will depend
upon regulatory and development activities and other factors. The Company
cannot predict the amount that it will expend for the construction of such a
production facility, and there can be no assurance as to when or whether the
FDA will determine that such facility conforms with Good Manufacturing
Practices. The License Agreement provides an option to Ortho to elect to
manufacture the emulsion products referred to therein, or to require the
Company to manufacture such products at a negotiated price.

The Company's business is subject to significant risks, including the
uncertainties associated with the lengthy regulatory approval process and with
obtaining and enforcing patents important to the Company's business and
possible competition from other products. Even if the Company's products
appear promising at an early stage of development, they may not reach the
market for a number of 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 by Alliance, 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 health care costs and potential legislation or regulation of
health care pricing.

17
<PAGE>

RESULTS OF OPERATIONS

1995 AS COMPARED WITH 1994
--------------------------

The Company's license and research revenue increased to $11.6 million in
1995 compared to $163,000 in 1994. The increase was primarily due to $4.0
million of license revenue and $7.1 million of research revenue derived from
the License Agreement.

The Company incurred total operating expenses of $42.1 million for 1995.
Operating expenses include $5.0 million for purchases of raw material for
certain products currently being developed, $1.8 million for Oxygent costs
incurred prior to execution of the License Agreement, $545,000 for products no
longer promoted or developed by Alliance, and a $1.7 million non-cash charge
related to the license of previously capitalized product rights. The $5.0
million charge for the purchase of raw materials arises from a December 1993
agreement the Company entered into with a supplier. In 1996, charges under the
agreement will be substantially less than in 1995. In January 1994, the
Company regained from Boehringer Ingelheim International GmbH ("BII") all
marketing and manufacturing rights to Imagent, diagnostic imaging agents, and
Oxygent products outside of North America. In conjunction with the acquisition
of the marketing and manufacturing rights from BII, the Company recorded
product rights of $1.8 million, based on the value of warrants issued to
acquire the rights. The unamortized portion ($1.7 million) of these product
rights was charged to research and development expense when the Company
licensed these product rights to Ortho.

Research and development expenses increased by 11% to $35.1 million for
1995 compared to $31.6 million for 1994. The growth in expenses is primarily
a result of increased raw material costs and the product rights charge
discussed above and increased salary costs. These expenses were partially
offset by a reduction in payments to universities and outside consultants.

General and administrative expenses decreased by 3% to $7.1 million for
1995 compared to $7.3 million for 1994. During the fourth quarter of 1995, the
Company was successful in recovering $1.6 million from its insurance carrier to
offset professional fees incurred in connection with the defense of its
lawsuit.

Investment and other income was $1.2 million for 1995 compared to $1.6
million for 1994. The decline in investment revenue was primarily a result of
lower average cash balances.

Alliance expects to incur substantial operating losses over the next
several years due to continuing and increasing expenses associated with its
research and development programs. Operating losses may fluctuate from quarter
to quarter as a result of the 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.

18
<PAGE>

1994 AS COMPARED WITH 1993
--------------------------

The Company had net product revenue of $246,000 for 1994 compared to
$50,000 for 1993. In August 1993, the Company received FDA approval to market
Imagent GI. The increase in net product revenue from 1993 to 1994 was
primarily attributable to sales of Imagent GI and Sat Pad. Sales of Imagent GI
and Sat Pad were not expected to provide significant revenue to the Company.
In September 1994, the Company discontinued promotional activities for Imagent
GI. The majority of the Company's products are in the development stage and
there can be no assurance as to whether or when it will be able to increase its
revenues significantly.

License and research revenue decreased to $163,000 for 1994 compared to
$2.3 million for 1993. The Company's 1993 license and research revenue was
primarily derived from the BII agreements. In July 1993, the BII agreements
were modified, which resulted in BII discontinuing all contract payments.

Research and development expenses increased by 28% to $31.6 million for
1994 compared to $24.8 million for 1993. The growth in expenses reflects
increases in staffing, costs of preclinical testing and clinical trials, and
additional laboratory supplies and equipment associated with the growth of the
Company's research and development efforts. Due to the discontinuance of
Imagent GI promotional activities, the Company reduced its perflubron
inventories to the estimated net realizable value from sales of Imagent GI,
resulting in a charge of $2.1 million.

General and administrative expenses increased by 14% to $7.3 million for
1994 compared to $6.4 million for 1993. The increases were principally due to
increases in staffing to support the growth of product research and development
efforts, and professional fees incurred in connection with the defense of the
lawsuit.

Investment and other income was $1.6 million for 1994 compared to $2.4
million for 1993. The decline in investment revenue was primarily a result of
lower average cash and short-term investment balances.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Table of Contents to Consolidated Financial Statements on page F-1
below for a list of the Financial Statements being filed herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning the executive officers of the Company is contained
in Part I of this Annual Report on Form 10-K under the caption "Executive
Officers of the Registrant." Information concerning the directors of the
Company is incorporated by reference to the section entitled "Election of
Directors" that the Company intends to include in its definitive proxy
statement for Alliance's November 1995 Annual Meeting of Shareholders (the
"Proxy Statement"). Copies of the Proxy Statement will be duly filed with the
commission

19
<PAGE>

pursuant to Rule 14a-6(c) promulgated under the Securities Exchange Act of
1934, as amended, not later than 120 days after the end of the fiscal year
covered by its Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The sections labeled "Executive Compensation" and "Election of Directors"
to appear in the Company's Proxy Statement are incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section labeled "Ownership of Voting Securities by Certain Beneficial
Owners and Management" to appear in the Company's Proxy Statement is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The sections labeled "Election of Directors" and "Executive Compensation"
to appear in the Company's Proxy Statement are incorporated herein by
reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents Filed as Part of the Report.
--------------------------------------

1. See Table of Contents to Consolidated Financial Statements on
Page F-1 for a list of Financial Statements being filed herein.

2. See Pages F-2 and F-3 for the Independent Auditors' Reports
being filed herein.

3. See Exhibits below for a list of all Exhibits being filed or
incorporated by reference herein.

(b) None

(3) (a) Restated Certificate of Incorporation of the Company, as amended
through August 31, 1994. (Incorporated by reference to Exhibit 3(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1994
(the "1994 10-K").)

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

(10) (a) Lease Agreement, as amended, between the Company and Hartford
Accident and Indemnity Company relating to the Company's San Diego, California
facilities. (Incorporated by reference to Exhibit 10(x) to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993.)

20
<PAGE>

(b) Loan Modification Agreement between the Company and Theodore
Roth, dated May 24, 1994 - Management contract or compensatory plan or
arrangement required to be filed. (Incorporated by reference to Exhibit 10(d)
to the 1994 10-K.)

(c) Formula Award of Stock Options for Non-employee members of the
Board of Directors as approved by shareholders of the Company - Management
contract or compensatory plan or arrangement required to be filed.
(Incorporated by reference to Exhibit 10(e) to the 1994 10-K.)

(d) License Agreement dated August 16, 1994 among the Company, Ortho
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute.
(Incorporated by reference to Exhibit 10(f) to the 1994 10-K.)

(e) Stock and Warrant Purchase Agreement dated August 16, 1994
between the Company and Johnson & Johnson Development Corporation.
(Incorporated by reference to Exhibit 10(g) to the 1994 10-K.)

(23.1) Consent of Independent Auditor - Ernst & Young LLP

(23.2) Consent of Independent Auditor - Deloitte & Touche LLP

21
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

ALLIANCE PHARMACEUTICAL CORP.
(Registrant)

Date: September 19, 1995 By: /s/ Duane J. Roth
-------------------
Duane J. Roth
President

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

/s/ Duane J. Roth President, Chief Executive September 19, 1995
---------------------------- Officer and a Director
Duane J. Roth

/s/ Theodore D. Roth Executive Vice President September 19, 1995
---------------------------- and Chief Financial Officer
Theodore D. Roth

/s/ Tim T. Hart Controller, Chief Accounting September 19, 1995
---------------------------- Officer
Tim T. Hart

/s/ Carroll O. Johnson Director September 19, 1995
----------------------------
Carroll O. Johnson

/s/ Stephen M. McGrath Director September 19, 1995
----------------------------
Stephen M. McGrath

/s/ Helen M. Ranney, M.D. Director September 19, 1995
----------------------------
Helen M. Ranney, M.D.

/s/ Donald E. O'Neill Director September 19, 1995
----------------------------
Donald E. O'Neill

/s/ Jean G. Riess, Ph.D. Director September 19, 1995
----------------------------
Dr. Jean Riess

/s/ Thomas F. Zuck. M.D. Director September 19, 1995
----------------------------
Thomas F. Zuck, M.D.

22
<PAGE>

EXHIBIT INDEX
-------------
Certain exhibits to this Report on Form 10-K have been incorporated by
reference. For a list of exhibits, see Item 14 hereof.

The following exhibits are being filed herewith:
<TABLE>
<CAPTION>
Location of
Exhibit in
Sequential
Numbering
Number Document System
------ -------- -----------
<S> <C> <C>
(23.1) Consent of Independent Auditor - Ernst & Young LLP

(23.2) Consent of Independent Auditor - Deloitte & Touche LLP

</TABLE>

23
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------

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

Page No.
----------
<S> <C>

Independent Auditors' Reports F-2 - F-3

Consolidated Balance Sheets at June 30, 1995 and 1994 F-4

Consolidated Statements of Operations for the Years
Ended June 30, 1995, 1994 and 1993 F-5

Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1995, 1994 and 1993 F-6

Consolidated Statements of Cash Flows for the Years
Ended June 30, 1995, 1994 and 1993 F-7

Notes to Consolidated Financial Statements F-8 - F-14

</TABLE>

No consolidated financial statement schedules are filed herewith because they
are not required or not applicable, or because the required information is
included in the financial statements or notes thereto.

F-1
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Alliance Pharmaceutical Corp.

We have audited the accompanying consolidated balance sheets of Alliance
Pharmaceutical Corp. and subsidiaries as of June 30, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended June 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements of Alliance Pharmaceutical
Corp. and subsidiaries for the year ended June 30, 1993, were audited by other
auditors whose report, dated July 27, 1993, expressed an unqualified opinion on
those statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the 1995 and 1994 financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Alliance Pharmaceutical Corp. and subsidiaries at June 30, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended June 30, 1995, in conformity with
generally accepted accounting principles.

/s/ Ernst & Young LLP
Ernst & Young LLP

San Diego, California
July 26, 1995

F-2
<PAGE>

Independent Auditors' Report
----------------------------

The Board of Directors of
Alliance Pharmaceutical Corp.:

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Alliance Pharmaceutical Corp. and
Subsidiaries (the "Company") for the year ended June 30, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of the Company's operations and its cash flows
for the year ended June 30, 1993 in conformity with generally accepted
accounting principles.

/s/ Deloitte & Touche LLP

New York, New York
July 27, 1993

F-3
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30,
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
------

Current assets:
Cash and cash equivalents (Note 3) $ 12,519,000 $ 1,902,000
Short-term investments (Note 3) 10,964,000 19,154,000
Research revenue receivable (Note 5) 2,060,000
Inventories and other current assets (Note 2) 1,913,000 1,349,000
------------- -------------
Total current assets 27,456,000 22,405,000

Property, plant and equipment - net (Note 2) 9,946,000 10,165,000
Purchased technology - net (Note 1) 15,871,000 17,033,000
Other assets - net (Note 2) 2,757,000 3,529,000
------------- -------------
$ 56,030,000 $ 53,132,000
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Accounts payable $ 2,509,000 $ 1,074,000
Accrued expenses (Note 2) 2,601,000 1,885,000
------------- -------------
Total current liabilities 5,110,000 2,959,000

Other 843,000 348,000

Commitments and contingencies (Note 7)

Stockholders' equity (Notes 4 and 5):
Preferred stock - $.01 par value; 5,000,000 shares
authorized; 1,500,000 shares issued and
outstanding at June 30, 1995 15,000

Common stock - $.01 par value; 50,000,000 shares
authorized; 24,759,150 and 21,372,054 shares
issued and outstanding at June 30, 1995 and 1994,
respectively 248,000 214,000
Additional paid-in capital 238,874,000 208,954,000
Accumulated deficit (189,060,000) (159,343,000)
------------- -------------
Total stockholders' equity 50,077,000 49,825,000
------------- -------------
$ 56,030,000 $ 53,132,000
============= =============
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>

Years ended June 30,
1995 1994 1993
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
License and research revenue (Note 5) $ 11,640,000 $ 163,000 $ 2,320,000
Product revenue - net 176,000 246,000 50,000
------------ ------------ ------------
11,816,000 409,000 2,370,000

Operating expenses:
Research and development 35,063,000 31,605,000 24,767,000
General and administrative 7,085,000 7,312,000 6,405,000
------------ ------------ ------------
42,148,000 38,917,000 31,172,000
------------ ------------ ------------
Loss from operations (30,332,000) (38,508,000) (28,802,000)

Investment and other income - net 1,209,000 1,562,000 2,422,000
------------ ------------ ------------
Net loss (29,123,000) (36,946,000) (26,380,000)

Dividends on preferred stock (594,000)
------------ ------------ ------------
Net loss applicable to common shares $(29,717,000) $(36,946,000) $(26,380,000)
============ ============ ============

Net loss per common share $ (1.35) $ (1.83) $ (1.39)
============ ============ ============

Weighted average number of shares outstanding 21,959,000 20,226,000 18,946,000
============ ============ ============
</TABLE>

See Notes to Consolidated Financial Statements.

F-5

<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Convertible Capital
preferred stock Common stock Additional arising from
----------------------- --------------------- paid-in acquisition of Accumulated
Shares Amount Shares Amount capital subsidiary deficit
---------- ---------- ---------- --------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1992 18,817,000 $188,000 $188,838,000 $1,544,000 $(96,017,000)
Exercise of stock options and
warrants 109,000 1,000 449,000
Installment payment related to
acquisition of BioPulmonics, Inc. 69,000 1,000 876,000 (744,000)
Issuance of stock in satisfaction
of employer matching contribution
to 401(k) savings plan 5,000 61,000
Amortization of deferred compensation 327,000
Net loss (26,380,000)
---------- ---------- ---------- --------- ------------ ------------- -------------
BALANCES AT JUNE 30, 1993 19,000,000 190,000 190,551,000 800,000 (122,397,000)
Sale of common stock 2,180,000 22,000 15,228,000
Exercise of stock options and
warrants 75,000 1,000 199,000
Installment payment related
to acquisition of
BioPulmonics, Inc. 105,000 1,000 921,000 (800,000)
Issuance of warrants in
connection with acquisition
of product rights 1,840,000
Issuance of stock in
satisfaction of employer
matching contribution to 401(k)
savings plan 12,000 95,000
Amortization of deferred
compensation 120,000
Net loss (36,946,000)
---------- ---------- ---------- --------- ------------ ------------- -------------
BALANCES AT JUNE 30, 1994 21,372,000 214,000 208,954,000 - (159,343,000)
Sale of convertible preferred stock 1,500,000 $ 15,000 14,618,000
Sale of common stock 3,175,000 32,000 14,262,000
Exercise of stock options and
warrants 56,000 1,000 36,000
Installment payment related to
acquisition of BioPulmonics, Inc. 131,000 1,000 999,000
Issuance of stock in satisfaction
of employer matching contribution
to 401(k) savings plan 25,000 150,000
Net unrealized loss on
available-for-sale securities (145,000)
Dividends on preferred stock (594,000)
Net loss (29,123,000)
---------- ---------- ---------- --------- ------------ ------------- -------------
BALANCES AT JUNE 30, 1995 1,500,000 $ 15,000 24,759,000 $ 248,000 $238,874,000 $ - $(189,060,000)
========== ========== ========== ========= ============ ============= =============
</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<PAGE>

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss $(29,123,000) $(36,946,000) $(26,380,000)
Adjustments to reconcile net loss to net cash
used in operations:
Depreciation and amortization 2,859,000 3,073,000 2,633,000
Non-cash compensation - net 150,000 215,000 388,000
Acquired research and development 1,686,000
Changes in operating assets and liabilities:
Inventories and other (2,728,000) 1,331,000 (1,628,000)
Accounts payable and accrued
expenses and other 1,459,000 285,000 330,000
------------ ------------ ------------
Net adjustments 3,426,000 4,904,000 1,723,000
------------ ------------ ------------
Net cash used in operating activities (25,697,000) (32,042,000) (24,657,000)
------------ ------------ ------------

Financing activities:
Issuance of common and preferred stock,
warrants, and convertible notes 29,557,000 15,450,000 450,000

Payments of long-term debt (3,000) (149,000)
Restricted cash 17,000
------------ ------------ ------------
Net cash provided by financing activities 29,557,000 15,447,000 318,000
------------ ------------ ------------

Investing activities:
Short-term investments 8,045,000 15,072,000 16,727,000
Property, plant and equipment (1,288,000) (1,891,000) (2,539,000)
------------ ------------ ------------
Net cash provided by investing activities 6,757,000 13,181,000 14,188,000
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 10,617,000 (3,414,000) (10,151,000)
Cash and cash equivalents at beginning of year 1,902,000 5,316,000 15,467,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 12,519,000 $ 1,902,000 $ 5,316,000
============ ============ ============
Supplemental disclosure of non-cash investing
and financing activities:
Common stock issued for BioPulmonics, Inc.
installment payment $ 1,000,000 $ 922,000 $ 877,000
Issuance of warrants in connection
with acquisition of product rights $ 1,840,000

Preferred stock dividends $ 594,000
</TABLE>

See Notes to Consolidated Financial Statements.

F-7
<PAGE>

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

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

The consolidated financial statements include the accounts of Alliance,
its wholly owned subsidiaries, BioPulmonics, Inc. ("BioPulmonics") and Rosanin
Corporation, and its majority-owned subsidiaries, Astral, Inc. and Applications
et Transferts de Technologies Avancees. All significant intercompany accounts
and transactions have been eliminated. Certain amounts in 1994 and 1993 have
been reclassified to conform to the current year's presentation.

CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
--------------------------------------------------

Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("FAS No. 115"), Accounting for Certain
Investments in Debt and Equity Securities. Cash, cash equivalents, and short-
term investments consist of highly liquid debt instruments. The Company
considers instruments purchased with an original maturity of three months or
less to be cash equivalents. Management has classified the Company's cash
equivalents and short-term investments as available-for-sale securities in the
accompanying financial statements. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity.

INVENTORIES
-----------

Inventories, which consist primarily of raw materials, are stated at the
lower of cost (first-in, first-out basis) or market.

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

Cash, cash equivalents, and short-term investments are financial
instruments which potentially subject the Company to concentration of credit
risk. The Company invests its excess cash primarily in U.S. government
securities and marketable debt securities of financial institutions and
corporations with strong credit ratings. The Company has established
guidelines relative to diversification and maturities to maintain safety and
liquidity. These guidelines are reviewed periodically and modified to take
advantage of trends in yields and interest rates. The Company has not
experienced any material losses on its investments.

PROPERTY, PLANT, EQUIPMENT, AND OTHER ASSETS
--------------------------------------------

Buildings, furniture, and equipment are stated at cost and depreciation is
computed using the straight-line method over the estimated useful lives of 4 to
25 years. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease term.
Technology and patent rights are amortized using the straight-line method over
5 to 20 years.

F-8
<PAGE>

PURCHASED TECHNOLOGY
--------------------

The purchased technology was primarily acquired by virtue of the merger of
Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in fiscal 1989.
The technology acquired is the Company's core perfluorochemical ("PFC")
technology and was valued based on an analysis of the present value of future
earnings anticipated from this technology at that time. The Company identified
alternative future uses for the PFC technology, including the Oxygent(TM)
(temporary blood substitute) and LiquiVent(R) (intrapulmonary oxygen carrier)
products.

The PFC technology is the basis for the Company's main drug development
programs and is being amortized over a 20-year life. Amortization of purchased
technology is included in research and development expense. Accumulated
amortization was $7,355,000 and $6,193,000 at June 30, 1995 and 1994,
respectively.

The carrying value of purchased technology is reviewed periodically based
on the projected cash flows to be received from 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.

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

Research and development expenditures are charged to expense as incurred.

NET LOSS PER SHARE
------------------

Net loss per share is based on the weighted average number of shares
outstanding during the respective years and does not include common stock
equivalents since their effect on the net loss per share would be anti-
dilutive.

2. FINANCIAL STATEMENT DETAILS

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

Property, plant, and equipment consist of the following:
<TABLE>
<CAPTION>

June 30,
1995 1994
----------- ------------
<S> <C> <C>
Land $ 225,000 $ 225,000
Buildings 300,000 300,000
Building improvements 1,574,000 1,561,000
Furniture, fixtures, and equipment 10,419,000 9,467,000
Leasehold improvements 3,678,000 3,356,000
----------- -----------
16,196,000 14,909,000
Less accumulated depreciation and
amortization (6,250,000) (4,744,000)
----------- -----------
$ 9,946,000 $10,165,000
=========== ===========
</TABLE>

F-9
<PAGE>

INVENTORIES AND OTHER CURRENT ASSETS
------------------------------------

Inventories and other current assets consist of the following:
<TABLE>
<CAPTION>
June 30,
1995 1994
---------- ----------
<S> <C> <C>
Inventories $1,323,000 $ 384,000
Loan receivable 127,000 197,000
Interest receivable 231,000 362,000
Deferred financing costs 126,000
Other 232,000 280,000
---------- ----------
$1,913,000 $1,349,000
========== ==========
</TABLE>

Inventories include amounts related to certain raw materials reimbursable
under a license agreement.

OTHER ASSETS - NET
------------------

Other assets consist of the following:
<TABLE>
<CAPTION>
June 30,
1995 1994
---------- ----------
<S> <C> <C>
Product, technology, and patent rights
(net of accumulated amortization
of $1,427,000 and $1,387,000 at
June 30, 1995 and 1994,
respectively) $1,615,000 $2,494,000
Other 1,142,000 1,035,000
---------- ----------
$2,757,000 $3,529,000
========== ==========
</TABLE>

ACCRUED EXPENSES
----------------

Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30,
1995 1994
---------- ----------
<S> <C> <C>
Payroll and related expenses $1,736,000 $1,398,000
Rent and related operating expenses 206,000 323,000
Other 659,000 164,000
---------- ----------
$2,601,000 $1,885,000
========== ==========
</TABLE>

3. INVESTMENTS

In July 1994, the Company adopted FAS No. 115. The Company's management
has classified its investment securities as available-for-sale and records
holding gains or losses as a separate component of stockholders' equity. The
cumulative effect of the change resulted in a decrease to stockholders' equity
of $127,000 at July 1, 1994.

F-10
<PAGE>

The following is a summary of available-for-sale securities at June 30,
1995:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government Securities $ 5,049,000 $1,000 $(108,000) $ 4,942,000
Corporate Securities 8,029,000 6,000 (44,000) 7,991,000
----------- ------ --------- -----------
$13,078,000 $7,000 $(152,000) $12,933,000
=========== ====== ========= ===========
</TABLE>

The gross realized losses on sales of available-for-sale securities
totaled $104,000 in 1995. The net unrealized losses of $145,000 in 1995 are
recorded as a component of additional paid-in capital. The unrealized losses
had no cash effect and therefore are not reflected in the consolidated
statement of cash flows.

The amortized cost and estimated fair value of available-for-sale debt
securities at June 30, 1995, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations.
<TABLE>
<CAPTION>

Estimated
Cost Fair Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 7,565,000 $ 7,539,000
Due in one year through three years 5,513,000 5,394,000
----------- -----------
$13,078,000 $12,933,000
=========== ===========
</TABLE>

As of June 30, 1995, $1,969,000 of the available-for-sale securities were
classified as cash equivalents.

4. STOCKHOLDERS' EQUITY

In April 1995, the Company completed offerings of 3.2 million shares of
newly issued common stock. Net proceeds to the Company from such offerings
were approximately $14.3 million.

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

The Company has a 1983 Incentive Stock Option Plan (the "1983 Plan"), a
1983 Non-Qualified Stock Option Program (the "1983 Program"), and a 1991 Stock
Option Plan which provides for both incentive and non-qualified stock options
(the "1991 Plan"). These plans provide for the granting of options to purchase
shares of the Company's common stock (up to an aggregate of 500,000, 2,500,000,
and 2,000,000 shares under the 1983 Plan, 1983 Program, and 1991 Plan,
respectively) to directors, officers, employees, and consultants. The
optionees, date of grant, option price (which cannot be less than 100% and 80%
of the fair market value of the common stock on the date of grant for incentive
stock options and non-qualified stock options, respectively), vesting schedule,
and term of options, which cannot exceed ten years (five years under the 1983
Plan), are determined by the Stock Option Committee of the Board of Directors.
The 1983 Plan has expired and no additional options may be granted under such
plan. In September 1995, the Board of Directors amended the 1991 Plan, subject
to stockholders' approval, to increase the number of shares available by
1,200,000 (to 3,200,000).

F-11
<PAGE>

The following table summarizes stock option activity through June 30,
1995:
<TABLE>
<CAPTION>
Weighted
Shares Average Price
--------- -------------
<S> <C> <C>
Balance at June 30, 1992 1,548,974 $ 9.87
Granted 408,210 $12.04
Exercised (102,941) $ 5.50
Terminated/Expired (44,340) $22.77
---------
Balance at June 30, 1993 1,809,903 $10.43
Granted 564,550 $ 9.42
Exercised (74,666) $ 2.81
Terminated/Expired (51,215) $11.57
---------
Balance at June 30, 1994 2,248,572 $10.42
Granted 967,050 $ 5.50
Exercised (56,103) $ 3.98
Terminated/Expired (115,531) $11.14
---------
Balance at June 30, 1995 3,043,988 $ 9.02
=========
Available for future grant under the
1983 Program 24,985
=========
Available for future grant under
the 1991 Plan, as amended, subject
to stockholder approval 1,264,740
=========
</TABLE>

At June 30, 1995, 1,773,902 options were vested and exercisable.

WARRANTS
--------

In December 1993, the Company issued a warrant to purchase 500,000 shares
of the Company's common stock through December 2000 at $12 per share. The
warrant was issued to a former corporate partner in exchange for certain
marketing and manufacturing rights. In August 1994, the Company issued a
warrant to purchase 300,000 shares of common stock through August 1997 at an
exercise price of $15 per share. The warrant was issued in conjunction with
the license agreement discussed in Note 5. At June 30, 1995, the Company had
warrants outstanding to purchase 982,289 shares of common stock at prices
ranging from $6.95 to $15.96 per share. The warrants expire on various dates
from July 1997 through December 2000.

PREFERRED STOCK
---------------

In fiscal 1995, in conjunction with a license agreement (see Note 5),
Johnson & Johnson Development Corp. purchased 1.5 million shares of Alliance
convertible preferred stock for $15.0 million. On or before June 30, 1998,
each share of the preferred stock will be converted into a number of common
shares based upon the lower of the average price of Alliance common stock at
the time of conversion or $20 per share. Prior to conversion, each share of
preferred stock is entitled to one-half vote on matters on which shareholders
are entitled to vote. The preferred stock carries a cumulative annual cash
dividend of $0.50 per share.

ACQUISITION OF BIOPULMONICS, INC.
---------------------------------

In December 1991, the Company purchased all the outstanding stock of
BioPulmonics in a transaction recorded using the purchase method of accounting.
The total purchase price was $3,055,000, payable in four installments.

F-12
<PAGE>

In June 1995, the Company made the final $1,000,000 payment to the former
BioPulmonics' stockholders to complete the acquisition, with substantially all
of which was made in the Company's common stock. Since the acquisition of
BioPulmonics, an alternative future use of the acquired technology has been
pursued by the Company. An intrapulmonary drug delivery system using the PFC-
based liquid as a carrier (or dispersing agent) is being developed by Alliance
from the liquid ventilation technology. Accordingly, the Company has recorded
purchased technology of $1,000,000.

5. LICENSE AGREEMENT

In August 1994, the Company executed a license agreement with Ortho
Biotech, Inc. and The R.W. Johnson Pharmaceutical Research Institute, a
division of Ortho Pharmaceutical Corporation (collectively referred to as
"Ortho"), which provides Ortho with worldwide marketing and, at its election,
manufacturing rights to the Company's injectable perfluorochemical emulsions
capable of transporting oxygen for therapeutic use. Ortho will pay to Alliance
a royalty based upon its sales of the products after commercialization. In
addition, Ortho paid to Alliance an initial license fee of $4.0 million and
will make other payments based on the achievement of certain milestones. Ortho
will also be responsible for substantially all the remaining costs of
developing the products. Through June 30, 1995, the Company earned research
revenue of $7.1 million from Ortho, of which $2.0 million was included in
accounts receivable. In conjunction with the license agreement, Johnson &
Johnson Development Corp. purchased 1.5 million shares of Alliance convertible
preferred stock for $15.0 million and obtained a warrant to purchase 300,000
shares of Alliance common stock at $15 per share during the next three years.

6. INCOME TAXES

Significant components of the Company's deferred tax assets as of June 30,
1995 are shown below. A valuation allowance of $70,601,000, of which
$12,428,000 is related to 1995, has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.

<TABLE>
<S> <C>
Deferred tax assets:

Net operating loss carryforwards $ 56,752,000
Research and development credits 8,133,000
Capitalized research expense 5,470,000
Other - net 246,000
------------
Total deferred tax assets 70,601,000
Valuation allowance for deferred tax assets (70,601,000)
------------
Net deferred tax assets $ -
============
</TABLE>

Approximately $1,740,000 of the valuation allowance for deferred tax
assets relates to stock option deductions which, when recognized, will be
allocated to contributed capital.

At June 30, 1995, the Company had federal and various state net
operating loss carryforwards of approximately $156,000,000 and $33,517,000,
respectively. The difference between the federal and state tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California tax purposes and the fifty percent
limitation on California loss carryforwards. The federal and various state tax
loss carryforwards will begin expiring in fiscal

F-13
<PAGE>

1998 and 1996, respectively, unless previously utilized. The Company also has
federal and state research and development tax credit carryforwards of
$6,996,000 and $1,748,000, respectively, which will begin expiring in fiscal
1998 unless previously utilized.

Federal and California tax laws limit the utilization of income tax
net operating loss and credit carryforwards that arise prior to a change of
control of the Company. However, the Company believes that such limitations
will not have an impact on the utilization of the carryforwards.

7. COMMITMENTS AND CONTINGENCIES

The Company leases certain office and research facilities in San Diego
and certain equipment under operating leases. Provisions of the facilities
lease provide for abatement of rent during certain periods and escalating rent
payments during the lease terms based on changes in the Consumer Price Index.
Rent expense is recognized on a straight-line basis over the term of the
leases.

Minimum annual commitments related to operating lease payments at June
30, 1995 are as follows:

<TABLE>
<CAPTION>
Years ending June 30,
---------------------
<S> <C>
1996 $ 1,837,000
1997 1,863,000
1998 1,908,000
1999 1,962,000
2000 948,000
Thereafter 1,523,000
-----------
Total $10,041,000
===========
</TABLE>

Rent expense for fiscal 1995, 1994, and 1993 was $2,043,000, $2,286,000,
and $1,886,000, respectively.

In December 1993, in order to obtain a commitment for a long-term supply
of raw material for both clinical trials and anticipated future commercial
production requirements, the Company entered into an agreement with a supplier
under which the Company was obligated to make payments to the vendor through
May 1997 based, in part, upon the achievement of certain milestones. The
Company's total minimum future commitment is approximately $3.0 million, some
or all of which may be reimbursed to the Company by existing and future
collaborative partners.

During September 1992, the Company and certain of its officers and
directors were named as defendants in several lawsuits filed by certain
shareholders. The actions were consolidated into one class action lawsuit.
The complaint claims, among other things, that the defendants failed to
disclose certain problems with two of the Company's products under development,
which conduct is alleged to have falsely portrayed the Company's financial
condition. In May 1995, the U.S. District Court for the Southern District of
California granted summary judgment in favor of the Company, dismissing the
lawsuit in its entirety. The plaintiffs have filed a notice of intent to
appeal the dismissal. The Company believes the eventual outcome of the
litigation will not have a material adverse effect on the Company's financial
condition.

F-14

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statements
(Forms S-3 and S-8) of Alliance Pharmaceutical Corp. of our report dated July
26, 1995, with respect to the consolidated financial statements of Alliance
Pharmaceutical Corp. included in the Annual Report (Form 10-K) for the year
ended June 30, 1995.

ERNST & YOUNG LLP

San Diego, California
September 20, 1995

<PAGE>

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements on Form
S-3 (Nos. 033-55630, 033-55630 A, 033-73096, 033-73360, 033-31579, 033-42551,
033-42551 A, 033-44162, 033-45247, 033-60493, and 033-58093) and Form S-8 (Nos.
033-77172, 033-32354, 033-45683, 033-21091, 033-12598, 033-59867, and 033-59869)
of Alliance Pharmaceutical Corp. of our report dated July 27, 1993, appearing in
this annual report on Form 10-K of Alliance Pharmaceutical Corp. for the year
ended June 30, 1995.

/s/ Deloitte & Touche LLP

New York, New York
September 20, 1995

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
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<PERIOD-END> JUN-30-1995
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<PP&E> 16,196,000
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0
15,000
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