ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(References to years are to our fiscal years ended June 30.)

PLAN OF OPERATION

Since our inception in 1983, we have financed our operations primarily through the sale of equity and debt securities, and we have applied substantially all of our resources to research and development programs and to clinical trials. We have incurred operating losses since inception and, as of September 30, 2008, have an accumulated deficit of $499.9 million. We expect to incur significant operating losses over at least the next few years as we continue our research and product development efforts and attempt to commercialize our products. The Company is continuing to seek additional financing to fund its continuing operations through June 2011. Because adequate funds have not been available to the Company in the past, the Company has already delayed its OXYGENT development efforts and has delayed, scaled back, and/or eliminated one or more of its other product development programs (see Note 1 to the accompanying unaudited condensed consolidated financial statements and the "Liquidity and Capital Resources" section below).

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

The discussion included in this report assumes that we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As discussed in Note 1 to the condensed consolidated financial statements, we may lack sufficient working capital to service our debts and to fund our continuing operations through the fiscal year ending June 30, 2009, which raises substantial doubt about our ability to continue as a going concern. As of September 30, 2008, we are in default under the terms of the 2007 Amendment and we owe the holders of our Senior Notes approximately $11.3 million in principal and accrued interest. We currently do not have the resources to repay the Senior Notes. If the holders of our Senior Notes demand repayment, and we are unable to do so, the holders of our Senior Notes may be able to force our liquidation. In the event of our liquidation, it is highly unlikely the holders of our equity securities will receive any of the proceeds of such liquidation.

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FORWARD-LOOKING INFORMATION

Except for historical information, the statements made herein and elsewhere are forward-looking. The Company wishes to caution readers that these statements are only predictions and that the Company's business is subject to significant risks. The factors discussed herein and other important factors, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for 2009, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These risks include, but are not limited to, the inability to obtain adequate financing for the Company's development efforts; the likelihood that our creditors will force our liquidation; the inability to enter into collaborative relationships to further develop, manufacture and commercialize the Company's products; changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company's products; the uncertainties associated with the lengthy regulatory approval process, including uncertainties associated with FDA decisions and timing on product development or approval; and the uncertainties associated with obtaining and enforcing patents important to the Company's business; and possible competition from other products. Furthermore, even if the Company's products appear promising at an early stage of development, they may not reach the market for a number of important reasons. Such reasons include, but are not limited to, the possibilities that the potential products will be found ineffective during clinical trials; failure to receive necessary regulatory approvals; difficulties in manufacturing on a large scale; failure to obtain market acceptance; and the inability to commercialize because of proprietary rights of third parties. The research, development and market introduction of new products will require the application of considerable technical and financial resources, while revenues generated from such products, assuming they are developed successfully, may not be realized for several years. Other material and unpredictable factors which could affect operating results include, without limitation, the uncertainty of the timing of product approvals and introductions and of sales growth; the ability to obtain necessary raw materials at cost-effective prices or at all; the effect of possible technology and/or other business acquisitions or transactions; and the increasing emphasis on controlling healthcare costs and potential legislation or regulation of healthcare pricing. Further cautionary information is contained in documents the Company files with the SEC from time to time, and you are encouraged to read the section entitled "Risk Factors" included in the Company's most recently filed Annual Report on Form 10-KSB filed with the SEC on October 2, 2008.

RESEARCH AND DEVELOPMENT

For the three months ended September 30, 2008 and 2007, we incurred research and development expenses of $(10,000) and $169,000, respectively, for OXYGENT, an intravascular oxygen carrier that we are developing to augment oxygen delivery in surgical patients at risk of acute oxygen deficit. Research and development costs to date for our oxygen-therapeutic product candidates, including OXYGENT, total approximately $161 million. While difficult to predict, we estimate that the completion of clinical trials for OXYGENT will cost at least an additional $70 million. We do not anticipate that OXYGENT will reach the market for at least a few years, if at all, and, because of the numerous risks and uncertainties associated with product development efforts, we are unable to predict the extent of any future expenditures or when material net cash inflows from OXYGENT may commence, if at all.

In January 2007, the French Ethics Committee (IRB) and the French Competent Authority (regulatory agency) granted approval to start the Phase 2b clinical trial for OXYGENT to prevent postoperative ileus resulting from hypoxia during major surgery trial. Subsequently in November 2007, Alliance suspended the clinical trial due to lack of adequate funding.

On February 6, 2007, we announced the manufacture and release for shipment of OXYGENT for the clinical trials planned in France and the PRC. Alliance successfully completed the contract manufacture of OXYGENT clinical trial material. However, on March 15, 2007, we announced that, in accordance with the current regulations of the sFDA, the supplies for an IND application and clinical development must be manufactured in a facility in the PRC. As a result, Alliance agreed to accelerate the manufacturing technology transfer to Double-Crane, which originally was planned to occur when Phase 3 trials were initiated in the PRC. This technology transfer is underway with Double-Crane completing the manufacturing facility and purchasing the required equipment for emulsion manufacture. Once clinical supplies are manufactured by Double-Crane, Double-Crane has indicated that it will submit its IND application for initiation of the agreed upon clinical development plan. Double-Crane will start a Phase 1 safety trial in Chinese nationals immediately after the sFDA approves the IND application.

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

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RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2008 AS COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2007

There was no revenue for the three months ended September 30, 2008, compared to $57,000 for the three months ended September 30, 2007. The revenue for the prior period was royalties.

Research and development expenses decreased by $179,000, or 106%, to $(10,000) for the three months ended September 30, 2008, compared to $169,000 for the three months ended September 30, 2007. The decrease in research and development expenses was primarily due to the refund of the balance of clinical trial insurance of $18,000 partially offset by patent and storage expenses of $8,000.

General and administrative expenses decreased by $106,000, or 36%, to $191,000 for the three months ended September 30, 2008, compared to $297,000 for the three months ended September 30, 2007. The decrease in general and administrative expenses was primarily the result of a net decrease in legal and accounting fees of $51,000, a net decrease in personnel expenses of $30,000, a decrease in rent expense of $14,000 and a decrease of $11,000 in financing costs.

Other income was $25,000 for the three months ended September 30, 2008 and $163,000 for the three months ended September 30, 2007. Other income for both periods was the result of proceeds recorded from the sale of raw material inventory (which was previously written off).

There was no investment income for the three months ended September 30, 2008, compared to $10,000 for the three months ended September 30, 2007. The decrease was primarily a result of a lower cash balance.

Interest expense was $205,000 for the three months ended September 30, 2008, a decrease of 16% compared to $243,000 for the three months ended September 30, 2007. The decreased interest expense for the current quarter was primarily the result of lower Senior Note principal balances because of conversions during fiscal year 2008.

For the three months ended September 30, 2008, we recorded a gain on the sale of an asset of $25,000 which was primarily due to the agreement to terminate all on-going obligations under previous agreements between the Company and Imcor whereby both companies agreed that the continuing rights and obligations of each company under the terms of the previous agreements were terminated and were of no further force or effect. Imcor paid $25,000 to Alliance in satisfaction of all of Imcor's obligations and liabilities under the terms of the previous agreements. In return, Alliance released Imcor from all liabilities, including future royalty payments, if any.

For the three months ended September 30, 2008, we recorded a loss on disposal of equipment of $17,000, which was primarily the gift of $31,000 of equipment, less $14,000 of depreciation, to Double-Crane.

For the three months ended September 30, 2007, we recorded a loss on modification of debt of $14,000 resulting from the issuance of an additional note in connection with the 2007 Amendment (see Note 3).

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have funded our operations primarily through the sale of equity securities, payments under our collaboration agreements and debt financing. From inception to September 30, 2008, we had received $243 million in net proceeds from sales of our equity securities, $260.8 million in payments from collaboration agreements and $74.3 million in debt financing of which $41 million of such debt has been converted into equity and $25.9 million of such debt has been retired through the restructuring of various agreements and the issuance of warrants to purchase our common stock.

At September 30, 2008, we had approximately $19,000 in cash compared to $6,000 at June 30, 2008. The increase resulted primarily from the net cash provided by operations of $13,000. At September 30, 2008, we had a working capital deficit of $11.9 million, compared to a working capital deficit of $11.6 million at June 30, 2008. The deficit increase was principally due to a net decrease in prepaid expenses and other current assets of $32,000, a net increase in accounts payable and accrued expenses of $13,000, an increase in deferred compensation of $80,000, an increase in the Senior Note accrued interest of $205,000, partially offset by net cash provided by operations. Our operations to date have consumed substantial amounts of cash and are expected to continue to do so for the foreseeable future.

Net cash provided by operating activities totaled $13,000 for the three months ended September 30, 2008, compared to net cash used in operations $524,000 for the three months ended September 30, 2007. The change during the three months ended September 30, 2008 was primarily due to a decrease in payments for research and development activities.

At September 30, 2008, the following approximate debt obligations were outstanding:

(a) $272,000 owed to various vendors;
(b) $285,000 in accrued expenses, including $220,000 in deferred compensation;
(c) $100,000 in deferred revenue;

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(d) $11.3 million in Senior Notes, including $3.1 million in accrued interest;

(e) $750,000 in deferred royalty payments to be paid through future IMAGENT earn-out payments, if any. In the event there are no future IMAGENT earn-out payments, the deferred royalties will not be paid.

Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through strategic collaborations, private or public sales of our securities, debt financings or by licensing all or a portion of our product candidates or technology. We cannot be certain that additional funding will be available to us on acceptable terms, or at all.

We no longer have working capital to fund our operations; therefore, in addition to seeking to complete a qualified financing, we are seeking additional collaborative research and development relationships with suitable corporate partners for our products. Because adequate funds have not been available to us in the past, we have already delayed our OXYGENT development efforts and have delayed, scaled back, and/or eliminated one or more of our other product development programs.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. We have incurred operating losses through September 30, 2008. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. As of September 30, 2008, we are in default under the terms of the 2007 Amendment and we owe the holders of our Senior Notes approximately $11.3 million in principal and accrued interest. We currently do not have the resources to repay the Senior Notes. If the holders of our Senior Notes demand repayment, and we are unable to do so, the holders of our Senior Notes may be able to force our liquidation. In the event of our liquidation, it is highly unlikely the holders of our equity securities will receive any of the proceeds of such liquidation. The accompanying unaudited condensed consolidated financial statements do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and must file reports, proxy statements and other information with the SEC. The reports, information statements and other information we file with the Commission can be inspected and copied at the Commission Public Reference Room, 100 F Street, N.E. Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that contains reports, proxy, information statements and other information regarding registrants, like us, which file electronically with the Commission.

We were incorporated in New York in 1983. Our principal executive offices are located at 7590 Fay Avenue, Suite 402, La Jolla, California 92037, and our telephone number is (858) 410-5200.

Our common stock is traded on the OTCBB under the symbol "ALLP.OB."

CRITICAL ACCOUNTING POLICIES

There were no significant changes in critical accounting policies or estimates from those at June 30, 2008.

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

As of September 30, 2008, we did not have any off-balance sheet financing arrangements or any equity ownership interests in any variable interest entity or other minority-owned ventures.