U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

            ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

        July 31, 2005                                        0-11088
 For the fiscal year ended                           Commission file number

                              ALFACELL CORPORATION
             (Exact name of registrant as specified in its charter)

            Delaware                                         22-2369085
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                          Identification No.)

          225 Belleville Avenue, Bloomfield, New Jersey        07003
            (Address of principal executive offices)         (Zip Code)

Registrant's telephone number, including area code:         (973) 748-8082

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.001 par value
                                (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. |_|

      Indicate by check mark whether the registrant is an accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

      Indicate  by check mark  whether  the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X|

      The aggregate market value of the common stock, par value $.001 per share,
held by  non-affiliates  based upon the  reported  last sale price of the Common
Stock on January 31, 2005 was approximately $103,176,000. As of October 10, 2005
there  were  36,652,872  shares of common  stock,  par  value  $.001 per  share,
outstanding.

                       Documents Incorporated by Reference

      Portions of the  registrant's  definitive  Proxy  Statement for the Annual
Meeting of the  Stockholders  scheduled  to be held on January 19,  2006,  to be
filed  with the  Commission  not  later  than 120 days  after  the  close of the
registrant's  fiscal year, have been  incorporated by reference,  in whole or in
part,  into Part III Items 10, 11, 12, 13 and 14 of this  Annual  Report on Form
10-K.

<PAGE>

                                Table of Contents

<TABLE>
<CAPTION>
PART I                                                                                          Page
                                                                                                ----
<S>                                                                                              <C>
         Item  1.  Business                                                                        3

         Item  2.  Properties                                                                     17

         Item  3.  Legal Proceedings                                                              17

         Item  4.  Submission of Matters to a Vote of Security Holders                            17

PART II

         Item  5.  Market for Registrant's Common Equity, Related Stockholder Matters
                   and Issuer Purchases of Equity Securities                                      17

         Item  6.  Selected Financial Data                                                        19

         Item  7.  Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                                            20

         Item  7A. Quantitative and Qualitative Disclosures About Market Risk                     33

         Item  8.  Financial Statements and Supplementary Data                                    33

         Item  9.  Changes in and Disagreements with Accountants
                   on Accounting and Financial Disclosure                                         33

         Item 9A.  Controls and Procedures                                                        33

         Item 9B.  Other Information                                                              35

PART III

         Item 10.  Directors and Executive Officers of the Registrant                             35

         Item 11.  Executive Compensation                                                         35

         Item 12.  Security Ownership of Certain Beneficial Owners
                   and Management and Related Stockholder Matters                                 35

         Item 13.  Certain Relationships and Related Transactions                                 35

         Item 14.  Principal Accounting Fees and Services                                         35

PART IV

         Item 15.  Exhibits and Financial Statement Schedules                                     35
</TABLE>

The  following  trademarks  appear in this  Annual  Report:  ONCONASE(R)  is the
registered  trademark of Alfacell  Corporation,  exclusively for the anti-cancer
indications;  Alimta(R) and Gemzar(R)  are  registered  trademarks of Eli Lilly;
Navelbine(R) is a registered trademark of Glaxo Smith Kline.

All  information on this Form 10-K is as of October 14, 2005 and we undertake no
obligation to update this information.


                                       2
<PAGE>

We maintain a website at  www.alfacell.com to provide information to the general
public and our  stockholders on our products,  resources and services along with
general  information on Alfacell,  its management,  financial  results and press
releases.  Copies of our most recent Annual  Report on Form 10-K,  our Quarterly
Reports on Form 10-Q or our other reports filed with the Securities and Exchange
Commission,  or SEC,  can be  obtained,  free of  charge  as soon as  reasonably
practicable  after such material is  electronically  filed with, or furnished to
the SEC, from our Investor Relations Department by calling 973-748-8082, through
an e-mail request from our website at www.alfacell.com/info.htm,  or through the
SEC's   website   by   clicking   the   direct   link   from  our   website   at
www.alfacell.com/investinfo.htm   or   directly   from  the  SEC's   website  at
www.sec.gov.  Our website and the  information  contained  therein or  connected
thereto are not  intended  to be  incorporated  into this Annual  Report on Form
10-K.

Our Board of Directors has adopted a Code of Business Conduct that is applicable
to all of our directors,  officers and employees.  Any material  changes made to
our Code of Business  Conduct or any waivers granted to any of our directors and
executive officers will be publicly disclosed by filing a current report on Form
8-K within five  business days of such  material  change or waiver.  We make the
Code of Business Conduct available on our website at www.alfacell.com.  Although
our Board of Directors has not  established a nominating  committee,  our formal
nominating  procedures  will be described in our definitive  proxy statement for
the Annual Meeting of  Stockholders to be held on January 19, 2006. In addition,
copies of our Code of Business  Conduct are available to our  shareholders  upon
request either by contacting our Investor  Relations  Department at 973-748-8082
or through an e-mail request from our website at www.alfacell.com/info.htm.

Information  contained herein contains,  in addition to historical  information,
forward-looking statements that involve risks and uncertainties. All statements,
other than  statements of  historical  fact,  regarding our financial  position,
potential,  business  strategy,  plans and objectives for future  operations are
"forward-looking  statements."  These statements are commonly  identified by the
use of  forward-looking  terms and phrases  such as  "anticipates,"  "believes,"
"estimates,"  "expects,"  "intends," "may," "seeks,"  "should," or "will" or the
negative thereof or other variations  thereon or comparable  terminology,  or by
discussions of strategy.  Actual future results may vary from  expectations  set
forth in these  forward-looking  statements.  The matters set forth herein under
the  caption  "Risk  Factors"  constitute  cautionary   statements   identifying
important factors with respect to these  forward-looking  statements,  including
certain  risks and  uncertainties,  that  could  cause  actual  results  to vary
significantly  from  the  future  results  indicated  in  these  forward-looking
statements.   Other   factors   could  also  cause  actual   results  to  differ
significantly  from  the  future  results  indicated  in  these  forward-looking
statements.

                                     Part I

Item 1. BUSINESS.

Overview

      Alfacell  Corporation is a biopharmaceutical  company primarily engaged in
the  discovery  and  development  of a new  class of  therapeutic  drugs for the
treatment of cancer and other  pathological  conditions.  Our  proprietary  drug
discovery and development program consists of novel therapeutics  developed from
amphibian  ribonucleases  (RNases).  RNases are biologically active enzymes that
split RNA molecules.  RNases are enzymes which play  important  roles in nature,
among which is the development of an organism and in cell  functions.  RNA is an
essential  bio-chemical  cellular component necessary to support life. There are
various  types of RNA,  all of which have  specific  functions in a living cell.
They help control several essential biological activities, namely; regulation of
cell proliferation,  maturation, differentiation and cell death. Therefore, they
are ideal  candidates for the development of  therapeutics  for cancer and other
life-threatening  diseases,  including HIV and autoimmune diseases, that require
anti-proliferative  and  apoptotic,   or  programmed  cell  death,   properties.
ONCONASE(R), the trademark name of our lead investigational drug candidate, is a
novel  amphibian  ribonuclease,  unique  among  the  superfamily  of  pancreatic
ribonuclease  isolated from the eggs of the Rana pipiens (the  Northern  Leopard
frog).  Ranpirnase,  the generic  name of  ONCONASE(R),  is the  smallest  known
protein  belonging to the  superfamily of pancreatic  ribonuclease  and has been
shown,  on  a  molecular  level,  to  re-regulate  the  unregulated  growth  and
proliferation of cancer cells.  Unlike most  anti-cancer  agents that attack all
cells  regardless  of  phenotype  (malignant  versus  normal)  and cause  severe
toxicities,  ONCONASE(R) is not an  indiscriminate  cytotoxic drug (cell killing
agent).  ONCONASE(R)  affects primarily  exponentially  growing malignant cells,
with activity  controlled through unique and specific molecular  mechanisms.


                                       3
<PAGE>

An  extensive  compendium  of in vitro  (in  cells),  in vivo (in  animals)  and
clinical data in man shows that ONCONASE(R) destroys cancer cells.

      ONCONASE(R),  is currently being evaluated as a treatment for unresectable
(inoperable)  malignant  mesothelioma,  a rare cancer  primarily  affecting  the
pleura  (lining of the lungs)  usually  caused by  exposure to  asbestos,  in an
international, centrally randomized Phase III trial. The first part of the trial
has been completed.  The second  confirmatory  part of the trial is ongoing.  In
September  2005,  we reported  that nearly 90% of the patients  required per the
study design for full patient accrual were now enrolled.  We have also conducted
other randomized and non-randomized trials with patients with advanced stages of
solid tumors in other types of cancers.

      The primary  endpoint of the Phase III trial is  survival,  and as such, a
sufficient  number  of  deaths  must  occur  in order to  perform  the  required
statistical  analyses to determine the efficacy of  ONCONASE(R) in patients with
unresectable malignant  mesothelioma.  If the results of the clinical trials are
positive, we expect to file for marketing registrations (NDA in the U.S. and MAA
in Europe) for  ONCONASE(R)  within six months of completion of the  statistical
analyses.  However,  at this  time,  we cannot  predict  with  certainty  when a
sufficient  number of deaths  will  occur to achieve  statistical  significance.
Hence, the timing of when we will be able to file for marketing registrations in
the US and EU is data driven.  Therefore,  we cannot predict with certainty what
our total cost  associated with obtaining  marketing  approvals will be, or when
and if such approvals will be granted, or when actual sales will occur.

      In December  2002,  we received  Fast Track  Designation  from the FDA for
ONCONASE(R) for the treatment of malignant mesothelioma.  Fast Track Designation
is an FDA program designed to expedite the review of new drugs that are intended
to  treat  serious  or life  threatening  conditions  and that  demonstrate  the
potential to address  unmet  medical  needs.  In February  2001,  we received an
Orphan Medicinal Product Designation for ONCONASE(R) for malignant  mesothelioma
from the European Agency for the Evaluation of Medicinal Products (EMEA). Orphan
Medicinal  Product  Designation  is a program  designed  to  provide  marketing,
protocol and other incentives for pharmaceutical companies to develop and market
products in the European Community that address life threatening or very serious
conditions  that  affect not more than five in 10,000  persons  in the  European
Community.  Orphan  designation  in Europe  entitles the Company to ten years of
marketing  exclusivity,  reduced  filing fees and  regulatory  guidance from the
EMEA.  In  March  2005,  we  received  Orphan  Drug  Designation  for  malignant
mesothelioma in Australia from the Therapeutics Goods Administration (TGA). This
designation   in  Australia   also  entitles  us  to  five  years  of  marketing
exclusivity, a 100% waiver of filing fees and regulatory guidance from the TGA.

      These FDA, EMEA and TGA designations for ONCONASE(R) may serve to expedite
its regulatory  review,  assuming the clinical  trials yield a positive  result.
Future  clinical  trials,  however,  may not  demonstrate  that  ONCONASE(R)  is
effective.  Thus,  our  applications  for FDA,  EMEA or TGA  approval  to market
ONCONASE(R), which are dependent upon the success of our clinical trials, may be
affected. The efficacy and safety of ONCONASE(R) for malignant mesothelioma will
ultimately be determined by these regulatory agencies.  In the interim, our Fast
Track  Designation  allows us to continue to have meetings and discussions  with
the FDA to  establish  mutually  agreed  upon  parameters  for the NDA to obtain
marketing  approval for  ONCONASE(R),  based on the assumption that the clinical
trials will continue to yield favorable results.

      Our drug discovery program forms the basis for the development of specific
recombinant  RNases for  chemically  linking drugs and other  compounds  such as
monoclonal  antibodies,  growth factors,  etc. and gene fusion products with the
goal of targeting various molecular  functions.  This program provides for joint
design and  generation of new products with outside  partners.  We may own these
new products  along with a partner(s),  or we may grant an exclusive  license to
the collaborating partner(s).

      We have  established a number of scientific  collaborations  with industry
partners,  academic  and research  institutions  including  the National  Cancer
Institute  (NCI) that are designed to develop new therapeutic  applications  for
ONCONASE(R).  One  collaboration  has produced RN321, a conjugate of ranpirnase,
with a monoclonal antibody that demonstrated activity in treating  non-Hodgkin's
lymphoma  in  preclinical  studies.  These  results  were  presented  by the NCI
investigators at the 2002  Ribonuclease  Meeting in Bath,  England.  The NCI has
manufactured RN321 (the conjugate) according to Good Manufacturing Practices, or
GMP regulations in preparation for commencing


                                       4
<PAGE>

clinical trials for the treatment of patients with  non-Hodgkin's  lymphoma with
RN321. Prior to commencing human clinical trials with RN321,  additional funding
approval from the Drug Development Group of the NIH is required.

      We have also  discovered  another series of proteins,  collectively  named
amphinases that may have therapeutic  uses. These proteins are bioactive in that
they have an effect on living cells and organisms and have both  anti-cancer and
anti-viral activity. All of the proteins characterized to date are RNases. These
products are currently undergoing  preclinical testing by the National Institute
of Allergy and Infectious  Diseases  (NIAID)  against various RNA viruses and by
outside collaborators.  One of these compounds, AC-03-636 has been determined to
be active  against  yellow  fever and  Hepatitis  C. The same  compound is being
evaluated at Johns Hopkins  University in a sustained  time release  formulation
for the treatment of brain tumors  (gliomas).  We are  currently in  discussions
with  potential  pharmaceutical  partners  for  the  development  of  these  new
compounds as conjugates and fusion proteins.

      In July 2005, we entered into a research collaboration  agreement with the
Novartis Institute for Tropical Diseases for the evaluation of AC-03-636 against
Dengue fever.

      We have  entered  into a  commercial  evaluation  license  with the NIH to
evaluate a humanized single-chain  monoclonal antibody.  Under the agreement, we
receive the right to evaluate commercial applications for this antibody, such as
immunotherapeutics  derived from the combination of the antibody with Alfacell's
proprietary family of cytotoxic RNases, including ONCONASE(R).

      We have entered into a research and development collaboration with a major
US  privately  held  stent  and  drug  delivery  company.  ONCONASE(R)  is being
evaluated in stents and other delivery platforms to treat cardiovascular disease
and cancer via direct site delivery.

      We  have  signed   confidentiality   agreements   and  have  entered  into
discussions  and due  diligence  with a number  of  companies  for US or  non-US
marketing rights for ONCONASE(R) and for  out-licensing  some of our early stage
drug candidates. We are engaged in the research, development and clinical trials
of our products both independently and through research collaborations.  We have
financed our operations since inception primarily through the sale of our equity
securities  and  convertible  debentures  in  registered  offerings  and private
placements.  Additionally, we have raised capital through other debt financings,
the  sale of our  tax  benefits  and  research  products,  interest  income  and
financing received from our Chief Executive Officer. These funds provide us with
the  resources to acquire  staff,  facilities,  capital  equipment,  finance our
technology,  product  development,  manufacturing  and clinical trials.  We have
incurred  losses  since  inception  and to  date  we have  not  consummated  any
licensing,  or marketing  agreements  for  ONCONASE(R) or any of our early stage
drug candidates.  As of July 31, 2005, we believe our cash balance is sufficient
to fund our  operations  at least  through  July 31, 2006 based on our  expected
level of expenditures in relation to activities in preparing  ONCONASE(R) for an
NDA and MAA filings and other  ongoing  operations of the company.  However,  we
will continue to seek additional financing through equity or debt financings and
the sale of net operating loss  carryforwards but cannot be sure that we will be
able to  raise  capital  on  favorable  terms  or at  all.  We may  also  obtain
additional  capital  through the exercise of  outstanding  options and warrants,
although we cannot  provide any  assurance  of such  exercises  or the amount of
capital we will receive,  if any. If we are unable to raise sufficient  capital,
our  operations  will be  severely  curtailed  and our  business  and  financial
condition will be adversely affected.

      Research and Development Programs

      Research  and  development  expenses  for the fiscal  years ended July 31,
2005, 2004, and 2003 were $5,082,000, $3,353,000, and $1,700,000,  respectively.
Our research and  development  programs  focus  primarily on the  development of
therapeutics from amphibian ribonucleases. Because ribonucleases have been shown
to  be  involved  in  the   regulation   of  cell   proliferation,   maturation,
differentiation and programmed cell death, known as apoptosis, ribonucleases may
be ideal  candidates for the  development of  therapeutics  for the treatment of
cancer  and other  life-threatening  diseases,  including  viral and  autoimmune
diseases that require anti-proliferative and pro-apoptotic properties.


                                       5
<PAGE>

Technology Platform and Pipeline

      Using  ribonucleases  as therapeutics is a relatively new approach to drug
development. The use of these proteins to re-regulate the unregulated growth and
proliferation of cancer cells is unlike most  anti-cancer  drugs that attack all
cells  regardless of their  phenotype,  malignant  versus normal,  and produce a
variety of severe toxicities.

      ONCONASE(R) and related drug candidates are not indiscriminate  cytotoxic,
or cell killing, agents, but rather, their activity is controlled through unique
and specific molecular mechanisms.  They affect primarily  exponentially growing
malignant cells.

      Cancer is  associated  with the over or under  production of many types of
proteins in tumor  cells.  We believe that the ability to  selectively  halt the
production of certain proteins via ribonuclease  activity in tumor cells without
damaging  normal cells,  may make  treatment of cancer more  effective.  To make
cancer therapy more effective and less toxic, we are developing  ONCONASE(R) and
a related family of regulatory  proteins,  collectively named amphinases.  These
novel RNases are being developed as  therapeutics  as well as effector  moieties
(payload), or killer molecules for targeted therapies. We believe that selective
degradation  of  intracellular  proteins is central to the process of programmed
cell death.

      We have devoted resources towards the development of recombinant  designer
RNases for chemical  conjugation and gene fusion products with various targeting
moieties such as monoclonal antibodies, growth factors, cytokines, etc.

Apoptosis

      Apoptosis,   or  programmed  cell  death,  is  essential  for  the  proper
development of embryos and of many body systems,  including the central  nervous
system,  immune regulation and others.  Apoptosis is required to accommodate the
billions  of new cells  produced  daily by our bodies and to  eliminate  aged or
damaged  cells.  Abnormal  regulation  of the  apoptosis  process  can result in
disease. For example, cancer, autoimmune disorders and many viral infections are
associated with inhibited  apoptosis or programmed  death of cells occurring too
slowly.  Conversely,  HIV is associated  with increased  apoptosis or programmed
death of cells  occurring too rapidly.  The process of programmed  cell death is
genetically regulated.  We believe that we are the first company to discover and
develop a novel family of primordial  "regulatory" proteins that have been shown
to play a fundamental role in this regulatory process.

ONCONASE(R) (ranpirnase) Pro-Apoptotic Mechanisms

      The molecular  mechanisms  were  identified  which determine the apoptotic
cell death induced by ranpirnase. tRNA, rRNA and mRNA are all different types of
RNA with specific functions in a living cell. Ranpirnase preferentially degrades
tRNA,  leaving rRNA and mRNA  apparently  undamaged.  The RNA damage  induced by
ranpirnase  appears  to  represent  a "death  signal",  or  triggers  a chain of
molecular  events  culminating in the activation of proteolytic  enzyme cascades
which, in turn,  induces  disintegration of the cellular  components and finally
leads to cell  death.  It has been  shown  that  there  is a  protein  synthesis
inhibition-independent  component,  which,  together with the changes induced by
the protein synthesis inhibition, results in tumor cell death.

      Many cancer  cells  become  resistant  to most types of cancer  treatment,
including   chemotherapy,   radiation  and  monoclonal  antibodies.   Overcoming
resistance  to  chemotherapy  remains  a major  challenge  for  cancer  therapy.
ONCONASE(R)  has been shown to  overcome  multiple  drug  resistance  or prevent
resistance to cancer therapy, thereby dramatically increasing the sensitivity of
certain cancer cells to chemotherapy and radiation therapy.

Clinical Studies and Preclinical Development of ONCONASE(R)

      We have been very selective in our product development strategy,  which is
focused on the use of ONCONASE(R)  alone or in combination with drugs which have
shown  evidence of  preclinical  and clinical  efficacy on tumor types for which
median  survivals are typically  less than a year and for which there are few or
no approved treatments.


                                       6
<PAGE>

      ONCONASE(R)  has been  tested in Phase I, Phase II and Phase III  clinical
trials in more than 40 cancer  centers  across the United  States since 1991, in
Europe since 2000 and recently, in Canada,  Australia and New Zealand.  Major US
cancer center participating have included  Columbia-Presbyterian,  University of
Chicago,   M.D.  Anderson,   Cedars-Sinai   Cancer  Centers  and  Johns  Hopkins
University.  Additional  clinical sites were approved recently in countries such
as Canada, Australia and New Zealand.

      ONCONASE(R)  has been tested as a single agent in patients  with a variety
of solid  tumors.  It has also been  tested in  combination  with  tamoxifen  in
patients  with  prostate  cancer,  advanced  pancreatic  cancer  and renal  cell
carcinoma as well as with doxorubicin in patients with malignant mesothelioma.

      We have collaborated with NIH, NCI, Johns Hopkins  University,  University
of Bath and The University of Pennsylvania  Medical Center,  Metabolic  Magnetic
Resonance  Research and Computing Center, and have developed a considerable body
of knowledge in RNase technology and novel RNase-based therapeutics. ONCONASE(R)
has demonstrated a broad spectrum of anti-tumor activity in vitro, or studies of
tumor cell lines in laboratory vessels,  and was determined to kill cancer cells
and therefore was judged to be "active" in the NCI Cancer Screen.

      In vitro and in vivo studies  showed both  cytostatic  (suppresses  cancer
cells from further  dividing)  and  cytotoxic  (kills  cancer  cells)  antitumor
activity when  ONCONASE(R)  was used as a single agent and in  combination  with
other agents.

In Vitro Studies

      ONCONASE(R),  in  combination  with  other  drugs  has  been  shown  to be
synergistic,   which  means  that  the  effect  of  ONCONASE(R)  when  given  in
combination  with other drugs is greater than if the drugs were given alone. The
combination of ONCONASE(R)  and tamoxifen,  an anti-cancer  drug,  resulted in a
significant cell kill in pancreatic,  prostate,  and ovarian tumor cell lines as
compared  to each drug alone.  Similar  results  were found with  respect to the
following:

      o     ONCONASE(R) + cisplatin  for non-small  cell lung cancer and ovarian
            cancer;

      o     ONCONASE(R) + carboplatin for non-small cell lung cancer;

      o     ONCONASE(R) + lovastatin in  pancreatic,  ovarian,  and two types of
            non-small cell lung cancer;

      o     ONCONASE(R) + vincristine in colorectal cancer and ;

      o     ONCONASE(R)  +  doxorubicin  in breast  cancer  including  resistant
            variants, malignant mesothelioma.

In Vivo Anti-Cancer Activity

      ONCONASE(R) as a Single Agent

      ONCONASE(R),  as a single agent has shown in vivo  anti-tumor  activity in
several  mouse models of solid  tumors.  The  following  are all examples of the
effect of ONCONASE(R) on various types of human cancer cells in mouse models:

      o     In the human squamous A-253  carcinoma and the  NIH-OVCAR-3  ovarian
            adenocarcinoma  models,  ONCONASE(R) has produced prolonged survival
            and delayed time to  development  of ascites (fluid in the abdomen),
            respectively.

      o     In  mice  bearing  M109  Madison  lung  carcinoma  cells,   time  to
            appearance of ascites and survival were  significantly  prolonged in
            ONCONASE(R)  treated  animals  as  compared  to  controls.   Several
            histologically  (microscopic  study of cells)  confirmed  cures were
            noted.

      o     In nude mice bearing human DU-145 prostate  carcinoma and pancreatic
            ASPC-1 carcinoma, ONCONASE(R) inhibited growth of the subcutaneously
            transplanted tumor.

      o     In several mouse tumor  models,  ONCONASE(R)  not only  demonstrated
            direct  anti-tumor  activity but also  increased  the  potential for
            other drugs to penetrate  the tumor tissue as well as increased  the
            tumor sensitivity to radiation therapy.

      ONCONASE(R) in Combination With Other Agents


                                       7
<PAGE>

      Based on in vivo results,  ONCONASE(R) in  combination  with the following
known and approved anti-cancer agents has been evaluated by us, in collaboration
with the NCI and other academic collaborators:

      o     vincristine

      o     doxorubicin

      o     tamoxifen

      o     cisplatin

      o     carboplatin

      When used in  combination  with  vincristine,  ONCONASE(R)  prolonged  the
survival of nude mice  bearing  vincristine-resistant,  HT-29  human  colorectal
carcinomas,  a type of cancer cell, transfected with mdr-1 gene, a multiple drug
resistant gene. These NCI results  demonstrated that ONCONASE(R) can restore the
sensitivity of resistant tumor cells to chemotherapy.

      NCI experiments in nude mice transplanted  intravenously with human breast
carcinoma cells treated with the combination of ONCONASE(R) and doxorubicin have
shown significantly prolonged survival. Tumor growth was significantly inhibited
as  demonstrated  by a  decrease  in the  number  of  pulmonary  metastases,  or
disseminated lesions in the lung, present at the time of sacrifice.

      NCI  reported  the  ability  of  ONCONASE(R)  to  overcome  multiple  drug
resistance as well as other forms of drug  resistance  (referring to a drug that
no longer kills cancer  cells) both in vitro and in vivo.  We believe that these
in  vivo  results   demonstrate  the  therapeutic   utility  of  ONCONASE(R)  in
chemotherapy-resistant  tumors,  and the findings  suggest that  ONCONASE(R)  in
combination  with  other  agents  has  broad  clinical   application  in  cancer
treatments.

      Research  being  conducted at Small Animal  Imaging and Animal Model Core,
Department of Radiology,  University of Pennsylvania, has shown that ONCONASE(R)
exhibits  tumoricidal  effects on cell cultures and animals for the treatment of
Non-Small Cell Lung Cancer (NSCLC).  Animal studies have shown that  ONCONASE(R)
alone  effectively  kills cancer  cells with  manageable  toxicity.  ONCONASE(R)
improves   radiation  response  and  enhances  the  efficacy  of  commonly  used
chemotherapeutic agents (cisplatin and carboplatin) in human NSCLC xenographs of
nude mice.

Clinical Trials

Onconase(R) Phase III Randomized Clinical Trials

      We are  currently  conducting  a  two-part  Phase  III  clinical  trial of
ONCONASE(R)  as a treatment  for malignant  mesothelioma.  The first part of the
Phase III trial compares ONCONASE(R) alone to doxorubicin.  Doxorubicin has been
considered by opinion leaders to be the most effective drug for the treatment of
malignant mesothelioma. The second part of the trial compares the combination of
ONCONASE(R)  and  doxorubicin  versus  doxorubicin  alone.  The trial is an open
label,  centrally  randomized,  controlled study. The patient enrollment for the
first part of the clinical  trial has been  completed and the trial is on-going.
The second part is currently nearing  completion of the patient enrollment stage
and is being  conducted in the United States,  Europe,  Canada,  New Zealand and
Australia.

      Since  ONCONASE(R)  has  Fast  Track  Designation  for  the  treatment  of
malignant  mesothelioma  patients,  we continue to have meetings and discussions
with the FDA to  establish  mutually  agreed  upon  parameters  for the New Drug
Application,  or NDA, to seek marketing  approval for ONCONASE(R),  assuming the
Phase III clinical trial yields favorable results.


                                       8
<PAGE>

Phase III Single Agent Results

      An interim subset analysis of the results of this Phase III clinical trial
according  to the Cancer Adult  Leukemia  Group B, or CALGB,  prognostic  groups
revealed  a marked  excess of poor  prognosis  patients  (groups 5 and 6) in the
ONCONASE(R) arm of the trial (32 patients or 38.1% of the patients  treated with
ONCONASE(R)) as compared to the doxorubicin arm of the trial (12 patients or 17%
of the patients treated with  doxorubicin).  By excluding these patients and the
10 patients  whose  central  pathology  review did not  confirm a  diagnosis  of
malignant mesothelioma (N=5) from the 154 intent-to-treat patients, we defined a
target treatment group, or TTG,  consisting of 104 patients who met the criteria
for CALGB  prognostic  groups  1-4.  Of these  patients,  47 were  treated  with
ONCONASE(R)  and 57 were  treated with  doxorubicin.  The single agent Phase III
results of the TTG showed a median  survival  benefit,  or MST,  of 2 months for
ONCONASE(R)  treated  patients,  11.6 months  versus 9.6 months.  This two month
median survival difference favoring ONCONASE(R)  represents a 20% advantage over
the active agent, doxorubicin. Moreover, the clinical activity of ONCONASE(R) is
also evident from the overall  1-year and 2-year  survival  rates of ONCONASE(R)
versus  doxorubicin  in the TTG,  46.8%  versus  38.6% and 20.2%  versus  12.3%,
respectively.  Doxorubicin  treatment was  associated  with a 60% higher risk of
death  compared to  ONCONASE(R)  treatment.  Tumor  assessment by an independent
radiologist  for  evaluable  patients  (which  included a baseline and follow-up
radiological  assessment) revealed evidence of objective clinical activity in 17
patients in each treatment arm. Four partial  responses and 13  stabilization of
previously progressive disease were reported in the ONCONASE(R) treated patients
and 7 partial responses and 10 stabilization of previously  progressive  disease
were reported in the doxorubicin  treated patients.  Despite the small number of
patients, the analysis revealed a statistically significant difference, log rank
test, p. = 0.037,  in survival of the responders  favoring  ONCONASE(R)  treated
patients with an MST 23.3 versus 14.4 months for doxorubicin treated patients as
well as the 2 year survival rates of 40% for ONCONASE(R) and 9% for doxorubicin.
Preliminary  results  were  presented at the 2000  American  Society of Clinical
Oncologists, or ASCO, meeting.

      These survival advantages were recognized as clinically  important in this
patient  population  by  opinion  leaders  and the FDA.  Therefore,  the FDA has
requested  confirmation  of the survival  results in the TTG  population  in the
second part of the ongoing trial.

      In March  2005,  we  received an Orphan  Drug  Designation  for  malignant
mesothelioma   for  ONCONASE(R)  in  Australia  from  the   Therapeutics   Goods
Administration,  or TGA. This  designation in Australia also entitles us to five
years of marketing  exclusivity for ONCONASE(R)  (for the treatment of malignant
mesothelioma),  a 100% waiver of filing fees and  regulatory  guidance  from the
TGA.

      In December  2002,  we received  Fast Track  Designation  from the FDA for
ONCONASE(R) and doxorubicin  for the treatment of malignant  mesothelioma.  Fast
Track is a formal  mechanism to interact with the FDA using  approaches that are
available  to all  applicants  for  marketing  claims  for drugs  that are being
developed for a serious or life-threatening  disease for which there is an unmet
medical need. The benefits of Fast Track include scheduled  meetings to seek FDA
input into development plans, the option of submitting an NDA in sections rather
than all components  simultaneously,  and the option of requesting evaluation of
studies using  surrogate  endpoints.  We are making use of this  designation  to
attempt to reduce the marketing approval timeline for ONCONASE(R).

      In February 2001, we received an Orphan Medicinal Product  Designation for
ONCONASE(R)  from the European Agency for the Evaluation of Medicinal  Products,
or the EMEA.  Orphan  Medicinal  Product  Designation  is a program  designed to
provide marketing, protocol and other incentives for pharmaceutical companies to
develop  and  market  products  in the  European  Community  that  address  life
threatening  or very  serious  conditions  that affect not more than 5 in 10,000
persons in the European  Community.  Orphan  designation in Europe  entitles the
Company to 10 years of marketing exclusivity, reduced filing fees and regulatory
guidance from the EMEA. We continue to fulfill the EMEA  requirements  regarding
the Marketing Authorization  Application,  or MAA registration  requirements for
ONCONASE(R) for the treatment of malignant mesothelioma.

      In part two of the ongoing Phase III trial,  interim analyses based on the
occurrence  of 105 deaths and at 210 deaths are planned.  Based upon the results
of these  analyses,  we may be able to file an NDA and an MAA  within six months
after  the  completion  of the  analyses.  However,  we cannot  assure  you that
marketing  approval for  ONCONASE(R)  as a treatment for malignant  mesothelioma
will be granted by the FDA, EMEA or the TGA.


                                       9
<PAGE>

      Based on  Phase  II  trial  results  after  meeting  with the FDA,  we had
initiated a Phase III trial in patients with advanced pancreatic cancer in 1995.
In the Phase II trial,  the median  survival  time of 5.5 months for 47 patients
with stage 4 disease  and liver  involvement  treated  with the  combination  of
ONCONASE(R)  weekly and tamoxifen daily was more than double the median survival
of such patients reported in previously  published trials treated with a variety
of other systemic therapies  (published median survival times ranged from 2.0 to
2.5 months). The Phase III trial was a multicenter  randomized trial designed to
evaluate an ONCONASE(R) and tamoxifen  regimen in untreated  patients as well as
patients who had failed GEMZAR(R),  an approved drug for pancreatic  cancer. The
primary endpoint of both segments of this Phase III trial was survival, however,
early survival  analyses of both segments did not reveal a significant  survival
advantage of ONCONASE(R) over the controls. Thus, due to the negative results of
the Phase III trial, despite favorable results produced in Phase II, competitive
pressures and our inability to accrue qualified patients in the clinical trials,
we made a decision that further  evaluation of this end-stage patient population
was not warranted at that time and our resources  were  refocused on the ongoing
malignant mesothelioma program.

ONCONASE(R) Phase II Clinical Trials

      ONCONASE(R) as a single agent, demonstrated objective clinical activity in
105 patients  with  uresectable,  or  inoperable,  malignant  mesothelioma  that
included many heavily  pretreated  patients with  refractory  tumors,  which are
tumors  that  did  not  readily  yield  to the  treatment.  Analysis  of the TTG
population  confirmed the  importance of the Cancer and Leukemia Group B (CALGB)
prognostic  groups and their utility for evaluating  systemic  therapies in this
patient population.

      Of the 105 patients  treated,  41 patients,  or 39%,  reported evidence of
clinical activity. Of the patients showing evidence of clinical activity,  there
were  four  with  partial  responses,  two with  minor  responses  and 35 showed
evidence of stabilization of previously  progressive  disease.  The MST of these
patients was 18.5 months and the overall  1-year and 2-year  survival rates were
61% and 40.8%,  respectively.  The results of this trial demonstrated a survival
benefit  for both  newly  diagnosed  patients  and  patients  who  failed  prior
therapies.  The  presentation  of this data to the FDA resulted in the design of
our Phase III malignant mesothelioma trial.

      A  multicenter  Phase II Broad  Eligibility  trial  designed  to  evaluate
ONCONASE(R) as a single agent has been conducted and results of the findings for
patients with non-small cell lung cancer,  or NSCLC,  and advanced breast cancer
were published.

      ONCONASE(R) as a single agent, demonstrated objective clinical activity in
patients with advanced NSCLC and breast cancer.  The median  survival time of 30
patients  with  advanced  NSCLC was greater than that in 19 of 20 regimens  when
supportive care, a placebo or another single agent was given. Furthermore it was
greater than 75% of the reported MSTs in combination  chemotherapy  trials.  The
MST  and 1 year  survival  rates  of  7.7  months  and  27%,  respectively,  for
ONCONASE(R)  treated  patients  compared  favorably  to 7.2  months  and 30% for
patients  treated with  Navelbine(R) (an approved drug for this indication) as a
single agent.

      Thirty  percent of 17 patients  with advanced  breast cancer  demonstrated
objective clinical  activity,  which included,  one partial response,  two minor
responses,  the  significant  reduction  in bone  pain in one  patient,  and the
control of uncontrollable malignant fluid in the lungs of another patient.

      A series of pilot  Phase II studies to  evaluate  ONCONASE(R)  as a single
agent,  and  ONCONASE(R)  and  tamoxifen in  previously  treated  patients  with
unresectable,  or inoperable,  renal cell cancer were conducted.  The results of
both the Phase II single agent and  ONCONASE(R)  and tamoxifen  were  published.
Although  the  single  agent  study did not  demonstrate  evidence  of  clinical
activity,  the regimen of ONCONASE(R) and tamoxifen did demonstrate  evidence of
clinical activity which indicated further  evaluation in untreated  patients was
warranted.

      A Phase II program to evaluate a new dose and schedule of ONCONASE(R)  was
initiated in 2005.  The first  indication  under  evaluation is in patients with
refractory  non-small  cell lung cancer.  Similar  trials are planned in 2006 in
patients with esophageal cancer and in patients with advanced breast cancer.


                                       10
<PAGE>

Research and Development Pipeline of Targeted Therapies

      Our  drug  discovery  program  forms  the  basis  for the  development  of
recombinant  designer  RNases for chemical  conjugation and gene fusion products
with various targeting moieties such as monoclonal  antibodies,  growth factors,
cytokines,  etc. We believe these  products can be produced in a cost  effective
and controlled manufacturing environment.

      This program also provides for joint design and generation of new products
with outside partners.  We, along with any outside  partners,  may own these new
products  jointly,  or we may grant an  exclusive  license to the  collaborating
partner(s).

Ranpirnase Conjugates and Fusion Proteins

      The  concept of  targeting  potent  toxins as effector  molecules  to kill
cancer or other specifically  targeted cells has been extensively evaluated over
the last two decades.  An immunotoxin is an antibody  linked to a toxic molecule
that  is  used  to  destroy  specific  cells.  Several  immunotoxins  containing
bacterial  and plant  toxins or other  biotoxins,  have been  evaluated in human
clinical  trials.  Efficacy has always been limited due to the high incidence of
immunogenicity,  or  an  immune  response,  and  other  intolerable  toxicities,
including death.  Conjugation of ranpirnase to targeting ligands,  or binding to
other  molecules,  appears to  eliminate  this  safety  problem in  pre-clinical
studies.

      We have  established a number of scientific  collaborations  with academic
and research institutions  including the NCI. The objective of our collaboration
with the NCI is to develop new therapeutic  applications for  ONCONASE(R).  This
collaboration  has produced RN321, a conjugate of ranpirnase,  with a monoclonal
antibody  that  demonstrated  activity  in  treating  non-Hodgkin's  lymphoma in
preclinical studies. The relative benefit in killing targeted tumor cells versus
non-targeted   healthy  cells,  or  the  therapeutic   index,  is  greater  than
200,000-fold  with  this  conjugate.   These  "proof-of-concept"   results  were
presented  at the  2002  Ribonuclease  Meeting  in  Bath,  England.  The NCI has
manufacturedRN321 (the conjugate) according to Good Manufacturing  Practices, or
GMP regulations in preparation for commencing  clinical trials for the treatment
of patients with  non-Hodgkin's  lymphoma with RN321.  Prior to commencing human
clinical trials with RN321 additional funding approval from the Drug Development
Group of the NIH is required.

      Although  ranpirnase  is active  against a variety of human  cancers,  its
activity is not uniform across different tumor types. However, whether the tumor
is more or less  sensitive  to  ranpirnase  as a single  agent,  its  anti-tumor
activity  can  be  greatly  augmented  by  conjugation  to  different  targeting
moieties,  or groups.  One of these moieties is the epidermal growth factor,  or
EGF,  which is a ligand for the EGF receptor often  hyperexpressed  on malignant
cells.  The  genetically  engineered  ranpirnase  conjugates with EGF (rRNP-EGF)
exerted significant anti-tumor activity in human cell types of the head and neck
and pancreatic carcinomas, and human D54MG glioblastoma, a cancerous brain tumor
cell.  Other  constructs  target  tumor blood vessel  formation,  which could be
potentially  used in a broad spectrum of solid tumors.  They are in pre-clinical
evaluation by our European collaborator.

Novel Amphibian Ribonucleases

      All of the proteins characterized to date are RNases.  Preclinical testing
of the new candidates collectively called amphinases showed them to be similarly
active to ranpirnase.  Their chemical  structure makes them ideal candidates for
genetic engineering of designer products.

      These  products  are  currently  undergoing  preclinical  testing  by  the
National  Institute  of Allergy  and  Infectious  Diseases  against  various RNA
viruses and by outside collaborators. One of these compounds, AC-03-636 has been
determined  to be active in yellow fever and  Hepatitis C. The same  compound is
being  evaluated  at  Johns  Hopkins  University  in a  sustained  time  release
formulation  for the  treatment  of brain  tumors  (gliomas).  In July 2005,  we
entered into a research collaboration  agreement with the Novartis Institute for
Tropical Diseases for the evaluation of AC-03-636 against Dengue fever.

Research Collaborations

      In  addition  to  the  above  programs,   we  are  pursuing   programs  in
collaboration with the NIH, NCI, Johns Hopkins  University,  University of Bath,
University of Pennsylvania Medical Center, Metabolic Magnetic Resonance


                                       11
<PAGE>

Research and Computing Center and Novartis Institute for Tropical Diseases.  The
objective of our  collaborations is to develop new therapeutic  applications and
formulations for ONCONASE(R) as well as our other drug candidates.

      The multiple effects of biological activity of ONCONASE(R) led to research
in  other  areas  of  cancer  biology.   Two  important  areas  associated  with
significant  market  opportunities  are  radiation  therapy and control of tumor
angiogenesis, or new tumor blood vessel formation. Many types of cancers undergo
radiation  therapy  at early  stages of the  disease;  however,  success of such
treatment is often  limited.  We believe any agent  capable of  enhancing  tumor
radiosensitivity  has great  market  potential.  Moreover,  since the  growth of
essentially all types of cancer is dependent on new blood vessel formation,  any
agent that has anti-angiogenic activity, we believe, is most desirable.

Evaluation Of ONCONASE(R) As A Radiation Enhancer

      The  p53  gene  is  a  tumor-suppressor   gene  which  means  that  if  it
malfunctions,  tumors will develop.  Published  studies have  demonstrated  that
ONCONASE(R)  causes an  increase  in both tumor  blood flow and in median  tumor
oxygen  partial  pressure  causing  tumor  cells to  become  less  resistant  to
radiation  therapy  regardless of the presence or absence of the  functional p53
tumor-suppressor  gene. We believe these findings  further expand the profile of
ONCONASE(R)  in vivo  activities and its potential  clinical  utility and market
potential.

      The  University  of  Pennsylvania   Medical  Center,   Metabolic  Magnetic
Resonance Research and Computing Center has evaluated ONCONASE(R) in combination
therapies such as with radiation,  cisplatinum and  carboplatinum in a series of
animal studies  bearing human lung  adecarcinoma  (a form of NSCLC lung cancer).
They also studied the effects of  ONCONASE(R)  in the  inhibition  of sub-lethal
damage repair (SLDR) and potentially lethal damage repair (PLDR).

      ONCONASE(R),   when  combined  with   radiation   therapy,   enhanced  the
radiation-sensitivity  to  treatment  in NSCLC tumor cells  without  causing the
common radiation-induced tissue damage to non-tumor cells. ONCONASE(R) inhibited
SLDR and PLDR in these animal models.

ONCONASE(R) As a Resistance-Overcoming and Apoptosis-Enhancing Agent

      The Fas (CD95) cell  surface  receptor  (and its Fas ligand FasL) has been
recognized  as an important  "death"  receptor  involved in the induction of the
"extrinsic" pathway of apoptosis. The apoptotic pathways have been the preferred
target for new drug  development in cancer,  autoimmune,  and other  therapeutic
areas.

      The  Thoracic  Surgery  Branch of the NCI  confirmed  the synergy  between
ranpirnase and soluble Fas ligand (sFasL) in inducing  significant  apoptosis in
sFasL-resistant  Fas+tumor  cells.  These results  provided  rationale for using
ONCONASE(R) as a potential treatment of FasL-resistant tumors and possibly other
disorders such as the autoimmune  lympho-proliferative  syndrome (ALPS). Further
research in this area is ongoing.

Evaluation Of ONCONASE(R) As An Anti-Viral Agent

      The  ribonucleolytic  activity was the basis for testing  ONCONASE(R) as a
potential  anti-viral agent against HIV. The NIH has performed an independent in
vitro  screen of  ONCONASE(R)  against the HIV virus type 1. The results  showed
ONCONASE(R)  to  inhibit  replication  of HIV by up to  99.9%  after a  four-day
incubation  period at  concentrations  not toxic to uninfected  cells.  In vitro
findings by the NIH revealed that ONCONASE(R) significantly inhibited production
of HIV  in  several  persistently  infected  human  cell  lines,  preferentially
breaking down viral RNA while not affecting  normal  cellular  ribosomal RNA and
messenger RNAs, which are essential to cell function.

      Moreover, the NIH, Division of AIDS also screened ONCONASE(R) for anti-HIV
activity.  ONCONASE(R)  demonstrated highly significant anti-HIV activity in the
monocyte/macrophage,   or  anti-viral,  system.  Ranpirnase  may  inhibit  viral
replication at several points during the life cycle of HIV,  including its early
phases.  Ranpirnase  may inhibit  replication of all different  HIV-1  subtypes.
These  properties  of  ranpirnase  are  particularly  relevant  in  view  of the
extremely high and exponentially  increasing rate of mutations of HIV that occur
during  infection,  and which are primarily  responsible  for the development of
resistance to several currently available anti-viral drugs. At present, over 50%
of  clinical  isolates  of HIV  are  resistant  to both  reverse  transcriptase,
mechanisms  which combat


                                       12
<PAGE>

viral replication,  and protease  inhibitors drugs, a class of anti-viral drugs.
An additional 25%, while being sensitive to protease  inhibitors,  are resistant
to RT inhibitor(s) drugs, reverse transcriptase drugs.

      European  collaborators  confirmed the earlier NIH findings of ONCONASE(R)
(ranpirnase)  anti-HIV activity,  and reported new findings of potent inhibition
of the replication of two  enteroviruses,  the Coxsackie A and ECHO type.  These
viruses affect  primarily  children under 10 years of age and are known to cause
myocarditis, encephalitis and aseptic meningitis.

Commercial Collaborations

      In July  2005,  we  entered in a  research  collaboration  agreement  with
Novartis Institute for Tropical Diseases for the evaluation of AC-03-636 against
Dengue  fever.  AC-03-636 is a novel  compound  from our  proprietary  family of
amphinase RNases

      A research and  development  collaboration  with a major US privately held
stent and drug delivery  company is ongoing.  ONCONASE(R) is being  evaluated in
stents and other delivery platforms to treat  cardiovascular  disease and cancer
via direct site delivery. Our research and development  collaboration with Wyeth
Pharmaceuticals  to develop a number of designer  drugs such as  conjugates  and
fusion proteins for a variety of indications  using our  proprietary  technology
has been terminated by the Company for Wyeth's  non-compliance with the terms of
the agreement.

Raw Materials

      The major active ingredient  derived from leopard frog eggs is the protein
ranpirnase.  We  have  sufficient  egg  inventory  on  hand  to  produce  enough
ONCONASE(R)  to complete  the current  Phase III  clinical  trial for  malignant
mesothelioma and supply ONCONASE(R) for up to two years after commercialization.
In  addition,  we can  successfully  produce  ranpirnase  by  using  recombinant
technology; however, it may not be more cost effective.

Manufacturing

      We have signed an agreement with Scientific  Protein  Laboratories,  which
will perform the intermediary  manufacturing process of purifying ranpirnase. We
contract with BenVenue Corporation for vial filling and with Cardinal Health for
the  labeling,  storage and shipping of  ONCONASE(R)  during the Phase III trial
period. Other than these arrangements,  we do not have specific arrangements for
the  manufacture  of our  product.  Products  manufactured  for use in Phase III
clinical  trials and for commercial sale must be manufactured in compliance with
Current Good Manufacturing Practices. Scientific Protein Laboratories,  BenVenue
Corporation  and Cardinal Health all manufacture in accordance with Current Good
Manufacturing  Practices. For the foreseeable future, we intend to rely on these
manufacturers,  or substitute  manufacturers,  if necessary,  to manufacture our
product.  We believe,  however,  that there are substantial  alternative service
providers  for the  services  for  which we  contract.  Because  we have not yet
received  drug   approval,   we  utilize  the  services  of  these  third  party
manufacturers  solely on an as needed basis with prices and terms  customary for
companies in  businesses  that are  similarly  situated.  In order to replace an
existing manufacturer, we must amend our Investigational New Drug application to
notify  the FDA of the new  manufacturer.  We are  dependent  upon our  contract
manufacturers  to comply with Current Good  Manufacturing  Practices and to meet
our production requirements.  It is possible that our contract manufacturers may
not comply with  Current  Good  Manufacturing  Practices  or deliver  sufficient
quantities of our products on schedule.


                                       13
<PAGE>

Marketing

      We do not plan to market our  products  on our own at this  time.  We have
entered into a number of Confidential Disclosure Agreements and are currently in
various   stages  of  active   discussions   with  several  major  and  mid-size
pharmaceutical and biotechnology  companies as potential commercial partners for
our lead  product  ONCONASE(R),  our  proprietary  RNA  interference  technology
pipeline, and other patented product candidates.

      We intend to enter into  development  and marketing  agreements with third
parties. We expect that under such arrangements we would grant certain exclusive
rights to our  corporate  partners in return for assuming  further  research and
development cost,  upfront licensing fees,  milestone  payments and royalties on
sales. Under these agreements, our marketing partner may have the responsibility
for a significant portion of product development and regulatory approval. In the
event that our marketing partner fails to develop a marketable  product or fails
to market a product successfully, our business may be adversely affected.

Government Regulation

      The manufacturing  and marketing of pharmaceutical  products in the United
States  requires  the  approval  of the FDA under  the  Federal  Food,  Drug and
Cosmetic Act. Similar approvals by comparable  regulatory  agencies are required
in most foreign  countries.  The FDA has  established  mandatory  procedures and
safety standards that apply to the clinical testing, manufacturing and marketing
of  pharmaceutical  products in the United States.  Obtaining FDA approval for a
new therapeutic may take many years and involve substantial expenditures. State,
local  and  other   authorities  also  regulate   pharmaceutical   manufacturing
facilities.

      As the initial step in the FDA regulatory  approval  process,  preclinical
studies  are  conducted  in  laboratory  dishes and animal  models to assess the
drug's   efficacy  and  to  identify   potential   safety   problems.   Moreover
manufacturing   processes  and  controls  for  the  product  are  required.  The
manufacturing  information  along with the results of these studies is submitted
to the FDA as a part of the IND,  which is filed  to  obtain  approval  to begin
human clinical testing. The human clinical testing program typically involves up
to three phases. Data from human trials as well as other regulatory requirements
such as chemistry,  manufacturing  and  controls,  pharmacology  and  toxicology
sections,  are submitted to the FDA in an NDA or Biologics License  Application,
or  BLA.  Preparing  an  NDA  or  BLA  involves  considerable  data  collection,
verification and analysis. A similar process in accordance with EMEA regulations
is required to gain marketing approval in Europe and in Australia.  Moreover,  a
commercial entity must be established and approved by the EMEA in a member state
of the EU at least  three  months  prior to filing the  Marketing  Authorization
Application, or MAA.

      We have not received United States or other marketing  approval for any of
our  product  candidates  and may not receive any  approvals.  We may  encounter
difficulties  or   unanticipated   costs  in  our  effort  to  secure  necessary
governmental  approvals,  which could delay or  preclude us from  marketing  our
products.

      With  respect to patented  products,  delays  imposed by the  governmental
approval  process may materially  reduce the period during which we may have the
exclusive right to exploit them.

Patents and Proprietary Technology

      We have protected our business by applying for, and obtaining, patents and
trademark  registrations.  We have also relied on trade  secrets and know-how to
protect our  proprietary  technology.  We continue to develop our  portfolio  of
patents,  trade secrets,  and know how. We have obtained,  and continue to apply
for, patents concerning our RNase-based technology.

      In  addition,  we have filed (and we intend to continue  to file)  foreign
counterparts of certain U.S. patent applications. Generally, we apply for patent
protection in the United States, selected European countries, and Japan.


                                       14
<PAGE>

      We own the following U.S. patents:

<TABLE>
<CAPTION>
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     Patent No.        Issue Date                                                              Expiration **
     ----------        ----------                                                              -------------

-------------------------------------------------------------------------------------------------------------
<S>                    <C>          <C>                                                          <C>
    6,423,515 B1       July 2002    covers methodology for synthesizing gene sequences of        Sept. 2019
                                    ranpirnase and a genetically engineered variant of
                                    ranpirnase
-------------------------------------------------------------------------------------------------------------
    6,290,951 B1       Sept. 2001   covers alteration of the cell cycle in vivo,                  Aug. 2018
                                    particularly for inducing apoptosis of tumor cells
-------------------------------------------------------------------------------------------------------------
    6,239,257 B1        May 2001    covers a family of variants of ONCONASE(R)                    Dec. 2018
-------------------------------------------------------------------------------------------------------------
    6,175,003 B1       Jan. 2001    covers the genes of ONCONASE(R) and a variant of             Sept. 2019
                                    ONCONASE(R)
-------------------------------------------------------------------------------------------------------------
     5,728,805         Mar. 1998    covers a family of variants of ONCONASE(R)                    June 2013
-------------------------------------------------------------------------------------------------------------
     5,595,734         Jan. 1997    covers combinations of ONCONASE(R) with certain other         Jan. 2014
                                    pharmaceuticals
-------------------------------------------------------------------------------------------------------------
     5,559,212         Sept. 1996   covers the amino acid sequence of ONCONASE(R)                Sept. 2013
-------------------------------------------------------------------------------------------------------------
     5,540,925         July 1996    covers combinations of ONCONASE(R) with certain other         July 2013
                                    pharmaceuticals
-------------------------------------------------------------------------------------------------------------
     5,529,775         June 1996    covers combinations of ONCONASE(R) with certain other         June 2013
                                    pharmaceuticals
-------------------------------------------------------------------------------------------------------------
     4,888,172         Dec. 1989    covers a pharmaceutical produced from fertilized frog         Dec. 2006
                                    eggs (Rana pipiens) and the methodology for
                                    producing it
-------------------------------------------------------------------------------------------------------------
   6,649,392 B1*       Nov. 2003    covers a family of recombinant variants of ONCONASE(R)        Apr. 2016
-------------------------------------------------------------------------------------------------------------
   6,649,393 B1*       Nov. 2003    covers nucleic acids encoding recombinant variants of         Apr. 2016
                                    ONCONASE(R) and methodology for producing such variants
-------------------------------------------------------------------------------------------------------------
</TABLE>

      *We own this patent jointly with the U.S. Government.

      We own the following foreign patents in Europe and Japan (European patents
are validated in selected European nations):

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
    Patent No.                                                                              Expiration **
    ----------                                                                              -------------

----------------------------------------------------------------------------------------------------------
<S>              <C>                                                                          <C>
EP 0 440 633     covers ONCONASE(R) and process technology for making it                      Mar. 2009
----------------------------------------------------------------------------------------------------------
EP 0 500 589     cover combinations of  ONCONASE(R) with certain other pharmaceuticals        Oct. 2010
JP 2972334
----------------------------------------------------------------------------------------------------------
EP 0 656 783     covers combinations of  ONCONASE(R) with certain other pharmaceuticals       July 2013
JP 3655628
----------------------------------------------------------------------------------------------------------
EP 0 837 878     covers a variant of ONCONASE(R)                                              June 2016
----------------------------------------------------------------------------------------------------------
</TABLE>

      **Assumes timely payment of all applicable maintenance fees and annuities;
excludes term extensions that do or may apply.

      These  patents  cover  ONCONASE(R),  a  variant  of  ONCONASE(R),  process
technology for making ONCONASE(R),  and combinations of ONCONASE(R) with certain
other chemotherapeutics.  We also have patent applications pending in the United
States, Europe, and Japan.

      The  scope  of  protection   afforded  by  patents  for   biotechnological
inventions can be uncertain,  and such  uncertainty  may apply to our patents as
well. The patent  applications we have filed, or that we may file in the future,
may not result in patents.  Our patents may not give us competitive  advantages,
may be wholly or partially invalidated or held unenforceable, or may be held not
to have been infringed by products that compete with our


                                       15
<PAGE>

products.  Patents  owned by others  may  adversely  affect  our  ability  to do
business.  Furthermore,  others  may  independently  develop  products  that are
similar to our products or that  duplicate our  products,  and may design around
the claims of our  patents.  Although  we believe  that our  patents  and patent
applications  are of  substantial  value to us, we cannot  assure  you that such
patents  and patent  applications  will be of  commercial  benefit  to us,  will
adequately  protect  us  from  competing  products  or will  not be  challenged,
declared invalid, or found not to have been infringed by competing products.  We
also rely on  proprietary  know-how and on trade secrets to develop and maintain
our competitive  position.  Others may independently develop or obtain access to
such know-how or trade secrets.  Although our employees and  consultants  having
access to proprietary  information  are required to sign agreements that require
them to keep such  information  confidential,  our employees or consultants  may
breach these agreements or these agreements may be held to be unenforceable.

Competition

      In February  2004,  the Food and Drug  Administration  granted Eli Lilly &
Company  approval to sell its  Alimta(R)  medication  as an orphan drug to treat
patients with pleural  mesothelioma.  Alimta(R) is a  multi-targeted  antifolate
that is based upon a  different  mechanism  of action than  ONCONASE(R).  To our
knowledge,  no other company is developing a product with the same  mechanism of
action as ONCONASE(R).

      There  may  be  several   companies,   universities,   research  teams  or
scientists,  which are engaged in research  similar,  or potentially  similar to
research performed by us. Some of these entities or persons may have far greater
financial  resources,   larger  research  staffs  and  more  extensive  physical
facilities. In addition, these entities or persons may develop products that are
more  effective  than ours and may be more  successful  than us at producing and
marketing their products.

      We are not aware,  however,  of any product  currently being marketed that
has the same mechanism of action as our proposed anti-tumor agent,  ONCONASE(R).
Search of  scientific  literature  reveals no published  information  that would
indicate that others are currently  employing  this method or producing  such an
anti-tumor agent.  However, we cannot assure you that others may not develop new
treatments that are more effective than ONCONASE(R).

Employees

      As of September 30, 2005, we have 14 employees,  of whom 7 were engaged in
research and  development  activities and 7 were engaged in  administration  and
management. We have 5 employees who hold Ph.D. degrees. All of our employees are
covered by confidentiality  agreements. We consider relations with our employees
to be  good.  None  of our  employees  is  covered  by a  collective  bargaining
agreement.

Environmental Matters

      Our operations  are subject to  comprehensive  regulation  with respect to
environmental,  safety and similar  matters by the United  States  Environmental
Protection  Agency and similar state and local agencies.  Failure to comply with
applicable  laws,  regulations  and  permits can result in  injunctive  actions,
damages and civil and  criminal  penalties.  If we expand or change our existing
operations or propose any new  operations,  we may need to obtain  additional or
amend existing  permits or  authorizations.  We spend time,  effort and funds in
operating  our  facilities to ensure  compliance  with  environmental  and other
regulatory requirements.

      Such efforts and  expenditures  are common  throughout  the  biotechnology
industry and generally  should have no material  adverse effect on our financial
condition. The principal environmental regulatory requirements and matters known
to us requiring  or  potentially  requiring  capital  expenditures  by us do not
appear  likely,  individually  or in the aggregate,  to have a material  adverse
effect on our financial condition. We believe that we are in compliance with all
current laws and regulations.


                                       16
<PAGE>

Item 2. PROPERTIES.

      We lease a total of  approximately  17,000  square  feet in an  industrial
office building located in Bloomfield, New Jersey on a month-to-month basis. The
monthly rental obligation is $11,333. We believe that the facility is sufficient
for our needs in the foreseeable future.

Item 3. LEGAL PROCEEDINGS.

Shogen v. Global Aggressive Growth Fund, Ltd. et al.

      Kuslima Shogen,  our Chief Executive  Officer and Chairman of the Board of
Directors,  filed the  above-captioned  case on November  18,  2004  against the
defendants, including the Witchel Defendants, in the US District Court, District
of New Jersey.  This case  relates to shares of Alfacell  common  stock that Ms.
Shogen had  provided  as  collateral  to secure a loan taken by Ms.  Shogen from
certain of the defendants.  Ms. Shogen alleges that these shares were unlawfully
sold by the  defendants.  Among other  things,  Ms.  Shogen seeks  damages of $9
million plus costs and  attorneys'  fees.  Alfacell was not an original party to
this action.  However,  according to a letter to the Court dated  September  21,
2005 and a draft, but unfiled, pleading provided to Ms. Shogen,  defendants, Sam
Witchel, Greg Witchel and Scharf, Witchel & Co., Inc. (collectively "the Witchel
Defendants")  are seeking leave of the Court to name Alfacell and American Stock
Transfer,  Alfacell's  transfer  agent,  in a third party  complaint and to seek
payment  from  Alfacell  of any sums  assessed  against  them as a result of Ms.
Shogen's  claims  against them.  Alfacell  believes that any claims  against the
Company,  if  permitted  by the  Court,  would be without  merit and  intends to
vigorously defend against such claims.

Shogen v. Pisani et al.

      This action was commenced by Ms. Shogen against the defendants in May 2005
in New Jersey  Superior  Court,  Essex County and relates to a loan taken by Ms.
Shogen from the defendants  that was secured by varying  amounts of Ms. Shogen's
Alfacell  common stock.  Alfacell was not an original  party to this action.  On
August 31, 2005 the defendants in this matter filed a  counterclaim  against Ms.
Shogen,  and named Alfacell as a third-party  defendant,  alleging that Alfacell
violated and conspired to violate certain  securities  laws.  Defendants seek an
unidentified  amount of compensatory,  punitive and statutory damages as well as
attorneys'   fees.   Neither   Alfacell  nor  Ms.  Shogen  has  answered   these
counterclaims.  Alfacell  believes  the claims  against  the Company are without
merit and intends to vigorously defend against such claims.

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

      None.

                                     Part II

Item 5.  MARKET  FOR  COMMON  EQUITY,  RELATED  STOCKHOLDER  MATTERS  AND ISSUER
         PURCHASES OF EQUITY SECURITIES.

      Our common stock is listed on the The Nasdaq SmallCap  Market,  or Nasdaq,
and has traded  under the  symbol  "ACEL"  since  September  9,  2004.  Prior to
September  9,  2004,  our  common  stock was  traded on the OTC  Bulletin  Board
(OTCBB).  As of October 10, 2005, there were  approximately  999 stockholders of
record of our common stock.

      The  following  table sets forth the range of high and low sale  prices of
our common  stock for the two fiscal  years  ended July 31,  2005 and 2004.  The
prices were obtained from Nasdaq and OTCBB and are believed to be representative
of inter-dealer quotations, without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.


                                       17
<PAGE>

                                                       High          Low

                   Year Ended July 31, 2005:

                        First Quarter                $ 7.50       $ 3.06

                        Second Quarter                 5.43         3.33

                        Third Quarter                  3.70         1.50

                        Fourth Quarter                 2.80         1.73

                   Year Ended July 31, 2004:

                        First Quarter                  4.51         1.25

                        Second Quarter                 5.14         2.65

                        Third Quarter                  9.97         3.70

                        Fourth Quarter                10.07         5.50

      We have not paid  dividends on our common stock since  inception and we do
not plan to pay dividends in the foreseeable future. Any earnings we may realize
will be retained to finance our growth.

      The  following  table  provides  additional  information  on the Company's
equity based compensation plans as of July 31, 2005:

<TABLE>
<CAPTION>
                                                                                             Number of securities
                                                                                            remaining available for
                                         Number of securities to     Weighted-average        future issuance under
                                         be issued upon exercise     exercise price of     equity compensation plans
                                         of outstanding options,   outstanding options,      (excluding securities
             Plan Category                 warrants and rights      warrants and rights     reflected in column a)
             -------------                 -------------------      -------------------     ----------------------
                                                   (a)                      (b)                       (c)
<S>                                             <C>                       <C>                      <C>
Equity  compensation  plans approved
by security holders                             3,497,845                 $ 3.35                   8,247,500
Equity  compensation plans not
approved by security holders                       68,056(1)(2)           $ 1.79                     - 0 -
</TABLE>

      (1)   In August 2001,  we converted  $50,000 of our accounts  payable into
            55,556  shares of  common  stock.  In  addition,  we  issued  55,556
            five-year  warrants to purchase  55,556 shares of common stock at an
            exercise price of $1.50 per share.

      (2)   During  the  fiscal  year  ended  July 31,  2005,  we issued  12,500
            warrants to a vendor in  consideration  for services to be rendered.
            5,000 of these  warrants  vested  immediately  and have an  exercise
            price of $2.50 per share and 7,500  warrants  vested on the 91st day
            from the grant date and have an  exercise  price of $3.50 per share.
            These  warrants  will  expire  twenty-four  months from the date the
            registration statement registering the shares underlying warrants is
            declared  effective  or  thirty-six  months  from the date of grant,
            whichever comes first.

Recent Sales of Unregistered Securities

      The following is a summary of sales of our equity  securities  from May 1,
2005 to July 31,  2005 in  transactions  that  were  not  registered  under  the
Securities Act of 1933, as amended (the "Securities Act"). Each of the following
was exempt from registration under Section 4(2) of the Securities Act based upon
the fact that each issuance was to an accredited investor. The net proceeds from
these  transactions  were used for general  corporate  purposes,  including  the
funding of research and development.

      In May 2005, we issued 1,199,890 shares of restricted  common stock and an
aggregate  total of  1,399,890  shares  of  common  stock  underlying  five-year
warrants with an exercise  price of $1.00 per share upon the conversion of notes
payable by an unrelated party in the amount of $239,978.


                                       18
<PAGE>

Issuer Purchases of Equity Securities

      We did not  repurchase  any shares of our common  stock  during the fiscal
year 2005:

Item 6. SELECTED FINANCIAL DATA.

      Set forth  below is the  selected  financial  data for our company for the
five fiscal years ended July 31, 2005:

<TABLE>
<CAPTION>
                                                        Year Ended July 31,
                        ------------------------------------------------------------------------------------
                               2005               2004              2003              2002              2001
                               ----               ----              ----              ----              ----
<S>                     <C>               <C>                <C>               <C>               <C>
Investment Income       $   141,708       $     42,113       $     9,877       $     4,838       $    13,121
Other Income                  9,836                 --            30,000                --                --
Net Loss(1)              (6,461,920)        (5,070,307)       (2,411,532)       (2,591,162)       (2,294,936)
Net Loss Per Basic
and Diluted Share              (.18)              (.17)             (.10)             (.12)             (.12)
Dividends                      None               None              None              None              None
Total Assets              4,901,624         10,421,063           495,322           228,871           201,609
Long-term Debt                   --                 --           242,516           315,929            23,663

Total Equity
(Deficiency)              3,221,670          8,881,647        (2,491,681)      $(1,885,437)         (740,378)
</TABLE>

      (1)   Included in the net loss of  $6,461,920,  $5,070,307  and $2,411,532
            for fiscal years ended July 31, 2005,  2004 and 2003,  respectively,
            are tax benefits of $287,975,  $221,847 and $231,357,  respectively,
            related  to  the  sale  of   certain   state  tax   operating   loss
            carryforwards.


                                       19
<PAGE>

Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

Overview

      Since our inception, we have devoted the vast majority of our resources to
the research and development of ONCONASE(R) and related drug candidates. We have
focused  our  resources  towards  the  completion  of the  clinical  program for
unresectable, or inoperable, malignant mesothelioma.

      Since  ONCONASE(R)  has  Fast  Track  Designation  for  the  treatment  of
malignant  mesothelioma  patients,  we continue to have meetings and discussions
with the FDA to  establish  mutually  agreed  upon  parameters  for the New Drug
Application,  or NDA, to seek marketing  approval for ONCONASE(R),  assuming the
Phase III clinical  trial for the  treatment of  malignant  mesothelioma  yields
favorable results.

      We received an Orphan Medicinal  Product  Designation for ONCONASE(R) from
the European  Agency for the Evaluation of Medicinal  Products,  or the EMEA. We
continue to fulfill the EMEA requirements regarding the Marketing  Authorization
Application,  or MAA registration requirements for ONCONASE(R) for the treatment
of malignant mesothelioma.

      Almost all of our research and development expenses since our inception of
$50,037,251  have gone toward the  development of  ONCONASE(R)  and related drug
candidates.  For  the  fiscal  years  2005,  2004  and  2003  our  research  and
development expenses were $5,082,000,  $3,353,000 and $1,700,000,  respectively,
almost all of which were used for the  development  of  ONCONASE(R)  and related
drug  candidates.  ONCONASE(R)  is  currently  in  an  international,  centrally
randomized  Phase III trial.  The first part of the trial has been completed and
the second confirmatory part of the trial is ongoing for which nearly 90% of the
patients  required per the study  design for full patient  accrual have now been
enrolled.  The  primary  endpoint  of the  trial is  survival,  and as  such,  a
sufficient  number  of  deaths  must  occur  in order to  perform  the  required
statistical  analyses to determine the efficacy of  ONCONASE(R) in patients with
unresectable (inoperable) malignant mesothelioma. If the results of the clinical
trials are positive, we expect to file for marketing registrations (NDA and MAA)
for  ONCONASE(R)  within six months of completion of the  statistical  analyses.
However, at this time, we cannot predict with certainty when a sufficient number
of deaths will occur to achieve statistical  significance.  Hence, the timing of
when we will be able to file  for  marketing  registrations  in the US and EU is
data driven.  Therefore,  we cannot  predict with  certainty what our total cost
associated  with  obtaining  marketing  approvals  will be,  or when and if such
approvals will be granted, or when actual sales will occur.

      We fund the research and  development of our products  primarily from cash
receipts  resulting  from  the sale of our  equity  securities  and  convertible
debentures in registered offerings and private placements. Additionally, we have
raised capital through other debt  financings,  the sale of our tax benefits and
research  products,  interest  income  and  financing  received  from our  Chief
Executive  Officer.  As of July  31,  2005,  we  believe  our  cash  balance  is
sufficient  to fund our  operations  at least through July 31, 2006 based on our
expected  level  of   expenditures   in  relation  to  activities  in  preparing
ONCONASE(R)  for marketing  registrations  and other  ongoing  operations of the
Company.  However, we will continue to seek additional  financing through equity
or debt financings and the sale of net operating loss  carryforwards  but cannot
be sure that we will be able to raise  capital on favorable  terms or at all. We
may also obtain additional  capital through the exercise of outstanding  options
and warrants,  although we cannot provide any assurance of such exercises or the
amount of capital we will receive,  if any. If we are unable to raise sufficient
capital,  our  operations  will  be  severely  curtailed  and our  business  and
financial condition will be adversely affected.


                                       20
<PAGE>

Results of Operations

Fiscal Years Ended July 31, 2005, 2004 and 2003

Revenues

      We are a development stage company as defined in the Financial  Accounting
Standards  Board's  Statement of Financial  Accounting  Standards  No. 7. We are
devoting  substantially  all our present  efforts to establishing a new business
and developing new drug products.  Our planned principal operations of marketing
and/or licensing of new drugs have not commenced and,  accordingly,  we have not
derived any  significant  revenue  from these  operations.  We focus most of our
productive and financial resources on the development of ONCONASE(R). We did not
have any sales in fiscal 2005, 2004 and 2003.  Investment income for fiscal 2005
was  $142,000  compared to $42,000  for fiscal  2004,  an increase of  $100,000.
Investment  income for fiscal  2004 was  $42,000  compared to $10,000 for fiscal
2003, an increase of $32,000.  These  increases  were due to higher  balances of
cash and cash equivalents.

Research and Development

      Research and development  expense for fiscal 2005 was $5,082,000  compared
to $3,353,000 for fiscal 2004, an increase of  $1,729,000,  or 52%. The increase
was  primarily  due to  expenses  in  connection  with  preparing  our  NDA  for
ONCONASE(R),  including the  completion of key toxicology  requirements  and key
requirements   for  chemistry,   manufacturing   and  controls,   including  the
ONCONASE(R)  stability program of approximately  $1,040,000.  This increase also
resulted from pre-clinical  sponsored research and development expenses; the new
Phase  II  program  for  non-small  cell  lung,  including  consulting  fees  of
approximately $292,000;  expansion of the confirmatory Phase IIIb clinical trial
in countries  outside of the European Union,  including the retention of another
clinical research organization to assure regulatory compliance in the conduct of
the trial in these  countries;  grant  payments;  clinical  monitoring  and data
management  fees related to our pivotal  Phase III clinical  trial for malignant
mesothelioma  of  approximately  $264,000;   increases  in  patent  expenses  of
approximately   $190,000;   personnel   costs  of   approximately   $71,000  and
depreciation  expense and equipment  repairs and  maintenance  of  approximately
$21,000;  offset by a decrease in the non-cash  expense related to stock options
issued for consulting services of approximately $149,000.

      Research and development  expense for fiscal 2004 was $3,353,000  compared
to $1,700,000 for fiscal 2003, an increase of $1,653,000,  or 97%. This increase
was  primarily  due  to  increases  in  data   management,   clinical   research
organization  fees and  clinical  expenses  related  to our  pivotal  Phase  III
clinical trial for malignant mesothelioma of approximately $1,302,000; sponsored
research and development expenses of approximately $236,000, consulting costs of
approximately  $142,000;  non cash expense  related to stock options  issued for
consulting services of approximately $94,000;  offset by a decrease in personnel
and insurance expenses of approximately $121,000.

General and Administrative

      General and administrative expense for fiscal 2005 was $1,771,000 compared
to $1,578,000 for fiscal 2004, an increase of $193,000, or 12%. The increase was
due  primarily to increases in  personnel  expenses of  approximately  $441,000;
professional  fees  related  to  board of  directors  fees  and  Sarbanes  Oxley
compliance fees of approximately  $177,000;  Nasdaq relisting membership fees of
approximately  $70,000;  accounting fees of $38,000 and depreciation  expense of
$5,000;  offset by  decreases  in  non-cash  expense  related to stock and stock
options issued for consulting services of approximately $367,000; legal expenses
of approximately  $141,000 and computer repairs and maintenance of approximately
$30,000.

      General and administrative expense for fiscal 2004 was $1,578,000 compared
to $624,000 for fiscal 2003, an increase of $954,000,  or 153%. The increase was
due  primarily  to an increase in  non-cash  expense  related to stock and stock
options  issued for consulting  services  associated  with business  development
activities of  approximately  $402,000;  increases in legal,  public  relations,
personnel,   insurance,  and  accounting  expenses  of  approximately  $230,000,
$109,000, $106,000, $77,000 and $30,000, respectively.


                                       21
<PAGE>

Interest

      Interest  expense  for fiscal  2005 was  $48,000  compared  to $403,000 in
fiscal 2004, a decrease of $355,000 or 88%.  The decrease was  primarily  due to
the maturity and  conversion  of  convertible  notes  payable into common stock.
Interest  expense  for fiscal 2004 was  $403,000  compared to $358,000 in fiscal
2003,  an increase of $45,000 or 12.6%.  The increase was  primarily  due to the
interest expense on the beneficial  conversion  feature of the convertible notes
payable and its related  warrants  issued to  unrelated  parties.  The  interest
expense was based on the value of the warrants  using the  Black-Scholes  option
pricing model, amortized on a straight-line basis over the term of the notes.

Income Taxes

      New Jersey has enacted legislation permitting certain corporations located
in New  Jersey to sell a portion of its state tax loss  carryforwards  and state
research and development credits in order to obtain tax benefits.  For the state
fiscal  year  2005  (July  1,  2004  to June  30,  2005),  we had  approximately
$1,335,000 total available tax benefits that were saleable;  of which New Jersey
permitted  us to sell  approximately  $339,000.  In December  2004,  we received
approximately  $288,000 from the sale of the $339,000 of tax benefits,  which we
recognized as tax benefits for the fiscal year ended July 31, 2005.

      For the state  fiscal  year 2004 (July 1, 2003 to June 30,  2004),  we had
approximately  $1,378,000  total  available tax benefits that were saleable;  of
which New Jersey permitted us to sell approximately  $261,000. In December 2003,
we  received  approximately  $222,000  from  the  sale  of the  $261,000  of tax
benefits, which we recognized as tax benefits for the fiscal year ended July 31,
2004.

      For the state  fiscal  year 2003 (July 1, 2002 to June 30,  2003),  we had
approximately  $1,373,000 in total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately  $273,000. In December 2002,
we  received  approximately  $231,000  from  the  sale  of the  $273,000  of tax
benefits, which we recognized as tax benefits for the fiscal year ended July 31,
2003.

      If still  available  under New  Jersey  law,  we will  attempt to sell the
remaining  $996,000 of our tax benefits  between July 1, 2005 and June 30, 2006.
This amount,  which is a carryover  of our  remaining  tax  benefits  from state
fiscal year 2005 and  earlier,  may increase if we incur  additional  tax losses
during state fiscal year 2006. We cannot estimate,  however,  what percentage of
our saleable  tax benefits New Jersey will permit us to sell,  how much money we
will receive in connection with the sale, if we will be able to find a buyer for
our tax benefits or if such funds will be available in a timely manner.

Net Loss

      We have incurred net losses during each year since our inception.  The net
loss for fiscal 2005 was $6,462,000 as compared to $5,070,000 in fiscal 2004 and
$2,411,000  in fiscal  2003.  The  cumulative  loss from the date of  inception,
August 24,  1981,  to July 31,  2005  amounted to  $75,506,000.  Such losses are
attributable  to the  fact  that we are  still  in the  development  stage  and,
accordingly,  have not derived sufficient revenues from operations to offset the
development stage expenses.

Liquidity and Capital Resources

      We have reported net losses of approximately $6,462,000,  $5,070,000,  and
$2,411,000   for  the  fiscal  years  ended  July  31,  2005,   2004  and  2003,
respectively.  The loss from date of  inception,  August 24,  1981,  to July 31,
2005, amounts to $75,506,000.

      We have financed our operations since inception primarily through the sale
of our equity securities and convertible  debentures in registered offerings and
private  placements.  Additionally,  we have raised  capital  through other debt
financings,  the sale of our tax benefits and  research  products,  and interest
income and  financing  received  from our Chief  Executive  Officer.  During the
fiscal  year  2005,  we had a net  decrease  in cash  and  cash  equivalents  of
$5,685,000,  which resulted primarily from net cash used in operating activities
of $5,933,000, principally for


                                       22
<PAGE>

research and development  activities,  and net cash used in investing activities
due to the  purchase of property  and  equipment  of $52,000  offset by net cash
provided by financing  activities  of $300,000  from  warrants and stock options
exercises of $307,000 less $7,000  reduction of debt. Total cash resources as of
July 31, 2005 were $4,463,000 compared to $10,148,000 at July 31, 2004.

      Our current  liabilities as of July 31, 2005 were  $1,680,000  compared to
$1,539,000 at July 31, 2004, an increase of $141,000. The increase was primarily
due to an increase in accrued  expenses of  approximately  $659,000,  mainly for
pre-clinical studies and clinical trial of approximately  $409,000 and $290,000,
respectively;   payroll  and  payroll   taxes  of   approximately   $41,000  and
professional  fees of approximately  $30,000 and a decrease in other accruals of
approximately  $111,000;  offset by the maturity and  conversion of  convertible
notes payable of  approximately  $373,000 and a decrease in accounts  payable of
approximately $145,000.

The following transactions occurred after July 31, 2005:

      o     In August and  September  2005,  we issued an  aggregate  of 118,637
            shares of common stock upon the exercise of warrants by an unrelated
            party and stock  options by an employee at exercise  prices  ranging
            from $0.75 to $0.85 per share. We realized gross proceeds of $89,478
            from these exercises.

      Our continued  operations  will depend on our ability to raise  additional
funds  through  various  potential  sources  such as equity and debt  financing,
collaborative agreements,  strategic alliances,  sale of tax benefits,  revenues
from the commercial  sale of  ONCONASE(R),  licensing of our  proprietary  RNase
technology and our ability to realize  revenues from our technology and our drug
candidates via  out-licensing  agreements with other companies.  Such additional
funds may not become  available as we need them or be  available  on  acceptable
terms.  Through July 31, 2005, a  significant  portion of our financing has been
through  the  sale  of our  equity  securities  and  convertible  debentures  in
registered  offerings and private  placements  and the exercise of stock options
and  warrants.   Additionally,   we  have  raised  capital  through  other  debt
financings, the sale of our tax benefits and research products,  interest income
and financing  received from our Chief Executive  Officer.  Until and unless our
operations  generate  significant  revenues,  we  expect  to  continue  to  fund
operations  from the sources of capital  previously  described.  There can be no
assurance  that we will be able to raise the  capital we need on terms which are
acceptable,  if at all. If we are unable to raise additional funds in the future
on  acceptable  terms,  or at all,  we may  need to  delay  certain  development
activities over the next twelve months. As of July 31, 2005, we believe our cash
balance is  sufficient  to fund our  operations  at least through July 31, 2006,
based on our  expected  level of  expenditures  in  relation  to  activities  in
preparing  ONCONASE(R) for marketing  registrations and other ongoing operations
of the Company.  However, we will continue to seek additional  financing through
equity or debt financings and the sale of net operating loss  carryforwards  but
cannot be sure that we will be able to raise  capital on  favorable  terms or at
all. We may also obtain  additional  capital through the exercise of outstanding
options and warrants, although we cannot provide any assurance of such exercises
or the  amount of  capital we will  receive,  if any.  If we are unable to raise
sufficient  capital,  our operations will be severely curtailed and our business
and financial condition will be adversely affected.

      We will continue to incur costs in  conjunction  with our U.S. and foreign
registrations  for  marketing  approval  of  ONCONASE(R).  We are  currently  in
discussions  with  potential   strategic   alliance   partners  to  further  the
development  and  marketing of  ONCONASE(R)  and other  related  products in our
pipeline. However, we cannot be sure that any such alliances will materialize.

      The market  price of our Common  Stock is  volatile,  and the price of the
stock could be  dramatically  affected one way or another  depending on numerous
factors.  The market price of our Common Stock could also be materially affected
by the marketing approval or lack of marketing approval of ONCONASE(R).

Off-balance Sheet Arrangements

      As part of our ongoing  business,  we do not  participate in  transactions
that  generate   relationships   with   unconsolidated   entities  or  financial
partnerships,  such as  entities  often  referred  to as  structured  finance or
special  purpose  entities  or SPE,  which would have been  established  for the
purpose of facilitating  off-balance sheet


                                       23
<PAGE>

arrangements or other contractually  narrow or limited purposes.  As of July 31,
2005, we are not involved in any material unconsolidated SPE transactions.

Critical Accounting Policies

      In December  2001, the SEC requested  that all  registrants  discuss their
most "critical accounting  policies" in management's  discussion and analysis of
financial  condition  and  results  of  operations.  The  SEC  indicated  that a
"critical  accounting policy" is one which is both important to the portrayal of
the company's  financial  condition and results and requires  management's  most
difficult,  subjective  or complex  judgments,  often as a result of the need to
make estimates  about the effect of matters that are inherently  uncertain.  The
accounting  policies  set forth  below  have been  considered  critical  because
changes to certain  judgments,  estimates and  assumptions  could  significantly
affect our financial statements.

Use of Estimates

      The  preparation  of financial  statements in conformity  with  accounting
principles  generally  accepted in the United  States of America  requires us to
make  estimates  and  assumptions  that affect the  reported  amounts of assets,
liabilities,  revenues,  expenses and related  disclosures  during the reporting
period. Since some of those estimates are subjective and complex, actual results
could differ from those estimates.

Research and Development

      Research and development costs are expensed as incurred.

Accounting For Stock-Based Compensation

      Statements of Financial  Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based  Compensation ("SFAS 123"), provides for the use of a fair value
based method of accounting for employee stock  compensation.  However,  SFAS 123
also allows an entity to continue to measure compensation cost for stock options
granted  to  employees  and  directors  using  the  intrinsic  value  method  of
accounting  prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock  Issued to  Employees  ("APB  25"),  which  only  requires  charges to
compensation expense for the excess, if any, of the fair value of the underlying
stock at the date a stock  option is granted  (or at an  appropriate  subsequent
measurement date) over the amount the employee must pay to acquire the stock, if
such amounts differ materially from the historical  amounts.  We have elected to
continue to account for employee stock options using the intrinsic  value method
under Opinion 25.

      Pursuant to SFAS 123, shares,  warrants or options issued to non-employees
for services are accounted for based on their fair market value determined using
the  Black-Scholes  option  pricing  model and in  accordance  with SFAS 123 and
Emerging  Issues  Task Force  (EITF)  Issue No.  96-18,  "Accounting  for Equity
Instruments  that are  Issued  To  Other  Than  Employees  for  Acquiring  of in
Conjunction with Selling Goods or Services."

Income Taxes

      We  account  for  income  taxes  under  the  provisions  of SFAS No.  109,
"Accounting  for Income  Taxes".  Under  this  method,  deferred  tax assets and
liabilities  are  determined  based  on the  difference  between  the  financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax  rates in  effect  for all  years in which  the  temporary  differences  are
expected to reverse.

Recently Issued Accounting Standards

      In  December  2004,  the FASB  issued  SFAS  No.  123(R)  (revised  2004),
"Share-Based  Payment"  ("SFAS  123(R)"),  which  amends  SFAS  123 and  will be
effective for the Company  beginning  with the fiscal quarter ending October 31,
2005.  The new standard  will require us to expense  employee  stock options and
other  share-based  payments  over the vesting  period.  The new standard may be
adopted in one of three ways - the modified  prospective  transition  method,  a
variation  of  the  modified  prospective  transition  method  or  the  modified
retrospective  transition


                                       24
<PAGE>

method.  We are  currently  evaluating  how  we  will  adopt  the  standard  and
evaluating  the  effect  that  the  adoption  of SFAS  123(R)  will  have on our
financial position and results of operations,  although we believe such adoption
will increase recorded compensation costs in the future.

      A valuation  allowance  is  provided  when it is more likely than not that
some portion or all of the deferred tax assets will not be realized.

Contractual Obligations and Commercial Commitments

      Our major  outstanding  contractual  obligations  relate to our  equipment
operating lease. Below is a table that presents our contractual  obligations and
commercial commitments as of July 31, 2005:

<TABLE>
<CAPTION>
                                                                Payments Due by Fiscal Year
                                              ----------------------------------------------------------------
                                                                                                     2011 and
                                  Total         2006       2007       2008         2009      2010   Thereafter
                                  -----         ----       ----       ----         ----      ----   ----------
<S>                             <C>           <C>        <C>        <C>          <C>        <C>        <C>
Operating lease                 $ 42,799      $ 9,171    $ 9,171    $ 9,171      $ 9,171    $ 6,115    $  --
                                --------      -------    -------    -------      -------    -------    -----
Total contractual
    cash obligations            $ 42,799      $ 9,171    $ 9,171    $ 9,171      $ 9,171    $ 6,115    $  --
                                ========      =======    =======    =======      =======    =======    =====
</TABLE>

                                  RISK FACTORS

      An  investment  in our common  stock is  speculative  and  involves a high
degree of risk.  You  should  carefully  consider  the  risks and  uncertainties
described  below and the other  information  in this Form 10-K and our other SEC
filings before  deciding  whether to purchase shares of our common stock. If any
of the following risks actually occur, our business and operating  results could
be harmed.  This could cause the trading  price of our common  stock to decline,
and you may lose all or part of your investment.

We have  incurred  losses  since  inception  and  anticipate  that we will incur
continued losses for the foreseeable  future. We do not have a current source of
product revenue and may never be profitable.

      We are a  development  stage  company and since our  inception  one of the
principal  sources of our working  capital has been private  sales of our common
stock.  We incurred a net loss of  approximately  $6,462,000 for the fiscal year
ended July 31, 2005.  We have  continued to incur losses since July 2005. We may
never achieve revenue sufficient for us to attain profitability.

      We  incurred  net  losses  of  approximately  $6,462,000,  $5,070,000  and
$2,411,000   for  the  fiscal  years  ended  July  31,  2005,   2004  and  2003,
respectively.

      Our profitability will depend on our ability to develop, obtain regulatory
approvals  for, and  effectively  market  ONCONASE(R)  as well as entering  into
strategic  alliances  for  the  development  of new  drug  candidates  from  the
out-licensing of our proprietary RNase technology.  The commercialization of our
pharmaceutical  products  involves  a  number  of  significant  challenges.   In
particular our ability to  commercialize  ONCONASE(R)  depends on the success of
our clinical development programs, our efforts to obtain regulatory approval and
our sales and  marketing  efforts or those of our  marketing  partners,  if any,
directed at physicians,  patients and  third-party  payors.  A number of factors
could affect these efforts including:

      o     Our ability to demonstrate clinically that our products have utility
            and are safe;

      o     Delays or refusals by regulatory  authorities in granting  marketing
            approvals;

      o     Our limited financial resources relative to our competitors;

      o     Our ability to obtain an appropriate marketing partner;

      o     The  availability  and level of  reimbursement  for our  products by
            third party payors;

      o     Incidents of adverse reactions to our products;


                                       25
<PAGE>

      o     Side  effects or misuse of our products  and  unfavorable  publicity
            that could result; and

      o     The occurrence of manufacturing or distribution disruptions.

      We  will  seek  to  generate  revenue  through  licensing,  marketing  and
development  arrangements  prior  to  receiving  revenue  from  the  sale of our
products.   To  date  we  have  not   consummated  any  licensing  or  marketing
arrangements  and we  may  not be  able  to  successfully  consummate  any  such
arrangements. We have entered into several development arrangements,  which have
resulted  in limited  revenues  for us.  However,  we cannot  ensure  that these
arrangements or future arrangements,  if any, will result in significant amounts
of revenue for us. We, therefore, are unable to predict the extent of any future
losses or the time required to achieve profitability, if at all.

We will need  additional  financing  to  continue  operations,  which may not be
available on acceptable terms, if it is available at all.

      We need additional  financing in order to continue  operations,  including
completion of our current clinical trials and filing marketing registrations for
ONCONASE(R)  in the United  States with the FDA and in Europe with the EMEA.  If
the results from our current  clinical trial do not demonstrate the efficacy and
safety  of  ONCONASE(R)  for  malignant  mesothelioma,   our  ability  to  raise
additional capital will be adversely affected.  Even if regulatory  applications
for marketing approvals are filed, we will need additional financing to continue
operations.  As of July 31, 2005, we believe that our cash balance is sufficient
to fund our  operations  at least  through July 31, 2006,  based on our expected
level of expenditures.  However,  we will continue to seek additional  financing
through  equity  or  debt   financings  and  the  sale  of  net  operating  loss
carryforwards  but  cannot  be sure  that we will be able to  raise  capital  on
favorable  terms or at all. We may also obtain  additional  capital  through the
exercise of  outstanding  options and warrants,  although we cannot  provide any
assurance of such exercises or the amount of capital we will receive, if any. If
we are unable to raise  sufficient  capital,  our  operations  will be  severely
curtailed and our business and financial condition will be materially  adversely
affected.

We may be unable to sell certain  state tax benefits in the future and if we are
unable to do so, it would eliminate a source of financing that we have relied on
in the past.

      At July 31,  2005,  we had federal net  operating  loss  carryforwards  of
approximately   $52,823,000  that  expire  from  2006  to  2025   (approximately
$8,675,000  expires  in the  years  2006 to  2010).  We also  had  research  and
experimentation tax credit carryforwards of approximately $1,955,000 that expire
from 2006 to 2025  (approximately  $152,000  expires in the years 2006 to 2010).
New Jersey has enacted legislation  permitting certain  corporations  located in
New  Jersey to sell a portion  of its  state  tax loss  carryforwards  and state
research and development credits in order to obtain tax benefits.  The aggregate
amount of tax benefits  that New Jersey allows  corporations  to sell each state
fiscal  year (July 1st  through  June 30th) is  determined  annually  and if New
Jersey reduces such aggregate amount in any fiscal year we may be unable to sell
some or all of our  available  tax benefits as we have in the past. In addition,
there is a limited  market  for  these  types of sales and we may not be able to
find someone to purchase our tax benefits for a reasonable price. Our historical
results of  operations  have been improved by our sale of tax benefits and if we
continue to generate a limited amount of revenue and are unable in the future to
sell our tax benefits, our results of operations will be negatively impacted.

      For the state  fiscal  year 2005 (July 1, 2004 to June 30,  2005),  we had
approximately  $1,335,000  total  available tax benefits that were saleable;  of
which New Jersey permitted us to sell approximately  $339,000. In December 2004,
we  received  approximately  $288,000  from  the  sale  of the  $339,000  of tax
benefits, which we recognized as tax benefits for the fiscal year ended July 31,
2005.  For the state  fiscal year 2004 (July 1, 2003 to June 30,  2004),  we had
approximately  $1,378,000  total  available tax benefits that were saleable;  of
which New Jersey permitted us to sell approximately  $261,000. In December 2003,
we  received  approximately  $222,000  from  the  sale  of the  $261,000  of tax
benefits, which we recognized as tax benefits for the fiscal year ended July 31,
2004.

      If still  available  under New  Jersey  law,  we will  attempt to sell the
remaining  $996,000 of our tax benefits  between July 1, 2005 and June 30, 2006.
This amount,  which is a carryover  of our  remaining  tax  benefits  from state
fiscal year 2005 and  earlier,  may increase if we incur  additional  tax losses
during state fiscal year 2006. We can not estimate,  however, what percentage of
our saleable  tax benefits New Jersey will permit us to sell,  how much money


                                       26
<PAGE>

we will receive in connection  with the sale, if we will be able to find a buyer
for our tax benefits or if such funds will be available in a timely manner.

We  cannot  predict  how long it will  take us nor how  much it will  cost us to
complete our Phase III trial because it is a survival  study and we are still in
patient enrollment in part two of this Phase III trial.

      We currently  have ongoing a two-part  Phase III trial of ONCONASE(R) as a
treatment for malignant  mesothelioma.  The first part of the clinical trial has
been completed and the second,  confirmatory part is still ongoing.  The primary
endpoint of the Phase III clinical trial is survival, which tracks the length of
time  patients  enrolled  in  the  study  live.  According  to the  protocol,  a
sufficient  number of patient deaths must occur in order to perform the required
statistical  analyses to determine the efficacy of  ONCONASE(R) in patients with
unresectable  (inoperable)  malignant  mesothelioma.  Since it is  impossible to
predict with  certainty  when these  patient  deaths in the Phase III trial will
occur, we do not have the capability of reasonably determining when a sufficient
number  of deaths  will  occur,  nor when we will be able to file for  marketing
registrations with the FDA, EMEA and TGA.

      In  addition,  clinical  trials are very  costly and time  consuming.  The
length of time required to complete a clinical trial depends on several  factors
including the size of the patient population,  the ability of patients to get to
the site of the clinical study, and the criteria for determining  which patients
are  eligible  to join the study.  Delays in  patient  enrollment,  could  delay
achieving a sufficient number of deaths required for statistical analyses, which
therefore  may delay the marketing  registrations.  Although we believe we could
modify some of our  expenditures  to reduce our cash  outlays in relation to our
clinical trials and other NDA related expenditures,  we cannot quantify which or
the amount such expenditures might be modified. Hence, a delay in the commercial
sale of  ONCONASE(R)  would  increase  the time  frame  of our cash  expenditure
outflows and may require us to seek additional financing. Such capital financing
may not be available on favorable terms or at all.

      The FDA and comparable  regulatory  agencies in foreign  countries  impose
substantial   pre-market   approval   requirements   on  the   introduction   of
pharmaceutical   products.  These  requirements  involve  lengthy  and  detailed
pre-clinical   and  clinical   testing  and  other  costly  and  time  consuming
procedures.  Satisfaction  of these  requirements  typically takes several years
depending on the type,  complexity  and novelty of the product.  We cannot apply
for FDA, EMEA or TGA approval to market  ONCONASE(R)  until the clinical  trials
and all other registration requirements have been met.

If we fail to obtain the necessary regulatory approvals,  we will not be allowed
to commercialize our drugs and will not generate product revenue.

      The FDA and comparable  regulatory  agencies in foreign  countries  impose
substantial   pre-market   approval   requirements   on  the   introduction   of
pharmaceutical   products.  These  requirements  involve  lengthy  and  detailed
pre-clinical   and  clinical   testing  and  other  costly  and  time  consuming
procedures.  Satisfaction  of these  requirements  typically takes several years
depending on the level of complexity  and novelty of the product.  Drugs in late
stages of clinical  development may fail to show the desired safety and efficacy
results  despite having  progressed  through  initial  clinical  testing.  While
limited  trials with our product have produced  certain  favorable  results,  we
cannot be certain that we will successfully  complete Phase I, Phase II or Phase
III  testing  of any  compound  within  any  specific  time  period,  if at all.
Furthermore,  the FDA or the company may suspend  clinical trials at any time on
various  grounds,  including a finding  that the  subjects or patients are being
exposed to an  unacceptable  health risk. In addition,  we cannot apply for FDA,
EMEA or TGA  approval to market  ONCONASE(R)  until  pre-clinical  and  clinical
trials  have been  completed.  Several  factors  could  prevent  the  successful
completion or cause significant delays of these trials including an inability to
enroll the required  number of patients or failure to demonstrate the product is
safe and effective in humans. Also if safety concerns develop, the FDA, EMEA and
TGA could stop our trials before completion.

      All statutes and regulations  governing the conduct of clinical trials are
subject to change by various  regulatory  agencies,  including  the FDA,  in the
future,  which could affect the cost and duration of our  clinical  trials.  Any
unanticipated costs or delays in our clinical studies would delay our ability to
generate product revenues and to raise additional  capital and could cause us to
be unable to fund the completion of the studies.


                                       27
<PAGE>

      We may not  market  or sell any  product  for  which we have not  obtained
regulatory  approval.  We  cannot  assure  you that the FDA or other  regulatory
agencies will ever approve the use of our products  that are under  development.
Even if we receive regulatory approval, such approval may involve limitations on
the  indicated  uses for which we may market our products.  Further,  even after
approval,  discovery of previously  unknown  problems could result in additional
restrictions, including withdrawal of our products from the market.

      If we fail to obtain the necessary regulatory approvals,  we cannot market
or sell  our  products  in the  United  States,  or in other  countries  and our
long-term  viability  would  be  threatened.  If we fail to  achieve  regulatory
approval or foreign marketing  authorizations for ONCONASE(R) we will not have a
saleable product or product revenues for quite some time, if at all, and may not
be able to continue operations.

We are and will be dependent upon third parties for  manufacturing our products.
If these  third  parties  do not devote  sufficient  time and  resources  to our
products our revenues and profits may be adversely affected.

      We do not have the required  manufacturing  facilities to manufacture  our
products.  We  presently  rely  on  third  parties  to  perform  certain  of the
manufacturing  processes for the production of  ONCONASE(R)  for use in clinical
trials. Currently, we contract with Scientific Protein Laboratories, LLC for the
manufacturing  of ranpirnase  (protein drug substance) from the oocytes,  or the
unfertilized  eggs,  of the Rana pipiens  frog,  which is found in the Northwest
United  States and is commonly  called the leopard  frog.  We contract  with Ben
Venue  Corporation for the manufacturing of ONCONASE(R) and with Cardinal Health
for the labeling, storage and shipping of ONCONASE(R) for clinical trial use. We
utilize the services of these third party  manufacturers  solely on an as needed
basis with terms and prices customary for our industry.

      Our use of manufacturers for ranpirnase and ONCONASE(R) have been approved
by the FDA. We have identified substantial alternative service providers for the
manufacturing  services for which we  contract.  In order to replace an existing
service  provider  we  must  amend  our  IND  to  notify  the  FDA  of  the  new
manufacturer.  Although the FDA  generally  will not suspend or delay a clinical
trial  as a  result  of  replacing  an  existing  manufacturer,  the FDA has the
authority to suspend or delay a clinical  trial if, among other  grounds,  human
subjects  are or would be exposed to an  unreasonable  and  significant  risk of
illness or injury as a result of the replacement manufacturer.

      We intend to rely on third parties to manufacture our products if they are
approved for sale by the appropriate regulatory agencies and are commercialized.
Third party  manufacturers may not be able to meet our needs with respect to the
timing,  quantity or quality of our products or to supply products on acceptable
terms.

Because we do not have marketing, sales or distribution capabilities,  we expect
to contract  with third  parties for these  functions  and we will  therefore be
dependent upon such third parties to market, sell and distribute our products in
order for us to generate revenues.

      We currently have no sales,  marketing or  distribution  capabilities.  In
order to commercialize any product candidates for which we receive FDA approval,
we expect to rely on established third party strategic partners to perform these
functions.  For example,  if we are successful in our Phase III clinical  trials
with ONCONASE(R),  and are granted marketing approval for the  commercialization
of  ONCONASE(R),  we will be unable to introduce  the product to market  without
establishing  a  marketing  collaboration  with a  partner  with  marketing  and
distribution  capabilities.  To date,  we have not entered into any marketing or
licensing  agreements for  ONCONASE(R).  We cannot assure you we will be able to
establish or maintain  relationships with one or more biopharmaceutical or other
marketing companies with existing  distribution  systems and direct sales forces
to market any or all of our product candidates,  on acceptable terms, if at all.
Further, it is likely that we will have limited or no control over the manner in
which our  product  candidates  are  marketed or the  resources  devoted to such
marketing efforts.

      In  addition,  we  expect  to  begin  to  incur  significant  expenses  in
determining  our  commercialization  strategy with respect to one or more of our
product  candidates.  The determination of our  commercialization  strategy with
respect to a product candidate will depend on a number of factors, including:

      o     the  extent to which we are  successful  in  securing  collaborative
            partners  to  offset  some or all of the  funding  obligations  with
            respect to product candidates;


                                       28
<PAGE>

      o     the extent to which our agreement with our collaborators  permits us
            to  exercise  marketing  or  promotion  rights  with  respect to the
            product candidate;

      o     how our product  candidates  compare to  competitive  products  with
            respect to  labeling,  pricing,  therapeutic  effect,  and method of
            delivery; and

      o     whether  we are  able  to  establish  agreements  with  third  party
            collaborators,  including large biopharmaceutical or other marketing
            companies,  with respect to any of our product  candidates  on terms
            that are acceptable

      A number of these factors are outside of our control and will be difficult
to determine.

Our product candidates may not be accepted by the market.

      Even if approved by the FDA and other regulatory authorities,  our product
candidates may not achieve market  acceptance,  which means we would not receive
significant  revenues  from  these  products.  Approval  by  the  FDA  does  not
necessarily  mean that the medical  community  will be convinced of the relative
safety,  efficacy  and  cost-effectiveness  of our products as compared to other
products.  In addition,  third party reimbursers such as insurance companies and
HMOs may be reluctant to reimburse expenses relating to our products.

We depend upon Kuslima Shogen and our other key personnel and may not be able to
retain these employees or recruit qualified replacement or additional personnel,
which would have a material adverse affect on our business.

      We are highly  dependent  upon our founder,  Chairman and Chief  Executive
Officer, Kuslima Shogen. Kuslima Shogen's talents, efforts, personality,  vision
and  leadership  have been,  and continue to be,  critical to our  success.  The
diminution or loss of the services of Kuslima Shogen, and any negative market or
industry  perception arising from that diminution or loss, would have a material
adverse  effect on our  business.  While our other  employees  have  substantial
experience  and have made  significant  contributions  to our business,  Kuslima
Shogen is our  senior  executive  and also our  primary  supporter  because  she
represents the Company's primary means of accessing the capital markets.

      Because  of  the  specialized  scientific  nature  of  our  business,  our
continued  success  also is  dependent  upon our  ability to attract  and retain
qualified management and scientific personnel.  There is intense competition for
qualified  personnel  in the  pharmaceutical  field.  As our  company  grows our
inability  to  attract  qualified  management  and  scientific  personnel  could
materially  adversely  affect  our  research  and  development   programs,   the
commercialization of our products and the potential revenue from product sales.

      We do not have  employment  contracts  with  Kuslima  Shogen or any of our
other management and scientific personnel.

Our proprietary technology and patents may offer only limited protection against
infringement and the development by our competitors of competitive products.

      We own two  patents  jointly  with the  United  States  government.  These
patents  expire in 2016. We also own ten United States  patents with  expiration
dates ranging from 2006 to 2019,  four European  patents with  expiration  dates
ranging from 2009 to 2016 and one Japanese  patent that expires in 2010. We also
own patent applications that are pending in the United States, Europe and Japan.
The scope of protection afforded by patents for  biotechnological  inventions is
uncertain,  and such uncertainty applies to our patents as well. Therefore,  our
patents may not give us competitive  advantages or afford us adequate protection
from competing products.  Furthermore, others may independently develop products
that are  similar  to our  products,  and may  design  around  the claims of our
patents.  Patent litigation and intellectual  property  litigation are expensive
and our resources are limited.  If we were to become involved in litigation,  we
might not have the funds or other resources  necessary to conduct the litigation
effectively.  This might prevent us from protecting our patents,  from defending
against  claims of  infringement,  or both.  To date,  we have not  received any
threats of litigation, legal actions or negotiations regarding patent issues.


                                       29
<PAGE>

Developments by competitors may render our products obsolete or non-competitive.

      In February  2004,  the Food and Drug  Administration  granted Eli Lilly &
Company  approval to sell its  Alimta(R)  medication  as an orphan drug to treat
patients with pleural mesothelioma.  Alimta is a multi-targeted  antifolate that
is  based  upon  a  different  mechanism  of  action  than  ONCONASE(R).  To our
knowledge,  no other company is developing a product with the same  mechanism of
action as  ONCONASE(R).  However,  there may be other  companies,  universities,
research  teams or  scientists  who are  developing  products  to treat the same
medical conditions our products are intended to treat. Eli Lilly is, and some of
these other  companies,  universities,  research teams or scientists may be more
experienced and have greater clinical, marketing and regulatory capabilities and
managerial  and financial  resources than we do. This may enable them to develop
products to treat the same medical conditions our products are intended to treat
before we are able to complete the development of our competing product.

      Our  business  is very  competitive  and  involves  rapid  changes  in the
technologies  involved  in  developing  new drugs.  If others  experience  rapid
technological  development,  our products may become obsolete before we are able
to recover expenses  incurred in developing our products.  We will probably face
new competitors as new technologies  develop. Our success depends on our ability
to remain  competitive in the  development of new drugs or we may not be able to
compete successfully.

We may be sued for product liability.

      Our business  exposes us to potential  product  liability  that may have a
negative  effect on our financial  performance and our business  generally.  The
administration  of drugs to humans,  whether in clinical trials or commercially,
exposes us to  potential  product  and  professional  liability  risks which are
inherent in the testing, production, marketing and sale of new drugs for humans.
Product  liability  claims  can be  expensive  to defend and may result in large
judgments or settlements  against us, which could have a negative  effect on our
financial  performance and materially adversely affect our business. We maintain
product  liability  insurance to protect our products and product  candidates in
amounts customary for companies in businesses that are similarly  situated,  but
our  insurance  coverage may not be  sufficient  to cover  claims.  Furthermore,
liability insurance coverage is becoming increasingly expensive and we cannot be
certain  that we will  always be able to  maintain  or  increase  our  insurance
coverage at an  affordable  price or in  sufficient  amounts to protect  against
potential losses. A product  liability claim,  product recall or other claim, as
well as any  claim for  uninsured  liabilities  or claim in  excess  of  insured
liabilities, may significantly harm our business and results of operations. Even
if a product  liability claim is not successful,  adverse publicity and time and
expense of defending such a claim may significantly interfere with our business.

If we are unable to obtain favorable  reimbursement for our product  candidates,
their commercial success may be severely hindered.

      Our  ability to sell our future  products  may depend in large part on the
extent to which  reimbursement  for the costs of our products is available  from
government  entities,  private health insurers,  managed care  organizations and
others.  Third-party payors are increasingly  attempting to contain their costs.
We cannot  predict  actions  third-party  payors may take,  or whether they will
limit the  coverage  and level of  reimbursement  for our  products or refuse to
provide any coverage at all.  Reduced or partial  reimbursement  coverage  could
make our  products  less  attractive  to  patients,  suppliers  and  prescribing
physicians and may not be adequate for us to maintain price levels sufficient to
realize an  appropriate  return on our  investment in our product  candidates or
compete on price.

      In some cases,  insurers and other healthcare payment organizations try to
encourage the use of less expensive generic brands and over-the-counter, or OTC,
products  through  their   prescription   benefits  coverage  and  reimbursement
policies.  These  organizations may make the generic alternative more attractive
to the patient by providing  different  amounts of reimbursement so that the net
cost of the  generic  product  to the  patient  is less  than  the net cost of a
prescription  brand product.  Aggressive pricing policies by our generic product
competitors  and the  prescription  benefits  policies of insurers  could have a
negative effect on our product revenues and profitability.

      Many managed care  organizations  negotiate the price of medical  services
and products and develop  formularies  for that purpose.  Exclusion of a product
from a formulary  can lead to its  sharply  reduced  usage in the


                                       30
<PAGE>

managed care organization  patient population.  If our products are not included
within an adequate  number of formularies or adequate  reimbursement  levels are
not provided,  or if those policies  increasingly favor generic or OTC products,
our market share and gross margins could be  negatively  affected,  as could our
overall business and financial condition.

      The  competition  among  pharmaceutical  companies to have their  products
approved for  reimbursement  may also result in downward pricing pressure in the
industry  or in the  markets  where our  products  will  compete.  We may not be
successful in any efforts we take to mitigate the effect of a decline in average
selling prices for our products. Any decline in our average selling prices would
also reduce our gross margins.

      In  addition,  managed care  initiatives  to control  costs may  influence
primary  care  physicians  to refer  fewer  patients  to  oncologists  and other
specialists.  Reductions in these referrals could have a material adverse effect
on the size of our potential  market and increase costs to  effectively  promote
our products.

      We are subject to new legislation,  regulatory  proposals and managed care
initiatives  that may increase our costs of compliance and adversely  affect our
ability to market our products, obtain collaborators and raise capital.

      There have been a number of legislative and regulatory  proposals aimed at
changing the healthcare system and pharmaceutical industry, including reductions
in the  cost of  prescription  products  and  changes  in the  levels  at  which
consumers   and   healthcare   providers   are   reimbursed   for  purchases  of
pharmaceutical  products.  For  example,  the  Prescription  Drug  and  Medicare
Improvement  Act of 2003  provides  a new  Medicare  prescription  drug  benefit
beginning in 2006 and mandates  other  reforms.  Although we cannot  predict the
full effects on our business of the  implementation of this new legislation,  it
is  possible  that the new  benefit,  which will be  managed  by private  health
insurers,  pharmacy benefit managers and other managed care organizations,  will
result in decreased  reimbursement  for  prescription  drugs,  which may further
exacerbate  industry-wide pressure to reduce the prices charged for prescription
drugs. This could harm our ability to market our products and generate revenues.
It is also possible that other proposals will be adopted. As a result of the new
Medicare  prescription drug benefit or any other proposals,  we may determine to
change our current manner of operation,  provide  additional  benefits or change
our  contract  arrangements,  any of which could harm our ability to operate our
business efficiently, obtain collaborators and raise capital.

We have only recently been relisted on the Nasdaq  SmallCap Market and our stock
is thinly  traded  and you may not be able to sell our stock when you want to do
so.

      From April 1999,  when we were  delisted from Nasdaq,  until  September 9,
2004,  when we  were  relisted  on the  Nasdaq  SmallCap  Market,  there  was no
established  trading  market for our common stock.  During that time, our common
stock was quoted on the OTC Bulletin  Board and was thinly  traded.  There is no
assurance  that we will be able to comply with all of the  listing  requirements
necessary to remain relisted on the Nasdaq  SmallCap  Market.  In addition,  our
stock  remains  thinly  traded  and you may be unable to sell our  common  stock
during times when the trading market is limited.

The price of our common stock has been, and may continue to be, volatile.

      The market price of our common stock,  like that of the securities of many
other  development  stage  biotechnology  companies,  has fluctuated over a wide
range and it is likely that the price of our common stock will  fluctuate in the
future.  Over the past three  years,  the sale price for our  common  stock,  as
reported by Nasdaq and the OTC Bulletin Board has fluctuated from a low of $0.18
to a high of $10.07. The market price of our common stock could be impacted by a
variety of factors, including:

      o     announcements  of   technological   innovations  or  new  commercial
            products by us or our competitors,

      o     disclosure  of the  results of  pre-clinical  testing  and  clinical
            trials by us or our competitors,

      o     disclosure of the results of regulatory proceedings,

      o     changes in government regulation,

      o     developments  in the patents or other  proprietary  rights  owned or
            licensed by us or our competitors,

      o     public  concern as to the safety and efficacy of products  developed
            by us or others,


                                       31
<PAGE>

      o     litigation, and

      o     general market conditions in our industry.

      In addition,  the stock market  continues to experience  extreme price and
volume  fluctuations.  These  fluctuations  have especially  affected the market
price  of many  biotechnology  companies.  Such  fluctuations  have  often  been
unrelated to the operating  performance of these companies.  Nonetheless,  these
broad market  fluctuations may negatively  affect the market price of our common
stock.

Events  with  respect to our share  capital  could cause the price of our common
stock to decline.

      Sales of  substantial  amounts of our common stock in the open market,  or
the  availability of such shares for sale,  could adversely  affect the price of
our common stock.  We had  36,534,235  shares of common stock  outstanding as of
July 31, 2005. The following securities that may be exercised into shares of our
common stock were issued and outstanding as of July 31, 2005:

      o     Options.  Stock options to purchase  3,497,845  shares of our common
            stock at a weighted average  exercise price of  approximately  $3.35
            per share.

      o     Warrants. Warrants to purchase 12,744,674 shares of our common stock
            at a weighted  average  exercise  price of  approximately  $2.30 per
            share.

      The shares of our common  stock that may be issued  under the  options and
warrants are currently  registered with the SEC or are eligible for sale without
any volume limitations pursuant to Rule 144(k) under the Securities Act.

Our incorporation  documents may delay or prevent (i) the removal of our current
management  or  (ii) a  change  of  control  that  a  stockholder  may  consider
favorable.

      We are currently  authorized to issue 1,000,000 shares of preferred stock.
Our Board of Directors is authorized,  without any approval of the stockholders,
to issue the preferred  stock and  determine  the terms of the preferred  stock.
This  provision   allows  the  board  of  directors  to  affect  the  rights  of
stockholders, since the board of directors can make it more difficult for common
stockholders to replace members of the board.  Because the board of directors is
responsible for appointing the members of our management, these provisions could
in  turn  affect  any  attempt  to  replace  current  management  by the  common
stockholders. Furthermore, the existence of authorized shares of preferred stock
might have the effect of  discouraging  any  attempt  by a person,  through  the
acquisition  of a  substantial  number of shares of  common  stock,  to  acquire
control of our company. Accordingly, the accomplishment of a tender offer may be
more difficult.  This may be beneficial to management in a hostile tender offer,
but have an adverse  impact on  stockholders  who may want to participate in the
tender  offer or inhibit a  stockholder's  ability  to  receive  an  acquisition
premium for his or her shares.

The ability of our stockholders to recover against Armus Harrison & Co., or AHC,
may be limited  because we have not been able to obtain the reissued  reports of
AHC with respect to the  financial  statements  included in this Form 10-K,  nor
have we been able to obtain AHC's consent to the use of such report herein.

      Section 18 of the  Securities  Exchange Act of 1934 (the  "Exchange  Act")
provides  that any  person  acquiring  or selling a security  in  reliance  upon
statements set forth in a Form 10-K may assert a claim against every  accountant
who has with its consent been named as having  prepared or certified any part of
the Form 10-K, or as having  prepared or certified any report or valuation  that
is used in  connection  with the Form 10-K, if that part of the Form 10-K at the
time it is filed contains a false or misleading statement of a material fact, or
omits a material  fact  required to be stated  therein or  necessary to make the
statements  therein not misleading (unless it is proved that at the time of such
acquisition such acquiring person knew of such untruth or omission).

      In June 1996, AHC dissolved and ceased all operations.  Therefore, we have
not  been  able to  obtain  the  reissued  reports  of AHC with  respect  to the
financial  statements  included  in the Form 10-K for the fiscal year ended July
31, 2005 nor have we been able to obtain AHC's consent to the use of such report
herein. As a result, in the event any persons seek to assert a claim against AHC
under Section 18 of the Exchange Act for any untrue statement


                                       32
<PAGE>

of a material fact contained in these  financial  statements or any omissions to
state a material  fact  required  to be stated  therein,  such  persons  will be
barred.  Accordingly,  you may be  unable to  assert a claim  against  AHC under
Section 18 of the Exchange Act for any purchases of the  Company's  Common Stock
made in reliance upon  statements set forth in the Form 10-K for the fiscal year
ended July 31,  2005.  In  addition,  the  ability of AHC to satisfy  any claims
properly  brought  against it may be limited as a practical  matter due to AHC's
dissolution in 1996.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The  response  to this Item is  submitted  as a separate  section of this report
commencing on Page F-1.

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

      On December 1, 1993, certain stockholders of Armus Harrison & Co., or AHC,
terminated their  association  with AHC, or the AHC termination,  and AHC ceased
performing  accounting  and  auditing  services,  except for limited  accounting
services to be performed on our behalf.  In June 1996,  AHC dissolved and ceased
all  operations.  The  report of J.H.  Cohn LLP with  respect  to our  financial
statements  from  inception  to July 31, 2005 is based on the report of KPMG LLP
from August 1, 1992 to July 31, 2002 and of AHC for the period from inception to
July 31, 1992,  although AHC has not  consented to the use of such report herein
and will not be  available  to perform any  subsequent  review  procedures  with
respect to such report.  Accordingly,  investors  will be barred from  asserting
claims  against AHC under Section 18 of the Exchange Act on the basis of the use
of such  report in any Form 10-K  into  which  such  report is  incorporated  by
reference.  In addition, in the event any persons seek to assert a claim against
AHC for false or misleading  financial  statements and  disclosures in documents
previously  filed by us,  such claim will be  adversely  affected  and  possibly
barred. Furthermore, as a result of the lack of a consent from AHC to the use of
its audit report herein,  or to its incorporation by reference into a Form 10-K,
our officers  and  directors  will be unable to rely on the  authority of AHC as
experts in auditing  and  accounting  in the event any claim is brought  against
such persons  under  Section 18 of the  Exchange Act based on alleged  false and
misleading  Financial  Statements  and  disclosures  attributable  to  AHC.  The
discussion  regarding  certain  effects of the AHC  termination is not meant and
should  not be  construed  in any  way as  legal  advice  to any  party  and any
potential purchaser should consult with his, her or its own counsel with respect
to the effect of the AHC  termination  on a potential  investment  in our Common
Stock or otherwise.

Item 9A. CONTROLS AND PROCEDURES.

(a)   EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the  participation  of our management,  including
our Chief  Executive  Officer and Chief  Financial  Officer,  we  evaluated  the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures as of July 31, 2005, the evaluation  date. Based upon the evaluation,
our Chief Executive  Officer and Chief Financial  Officer  concluded that, as of
the evaluation  date,  our  disclosure  controls and procedures are effective in
timely alerting them to the material  information  relating to us required to be
included in our periodic SEC filings.

(b)   MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management  of the  Company is  responsible  for  establishing  and  maintaining
adequate  internal  control over  financial  reporting.  The Company's  internal
control over  financial  reporting is designed to provide  reasonable  assurance
regarding  the  reliability  of  financial  reporting  and  the  preparation  of
financial  statements  for  external  purposes  in  accordance  with  accounting
principles  generally  accepted in the United  States of America.  The Company's
internal control over financial reporting includes those policies and procedures
that:


                                       33
<PAGE>

      o     pertain to the  maintenance  of records  that in  reasonable  detail
            accurately and fairly reflect the  transactions  and dispositions of
            the assets of the Company;

      o     provide  reasonable  assurance  that  transactions  are  recorded as
            necessary  to  permit   preparation   of  financial   statements  in
            accordance  with  accounting  principles  generally  accepted in the
            United States of America,  and that receipts and expenditures of the
            Company are being made only in  accordance  with  authorizations  of
            management and directors of the Company; and

      o     provide  reasonable   assurance   regarding   prevention  or  timely
            detection of  unauthorized  acquisition,  use or  disposition of the
            Company's  assets that could have a material effect on the financial
            statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

Management  assessed the  effectiveness  of the Company's  internal control over
financial  reporting as of July 31, 2005. In making this assessment,  management
used the criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on our assessment and those criteria, management believes that the Company
maintained  effective  internal control over financial  reporting as of July 31,
2005.

Management's  assessment of the effectiveness of the Company's  internal control
over financial  reporting as of July 31, 2005 has been audited by J.H. Cohn LLP,
an  independent  registered  public  accounting  firm, as stated in their report
which is included herein.

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Alfacell Corporation

We have audited management's assessment,  included in the accompanying Report of
Management  on  Internal  Control  over  Financial   Reporting,   that  Alfacell
Corporation (A Development Stage Company) maintained  effective internal control
over financial  reporting as of July 31, 2005, based on criteria  established in
Internal  Control - Integrated  Framework  issued by the Committee of Sponsoring
Organizations  of  the  Treadway  Commission  (COSO).   Alfacell   Corporation's
management  is  responsible  for  maintaining  effective  internal  control over
financial  reporting  and for its  assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the Company's
internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness  of internal control and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company's internal control over financial  reporting includes those policies and
procedures  that (1) pertain to the  maintenance  of records that, in reasonable
detail,  accurately and fairly reflect the  transactions and dispositions of the
assets of the company;  (2) provide  reasonable  assurance that transactions are
recorded  as  necessary  to  permit  preparation  of  financial   statements  in
accordance with accounting principles generally accepted in the United States of
America,  and that receipts and  expenditures of the company are being made only
in accordance  with  authorizations  of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of


                                       34
<PAGE>

unauthorized acquisition,  use or disposition of the company's assets that could
have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect  misstatements.  Also projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion,  management's  assessment that Alfacell  Corporation  maintained
effective  internal  control over  financial  reporting as of July 31, 2005,  is
fairly  stated,  in all  material  respects,  based on criteria  established  in
Internal  Control-Integrated  Framework  issued by the  Committee of  Sponsoring
Organizations of the Trading  Commission (COSO).  Also in our opinion,  Alfacell
Corporation  maintained,  in all material  respects,  effective internal control
over financial  reporting as of July 31, 2005, based on criteria  established in
Internal  Control-Integrated  Framework  issued by the  Committee of  Sponsoring
Organizations of the Trading Commission (COSO).

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the balance sheets and the related
statements of operations,  stockholders'  equity  (deficiency) and cash flows of
Alfacell  Corporation  and  our  report  dated  October  4,  2005  expressed  an
unqualified opinion.


                                                       /s/ J.H. Cohn LLP

Roseland, New Jersey
October 4, 2005

(c)   CHANGES IN INTERNAL CONTROLS

There were no significant changes made in our internal controls during the three
months  ended July 31, 2005 or, to our  knowledge,  in other  factors that could
significantly affect these controls subsequent to the date of their evaluation.

Item 9B. OTHER INFORMATION.

None

                                    Part III

The  information  required by Item 10 - Directors and Executive  Officers of the
Registrant;  Item 11 - Executive  Compensation;  Item 12 - Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder  Matters;  Item
13 - Certain  Relationships  and  Related  Transactions  and Item 14 - Principal
Accounting Fees and Services is incorporated into Part III of this Annual Report
on Form 10-K by  reference  to the Proxy  Statement  for our  Annual  Meeting of
Stockholders scheduled to be held on January 19, 2006.

                                     Part IV

Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)(1) and (2) The  response  to these  portions  of Item 15 is  submitted  as a
separate section of this report commencing on page F-1.

(a)(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K).


                                       35
<PAGE>


<TABLE>
<CAPTION>
                                                                                                    Filed Herewith
                                                                                                    or Incorporated
Exhibit No.    Item Title                                                                            by Reference
-----------    ----------                                                                            ------------
<S>            <C>                                                                                        <C>
3.1            Certificate of Incorporation, dated June 12, 1981 (incorporated by reference to
               Exhibit 3.1 to the Company's Registration Statement on Form S-1, File No.
               333-112865, filed on February 17, 2004)                                                     *

3.2            Amendment to Certificate of Incorporation, dated February 18, 1994 (incorporated
               by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1,
               File No. 333-112865, filed on February 17, 2004)                                            *

3.3            Amendment to Certificate of Incorporation, dated December 26, 1997 (incorporated
               by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1,
               File No. 333-112865, filed on February 17, 2004)                                            *

3.4            Amendment to Certificate of Incorporation, dated January 14, 2004 (incorporated
               by reference to Exhibit 3.4 to the Company's Registration Statement on Form S-1,
               File No. 333-112865, filed on February 17, 2004)                                            *

3.5            Certificate of Designation for Series A Preferred Stock, dated September 2, 2003
               (incorporated by reference to Exhibit 3.5 to the Company's Registration Statement
               on Form S-1, File No. 333-112865, filed on February 17, 2004)                               *

3.6            Certificate of Elimination of Series A Preferred Stock, dated February 3, 2004
               (incorporated by reference to Exhibit 3.6 to the Company's Registration Statement
               on Form S-1, File No. 333-112865, filed on February 17, 2004)                               *

3.7            By-Laws (incorporated by reference to Exhibit 3.4 to Registration Statement on
               Form S-1, File No. 333-111101, filed on December 11, 2003)                                  *

10.1           1993 Stock Option Plan and Form of Option Agreement (incorporated by reference to
               Exhibit 10.10 to Registration Statement on Form SB-2, File No. 33-76950, filed on
               August 1, 1994)                                                                             *

10.2           1997 Stock Option Plan (incorporated by reference to Exhibit 10.2 to Registration
               Statement on Form S-1, File No. 333-111101, filed on December 11, 2003)                     *

10.3           2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the
               Company's Registration Statement on Form S-1, File No. 333-112865, filed on
               February 17, 2004)                                                                          *

10.4           Form of Subscription Agreement and Warrant Agreement used in Private Placements
               completed in February 2000 (incorporated by reference to Exhibit 10.21 to the
               Company's Annual Report on Form 10-K, filed on October 30, 2000)                            *

10.5           Form of Subscription Agreement and Warrant Agreement used in the August and
               September 2000 Private Placements (incorporated by reference to Exhibit 10.24 to
               the Company's Quarterly Report on Form 10-Q, filed on December 15, 2000)                    *

10.6           Form of Subscription Agreement and Warrant Agreement used in the April 2001
               Private Placements (incorporated by reference to Exhibit 10.23 to Registration
               Statement on Form S-1, File No. 333-38136, filed on July 30, 2001)                          *

10.7           Form of Convertible Note entered into in April 2001 (incorporated by reference to
               Exhibit 10.24 to Registration Statement on Form S-1, File No. 333-38136, filed on
               July 30, 2001)                                                                              *

10.8           Form of Subscription Agreement and Warrant Agreement used in the July 2001
               Private Placements (incorporated by reference to Exhibit 10.25 to Registration
               Statement on Form S-1, File No. 333-38136, filed on July 30, 2001)                          *
</TABLE>


                                       36
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    Filed Herewith
                                                                                                    or Incorporated
Exhibit No.    Item Title                                                                            by Reference
-----------    ----------                                                                            ------------
<S>            <C>                                                                                        <C>
10.9           Form of Subscription Agreement and Warrant Agreement used in the August and
               October 2001 private placement (incorporated by reference to Exhibit 10.26 to
               Registration Statement on Form S-1, File No. 333-38136, filed on December 14,
               2001)                                                                                       *

10.10          Form of Subscription Agreement and Warrant Agreement used in the September 2001,
               November 2001 and January 2002 private placements (incorporated by reference to
               Exhibit 10.27 to Registration Statement on Form S-1, File No. 333-38136, filed on
               February 21, 2002)                                                                          *

10.11          Warrant issued in the February 2002 private placement (incorporated by reference
               to Exhibit 10.28 to Registration Statement on Form S-1, File No. 333-38136, filed
               on February 21, 2002)                                                                       *

10.12          Form of Subscription Agreement and Warrant Agreement used in the March 2002,
               April 2002 and May 2002 private placements (incorporated by reference to Exhibit
               10.29 to Registration Statement on Form S-1, File No. 333-89166, filed on May 24,
               2002)                                                                                       *

10.13          Form of Subscription Agreement and Warrant Agreement used in the June 2002 and
               October 2002 private placements (incorporated by reference to Exhibit 10.30 to
               the Post-Effective Amendment to Registration Statement on Form S-1, File No.
               333-38136, filed on March 3, 2003)                                                          *

10.14          Form of Note Payable and Warrant Certificate entered into April, June, July,
               September, November and December 2002 (incorporated by reference to Exhibit 10.31
               to the Post-Effective Amendment to Registration Statement on Form S-1, File No.
               333-38136, filed on March 3, 2003)                                                          *

10.15          Form of Note Payable and Warrant Certificate entered into November 2001, January,
               March and May 2003 (incorporated by reference to Exhibit 10.23 to the Company's
               Annual Report on Form 10-K, filed on October 29, 2003)                                      *

10.16          Form of Subscription Agreement and Warrant Agreement used in the February 2003
               and April through August 2003 private placements (incorporated by reference to
               Exhibit 10.24 to the Company's Annual Report on Form 10-K, filed on October 29,
               2003)                                                                                       *

10.17          Form of Amended Notes Payable which amends the November 2001, April 2002, June
               2002, July 2002, September 2002, November 2002 December 2002, January 2003, March
               2003 and May 2003 notes payable (incorporated by reference to Exhibit 10.27 to
               The Company's Annual Report on Form 10-K, filed on October 29, 2003)                        *

10.18          Securities Purchase Agreement and Warrant Agreement used in September 2003
               private placement and Form of Warrant Certificate issued on January 16, 2004 and
               January 29, 2004 to SF Capital Partners Ltd. (incorporated by reference to
               Exhibit 10.25 to the Company's Annual Report on Form 10-K, filed on October 29,
               2003)                                                                                       *

10.19          Registration Rights Agreement used in September 2003 private placement with SF
               Capital Partners Ltd. (incorporated by reference to Exhibit 10.26 to the
               Company's Annual Report on Form 10-K, filed on October 29, 2003)                            *

10.20          Form of Securities Purchase Agreement used in May 2004 private placement with
               Knoll Capital Fund II, Europa International, Inc. and Clifford and Phyllis
               Kalista JTWROS (incorporated by reference to Exhibit 4.3 to Registration
               Statement on Form S-1, File No. 333-112865, filed on May 18, 2004)                          *
</TABLE>


                                       37
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    Filed Herewith
                                                                                                    or Incorporated
Exhibit No.    Item Title                                                                            by Reference
-----------    ----------                                                                            ------------
<S>            <C>                                                                                        <C>
10.21          Form of Registration Rights Agreement used in May 2004 private placement with
               Knoll Capital Fund II, Europa International, Inc. and Clifford and Phyllis
               Kalista JTWROS (incorporated by reference to Exhibit 4.4 to Registration
               Statement on Form S-1, File No. 333-112865, filed on May 18, 2004)                          *

10.22          Form of Warrant Certificate issued on May 11, 2004 to Knoll Capital Fund II,
               Europa International, Inc. and Clifford and Phyllis Kalista JTWROS (incorporated
               by reference to Exhibit 4.5 to Registration Statement on Form S-1, File No.
               333-112865, filed on May 18, 2004)                                                          *

10.23          Form of Stock Option Agreement issued to the Company's Board of Directors under
               the Company's 1997 Stock Option Plan (incorporated by reference to Exhibit 10.23
               to the Company's quarterly report on Form 10-Q filed on June 9, 2005.                       *

10.24          Form of Stock Option Agreement issued to the Company's Executive
               Officers under the Company's 1997 Stock Option Plan (incorporated
               by reference to Exhibit 10.24 to the Company's quarterly report
               on Form 10-Q filed on June 9, 2005.                                                         *

10.25          Separation Agreement and General Release with Andrew Savadelis dated May 26, 2005.          +

21.1           Subsidiaries of Registrant                                                                  +

23.1           Consent of J.H. Cohn LLP                                                                    +

23.2           Consent of KPMG LLP                                                                         +

31.1           Certification of Principal Executive Officer pursuant to  of the
               Sarbanes-Oxley Act of 2002                                                                  +

31.2           Certification of Principal Financial Officer pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002                                                                  +

32.1           Certification of Principal Executive Officer pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002                                                                  +

32.2           Certification of Principal Financial Officer pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002                                                                  +
</TABLE>

*     Previously filed; incorporated herein by reference

+     Filed herewith


                                       38
<PAGE>

                                    Signature

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.

                                 ALFACELL CORPORATION


Dated: October 14, 2005          By: /s/ KUSLIMA SHOGEN
                                     Kuslima Shogen, Chief Executive Officer and
                                     Chairman of the Board

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.

Dated: October 14, 2005                    /s/ KUSLIMA SHOGEN
                                           Kuslima Shogen, Chief Executive
                                           Officer and Chairman of the Board
                                           (Principal Executive Officer)

Dated: October 14, 2005                    /s/ ROBERT D. LOVE
                                           Robert D. Love, Chief Financial
                                           Officer (Principal Financial Officer
                                           and Principal Accounting Officer)

Dated: October 14, 2005                    /s/ JOHN P. BRANCACCIO
                                           John P. Brancaccio, Director

Dated: October 14, 2005                    /s/ STEPHEN K. CARTER
                                           Stephen K. Carter, M.D., Director

Dated: October 14, 2005                    /s/ DONALD R. CONKLIN
                                           Donald R. Conklin, Director

Dated: October 14, 2005                    /s/ JAMES J. LOUGHLIN
                                           James J. Loughlin, Director

Dated: October 14, 2005                    /s/ ANDREW P. SAVADELIS
                                           Andrew P. Savadelis, Director

Dated: October 14, 2005                    /s/ DAVID SIDRANSKY
                                           David Sidransky, M.D., Director

Dated: October 14, 2005                    /s/ PAUL M. WEISS
                                           Paul M. Weiss, Ph.D., Director


                                       39
<PAGE>

                              Alfacell Corporation

                          Index to Financial Statements

                                                                            Page
                                                                            ----

Audited Financial Statements:

Report of Independent Registered Public Accounting Firm:  J.H. Cohn LLP......F-2

Report of Independent Registered Public Accounting Firm:  KPMG LLP...........F-3

Independent Auditors' Report of Armus, Harrison & Co.........................F-4

Balance Sheets - July 31, 2005 and 2004......................................F-6

Statements of Operations - Years ended July 31, 2005, 2004, and 2003
     and the Period from August 24, 1981
     (Date of Inception) to July 31, 2005....................................F-7

Statement of Stockholders' Equity (Deficiency)
     Period from August 24, 1981
     (Date of Inception) to July 31, 2005....................................F-8

Statements of Cash Flows - Years ended July 31, 2005, 2004, and 2003
     and Period from August 24, 1981
     (Date of Inception) to July 31, 2005...................................F-14

Notes to Financial Statements - Years ended July 31, 2005, 2004 and
     2003 and the Period from August 24, 1981
     (Date of Inception) to July 31, 2005...................................F-17


                                      F-1
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Alfacell Corporation

We have  audited the  accompanying  balance  sheets of ALFACELL  CORPORATION  (A
Development  Stage  Company)  as of July 31,  2005  and  2004,  and the  related
statements of operations,  stockholders'  equity (deficiency) and cash flows for
each of the years in the  three  year  period  ended  July 31,  2005 and for the
period  from  August  24,  1981  (date of  inception)  to July 31,  2005.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits. The financial statements of Alfacell Corporation for the period from
August 24, 1981 to July 31, 2002 were audited by other  auditors  whose  reports
dated  November 4, 2002 and December 9, 1992,  except for Note 18 which is as of
July 19, 1993 and Note 3 which is as of October 28, 1993, expressed  unqualified
opinions  on  those  statements  with  explanatory  paragraphs  relating  to the
Company's ability to continue as a going concern.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (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,  based on our audits  and,  for the  effect on the period  from
August 24,  1981 to July 31,  2005 of the amounts for the period from August 24,
1981 to  July  31,  2002,  on the  reports  of  other  auditors,  the  financial
statements  referred to above  present  fairly,  in all material  respects,  the
financial position of Alfacell Corporation as of July 31, 2005 and 2004, and its
results  of  operations  and cash  flows for each of the years in the three year
period  ended July 31,  2005 and for the period from August 24, 1981 to July 31,
2005, in conformity with accounting  principles generally accepted in the United
States of America.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board  (United  States),  the  effectiveness  of Alfacell
Corporation's  internal  control over  financial  reporting as of July 31, 2005,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring  Organizations  of the Treadway  Commission  and our
report dated October 4, 2005, expressed an unqualified opinion thereon.


                                                       /s/ J.H. Cohn LLP

Roseland, New Jersey
October 4, 2005


                                      F-2
<PAGE>

             Report Of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors
Alfacell Corporation:

We have audited the statements of operations, stockholders' equity (deficiency),
and cash flows for the period from August 24, 1981 (date of  inception)  to July
31, 2002 (not presented  herein) of Alfacell  Corporation  (a development  stage
company).  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit. The financial  statements of Alfacell Corporation
for the period  from  August  24,  1981 to July 31,  1992 were  audited by other
auditors who have ceased  operations  and whose  report dated  December 9, 1992,
except  as to note 18  which is July 19,  1993 and note 3 which is  October  28,
1993,  expressed an unqualified  opinion on those statements with an explanatory
paragraph regarding the Company's ability to continue as a going concern.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (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  audit  provides  a
reasonable basis for our opinion.

In our opinion, based on our audit and, for the effect on the period from August
24,  1981 to July 31, 2002 of the amounts for the period from August 24, 1981 to
July 31, 1992, on the report of other auditors who have ceased  operations,  the
financial statements referred to above present fairly, in all material respects,
the results of operations  and cash flows for the period from August 24, 1981 to
July 31, 2002 (not presented herein) of Alfacell  Corporation in conformity with
U.S. generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has a working  capital  deficit and has  limited  liquid  resources  which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these  matters are also  described  in Note 2. The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


                                                       /s/ KPMG LLP

Short Hills, New Jersey
November 4, 2002


                                      F-3
<PAGE>

      On December 1, 1993, certain  shareholders of Armus Harrison & Co. ("AHC")
terminated their  association with AHC (the "AHC  termination"),  and AHC ceased
performing  accounting  and  auditing  services,  except for limited  accounting
services to be performed on behalf of the Company.  In June 1996,  AHC dissolved
and  ceased all  operations.  The  report of AHC with  respect to the  financial
statements  of the Company from  inception to July 31, 1992 is included  herein,
although AHC has not  consented to the use of such report herein and will not be
available  to perform any  subsequent  review  procedures  with  respect to such
report. Accordingly,  investors will be barred from asserting claims against AHC
under  Section 11 of the  Securities  Act of 1933,  as amended (the  "Securities
Act") on the basis of the use of such report in any  registration  statement  of
the Company into which such report is incorporated by reference. In addition, in
the event any persons seek to assert a claim against AHC for false or misleading
financial  statements  and  disclosures  in  documents  previously  filed by the
Company, such claim will be adversely affected and possibly barred. Furthermore,
as a result  of the lack of a consent  from AHC to the use of its  audit  report
herein,  or, to its incorporation by reference into a registration  statement or
other filings,  the officers and directors of the Company will be unable to rely
on the  authority of AHC as experts in auditing and  accounting in the event any
claim is brought  against such persons  under Section 11 of the  Securities  Act
based on alleged  false and  misleading  financial  statements  and  disclosures
attributable  to  AHC.  The  discussion  regarding  certain  effects  of the AHC
termination  is not meant and should not be construed in any way as legal advice
to any party and any potential purchaser should consult with his, her or its own
counsel  with  respect  to the  effect  of the AHC  termination  on a  potential
investment in the Common Stock of the Company or otherwise.

                          Independent Auditors' Report

Board of Directors
Alfacell Corporation
Bloomfield, New Jersey

We have audited the balance sheets of Alfacell  Corporation (a Development Stage
Company) as of July 31, 1992 and 1991, as restated,  and the related  statements
of  operations,  stockholders'  deficiency,  and cash flows for the three  years
ended July 31, 1992, as restated,  and for the period from inception  August 24,
1981 to July 31, 1992, as restated. In connection with our audit of the 1992 and
1991  financial  statements,  we have  also  audited  the  1992,  1991  and 1990
financial  statement  schedules  as  listed  in the  accompanying  index.  These
financial statements and financial statement schedules are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
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 audit provides a reasonable basis for our opinion.

In our opinion the financial  statements referred to above present fairly in all
material respects, the financial position of Alfacell Corporation as of July 31,
1992 and 1991,  as  restated,  and for the three years ended July 31,  1992,  as
restated, and for the period from inception August 24, 1981 to July 31, 1992, as
restated,  and the results of operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.


                                      F-4
<PAGE>

      The  accompanying  financial  statements  have  been  prepared  on a going
concern basis which  contemplates the realization of assets and the satisfaction
of liability  in the normal  course of  business.  As shown in the  statement of
operations,  the Company has incurred  substantial losses in each year since its
inception.  In  addition,  the Company is a  development  stage  company and its
principal  operation for production of income has not  commenced.  The Company's
working  capital has been reduced  considerably by operating  losses,  and has a
deficit net worth.  These factors,  among others,  as discussed in Note 2 to the
Notes of Financial  Statements,  indicates the uncertainties about the Company's
ability to continue as a going concern.  The financial statements do not include
any adjustments  relating to the  recoverability  and classification of recorded
asset  amounts and the amount or  classification  of  liabilities  that might be
necessary should the Company be unable to continue its existence.


                                                /s/ Armus, Harrison & Co.
                                                -----------------------------
                                                Armus, Harrison & Co.

Mountainside, New Jersey
December 9, 1992
Except as to Note 18 which
  is July 19, 1993 and Note 3
  which is October 28, 1993


                                      F-5
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                                 Balance Sheets

                             July 31, 2005 and 2004

<TABLE>
<CAPTION>
                                                                         2005               2004
                                                                     ------------       ------------
<S>                                                                  <C>                <C>
ASSETS

Current assets:
    Cash and cash equivalents                                        $  4,462,951       $ 10,147,694
    Other assets                                                          196,936             64,771
                                                                     ------------       ------------
        Total current assets                                            4,659,887         10,212,465

Property and equipment, net of accumulated depreciation and
    amortization of $1,061,012 in 2005 and $1,095,412 in 2004              80,395             56,783

Loan receivable, related party                                            161,342            151,815
                                                                     ------------       ------------

        Total assets                                                 $  4,901,624       $ 10,421,063
                                                                     ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Current portion of notes payable, net of debt discount of
       $34,120 at July 31, 2004                                      $         --       $    372,611
    Accounts payable                                                      396,263            541,600
    Accrued expenses                                                    1,283,691            625,205
                                                                     ------------       ------------
        Total liabilities                                               1,679,954          1,539,416
                                                                     ------------       ------------

Commitments and contingencies

Stockholders' equity:
    Preferred stock, $.001 par value.  Authorized and unissued,
       1,000,000 shares at July 31, 2005 and 2004                              --                 --
    Common stock $.001 par value. Authorized 100,000,000
       shares at July 31, 2005 and 2004; issued and outstanding
       36,534,235 shares and 34,347,885 shares at July 31, 2005
       and 2004, respectively                                              36,534             34,348
    Capital in excess of par value                                     78,691,572         77,891,815
    Deficit accumulated during development stage                      (75,506,436)       (69,044,516)
                                                                     ------------       ------------
        Total stockholders' equity                                      3,221,670          8,881,647
                                                                     ------------       ------------

        Total liabilities and stockholders' equity                   $  4,901,624       $ 10,421,063
                                                                     ============       ============
</TABLE>

See accompanying notes to financial statements.


                                      F-6
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                            Statements of Operations

                    Years ended July 31, 2005, 2004 and 2003
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 2005

<TABLE>
<CAPTION>
                                                August 24, 1981
                                                  (date of
                                                  inception)
                                                to July 31, 2005         2005                2004              2003
                                                ----------------     ------------       ------------       ------------
<S>                                               <C>                <C>                <C>                <C>
Revenues:
    Sales                                         $    553,489       $         --       $         --       $         --
    Investment income                                1,570,821            141,708             42,113              9,877
    Other income                                        99,939              9,836                 --             30,000
                                                  ------------       ------------       ------------       ------------
                                                     2,224,249            151,544             42,113             39,877
                                                  ------------       ------------       ------------       ------------

Cost and expenses:
    Cost of sales                                      336,495                 --                 --                 --
    Research and development                        50,037,251          5,082,339          3,352,977          1,699,962
    General and administrative                      25,637,588          1,771,379          1,578,357            624,406
    Interest:
       Related parties                               1,147,547                 --                 --                 --
       Others                                        2,873,964             47,721            402,933            358,398
                                                  ------------       ------------       ------------       ------------
                                                    80,032,845          6,901,439          5,334,267          2,682,766
                                                  ------------       ------------       ------------       ------------

Loss before state tax benefit                      (77,808,596)        (6,749,895)        (5,292,154)        (2,642,889)

 State tax benefit                                   2,302,160            287,975            221,847            231,357
                                                  ------------       ------------       ------------       ------------

           Net loss                               $(75,506,436)      $ (6,461,920)      $ (5,070,307)      $ (2,411,532)
                                                  ============       ============       ============       ============

 Loss per basic and diluted common share                             $      (0.18)      $      (0.17)      $      (0.10)
                                                                     ============       ============       ============

 Weighted average number of shares
   outstanding                                                         35,379,000         29,438,000         23,166,000
                                                                     ============       ============       ============
</TABLE>

See accompanying notes to financial statements.


                                      F-7
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 2005

<TABLE>
<CAPTION>
                                                             Common Stock
                                                        ----------------------


                                                                                      Capital In        Common
                                                         Number of                  Excess of par    Stock to be
                                                          Shares         Amount         Value           Issued
                                                        ----------      -------     -------------    -----------
<S>                                                    <C>              <C>          <C>                    <C>
Issuance of shares to officers and stockholders
  for equipment, research and development,
  and expense reimbursement                                712,500      $   713      $   212,987              --
Issuance of shares for organizational legal service         50,000           50            4,950              --
Sale of shares for cash, net                                82,143           82          108,418              --
Adjustment for 3 for 2 stock split declared
  September 8, 1982                                        422,321          422             (422)             --
Net loss                                                        --           --               --              --
                                                        ----------      -------      -----------      ----------
Balance at July 31, 1982                                 1,266,964        1,267          325,933              --

Issuance of shares for equipment                            15,000           15           13,985              --
Sale of shares to private investors                         44,196           44           41,206              --
Sale of shares in public offering, net                     660,000          660        1,307,786              --
Issuance of shares under stock grant program                20,000           20          109,980              --
Exercise of warrants, net                                    1,165            1            3,494              --
Net loss                                                        --           --               --              --
                                                        ----------      -------      -----------      ----------
Balance at July 31, 1983                                 2,007,325        2,007        1,802,384              --

Exercise of warrants, net                                  287,566          287          933,696              --
Issuance of shares under stock grant program                19,750           20          101,199              --
Issuance of shares under stock bonus plan for
  directors and consultants                                130,250          131          385,786              --
Net loss                                                        --           --               --              --
                                                        ----------      -------      -----------      ----------
Balance at July 31, 1984                                 2,444,891        2,445        3,223,065              --

Issuance of shares under stock grant program                48,332           48          478,057              --
Issuance of shares under stock bonus plan for
  directors and consultants                                 99,163           99          879,379              --

Shares canceled                                            (42,500)         (42)        (105,783)             --
Exercise of warrants, net                                  334,957          335        1,971,012
Net loss                                                        --           --               --              --
                                                        ----------      -------      -----------      ----------
Balance at July 31, 1985                                 2,884,843        2,885        6,445,730              --

Issuance of shares under stock grant program                11,250           12          107,020              --
Issuance of shares under stock bonus plan for
  directors and consultants                                 15,394           15          215,385              --
Exercise of warrants, net                                   21,565           21           80,977              --
Net loss                                                        --           --               --              --
                                                        ----------      -------      -----------      ----------
Balance at July 31, 1986 (carried forward)               2,933,052        2,933        6,849,112              --

<CAPTION>


                                                            Deficit
                                                          Accumulated                                             Total
                                                            During                            Deferred        Stockholders'
                                                          Development     Subscription     compensation,         Equity
                                                             Stage         Receivable     restricted stock    (Deficiency)
                                                          -----------     ------------    ----------------    -------------
<S>                                                       <C>              <C>               <C>               <C>
Issuance of shares to officers and stockholders
  for equipment, research and development,
  and expense reimbursement                               $        --      $       --        $       --        $   213,700
Issuance of shares for organizational legal service                --              --                --              5,000
Sale of shares for cash, net                                       --              --                --            108,500
Adjustment for 3 for 2 stock split declared
  September 8, 1982                                                --              --                --                 --
Net loss                                                     (121,486)             --                --           (121,486)
                                                          -----------      ----------        ----------        -----------
Balance at July 31, 1982                                     (121,486)             --                --            205,714

Issuance of shares for equipment                                   --              --                --             14,000
Sale of shares to private investors                                --              --                --             41,250
Sale of shares in public offering, net                             --              --                --          1,308,446
Issuance of shares under stock grant program                       --              --                --            110,000
Exercise of warrants, net                                          --              --                --              3,495
Net loss                                                     (558,694)             --                --           (558,694)
                                                          -----------      ----------        ----------        -----------
Balance at July 31, 1983                                     (680,180)             --                --          1,124,211

Exercise of warrants, net                                          --              --                --            933,983
Issuance of shares under stock grant program                       --              --                --            101,219
Issuance of shares under stock bonus plan for
  directors and consultants                                        --              --                --            385,917
Net loss                                                   (1,421,083)             --                --         (1,421,083)
                                                          -----------      ----------        ----------        -----------
Balance at July 31, 1984                                   (2,101,263)             --                --          1,124,247

Issuance of shares under stock grant program                       --              --                --            478,105
Issuance of shares under stock bonus plan for
  directors and consultants                                        --              --                --            879,478

Shares canceled                                                    --              --                --           (105,825)
Exercise of warrants, net                                          --              --                --          1,971,347
Net loss                                                   (2,958,846)             --                --         (2,958,846)
                                                          -----------      ----------        ----------        -----------
Balance at July 31, 1985                                   (5,060,109)             --                --          1,388,506

Issuance of shares under stock grant program                       --              --                --            107,032
Issuance of shares under stock bonus plan for
  directors and consultants                                        --              --                --            215,400
Exercise of warrants, net                                          --              --                --             80,998
Net loss                                                   (2,138,605)             --                --         (2,138,605)
                                                          -----------      ----------        ----------        -----------
Balance at July 31, 1986 (carried forward)                 (7,198,714)             --                --           (346,669)
</TABLE>


                                      F-8
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                        Common Stock
                                                  ------------------------


                                                                                Capital In       Common
                                                  Number of                   Excess of par    Stock to be
                                                    Shares        Amount           Value         Issued
                                                  ---------     ----------    -------------    -----------
<S>                                               <C>           <C>            <C>                      <C>
Balance at July 31, 1986 (brought forward)        2,933,052     $    2,933     $ 6,849,112              --

Exercise of warrants,net                             14,745             15         147,435              --
Issuance of shares under stock bonus plan
  for directors and consultants                       5,000              5          74,995              --

Issuance of shares for services                     250,000            250         499,750              --
Sale of shares to private investors, net              5,000              5          24,995              --
Net loss                                                 --             --              --              --
                                                  ---------     ----------     -----------     -----------
Balance at July 31, 1987                          3,207,797          3,208       7,596,287              --

Issuance of shares for legal and
  consulting services                               206,429            207         724,280              --
Issuance of shares under employment
  incentive program                                 700,000            700       2,449,300              --
Issuance of shares under stock grant program         19,000             19          66,481              --
Exercise of options, net                            170,000            170         509,830              --
Issuance of shares for litigation settlement         12,500             12          31,125              --
Exercise of warrants,net                             63,925             64         451,341              --
Sale of shares to private investors                  61,073             61         178,072              --
Amortization of deferred compensation,
  restricted stock                                       --             --              --              --
Net loss                                                 --             --              --              --
                                                  ---------     ----------     -----------     -----------
Balance at July 31, 1988                          4,440,724          4,441      12,006,716              --

Sale of shares for litigation settlement            135,000            135       1,074,703              --
Conversion of debentures, net                       133,333            133         399,867              --
Sale of shares to private investors                 105,840            106         419,894              --
Exercise of options, net                              1,000              1           3,499              --
Issuance of shares under employment agreement       750,000            750       3,749,250              --
Issuance of shares under the 1989 Stock Plan         30,000             30         149,970              --
Amortization of deferred compensation,
  restricted stock                                       --             --              --              --
Net loss                                                 --             --              --              --
                                                  ---------     ----------     -----------     -----------
Balance at July 31, 1989                          5,595,897          5,596      17,803,899              --

Issuance of shares for legal and
  consulting services                                52,463             52         258,725              --
Issuance of shares under the 1989 Stock Plan         56,000             56         335,944              --
Sale of shares for litigation settlement             50,000             50         351,067              --
Exercise of options at, net                         105,989            106         345,856              --

<CAPTION>


                                                       Deficit
                                                     Accumulated                       Deferred           Total
                                                        During                       compensation,     Stockholders'
                                                     Development      Subscription    restricted          Equity
                                                        Stage          Receivable         stock        (Deficiency)
                                                     ------------     ------------   -------------     -------------
<S>                                                  <C>               <C>            <C>              <C>
Balance at July 31, 1986 (brought forward)           $ (7,198,714)     $       --     $        --      $  (346,669)

Exercise of warrants,net                                       --              --              --          147,450
Issuance of shares under stock bonus plan
  for directors and consultants                                --              --              --           75,000

Issuance of shares for services                                --              --              --          500,000
Sale of shares to private investors, net                       --              --              --           25,000
Net loss                                               (2,604,619)             --              --       (2,604,619)
                                                     ------------      ----------     -----------      -----------
Balance at July 31, 1987                               (9,803,333)             --              --       (2,203,838)

Issuance of shares for legal and
  consulting services                                          --              --              --          724,487
Issuance of shares under employment
  incentive program                                            --              --      (2,450,000)              --
Issuance of shares under stock grant program                   --              --              --           66,500
Exercise of options, net                                       --              --              --          510,000
Issuance of shares for litigation settlement                   --              --              --           31,137
Exercise of warrants,net                                       --              --              --          451,405
Sale of shares to private investors                            --              --              --          178,133
Amortization of deferred compensation,
  restricted stock                                             --              --         449,167          449,167
Net loss                                               (3,272,773)             --              --       (3,272,773)
                                                     ------------      ----------     -----------      -----------
Balance at July 31, 1988                              (13,076,106)             --      (2,000,833)      (3,065,782)

Sale of shares for litigation settlement                       --              --              --        1,074,838
Conversion of debentures, net                                  --              --              --          400,000
Sale of shares to private investors                            --              --              --          420,000
Exercise of options, net                                       --              --              --            3,500
Issuance of shares under employment agreement                  --              --      (3,750,000)              --
Issuance of shares under the 1989 Stock Plan                   --              --        (150,000)              --
Amortization of deferred compensation,
  restricted stock                                             --              --       1,050,756        1,050,756
Net loss                                               (2,952,869)             --              --       (2,952,869)
                                                     ------------      ----------     -----------      -----------
Balance at July 31, 1989                              (16,028,975)             --      (4,850,077)      (3,069,557)

Issuance of shares for legal and
  consulting services                                          --              --              --          258,777
Issuance of shares under the 1989 Stock Plan                   --              --        (336,000)              --
Sale of shares for litigation settlement                       --              --              --          351,117
Exercise of options at, net                                    --              --              --          345,962
</TABLE>


                                      F-9
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                        Common Stock
                                                  ------------------------


                                                                               Capital In        Common
                                                  Number of                   Excess of par   Stock to be
                                                    Shares        Amount           Value         Issued
                                                  ---------     ----------    -------------    ----------
<S>                                               <C>           <C>            <C>                     <C>
Sale of shares to private investors                  89,480     $       90     $   354,990             --
Issuance of shares under employment agreement       750,000            750       3,749,250             --
Conversion of debentures, net                       100,000            100         499,900             --
Amortization of deferred compensation,
  restricted stock                                       --             --              --             --
Net loss                                                 --             --              --             --
                                                  ---------     ----------     -----------     ----------
Balance at July 31, 1990                          6,799,829          6,800      23,699,631             --

Exercise of options, net                             16,720             16         108,664             --
Issuance of shares for legal consulting
  services                                           87,000             87         358,627
Issuance of shares under the 1989
  Stock Plan                                        119,000            119         475,881             --
Amortization of deferred compensation,
  restricted stock                                       --             --              --             --
Net loss                                                 --             --              --             --
                                                  ---------     ----------     -----------     ----------
Balance at July 31, 1991                          7,022,549          7,022      24,642,803             --

Exercise of options at, net                           1,000              1           3,499             --
Sale of shares to private investors                  70,731             71         219,829             --
Conversion of debentures, net                        94,000             94         469,906             --
Issuance of shares for services                      45,734             46         156,944             --
Issuance of shares under the 1989
  Stock Plan                                        104,000            104         285,896             --
Amortization of deferred compensation,
  restricted stock                                       --             --              --             --
Net loss                                                 --             --              --             --
                                                  ---------     ----------     -----------     ----------
Balance at July 31, 1992                          7,338,014          7,338      25,778,877             --

Sale of shares to private investors                 352,667            353         735,147             --
Issuance of shares for legal services                49,600             50         132,180             --
Issuance of shares for services                       5,000              5           9,995             --
Issuance of shares under the 1989
  Stock Plan                                        117,000            117         233,883             --
Amortization of deferred compensation,
  restricted stock                                       --             --              --             --
Net loss                                                 --             --              --             --
                                                  ---------     ----------     -----------     ----------
Balance at July 31, 1993                          7,862,281          7,863      26,890,082             --

Conversion of debentures, net                       425,400            425       1,701,575             --
Sale of shares to private investors, net            743,000            743       1,710,048             --
Conversion of short-term borrowings                  72,800             73         181,927             --
Issuance of shares for services                      16,200             16          43,334             --

<CAPTION>


                                                       Deficit
                                                     Accumulated                       Deferred           Total
                                                        During                       compensation,    Stockholders'
                                                     Development      Subscription    restricted          Equity
                                                        Stage          Receivable        stock         (Deficiency)
                                                     ------------     ------------   -------------    -------------
<S>                                                  <C>               <C>            <C>              <C>
Sale of shares to private investors                  $         --      $       --     $        --      $   355,080
Issuance of shares under employment agreement                  --              --      (3,750,000)              --
Conversion of debentures, net                                  --              --              --          500,000
Amortization of deferred compensation,
  restricted stock                                             --              --       3,015,561        3,015,561
Net loss                                               (4,860,116)             --              --       (4,860,116)
                                                     ------------      ----------     -----------      -----------
Balance at July 31, 1990                              (20,889,091)             --      (5,920,516)      (3,103,176)

Exercise of options, net                                       --              --              --          108,680
Issuance of shares for legal consulting
  services                                                     --              --                          358,714
Issuance of shares under the 1989
  Stock Plan                                                   --              --        (476,000)              --
Amortization of deferred compensation,
  restricted stock                                             --              --       2,891,561        2,891,561
Net loss                                               (5,202,302)             --              --       (5,202,302)
                                                     ------------      ----------     -----------      -----------
Balance at July 31, 1991                              (26,091,393)             --      (3,504,955)      (4,946,523)

Exercise of options at, net                                    --              --              --            3,500
Sale of shares to private investors                            --              --              --          219,900
Conversion of debentures, net                                  --              --              --          470,000
Issuance of shares for services                                --              --              --          156,990
Issuance of shares under the 1989
  Stock Plan                                                   --              --        (286,000)              --
Amortization of deferred compensation,
  restricted stock                                             --              --       3,046,726        3,046,726
Net loss                                               (4,772,826)             --              --       (4,772,826)
                                                     ------------      ----------     -----------      -----------
Balance at July 31, 1992                              (30,864,219)             --        (744,229)      (5,822,233)

Sale of shares to private investors                            --              --              --          735,500
Issuance of shares for legal services                          --              --              --          132,230
Issuance of shares for services                                --              --         (10,000)              --
Issuance of shares under the 1989
  Stock Plan                                                   --              --        (234,000)              --
Amortization of deferred compensation,
  restricted stock                                             --              --         664,729          664,729
Net loss                                               (2,357,350)             --              --       (2,357,350)
                                                     ------------      ----------     -----------      -----------
Balance at July 31, 1993                              (33,221,569)             --        (323,500)      (6,647,124)

Conversion of debentures, net                                  --              --              --        1,702,000
Sale of shares to private investors, net                       --              --              --        1,710,791
Conversion of short-term borrowings                            --              --              --          182,000
Issuance of shares for services                                --              --              --           43,350
</TABLE>


                                      F-10
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                      Common Stock
                                               -------------------------


                                                                              Capital In         Common
                                                Number of                   Excess of par     Stock to be
                                                 Shares         Amount          Value            Issued
                                               ----------     ----------    -------------     -----------
<S>                                                 <C>       <C>            <C>                  <C>
Issuance of shares under the 1989
  Stock Plan, for services                          5,000     $        5     $     14,995              --
Issuance of options to related parties
  upon conversion of accrued interest,
  payroll and expenses                                 --             --        3,194,969              --
Repurchase of stock options from related
  party                                                --             --         (198,417)             --
Issuance of options upon conversion of
  accrued interest                                     --             --          142,441              --
Common stock to be issued                              --             --               --          50,000
Amortization of deferred compensation,
  restricted stock                                     --             --               --              --
Net loss                                               --             --               --              --
                                               ----------     ----------     ------------      ----------
Balance at July 31, 1994                        9,124,681          9,125       33,680,954          50,000

Sale of shares to private investors, net          961,000            961        2,023,241         (50,000)
Conversion of short-term borrowings                17,600             17           43,983              --
Issuance of shares for services                    30,906             31           77,234              --
Exercise of options, net                          185,000            185          437,015              --
Common stock to be issued                              --             --               --         339,008
Common stock to be issued, for services                --             --               --           4,800
Amortization of deferred compensation,
  restricted stock                                     --             --               --              --
Net loss                                               --             --               --              --
                                               ----------     ----------     ------------      ----------
Balance at July 31, 1995                       10,319,187         10,319       36,262,427         343,808

Sale of shares to private investors, net        2,953,327          2,953        8,969,655        (339,008)
Issuance of shares for services                    19,995             20           70,858          (4,800)
Exercise of options, net                          566,700            567        1,657,633              --
Sale of warrants                                       --             --           12,084              --
Issuance of options/warrants for services              --             --           50,872              --
Common stock to be issued                              --             --               --         258,335
Subscription receivable                                --             --               --              --
Net loss                                               --             --               --              --
                                               ----------     ----------     ------------      ----------
Balance at July 31, 1996                       13,859,209         13,859       47,023,529         258,335

Sale of shares to private investors, net          112,000            112          503,888              --
Issuance of options for services                       --             --           76,504              --
Exercise of options, net                          729,134            729        2,620,359        (258,335)
Exercise of warrants, net                         147,450            148          737,102              --
Net loss                                               --             --               --              --
                                               ----------     ----------     ------------      ----------
Balance at July 31, 1997 (carried forward)     14,847,793         14,848       50,961,382              --

<CAPTION>


                                                   Deficit
                                                 Accumulated                        Deferred         Total
                                                    During                       compensation,   Stockholders'
                                                 Development     Subscription     restricted        Equity
                                                    Stage         Receivable         stock        (Deficiency)
                                                ------------     ------------    -------------   -------------
<S>                                             <C>               <C>             <C>             <C>
Issuance of shares under the 1989
  Stock Plan, for services                      $         --      $       --      $       --      $    15,000
Issuance of options to related parties
  upon conversion of accrued interest,
  payroll and expenses                                    --              --              --        3,194,969
Repurchase of stock options from related
  party                                                   --              --              --         (198,417)
Issuance of options upon conversion of
  accrued interest                                        --              --              --          142,441
Common stock to be issued                                 --              --              --           50,000
Amortization of deferred compensation,
  restricted stock                                        --              --         265,000          265,000
Net loss                                          (2,234,428)             --              --       (2,234,428)
                                                ------------      ----------      ----------      -----------
Balance at July 31, 1994                         (35,455,997)             --         (58,500)      (1,774,418)

Sale of shares to private investors, net                  --              --              --        1,974,202
Conversion of short-term borrowings                       --              --              --           44,000
Issuance of shares for services                           --              --              --           77,265
Exercise of options, net                                  --              --              --          437,200
Common stock to be issued                                 --              --              --          339,008
Common stock to be issued, for services                   --              --              --            4,800
Amortization of deferred compensation,
  restricted stock                                        --              --          58,500           58,500
Net loss                                          (1,993,123)             --              --       (1,993,123)
                                                ------------      ----------      ----------      -----------
Balance at July 31, 1995                         (37,449,120)             --              --         (832,566)

Sale of shares to private investors, net                  --              --              --        8,633,600
Issuance of shares for services                           --              --              --           66,078
Exercise of options, net                                  --              --              --        1,658,200
Sale of warrants                                          --              --              --           12,084
Issuance of options/warrants for services                 --              --              --           50,872
Common stock to be issued                                 --              --              --          258,335
Subscription receivable                                   --        (254,185)             --         (254,185)
Net loss                                          (2,942,152)             --              --       (2,942,152)
                                                ------------      ----------      ----------      -----------
Balance at July 31, 1996                         (40,391,272)       (254,185)             --        6,650,266

Sale of shares to private investors, net                  --              --              --          504,000
Issuance of options for services                          --              --              --           76,504
Exercise of options, net                                  --         254,185              --        2,616,938
Exercise of warrants, net                                 --              --              --          737,250
Net loss                                          (5,018,867)             --              --       (5,018,867)
                                                ------------      ----------      ----------      -----------
Balance at July 31, 1997 (carried forward)       (45,410,139)             --              --        5,566,091
</TABLE>


                                      F-11
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                             Common Stock
                                                      -------------------------


                                                                                    Capital In         Common
                                                       Number of                   Excess of par    Stock to be
                                                        Shares         Amount          Value           Issued
                                                      ----------     ----------    -------------    -----------
<S>                                                   <C>            <C>            <C>                    <C>
Balance at July 31, 1997 (brought forward)            14,847,793     $   14,848     $50,961,382              --

Sale of shares to private investors, net               2,337,150          2,337       4,199,877              --
Issuance of options for services                              --             --         199,954              --
Exercise of warrants, net                                  4,950              5          11,080              --
Issuance of shares for services, net                      50,000             50          99,950              --
Net loss                                                      --             --              --              --
                                                      ----------     ----------     -----------     -----------
Balance at July 31, 1998                              17,239,893         17,240      55,472,243              --

Issuance of options for services                              --             --         205,593              --
Issuance of shares for services, net                      46,701             46          16,359              --
Net loss                                                      --             --              --              --
                                                      ----------     ----------     -----------     -----------
Balance at July 31, 1999                              17,286,594         17,286      55,694,195              --

Sale of shares to private investors, net                 875,000            875         547,417              --
Exercise of options, net                                  95,000             95          45,755              --
Issuance of shares for services, net                     174,965            175          92,009              --
Vesting of options previously issued for services             --             --         146,912              --
Net loss                                                      --             --              --              --
                                                      ----------     ----------     -----------     -----------
Balance at July 31, 2000                              18,431,559         18,431      56,526,288              --

Sale of shares to private investors, net                 863,331            863         955,561              --
Exercise of options, net                                 165,555            166          83,565              --
Issuance of shares for services, net                      11,800             12          10,018              --
Exercise of convertible debentures, net                  330,000            330         296,670              --
Issuance of warrants with convertible debt                    --             --         178,807              --
Issuance of options for services                              --             --         160,426              --
Net loss                                                      --             --              --              --
                                                      ----------     ----------     -----------     -----------
Balance at July 31, 2001                              19,802,245         19,802      58,211,335              --

Sale of shares to private investors, net               2,622,122          2,623       1,047,925              --
Exercise of stock options and warrants                   186,000            186          92,814              --
Issuance of shares for services, net                      78,340             78          64,048              --
Exercise of convertible debentures, net                   72,214             72          64,921              --
Vesting of options previously issued for services             --             --         173,436              --
Net loss                                                      --             --              --              --
                                                      ----------     ----------     -----------     -----------
Balance at July 31, 2002 (carried forward)            22,760,921         22,761      59,654,479              --


<CAPTION>


                                                           Deficit
                                                          Accumulated                      Deferred           Total
                                                            During                       compensation,    Stockholders'
                                                          Development     Subscription    restricted         Equity
                                                             Stage         Receivable       stock         (Deficiency)
                                                         ------------     ------------   -------------    -------------
<S>                                                      <C>               <C>            <C>              <C>
Balance at July 31, 1997 (brought forward)               $(45,410,139)     $       --     $       --       $ 5,566,091

Sale of shares to private investors, net                           --              --             --         4,202,214
Issuance of options for services                                   --              --             --           199,954
Exercise of warrants, net                                          --              --             --            11,085
Issuance of shares for services, net                               --              --             --           100,000
Net loss                                                   (6,387,506)             --             --        (6,387,506)
                                                         ------------      ----------     ----------       -----------
Balance at July 31, 1998                                  (51,797,645)             --             --         3,691,838

Issuance of options for services                                   --              --             --           205,593
Issuance of shares for services, net                               --              --             --            16,405
Net loss                                                   (3,156,636)             --             --        (3,156,636)
                                                         ------------      ----------     ----------       -----------
Balance at July 31, 1999                                  (54,954,281)             --             --           757,200

Sale of shares to private investors, net                           --              --             --           548,292
Exercise of options, net                                           --              --             --            45,850
Issuance of shares for services, net                               --              --             --            92,184
Vesting of options previously issued for services                  --              --             --           146,912
Net loss                                                   (1,722,298)             --             --        (1,722,298)
                                                         ------------      ----------     ----------       -----------
Balance at July 31, 2000                                  (56,676,579)             --             --          (131,860)

Sale of shares to private investors, net                           --              --             --           956,424
Exercise of options, net                                           --              --             --            83,731
Issuance of shares for services, net                               --              --             --            10,030
Exercise of convertible debentures, net                            --              --             --           297,000
Issuance of warrants with convertible debt                         --              --             --           178,807
Issuance of options for services                                   --              --             --           160,426
Net loss                                                   (2,294,936)             --             --        (2,294,936)
                                                         ------------      ----------     ----------       -----------
Balance at July 31, 2001                                  (58,971,515)             --             --          (740,378)

Sale of shares to private investors, net                           --              --             --         1,050,548
Exercise of stock options and warrants                             --              --             --            93,000
Issuance of shares for services, net                               --              --             --            64,126
Exercise of convertible debentures, net                            --              --             --            64,993
Vesting of options previously issued for services                  --              --             --           173,436
Net loss                                                   (2,591,162)             --             --        (2,591,162)
                                                         ------------      ----------     ----------       -----------
Balance at July 31, 2002 (carried forward)                (61,562,677)             --             --        (1,885,437)
</TABLE>


                                      F-12
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                                  Common Stock
                                                            -------------------------


                                                                                             Capital In         Common
                                                             Number of                     Excess of par     Stock to be
                                                              Shares          Amount           Value            Issued
                                                            ----------      ----------     -------------     -----------
<S>                                                         <C>             <C>             <C>                      <C>
Balance at July 31, 2002 (brought forward)                  22,760,921      $   22,761      $59,654,479               --

Sale of shares to private investors, net                     1,315,000           1,315          652,312               --
Exercise of stock options and warrants                         764,000             764          376,896               --
Issuance of shares for payment of accounts payable             186,208             186           94,037               --
Issuance of options for services rendered                           --              --           75,521               --
Vesting of options previously issued for services                   --              --           10,038               --

Issuance of warrants in connection with debt issuances              --              --          594,219               --
Net loss                                                            --              --               --               --
                                                            ----------      ----------      -----------      -----------
Balance at July 31, 2003                                    25,026,129          25,026       61,457,502               --

Sale of shares to private investors, net                     3,035,200           3,036       10,732,942               --
Exercise of stock options and warrants                       3,100,160           3,100        4,155,397               --
Issuance of shares for payment of accounts payable              14,703              15           52,161               --
Issuance of shares for conversion of subordinated
  debentures, other                                          3,042,817           3,043          924,829               --
Issuance of shares for services rendered                       128,876             128          288,372               --
Issuance of options for services rendered                           --              --          280,612               --
Net loss                                                            --              --               --               --
                                                            ----------      ----------      -----------      -----------
Balance at July 31, 2004                                    34,347,885          34,348       77,891,815               --

Exercise of stock options and warrants, net                    438,372             438          306,717               --
Issuance of shares and warrants for conversion of
  subordinated debentures, other                             1,744,978           1,745          462,754               --
Issuance of shares for services rendered                         3,000               3           13,497               --
Issuance of options and warrants for services rendered              --              --           16,789               --
Net loss                                                            --              --               --               --
                                                            ----------      ----------      -----------      -----------
Balance at July 31, 2005                                    36,534,235      $   36,534      $78,691,572               --
                                                            ==========      ==========      ===========      ===========

<CAPTION>


                                                               Deficit
                                                             Accumulated                         Deferred           Total
                                                                During                         compensation,    Stockholders'
                                                             Development      Subscription      restricted         Equity
                                                                Stage          Receivable          stock         (Deficiency)
                                                            ------------      ------------     -------------    -------------
<S>                                                         <C>                <C>              <C>              <C>
Balance at July 31, 2002 (brought forward)                  $(61,562,677)      $        --      $        --      $ (1,885,437)

Sale of shares to private investors, net                              --                --               --           653,627
Exercise of stock options and warrants                                --                --               --           377,660
Issuance of shares for payment of accounts payable                    --                --               --            94,223
Issuance of options for services rendered                             --                --               --            75,521
Vesting of options previously issued for services                     --                --               --            10,038

Issuance of warrants in connection with debt issuances                --                --               --           594,219
Net loss                                                      (2,411,532)               --               --        (2,411,532)
                                                            ------------       -----------      -----------      ------------
Balance at July 31, 2003                                     (63,974,209)               --               --        (2,491,681)

Sale of shares to private investors, net                              --                --               --        10,735,978
Exercise of stock options and warrants                                --                --               --         4,158,497
Issuance of shares for payment of accounts payable                    --                --               --            52,176
Issuance of shares for conversion of subordinated
  debentures, other                                                   --                --               --           927,872
Issuance of shares for services rendered                              --                --               --           288,500
Issuance of options for services rendered                             --                --               --           280,612
Net loss                                                      (5,070,307)               --               --        (5,070,307)
                                                            ------------       -----------      -----------      ------------
Balance at July 31, 2004                                     (69,044,516)               --               --         8,881,647

Exercise of stock options and warrants, net                           --                --               --           307,155
Issuance of shares and warrants for conversion of
  subordinated debentures, other                                      --                --               --           464,499
Issuance of shares for services rendered                              --                --               --            13,500
Issuance of options and warrants for services rendered                --                --               --            16,789
Net loss                                                      (6,461,920)               --               --        (6,461,920)
                                                            ------------       -----------      -----------      ------------
Balance at July 31, 2005                                    $(75,506,436)      $        --      $        --      $  3,221,670
                                                            ============       ===========      ===========      ============
</TABLE>

See accompanying notes to financial statements.


                                      F-13
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                            Statements of Cash Flows

                    Years ended July 31, 2005, 2004 and 2003
                      and the Period from August 24, 1981
                      (Date of Inception) to July 31, 2005

<TABLE>
<CAPTION>
                                                                     August 24, 1981
                                                                   (date of inception)
                                                                            to
                                                                         July 31,
                                                                           2005             2005            2004            2003
                                                                   -------------------  -----------     -----------     -----------
<S>                                                                    <C>              <C>             <C>             <C>
Cash flows from operating activities:
  Net loss                                                             $(75,506,436)    $(6,461,920)    $(5,070,307)    $(2,411,532)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Gain on sale of marketable securities                                 (25,963)             --              --              --
      Depreciation and amortization                                       1,585,684          28,917           9,549          15,812
      Loss on disposal of property and equipment                             18,926              --              --              --
      Issuance of common stock, stock options and warrants for
         services rendered                                                6,717,013          30,289         569,112          85,559
      Amortization of debt discount                                         594,219          34,120         316,688         243,411
      Amortization of deferred compensation                              11,442,000              --              --              --
      Amortization of organization costs                                      4,590              --              --              --
      Changes in assets and liabilities:
       (Increase) decrease in other current assets                         (256,803)       (132,165)        (54,668)         35,651
       Increase in loans receivable, related party                          (65,291)         (9,527)         (9,528)        (73,620)
       Increase in loans and interest payable, related party                744,539              --              --              --
       (Decrease) increase in accounts payable                              902,898        (145,337)       (105,653)         (2,476)
       Increase in accrued payroll and expenses, related parties          2,348,145              --              --              --
       Increase (decrease) in accrued expenses                            2,002,575         722,985        (669,901)        553,700
                                                                       ------------     -----------     -----------     -----------
           Net cash used in operating activities                        (49,493,904)     (5,932,638)     (5,014,708)     (1,553,495)
                                                                       ------------     -----------     -----------     -----------

Cash flows from investing activities:
      Purchase of marketable securities                                    (290,420)             --              --              --
      Proceeds from sale of marketable equity securities                    316,383              --              --              --
      Purchase of property and equipment                                 (1,512,902)        (52,529)        (53,537)             --
      Patent costs                                                          (97,841)             --              --              --
                                                                       ------------     -----------     -----------     -----------
           Net cash used in investing activities                         (1,584,780)        (52,529)        (53,537)             --
                                                                       ------------     -----------     -----------     -----------
</TABLE>


                                      F-14
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                     August 24, 1981
                                                                   (date of inception)
                                                                            to
                                                                         July 31,
                                                                           2005             2005           2004            2003
                                                                   ------------------   -----------    -----------     -----------
<S>                                                                    <C>              <C>            <C>             <C>
Cash flows from financing activities:
  Proceeds from short-term borrowings                                  $    874,500     $        --    $        --     $    25,000
  Payment of short-term borrowings                                         (653,500)             --             --         (25,000)
  Increase (decrease) in loans payable, related party, net                2,628,868              --             --        (139,794)
  Proceeds from bank debt and other long-term debt, net of
     deferred debt costs                                                  3,667,460              --             --         915,000
  Reduction of bank debt and long-term debt                              (2,966,568)         (6,731)        (8,673)         (8,704)
  Proceeds from issuance of common stock, net                            40,750,316              --     10,735,978         653,627
  Proceeds from exercise of stock options and warrants, net              10,526,566         307,155      4,158,497         377,660
  Proceeds from issuance of convertible debentures, related party           297,000              --             --              --
  Proceeds from issuance of convertible debentures, unrelated party         416,993              --             --              --
                                                                       ------------     -----------    -----------     -----------
      Net cash provided by financing activities                          55,541,635         300,424     14,885,802       1,797,789
                                                                       ------------     -----------    -----------     -----------
      Net (decrease) increase in cash and cash equivalents                4,462,951      (5,684,743)     9,817,557         244,294
Cash and cash equivalents at beginning of period                                 --      10,147,694        330,137          85,843
                                                                       ------------     -----------    -----------     -----------
Cash and cash equivalents at end of period                             $  4,462,951     $ 4,462,951    $10,147,694     $   330,137
                                                                       ============     ===========    ===========     ===========

Supplemental disclosure of cash flow information - interest paid       $  1,714,018     $       305    $     6,375     $    24,697
                                                                       ============     ===========    ===========     ===========

Noncash financing activities:
  Issuance of convertible subordinated debenture for
     loan payable to officer                                           $  2,725,000     $        --    $        --     $        --
                                                                       ============     ===========    ===========     ===========

 Issuance of common stock upon the conversion of convertible
     subordinated debentures, related party                            $  3,242,000     $        --    $        --     $        --
                                                                       ============     ===========    ===========     ===========

  Conversion of short-term borrowings to common stock                  $    226,000     $        --    $        --     $        --
                                                                       ============     ===========    ===========     ===========

  Conversion of accrued interest, payroll and expenses by
     related parties to stock options                                  $  3,194,969     $        --    $        --     $        --
                                                                       ============     ===========    ===========     ===========

  Repurchase of stock options from related party                       $   (198,417)    $        --    $        --     $        --
                                                                       ============     ===========    ===========     ===========

  Conversion of accrued interest to stock options                      $    142,441     $        --    $        --     $        --
                                                                       ============     ===========    ===========     ===========
</TABLE>


                                      F-15
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                 August 24, 1981
                                                               (date of inception)
                                                                    to July 31,
                                                                       2005              2005           2004          2003
                                                               ------------------    -----------    -----------    ----------
<S>                                                                 <C>              <C>            <C>            <C>
Conversions of accounts payable to common stock                     $  506,725       $        --    $    52,176    $   94,223
                                                                    ==========       ===========    ===========    ==========

Conversion of notes payable, bank and accrued interest
    to long-term debt                                               $1,699,072       $        --    $        --    $       --
                                                                    ==========       ===========    ===========    ==========

Conversion of loans and interest payable, related party
    and accrued payroll and expenses, related parties to
    long-term accrued payroll and other, related party              $1,863,514       $        --    $        --    $       --
                                                                    ==========       ===========    ===========    ==========

Issuance of common stock and warrants upon the conversion
    of convertible subordinated debentures and
    accrued interest, other                                         $1,584,364       $   464,499    $   927,872    $       --
                                                                    ==========       ===========    ===========    ==========

Issuance of common stock for services rendered                      $    2,460       $        --    $        --    $       --
                                                                    ==========       ===========    ===========    ==========

Issuance of warrants with notes payable                             $  594,219       $        --    $        --    $  594,219
                                                                    ==========       ===========    ===========    ==========
</TABLE>

See accompanying notes to financial statements.


                                      F-16
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                          Notes to Financial Statements

                    Years ended July 31, 2005, 2004 and 2003
                      and the Period From August 24, 1981
                      (Date of Inception) to July 31, 2005

(1)   Summary of Significant Accounting Policies

      Business Description

      Alfacell  Corporation  (the  "Company")  was  incorporated  in Delaware on
      August  24,  1981  for  the   purpose  of   engaging  in  the   discovery,
      investigation  and  development  of a new class of  anti-cancer  drugs and
      anti-viral  agents.  The Company is a development stage company as defined
      in  Statement  of  Financial  Accounting  Standards  No. 7. The Company is
      devoting  substantially  all of its present  efforts to  establishing  its
      business.  Its  planned  principal  operations  have  not  commenced  and,
      accordingly, no significant revenue has been derived therefrom.

      The  Company's  current  operations  encompass  all the risks  inherent in
      discovering and developing a new drug, including: an uncertainty regarding
      the timing and amount of future  revenues to be derived from the Company's
      technology;  obtaining future capital as needed;  attracting and retaining
      key personnel;  and a business  environment  with heightened  competition,
      rapid technological change and strict government regulations.

      Use of Estimates

      The  preparation  of  financial  statements  requires  management  to make
      estimates and assumptions  that affect reported amounts and disclosures in
      these  financial  statements.  Actual  results  could  differ  from  those
      estimates.

      Property and Equipment

      Property and equipment is stated at cost.  Depreciation  is computed using
      the straight-line method over the estimated useful lives of the respective
      assets  ranging  from three to seven  years.  When  assets are  retired or
      otherwise disposed of, the cost and related  accumulated  depreciation are
      removed from the accounts  and any  resulting  gain or loss is included in
      operations for the period.

      The cost of repairs and  maintenance is charged to operations as incurred;
      significant renewals and betterments are capitalized.

      Cash Equivalents

      The Company  considers all  highly-liquid  investments  with maturities of
      three months or less, at the time of purchase, to be cash equivalents.

      Research and Development

      Research and development costs are expensed as incurred.

      Fair Value of Financial Instruments

      For all financial instruments,  carrying value approximates fair value due
      to the short maturity of those  instruments.  Debt  instruments  have been
      issued at rates  which  represent  prevailing  market  rates  for  similar
      financings.


                                      F-17
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(1)   Summary of Significant Accounting Policies, (Continued)

      Earnings (Loss) Per Common Share

      "Basic"  earnings (loss) per common share equals net income (loss) divided
      by weighted average common shares outstanding during the period. "Diluted"
      earnings per common share equals net income divided by the sum of weighted
      average  common  shares  outstanding  during the period,  adjusted for the
      effects  of  potentially  dilutive  securities.  The  Company's  Basic and
      Diluted  per share  amounts  are the same  since the  Company is in a loss
      position and the assumed  exercise of stock options and warrants  prior to
      July 31, 2005 would be  anti-dilutive.  The number of outstanding  options
      and warrants  that could dilute  earnings per share in future  periods was
      16,242,519,  14,329,413  and  9,663,023 at July 31,  2005,  2004 and 2003,
      respectively.

      Long-Lived Assets

      The Company reviews long-lived assets for impairment  annually or whenever
      events or changes in business  circumstances  occur that indicate that the
      carrying amount of the assets may not be recoverable. The Company assesses
      the  recoverability  of  long-lived  assets  held and to be used  based on
      undiscounted  cash flows,  and  measures  the  impairment,  if any,  using
      discounted cash flows.

      Stock Option Plans

      Statement of Financial  Accounting  Standards ("SFAS") No. 123, Accounting
      for Stock-Based  Compensation ("SFAS 123"), provides for the use of a fair
      value based method of accounting for employee stock compensation. However,
      SFAS 123 also allows an entity to continue  to measure  compensation  cost
      for stock options  granted to employees and directors  using the intrinsic
      value method of  accounting  prescribed  by  Accounting  Principles  Board
      Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), which
      only requires charges to compensation  expense for the excess,  if any, of
      the fair  value of the  underlying  stock  at the date a stock  option  is
      granted (or at an appropriate subsequent measurement date) over the amount
      the  employee  must pay to  acquire  the  stock,  if such  amounts  differ
      materially  from the  historical  amounts.  The  Company  has  elected  to
      continue to account for employee  stock options using the intrinsic  value
      method  under  Opinion 25. As the  exercise  price of all options  granted
      under  these plans was equal to the fair  market  price of the  underlying
      common stock on the grant date, no stock-based employee  compensation cost
      has been recognized in the statements of operations.

      Shares,  warrants or options  issued to  non-employees  for  services  are
      accounted  for  based on their  fair  market  value  determined  using the
      Black-Scholes  option  pricing  model  in  accordance  with  SFAS  123 and
      Emerging  Issues Task Force  ("EITF")  Issue No.  96-18,  "Accounting  for
      Equity  Instruments  that are Issued to Other Than Employees for Acquiring
      or In Conjunction with Selling Goods or Services."

      In accordance with SFAS 123 and SFAS No. 148,  "Accounting for Stock-Based
      Compensation  - Transition and Disclosure - An Amendment of FASB Statement
      No. 123" ("SFAS 148"),  the Company's pro forma option expense is computed
      using the  Black-Scholes  option pricing model using the  assumptions  set
      forth in Note 9. To comply with SFAS 148,  the Company is  presenting  the
      following  table to  illustrate  the  effect  on the net loss and loss per
      share if it had applied the fair value recognition provisions of SFAS 123,
      as amended, to options granted under the stock-based employee compensation
      plans. For purposes of this pro forma  disclosure,  the estimated value of
      the options is  amortized  ratably to expense  over the  options'  vesting
      periods.


                                      F-18
<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(1)   Summary of Significant Accounting Policies, (Continued)

<TABLE>
<CAPTION>
             Net Loss:                                                     2005              2004               2003
                                                                           ----              ----               ----
<S>                                                                   <C>                <C>                <C>
             As reported                                              $(6,461,920)       $(5,070,307)       $(2,411,532)
             Total stock-based
                employee compensation
                expense determined under a fair
                value based method for all awards,
                net of related tax effects                             (3,278,082)        (1,489,721)          (152,598)
                                                                      -----------        -----------        -----------
             Pro forma                                                $(9,740,002)       $(6,560,028)       $(2,564,130)
                                                                      ===========        ===========        ===========
            Basic and diluted loss per common share:
             As reported                                              $     (0.18)       $     (0.17)       $     (0.10)
             Pro forma                                                      (0.28)             (0.22)             (0.11)
</TABLE>

      Recently Issued Accounting Standards

      In  December  2004,  the FASB  issued  SFAS  No.  123(R)  (revised  2004),
      "Share-Based  Payment" ("SFAS 123(R)"),  which amends SFAS 123 and will be
      effective for the Company beginning with the fiscal quarter ending October
      31, 2005.  The new  standard  will  require us to expense  employee  stock
      options and other  share-based  payments over the vesting period.  The new
      standard  may be adopted in one of three ways - the  modified  prospective
      transition  method,  a variation  of the modified  prospective  transition
      method or the modified  retrospective  transition method. We are currently
      evaluating  how we will adopt the standard and  evaluating the effect that
      the  adoption  of SFAS  123(R)  will have on our  financial  position  and
      results of  operations,  although the Company  believes such adoption will
      increase recorded compensation costs in the future.

      Accounting For Warrants Issued With Convertible Debt

      The Company  accounts for the  intrinsic  value of  beneficial  conversion
      rights  arising from the issuance of  convertible  debt  instruments  with
      non-detachable  conversion  rights that are in-the-money at the commitment
      date pursuant to the consensuses of EITF Issue No. 98-5 and EITF Issue No.
      00-27.  Such value is  allocated  to  additional  paid-in  capital and the
      resulting  debt discount is charged to interest  expense over the terms of
      the notes  payable.  Such value is  determined  after first  allocating an
      appropriate  portion of the  proceeds  received  to  warrants or any other
      detachable instruments included in the exchange.

      Income Taxes

      The Company accounts for income taxes under the provisions of Statement of
      Financial  Accounting  Standards  No. 109,  "Accounting  for Income Taxes"
      ("SFAS 109").  Under this method,  deferred tax assets and liabilities are
      determined based on temporary  differences between the financial statement
      carrying amounts and tax bases of assets and liabilities using enacted tax
      rates in  effect  for all  years in which the  temporary  differences  are
      expected to reverse.  A valuation  allowance  is provided  when it is more
      likely than not that some  portion or all of the  deferred tax assets will
      not be realized.

(2)   Liquidity

      The  Company  has  reported  net  losses  of   approximately   $6,462,000,
      $5,070,000,  and $2,411,000 for the fiscal years ended July 31, 2005, 2004
      and 2003, respectively.  The loss from date of inception,  August 24, 1981
      to July 31, 2005, amounts to $75,506,000.


                                      F-19
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(2)   Liquidity, (Continued)

      The Company's long-term continued operations will depend on its ability to
      raise  additional funds through various  potential  sources such as equity
      and debt financing, collaborative agreements, strategic alliances, sale of
      tax benefits, revenues from the commercial sale of ONCONASE(R),  licensing
      of its proprietary  RNase  technology and its ability to realize  revenues
      from its technology and its drug candidates via  out-licensing  agreements
      with other  companies.  Such additional  funds may not become available as
      the Company may need them or be available  on  acceptable  terms.  Through
      July 31, 2005, a significant  portion of the Company's  financing has been
      through the sale of its equity  securities and  convertible  debentures in
      registered  offerings  and private  placements  and the  exercise of stock
      options and warrants. Additionally, the Company has raised capital through
      debt financings, the sale of tax benefits and research products,  interest
      income and financing received from its Chief Executive Officer.  Until and
      unless the Company's operations generate significant revenues, the Company
      expects  to  continue  to fund  operations  from the  sources  of  capital
      previously  described.  There can be no assurance that the Company will be
      able to raise the  capital it needs on terms which are  acceptable,  if at
      all. If the Company is unable to raise  additional  funds in the future on
      acceptable  terms,  or at all,  the  Company  may  need to  delay  certain
      development  activities over the next twelve months.  As of July 31, 2005,
      management  believes that the Company's cash balance is sufficient to fund
      its operations at least through July 31, 2006, based on its expected level
      of  expenditures  in relation to activities in preparing  ONCONASE(R)  for
      marketing   registrations  in  the  U.S.  and  Europe  and  other  ongoing
      operations  of the Company.  However,  the Company  will  continue to seek
      additional financing through equity or debt financings and the sale of net
      operating  loss  carryforwards  but cannot be sure that it will be able to
      raise  capital on  favorable  terms or at all. The Company may also obtain
      additional  capital  through  the  exercise  of  outstanding  options  and
      warrants,  although it cannot  provide any assurance of such  exercises or
      the amount of capital it will receive, if any. If the Company is unable to
      raise sufficient  capital,  its operations will be severely  curtailed and
      its business and financial condition will be adversely affected.

      The Company will continue to incur costs in conjunction  with its U.S. and
      foreign  registrations for marketing approval of ONCONASE(R).  The Company
      is currently in discussions with potential  strategic alliance partners to
      further the  development  and marketing of  ONCONASE(R)  and other related
      products in its  pipeline.  However,  the Company  cannot be sure that any
      such alliances will materialize.

(3)   Property and Equipment

      Property and equipment, at cost, consists of the following at July 31:

<TABLE>
<CAPTION>
                                                                         2005               2004
                                                                         ----               ----
<S>                                                                  <C>                 <C>
            Laboratory equipment                                     $  769,760          $  794,123
            Office equipment                                            273,814             260,239
            Leasehold improvements                                       97,833              97,833
                                                                     ----------          ----------
              Total                                                   1,141,407           1,152,195
               Less accumulated depreciation and amortization         1,061,012           1,095,412
                                                                     ----------          ----------
               Property and equipment, net                           $   80,395          $   56,783
                                                                     ==========          ==========
</TABLE>

(4)   Long-term Debt

      Long-term debt consists of the following at July 31:

<TABLE>
<CAPTION>
                                                                                         2005           2004
                                                                                         ----           ----
<S>                                                                                    <C>             <C>
      Convertible notes payable, unsecured, unrelated party at 8% interest, net of
      debt discount of $34,120 at July 31, 2004 with maturity during fiscal 2005       $     --        $365,880
      Note payable, in monthly installments of $1,459, including principal and
      interest commencing April 2000 and each month thereafter until March 2005.             --           6,731
                                                                                       --------        --------
                                                                                             --         372,611
      Less current portion                                                                   --         372,611
                                                                                       --------        --------
                                                                                       $     --        $     --
                                                                                       ========        ========
</TABLE>


                                      F-20
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(4)   Long-term Debt, (Continued)

      During  the  fiscal  year  ended  July 31,  2003,  the  Company  issued 8%
      convertible  notes payable to unrelated  parties with  principal  balances
      totaling an aggregate of $915,000.  These notes payable matured on various
      dates from  April  2004  through  May 2005 and were  convertible  into the
      Company's  common stock at conversion  prices  ranging from $0.20 to $0.50
      per share and an equal number of five-year  warrants at an exercise  price
      of $1.00 per share.  With the issuance of the notes  payable,  the Company
      issued  to  the  unrelated  parties  five-year  warrants  to  purchase  an
      aggregate of 665,000  shares of the Company's  common stock at an exercise
      price of $0.60 per share.  In addition,  the Company has issued  five-year
      warrants to  purchase  an  aggregate  of 915,000  shares of the  Company's
      common stock at per share exercise prices of $1.00 and $1.10.  The Company
      valued  these  warrants  at a total of  $219,259  based on the fair  value
      determined by using the Black-Scholes method. At the issuance dates of the
      notes payable, the fair market values of the Company's shares exceeded the
      effective conversion prices.

      Accordingly, the Company initially increased additional paid-in capital by
      $219,259 for the fair value of the warrants and reduced the carrying value
      of  the  notes   payable  for  the  same  amount  for  the  debt  discount
      attributable to the fair value of the warrants.  The Company amortized the
      debt discount over the terms of the notes payable.

      Pursuant to the  applicable  guidance in the  consensus for EITF Issue No.
      00-27,  the Company  valued the  beneficial  conversion  feature using the
      effective  conversion  price.  Accordingly,  the Company  first  allocated
      $219,259 to the  detachable  warrants and decreased the carrying  value of
      the notes payable.

      Based  on  the  effective   conversion  prices,  the  Company  recorded  a
      beneficial conversion charge of $374,960 which was allocated to additional
      paid-in capital and debt discount which was amortized as interest  expense
      over the terms of the notes payable.

      During the fiscal  year ended July 31,  2004,  the  principal  and accrued
      interest of the notes  payable in an  aggregate  amount of  $927,872  were
      converted  resulting in the  issuance of 3,042,817  shares of common stock
      and 3,733,839  five year warrants with exercise  prices ranging from $1.00
      to $1.10 per share.

      During the fiscal  year ended July 31,  2005,  the  principal  and accrued
      interest of the notes  payable in an  aggregate  amount of  $464,499  were
      converted  resulting in the  issuance of 1,744,978  shares of common stock
      and  2,044,978  five year  warrants  with an  exercise  price of $1.00 per
      share.

(5)   Related Party

      Amounts  due  from the  Company's  CEO  totaling  $161,342,  $151,815  and
      $142,287 at July 31, 2005, 2004 and 2003, respectively,  are classified as
      a long-term  asset in Loan  receivable,  related party as the Company does
      not expect  repayment  of these  amounts  within one year.  In each of the
      fiscal years ended July 31,  2005,  2004 and 2003,  the Company  earned 8%
      interest  in the amount of  approximately  $9,500 on the unpaid  principal
      balance.

(6)   Leases

      The Company leases its facility on a  month-to-month  basis.  Rent expense
      charged to operations was $136,000 in each of 2005, 2004 and 2003.


                                      F-21
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity

      On September 1, 1981,  the Company  issued  712,500 shares of common stock
      (1,068,750  shares  adjusted  for the stock split on September 8, 1982) to
      officers  and  stockholders  in  exchange  for  equipment,   research  and
      development services, stock registration costs,  reimbursement of expenses
      and other miscellaneous services. The common stock issued for services was
      recorded at the estimated  fair value of services  rendered based upon the
      Board  of  Directors'  determination  and  ratification  of the  value  of
      services.  Equipment received in exchange for common stock was recorded at
      the transferor's  cost.  Common stock issued for reimbursement of expenses
      was  recorded  based  upon  expenses  incurred.  All values  assigned  for
      expenses and services rendered were charged to operations except for stock
      registration costs, which were charged against proceeds.

      On July 30, 1982,  the Company sold 82,143 shares of common stock (123,214
      shares  adjusted  to reflect the stock  split on  September  8, 1982) to a
      private investor at a price of $1.40 per share,  resulting in net proceeds
      to the Company of approximately $108,500.

      On September 8, 1982, the Company  declared a 3-for-2 stock split.  Shares
      previously  issued by the Company  were  restated in  accordance  with the
      stock split.

      On September 8, 1982,  the Company issued 15,000 shares of common stock to
      an officer  and  stockholder  in exchange  for  equipment.  The  equipment
      received in exchange for the common stock was recorded at the transferor's
      cost.

      On  November  1, 1982 and  January 3, 1983,  the  Company  sold 28,125 and
      16,071 shares of common stock, respectively,  to private investors at $.93
      per share,  resulting  in net  proceeds  to the  Company of  approximately
      $41,250.

      On January 17, 1983,  the Company sold 660,000  shares of its common stock
      and 330,000 common stock purchase warrants in a public offering at a price
      of  $2.50  per  share,  resulting  in  net  proceeds  to  the  Company  of
      approximately  $1,308,446.  The  warrants  were to expire 12 months  after
      issuance;  however,  the Company  extended the expiration date to July 16,
      1984.  During  the fiscal  years  ended  July 31,  1983 and 1984,  the net
      proceeds to the Company  from the  exercise  of the  warrants  amounted to
      $934,000.  Each common stock purchase  warrant was not detachable from its
      common stock or  exercisable  until six months after the issuance  date of
      January 17, 1983.  Each warrant  entitled the holder to purchase one share
      of common  stock at an exercise  price of $3.00 after six months and prior
      to nine months after issuance. The exercise price increased to $3.50 after
      nine months and prior to 12 months after issuance.

      In connection with the public offering,  the Company sold 60,000 five-year
      purchase  warrants to the  underwriters  at a price of $.001 per  warrant.
      Each warrant  entitled the holder to purchase one share of common stock at
      an exercise price of $3.00. Pursuant to the antidilution provisions of the
      warrants,  the underwriters received warrants to purchase 67,415 shares at
      an exercise price of $2.67 per share.  By July 31, 1986, all such warrants
      were  exercised  and  the  Company  received   proceeds  of  approximately
      $180,000.

      On February 22, 1984, the Company filed a registration  statement with the
      Securities  and Exchange  Commission for the issuance of two series of new
      warrants,  each to purchase an  aggregate of 330,000  shares  (hereinafter
      referred to as one-year  warrants  and  two-year  warrants).  The one-year
      warrants  had an exercise  price of $6.50 per share and  expired  July 17,
      1985. The two-year  warrants had an exercise price of $10.00 per share and
      were to expire July 17, 1986. However, the Company extended the expiration
      date to August 31, 1987. The one-year  warrants and two-year warrants were
      issued as of July 17, 1984 on a one-for-one basis to those public offering
      warrant holders who exercised their original  warrants,  with the right to
      oversubscribe  to any of the  warrants  not  exercised.  During the fiscal
      years ended July 31, 1985,  1986, 1987 and 1988, the Company  received net
      proceeds of  approximately  $2,471,000  as a result of the exercise of the
      warrants.


                                      F-22
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      On January 2, 1987,  the Company  issued 250,000 shares of common stock to
      officers and  stockholders,  including the  President and Chief  Executive
      Officer,  in recognition of services  performed for the Company.  The fair
      value of such shares was recorded as compensation expense.

      On February 3, 1987,  the Company  sold 5,000  shares of common stock to a
      private  investor  for $5.00 per share,  resulting  in net proceeds to the
      Company of approximately $25,000.

      On September 1, 1987,  the Board of Directors  approved new wage contracts
      for three  officers.  The  contracts  provided for the issuance of 700,000
      shares of common stock as an  inducement  for  signing.  The fair value of
      these shares was recorded as deferred  compensation and was amortized over
      the term of the employment agreements. The contracts also provided for the
      issuance of 1,500,000  shares of common stock in 750,000  increments  upon
      the  occurrence  of certain  events.  These shares were issued  during the
      fiscal  years  ended  July 31,  1989  and 1990 and the fair  value of such
      shares was recorded as deferred  compensation  and was amortized  over the
      remaining term of the employment  agreements.  The contracts also provided
      for five-year  options to purchase 750,000 shares of common stock at $3.00
      per share;  options for the purchase of 170,000  shares were  exercised on
      June 16, 1988 and the remaining options for the purchase of 580,000 shares
      expired on September 2, 1992.

      During the fiscal year ended July 31,  1988,  the Company  issued  206,429
      shares of common stock for payment of legal and consulting  services.  The
      Company also issued 12,500  shares of common stock in connection  with the
      settlement  of  certain  litigation.  The fair  value of such  shares  was
      charged to operations.

      During the fiscal year ended July 31, 1988, the Company sold 61,073 shares
      of common stock to private  investors at $2.92 per share  resulting in net
      proceeds to the Company of approximately $178,133.

      On  September  21,  1988,  the  Company  entered  into  a  stipulation  of
      settlement  arising  from a  lawsuit  wherein  it agreed to pay a total of
      $250,000  in 12 monthly  installments.  Under the  agreement,  the Company
      authorized  the  issuance  on  September  7, 1988 and  October 18, 1988 of
      85,000 and 50,000  shares,  respectively,  to an escrow  account to secure
      payment of the $250,000 due under the  stipulation of  settlement.  During
      the fiscal  year  ended July 31,  1989,  the  Company  issued and sold the
      135,000 shares of common stock for  $1,074,838.  On February 14, 1989, the
      Board of Directors authorized the issuance of an additional 50,000 shares.
      During the year ended July 31,  1990,  the shares were sold for  $351,117.
      The proceeds from the above  transactions  were used to pay the settlement
      and  related  legal  costs,  reduce  loans  from and  interest  due to the
      Company's Chief Executive Officer, and for working capital.

      During the fiscal  year ended July 31,  1989,  the  Company  sold  105,840
      shares of common stock to private  investors at $3.97 per share  resulting
      in net proceeds to the Company of approximately $420,000.

      During the fiscal  year ended July 31,  1990,  the Company  issued  52,463
      shares of common  stock for payment of legal and  consulting  services and
      50,000 shares of common stock in connection with the settlement of certain
      litigation. The fair value of the common stock was charged to operations.

      During the fiscal year ended July 31, 1990, the Company sold 89,480 shares
      of common stock to private  investors at $3.97 per share  resulting in net
      proceeds to the Company of approximately $355,080.

      During the fiscal  year ended July 31,  1991,  the Company  issued  87,000
      shares of common stock for payment of legal and consulting  services.  The
      fair value of the common stock was charged to operations.


                                      F-23
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      During the fiscal year ended July 31, 1992, the Company sold 70,731 shares
      of common stock to private investors at $2.75 to $3.50 per share resulting
      in net proceeds to the Company of approximately $219,900.

      During the fiscal  year ended July 31,  1992,  the Company  issued  45,734
      shares of common  stock as payment for  services  rendered to the Company.
      The fair value of the common stock was charged to operations.

      During the fiscal  years ended July 31,  1992 and 1990,  94,000 and 50,000
      shares of common stock,  respectively,  were issued to the Company's Chief
      Executive Officer upon the conversion of outstanding debentures.

      During the fiscal  year ended July 31,  1993,  the  Company  sold  352,667
      shares of common stock to private  investors at prices  ranging from $2.00
      to  $3.00  per  share   resulting  in  net  proceeds  to  the  Company  of
      approximately  $735,500.  In addition,  the private investors were granted
      options to purchase common stock totaling 587,167 shares at prices ranging
      from $3.00 to $7.00. During the fiscal years ended July 31, 1995 and 1996,
      322,500  and  228,833  options  expired,  respectively.  A total of 42,167
      options due to expire on July 31, 1995 were  extended to July 31, 1996 and
      their  exercise  price was reduced to $2.50.  During the fiscal year ended
      July 31, 1996, 35,834 options were exercised  resulting in net proceeds to
      the Company of approximately $89,600.

      During the fiscal  year ended July 31,  1993,  the Company  issued  54,600
      shares of common stock as payment for legal and other  services  performed
      for  the  Company.  The  fair  value  of  49,600  shares  was  charged  to
      operations.   The  remaining   5,000  shares  were  recorded  as  deferred
      compensation  and were  amortized  over a one-year  period,  beginning  in
      February  1993,  in accordance  with the  agreement  entered into with the
      recipient.

      During the fiscal  year ended July 31,  1994,  the  Company  issued  7,000
      shares of common stock as payment for services  performed for the Company.
      The fair value of the common stock was charged to operations.

      During the fiscal year ended July 31, 1994, the Company sold 25,000 shares
      of common stock to a private  investor at $2.00 per share resulting in net
      proceeds to the Company of $50,000. In addition,  the private investor was
      granted  options to purchase  common stock totaling 25,000 shares at $4.00
      per common share. These options were exercised in September 1996 resulting
      in net proceeds to the Company of $100,000.

      During the fiscal  year ended July 31,  1994,  the  Company  sold  800,000
      shares of common stock to private  investors at $2.50 per share  resulting
      in net proceeds to the Company of  $1,865,791.  In  addition,  the private
      investors were granted  warrants to purchase common stock totaling 800,000
      shares at $5.00 per common  share.  Warrants  for the  purchase of 147,450
      shares were exercised  during fiscal 1997 resulting in net proceeds to the
      Company of $737,250.  The remaining 652,550 warrants expired during fiscal
      1997.

      During the fiscal year ended July 31, 1994, 400,000 shares of common stock
      were issued to the Company's Chief  Executive  Officer upon the conversion
      of outstanding debentures.

      During the fiscal year ended July 31, 1994,  25,400 shares of common stock
      were issued upon the conversion of other outstanding debentures.


                                      F-24
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      In September 1994, the Company completed a private placement  resulting in
      the issuance of 288,506 shares of common stock and three-year  warrants to
      purchase  288,506 shares of common stock at an exercise price of $5.50 per
      share.  The warrants  expired  during  fiscal  1998.  The common stock and
      warrants  were sold in units  consisting  of 20,000 shares of common stock
      and warrants to purchase 20,000 shares of common stock. The price per unit
      was $50,000. The Company received proceeds of approximately  $545,000, net
      of costs  associated with the placement of  approximately  $55,000 and the
      conversion  of certain  debt by  creditors  of  $121,265  into  equivalent
      private  placement  units of 17,600  shares for  conversion  of short-term
      borrowings  and 30,906  shares  issued for services  rendered.  In October
      1994, an  additional  two units at $50,000 per unit were sold to a private
      investor  under the same terms as the  September  1994  private  placement
      resulting in the issuance of 40,000 shares of common stock and warrants to
      purchase 40,000 shares of common stock. The warrants expired during fiscal
      1998.

      During the fiscal year ended July 31, 1995, 185,000 shares of common stock
      were  issued  upon the  exercise of stock  options by  unrelated  parties,
      resulting in net proceeds to the Company of $437,200.  The exercise prices
      of the options  ranged from $2.27 to $2.50,  which had been  reduced  from
      $3.50 and $5.00, respectively, during fiscal 1995.

      During the fiscal  year ended July 31,  1995,  the  Company  sold  681,000
      shares of common stock to private  investors  resulting in net proceeds to
      the Company of  approximately  $1,379,000.  The shares were sold at prices
      ranging from $2.00 to $2.25.

      During the fiscal  year ended July 31,  1995,  the  Company  sold  139,080
      shares of common stock and 47,405  three-year  warrants to purchase shares
      of  common  stock  at an  exercise  price of $4.00  per  share to  private
      investors.  The stock and warrants were sold at prices  ranging from $2.25
      to $2.73  per  share  and  resulted  in net  proceeds  to the  Company  of
      $343,808,  of which $4,800 was for services  rendered.  The common  shares
      were issued to the investors subsequent to July 31, 1995.

      On August 4, 1995,  the Company  issued  6,060  shares of common  stock as
      payment for services rendered to the Company. The fair value of the common
      stock was charged to operations.

      On September 29, 1995, the Company completed a private placement resulting
      in the  issuance  of  1,925,616  shares  of common  stock  and  three-year
      warrants to purchase an aggregate  of 55,945  shares of common stock at an
      exercise  price of $4.00 per share.  Of these shares 1,935 were issued for
      services  rendered to the Company.  The common stock was sold alone at per
      share prices ranging from $2.00 to $3.70, and in combination with warrants
      at per unit  prices  ranging  from $4.96 to $10.92,  which  related to the
      number of warrants contained in the unit. The Company received proceeds of
      approximately $4.1 million, including $1,723,000 for approximately 820,000
      shares  received  during the fiscal year ended July 31, 1995. The warrants
      expired in October 1998.

      As  consideration  for the extension of the Company's  term loan agreement
      with its bank, the Company  granted the bank a warrant to purchase  10,000
      shares of common stock at an exercise  price of $4.19.  The warrants  were
      issued as of October 1, 1995 and expired on August 31, 1997.

      In June 1996, the Company sold in a private placement  1,515,330 shares of
      common stock and three-year  warrants to purchase 313,800 shares of common
      stock at an exercise  price of $7.50 per share.  Of these  shares,  12,000
      were issued for  services  rendered to the  Company.  The common stock was
      sold alone at a per share price of $3.70, in combination  with warrants at
      a per unit price of $12.52 and  warrants  were sold alone at a per warrant
      price of $1.42.  Each unit  consisted  of three shares of common stock and
      one warrant.  The Company received proceeds of approximately $5.7 million.
      The warrants expired during the fiscal 2000.


                                      F-25
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      In June 1996, the Company issued 10,000 five-year stock options as payment
      for services rendered.  The options vested immediately and had an exercise
      price of $4.95 per share.  The Company  recorded  research and development
      expense of $28,260,  which was the fair value of the stock  options on the
      date of issuance.  The options  expired  during the fiscal year ended July
      31, 2001.

      During the fiscal year ended July 31, 1996, 207,316 shares of common stock
      were sold from October 1995 to April 1996 at per share prices ranging from
      $3.60 to $4.24 resulting in proceeds of approximately $808,000.

      During the fiscal year ended July 31,  1996,  656,334  stock  options were
      exercised by both related and unrelated  parties resulting in net proceeds
      of approximately $1.9 million to the Company. Of these shares, 89,634 were
      issued  subsequent  to July 31, 1996.  The exercise  prices of the options
      ranged from $2.50 to $3.87 per share.

      In August 1996,  the Company  issued 10,000 stock options with an exercise
      price  of $4.69  per  share  exercisable  for five  years as  payment  for
      services to be rendered.  An equal portion of these options vested monthly
      for one year commencing  September 1, 1996. The Company  recorded  general
      and  administrative  expense of  $27,900,  which was the fair value of the
      stock  options on the date of  issuance.  The options  expired  during the
      fiscal year ended July 31, 2002.

      In March 1997,  the Company issued 112,000 shares of common stock at $4.50
      per share in a private placement to an investor  resulting in net proceeds
      of $504,000 to the Company.

      In May 1997,  the Company  issued  100,000  stock  options to Dr.  Stephen
      Carter,  a director,  with an exercise price of $5.20 per share as payment
      for serving as  Chairman of the  Scientific  Advisory  Board (the  "SAB").
      These options vested as follows:  10,000 vested immediately,  10,000 after
      one full calendar year,  10,000  annually for each of the following  three
      years and 50,000 on May 13, 2002.  The Company  recorded a total  research
      and development expense of $353,400,  which was the fair value on the date
      of issuance  of that  portion of the stock  options  that had vested as of
      July 31,  2002.  Of these  options,  40,000  expired as of the fiscal year
      ended July 31, 2005.

      During the fiscal year ended July 31,  1997,  639,500  stock  options were
      exercised by both related and unrelated  parties resulting in net proceeds
      of approximately  $2.6 million to the Company.  The exercise prices of the
      options ranged from $2.45 to $4.00 per share.

      During  the  fiscal  year  ended  July 31,  1997,  147,450  warrants  were
      exercised by both related and unrelated  parties resulting in net proceeds
      of  approximately  $737,250  to the  Company.  The  exercise  price of the
      warrants was $5.00 per share.

      In October  1997,  the Company  issued  75,000 stock options to a director
      with an exercise price of $3.66 per share as payment for non-board related
      services to be rendered.  These options  vested as follows:  10,000 vested
      immediately; 10,000 after one full calendar year; 10,000 annually for each
      of the  following  three  years;  and 25,000 on October 31,  2002. A total
      general and administrative expense of $185,600 was amortized on a straight
      -line basis over a five-year  period,  which commenced in October 1997. Of
      these options, 30,000 expired as of the fiscal year ended July 31, 2005.

      In October 1997,  the Company issued 12,000  five-year  stock options to a
      consultant  with an  exercise  price of $3.91  per  share as  payment  for
      services to be rendered.  An equal portion of these options vested monthly
      and were amortized over a one-year period which commenced in October 1997.
      In May 1998, the Company terminated the services of the consultant,  which
      resulted in the  cancellation  of 5,000  options.  The Company  recorded a
      total research and development  expense for the remaining 7,000 options in
      the amount of  $15,800,  based upon the fair value of such  options on the
      date of  issuance,  amortized  on a  straight-line  basis over the vesting
      period of the grant.  These options  expired  during the fiscal year ended
      July 31, 2003.


                                      F-26
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      On December 9, 1997,  the  stockholders  authorized  the  amendment of the
      Company's   Certificate  of   Incorporation  to  increase  the  number  of
      authorized  shares of common stock, par value $.001 from 25,000,000 shares
      to 40,000,000 shares.

      On December 9, 1997, the stockholders  approved the 1997 Stock Option Plan
      (the "1997 Plan").  The total number of shares of common stock  authorized
      for  issuance  upon  exercise of options  granted  under the 1997 Plan was
      2,000,000.  Options are  granted at fair  market  value on the date of the
      grant and generally are  exercisable in 20% increments  annually over five
      years  starting one year after the date of grant and terminate  five years
      from their initial exercise date.

      On January 23, 1998, the Securities  and Exchange  Commission  (the "SEC")
      declared effective a registration  statement on Form S-3 for the offer and
      sale by certain stockholders of up to 3,734,541 shares of common stock. Of
      these shares (i) an  aggregate of 2,737,480  shares were issued to private
      placement investors in private placement transactions which were completed
      during the period from March 1994 through March 1997 (the "Earlier Private
      Placements"),  (ii) an  aggregate  of 409,745  shares were  issuable  upon
      exercise of warrants which were issued to private  placement  investors in
      the Earlier  Private  Placements  and (iii) an aggregate of 587,316 shares
      may be issued,  or have been issued,  upon  exercise of options which were
      issued to option  holders  in certain  other  private  transactions.  As a
      result of the  delisting  of the  Company's  Common  Stock from the Nasdaq
      SmallCap Market, the Company no longer qualified for the use of a Form S-3
      registration  statement  for this offering when it filed its Annual Report
      on Form 10-K for the  fiscal  year  ended  July 31,  1999 and  thus,  this
      registration  statement  was no  longer  effective.  The  Company  filed a
      registration  statement on Form S-1 to register  these  shares,  which was
      declared effective in February 2002.

      In February 1998, the Company completed a Private  Placement  primarily to
      institutional investors, which resulted in the issuance of 1,168,575 units
      at a unit  price of $4.00.  Each unit  consisted  of two (2) shares of the
      Company's  common stock,  par value $.001 per share and one (1) three-year
      warrant to purchase one (1) share of common stock at an exercise  price of
      $2.50 per share.  The  Company  received  net  proceeds  of  approximately
      $4,202,000.   The  placement  agent  received   warrants  to  purchase  an
      additional  116,858  units  comprised  of  the  same  securities  sold  to
      investors  at an  exercise  price  of  $4.40  per  unit  as  part  of  its
      compensation.  In May 2001,  the  expiration  date of these  warrants  was
      extended  from May 19, 2001 to August 17, 2001.  The  warrants  expired on
      August 17, 2001.

      In March 1998, the Company  converted an  outstanding  payable into 50,000
      shares of the Company's  Common Stock.  The fair value of the Common Stock
      approximated the outstanding payable amount of $100,000.

      In March 1998,  the Company issued 75,000 stock options to a director with
      an  exercise  price of $2.80 per share as payment  for  non-board  related
      services  rendered.   These  options  vested  as  follows:  10,000  vested
      immediately; 10,000 after one full calendar year; 10,000 annually for each
      of the  following  three  years;  and  25,000 on March 24,  2003.  A total
      general  and  administrative  expense  of  $138,100  was  amortized  on  a
      straight-line  basis over a five-year  period,  which  commenced  in March
      1998. As of July 31, 2003, the expense was fully. Of these options, 10,000
      expired  during the  fiscal  year  ended  July 31,  2003 and  65,000  were
      exercised during the fiscal year ended July 31, 2004.

      On April 20, 1998 the SEC declared  effective a registration  statement on
      Form S-3 for the offer and sale by certain stockholders of up to 3,918,299
      shares of common  stock.  Of these  shares (i) an  aggregate  of 2,337,150
      shares of common stock were issued to the private  placement  investors in
      the February 1998 Private Placement, (ii) an aggregate of 1,168,575 shares
      may be issued  upon  exercise  of the  Warrants  which were  issued to the
      private placement investors in the February 1998 Private Placement,  (iii)
      350,574 shares may be issued upon


                                      F-27
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      the  exercise  of the  Placement  Agent  Warrant  which was  issued to the
      placement  agent in the February  1998 Private  Placement and the Warrants
      issuable upon exercise of the Placement Agent Warrant,  (iv) 50,000 shares
      of common stock were issued to a Supplier in connection with conversion of
      an outstanding  accounts payable, and (v) 12,000 shares may be issued upon
      the  exercise of options  which were issued as payment for  services to be
      rendered.  As a result of the delisting of the Company's common stock from
      the Nasdaq SmallCap Market, the Company no longer qualified for the use of
      a Form S-3  registration  statement  for this  offering  when it filed its
      Annual  Report on Form 10-K for the fiscal  year  ended July 31,  1999 and
      thus, this  registration  statement was no longer  effective.  The Company
      filed a registration statement on Form S-1 to register these shares, which
      was declared effective in February 2002.

      During  the  fiscal  year  ended July 31,  1998,  the  Company  issued 833
      three-year stock options as payment for services  rendered in August 1997.
      The options  vested thirty days from the issuance date and had an exercise
      price of $4.47 per share.  The total  general and  administrative  expense
      recorded for these  options was $1,700,  based upon the fair value of such
      options on the date of issuance. These options expired in August 2000.

      During the fiscal  year ended July 31,  1998,  the Company  issued  15,000
      three-year  stock  options  with an  exercise  price of $4.15 per share as
      payment for services. An equal portion of these options vested monthly and
      a total general and administrative expense of $30,000 was amortized over a
      one-year  period which  commenced  September 1997. The Company also issued
      5,000  three-year  stock options with an exercise price of $4.15 per share
      as payment for services.  Of these  options,  833 vested  monthly for five
      months commencing September 30, 1997 and 835 vested on the last day of the
      sixth  month.  Total  general  and  administrative  expense  of $9,700 was
      amortized over a six-month  period which  commenced  September 1997. As of
      July 31, 1998, the Company recorded general and administrative  expense of
      $37,100, based upon the fair value of the 20,000 stock options on the date
      of the  issuance,  amortized  on a  straight-line  basis over the  vesting
      periods of the  grants.  These  options  expired  three  years  after they
      vested.

      During the fiscal year ended July 31,  1998,  4,950 shares of common stock
      were issued upon the exercise of warrants by unrelated parties,  resulting
      in net  proceeds of  approximately  $11,100 to the  Company.  The exercise
      prices of the warrants ranged from $2.20 to $2.50 per share.

      On October 1, 1998 (the  "Effective  Date"),  the Company  entered into an
      agreement with a consultant (the  "Agreement"),  resulting in the issuance
      of 200,000  five-year  stock  options with an exercise  price of $1.00 per
      share as payment for  services to be  rendered.  These  options  vested as
      follows: an aggregate of 20,000 vested on October 1, 1999; an aggregate of
      2,500 of such options  vested on the last day of each month over the first
      twelve months after the  Effective  Date of the  Agreement;  the remaining
      150,000  options vested on the third  anniversary of the Effective Date of
      the Agreement.  The Company recorded  approximately $49,300 of general and
      administrative  expense  based upon the fair  value of the vested  options
      through  July 31, 2000.  During the fiscal year ended July 31,  2000,  the
      Agreement was  terminated  which resulted in the  cancellation  of 150,000
      options.  The remaining  50,000 options were  exercised  during the fiscal
      year ended July 31, 2004,  which  resulted in gross proceeds of $50,000 to
      the Company.

      During the fiscal  year ended July 31,  1999,  the  Company  issued  5,000
      three-year  stock  options as payment  for  services  rendered.  The total
      general and administrative  expense recorded for these options was $4,200,
      based upon the fair value of such options on the date of  issuance.  These
      options were exercised  during the fiscal year ended July 31, 2000,  which
      resulted in gross proceeds of $7,150 to the Company.

      During the fiscal  year ended July 31,  1999,  the Company  issued  40,701
      shares of common  stock for payment of legal  services.  The fair value of
      the common stock in the amount of $16,631 was charged to operations.


                                      F-28
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      During the fiscal  year ended July 31,  1999,  the  Company  issued  6,000
      shares of common stock for payment of services rendered. The fair value of
      the common stock in the amount of $2,460 was charged to operations.

      During the fiscal year ended July 31,  2000,  the Company  issued  174,965
      shares of common stock for payment of services rendered. The fair value of
      the common stock in the amount of $92,184 was charged to operations.

      During the fiscal  year ended July 31,  2000,  the Company  issued  95,000
      shares of common  stock upon the  exercise of stock  options by  unrelated
      parties,  which resulted in gross proceeds of $45,850 to the Company.  The
      exercise prices of the options ranged from $0.43 to $1.43.

      During the fiscal year ended July 31, 2000,  the Company sold an aggregate
      of 875,000  shares of common stock to private  investors at prices ranging
      from $0.50 to $1.00 per share resulting in net proceeds of $548,300 to the
      Company.  In addition,  the private  investors  were  granted  warrants to
      purchase an  aggregate  of 875,000  shares of common  stock,  inclusive of
      additional warrants issued so that all investors in the private placements
      received  substantially the same securities,  at per share exercise prices
      ranging from $1.03 to $4.55.  These  warrants  expired in May 2003 and May
      2005.

      During the fiscal  year ended July 31,  2001,  the Company  issued  11,800
      shares of common stock for payment of services rendered. The fair value of
      the common stock in the amount of $10,030 was charged to operations.

      During the fiscal year ended July 31, 2001,  the Company sold an aggregate
      of 863,331  shares of common stock to private  investors at prices ranging
      from $0.90 to $1.50 per share resulting in net proceeds of $956,000 to the
      Company.  In addition,  the private  investors  were  granted  warrants to
      purchase  an  aggregate  of  696,665  shares of common  stock at per share
      exercise  prices  ranging from $1.50 to $3.00.  The  warrants  will expire
      during the period commencing July 2004 and ending in October 2006.

      During the fiscal year ended July 31,  2001,  the Company  issued  165,555
      shares of common  stock  upon the  exercise  of stock  options  by related
      parties,  which resulted in gross proceeds of $83,700 to the Company.  The
      per share exercise prices of the options ranged from $0.29 to $0.85.

      During the fiscal  year ended July 31,  2001,  the Company  issued  50,000
      five-year  stock  options to a director as payment for  non-board  related
      services.  These options vested  immediately  and had an exercise price of
      $0.90 per share. The Company recorded general and  administrative  expense
      of  $31,600,  which was the fair  market  value of the  options  using the
      Black-Scholes options-pricing model on the date of issuance. These options
      were exercised during the fiscal year ended July 31, 2004.

      During the fiscal year ended July 31,  2001,  the Company  issued  330,000
      shares of common  stock  upon the  conversion  of  convertible  notes from
      related  parties at $0.90 per share.  In addition,  upon  conversion,  the
      related parties were granted three-year  warrants to purchase an aggregate
      of 330,000 shares of common stock at an exercise price of $2.50 per share.
      The  estimated  value of these  warrants  in the  amount of  $108,900  was
      recorded by the Company as interest  expense  during the fiscal year ended
      July 31, 2001. In October 2001,  the board of directors  approved a change
      of the 330,000 warrants from three-year warrants to five-year warrants and
      the exercise price from $2.50 per share to $1.50 per share to conform with
      private placements to unrelated  parties.  As of July 31, 2005, 110,000 of
      these warrants were exercised.

      During the fiscal  year ended July 31,  2002,  the Company  issued  72,214
      shares of common  stock  upon the  conversion  of  convertible  notes from
      unrelated  parties at $0.90 per share. In addition,  upon conversion,  the
      unrelated parties were granted five-year warrants to purchase an aggregate
      of 72,214 shares of common stock at an exercise  price of $1.50 per share.
      The  estimated  value of these  warrants  in the  amount  of  $32,200  was
      recorded by the Company as interest  expense  during the fiscal year ended
      July 31, 2002.


                                      F-29
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      During the fiscal  year ended July 31,  2002,  the Company  issued  78,340
      shares of common stock in settlement of accounts  payable in the amount of
      $64,126. In addition, one of the vendors was granted five-year warrants to
      purchase  55,556 shares of common stock at an exercise  price of $1.50 per
      share.  The settled  accounts payable amount was credited to equity as the
      value of the common stock and warrants.

      During  the  fiscal  year  ended  July 31,  2002,  the  Company  issued an
      aggregate  of 85,221  five-year  stock  options  as payment  for  services
      rendered.  The options  vested  immediately  and had a per share  exercise
      prices of $0.75 as to 70,000  stock  options and $0.94 as to 15,221  stock
      options.  The Company  recorded  an  aggregate  total of $40,747  non-cash
      expenses for these  options,  based upon the fair value on the date of the
      issuance as estimated by the Black-Scholes  options-pricing  model.  These
      options were exercised as of July 31, 2005.

      During the fiscal year ended July 31, 2002,  the Company sold an aggregate
      of 2,622,122 shares of common stock to private investors at prices ranging
      from $0.35 to $0.90 per share  resulting in net proceeds of  $1,050,000 to
      the Company.  In addition,  the private investors were granted warrants to
      purchase an  aggregate  of  2,673,422  shares of common stock at per share
      exercise  prices  ranging from $0.75 to $1.50.  The  warrants  will expire
      during the period  commencing  August 2006 and ending in June 2007.  As of
      July 31, 2005, 797,545 of these warrants were exercised.

      During the fiscal year ended July 31, 2002, the Company issued warrants to
      purchase  1,500,000 shares of common stock to Roan Meyers  Associates L.P.
      for an aggregate  warrant  purchase price of $1,500 in connection with the
      engagement of Roan Meyers to render advisory services.  Of these warrants,
      250,000 were  exercisable at $.50 per share,  650,000 were  exercisable at
      $1.00  per share and  600,000  were  exercisable  at $1.50 per  share.  In
      February  2002,  the Company  recorded an expense equal to the fair market
      value of the first 500,000 warrants which vested  immediately,  based upon
      the fair value of such  warrants as  estimated  by  Black-Scholes  pricing
      model ($153,300),  less the $1,500 received from the sale of the warrants.
      The remaining 1,000,000 warrants were to become exercisable if Roan Meyers
      was successful in helping the Company raise capital.  However, Roan Meyers
      was not  successful  in raising  additional  capital  from a third  party.
      During the fiscal year ended July 31, 2002, Roan Meyers exercised warrants
      to purchase an aggregate of 186,000 shares of common stock, at an exercise
      price of $0.50 per share, resulting in aggregate gross proceeds of $93,000
      to the Company. During the fiscal year ended July 31, 2003, the vesting of
      the 600,000  warrants  was amended to vest  immediately  and the  exercise
      price was amended from $1.50 to $0.50 per share due to the price change of
      the Company's  common  stock.Roan  Meyers exercised these warrants and was
      issued  600,000  shares of common  stock.  The Company also issued  40,000
      shares of common  stock upon the exercise of warrants by Roan Meyers at an
      exercise price of $.50 per share.  The Company  realized  aggregate  gross
      proceeds of $320,000 from these capital raising  transactions.  During the
      fiscal year ended July 31, 2004,  the exercise  price of 250,000  warrants
      was amended  from $1.00 to $0.50 per share due to the price  change of the
      Company's common stock and the vesting of the 400,000 warrants was amended
      to vest immediately.  Roan Meyers exercised the remaining 674,000 warrants
      which  resulted in the  issuance of 674,000  shares of common stock by the
      Company.  The Company  realized gross proceeds of $537,000 in this capital
      raising transaction.

      During  the  fiscal  year  ended  July 31,  2002,  the  Company  issued an
      aggregate of 75,000  five-year  stock  options to unrelated  parties as an
      incentive  for  lending  the Company an  aggregate  of $75,000,  which was
      repaid  during the quarter.  The options  vested  immediately  and have an
      exercise  price of $1.50 per share.  The total non-cash  interest  expense
      recorded for these options was $25,615,  based upon the fair value of such
      option  on  the  date  of  issuance  as  estimated  by  the  Black-Scholes
      options-pricing  model. As of July 31, 2005,  25,000 of these options were
      exercised.


                                      F-30
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      During the fiscal  year ended July 31,  2002,  the  Company  issued a note
      payable to an unrelated party in an aggregate amount of $300,000. The note
      was due in thirty days bearing interest at 8% per annum. In addition,  the
      lender received  warrants to purchase 300,000 shares of common stock at an
      exercise  price of $0.60 per share.  The total non-cash  interest  expense
      recorded for these warrants was $40,690, based upon the fair value of such
      option  on  the  date  of  issuance  as  estimated  by  the  Black-Scholes
      options-pricing  model.  The notes were extended for eighteen  months at a
      conversion  price of $0.40 per share  plus a  five-year  warrant  for each
      share of the Company's  common stock issued upon conversion at an exercise
      price of $1.00 per share.  These notes were  converted  into shares of the
      Company's common stock and warrants in fiscal year 2004.

      During  the  fiscal  year  ended  July 31,  2003,  the  Company  issued an
      aggregate of 764,000  shares of common stock upon the exercise of warrants
      and stock options by unrelated parties which resulted in gross proceeds of
      approximately $378,000 to the Company.

      During  the  fiscal  year  ended  July 31,  2003,  the  Company  issued an
      aggregate 186,208 shares of common stock in settlement of accounts payable
      in the aggregate  amount of $94,223.  In addition,  one of the vendors was
      granted  five-year options to purchase 50,000 shares of common stock at an
      exercise price of $1.25 per share.  The Company  recorded $17,581 non-cash
      research and development  expenses for these options,  based upon the fair
      value  on the  date of the  issuance  as  estimated  by the  Black-Scholes
      options-pricing model. The settled accounts payable amount was credited to
      equity as the value of the common stock and options.

      During the fiscal  year ended July 31,  2003,  the Company  issued  25,000
      five-year  stock options to an unrelated party as an incentive for lending
      the Company an aggregate of $25,000,  which was fully paid as of April 30,
      2003. The stock options vested  immediately  and have an exercise price of
      $0.23 per share.  The total non-cash  interest  expense recorded for these
      stock  options  was  $2,503.  In  addition,  the  Company  issued  140,000
      five-year stock options for services rendered.  These stock options vested
      immediately  and have  exercise  prices of $0.84 and $1.25 per share.  The
      total  non-cash  charge  relating to these options was $55,437.  The total
      value of these  options  was based upon the fair value of such  options on
      the date of issuance as  estimated  by the  Black-Scholes  options-pricing
      model.  Of these  options,  20,000 were  exercised  during the fiscal year
      ended July 31, 2004.

      During  the  fiscal  year  ended  July 31,  2003,  the  Company  issued 8%
      convertible  notes payable to unrelated  parties with  principal  balances
      totaling an aggregate of $915,000.  These notes payable matured on various
      dates from  April  2004  through  May 2005 and were  convertible  into the
      Company's  common stock at conversion  prices  ranging from $0.20 to $0.50
      per share and an equal number of five year warrants with an exercise price
      of $1.00 per share.  With the issuance of the notes  payable,  the Company
      issued  to the  unrelated  parties  five  year  warrants  to  purchase  an
      aggregate of 665,000 shares of the Company's  common stock, at an exercise
      price of $0.60 per share. In addition,  the Company issued on the due date
      of the notes  payable  five year  warrants  to purchase  an  aggregate  of
      915,000 shares of the Company's  common stock at per share exercise prices
      of $1.00 and  $1.10.  The  Company  valued  these  warrants  at a total of
      $219,259  based on the fair value  determined  by using the  Black-Scholes
      method. At the issuance dates of the notes payable, the fair market values
      of  the  Company's  shares  exceeded  the  effective   conversion  prices.
      Accordingly, the Company initially increased additional paid-in capital by
      $219,259 for the fair value of the warrants and reduced the carrying value
      of  the  notes   payable  for  the  same  amount  for  the  debt  discount
      attributable to the fair value of the warrants. The Company also increased
      its  additional   paid-in  capital  and  debt  discount  by  $374,960  for
      beneficial  conversion  rights issued in connection  with the issuances of
      these notes (see note 4).

      During the fiscal year ended July 31, 2003,  the Company sold an aggregate
      of 1,315,000 shares of common stock to private investors at prices ranging
      from $0.20 to $0.73 per share resulting in net proceeds of $653,627 to the
      Company.  In addition,  the private  investors  were  granted  warrants to
      purchase an  aggregate  of  1,315,000  shares of common stock at per share
      exercise  prices  ranging from $1.00 to $1.50.  The  warrants  will expire
      during the period  commencing  January 2008 and ending in October 2008. As
      of July 31, 2005, 680,000 of these warrants were exercised.


                                      F-31
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      On January 14, 2004, at the Company's annual meeting of stockholders,  the
      Company's  stockholders approved an amendment to the Company's Certificate
      of Incorporation,  as amended,  to increase the number of shares of common
      stock  authorized from  40,000,000 to 100,000,000.  Since no notes payable
      had been  converted  as of such  date,  the terms of the  Company's  notes
      payable  relating  to  conversion  and  exercise  which  were  amended  to
      authorize  conversion  to Series A Preferred  Stock  because there were an
      insufficient  number of  authorized  shares of common stock  available for
      issuance upon  conversion,  reverted to their  original terms so that they
      were again convertible into shares of common stock,  rather than shares of
      Series A Preferred Stock.

      On January 14, 2004, at the Company's annual meeting of stockholders,  the
      Company's  stockholders  approved the 2004 Stock Incentive Plan (the "2004
      Plan"). The total number of shares of common stock authorized for issuance
      under the 2004 Plan is 8,500,000.

      During  the  fiscal  year  ended  July 31,  2004,  the  Company  issued an
      aggregate of 120,000 shares of common stock to private investors resulting
      in aggregate  gross proceeds of $60,000 to the Company.  In addition,  the
      private  investors  were granted  five-year  warrants to purchase  120,000
      shares of common stock at an exercise price of $1.25 per share.

      During the fiscal  year ended July 31,  2004,  the  Company  issued  3,996
      five-year stock options to a consultant as payment for services  rendered.
      The options  vested  immediately  and have a per share  exercise  price of
      $0.60.  The Company  recorded a total of $5,235 of non-cash  expenses  for
      these  options,  based upon the fair value on the date of the  issuance as
      estimated by the Black-Scholes  options pricing model.  These options were
      exercised  during the fiscal year ended July 31, 2004  resulting  in gross
      proceeds of $2,398 to the Company.

      During the fiscal year ended July 31,  2004,  the Company  entered  into a
      two-part  financing  agreement  with SF  Capital  Partners,  Ltd.  for the
      private  placement  of  1,704,546  shares of common  stock and warrants to
      purchase 852,273 shares of common stock, at an exercise price of $1.50 per
      share. As consideration, the Company received $1,500,000. In addition, the
      Company  granted  SF  Capital  Partners,  Ltd.  a  warrant  to  invest  an
      additional  $1,500,000  to  purchase  the  Company's  common  stock  at an
      exercise price based upon a 20-day  trailing  average of the closing price
      per share of the  Company's  common  stock  (the  "Additional  Warrants").
      During the fiscal  year ended July 31,  2004,  SF Capital  Partners,  Ltd.
      exercised the Additional  Warrants at a 20-day trailing  average  exercise
      price of $3.96 which  resulted in gross  proceeds  of  $1,500,000  and the
      issuance  of 379,170  shares of common  stock and an  Exercise  Warrant to
      purchase  an  additional  189,585  shares of  common  stock at a per share
      exercise  price of $4.75.  The Company  also issued an aggregate of 53,876
      shares of restricted common stock to a third party as finder's fee.

      During the fiscal  year ended July 31,  2004,  the Company  issued  25,000
      five-year stock options to a board member as payment for non-board related
      services and 110,000  five-year  stock options to various  consultants for
      services  rendered.  The options vested  immediately  and have a per share
      exercise price of $3.46. The Company recorded a total of $275,377 non-cash
      expenses for these  options,  based upon the fair value on the date of the
      issuance as estimated by the Black-Scholes options pricing model.

      During  the  fiscal  year  ended  July 31,  2004,  the  Company  issued an
      aggregate  of  14,703  restricted  shares of common  stock as  payment  of
      accounts payable in the amount of $52,176.

      During  the  fiscal  year  ended  July 31,  2004,  the  Company  issued an
      aggregate  of 75,000  restricted  shares of common  stock as  payment  for
      services rendered in an aggregate amount of $288,500.


                                      F-32
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      During the fiscal year ended July 31, 2004, the Company  issued  1,210,654
      shares of common stock to an existing institutional investor, resulting in
      gross  proceeds  of  $10,000,000   to  the  Company.   In  addition,   the
      institutional   investor  was  granted  five-year   warrants  to  purchase
      1,210,654 shares of Common Stock at an exercise price of $12.39 per share.
      The Company paid a 5% finder's fee to a third party in connection with the
      private  placement,  which included a five-year warrant to purchase 60,533
      shares of common stock at an exercise price of $12.39 per share.

      During the fiscal  year ended July 31,  2004,  the Company  increased  its
      outstanding  shares by 40,000  shares of common stock for  replacement  of
      previously issued stock.

      During  the  fiscal  year  ended  July 31,  2004,  the  Company  issued an
      aggregate of 3,042,817  shares of  restricted  common stock and  five-year
      warrants to purchase 3,733,839 shares of common stock with exercise prices
      ranging from $1.00 to $1.10 per share upon the conversion of notes payable
      and accrued interest in the amount of approximately $927,872.

      During  the  fiscal  year  ended  July 31,  2004,  the  Company  issued an
      aggregate  of  2,676,994  shares  of common  stock  upon the  exercise  of
      warrants by  unrelated  parties and stock  options by  unrelated  parties,
      employees,  a director and former  director at per share  exercise  prices
      ranging from $0.26 to $4.74. The Company realized aggregate gross proceeds
      of $2,656,099 from these exercises.

      During  the fiscal  year ended July 31,  2004,  the  Company  incurred  an
      aggregate of $824,022 of costs relating to various private placements.

      During  the  fiscal  year  ended  July 31,  2005,  the  Company  issued an
      aggregate of 1,744,978  shares of common stock and  five-year  warrants to
      purchase an aggregate of 2,044,978 shares of common stock with an exercise
      price of $1.00 per share  upon the  conversion  of notes  payable  and its
      accrued interest in an aggregate amount of $464,499.

      During  the  fiscal  year  ended  July 31,  2005,  the  Company  issued an
      aggregate  of 438,372  shares of common  stock upon the  exercise of stock
      options and warrants by unrelated parties, employees and a director at per
      share exercise  prices ranging from $0.26 to $1.91.  The Company  realized
      aggregate net proceeds of $307,155 from these exercises.

      During the fiscal  year ended July 31,  2005,  the  Company  issued  3,000
      shares of  restricted  common  stock as payment for services  rendered.  A
      non-cash  expense of $13,500 was recorded by the Company for these shares,
      based upon the fair value of the common stock at the date of issuance.

      During the fiscal  year ended July 31,  2005,  the Company  issued  12,500
      warrants to a vendor in consideration  for services to be rendered.  5,000
      of these warrants which vested immediately have an exercise price of $2.50
      per share and 7,500  warrants  which vested on the 91st day from the grant
      date have an exercise price of $3.50 per share. These warrants will expire
      24 months from the date the registration  statement registering the shares
      underlying  the warrants is declared  effective or 36 months from the date
      of grant,  whichever comes first.  The Company recorded a total of $13,552
      of non-cash expense for these warrants,  based upon the fair value at July
      31, 2005 as estimated by the Black-Scholes option pricing model.

      During  the  fiscal  year  ended  July 31,  2005,  the  Company  issued an
      aggregate of 20,000  ten-year  stock options to consultants as payment for
      continuing  services.  The options will vest 25% each year starting on the
      first  anniversary of the  commencement of the services of the consultants
      provided they remain as  consultants on the relevant  vesting  dates.  The
      stock  options  have an  exercise  price of $2.05 per share.  The  Company
      recorded a total of $3,237 of non-cash  expense for these  options,  based
      upon the fair value at July 31,  2005 as  estimated  by the  Black-Scholes
      option pricing model.


                                      F-33
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Common Stock Warrants

      During the  fiscal  years 1988 and 1991,  the Board of  Directors  granted
      stock  purchase  warrants to acquire a maximum of 400,000 shares of common
      stock at $5.00 per share which were not exercised and have since expired.

      The  following  table  summarizes  the activity of common  stock  warrants
      issued in connection  with the private  placements and conversion of notes
      payable completed in fiscal years 1994 through 2005:

<TABLE>
<CAPTION>
                                                               Warrants      Exercise Price            Expiration
                                                               --------      --------------            ----------
<S>                                                           <C>              <C>                <C>
    Sold in March 1994 Private Placement                        800,000        $   5.00            3/21/97 to 6/21/97
                                                              ---------
Outstanding at July 31, 1994                                    800,000           5.00             3/21/97 to 6/21/97
    Sold in September 1994 Private Placement                    288,506           5.50             12/9/97 to 12/14/97
    Sold in October 1994 Private Placement                       40,000           5.50                   1/21/98
    Sold in September 1995 Private Placement                     47,405           4.00                   10/1/98
                                                              ---------
Outstanding and exercisable at July 31, 1995                  1,175,911        4.00 - 5.50         3/21/97 to 10/1/98

    Issued to bank in connection with an amendment
       to the Company's term loan                                10,000           4.19                   8/31/97
    Sold in September 1995 Private Placement                      8,540           4.00                   10/1/98
    Sold in June 1996 Private Placement                         313,800           7.50             8/29/99 to 9/10/99
                                                              ---------
Outstanding and exercisable at July 31, 1996                  1,508,251        4.00 - 7.50         3/21/97 to 9/10/99
    Exercised                                                  (147,450)          5.00             3/21/97 to 6/21/97
    Expired                                                    (652,550)          5.00             3/21/97 to 6/21/97
                                                              ---------
Outstanding and exercisable at July 31, 1997                    708,251        4.00 - 7.50         12/9/97 to 9/10/99
    Sold in February 1998 Private Placement                   1,168,575           2.50                   8/17/01

    Issued to the Placement Agent in connection with
       the February 1998 Private placement
       (see note 7)                                             350,574        2.20 - 2.50               8/17/01
    Exercised                                                    (4,950)       2.20 - 2.50               5/19/01
    Expired                                                    (338,506)       4.19 - 5.50         8/31/97 to 1/21/98
                                                              ---------
Outstanding and exercisable at July 31, 1998                  1,883,944        2.20 - 7.50         10/1/98 to 8/17/01
    Expired                                                     (55,945)          4.00                   10/1/98
    Sold in February 2000 Private Placement                     875,000        1.03 - 4.55         5/28/03 to 5/28/05
    Expired                                                    (313,800)          7.50             8/30/99 to 9/11/99
                                                              ---------
Outstanding and exercisable at July 31, 2000                  2,389,199        1.03 - 4.55         5/19/01 to 5/28/05
    Sold in various private placements                          696,665        1.50 - 3.00         7/07/04 to 10/30/06

    Issued to related parties upon conversion of note
       payable                                                  330,000           1.50                   7/07/06
                                                              ---------
Outstanding and exercisable at July 31, 2001                  3,415,864        1.03 - 4.55         8/17/01 to 10/30/06
    Expired                                                  (1,514,199)       2.20 - 2.50               8/17/01
    Sold in various private placements                        2,673,422        0.75 - 1.50         11/03/06 to 9/10/07

    Issued to vendor upon settlement of accounts
       payable                                                   55,556           1.50                   8/15/06
    Issued to unrelated party for advisory services           1,500,000        0.50 - 1.50               2/6/07
    Exercised                                                  (186,000)          0.50                   2/6/07

    Issued to unrelated parties upon conversion of
       notes payable                                             72,214           1.50                  10/31/06

    Issued to unrelated parties in connection with
       notes payable                                            300,000           0.60             11/13/06 to 7/29/07
                                                              ---------
Outstanding and exercisable at July 31, 2002                  6,316,857        0.50 - 4.55         5/28/03 to 9/10/07
    Expired                                                    (437,500)       1.03 - 3.25               5/28/03
</TABLE>


                                      F-34
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Common Stock Warrants, (Continued)

<TABLE>
<CAPTION>
                                                            Warrants        Exercise Price            Expiration
                                                            --------        --------------            ----------
<S>                                                        <C>               <C>                 <C>
    Sold in various private placements                      1,315,000         1.00 - 1.50         1/24/08 to 10/31/08
    Exercised                                                (640,000)            0.50                   2/6/07
    Issued to unrelated parties in connection with
       notes payable                                          665,000             0.60              9/6/07 to 3/14/08
                                                          -----------
Outstanding and exercisable at July 31, 2003                7,219,357          0.50 - 4.55         5/28/05 to 10/31/08
    Sold in various private placements                      2,372,512         1.25 - 12.39          9/3/08 to 5/9/09
    Exercised                                              (2,014,273)        0.50 - 1.50          2/6/07 to 10/31/08
    Issued to third party as finder's fee                      60,533            12.39                   5/9/09
    Issued to unrelated parties in connection
       with conversion of notes payable                     3,733,839         1.00 - 1.10          12/4/08 to 7/15/09
                                                          -----------
Outstanding and exercisable at July 31, 2004               11,371,968         0.60 - 12.39         5/28/05 to 7/15/09
    Exercised                                                (247,272)        0.75 - 1.25           7/16/07 to 8/5/08
    Expired                                                  (437,500)        2.50 - 4.55                5/28/05
    Issued to unrelated parties in connection with
       conversion of notes payable                          2,044,978             1.00              9/14/09 to 5/6/10
    Issued to a vendor in connection with services
       rendered                                                12,500         2.50 - 3.50                4/25/08
                                                          -----------
Outstanding and exercisable at July 31, 2005               12,744,674        $0.60 - $12.39        11/29/05 to 5/6/10
                                                          ===========        ==============        ==================
</TABLE>

(9)   Stock Options

      2004 Stock Incentive Plan

      The Company's  stockholders  approved the 2004 Stock  Incentive  Plan (the
      "2004 Plan") for the issuance of up to 8,500,000  shares,  which  provides
      that common stock and stock options may be granted to employees, directors
      and consultants. The 2004 Plan provides for the granting of stock options,
      stock appreciation rights,  restricted shares, or other share based awards
      to eligible employees and directors,  as defined in the 2004 Plan. Options
      granted  under  the 2004 Plan will  have an  exercise  price  equal to the
      market value of the Company's  common stock on the date of the grant.  The
      term,  time and method of exercise of options  granted under the 2004 Plan
      are fixed by the Board of Directors or a committee thereof.

      1997 Stock Option Plan

      The  Company's  stockholders  approved  the 1997 stock option plan for the
      issuance  of options  for up to  2,000,000  shares,  which  provides  that
      options may be granted to employees,  directors and  consultants.  Options
      are  granted at market  value on the date of the grant and  generally  are
      exercisable in 20%  increments  annually over five years starting one year
      after  the date of grant and  terminate  five  years  from  their  initial
      exercise date.

      1993 Stock Option Plan

      The  Company's  stockholders  approved  the 1993 stock option plan for the
      issuance  of options  for up to  3,000,000  shares,  which  provides  that
      options may be granted to employees,  directors and  consultants.  Options
      are  granted at market  value on the date of the grant and  generally  are
      exercisable in 20%  increments  annually over five years starting one year
      after  the date of grant and  terminate  five  years  from  their  initial
      exercise  date.  This plan  expired in November  2003 except to the extent
      there are outstanding options.


                                      F-35
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)   Stock Options, (Continued)

      As of July 31, 1994,  1,703,159  options were granted under the 1993 stock
      option plan.

      The following table summarizes stock option activity for the period August
      1, 1994 to July 31, 2005:

<TABLE>
<CAPTION>
                                         Shares Available       Options           Weighted Average Exercise
                                            for Grant         Outstanding              Price Per Share
                                            ---------         -----------              ---------------
<S>                                         <C>                <C>                          <C>
      Balance August 1, 1994                 1,926,841          5,935,337                   $3.76
           Granted                            (818,850)           818,850                    2.60
           Exercised                                --           (185,000)                   2.36
           Canceled/Expired                         --         (1,897,500)                   4.30
                                            ----------         ----------
      Balance August 1, 1995                 1,107,991          4,671,687                    3.39
           Granted                            (296,205)           296,205                    3.99
           Exercised                                --           (656,334)                   2.92
           Canceled/Expired                      6,500           (235,333)                   4.89
                                            ----------         ----------
      Balance July 31, 1996                    818,286          4,076,225                    3.43
           1997 Plan                         2,000,000                 --                      --
           Granted                            (932,500)           932,500                    4.90
           Exercised                                --           (639,500)                   3.82
           Canceled/Expired                    484,845           (484,845)                   4.70
                                            ----------         ----------
      Balance July 31, 1997                  2,370,631          3,884,380                    3.56
           Granted                            (234,333)           234,333                    3.31
           Canceled/Expired                     91,100            (91,100)                   3.81
                                            ----------         ----------
      Balance July 31, 1998                  2,227,398          4,027,613                    3.54
           Granted                            (595,000)           595,000                    0.62
           Canceled/Expired                    443,934           (555,737)                   3.97
                                            ----------         ----------
      Balance July 31, 1999                  2,076,332          4,066,876                    3.05
           Granted                            (827,000)           827,000                    0.52
           Exercised                                --            (95,000)                   0.48
           Canceled/Expired                    638,395         (1,031,880)                   2.73
                                            ----------         ----------
      Balance July 31, 2000                  1,887,727          3,766,996                    2.65
           Granted                            (447,000)           447,000                    0.85
           Exercised                                --           (165,555)                   0.51
           Canceled/Expired                    774,315         (1,018,557)                   3.42
                                            ----------         ----------
      Balance July 31, 2001                  2,215,042          3,029,884                    2.24
           Granted                            (544,221)           544,221                    0.69
           Canceled/Expired                    655,840           (900,081)                   2.31
                                            ----------         ----------
      Balance July 31, 2002                  2,326,661          2,674,024                    1.90
           Granted                            (630,000)           630,000                    0.50
           Exercised                                --           (124,000)                   0.47
           Canceled/Expired                    485,118           (736,358)                   3.09
                                            ----------         ----------
      Balance July 31, 2003                  2,181,779          2,443,666                    1.26
           2004 Stock Incentive Plan         8,500,000                 --                      --
           Granted                          (1,388,996)         1,388,996                    5.03
           Exercised                                --           (666,717)                   0.98
           Canceled/Expired                   (262,783)          (208,500)                   3.20
                                            ----------         ----------
      Balance July 31, 2004                  9,030,000          2,957,445                    2.95
           Granted                          (1,073,000)         1,073,000                    4.36
           Exercised                                --           (191,100)                   0.75
           Canceled/Expired                    290,500           (341,500)                   4.57
                                            ----------         ----------
      Balance July 31, 2005                  8,247,500          3,497,845                   $3.35
                                            ==========         ==========                   =====
</TABLE>


                                      F-36
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)   Stock Options, (Continued)

      The options  outstanding  at July 31, 2005 will expire  between August 21,
      2005 and July 26, 2015.

      The  weighted-average  fair  value  per  option  at the date of grant  for
      options  granted  during the fiscal years 2005,  2004 and 2003 were $3.87,
      $4.36 and  $0.21,  respectively.  The fair value was  estimated  using the
      Black-Scholes option pricing model based on the following assumptions:

                                                     2005       2004      2003
                                                     ----       ----      ----
            Expected dividend yield                     0%         0%        0%
            Risk-free interest rate                  4.25%      4.00%     2.00%
            Expected stock price volatility          95.2%      78.0%     77.8%
            Expected term until exercise (years)     9.56       6.86      5.50

      The following table summarizes  information concerning options outstanding
      at July 31, 2005:

<TABLE>
<CAPTION>
                                 Options Outstanding                         Options Exercisable
              --------------------------------------------------------      ---------------------
                                          Weighted Average    Weighted                   Weighted
                                              Remaining       Average                    Average
                 Range of                    Contractual      Exercise                   Exercise
              Exercise Prices     Shares    Term (Years)       Price          Shares      Price
              ---------------     ------    ------------       -----          ------      -----
<S>                             <C>             <C>           <C>            <C>         <C>
              $ 0.23 - 1.87     1,875,845       4.78          $ 1.04         1,134,045   $ 0.76
                2.05 - 2.16        70,000       9.95            2.13            10,000     2.16
                3.46 - 3.78       266,250       3.18            3.59           266,250     3.59
                4.38 - 4.75       279,500       2.75            4.58           159,500     4.73
                5.10 - 5.20        70,000       1.42            5.19            70,000     5.19
                   6.73           475,000       8.88            6.73           147,400     6.73
                8.10 - 8.38       461,250       7.10            8.28           253,500     8.21
              =============     ---------       ====            ====         ---------     ====
                                3,497,845                                    2,040,695
                                =========                                    =========
</TABLE>

      Stock  option  activity  prior to  adoption of SFAS 123 (see Note 1) is as
      follows:

      1981 Non-Qualified Stock Option Plan

      In 1981, the Board of Directors adopted a non-qualified  stock option plan
      and  had  reserved  300,000  shares  for  issuance  to  key  employees  or
      consultants.  Options were  nontransferable  and expired if not  exercised
      within five years.  Option grants of 60,000 shares expired  unexercised by
      July 31, 1991.

      Non-Qualified Stock Options

      The Board of Directors issued  non-qualified  stock options which were not
      part of the 1981 non-qualified stock option plan or the 1989 Stock Plan as
      follows:

<TABLE>
<CAPTION>
                                                                             Shares        Price Range
                                                                             ------        -----------
<S>                                                                        <C>             <C>
            Granted                                                        1,782,000       $ 3.00-3.87
            Exercised                                                       (276,989)        3.00-3.50
            Canceled                                                        (106,000)        3.00-3.50
            Expired                                                         (649,011)        3.00-3.50
            Granted pursuant to conversion of certain liabilities:
              Related party                                                1,324,014           3.20
              Unrelated party                                                 73,804           3.20
            Repurchased stock options                                       (102,807)          3.20
                                                                          ----------
            Balance at July 31, 1994                                       2,045,011       $ 3.20-3.87
                                                                          ==========       ===========
</TABLE>


                                      F-37
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)   Stock Options, (Continued)

      In connection with certain private placements, the Board of Directors had
      included in the agreements, options to purchase additional shares of the
      Company's common stock as follows:

<TABLE>
<CAPTION>
                                                                        Shares          Price Range
                                                                        ------          -----------
<S>                                                                    <C>              <C>
            Granted (42,167 options were repriced and extended)         894,887         $ 2.50-7.00
            Exercised                                                   (81,000)          3.97-6.50
            Expired                                                    (201,720)          3.97-6.50
                                                                       --------
            Balance at July 31, 1994                                    612,167         $ 2.50-7.00
                                                                       ========         ===========
</TABLE>

      All of the above options expired as of July 31, 2001.

      1989 Stock Plan

      On February 14, 1989, the Company  adopted the Alfacell  Corporation  1989
      Stock  Plan  (the  "1989  Stock  Plan"),  pursuant  to which  the Board of
      Directors could issue awards, options and grants.

      No more  options are being  granted  pursuant to this plan.  The per share
      option  exercise  price  was  determined  by the Board of  Directors.  All
      options  and  shares  issued  upon  exercise  were   nontransferable   and
      forfeitable in the event employment was terminated within two years of the
      date of hire.  In the event the option was  exercised and said shares were
      forfeited,  the Company  would  return to the  optionee  the lesser of the
      current market value of the securities or the exercise price paid.

      The stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                      Shares          Price Range
                                                                      ------          -----------
<S>                                                                 <C>               <C>
            Granted, February 14, 1989                               3,460,000        $ 3.50-5.00
            Options issued in connection with share purchase            36,365            2.75
            Expired                                                 (1,911,365)        2.75-5.00
            Canceled                                                   (10,000)           5.00
                                                                    ----------
            Balance at July 31, 1994                                 1,575,000        $ 3.50-5.00
                                                                    ==========        ===========
</TABLE>

(10)  Stock Grant and Compensation Plans

      The Company had adopted a stock grant program effective September 1, 1981,
      and pursuant to said plan, had reserved 375,000 shares of its common stock
      for issuance to key  employees.  The stock grant program was superseded by
      the 1989 Stock Plan,  and no further  grants will be given pursuant to the
      grant plan. The following stock transactions  occurred under the Company's
      stock grant program:

              Year ended                          Fair         Amount of
               July 31,        Shares            Value       Compensation
               --------        ------            -----       ------------

                 1983          20,000         $   5.50         $110,000
                 1984          19,750            5.125          101,219
                 1985          48,332         5.125-15.00       478,105
                 1986          11,250         5.125-15.00       107,032
                 1988          19,000             3.50            6,500


                                      F-38
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(10)  Stock Grant and Compensation Plans, (Continued)

      On January 26, 1984, the Company  adopted a stock bonus plan for directors
      and  consultants.  The plan was  amended  on  October  6, 1986 to  reserve
      500,000  shares for issuance  under the plan and to clarify a  requirement
      that stock  issued  under the Plan could not be  transferred  until  three
      years after the date of the grant.  The stock bonus plan for directors and
      consultants  was  superseded by the 1989 Stock Plan and no further  grants
      will  be  given  pursuant  to the  stock  bonus  plan  for  directors  and
      consultants. The following stock transactions occurred under the Company's
      stock bonus plan:

           Year ended                             Fair          Amount of
            July 31,            Shares            Value       Compensation
            --------            ------            -----       ------------

              1984              130,250        $ 2.50-3.88     $ 385,917
              1985               99,163         3.50-15.00       879,478
              1985              (42,500)           2.50         (105,825)*
              1986               15,394         9.65-15.00       215,400
              1987                5,000           15.00           75,000

      *     Shares granted in 1984 were  renegotiated  in 1985 and canceled as a
            result of the recipient's termination.

      1989 Stock Plan

      Under the 1989 Stock Plan,  one  million  shares of the  Company's  common
      stock were  reserved for issuance as awards to  employees.  The 1989 Stock
      Plan also provides for the granting of options to purchase common stock of
      the Company  (see note 9). In addition,  the 1989 Stock Plan  provided for
      the issuance of 1,000,000  shares of the Company's common stock as grants.
      To  be  eligible  for  a  grant,   grantees  must  have  made  substantial
      contributions and shown loyal dedication to the Company.

      Awards and grants  were  authorized  under the 1989 Stock Plan  during the
      following fiscal years:

            Year ended                            Fair         Amount of
             July 31,             Shares         Value       Compensation
             --------             ------         -----       ------------
               1989               30,000         $5.00          $150,000
               1990               56,000          6.00           336,000
               1991              119,000          4.00           476,000
               1992              104,000          2.75           286,000
               1993              117,000          2.00           234,000
               1994                5,000          3.00            15,000

      Compensation  expense is recorded  for the fair value of all stock  awards
      and grants over the vesting  period.  The 1994 stock award was immediately
      vested.  There were no stock awards in fiscal year ended 1999 and the plan
      expired in 1999.

(11)  Income Taxes

      The Company  accounts for income taxes under the  provisions  of SFAS 109.
      Under this method,  deferred  tax assets and  liabilities  are  determined
      based on the difference  between the financial  statement carrying amounts
      and tax bases of assets and liabilities  using enacted tax rates in effect
      for all years in which the temporary differences are expected to reverse.


                                      F-39
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(11)  Income Taxes, (Continued)

      New Jersey has enacted legislation permitting certain corporations located
      in New  Jersey to sell a portion of its state tax loss  carryforwards  and
      state  research and  development  credits in order to obtain tax benefits.
      For the state  fiscal  year  2005  (July 1,  2004 to June 30,  2005),  the
      Company had  approximately  $1,335,000  total  available tax benefits that
      were  saleable;  of  which  New  Jersey  permitted  the  Company  to  sell
      approximately   $339,000.   In  December   2004,   the  Company   received
      approximately  $288,000  from the sale of the  $339,000  of tax  benefits,
      which the Company  recognized  as tax  benefits  for the fiscal year ended
      July 31, 2005.

      For the state  fiscal  year  2004  (July 1,  2003 to June 30,  2004),  the
      Company had  approximately  $1,378,000  total  available tax benefits that
      were  saleable;  of  which  New  Jersey  permitted  the  Company  to  sell
      approximately   $261,000.   In  December   2003,   the  Company   received
      approximately  $222,000  from the sale of the  $261,000  of tax  benefits,
      which the Company  recognized  as tax  benefits  for the fiscal year ended
      July 31, 2004.

      For the state  fiscal  year  2003  (July 1,  2002 to June 30,  2003),  the
      Company had  approximately  $1,373,000  total  available tax benefits that
      were  saleable,  of  which  New  Jersey  permitted  the  Company  to  sell
      approximately   $273,000.   In  December   2002,   the  Company   received
      approximately  $231,000  from the sale of the  $273,000  of tax  benefits,
      which the Company recognized as tax benefits for fiscal 2003.

      If still  available under New Jersey law, the Company will attempt to sell
      the remaining  $996,000 of its tax benefits  between July 1, 2005 and June
      30, 2006. This amount,  which is a carryover of its remaining tax benefits
      from state  fiscal  year 2005 and  earlier,  may  increase  if the Company
      incurs  additional  tax losses during state fiscal year 2006.  The Company
      can not estimate,  however,  what  percentage of its saleable tax benefits
      New  Jersey  will  permit it to sell,  how much  money it will  receive in
      connection  with the sale,  if it will be able to find a buyer for its tax
      benefits or if such funds will be available in a timely manner.

      At July 31, 2005 and 2004, the tax effects of temporary  differences  that
      give rise to the deferred tax assets are as follows:

<TABLE>
<CAPTION>
      Deferred tax assets:                                                  2005                 2004
                                                                            ----                 ----
<S>                                                                    <C>                   <C>
         Excess of book over tax depreciation and amortization         $     27,499          $     27,016
         Accrued expenses and other                                         167,324               120,910
         Federal and state net operating loss carryforwards              19,413,740*           17,322,364*
         Research and experimentation and investment tax credit
           carryforwards                                                  1,955,172*            1,425,860*
                                                                       ------------          ------------
         Total gross deferred tax assets                                 21,563,735            18,896,150
         Valuation allowance                                            (21,563,735)          (18,896,150)
                                                                       ------------          ------------
         Net deferred tax assets                                       $         --          $         --
                                                                       ============          ============
</TABLE>

      * Net of amount sold pursuant to New Jersey state tax legislation.

      A valuation  allowance  is  provided  when it is more likely than not that
      some portion or all of the  deferred tax assets will not be realized.  The
      tax benefit  assumed using the federal  statutory tax rate of 34% has been
      reduced to the actual  benefits  reflected on the statements of operations
      due principally to the  aforementioned  valuation  allowance.  In 2005 and
      2004 the valuation  allowance  increased by  $2,668,000,  and  $2,837,000,
      respectively, and decreased by $205,000 in 2003.


                                      F-40
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(11)  Income Taxes, (Continued)

      At July 31, 2005, the Company has federal net operating loss carryforwards
      of  approximately  $52,823,000  that  expire  in the  years  2006  to 2025
      (approximately  $8,675,000 expires in the years 2006 to 2010). The Company
      also  has  research  and  experimentation  tax  credit   carryforwards  of
      approximately   $1,955,000   that   expire  in  the  years  2006  to  2025
      (approximately  $152,000  expires  in the years  2006 to  2010).  Ultimate
      utilization/availability  of such net  operating  losses  and  credits  is
      dependent upon the Company's  ability to generate taxable income in future
      periods and may be  significantly  curtailed  if a  significant  change in
      ownership  occurs in accordance  with the provisions of the Tax Reform Act
      of 1986.

(12)  Other Financial Information

      Accrued expenses as of July 31, consist of the following:

                                                2005              2004
                                                ----              ----

            Payroll and payroll taxes        $   85,181        $   44,112
            Professional fees                   123,200            92,768
            Clinical trial                      609,382           319,338
            Pre-clinical studies                460,859            52,011
            Other                                 5,069           116,976
                                             ----------        ----------
                                             $1,283,691        $  625,205
                                             ==========        ==========

(13)  Commitments and Contingencies

      On July 23,  1991,  the Board of Directors  authorized  the Company to pay
      Kuslima  Shogen,  the  Company's  CEO, an amount equal to 15% of any gross
      royalties  which  may be paid to the  Company  from  any  license(s)  with
      respect to the  Company's  principal  product,  ONCONASE(R),  or any other
      products  derived from  amphibian  source  extract,  produced  either as a
      natural,  synthesized,  and/or  genetically  engineered drug for which the
      Company is the owner or co-owner of the patents,  or acquires  such rights
      in the future, for a period not to exceed the life of the patents.  If the
      Company  manufactures and markets its own drugs, then the Company will pay
      an amount equal to 5% of net sales from any products  sold during the life
      of the  patents.  On April  16,  2001,  this  agreement  was  amended  and
      clarified to provide that Ms. Shogen would receive the 15% royalty payment
      relating to licensees or the 5% fee relating to sales but not both, unless
      the Company and the licensee both market the licensed product.

      The  Company  has product  liability  insurance  coverage in the amount of
      $3,000,000 for clinical trials in the U.S. Additionally,  the Company also
      maintains  product  liability   insurance  in  Europe  in  the  amount  of
      DM20,000,000,  AU$10,000,000 in Australia and in Romania  (euro)10,000 per
      patient for death and  permanent  disability  and limit of  indemnity  for
      medical expenses of (euro)3,000 per patient.  No product  liability claims
      have been filed against the Company.  If a claim arises and the Company is
      found liable in an amount that significantly exceeds the policy limits, it
      may have a material  adverse  effect upon the  financial  condition of the
      Company.

      The  Company  is,  from  time to  time,  involved  in  litigation  as both
      defendant and plaintiff arising in the ordinary course of business. In the
      opinion of management,  the results of any pending  litigation  should not
      have a material  adverse  effect on the  Company's  financial  position or
      operating results.


                                      F-41
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(13)  Commitments and Contingencies, (Continued)

      Below is a table that presents our contractual  obligations and commercial
      commitments as of July 31, 2005:

<TABLE>
<CAPTION>
                                                                Payments Due by Fiscal Year
                                              ------------------------------------------------------------------
                                                                                                       2011 and
                                  Total        2006       2007       2008         2009       2010     Thereafter
                                  -----        ----       ----       ----                             ----------
<S>                             <C>           <C>        <C>        <C>          <C>        <C>            <C>
      Operating lease           $ 42,799      $ 9,171    $ 9,171    $ 9,171      $ 9,171    $ 6,115        $   -
                                --------      -------    -------    -------      -------    -------        -----
      Total contractual cash
          obligations           $ 42,799      $ 9,171    $ 9,171    $ 9,171      $ 9,171    $ 6,115        $   -
                                ========      =======    =======    =======      =======    =======        -----
</TABLE>

(14)  Research and Development Agreement

      In July 2005, the Company  entered in a research  collaboration  agreement
      with  Novartis  Institute  for  Tropical  Diseases for the  evaluation  of
      AC-03-636  against  Dengue fever.  AC-03-636 is a novel  compound from our
      proprietary family of amphinase RNases.

      The research  collaboration  with Wyeth  Pharmaceuticals  to  co-develop a
      number of designer  drugs such as  conjugates  and fusion  proteins  for a
      variety of indications using the Company's proprietary technology has been
      terminated by the Company for Wyeth's non-compliance with the terms of the
      agreement.

(15)  401(k) Savings Plan

      Effective  October 1, 1998, the Company adopted a 401(k) Savings Plan (the
      "Plan").  Qualified  employees may participate by contributing to the Plan
      subject to certain Internal Revenue Service restrictions. The Company will
      match  an  amount  equal  to 50% of the  first  6% of  each  participant's
      contribution.  The Company's contribution is subject to a vesting schedule
      of 0%, 25%, 50%, 75% and 100% for  employment  of less than one year,  one
      year,  two years,  three  years and four years,  respectively,  except for
      existing employees which vesting schedule was based from the date the Plan
      was adopted.  For the fiscal years ended July 31, 2005, 2004 and 2003, the
      Company's  contributions  to the Plan  amounted  to  $29,231,  $15,690 and
      $24,956, respectively.

(16)  Quarterly Financial Data (Unaudited)

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                          2005                                                      2004
               ---------------------------------------------------------------------------------------------------------------------
                 First      Second       Third      Fourth      Totals      First      Second      Third      Fourth      Totals
------------------------------------------------------------------------------------------------------------------------------------
<S>            <C>         <C>         <C>         <C>         <C>         <C>       <C>         <C>         <C>         <C>
Investment
   income      $    29.2   $    33.7   $    41.0   $    37.8   $   141.7   $   3.7   $     4.5   $     3.1   $    30.8   $    42.1
Other income          --          --         9.8          --         9.8        --          --          --          --          --

Operating
  loss          (1,368.8)   (1,955.3)   (1,674.6)   (1,751.2)   (6,749.9)   (980.0)   (1,199.6)   (1,350.5)   (1,762.0)   (5,292.1)
------------------------------------------------------------------------------------------------------------------------------------

Net loss(a)     (1,080.8)   (1,955.3)   (1,674.6)   (1,751.2)   (6,461.9)   (758.2)   (1,199.6)   (1,350.5)   (1,762.0)   (5,070.3)
------------------------------------------------------------------------------------------------------------------------------------

Loss per share
 - basic and
 diluted       $   (0.03)  $   (0.06)  $   (0.05)  $   (0.05)  $   (0.18)  $ (0.03)  $   (0.04)  $   (0.05)  $   (0.05)  $   (0.17)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)   Included in the net loss of $1,080.8 and $758.2 for first  quarter of 2005
      and 2004 are tax benefits of $288.0 and $221.8,  respectively,  related to
      the sale of certain state tax operating loss carryforwards.


                                      F-42
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(17)  Subsequent Events

      From August 1, 2005  through  September  19, 2005,  the Company  issued an
      aggregate of 118,637  shares of common stock upon the exercise of warrants
      by an unrelated  party and stock options by an employee at exercise prices
      ranging from $0.75 to $0.85 per share. The Company realized gross proceeds
      of $89,478 from these exercises.


                                      F-43