ALLIANCE PHARMACEUTICAL CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)

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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934

For the fiscal year ended JUNE 30, 2001
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OR

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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
------ EXCHANGE ACT OF 1934

For the transition period from to
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Commission file number 0-12950

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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

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 (858) 410-5200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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. [ ]

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 on August 31, 2001, was $58.6 million.

The number of shares of the Registrant's common stock, $.01 par value,
outstanding at August 31, 2001 was 49,541,071.

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 2001 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.

PART I

EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS SET FORTH IN THIS REPORT
ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH HEREIN. THE
COMPANY REFERS YOU TO CAUTIONARY INFORMATION CONTAINED ELSEWHERE HEREIN, IN
OTHER DOCUMENTS THE COMPANY FILES WITH THE SECURITIES AND EXCHANGE COMMISSION
FROM TIME TO TIME, AND THOSE RISK FACTORS SET FORTH IN THE COMPANY'S MOST RECENT
REGISTRATION STATEMENTS ON FORM S-3 (REGISTRATION NUMBER 333-47032) AND FORM S-4
(REPORT NUMBER 333-49676).

ITEM 1. BUSINESS

Alliance Pharmaceutical Corp. (the "Company" or "Alliance") is a
pharmaceutical research and development company that focuses on developing
scientific discoveries into medical products and licensing these products to
multinational pharmaceutical companies in exchange for fixed payments and
royalty or profit sharing payments. Two of the Company's late stage products in
development are OXYGENT(TM), an intravascular oxygen carrier to reduce the need
for donor blood in surgical and other patients at risk of acute tissue hypoxia
(oxygen deficiency); and IMAVIST(TM) (formerly named IMAGENT(R)), an intravenous
contrast agent for enhancement of ultrasound images to assess cardiac structure
and function and to detect organ lesions and blood flow abnormalities. Alliance
and Baxter Healthcare Corporation ("Baxter") have formed a joint venture to
further develop and market OXYGENT in the U.S., Canada and Europe, and IMAVIST
is licensed on a worldwide basis to Schering AG, Germany ("Schering").

The Company's strategy is to identify potential new medical products
through its own efforts and scientific collaborations with researchers and
clinicians in universities and medical centers where many of the basic causes of
disease and potential targets for new therapies are discovered. Using its
experience in defining pharmaceutical formulations, designing manufacturing
processes, conducting preclinical pharmacology and toxicology studies, and
conducting human testing, Alliance endeavors to advance these discoveries into
clinical development. The Company seeks collaborative relationships for the
final stages of product development, including completing late-phase human
testing, obtaining worldwide regulatory approvals, building large-scale
manufacturing capacities, and marketing.

The Company was incorporated in New York in 1983. Its principal
executive offices are located at 3040 Science Park Road, San Diego, California
92121, and its telephone number is (858) 410-5200.

PFC PRODUCTS

Alliance's two primary products in development, OXYGENT and IMAVIST,
are based upon perfluorochemical ("PFC") and emulsion technologies. PFCs are
biochemically inert compounds and may be employed in a variety of therapeutic
and diagnostic applications. The Company's primary drug substance is perflubron,
a brominated PFC that has a high solubility for respiratory gases and can be
used to transport these gases throughout the body.

OXYGENT. OXYGENT (perflubron emulsion) is an intravascular oxygen carrier being
developed to augment oxygen delivery in surgical and other patients at risk of
acute tissue oxygen deficit. It is intended to be used to provide oxygen to
tissues during elective surgeries where substantial blood loss is anticipated.
It is estimated that approximately eight to ten million patients worldwide
annually receive one or more units of donor blood during elective surgeries,
including, cardiovascular, orthopedic, and general surgical procedures. An
oxygen carrier could be used instead of donor blood for a portion of these
patients. A single unit of OXYGENT is expected to provide the equivalent oxygen
delivery of one to two units of red blood cells.

In addition to the well-publicized risks of infectious disease
transmission (e.g., HIV, hepatitis) and potential immune suppression effects
related to blood transfusions, there are emerging concerns regarding the
availability and quality of donor blood. The National Blood Data Resource
Center ("NBDRC") has released data showing that blood donations have
decreased while blood usage has increased over the past several years. This
expected blood shortage may be further exacerbated by an August 27, 2001
recommendation by the U.S. Food and Drug Administration ("FDA") to prohibit
blood donations from people who spent three or more cumulative months in the
United Kingdom from 1980 through 1996 or five or more cumulative years in
France from 1980 to the present, and military personnel who spent six or more
months at any U.S. military base in Northern Europe. The FDA also recommended
that the prohibition eventually be expanded to anyone who spent five or more
years in Europe from 1980 to the present. In addition, the Red Cross, which
collects half the U.S. blood supply,

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announced plans to prohibit donations from anyone who spent three or more
months in the U.K. and six months anywhere in Europe. These recommendations
are part of an effort to exclude donors who are potentially at risk of having
been exposed to infected beef that may be linked to new variant
Creutzfeldt-Jakob (nvCJD) disease. Additionally, there are concerns regarding
the quality of donor blood because of a "storage lesion" effect. This effect
is a progressive deterioration of red blood cell function that occurs while
the blood is stored. This reduces the immediate oxygen transport
effectiveness of the donor red cells, which are typically stored for up to
six weeks prior to their use in transfusions.

These issues have heightened the search for alternatives that reduce
or eliminate the need for donor blood in elective surgeries. OXYGENT is a
sterile emulsion that is compatible with all blood types and is expected to
have a shelf-life of approximately two years. It is manufactured using a
cost-effective, proprietary process at Alliance's commercial-scale facility
that has the potential to produce approximately 800,000 units annually.
OXYGENT may be used with other blood sparing techniques, including Alliance's
proprietary AUGMENTED ACUTE NORMOVOLEMIC HEMODILUTION(TM) technique.

In September 2000, the Company announced that its analysis of the
data from a Phase 3 study in Europe demonstrated that the product provided a
statistically significant reduction in the need for donor blood in patients
undergoing a variety of general surgery procedures. Additionally, a greater
percentage of patients in the OXYGENT-treated group were able to avoid the
need for any donor blood transfusion as compared to the control group. In
January 2001, the Company voluntarily suspended enrollment in an on-going
Phase 3 cardiac surgery study in the U.S. due to an imbalance in certain
adverse events, primarily the incidence of stroke. While the frequency of
these adverse events in the OXYGENT treatment group was consistent with
published data for patients undergoing cardiac bypass surgery, the control
group frequency was remarkably low, causing a disparity in the proportion
between the treatment and control patients. Subsequent to the year end,
Alliance met with the FDA regarding the continuing clinical development of
OXYGENT and presented a data analysis that explained reasons for the
imbalance. A final report with additional analyses, including support for the
design of a new study, will be submitted to the FDA later this year.
Following this submission, the Company anticipates providing the FDA and
international regulatory authorities with an expanded clinical development
plan that includes a new pivotal Phase 3 study with general surgery patients.

In May 2000, the Company and Baxter entered into a joint venture for
the manufacturing, marketing, sales and distribution of OXYGENT in the United
States, Canada and countries in the European Union (the "Baxter Territory").
Under the arrangement, Baxter purchased $20 million of convertible Series F
Preferred Stock in Alliance. In order for Baxter to maintain its rights to
commercialize the product, Baxter was required to purchase an additional $30
million of convertible redeemable preferred stock through September 2001. In
May 2001, because of a revised product development schedule, the Company and
Baxter modified the expected payments, and Baxter purchased an additional $4
million of Series F Preferred Stock and $3 million of certain OXYGENT related
equipment in lieu of purchasing the same amount of preferred stock. In August
2001, Baxter purchased another $4 million of the Company's Series F Preferred
Stock, and the companies agreed to restructure the remaining $19 million of
stock purchases originally scheduled for 2001 in order to reflect the
timeline revisions in the clinical and regulatory plans, and in order for
Baxter to maintain its rights to the product. The $19 million obligation will
be paid to the Company if certain milestones are reached during the
development of the new pivotal Phase 3 trial protocol and the conduct of the
study.

IMAVIST (formerly named "IMAGENT"). IMAVIST is an intravenous contrast agent
for enhancement of ultrasound images to assess cardiac function. IMAVIST also
has the potential to detect organ lesions and blood flow abnormalities. More
than 30 million scans of the heart, vasculature, and abdominal organs are
performed annually in the U.S., some of which may potentially benefit from a
cost-effective contrast agent. To be successful in the marketplace,
ultrasound contrast agents should provide enhanced diagnostic images during
several minutes of scanning, be easy to use, be stable during transportation,
and have a long shelf-life. IMAVIST is being developed to meet these
requirements.

IMAVIST is a powder comprising hollow microspheres containing a
mixture of PFC vapor and gas and water-soluble components that are known to
be acceptable for parenteral use. Prior to use, IMAVIST is constituted with
water to form microbubbles that are then injected into the patient. The gas
microbubbles are highly echogenic and, when delivered intravenously, reflect
sound-wave signals that enhance ultrasound images. In clinical trials with
IMAVIST, gray-scale contrast enhancement of cardiac, abdominal, and vascular
structures has been observed with no serious adverse events.

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In 1999, the Company completed two Phase 3 studies with IMAVIST that
successfully demonstrated a clinically and highly statistically significant
improvement in visualization of the walls of the heart (endocardial border
delineation) compared to standard (non-contrasted) ultrasound imaging. In
October 1999, the Company submitted a New Drug Application ("NDA") to the FDA
and, in August 2000, received a letter from the FDA stating that it found the
NDA to be approvable upon satisfactory response to certain issues identified
in the review process. In August 2001, the Company submitted documentation to
the FDA, and the Company believes that the submission fully addresses the
issues noted by the FDA. The Company hopes to receive final approval and
permission for marketing IMAVIST in the U.S. later this year.

In September 1997, the Company entered into a license agreement (the
"Schering License Agreement") with Schering, which provides Schering with
worldwide exclusive marketing and manufacturing rights to Alliance's drug
compounds, drug compositions and medical devices and systems related to
perfluorocarbon ultrasound imaging products, including IMAVIST. The product
is being developed jointly by Alliance and Schering.

LIQUIVENT. LIQUIVENT (neat perflubron), an intrapulmonary agent for use in
reducing a patient's exposure to the harmful effects of conventional
mechanical ventilation, was in a Phase 2-3 clinical trial involving adult
patients with acute lung injury and acute respiratory distress syndrome
("ARDS") in the U.S., Canada and Europe. In May 2001, the Company announced
that efficacy data from the study revealed that partial liquid ventilation
("PLV"), the Company's proprietary technique to administer LIQUIVENT, did not
meet either the primary study endpoint for improvement in "ventilator free
days" or the secondary endpoint of improvement in 28-day mortality. Safety
data demonstrated that LIQUIVENT, an oxygen-carrying liquid, was well
tolerated by the patients. The Company does not contemplate further PLV
studies with adult ARDS patients, but intends to pursue the use of LIQUIVENT
for other indications in the treatment of lung disease, such as use of the
product as a liquid carrier to facilitate the delivery of drugs into the
lungs.

Alliance is also supporting internal research efforts to expand the
applicability of its core technologies. These efforts include the development
of dry powder microscopic particle formulations for the delivery of
antibodies and other immunologic agents via the respiratory tract. In
addition, 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. If new license and research agreements are added and the Company is
not able to obtain outside sources of funding, the Company's losses from
research and development activities are expected to increase significantly.

The Company's products require substantial development efforts. The
Company may encounter unforeseen technical or other problems which may force
delay, abandonment, or substantial change in the development of a specific
product or process, technological change, or product development by others,
any of which may materially adversely affect its business. The Company
expends substantial amounts of money on research and development and expects
to do so for the foreseeable future. In fiscal 2001, 2000 and 1999, the
Company incurred research and development expenses of $55.3 million, $54.6
million and $60.4 million, respectively.

METRACOR TECHNOLOGIES, INC.

In July 1997, the Company entered into a development agreement (the
"Development Agreement") with VIA Medical Corporation (renamed Metracor
Technologies, Inc. ("Metracor") in June 2001) for the joint development of
RODA(R) (Real-time Oxygen Dynamics Analyzer). RODA is a minimally invasive,
point-of-care patient monitoring system that combines oxygen dynamics
software designed by the Company with Metracor's ex vivo blood gas and
chemistry sensor technology. In August 1998, Alliance and Metracor entered
into a manufacturing, marketing and distribution agreement (the "Marketing
Agreement") whereby Metracor was primarily responsible for manufacturing and
marketing RODA, and the parties were to share revenues from the sale of
products. RODA is intended to provide continuous (intermittent) measurements
of certain blood chemistry and blood gas parameters, as well as an overall
assessment of surgical and intensive care patients' cardiovascular and
oxygenation status. In June 2001, the Development Agreement was terminated
and the Marketing Agreement was restructured. Under the arrangement, Metracor
obtained an exclusive royalty-free license to all of Alliance's rights and
interest in and to RODA, and an option was granted by Alliance to Metracor to
acquire all of Alliance's rights to RODA in the future upon the occurrence of
certain events. Alliance also entered into an agreement to acquire
approximately 2.5 million shares of Series B Preferred Stock of Metracor
("Metracor B Stock") in exchange for approximately $500,000 cash and the
Metracor license. After acquiring the Metracor B Stock, Alliance owns
approximately 5% of Metracor.

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In connection with the transaction, Alliance entered into an option
agreement with all other investors (the "Investors") purchasing the Metracor
B Stock. Under the terms of the option agreement, Alliance may purchase all
(but not less than all) of the Investors Metracor B Stock until December 1,
2002 or earlier upon certain events (the "Alliance Option"). If Alliance
exercises the Alliance Option, Alliance will pay the Investors, at Alliance's
discretion, either $0.93273 cash per share of Metracor B Stock (the "Cash
Price") (for an aggregate price of approximately $14.1 million), or 0.13072
shares of Alliance Common Stock per share of Metracor B Stock (the "Alliance
Stock Price") (for an aggregate price of approximately 1.97 million shares of
Alliance Common Stock). If exercised, Alliance would collectively hold
approximately 36% of Metracor.

Metracor may sell up to approximately five million shares of
additional Metracor B Stock to other Investors who will become parties to the
Option Agreement. Should Metracor sell the entire additional five million
shares, and Alliance exercise the Alliance Option, Alliance would hold
approximately 47% of Metracor in return for an aggregate Cash Price of $18.8
million or an aggregate Alliance Stock Price of 2.63 million shares of Alliance
Common Stock.

The Option Agreement also includes a thirty day option exercisable
collectively by the Investors, including if applicable, purchasers of the
five million additional shares, if Alliance does not exercise the Alliance
Option prior to November 1, 2002 to require Alliance to purchase all of the
Metracor B Stock at the Cash Price (subject to Alliance's right to pay the
Alliance Stock Price in lieu of the Cash Price).

ACQUISITION OF MOLECULAR BIOSYSTEMS, INC.

On December 29, 2000, Alliance acquired Molecular Biosystems, Inc.
("MBI"), which became a wholly-owned subsidiary of the Company, in exchange
for 770,000 shares of Alliance common stock. MBI is the developer of
Optison(R), the only intravenous ultrasound contrast agent for the heart
being marketed in both the United States and Europe. MBI was receiving
ongoing royalties from its agreement regarding Optison with Mallinckrodt, a
unit of Tyco Healthcare. Mallinckrodt's territory includes all countries
except Japan, South Korea and Taiwan. In August 2001, MBI and Mallinckrodt
amended the agreement in connection with Mallinckrodt's announcement that it
was exiting the ultrasound contrast agent business and transferring its
rights to Nycomed Amersham, plc. Under the modified agreement, MBI received
$5 million in cash and is entitled to potential royalties for two years in
lieu of any further payments.

Optison is being developed for marketing in Japan, South Korea, and
Taiwan pursuant to an agreement with Chugai Pharmaceutical Co., Ltd.

COLLABORATIVE RELATIONSHIPS

BAXTER HEALTHCARE CORPORATION. In May 2000, Alliance and Baxter entered into
a joint venture for the manufacture, marketing, sales and distribution of
OXYGENT in the Baxter Territory. The companies formed PFC Therapeutics, LLC
("PFC Therapeutics") to oversee the further development, manufacture,
marketing, sales and distribution of OXYGENT; and each party invested $5
million in PFC Therapeutics. In connection with the transaction, PFC
Therapeutics obtained an exclusive license in the Baxter Territory to
manufacture, market, sell and distribute all of the Company's injectable PFC
emulsions capable of transporting oxygen in therapeutic effective amounts in
the bloodstream, including OXYGENT. PFC Therapeutics paid Alliance a prepaid
royalty of $10 million. Alliance and Baxter will also share in the
distribution of PFC Therapeutics' future cash flows. Under the arrangement,
Alliance will continue to fund the current development plan for OXYGENT'S
initial approval in the Baxter Territory. PFC Therapeutics has a right of
first offer to license OXYGENT in one or more countries outside the Baxter
Territory. Pursuant to a manufacturing and supplier agreement between
Alliance and PFC Therapeutics, Alliance will initially manufacture OXYGENT
for distribution in the Baxter Territory. Under separate agreements between
Baxter and PFC Therapeutics, Baxter has the exclusive right to promote,
market, distribute and sell OXYGENT in the Baxter Territory, and Baxter has
the right to take over the manufacturing responsibility for OXYGENT. In
connection with this arrangement, Baxter purchased 500,000 shares of the
Company's convertible Series F Preferred Stock for $20 million. Initially, in
order for Baxter to maintain its rights to commercialize the product, Baxter
was required to purchase an additional $30 million of convertible redeemable
preferred stock from Alliance through September 2001. In May 2001, because of
a revised product development schedule, the Company and Baxter modified the
expected payments, and Baxter purchased an additional $4 million of Series F
Preferred Stock and $3 million of certain OXYGENT related equipment in lieu
of purchasing the same amount of preferred stock. In August 2001, Baxter
purchased another $4 million of the Company's Series F Preferred Stock and
the companies agreed to restructure the remaining $19 million of stock
purchases originally scheduled for 2001 in order to reflect the timeline

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revisions in the clinical and regulatory plans, and in order for Baxter to
maintain its rights to the product. The $19 million obligation will be paid
to the Company if certain milestones are reached during the development of
the new pivotal Phase 3 trial protocol and the conduct of the study.

SCHERING AG. In September 1997, the Company entered into the Schering License
Agreement, which provides Schering with worldwide exclusive marketing and
manufacturing rights to Alliance's drug compounds, drug compositions and
medical devices and systems related to perfluorocarbon ultrasound imaging
products, including IMAVIST. This product is being developed jointly by
Alliance and Schering. Under the Schering License Agreement, Schering paid to
Alliance an initial license fee of $4 million and agreed to pay further
milestone payments and royalties on product sales. Schering also agreed to
provide funding to Alliance for some of its development expenses. In
conjunction with the Schering License Agreement, Schering Berlin Venture
Corp. ("SBVC"), an affiliate of Schering, purchased 500,000 shares of the
Company's convertible Series D Preferred Stock for $10 million. In February
2000, the Series D Preferred Stock converted into 1,000,000 shares of common
stock.

INHALE THERAPEUTIC SYSTEMS, INC. ("Inhale") In November 1999, the Company
transferred to Inhale certain rights to the PULMOSPHERES(R) technology and
other assets for use in respiratory drug delivery. The Company received $15
million in cash from Inhale and $5 million in Inhale stock. Alliance will
also receive milestone payments based on the achievement of future defined
events, plus additional royalty payments based on eventual sales of a defined
number of products commercialized using the technology. Inhale has agreed
that Alliance can commercialize two respiratory products that will be
formulated by Inhale utilizing the PULMOSPHERES technology on a royalty-free
basis. As partial consideration for $5 million in Alliance stock, Alliance
has retained the right to use the technology to develop products for drug
delivery in conjunction with liquid ventilation, as well as an unlimited
number of PULMOSPHERES-based non-respiratory products such as topical and
injectable formulations.

The Company intends to obtain new collaborative relationships for
its other products. 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.

MARKETING

The Company does not have internal marketing and sales capabilities.
The Company's strategy is for its collaborative partners to market and sell
any products that it develops successfully. Currently, Schering will be
solely responsible for all activities related to marketing and sales of
IMAVIST, and Baxter will be solely responsible for all activities related to
marketing and sales of OXYGENT in the Baxter Territory. The Company intends
to obtain appropriate marketing relationships for its other products. To the
extent that the Company enters into co-promotion or other licensing
arrangements, any revenues received by the Company will be dependent on the
efforts of third parties, and there can be no assurance that any such efforts
will be successful. Further, there can be no assurance that the Company will
be able to enter into future marketing relationships on acceptable terms. The
termination of any marketing relationships may limit the ability of the
Company to market its products, thereby materially adversely affecting its
business.

Should the Company have to market and sell its products directly,
the Company would need to develop a marketing and sales force with technical
expertise and distribution capability. The creation of an infrastructure to
commercialize pharmaceutical products is an expensive and time-consuming
process. There can be no assurance that the Company would be able to
establish the necessary marketing and sales capabilities or be successful in
gaining market acceptance for its products.

MANUFACTURING

The Company manufactures all of its products for preclinical testing
and clinical trials. OXYGENT is produced at a commercial-scale manufacturing
facility in San Diego, California. The Company believes that this production
facility will provide sufficient capacity for future clinical trials and
market launch of OXYGENT, if and when it is approved by the FDA. However, a
larger facility may be required in the future. Baxter has the right to take
over responsibility for manufacturing OXYGENT for sale in the Baxter
Territory.

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IMAVIST is manufactured in San Diego at the Company's
commercial-scale facility. It is manufactured using a proprietary process to
form dry, PFC vapor-containing spheres that are constituted with an aqueous
solution to form microbubbles just prior to use. Alliance has expanded its
market launch production capacity in San Diego for IMAVIST. The Schering
License Agreement requires the Company to manufacture the product at its San
Diego facility for a period of time after market launch at a negotiated
price. Schering will be responsible for establishing production capacity
beyond the maximum capacity of the San Diego facility.

If facility expansion for any of the Company's products is
necessary, it may occur in stages, each of which would require regulatory
approval, and product demand could at times exceed supply capacity. The
Company has not selected a site for any expanded facilities and cannot
predict the amount it will expend for the construction of any facilities. The
Company does not know when or whether the FDA will determine that any
expanded facilities comply with Good Manufacturing Practices. The projected
location and construction of a facility will depend on regulatory approvals,
product development, and capital resources, among other factors. The Company
has not obtained any regulatory approvals for its production facilities for
these products nor can there be any assurance that it will be able to do so.

SOURCES AND AVAILABILITY OF RAW MATERIALS

Prior to obtaining FDA approval for its products, the Company will
seek to obtain long-term supply for its principal raw materials. Raw
materials used in the Company's products cannot be changed without
equivalency testing of any new material by the Company and approval of the
FDA. The Company has obtained a sufficient inventory of perflubron, the
principal raw material utilized in OXYGENT for clinical trials. The Company
and Baxter are negotiating with a potential supplier to secure a long-term
supply of perflubron. The Company has also negotiated a long-term supply
agreement for the principal raw material for IMAVIST. Although some raw
materials for its products are currently qualified from only one source, the
Company attempts to acquire a substantial inventory of such materials and to
negotiate long-term supply arrangements. The Company believes it will not
have any raw material supply issues; however, no assurances can be given that
a long-term supply will be obtained for such materials on terms acceptable to
the Company. The Company's business could be materially and adversely
affected if it or its collaborative partners are unable to obtain qualified
raw materials on a timely basis and at a cost-effective price.

PATENTS

The Company seeks proprietary protection for its products,
processes, technologies and ongoing improvements. The Company is pursuing
patent protection in the U.S. 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, Israel, Japan, Norway,
South Africa and other countries, and patents have been granted in many of
these countries.

Alliance has numerous issued U.S. patents related to or covering PFC
emulsions with corresponding patents and applications in Europe, Japan and
elsewhere. Such emulsions are the basis of the Company's OXYGENT product. The
issued patents and pending patent applications cover specific details of
emulsified PFCs through composition claims, product-by-process claims, and
method claims describing their manufacture and use. In addition to the
specific OXYGENT formulation, issued patents broadly cover concentrated PFC
emulsions, as well as methods for their manufacture and use.

Alliance has received U.S. patents for a method of using blood
substitutes to facilitate oxygen delivery. Corresponding patents are issued
or pending in Europe, Japan and other countries. The issued patents cover
methods 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, animal, plant or
recombinant hemoglobin, in order to reduce or eliminate the need for
allogeneic (donor) blood transfusions during surgery.

Alliance has several issued U.S. patents and patent applications
related to IMAVIST. The issued patents and pending applications contain
claims directed to the manufacture and use of novel stabilized microbubble
compositions based on the discovery that PFC gases, in combination with
appropriate surfactants or other non-PFC gases, can stabilize microbubbles
for use in ultrasonic imaging. The patents further contain claims directed to
formulations and compositions that cover IMAVIST. Foreign applications
directed to the same subject matter are also granted or pending. In May 2000,
the Company received its fifth U.S. patent covering the use of various
contrast agents, including IMAVIST, in harmonic imaging.

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. An issued U.S. patent licensed to the
Company covers methods of administering liquids, including LIQUIVENT, to
patients. Other U.S. patents covering additional methods of enhancing
patients' respiratory gas exchange by administering liquids, including
LIQUIVENT, have also issued. Additionally, the Company has issued patents and
pending applications that cover apparatus for liquid ventilation using PFCs.
The Company also has issued patents and pending patent applications regarding
the use of PFCs to deliver drugs to the lungs and to wash debris from, and
open, collapsed lungs. In addition, the Company has received a U.S. patent
covering the use of fluorochemicals to treat localized and systemic
inflammation.

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The Company also has issued patents and pending patent applications
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. Additionally, the
fluorinated compounds may be employed in cosmetics, protective creams, and
lubricating agents, as well as incorporated in emulsions,
microemulsions and gels that may be useful as drug delivery vehicles or
contrast agents. The Company also has pending applications relating to its
dry powder technologies as well as various types of emulsions and
microstructures (tubules, helixes, fibers) that may have uses in the fields
of medicine, biomolecular engineering, microelectronics and electro-optics.

The Company, through its wholly owned subsidiary, MDV Technologies,
Inc. ("MDV") has numerous issued U.S. patents and pending applications
related to the composition, use and manufacture of FLOGEL(R), a
thermo-reversible liquid/gel product. Corresponding patents have issued, or
applications have been filed, in Europe, Japan and certain other foreign
countries. MDV also has issued patents in the U.S. and Europe covering the
use of poloxamer gels for the prevention of adhesion formation, delivery of
drugs and ophthalmic applications.

Aside from the issued patents, 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
valid and enforceable. Although certain patents of the Company are subject to
such ongoing challenges and Alliance has challenged the patents of other
companies, Alliance believes that the outcome of these challenges will not
have a material adverse effect on the Company's proprietary technology
position.

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 employees' 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.

COMPETITION

Biotechnology and pharmaceutical companies 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 that 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. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing
the intended purposes of the Company's products, which might render the
Company's technology and products uncompetitive or obsolete. 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 temporary blood
substitute. There are two primary approaches for oxygen delivery: PFC
emulsions and hemoglobin solutions. Hemoglobin development efforts include
chemically modified, stroma-free 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 temporary
oxygen carrier "blood substitute." One company has filed for regulatory
approval in the U.K. and Canada, and another company has recently filed for
approval in the U.S. based on data from a Phase 2 trauma study. A third
company has an approval for its product in South Africa and has recently
completed a Phase 3 study in orthopedic surgery, which it plans to use as the
basis for a filing for approval in the U.S. before the end of 2001.

7

The Company has competition in the development of ultrasound imaging
contrast agents. There are currently two FDA approved ultrasound contrast
agents for certain cardiology applications in the U.S., one of which is being
sold. In addition, one company filed an NDA with the FDA seeking approval to
market its product. There are currently four that have been approved in
Europe, three of which are currently being sold. Certain companies are in
advanced clinical trials for the use of ultrasound contrast agents for
assessing certain organs and vascular structures. The Company expects that
competition in the ultrasound contrast imaging agent field will be based
primarily on each product's safety profile, efficacy, stability, ease of
administration, breadth of approved indications, and physician, healthcare
payor and patient acceptance. The Company believes that if and when IMAVIST
is approved for commercial sale, it will be well positioned to compete
successfully, although there can be no assurance that the product will be
able to do so.

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.

GOVERNMENT REGULATION

The Company's products require governmental approval before
production and marketing can commence. The regulatory approval process is
administered by the FDA in the U.S. 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.

Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase 1, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound is tested for safety and dosage
tolerance. Phase 2 typically involves studies in a larger patient population
to identify possible adverse effects and safety risks, to begin gathering
preliminary efficacy data, and to investigate potential dose sizes and
schedules. Phase 3 trials are undertaken to further evaluate clinical
efficacy and to further test for safety within an expanded patient
population. Each trial is conducted in accordance with standards under
protocols that detail the objectives of the study, the parameters to be used
to monitor safety, and the efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the investigational new drug
application. Further, each clinical study must be evaluated by an independent
review board at the institution at which the study will be conducted. The
review board will consider, among other things, ethical factors, the safety
of human subjects and the possible liability of the institution.

Following completion of these studies, an NDA must be submitted to
and approved by the FDA in order to market the product in the U.S. 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.

8

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 with the approval for marketing of IMAGENT GI, a
perflubron-based drug previously developed by the Company; however, all
materials contained in the Company's products remain 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 U.S. Department of Agriculture, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and the California State Department of Health Services, Food
and Drug Branch. Such regulation, by governmental authorities in the U.S. and
other countries may impede or limit the Company's ability to develop and
market its products.

EMPLOYEES

As of August 31, 2001, the Company had 178 full-time employees, of
whom 143 were engaged in research and development, production and associated
support, 4 in business development and market research, 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 51, has been Chief Executive Officer since
1985 and Chairman since October 1989. Prior to joining Alliance, Mr. Roth
served as President of Analytab Products, Inc., an American Home Products
company involved in manufacturing and marketing medical diagnostics,
pharmaceuticals and devices. For the previous ten years, he was employed in
various sales, marketing and general management capacities by Ortho
Diagnostic Systems, Inc., a Johnson & Johnson company, which is a
manufacturer of diagnostic and pharmaceutical products. Mr. Roth's brother,
Theodore D. Roth, is President and Chief Operating Officer of the Company.

THEODORE D. ROTH. Mr. Roth, who is 50, was Executive Vice President and Chief
Financial Officer of the Company from November 1987 to May 1998, when he was
appointed President and Chief Operating Officer. 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 Duane J. Roth, the Chairman and Chief Executive Officer of the
Company.

DAVID H. KLEIN, PH.D. Dr. Klein, who is 68, is Senior Vice President,
Pharmaceutical Development. He originally joined Alliance in 1989, became a
consultant to the Company in 1997, and rejoined the Company in June 2000. For
over 40 years he has carried out and directed chemical research in various
academic, research and pharmaceutical institutions. Prior to joining
Alliance, Dr. Klein worked for over four years at Sun, Inc. on medical uses
of perfluorocarbon emulsions. He has served as a consultant for the National
Science Foundation, the Michigan Department of Natural Resources and the
United States Senate. He received his Ph.D. in analytical chemistry from Case
Western Reserve University.

B. JACK DEFRANCO. Mr. DeFranco, who is 56, has been Vice President, Market
Development for Alliance since January 1991. He has more than 25 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 his M.B.A. from Fairleigh Dickinson University.

9

HOWARD C. DITTRICH, M.D. Dr. Dittrich, who is 48, joined the Company in
January 2001 and is currently Vice President of Regulatory Affairs and Chief
Medical Officer. Prior to joining Alliance, Dr. Dittrich worked at Molecular
Biosystems, Inc. since 1996, where he most recently served as Executive Vice
President in charge of Regulatory, Clinical, Pre-Clinical, Quality and
Research. Dr. Dittrich is a Clinical Professor of Medicine in the Division of
Cardiology at the University of California San Diego where he maintains a
cardiology practice. Dr. Dittrich received his M.D. from the University of
Iowa and is board certified in Internal Medicine and Cardiovascular Diseases.

N. SIMON FAITHFULL, M.D., PH.D. Dr. Faithfull, who is 61, has been Vice
President, Medical Affairs Development 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.

KATHRYN E. FLAIM, PH.D. Dr. Flaim, who is 51, was appointed Vice President,
Clinical Products Support in August 1998, having joined Alliance in 1990 as
Director, Clinical Research. Dr. Flaim has over 15 years of experience in
clinical trial design and regulatory submissions. For nine years before
joining Alliance, she was Associate Director of the Division of Clinical
Research and Development at SmithKline Beecham. Previously, she was an
Assistant Professor at the Milton S. Hershey Medical Center at Pennsylvania
State University. Dr. Flaim received her Ph.D. from the University of
California at Davis.

TIM T. HART, C.P.A. Mr. Hart, who is 44, was appointed Vice President in May
1999 and Chief Financial Officer in August 1998. He joined the Company in
1991 as Controller and has also served as Treasurer since 1994. Prior to
joining Alliance in 1991, he was employed in various financial management
positions at Cubic Corporation for over eight years. He was also employed by
Ernst & Whinney in San Diego, California as a C.P.A.

JONI HARVEY. Ms. Harvey, who is 47, was appointed Vice President Operations
in February 2001. Prior to joining Alliance, Ms. Harvey worked for 12 years
for Molecular Biosystems Inc., where she served in various capacities, most
recently as Vice President Operations. For the previous eight years, she was
employed in various quality and manufacturing management positions at Baxter
Healthcare Corp.

H. JOERG LIMMER, DVM. Dr. Limmer, who is 60, was appointed Vice President,
Worldwide Clinical Development in September 1996. Prior to joining Alliance,
Dr. Limmer worked six years for Boehringer Ingelheim Pharma as Regional
Director and Vice President where he was responsible for medical and
marketing affairs for Eastern European countries. For the previous 20 years,
he was Director of Clinical Research at Dr. Karl Thomae GmbH, a subsidiary of
Boehringer Ingelheim GmbH in Germany. His primary focus was in the area of
diabetes mellitus, fat metabolism, atherosclerosis and intensive care
products. Dr. Limmer received his D.V.M. from the Freie Universitaet of
Berlin, Germany.

CHRISTIANE O. ROCKWELL. Ms. Rockwell, who is 48, was appointed Vice
President, Quality Assurance in July 2000. Prior to joining Alliance, Ms.
Rockwell worked for 20 years for Allergan, Inc., where she served in various
capacities, most recently as Worldwide Quality Assurance Manager. Ms.
Rockwell received her M.B.A. from Pepperdine University and her B.S. from
University of Tours, France.

GWEN ROSENBERG. Ms. Rosenberg, who is 47, was appointed Vice President,
Corporate Communications in May 1998. Ms. Rosenberg joined the Company in
1990 and has served in various capacities. For the previous eleven years, she
was a research scientist at the University of California, San Diego and at
Scripps Clinic and Research Foundation, and was concurrently a science
reporter for the San Diego Daily Transcript. Ms. Rosenberg has also taught
high school chemistry and biology in New York. She received her B.A. and M.A.
degrees from Adelphi University and The State University of New York at Stony
Brook, respectively.

MARK SEEFELD, PH.D., D.A.B.T. Dr. Seefeld, who is 48, was appointed Vice
President, Preclinical Drug Safety and Development in August 1998, having
joined Alliance in 1993 as Director, Toxicology. For more than ten years
prior to joining the Company, he held positions in both general and
reproductive toxicology at Parke-Davis, Pharmaceutical

10

Research Division of the Warner-Lambert Company, and 3M Pharmaceuticals. Dr.
Seefeld received his Ph.D. from the University of Wisconsin-Madison and is
board certified by the American Board of Toxicology.

ITEM 2. PROPERTIES

FACILITIES

The Company has all of its facilities in San Diego, California,
where the Company has approximately 159,000 square feet in four leased
facilities, the Company maintains its principal executive offices, performs
research and development on its PFC-based products, and has its IMAVIST and
OXYGENT manufacturing facilities. The Company sold its Otisville, New York
facility in June 2001.

While the Company believes that it can produce materials for
clinical trials and initial market launch for OXYGENT and IMAVIST at its
existing San Diego facilities, it may need to expand its commercial
manufacturing capabilities for its products in the future. Any expansion for
any of its products may occur in stages, each of which would require
regulatory approval, and product demand could at times exceed supply
capacity. The Company has not selected a site for such expanded facilities
and cannot predict the amount it will expend for the construction of such
facilities. There can be no assurance as to when or whether the FDA will
determine that such facilities comply with Good Manufacturing Practices. The
projected location and construction of such facilities will depend on
regulatory approvals, product development, and capital resources, among other
factors. The Company has not obtained any regulatory approvals for its
production facilities for these products nor can there be any assurance that
it will be able to do so. The Schering License Agreement requires the Company
to manufacture products at its San Diego facility for a period of time after
market launch at a negotiated price. Schering will be responsible for
establishing production capacity beyond the maximum capacity of the San Diego
facility. Baxter has the right to take over responsibility for manufacturing
OXYGENT for sale in the Baxter Territory.

ITEM 3. LEGAL PROCEEDINGS

On February 23, 2001, a lawsuit was filed by two former shareholders
of MBI purportedly on behalf of themselves and others against Alliance and
certain of its officers. On March 1, 2001 and March 19, 2001, two additional
similar lawsuits were filed by other former shareholders of MBI. The
lawsuits, filed in the U.S. District Court for the Southern District of New
York, allege that the Company's registration statement filed in connection
with the acquisition of MBI contains misrepresentations and omissions of
material facts in violation of certain Federal securities laws. In May 2001,
the actions were consolidated. In July 2001, the plaintiffs filed a
consolidated amended complaint and, in August 2001, the Company filed a
motion to dismiss. The plaintiffs are seeking rescission or compensatory
damages, payment of fees and expenses, and further relief. In August 2001
another purported class action alleging substantially identical allegations
was filed in the U.S. District Court for the Southern District of California,
however, the Company understands that plaintiffs intend to dismiss this
lawsuit in light of the consolidated action in the New York court. Alliance
believes that the lawsuits are completely without merit, however, there can
be no assurances that the Company will ultimately prevail or that the outcome
will not have a material adverse effect on the Company's future financial
position or results of operations.

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, 2001.

11

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 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.

On August 31, 2001, the closing price of the Company's common stock was
$1.20.

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

On August 31, 2001, the approximate number of record holders of the
Company's common stock was in excess of 1,300. The Company believes that, in
addition, there are in excess of 25,000 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 selected consolidated financial data set forth below with
respect to the Company's statements of operations for each of the years in
the three year period ended June 30, 2001, and with respect to the balance
sheets at June 30, 2000 and 2001, are derived from the audited consolidated
financial statements which are included elsewhere in this Annual Report on
Form 10-K and are qualified by reference to such financial statements. The
statement of operations data for the years ended June 30, 1997 and 1998, and
the balance sheet data at June 30, 1997, 1998 and 1999, are derived from
audited financial statements not included in this Annual Report on Form 10-K.
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements for the Company and notes thereto and Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein (in thousands except per share amounts).

12

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.)

Since commencing operations in 1983, the Company has applied
substantially all of its resources to research and development programs and
to clinical trials. The Company has incurred losses since inception and, as
of June 30, 2001, has an accumulated deficit of $433.9 million. The Company
expects to incur significant losses over at least the next few years as the
Company continues its research and product development efforts and attempts
to commercialize its products.

The Company's revenues have come primarily from collaborations with
corporate partners, including research and development and milestone
payments. The Company's expenses have consisted primarily of research and
development costs and administrative costs. To date, the Company's revenues
from the sale of products have not been significant. The Company believes its
future operating results may be subject to quarterly fluctuations due to a
variety of factors, including the timing of future collaborations and the
achievement of milestones under collaborative agreements, whether and when
new products are successfully developed and introduced by the Company or its
competitors, and market acceptance of products under development.

LIQUIDITY AND CAPITAL RESOURCES

Through June 2001, the Company financed its activities primarily
from public and private sales of equity, debt financing and funding from
collaborations with corporate partners.

In August 2001, the Company announced that it had reached an
agreement in principle on terms for the private placement of at least $15
million of shares of common stock and common stock purchase warrants to a
group of institutional investors. The Company will seek shareholder approval
for the financing and a reverse stock split which is a condition of the
financing, at its annual shareholder meeting. The securities sold in the
contemplated private placement will not be registered under the Securities
Act of 1933 (the "Act") and may not be offered or sold in the United States
absent registration or an applicable exemption from the registration
requirements of the Act. The Company believes this $15 million financing is
necessary. There are no assurances that the financing will be consummated in
the necessary time frame needed for continuing operations or on terms
favorable to the Company. The accompanying financial statements include a
going concern paragraph in the opinion on the Company's financial statements
for the year ended June 30, 2001.

In August 2001, the Company announced the amendment of the
Optison(R) Product Rights Agreement (OPRA) dated May 9, 2000 with
Mallinckrodt, a unit of Tyco Healthcare and the Company's subsidiary, MBI.
Optison, an intravenous ultrasound contrast agent, was developed by MBI and
has been marketed by Mallinckrodt in the U.S. and Europe. Under the original
terms of OPRA, Mallinckrodt was to pay MBI a royalty of 5% of net sales of
Optison in the U.S. and Europe for as long as Mallinckrodt was marketing the
product. MBI has received royalties of approximately

13

$200,000 per quarter from Mallinckrodt this year. Under the modified
agreement, MBI received $5 million in cash and is entitled to potential
royalties for two years in lieu of any further payments.

In November 2000, the Company sold $7 million in principal amount of
five-year 6% subordinated convertible notes to certain investors. The notes
are convertible at any time after November 15, 2001, at each investor's
option into shares of Alliance common stock at $15.72 per share, subject to
certain antidilution provisions. The Company will have certain rights to
cause the notes to convert into common stock. The investors also paid $1.5
million for the option to purchase at any time $9.9 million of zero-coupon
subordinated convertible notes, convertible into Alliance common stock at
$22.17 per share, subject to certain antidilution provisions. In connection
with the transaction, Alliance placed $1.5 million in a restricted cash
account to be used to pay interest on the issued notes.

In August and September 2000, the Company sold $12 million in
principal amount of four-year 5% subordinated convertible debentures to
certain investors. The debentures are convertible at any time at each
investor's option into shares of Alliance common stock at $13.32 per share,
subject to certain antidilution provisions. The conversion price of the
debentures was below the trading market price on the day the debentures were
issued. As a result of this beneficial conversion price, the Company recorded
an immediate charge to interest expense of $1.1 million on these convertible
debentures. The Company will have certain rights to cause the debentures to
convert into common stock. The investors will have the option at any time to
purchase, and the Company will have certain rights to require the investors
to purchase, an additional $12 million of four-year 5% subordinated
convertible debentures, convertible into Alliance common stock at $16 per
share.
In May 2000, Alliance and Baxter entered into a joint venture for
the manufacture, marketing, sales and distribution of OXYGENT in the Baxter
Territory. The companies formed PFC Therapeutics to oversee the further
development, manufacture, marketing, sales and distribution of OXYGENT; and
each party invested $5 million in PFC Therapeutics. In connection with the
transaction, PFC Therapeutics obtained an exclusive license in the Baxter
Territory, to manufacture and market all of the Company's injectable
perfluorochemical emulsions capable of transporting oxygen in therapeutic
effective amounts in the bloodstream, including OXYGENT. PFC Therapeutics
paid Alliance a prepaid royalty of $10 million. Alliance and Baxter will also
share in the distribution of PFC Therapeutics' future cash flows. Under the
arrangement, Alliance will continue to fund the current development plan for
OXYGENT'S initial approval in the Baxter Territory. PFC Therapeutics has a
right of first offer to license OXYGENT in one or more countries outside the
Baxter Territory. Pursuant to a manufacturing and supplier agreement between
Alliance and PFC Therapeutics, Alliance will initially manufacture OXYGENT
for distribution in the Baxter Territory. Under separate agreements between
Baxter and PFC Therapeutics, Baxter will have the exclusive right to promote,
market, distribute and sell OXYGENT in the Baxter Territory, and Baxter has
the right to take over the manufacturing responsibility for OXYGENT. In
connection with this arrangement, Baxter has purchased 500,000 shares of the
Company's convertible Series F Preferred Stock for $20 million. Initially, in
order for Baxter to maintain its rights to commercialize the product, Baxter
was required to purchase an additional $30 million of convertible redeemable
preferred stock through September 2001. In May 2001, because of a revised
product development schedule, the Company and Baxter modified the expected
payments, and Baxter purchased an additional $4 million of Series F Preferred
Stock and $3 million of certain OXYGENT related equipment in lieu of
purchasing the same amount of preferred stock. In August 2001, Baxter
purchased another $4 million of the Company's Series F Preferred Stock and
the companies agreed to restructure the remaining $19 million stock purchases
originally scheduled for 2001 in order to reflect the timeline revisions in
the clinical and regulatory plans, and in order for Baxter to maintain its
rights to the product. The $19 million obligation will be paid to the Company
if certain milestones are reached during the development of the new pivotal
Phase 3 trial protocol and the conduct of the study.

In February 2000, the Company sold $15 million in principal amount
of four-year 5% subordinated convertible debentures to certain investors. The
debentures are convertible at any time at each investor's option into shares
of Alliance common stock at $9.65 per share, subject to certain antidilution
provisions. The conversion price of the debentures was below the trading
market price on the day the debentures were issued. As a result of this
beneficial conversion price, the Company has recorded an immediate charge to
interest expense of $3.7 million on these convertible debentures. The Company
will have certain rights to cause the debentures to convert into common
stock. The investors will have the option at any time to purchase, and the
Company will have certain rights to require the investors to

14

purchase, an additional $15 million of four-year 5% subordinated convertible
debentures, convertible into Alliance common stock at $12.06 per share. In
connection with the transaction, the Company issued a warrant to purchase up
to 77,720 shares of common stock at an exercise price of $9.65 per share. The
Company has recorded deferred interest expense on the warrant, based upon a
Black-Scholes valuation, of $503,000, which will be amortized over the life
of the warrant. The unamortized deferred interest balance was $265,000 at
June 30, 2001. During fiscal 2001, $6.1 million of these debentures were
converted into 632,124 shares of Alliance common stock.

In November 1999, the Company completed the sale of certain aspects
of its PULMOSPHERES technology to Inhale for $15 million in cash and $5
million in common stock of Inhale, plus the right to receive additional
future milestone and royalty payments. In consideration for retaining certain
rights to use the technology, Alliance issued $5 million in Alliance common
stock to Inhale.

In May 1999, the Company privately placed $1.8 million of 6%
convertible subordinated notes due May 2002 and issued warrants to the note
holders to purchase up to 300,000 shares of common stock at $2.45 per share.
In February 2000, the Company caused the notes to be converted into 900,000
shares of common stock of the Company. The conversion price of the notes was
$2 per share, which was below the trading market price of the stock on the
day the notes were issued. As a result of this beneficial conversion price,
the Company recognized an immediate charge to interest expense of $844,000 on
these convertible notes. The Company recorded deferred interest expense on
the warrants of $521,000, based upon a Black-Scholes valuation, and amortized
the deferred interest over the life of the notes. The unamortized deferred
interest balance was expensed in February 2000 when the notes were converted.

In September 1997, the Company entered into the Schering License
Agreement, which provides Schering with worldwide exclusive marketing and
manufacturing rights to IMAVIST. In conjunction with the Schering License
Agreement, SBVC purchased 500,000 shares of the Company's convertible Series
D Preferred Stock for $10 million. In February 2000, the Series D Preferred
Stock was converted into 1,000,000 shares of common stock of the Company. The
product is being developed jointly by Alliance and Schering. Under the
Schering License Agreement, Schering paid to Alliance in 1998 an initial
license fee of $4 million, and agreed to pay further milestone payments and
royalties on product sales. Schering is also providing funding to Alliance
for some of its development expenses related to IMAVIST. Because of changes
in the development of the field of ultrasound contrast agents and in the
parties' development plans, Alliance and Schering amended the Schering
License Agreement as of December 30, 1998. Under the original arrangement,
royalty rates were based upon the development of specific medical uses for
IMAVIST, which placed limitations on the development effort. The parties
elected to revise the royalty calculation which is now based on sales of
IMAVIST, a more traditional method of determining royalties. This
modification permits the parties to be flexible in developing IMAVIST.
Although the method of calculating royalties has been changed, the Company
believes that there will be no material difference in the amount of royalties
to be earned by the Company under the Schering License Agreement.
Additionally, the parties reduced ongoing development reimbursements and
added new milestone payments.

In June 1998, the Company entered into a loan and security agreement
with a bank to provide for up to $15 million at the bank's prime rate plus
0.5%. Amounts borrowed are secured by a $3.6 million restricted certificate of
deposit and certain fixed assets and patents, and are scheduled to be repaid
over three years. If certain financial covenants are not satisfied, the
outstanding balance may become due and payable. On June 30, 2001, the balance
outstanding on this loan was $4.6 million. The Company has a $1.5 million
line of credit available with a bank which is primarily available to cover
letters of credit securing its leased premises obligations.

The Company had net working capital of ($862,000) at June 30, 2001,
compared to $21.3 million at June 30, 2000. The Company's cash, cash
equivalents, and short-term investments decreased to $6.3 million at June 30,
2001, from $33.5 million at June 30, 2000. The decrease resulted primarily
from net cash used in operations of $57.6 million and principal payments on
long-term debt of $4.9 million, partially offset by proceeds of $19 million
from the sale of convertible debentures and notes, $4.9 million from the sale
of short-term investments, proceeds of $3.9 million from the issuance of
common stock upon the exercise of options and warrants, net proceeds of $3.8
million from the sale of preferred stock and proceeds of $3 million from the
sale of assets. As a result of the MBI acquisition in December 2000, the
Company increased its cash and marketable securities by $8 million. The
Company's operations to date have consumed substantial amounts of cash and
are expected to continue to do so for the foreseeable future.

15

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

The Company expects to incur substantial expenditures associated
with product development, particularly for OXYGENT AND IMAVIST. The Company
may 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 such financing will be available
on reasonable 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, proceeds of
$5 million received from Mallinckrodt, a unit of Tyco Healthcare, in
connection with the amendment of the Optison Product Rights Agreement in
August 2001, a $4 million investment in the Company's Series F Preferred
Stock made by Baxter in August 2001, expected milestone payments by Baxter,
estimated proceeds from the proposed private placement in October 2001 and
expected revenue from investments will be adequate to satisfy its capital
requirements through at least fiscal 2002. The Company's future capital
requirements will depend on many factors, including, but not limited to,
continued scientific progress in its research and development programs,
progress with preclinical testing and clinical trials, the time and cost
involved in obtaining regulatory approvals, patent costs, competing
technological and market developments, changes in existing collaborative
relationships, the ability of the Company to establish additional
collaborative relationships, and the cost of manufacturing scale-up.

While the Company believes that it can produce materials for
clinical trials and the initial market launch for OXYGENT and IMAVIST at its
existing San Diego, California facilities, it may need to expand its
commercial manufacturing capabilities for its products in the future. Any
expansion for any of its products may occur in stages, each of which would
require regulatory approval, and product demand could at times exceed supply
capacity. The Company has not selected a site for such expanded facilities
and cannot predict the amount it will expend for the construction of such
facilities. There can be no assurance as to when or whether the FDA will
determine that such facilities comply with Good Manufacturing Practices. The
projected location and construction of such facilities will depend on
regulatory approvals, product development, and capital resources, among other
factors. The Company has not obtained any regulatory approvals for its
production facilities for these products, nor can there be any assurance that
it will be able to do so. The Company currently has responsibility for
manufacturing OXYGENT; however, Baxter has the right to take over
responsibility for manufacturing the product for sale in the Baxter
Territory. The Schering License Agreement requires the Company to manufacture
products at its San Diego facility for a period of time after market launch
at a negotiated price. Schering will be responsible for establishing
production capacity beyond the maximum capacity of the San Diego facility.
The Company sold its facility in Otisville, New York in June 2001.

Except for historical information, the statements made herein and
elsewhere are forward-looking. The Company wishes to caution readers that
these statements are only predictions and that the Company's business is
subject to significant risks. The factors discussed herein and other
important factors, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
consolidated results for 2002, and beyond, to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. These risks include, but are not limited to, the inability to obtain
adequate financing for the Company's development efforts; the inability to
enter into collaborative relationships to further develop and commercialize
the Company's products; changes in any such relationships, or the inability
of any collaborative partner to adequately commercialize any of the Company's
products; the uncertainties associated with the lengthy regulatory approval
process, including uncertainties associated with FDA decisions and timing on
product development or approval; and the

16

uncertainties associated with obtaining and enforcing patents important to
the Company's business; and possible competition from other products.
Furthermore, even if the Company's products appear promising at an early
stage of development, they may not reach the market for a number of important
reasons. Such reasons include, but are not limited to, the possibilities that
the potential products will be found ineffective during clinical trials;
failure to receive necessary regulatory approvals; difficulties in
manufacturing on a large scale; failure to obtain market acceptance; and the
inability to commercialize because of proprietary rights of third parties.
The research, development, and market introduction of new products will
require the application of considerable technical and financial resources,
while revenues generated from such products, assuming they are developed
successfully, may not be realized for several years. Other material and
unpredictable factors which could affect operating results include, without
limitation, the uncertainty of the timing of product approvals and
introductions and of sales growth; the ability to obtain necessary raw
materials at cost-effective prices or at all; the effect of possible
technology and/or other business acquisitions or transactions; and the
increasing emphasis on controlling healthcare costs and potential legislation
or regulation of healthcare pricing.

RESULTS OF OPERATIONS

2001 COMPARED TO 2000

The Company's license and research revenue was $1.9 million for
2001, compared to $16 million for 2000. Fiscal year 2000 revenue included
$14.1 million from the sale of certain aspects of its PULMOSPHERES
technology to Inhale.

Research and development expenses increased by 1% to $55.3 million
for 2001, compared to $54.6 million for 2000. The increase in expenses was
primarily due to a $1.1 million increase in utility expenses, offset by a
$642,000 decrease in staffing costs for employees primarily engaged in
research and development activities, as well as other decreases related to
the Company's research and development activities. The Company expects
research and development expenses to decrease in 2002 compared to 2001, due
to reduced clinical trial expenses.

General and administrative expenses were $8.7 million for 2001,
compared to $9.8 million for 2000. The decrease in general and administrative
expenses was primarily due to decreased professional fees related to
partnering and financing activities.

Investment income was $5.6 million for 2001, compared to $7.5
million for 2000. The decrease was primarily a result of a decrease in
realized gains from the sale of short-term investments.

Interest expense was $2.2 million for 2001, compared to $2 million
for 2000. The increase was primarily a result of higher average long-term
debt balances.

In 2001, the Company recorded imputed interest expense of $1.1
million related to the beneficial conversion feature on $12 million principal
amount of subordinated convertible debentures. In 2000, the Company recorded
imputed interest expense of $3.7 million related to the beneficial conversion
feature on $15 million principal amount of subordinated convertible
debentures.

2000 COMPARED TO 1999

The Company's license and research revenue was $16 million for 2000,
compared to $8.3 million for 1999. The increase in revenue was primarily a
result of the proceeds from the sale of technology to Inhale.

Research and development expenses decreased by 10% to $54.6 million
for 2000, compared to $60.4 million for 1999. The decrease in expenses was
primarily due to a $3.4 million decrease in payments to outside researchers
for preclinical and clinical trials and other product development work, a
$1.8 million decrease in staffing costs for employees primarily engaged in
research and development activities, as well as other decreases related to
the Company's research and development activities.

General and administrative expenses were $9.8 million for 2000,
compared to $8.6 million for 1999. The increase in general and administrative
expenses was primarily due to increased professional fees resulting from
partnering and financing activities.

17

Investment income was $7.5 million for 2000, compared to $1.9
million for 1999. The increase was primarily a result of an increase in
realized gains from the sale of short-term investments.

Interest expense was $2 million for 2000, compared to $1.1 million
for 1999. The increase was primarily due to non-cash interest expense charges
related to warrants issued.

In 2000, the Company recorded imputed interest expense of $3.7
million related to the beneficial conversion feature on the $15 million
subordinated convertible debentures. In 1999, the Company recorded imputed
interest expense of $844,000 related to the beneficial conversion feature on
the $1.8 million convertible subordinated notes.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is or has been exposed to changes in interest rates
primarily from its long-term debt arrangements and, secondarily, its
investments in certain securities. Under its current policies, the Company
does not use interest rate derivative instruments to manage exposure to
interest rate changes. The Company believes that a hypothetical 100 basis
point adverse move in interest rates along the entire interest rate yield
curve would not materially affect the fair value of the Company's interest
sensitive financial instruments at June 30, 2001.

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 October 2001 Annual Meeting of Shareholders (the
"Proxy Statement"). Copies of the Proxy Statement will be duly filed with the
SEC pursuant to Rule 14a-6(c) promulgated under the Securities Exchange Act
of 1934, as amended, not later than 120 days after the end of the fiscal year
covered by its Annual Report on Form 10-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.

18

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 Page F-2 for the Report of Ernst & Young LLP,
Independent Auditors being filed herein.

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

(b) Reports on Form 8-K.

1. The Company filed a Current Report on Form 8-K dated
August 31, 2001 stating that it has reached an agreement in principle on
terms for the private placement of at least $15 million of common shares to a
group of institutional investors. The company will seek shareholder approval
for the financing, which includes a reverse stock split, at its annual
shareholder meeting. The securities sold in the contemplated private
placement will not be registered under the Act and may not be offered or sold
in the U.S. absent registration or an applicable exemption from the
registration statement requirements of the Act.

2. The Company filed a Current Report on Form 8-K dated
August 6, 2001 stating that its wholly-owned subsidiary, MBI, entered into an
amendment to the OPTISON(R) Product Rights Agreement dated May 9, 2000 with
Mallinckrodt, Inc., a unit of Tyco Healthcare, pursuant to which MBI received
an immediate cash payment of $5 million and unspecified future royalties for
two years in lieu of any further royalty payments from the sale of OPTISON in
the United States and Europe.

3. The Company filed a Current Report on Form 8-K dated
June 22, 2001 stating that it entered into an agreement to acquire
approximately 2.5 million shares of Series B Preferred Stock of Metracor in
exchange for approximately $500,000 cash and the grant of an exclusive
license and sublicense, where applicable, to all of Alliance's rights and
interest in and to RODA. In connection with the transaction, Alliance entered
into an Option Agreement with all other investors (the "Investors")
purchasing shares of Series B Preferred Stock of Metracor (which Investors
purchased, in aggregate, approximately 15.1 million shares) (the "Series B
Shares"). Under the terms of the Option Agreement, Alliance may purchase all
(but not less than all) of the Series B Shares held by the Investors until
December 1, 2002 (or earlier in certain events) (the "Alliance Option"). If
Alliance exercises the Alliance Option, Alliance will pay the Investors, at
Alliance's discretion, either $0.93273 cash per Series B Share (the "Cash
Exercise Price Per Share") (for an aggregate price of approximately $14.1
million), or 0.13072 shares of Alliance Common Stock per Series B Share (the
"Alliance Stock Exercise Price Per Share") (for an aggregate price of
approximately 1.97 million shares of Alliance Common Stock). Metracor may
sell up to approximately 5 million shares of additional Series B Shares to
other investors who will be subject to and receive all of the rights and
obligations of the Investors.

The Option Agreement also includes an option (the "Investor
Option") that becomes exercisable collectively by the Investors, should Alliance
not exercise the Alliance Option prior to November 1, 2002. The Investors, prior
to November 30, 2002, may elect to require Alliance to purchase, at the Cash
Exercise Price Per Share, all of the Series B Shares held by the Investors,
subject to Alliance's right to pay the Investors at the Alliance Stock Exercise
Price Per Share. The Investor Option will expire upon the occurrence of certain
events.

19

4. The Company filed a Current Report on Form 8-K dated May
21, 2001 stating that it received preliminary results from a Phase 2-3
clinical study that evaluated the use of PARTIAL LIQUID VENTILATION(TM) (PLV)
with LIQUIVENT(R) for adult patients with ARDS being supported by a
mechanical ventilator. Efficacy data from the study revealed that PLV with
LIQUIVENT did not meet either the primary study endpoint for improvement in
"ventilator free days" or the secondary endpoint of improvement in 28-day
mortality. Safety data demonstrated that LIQUIVENT was well tolerated by the
patients.

(c) Exhibits.

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

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

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

(b) Formula Award of Stock Options for Non-employee Members
of the Board of Directors as approved by shareholders of the Company
(incorporated by reference to Exhibit 10(e) of the 1994 10-K).(1)

(c) Agreement and Plan of Merger by and among the Company,
MDV Acquisition Corp. and MDV Technologies, Inc. dated October 8, 1996
(incorporated by reference to Exhibit 1 of the Current Report on Form 8-K
filed on November 20, 1996).

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

(e) Preferred Stock Purchase Agreement dated September 23,
1997, between the Company and Schering Berlin Venture Corp. (incorporated by
reference to Exhibit 2(b) of the 1997 8-K/A).

(f) Royalty Rights Agreement dated as of August 13, 1998,
between the Company and certain investors (incorporated by reference to
Exhibit 10(k) of the 1998 10-K).

(g) Credit Agreement dated as of June 17, 1998, between the
Company and Imperial Bank (incorporated by reference to Exhibit 10(m) of the
1998 10-K).

(h) Security Agreement dated June 17, 1998, executed by the
Company in favor of Imperial Bank (incorporated by reference to Exhibit 10(o)
of the 1998 10-K).

(i) Lease Agreement dated November 7, 1998, between the
Company and WHAMC Real Estate Limited Partnership, a Delaware limited
partnership, relating to certain manufacturing and development facilities in
San Diego, California (incorporated by reference to Exhibit 10(p) of the 1998
10-K).

(j) First Amendment to License Agreement, dated as of
December 30, 1998, between the Company and Schering AG, Germany (incorporated
by reference to Exhibit 10 of the December 1998 10-Q).(2)

(k) Employment Letter Agreement dated February 26, 1999 and
executed by Dr. Artemios B. Vassos (incorporated by reference to Exhibit
10(a) of the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1999 (the "March 1999 10-Q")).(1)

(l) Promissory Note in the amount of $180,000 dated March 3,
1999, and executed by Dr. Artemios B. Vassos in favor of the Company
(incorporated by reference to Exhibit 10(b) of the March 1999 10-Q).(1)

20

(m) Promissory Note in the amount of $125,000 dated March 3,
1999, and executed by Dr. Artemios B. Vassos in favor of the Company
(incorporated by reference to Exhibit 10(c) of the March 1999 10-Q).(1)

(n) Promissory Note in the amount of $125,000 dated March 3,
1999, and executed by Dr. Artemios B. Vassos in favor of the Company
(incorporated by reference to Exhibit 10(d) of the March 1999 10-Q).(1)

(o) Security Purchase Agreement dated May 20, 1999, between
the Company and Harris & Harris Group, Inc., Jan A. Dekker and Stephen McGrath
with forms of the 6% Convertible Subordinated Note Due May 20, 2002 and Warrant
(incorporated by reference to Exhibit 10(u) of the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1999 (the "1999 10-K")).

(p) Agreement to Waive Covenant Violation and Modify Loan
dated May 17, 1999, between the Company and Imperial Bank (incorporated by
reference to Exhibit 10(w) of the 1999 10-K).

(q) Intellectual Property Security Agreement dated May 17,
1999, between the Company and Imperial Bank (incorporated by reference to
Exhibit 10(x) of the 1999 10-K).(2)

(r) First Amendment to Credit Agreement dated June 17, 1999,
among the Company, MDV Technologies, Inc. and Imperial Bank (incorporated by
reference to Exhibit 10(y) of the 1999 10-K).(2)

(s) Intellectual Property Security Agreement dated August 2,
1999, between MDV Technologies, Inc. and Imperial Bank (incorporated by
reference to Exhibit 10(z) of the 1999 10-K).

(t) Commercial Security Agreement dated August 3, 1999, among
the Company, MDV Technologies, Inc. and Imperial Bank (incorporated by reference
to Exhibit 10(aa) of the 1999 10-K).

(u) Promissory Note dated August 2, 1999, in the amount of
$5,000,000 executed by the Company and MDV Technologies, Inc. in favor of
Imperial Bank (incorporated by reference to Exhibit 10(bb) of the 1999 10-K).

(v) Promissory Note dated August 2, 1999, in the amount of
$8,422,619.04 executed by the Company and MDV Technologies, Inc. in favor of
Imperial Bank (incorporated by reference to Exhibit 10(cc) of the 1999 10-K).

(w) Split Dollar Life Insurance Agreement between the Company
and Duane J. Roth dated November 12, 1998 (incorporated by reference to Exhibit
10(a) to the Company's Quarterly report on Form 10-Q for the quarterly period
ended September 31, 1999 (the "September 1999 10-Q")).(1)

(x) Collateral Assignment of Life Insurance Policy between the
Company and Duane J. Roth dated November 25, 1998 (incorporated by reference to
Exhibit 10(b) of the September 1999 10-Q).(1)

(y) Split Dollar Life Insurance Agreement between the Company
and Theodore D. Roth dated November 12, 1998 (incorporated by reference to
Exhibit 10(c) of the September 1999 10-Q).(1)

(z) Collateral Assignment of Life Insurance Policy between the
Company and Theodore D. Roth dated November 12, 1998 (incorporated by reference
to Exhibit 10(d) of the September 1999 10-Q).(1)

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

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

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

21

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

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

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

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

(hh) Supply Agreement dated as of July 9, 1999, between the
Company and Fluoromed L.P. (incorporated by reference to Exhibit 10(d) of the
Company's Quarterly report on Form 10-Q for the quarterly period ended December
31, 1999).(2)

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

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

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

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

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

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

(oo) License Agreement dated May 19, 2000, between the Company
and PFC Therapeutics, LLC (incorporated by reference to Exhibit 10(pp) of the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2000
(the "2000 10-K")).(2)

(pp) Marketing and Distribution Agreement executed May 19,
2000, effective June 1, 2000 between the Company, Baxter Healthcare Corporation
and PFC Therapeutics, LLC (incorporated by reference to Exhibit 10(qq) of the
2000 10-K).(2)

(qq) Alliance Manufacturing and Supplier Agreement dated May
19, 2000, between the Company and PFC Therapeutics, LLC (incorporated by
reference to Exhibit 10(rr) of the 2000 10-K).(2)

(rr) Baxter Manufacturing and Supplier Agreement dated May 19,
2000, between Baxter Healthcare Corporation and PFC Therapeutics, LLC
(incorporated by reference to Exhibit 10(ss) of the 2000 10-K).(2)

(ss) Operating Agreement dated May 17, 2000, between the
Company and Baxter Healthcare Corporation (incorporated by reference to Exhibit
10(tt) of the 2000 10-K).(2)

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

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

22

(vv) Security Agreement dated May 19, 2000, between the
Company and PFC Therapeutics, LLC (incorporated by reference to Exhibit 10(ww)
of the 2000 10-K).(2)

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

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

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

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

(aaa) Consulting Agreement between Alliance Pharmaceutical
GmbH and Jean Riess (incorporated by reference to Exhibit 10(b) of the December
2000 10-Q).(1)

(bbb) Severance Agreement and Release between Artemios B.
Vassos and the Company dated January 31, 2001 (incorporated by reference to
Exhibit 10(a) of the Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2001 (the "March 2001 10-Q")).(1)

(ccc) Consulting Agreement between Artemios B. Vassos and the
Company dated November 4, 2000 (incorporated by reference to Exhibit 10(b) of
the March 2001 10-Q).(1)

(ddd) 1991 Stock Option Plan of the Company as amended through
May 8, 2001 (incorporated by reference to Exhibit 10(c) of the March 2001 10-Q).

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

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

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

(hhh) Consulting Agreement dated July 31, 2001 between the
Company and Harold W. DeLong.(1)

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

(jjj) Letter Agreement dated as of May 1, 2001 between the
Company and Baxter Healthcare Corporation amending the Deferred Stock Purchase
Agreement dated May 19, 2000.(3)

(kkk) Term Sheet dated August 1, 2001 between the Company and
Baxter Healthcare Corporation amending the Deferred Stock Purchase Agreement
dated May 19, 2000.(3)

(lll) Third Amendment to Optison Products Rights Agreement
dated as of August 6, 2001, between the Company, Molecular Biosystems, Inc. and
Mallinckrodt Inc.

(mmm) Form of Amendment to the 1991, 2000 and 2001 Stock
Option Plans of the Company adopted May 8, 2001.

23

(21) Subsidiary List

(23.1) Consent of Ernst & Young LLP, Independent Auditors

(1) Management contract or compensatory plan or arrangement required to be
filed.

(2) Certain confidential portions of this exhibit have been deleted pursuant to
an order granted by the Securities and Exchange Commission under the Securities
Exchange Act of 1934.

(3) A request for confidential treatment of certain portions of this exhibit has
been filed with the Securities and Exchange Commission.

24

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 7, 2001 By: \S\ THEODORE D. ROTH
-------------------------
Theodore D. 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 Chairman and September 7, 2001
- ------------------------------ Chief Executive Officer
Duane J. Roth

\s\ THEODORE D. ROTH Director, President and September 7, 2001
- ------------------------------ Chief Operating Officer
Theodore D. Roth

\s\ TIM T. HART Chief Financial Officer, September 7, 2001
- ------------------------------ Treasurer and Chief
Tim T. Hart Accounting Officer

\s\ PEDRO CUATRECASAS, M.D. Director September 7, 2001
- ------------------------------
Pedro Cuatrecasas, M.D.

Director ___________, 2001
- ------------------------------
Fred M. Hershenson, Ph.D.

\s\ CARROLL O. JOHNSON Director September 7, 2001
- ------------------------------
Carroll O. Johnson

Director ___________, 2001
- ------------------------------
Stephen M. McGrath

\s\ HELEN M. RANNEY, M.D. Director September 7, 2001
- ------------------------------
Helen M. Ranney, M.D.

\s\ DONALD E. O'NEILL Director September 7, 2001
- ------------------------------
Donald E. O'Neill

\s\ JEAN RIESS, PH.D. Director September 7, 2001
- ------------------------------
Jean Riess, Ph.D.

Director ___________, 2001
- ------------------------------
Thomas F. Zuck, M.D.

25

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

TABLE OF CONTENTS TO CONSOLIDATED FINANCIAL STATEMENTS

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

F-1

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, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the three years in the period ended
June 30, 2001. 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.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alliance
Pharmaceutical Corp. and subsidiaries at June 30, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, Alliance Pharmaceutical
Corp. and subsidiaries have reported accumulated losses of $433,867,000 and
without additional financing, lacks sufficient working capital to fund
operations for the entire fiscal year ended June 30, 2002, which raises
substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are described in Note 1. The
accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.

ERNST & YOUNG LLP

San Diego, California
August 10, 2001

F-2

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-3

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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ------------------------------------------------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-5

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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-6

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

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of
Alliance Pharmaceutical Corp., the accounts of its wholly owned subsidiary
Molecular Biosystems, Inc. ("MBI") from the acquisition date of December 29,
2000, its wholly owned subsidiaries Astral, Inc and MDV Technologies, Inc.,
its wholly owned subsidiary Alliance Pharmaceutical GmbH from its inception
in December 1998, and its majority-owned subsidiary Talco Pharmaceutical,
Inc. All significant intercompany accounts and transactions have been
eliminated. Certain amounts in 2000 and 1999 have been reclassified to
conform to the current year's presentation.

LIQUIDITY AND BASIS OF PRESENTATION

The accompanying financial statements are prepared assuming the
Company is a going concern. The Company believes it lacks sufficient working
capital to fund operations for the entire fiscal year ended June 30, 2002.
Therefore, substantial additional capital resources will be required to fund
the ongoing operations related to the Company's research, development,
manufacturing and business development activities. Management believes there
are a number of potential alternatives available to meet the continuing
capital requirements such as public or private financings or collaborative
agreements. Subsequent to year-end, the Company received $9 million (a $5
million payment from Mallinckrodt, a unit of Tyco Healthcare, in connection
with the amendment of the Optison Product Rights Agreement ("OPRA") with MBI,
and a $4 million investment in the Company's Series F Preferred Stock made by
Baxter Healthcare Corporation ("Baxter")). In addition, on August 31, 2001
the Company announced that it has reached an agreement in principle on terms
for the private placement of at least $15 million of common shares to a group
of institutional investors. The estimated proceeds of the proposed private
placement, together with the $9 million already received, and expected
milestone payments from Baxter are expected to satisfy the Company's capital
requirements through at least fiscal 2002. There can be no assurance that any
of these financing arrangements will be consummated in the necessary time
frames needed for continuing operations or on terms favorable to the Company.
The Company is taking actions to reduce its ongoing expenses. If adequate
funds are not available, the Company will be required to significantly
curtail its operating plans and may have to sell or license out significant
portions of the Company's technology or potential products. The 2001
financial statements do not include any adjustment to reflect the possible
future effects on the recoverability and classification of assets or the
amount and classification of liabilities that may result from the outcome of
this uncertainty.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the consolidated financial
statements. Actual results could differ from those estimates.

CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS

Short-term investments consist of highly liquid debt instruments.
Management has classified the Company's 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 reported as a separate component of accumulated
comprehensive income (loss). The Company considers instruments purchased with
an original maturity of three months or less to be cash equivalents.

F-7

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 debt instruments of financial institutions and corporations
with strong credit ratings. The Company has established guidelines relative
to diversification and maturities to maintain safety and liquidity. These
guidelines are reviewed periodically and modified to take advantage of trends
in yields and interest rates. The Company has not experienced any material
losses on its short-term 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 3 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 4 to 20 years.

PURCHASED TECHNOLOGY

The purchased technology was primarily acquired as a result of the
merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in
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. Purchased technology also includes $4.5 million for
technology capitalized as a result of the acquisition of MBI in December 2000.

The PFC technology is the basis for the Company's main drug
development programs and is being amortized over a 20-year life. The PFC
technology has a net book value of $8.9 million and $10.1 million, and is
reported net of accumulated amortization of $14.3 million and $13.2 million
at June 30, 2001 and 2000, respectively. At June 30, 2001, the technology
acquired from MBI has a book value of $3.9 million, net of accumulated
amortization of $559,000, and is being amortized over four years.

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

INVESTMENT IN JOINT VENTURE

In May 2000, the Company and Baxter formed a joint venture, PFC
Therapeutics, LLC ("PFC Therapeutics") for the manufacture, marketing, sales
and distribution of OXYGENT in the United States, Canada and countries in the
European Union. The Company received a prepaid royalty of $10 million from
PFC Therapeutics, which is recorded as deferred revenue as of June 30, 2001
and 2000. The Company will recognize the revenue as the royalties are earned
and will record its portion of the operating results of the joint venture as
equity in income or loss of the joint venture within the Company's
consolidated statement of operations. PFC Therapeutics holds $10 million in
assets as of June 30, 2001 and had no significant operating results for the
past two fiscal years.

REVENUE RECOGNITION

Revenue under collaborative research agreements is recognized as
services are provided and revenue related to milestone payments is recognized
upon the completion of the milestone event or requirement under such
agreements. Revenue from product sales is recognized upon the transfer of
title, which is generally when products are shipped. The Company recognizes
revenue only on payments that are non-refundable, and defers revenue
recognition until performance obligations have been completed.

In December 1999, the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101, "Revenue Recognition in the Financial
Statements", ("SAB No. 101"), which provides guidance on the recognition,
presentation and disclosure of revenue in the financial statements and which
was effective October 1, 2000. The adoption of SAB No. 101 did not have a
material impact on the Company's financial statements.

F-8

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenditures are charged to expense as
incurred.

ACCOUNTING FOR STOCK-BASED COMPENSATION

As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to retain its current intrinsic value-based method and will disclose
the pro forma effect of using the fair value-based method to account for its
stock-based compensation in its financial statements.

NET LOSS PER SHARE

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

COMPREHENSIVE INCOME (LOSS)

Financial Accounting Standards Board's Statement No. 130,
"Comprehensive Income" ("SFAS No. 130") requires unrealized gains and losses
on the Company's available-for-sale securities to be included in accumulated
comprehensive income (loss). The Company has reported the total comprehensive
loss in the Consolidated Statements of Stockholders' Equity.

NEW ACCOUNTING REQUIREMENTS

In July 2001, the Financial Accounting Standards Board ("FASB")
issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business
Combinations" and "Goodwill and Other Intangible Assets." FAS 141 replaces
APB 16 and eliminates pooling-of-interests accounting prospectively. It also
provides guidance on purchase accounting related to the recognition of
intangible assets and accounting for negative goodwill. FAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Under FAS 142, goodwill will be tested annually and whenever events
or circumstances occur indicating that goodwill might be impaired. FAS 141
and FAS 142 are effective for all business combinations completed after June
30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for
business combinations consummated prior to July 1, 2001 will cease, and
intangible assets acquired prior to July 1, 2001 that do not meet the
criteria for recognition under FAS 141 will be reclassified to goodwill.
Companies are required to adopt FAS 142 for fiscal years beginning after
December 15, 2001, but early adoption is permitted under certain
circumstances. The adoption of these standards is not expected to have a
material impact on the Company's results of operations and financial position.

2. FINANCIAL STATEMENT DETAILS

OTHER CURRENT ASSETS

Other current assets consist of the following:

F-9

PROPERTY, PLANT AND EQUIPMENT - NET

Property, plant and equipment consist of the following:

ACCRUED EXPENSES

Accrued expenses consist of the following:

3. INVESTMENTS

The Company classifies its investment securities as
available-for-sale and records holding gains or losses in accumulated
comprehensive income (loss).

The following is a summary of available-for-sale securities:

The gross realized gains on sales of available-for-sale securities
totaled $3,917,000 and $6,282,000, in 2001 and 2000, respectively. The gross
unrealized gain (loss) of ($219,000) and $3,510,000 in 2001 and 2000,
respectively, are recorded as a component of comprehensive income (loss). The
unrealized gain or loss had no cash effect and therefore is not reflected in
the Consolidated Statements of Cash Flows.

4. LONG-TERM DEBT

In June 1998, the Company entered into a loan and security agreement
with a bank to provide for up to $15 million at the bank's prime rate plus
0.5%. The loan bears interest at rates ranging from 5.23% to 7.25% at June
30, 2001. Amounts borrowed are secured by a $3.6 million restricted
certificate of deposit, by certain fixed assets and patents, and are
scheduled to be repaid over three years. If certain financial covenants are
not satisfied, the outstanding balance may become due and payable. On June
30, 2001, the balance outstanding on this loan was $4.6 million.

In May 1999, the Company privately placed $1.8 million of 6%
convertible subordinated notes due May 2002 and issued warrants to the note
holders to purchase up to 300,000 shares of common stock at $2.45 per share.
In February 2000, the Company caused the notes to be converted into 900,000
shares of common stock of the Company.

F-10

The conversion price of the notes was $2 per share, which was below the
trading market price of the stock on the day the notes were issued. As a
result of this beneficial conversion price, the Company recognized an
immediate charge to interest expense of $844,000 on these convertible notes.
The Company recorded deferred interest expense on the warrants of $521,000,
based upon a Black-Scholes valuation, and amortized the deferred interest
over the life of the notes. The unamortized deferred interest balance was
expensed in February 2000 when the notes were converted.

In February 2000, the Company sold $15 million of four-year 5%
subordinated convertible debentures to certain investors. The debentures are
convertible at any time at each investor's option into shares of Alliance
common stock at $9.65 per share, subject to certain antidilution provisions.
The conversion price of the debentures was below the trading market price on
the day the debentures were issued. As a result of this beneficial conversion
price, the Company has recorded an immediate charge to interest expense of
$3.7 million on these convertible debentures. The Company will have certain
rights to cause the debentures to convert into common stock. The investors
will have the option at any time to purchase, and the Company will have
certain rights to require the investors to purchase, an additional $15
million of four-year 5% subordinated convertible debentures, convertible into
Alliance common stock at $12.06 per share. The Company issued to certain
investors of the debentures a warrant to purchase up to 77,720 shares of
common stock at an exercise price of $9.65 per share. The Company has
recorded deferred interest expense on the warrant, based upon a Black-Scholes
valuation, of $503,000, which will be amortized over the life of the warrant.
The unamortized deferred interest balance was $265,000 at June 30, 2001.
During the fiscal year ended June 30, 2001, $6.1 million of these debentures
and accrued interest were converted into 638,000 shares of Alliance common
stock.

In August and September 2000, the Company sold $12 million of
four-year 5% subordinated convertible debentures to certain investors. The
debentures are convertible at any time at each investor's option into shares
of Alliance common stock at $13.32 per share, subject to certain antidilution
provisions. The conversion price of the debentures was below the trading
market price on the day the debentures were issued. As a result of this
beneficial conversion price, the Company recorded an immediate charge to
interest expense of $1.1 million on these convertible debentures. The Company
will have certain rights to cause the debentures to convert into common
stock. The investors will have the option at any time to purchase, and the
Company will have certain rights to require the investors to purchase, an
additional $12 million of four-year 5% subordinated convertible debentures,
convertible into Alliance common stock at $16 per share, subject to certain
antidilution provisions.

In November 2000, the Company sold $7 million of five-year 6%
subordinated convertible notes to certain investors. The notes are
convertible at any time after November 15, 2001, at each investor's option
into shares of Alliance common stock at $15.72 per share, subject to certain
antidilution provisions. The Company will have certain rights to cause the
notes to convert into common stock. The investors also paid $1.5 million for
the option to purchase at any time $9.9 million of zero-coupon subordinated
convertible notes, convertible into Alliance common stock at $22.17 per
share, subject to certain antidilution provisions. In connection with the
transaction, Alliance placed $1.5 million in a restricted cash account to be
used to pay interest on the issued notes.

The Company's principal payments for the long-term debt for the
years ending June 30, 2002, 2003, 2004, 2005 and 2006 are $2.7 million, $1.5
million, $417,000, $-0- and $-0-, respectively. Due to the option of the
Company to satisfy the subordinated convertible debentures/notes with the
issuance of common stock, the Company has excluded any principal payments on
the convertible notes from the five year schedule of principal payments.

5. STOCKHOLDERS' EQUITY (DEFICIT)

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"), a
1991 Stock Option Plan, a 2000 Stock Option Plan and a 2001 Stock Option Plan
which provide for both incentive and non-qualified stock options (the "1991
Plan", the "2000 Plan" and the "2001 Plan"). These plans provide for the
granting of options to purchase shares of the Company's common stock (up to
an aggregate of 500,000, 2,500,000, 8,300,000, 2,100,000 and 2,000,000 shares
under the 1983 Plan, 1983 Program, 1991 Plan, 2000 Plan and 2001 Plan,
respectively) to directors, officers, employees, and consultants. The
optionees, date of grant, option price (which cannot be less than 100% and
80% of the fair market value of the common stock on the date of grant for
incentive stock options and non-qualified stock options, respectively),
vesting schedule, and term of options, which cannot exceed ten years (five
years under the 1983 Plan), are determined by the Compensation Committee of
the Board of Directors. The 1983 Plan and the 1983 Program have expired and
no additional options may be granted under such plans.

F-11

The following table summarizes stock option activity for the three
years ended June 30, 2001:

The following table summarizes information concerning outstanding and
exercisable stock options at June 30, 2001:

F-12

The Company has adopted the disclosure-only provisions of SFAS No.
123. In accordance with its provisions, the Company applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its stock option plans, and accordingly, no compensation cost has been
recognized for stock options in 2001, 2000 or 1999. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date and amortized to expense over their vesting period as
prescribed by SFAS No. 123, the Company's net loss applicable to common
shares and net loss per share would have been increased to the pro forma
amounts indicated below for the years ended June 30:

The impact of outstanding non-vested stock options granted prior to
1996 has been excluded from the pro forma calculations; accordingly, the
2001, 2000 and 1999 pro forma adjustments are not indicative of future period
pro forma adjustments if the calculation reflected all applicable stock
options. The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model with the following assumptions for 2001,
2000 and 1999, respectively: risk-free interest rate range of 4.625% to 6.5%
for 2001 and 5.63% to 6.63% for all prior years; dividend yield of 0% (for
all years); volatility factor of 105%, 83% and 78%; and a weighted-average
expected term of 6 years, 6 years and 7 years. The estimated weighted average
fair value at grant date for the options granted during 2001, 2000 and 1999
was $5.86, $4.64 and $3.23 per option, respectively.

The following table summarizes common shares reserved for issuance
at June 30, 2001 on exercise or conversion of:

WARRANTS

At June 30, 2001, the Company had warrants outstanding to purchase
1,193,142 shares of common stock at prices ranging from $2.45 to $9.65 per
share. The warrants expire on various dates from February 2004 through
November 2004.

PREFERRED STOCK

In September 1997, in conjunction with a license agreement (the
"Schering License Agreement"), Schering Berlin Venture Corp. ("SBVC"), an
affiliate of Schering AG, Germany ("Schering"), purchased 500,000 shares of
the Company's convertible Series D Preferred Stock for $10 million. In
February 2000, the Series D Preferred Stock was converted into 1,000,000
shares of common stock of the Company.

In August 1998, the Company sold 100,000 shares of its convertible
Series E-1 Preferred Stock to certain investors for $6 million. The Company
recognized an imputed dividend of $483,000 to reflect a beneficial conversion
feature on these preferred shares. In January 1999, 47,837 shares of the
Series E-1 Preferred Stock were converted into 1,091,338 shares of Alliance
common stock at an average price of $2.63 per share. In May 1999, 31,456
shares of Series E-1 Preferred Stock converted into 767,219 shares of
Alliance common stock. The Company also repurchased the remaining 20,707
shares of Series E-1 Preferred Stock for $2.2 million of cash. The Company
recorded a preferred stock dividend of $1.2 million, which represents the
excess of the fair value of the consideration transferred to the preferred

F-13

stockholders over the carrying value of the preferred stock. The investors
obtained a right to receive a royalty on future sales of one of the Company's
products under development, provided that the product is approved by the U.S.
Food and Drug Administration by December 2003. The total royalty obligation
is 0.3% of net sales of the product for a period of three years. The Company
has certain rights to repurchase the royalty right.

In May 2000, the Company entered into a joint venture with Baxter
and sold 500,000 shares of its convertible Series F Preferred Stock for $20
million. In May 2001, the Company sold to Baxter 100,000 shares of its
convertible Series F Preferred Stock for $4 million. If Alliance's common
stock price averages $22 per share over a 20-day period within the next four
years, the conversion price for the Series F Preferred Stock will be $22 per
share. If the stock does not reach that price, the conversion price will be
based on the market value of Alliance's common stock at the time of
conversion, subject to certain limitations. The Series F Preferred Stock has
no annual dividend and is not entitled to any voting rights except as
otherwise required by law.

6. LICENSE AGREEMENTS

In September 1997, the Company entered into the Schering License
Agreement, which provides Schering with worldwide exclusive marketing and
manufacturing rights to Alliance's drug compounds, drug compositions, and
medical devices and systems related to perfluorocarbon ultrasound imaging
products, including IMAVIST(TM) (formerly named IMAGENT(R)). In conjunction
with the Schering License Agreement, SBVC purchased 500,000 shares of the
Company's convertible Series D Preferred Stock for $10 million. In February
2000, the Series D Preferred Stock was converted into 1,000,000 shares of
common stock of the Company. IMAVIST is being developed jointly by Alliance
and Schering. Under the Schering License Agreement, Schering paid to Alliance
in 1998 an initial license fee of $4 million, and agreed to pay further
milestone payments and royalties on product sales. Schering is also providing
funding to Alliance for some of its development expenses related to IMAVIST.

In May 2000, Alliance and Baxter entered into a joint venture for
the manufacture, marketing, sales and distribution of OXYGENT in the United
States, Canada and countries in the European Union (the "Baxter Territory").
The companies formed PFC Therapeutics to oversee the further development,
manufacture, marketing, sales and distribution of OXYGENT; and each party
invested $5 million in PFC Therapeutics. In connection with the transaction,
PFC Therapeutics obtained an exclusive license from Alliance in the Baxter
Territory, to manufacture and market all of the Company's injectable
perfluorochemical emulsions capable of transporting oxygen in therapeutic
effective amounts in the bloodstream, including OXYGENT. PFC Therapeutics
paid Alliance a prepaid royalty of $10 million, which has been recorded as
deferred revenue. Alliance and Baxter will also share in the distribution of
PFC Therapeutics' future cash flows. Under the arrangement, Alliance will
continue to fund the current development plan for OXYGENT'S initial approval
in the Baxter Territory. PFC Therapeutics has a right of first offer to
license OXYGENT in one or more countries outside the Baxter Territory.
Pursuant to a manufacturing and supplier agreement between Alliance and PFC
Therapeutics, Alliance will initially manufacture OXYGENT for distribution in
the Baxter Territory. Under separate agreements between Baxter and PFC
Therapeutics, Baxter will have the exclusive right to promote, market,
distribute and sell OXYGENT in the Baxter Territory, and Baxter has the right
to take over the manufacturing responsibility for OXYGENT. In connection with
this arrangement, Baxter has purchased 500,000 shares of the Company's
convertible Series F Preferred Stock for $20 million. Initially, in order for
Baxter to maintain its rights to commercialize the product, Baxter was
required to purchase an additional $30 million of convertible redeemable
preferred stock through September 2001. In May 2001, because of a revised
product development schedule, the Company and Baxter modified the expected
payments, and Baxter purchased an additional $4 million of Series F Preferred
Stock and $3 million of certain OXYGENT related equipment in lieu of
purchasing the same amount of preferred stock, in a transaction accounted for
as a sale and lease-back. In August 2001, Baxter purchased another $4 million
of the Company's Series F Preferred Stock and the companies agreed to
restructure the remaining $19 million stock purchases originally scheduled
for 2001 in order to reflect the timeline revisions in the clinical and
regulatory plans, and in order for Baxter to maintain its rights to the
product. The $19 million obligation will be paid to the Company if certain
milestones are reached during the development of the new pivotal Phase 3
trial protocol and the conduct of the study.

In May 2001, the Company sold manufacturing equipment to Baxter for
proceeds of $3 million. In conjunction with the sale of the equipment to
Baxter, the Company leased the equipment back from Baxter. The term of the
lease is for six years and the Company will begin making monthly payments of
$40,000 plus interest (at prime plus 1%) following the first year of the
lease term. In addition, following the expiration of the lease term, Alliance
will be able to

F-14

purchase the equipment for $750,000. The lease obligation to Baxter of $3
million has been included in long-term debt of the Company as of June 30,
2001.

In July 1997, the Company entered into a development agreement (the
"Development Agreement") with VIA Medical Corporation (renamed Metracor
Technologies, Inc. ("Metracor") in June 2001) for the joint development of
RODA (Real-time Oxygen Dynamics Analyzer). RODA is a minimally invasive,
point-of-care patient monitoring system that combines oxygen dynamics
software designed by the Company with Metracor's ex vivo blood gas and
chemistry sensor technology. In August 1998, Alliance and Metracor entered
into a manufacturing, marketing and distribution agreement (the "Marketing
Agreement") whereby Metracor was primarily responsible for manufacturing and
marketing RODA, and the parties were to share revenues from the sale of
products. RODA is intended to provide continuous (intermittent) measurements
of certain blood chemistry and blood gas parameters, as well as an overall
assessment of surgical and intensive care patients' cardiovascular and
oxygenation status. In June 2001, the Development Agreement was terminated
and the Marketing Agreement was restructured. Under the arrangement, Metracor
obtained an exclusive royalty-free license to all of Alliance's rights and
interest in and to RODA, and an option was granted by Alliance to Metracor to
acquire all of Alliance's rights to RODA in the future upon the occurrence of
certain events. Alliance also entered into an agreement to acquire
approximately 2.5 million shares of Series B Preferred Stock of Metracor
("Metracor B Stock") in exchange for approximately $500,000 cash and the
Metracor License. After acquiring the Metracor B Stock, Alliance owns
approximately 5% of Metracor.

In connection with the transaction, Alliance entered into an option
agreement with all other investors (the "Investors") purchasing the Metracor
B Stock. Under the terms of the option agreement, Alliance may purchase all
(but not less than all) of the Investors Metracor B Stock until December 1,
2002 or earlier upon certain events (the "Alliance Option"). If Alliance
exercises the Alliance Option, Alliance will pay the Investors, at Alliance's
discretion, either $0.93273 cash per share of Metracor B Stock (the "Cash
Price") (for an aggregate price of approximately $14.1 million), or 0.13072
shares of Alliance Common Stock per share of Metracor B Stock (the "Alliance
Stock Price") (for an aggregate price of approximately 1.97 million shares of
Alliance Common Stock). If exercised, Alliance would collectively hold
approximately 36% of Metracor.

Metracor may sell up to approximately five million shares of
additional Metracor B Stock to other Investors who will become parties to the
Option Agreement. Should Metracor sell the entire additional five million
shares, and Alliance exercise the Alliance Option, Alliance would hold
approximately 47% of Metracor in return for an aggregate Cash Price of $18.8
million or an aggregate Alliance Stock Price of 2.63 million shares of
Alliance Common Stock.

The Option Agreement also includes a thirty day option exercisable
collectively by the Investors, including if applicable, purchasers of the
five million additional shares, if Alliance does not exercise the Alliance
Option prior to November 1, 2002 to require Alliance to purchase all of the
Metracor B Stock at the Cash Price (subject to Alliance's right to pay the
Alliance Stock Price in lieu of the Cash Price).

7. SALE OF TECHNOLOGY

In November 1999, the Company completed the sale of certain aspects
of its PULMOSPHERES(R) technology to Inhale Therapeutic Systems, Inc.
("Inhale") for $15 million in cash and $5 million in common stock of Inhale,
plus the right to receive additional future milestone and royalty payments.
In consideration for retaining certain rights to use the technology, Alliance
issued $5 million in Alliance common stock to Inhale. The Company recorded
net revenue of $14.1 million associated with this transaction in fiscal 2000.

8. ACQUISITION OF MOLECULAR BIOSYSTEMS, INC.

On December 29, 2000, the Company acquired the outstanding shares of
MBI in exchange for 770,000 shares of Alliance common stock. MBI is the
developer of OPTISON(R), an intravenous ultrasound contrast agent being
marketed in both the United States and Europe. The acquisition was accounted
for as a purchase.

F-15

A summary of the MBI acquisition costs and allocation to the assets
acquired and liabilities assumed is as follows:

Total acquisition costs:
Issuance of common stock $ 10,526,000
Acquisition-related expenses 600,000
---------------------
$ 11,126,000
=====================

Allocated to assets and liabilities as follows:

Tangible assets acquired $ 10,090,000
Assumed liabilities (3,440,000)
Purchased technology 4,476,000
---------------------
$ 11,126,000
=====================

Assuming that the acquisition of MBI had occurred on the first day of
the Company's fiscal year ended June 30, 2000, (unaudited) pro forma condensed
consolidated financial information would be as follows:

This pro forma information is not necessarily indicative of the
actual results that would have been achieved had MBI been acquired the first
day of the Company's fiscal year ended June 30, 2000, nor is it necessarily
indicative of future results.

9. INCOME TAXES

Significant components of the Company's deferred tax assets as of
June 30, 2001 and 2000, respectively, are shown below. A valuation allowance
of $166,198,000, of which $21,243,000 is related to 2001, has been recognized
to offset the deferred tax assets as realization of such assets is uncertain.

Deferred tax assets consist of the following:

Approximately $3,930,000 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, 2001, the Company had federal and various state net
operating loss carryforwards of approximately $350,000,000 and $27,567,000,
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. Approximately $1,851,000 of
federal tax loss carryforwards expired in fiscal 2001 and will continue to
expire (approximately $3,027,000 in fiscal 2002) unless previously utilized.
The

F-16

Company also has federal and state research and development tax credit
carryforwards of $13,475,000 and $5,215,000, respectively, which will begin
expiring in fiscal 2002 unless previously utilized.

Pursuant to Sections 382 and 383 of the Internal Revenue Code,
annual use of the Company's net operating loss and credit carryforwards may
be limited because of cumulative changes in ownership of more than 50% which
have occurred; however, the Company does not believe such limitation will
have a material impact upon the utilization of these carryforwards.

10. COMMITMENTS AND CONTINGENCIES

The Company leases certain office and research facilities in San
Diego and certain equipment under operating leases. Provisions of the
facilities leases 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, 2001 are as follows:

Rent expense for fiscal 2001, 2000, and 1999 was $4.3 million, $4.2
million and $4.1 million, respectively.

On February 23, 2001, a lawsuit was filed by two former shareholders
of MBI purportedly on behalf of themselves and others against the Company and
certain of its officers. On March 1, 2001 and March 19, 2001, two additional
similar lawsuits were filed by other former shareholders of MBI. The
lawsuits, filed in the U.S. District Court for the Southern District of New
York, allege that the Company's registration statement filed in connection
with the acquisition of MBI contains misrepresentations and omissions of
material facts in violation of certain Federal securities laws. In May 2001,
the actions were consolidated. In July 2001, the plaintiffs filed a
consolidated amended complaint and, in August 2001, the Company filed a
motion to dismiss. The plaintiffs are seeking rescission or compensatory
damages, payment of fees and expenses, and further relief. In August 2001,
another purported class action alleging substantially identical allegations
was filed in the U.S. District Court for the Southern District of California;
however, the Company understands that plaintiffs intend to dismiss this
lawsuit in light of the consolidated action in the New York court. The
Company believes that the lawsuits are completely without merit, however,
there can be no assurances that the Company will ultimately prevail or that
the outcome will not have a material adverse effect on Company's future
financial position or results of operations.

F-17

11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables present unaudited quarterly financial
information for each of the four quarters of the fiscal years ended June 30,
2001 and June 30, 2000. We believe this information reflects a fair
presentation of such information in accordance with generally accepted
accounting principles. The results are not necessarily indicative of results
for any future period. More detailed information can be found in our
quarterly statements on Form 10-Q for the respective periods. Selected
unaudited quarterly results were as follows (in thousands, except per share
amounts):

(1) Net loss per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net loss per share will not
necessarily equal the total for the year.

12. SUBSEQUENT EVENTS

On August 2, 2001, Baxter purchased $4 million of the Company's
Series F Preferred Stock and the companies agreed to restructure the
remaining $19 million stock purchases originally scheduled for 2001 in order
to reflect the timeline revisions in the clinical and regulatory plans, and
in order for Baxter to maintain its rights to the product. The $19 million
obligation will be paid to the Company if certain milestones are reached
during the development of the new pivotal Phase 3 trial protocol and the
conduct of the study.

On August 6, 2001, MBI, a subsidiary of the Company, announced the
amendment of the Optison(R) Product Rights Agreement (OPRA) dated May 9, 2000
with Mallinckrodt, a unit of Tyco Healthcare. Optison, an intravenous
ultrasound contrast agent, was developed by MBI and has been marketed by
Mallinckrodt in the U.S. and Europe. Under the original terms of OPRA,
Mallinckrodt was to pay MBI a royalty of 5 percent of net sales of Optison in
the U.S. and Europe for as long as Mallinckrodt was marketing the product.
MBI has received royalties of approximately $200,000 per quarter from
Mallinckrodt this year. Under the modified agreement, MBI received $5 million
in cash and is entitled to potential royalties for two years in lieu of any
further payments.

F-18

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:

- -------------------------
(1) Management contract or compensatory plan or arrangement required
to be filed.

(2) A request for confidential treatment of certain portions of this
exhibit has been filed with the Securities and Exchange
Commission.