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


                                   FORM 10-KSB

            ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                              July 31, 1996 0-11088
                For the fiscal year ended Commission file number

                              ALFACELL CORPORATION
                 (Name of small business issuer 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)

                    Issuer's telephone number: (201) 748-8082
   Securities registered pursuant to Section 12(b) of the Exchange Act: None
      Securities registered pursuant to Section 12(g) of the Exchange Act:
                          Common Stock, $.001 par value
                                (Title of Class)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B and no  disclosure  will 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-KSB or any  amendment to
this Form 10-KSB.  

    [X] Issuer's revenues for the fiscal year ended July 31, 1996 were $184,250.

    The  aggregate  market value of the Common  Stock,  par value $.001 per
share, held by non-affiliates based upon the average of the bid and asked prices
as  reported  by the  National  Quotation  Bureau  on  September  23,  1996  was
$57,295,203.  As of September  23, 1996 there were  14,446,193  shares of Common
Stock, par value $.001 per share, outstanding.

         The Index to Exhibits appears on page 12.

                       Documents Incorporated by Reference

The   registrant's   definitive  Proxy  Statement  for  the  Annual  Meeting  of
Stockholders  scheduled to be held on November  21,  1996,  to be filed with the
Commission  not later than 120 days after the close of the  registrant's  fiscal
year, has been  incorporated  by reference,  in whole or in part, into Part III,
Items 9, 10, 11 and 12 of this Annual Report on Form 10-KSB.

Transitional Small Business Disclosure Format:  Yes          No   X




<PAGE>



                                Table of Contents

PART I                                                                    Page

         Item  1. Business                                                  1

         Item  2. Properties                                                6

         Item  3. Legal Proceedings                                         7

         Item  4. Submission of Matters to a Vote of Security
                            Holders                                         7

PART II

         Item  5. Market for Common Equity and Related Stockholder
                            Matters                                         7

         Item  6. Management's Discussion and Analysis of Financial
                            Condition and Results of Operations             8

         Item  7. Financial Statements                                     10

         Item  8. Changes in and Disagreements with Accountants
                            on Accounting and Financial Disclosure         10

PART III

         Item  9. Directors and Executive Officers, Promoters
                            and Control Persons; Compliance with
                            Section 16(a) of the Exchange Act              10

         Item 10. Executive Compensation                                   10

         Item 11. Security Ownership of Certain Beneficial Owners
                            and Management                                 10

         Item 12. Certain Relationships and Related Transactions           10

         Item 13. Exhibits and Reports on Form 8-K                         11





The  following  trademarks  appear in this  Annual  Report:  ONCONASE(registered
trademark) is a registered trademark of Alfacell Corporation;  Gemzar(registered
trademark) is a registered trademark of Eli Lilly & Co.

                                       (i)

<PAGE>



                                     Part I

Item 1.  BUSINESS.

Overview

Alfacell  Corporation  ("Alfacell"  or  the  "Company")  is a  biopharmaceutical
company  organized  in  1981  to  engage  in the  discovery,  investigation  and
development of a new class of anti-cancer  drugs isolated from leopard frog eggs
and  early   embryos.   The  Company's   first  product  under   development  is
ONCONASE(registered  trademark)  which targets  solid tumors,  most of which are
known to ultimately become resistant to other  chemotherapeutic  drugs. To date,
the most  significant  clinical  results  with  ONCONASE  have been  observed in
advanced pancreatic,  non-small cell lung, malignant mesothelioma and metastatic
breast cancer.  According to the American Cancer Society in 1996,  approximately
388,000  people in the United  States will be  diagnosed  with lung,  breast and
pancreatic cancer and approximately 231,000 will die.

ONCONASE has been used to treat  patients  with advanced  stages of  pancreatic,
non-small cell lung,  malignant  mesothelioma and metastatic  breast cancer on a
weekly basis.  Encouraging results have been observed in Phase I and II clinical
trials in patients with these tumor types,  warranting  further trials,  some of
which are underway.  Side effects associated with ONCONASE have been modest, are
primarily  renal and are  reversible  upon  reduction  of dose,  or temporary or
permanent  discontinuation  of  treatment.  Patients  treated with ONCONASE have
shown no evidence of myelosuppression (bone marrow suppression),  alopecia (hair
loss) or other severe toxicities  frequently  observed after treatment with most
other  chemotherapeutic  drugs.  In November  1995,  Alfacell began a randomized
multi-center  Phase III clinical  trial to test the  combination of ONCONASE and
tamoxifen  versus  5-fluorouracil  ("5-FU") in  approximately  200 patients with
advanced  pancreatic cancer. A subsequent Phase III clinical trial was initiated
in August  1996,  to  compare  ONCONASE  and  tamoxifen  with  Gemzar(registered
trademark),  a Food and Drug Administration ("FDA") approved drug for pancreatic
cancer, in approximately 100 patients.

The Company believes that ONCONASE may also be used as an anti-viral  agent. The
National  Institutes  of Health  ("NIH") has performed an  independent  in vitro
screen of  ONCONASE  against  the HIV virus type 1 ("HIV  virus").  The  results
showed  ONCONASE to inhibit  replication of the HIV virus 99.9% after a four day
incubation period at  concentrations  not toxic to uninfected H9 leukemic cells.
In  addition,  in  vitro  findings  by NIH  scientists  revealed  that  ONCONASE
significantly  inhibited  production  of the HIV virus in  several  persistently
infected  human  cell  lines,  preferentially  degrading  viral  RNA  while  not
affecting normal cellular ribosomal RNA and messenger RNAs. Although the Company
plans to conduct further research  concerning  ONCONASE's  anti-viral  activity,
there can be no assurance that ONCONASE will show any level of anti-HIV activity
in humans.

Beyond the  development  of ONCONASE,  Alfacell has also  discovered a series of
biologically  active  proteins from the same natural  source from which ONCONASE
was  discovered.  These proteins appear to be involved in the regulation of both
early  embryonic  and malignant  cell growth.  However,  significant  additional
research will be required in order to develop them into  therapeutics.  ONCONASE
is a novel compound and represents a new class of  therapeutic  compounds  whose
mechanism of action may be important in treating resistant solid tumors, as well
as potentially  having anti-viral  applications.  There can be no assurance that
development of these proteins into effective and approvable therapeutics will be
accomplished.

Information contained herein contains "forward-looking statements" which can be 
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions
of strategy. No

                                        1

<PAGE>



assurance can be given that the future  results  covered by the  forward-looking
statements  will be  achieved.  The  matters  set forth in Exhibit  99.1  hereto
constitute cautionary  statements  identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results  indicated
in such  forward-looking  statements.  Other  factors  could also  cause  actual
results  to  vary  materially   from  the  future  results   indicated  in  such
forward-looking statements.

ONCONASE(registered trademark)

Originally,  the Company developed an unpurified  biological  extract from early
stage leopard frog embryos and eggs.  This extract was found to possess a unique
bioactive  profile.  In 1987,  the  Company  isolated a specific  protein,  P-30
Protein, (herein referred to by its registered trade name ONCONASE).  Based upon
the complete amino acid sequence analysis (comparison of the amino acid sequence
of  ONCONASE  with that of over 10,000  protein  sequences  registered  with the
National  Biomedical  Research  Foundation  Protein   Identification   Resource,
Georgetown  University,  Washington,  DC), it has been established that ONCONASE
has a novel structure.  It has also been determined that, thus far,  ONCONASE is
the smallest protein belonging to the superfamily of pancreatic ribonucleases.

Postulated Mechanism of Action

Although the full mechanism of ONCONASE's anti-tumor activity has not been fully
delineated, the following processes have been identified experimentally:

Binding of ONCONASE to cell surface receptors followed by:

         .        Cellular internalization;

         .        Ribonucleolytic degradation of RNAs;

         .        Inhibition of protein synthesis;

         .        Inhibition of the cell growth; and

         .        Cell death.

Pre-clinical and clinical data to date have shown that ONCONASE has the capacity
to enter  chemotherapy  resistant  cells,  overcomes  multiple  drug  resistance
("MDR") and other  mechanisms of drug  resistance,  and is synergistic with many
other chemotherapies against numerous tumor cell lines.

Clinical Trials

ONCONASE was tested as a single agent in patients with a variety of solid tumors
and in combination  with  tamoxifen in advanced  pancreatic  patients.  In vitro
results  showed  ONCONASE  to  be  synergistic   with  tamoxifen  in  inhibiting
pancreatic carcinoma tumor cell growth.

Reported  toxicities in Phase I and II clinical  trials,  were primarily  renal,
dose-related  and  reversible.  There has been no evidence  of  myelosuppression
(bone  marrow  suppression),  alopecia  (hair loss) or other  severe  toxicities
frequently  observed  after  treatment with most other  chemotherapeutic  drugs.
Alfacell  has two  on-going  Phase III  clinical  trials in advanced  pancreatic
cancer patients. The Company began a randomized

                                        2

<PAGE>



multi-center  Phase III clinical  trial in November  1995. In May 1996,  the FDA
approved Gemzar for the treatment of advanced pancreatic cancer;  therefore,  in
August 1996 the Company  broadened  the criteria  for  inclusion in its study to
include  patients  previously  treated  with  Gemzar.  The trial is  designed to
compare  the  survival  and  quality  of  life  of  patients  treated  with  the
combination  of ONCONASE and tamoxifen  versus 5-  fluorouracil  (5-FU),  an FDA
approved  chemotherapy.   Additionally,  Alfacell  initiated  a  new  Phase  III
multicenter  clinical  trial in August 1996,  comparing  ONCONASE plus tamoxifen
with Gemzar in newly diagnosed pancreatic patients.

ONCONASE  is  being  tested  in  a  Phase  II  clinical   trial  for   malignant
mesothelioma.  No standard therapy exists to treat this deadly cancer,  and most
advanced malignant  mesothelioma patients die of progressive disease within 6-12
months of diagnosis.  Results to date have been encouraging;  however, there can
be no assurance  that  previous  clinical  trial  results will be  reflective of
future clinical results or will be sufficient to obtain FDA approval.

Research and Development
------------------------

Research  and  development  expenses  for the fiscal  years ended July 31, 1996,
1995, and 1994 were $2,188,890, $1,205,523 and $1,114,455,  respectively. During
fiscal 1996,  the  Company's  research and  development  efforts were focused on
manufacturing  ONCONASE  under  cGMP  conditions  ("current  Good  Manufacturing
Practices") for the Phase III clinical trials, commencing the Phase III clinical
trial in advanced  pancreatic  cancer and  monitoring  on-going  activity of the
Phase II clinical trial in malignant mesothelioma.

The Company has a Cooperative Research and Development  Agreement ("CRADA") with
the NIH. Areas of research  include studies of anti-HIV  activity;  the study of
the  mechanism  of action of ONCONASE at the cellular  and  subcellular  levels;
tests of the anti-tumor activities of ONCONASE conjugates; ONCONASE gene therapy
and  investigation  of  anti-tumor  activity of ONCONASE  against  primary brain
tumors.

The  Company  also has a CRADA  with the  National  Cancer  Institute's  ("NCI")
Biological Response Modifier and Developmental  Therapeutics Programs.  Areas of
research  include  characterization  of the  inhibition  of tumor cell growth by
ONCONASE  in  animal  models  and in  vitro  and in  vivo  studies  of  chemical
conjugates of ONCONASE with anti-tumor antibodies.

Management of the Company  believes it has  discovered a family of proteins from
the same  source as  ONCONASE  which  plays a role in cell  maturation  and cell
proliferation  and may play a role in developing other treatments for cancer. At
present,  the Company is defining a number of active  proteins  from the natural
source  material,  in  addition  to  ONCONASE,   which  may  exhibit  cytotoxic,
cytostatic, and other pharmacological effects.

Raw Materials
-------------

The major active  ingredient  in the original  extract  derived from early stage
leopard  frog  embryos  and eggs is the  protein,  ONCONASE.  Although  Alfacell
currently   acquires  its  natural  source  material  from  a  single  supplier,
management  believes  that it is abundantly  available  from other  sources.  In
addition,  the Company is conducting  research  concerning  the  alternative  of
manufacturing ONCONASE through recombinant technology.  However, there can be no
assurance that alternative manufacturing methods will be viable.


                                        3

<PAGE>



Manufacturing
-------------

The  Company  has  signed an  agreement  with  Scientific  Protein  Laboratories
("SPL"),  a subsidiary of a division of American Home Products Corp., which will
perform the intermediary manufacturing process which entails purifying ONCONASE.
Subsequently,  the  intermediate  product is sent to a  contract  filler for the
final  manufacturing step and vial filling.  Other than these  arrangements,  no
specific  arrangements  have  been  made for the  manufacture  of the  Company's
product.  Compliance with cGMP is a requirement for product manufactured for use
in Phase III clinical trials and for commercial sale. Both SPL, and the contract
filler to whom the intermediate product is sent for the final manufacturing step
and vial filling,  manufacture  in  accordance  with cGMP.  For the  foreseeable
future,  the  Company  intends  to rely on these  manufacturers,  or  substitute
manufacturers,  if necessary, to manufacture its product. If the Company were to
establish a  manufacturing  facility,  which it currently does not intend to do,
the Company would require substantial  additional funds and would be required to
hire and retain  significant  additional  personnel to comply with the extensive
cGMP  regulations of the FDA applicable to such a facility.  No assurance can be
given that the  Company  would be able to make the  transition  successfully  to
commercial production, if it chose, or were required, to do so.

Marketing
---------

Neither the Company nor any of its  officers  or  employees  has  pharmaceutical
marketing  experience.  If the  Company  were to  market  its  products  itself,
significant  additional  expenditures and management resources would be required
to  develop  an  internal  sales  force and there can be no  assurance  that the
Company  would  be  successful  in  penetrating  the  markets  for any  products
developed or that internal marketing capabilities would be developed at all. The
Company  intends,  in some  instances,  to enter into  development and marketing
agreements with third parties.  The Company expects that under such arrangements
it would act as a comarketing  partner or would grant exclusive marketing rights
to its corporate  partners in return for up-front fees,  milestone  payments and
royalties on sales. Under these agreements,  the Company's marketing partner may
have the responsibility for a significant  portion of development of the product
and  regulatory  approval.  In the event  that the  marketing  partner  fails to
develop a  marketable  product  or fails to market a product  successfully,  the
Company's 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 agencies are required in most foreign countries.
The FDA has established mandatory procedures and safety standards which apply to
the clinical  testing,  manufacture  and marketing of  pharmaceutical  products.
Obtaining  FDA  approval for a new  therapeutic  may take many years and involve
substantial  expenditures.  Pharmaceutical  manufacturing  facilities  are  also
regulated by state, local and other authorities.

As an initial step in the FDA regulatory approval process,  pre-clinical studies
are  conducted  in animal  models to assess the drug's  efficacy and to identify
potential safety problems. The results of these studies are submitted to the FDA
as a part of the Investigational New Drug Application ("IND"), which is filed to
obtain  approval to begin human clinical  testing.  The human  clinical  testing
program may involve up to three phases.  Data from human trials are submitted to
the  FDA in a New  Drug  Application  ("NDA")  or  Product  License  Application
("PLA").  Preparing  an  NDA  or  PLA  involves  considerable  data  collection,
verification and analysis.


                                        4

<PAGE>



The Company has not received FDA or other  marketing  approval for any products.
Difficulties  or  unanticipated  costs may be  encountered by the Company in its
effort to secure necessary governmental approvals, which could delay or preclude
the Company from  marketing its products.  There can be no assurance that any of
the Company's products will be approved by the FDA or any foreign country.

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

Patents
-------

The Company  believes it is important to develop new  technology and improve its
existing technology. When appropriate,  the Company files patent applications to
protect such inventions.

The Company owns four U.S. Patents:
-----------------------------------

   a)    U.S. Patent No. 4,888,172 issued in 1989, which covers pharmaceuticals 
         derived from an amphibian source;

   b)    U.S. Patent No. 5,559,212 issued in 1996, which covers ONCONASE; and

   c)    U.S. Patents Nos. 5,529,775 and 5,540,925 issued in 1996, which cover 
         combinations of ONCONASE with certain other chemotherapeutics.

The Company owns U.S. Patent No. 4,882,421, which has now been disclaimed and
is therefore legally unenforceable.  This disclaimer permitted the Company to
obtain U.S. Patents Nos. 5,529,775, 5,540,925 and 5,559,212.

The  Company  also owns two  European  patents.  These  European  patents  cover
ONCONASE,  process technology for making ONCONASE,  and combinations of ONCONASE
with  certain  other  chemotherapeutics.  The  Company  also owns  other  patent
applications,  which are pending in the United States,  Europe,  and Japan.  The
Company owns an undivided  interest in each of two applications that are pending
in the United States.  Each application  relates to a Subject Invention (as that
term is defined in CRADAs to which the Company and the NIH are parties).

Patents  covering  biotechnological  inventions have an uncertain scope, and the
Company is subject to this  uncertainty.  The Company's patent  applications may
not issue as  patents.  Moreover,  the  Company's  patents  may not  provide the
Company with competitive  advantages and may not withstand challenges by others.
Likewise,  patents  owned by others  may  adversely  affect  the  ability of the
Company to do business.  Furthermore,  others may independently  develop similar
products,  may duplicate the Company's  products,  and may design around patents
owned by the Company.

The Company also relies on proprietary  know-how and on trade secrets to develop
and maintain its competitive  position.  Others may  independently  develop such
know-how or trade  secrets or may  otherwise  obtain  access  thereto.  Although
Company employees and consultants  having access to proprietary  information are
contractually  required to keep such information  confidential,  such agreements
may be breached or held unenforceable.


                                        5

<PAGE>



Pursuant to the Term Loan (as hereinafter defined),  the Company's bank acquired
a security  interest in the Company's patent  portfolio.  The bank has agreed to
subordinate  its interest to licensees of the Company if certain  conditions are
met.

Competition
-----------

There are several companies,  universities,  research teams and scientists, both
private  and   governmentsponsored,   which  engage  in  research  similar,   or
potentially similar, to that performed by the Company. Many of such entities and
associations  have far greater financial  resources,  larger research staffs and
more extensive  physical  facilities  than the Company.  These  competitors  may
succeed in their  research and  development of products which are more effective
than any developed by the Company and may be more successful than the Company in
their  production  and  marketing  of such  products.  The Company is not aware,
however,  of any  product  currently  being  marketed  which is  similar  to the
Company's  proposed  anti-tumor  agent,  ONCONASE.  A search by the  Company  of
scientific literature reveals no published information which would indicate that
others are  currently  employing  its methods or  producing  such an  anti-tumor
agent.  There are several  chemotherapeutic  agents  currently used to treat the
forms of cancer which ONCONASE is being used to treat. There can be no assurance
that ONCONASE will prove to be as safe and as effective as currently  used drugs
or that new  treatments  will not be  developed  which are more  effective  than
ONCONASE.

Employees
---------

As of September 23, 1996,  Alfacell employed thirteen persons, of whom nine were
engaged  in  research  and  development  activities  and four  were  engaged  in
administration and management.  The Company has five employees who hold Ph.D. or
M.D.  degrees.  All of the Company's  employees  are covered by  confidentiality
agreements.  Alfacell  considers  relations  with its employees to be very good.
None  of  the  Company's  employees  are  covered  by  a  collective  bargaining
agreement.

Environmental Matters
---------------------

The Company's operations are subject to comprehensive regulation with respect to
environmental,  safety and similar  matters by the United  States  Environmental
Protection  Agency  ("EPA") 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 the Company  expands or
changes its  existing  operations  or  proposes  any new  operations,  it may be
required to obtain additional or amended permits or authorizations.  The Company
spends time,  effort and funds in operating its 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 the Company.  The principal regulatory
requirements and matters known to the Company requiring or potentially requiring
capital expenditures by the Company do not appear likely, individually or in the
aggregate,  to  have  a  material  adverse  effect  on the  Company's  financial
condition.  The Company  believes that it is in compliance with all current laws
and regulations.

Item 2.  PROPERTIES.
--------------------

The  Company  owns  no  real  property.   The  Company   subleases  a  total  of
approximately 12,600 square feet in an industrial and office building located in
Bloomfield,  New Jersey.  The Company  subleases its facility  under a five year
operating sublease which was due to expire October 31, 1993, but was extended to
November 11, 1996 at a reduced annual rental obligation commencing April 1, 1993
of $66,000.  In addition to the basic rent,  the Company is obligated to pay its
pro rata share of increases in municipal real estate taxes

                                        6

<PAGE>



and utilities over the base year 1988. The Company  expects to lease its current
facility  directly  from the  owners  of the  building  upon  expiration  of its
sublease in November 1996. An agreement in principle has been reached,  however,
there can be no  assurance  that such lease  will be  consummated.  The  Company
believes that the facility is sufficient for its current needs.

Item 3.  LEGAL PROCEEDINGS.
-------  ------------------

None.

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

None.

                                     Part II

Item 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
-------  ---------------------------------------------------------

The  Company's  Common Stock is traded under the symbol  "ACEL".  At the present
time, the Company's  Common Stock is quoted on the Bulletin  Board. On September
23, 1996, the high bid and low asked  quotations for the Company's  Common Stock
were $4-1/2 and $4-3/4,  respectively.  As of  September  23,  1996,  there were
approximately 1,551 stockholders of record of the Company's Common Stock.

The following  table sets forth the range of high and low closing bid quotations
obtained  from the  National  Quotation  Bureau for the Common Stock for the two
fiscal  years  ended July 31,  1995 and 1996.  These  quotes are  believed to be
representative of inter-dealer quotations,  without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.

                                                          High             Low
Year Ended July 31, 1995:
         First Quarter                                3-1/8           1-5/8
         Second Quarter                               4               1
         Third Quarter                                4               1-1/2
         Fourth Quarter                               2-3/4           1-3/8

Year Ended July 31, 1996:
         First Quarter                                6-13/16         2-1/8
         Second Quarter                               5-5/8           2-7/8
         Third Quarter                                5-3/8           3-3/16
         Fourth Quarter                               5-7/8           3-7/8


The Company has paid no dividends on its Common  Stock since its  inception  and
does not plan to pay  dividends on its Common Stock in the  foreseeable  future.
Any  earnings  which the  Company  may  realize  will be retained to finance the
growth of the Company.  Pursuant to the term loan  agreement  dated May 31, 1993
entered  into  between  the  Company  and  its  bank  in  connection   with  the
restructuring  of the Company's  bank loan,  as amended in October 1995,  for so
long as any portion of the note  representing  the  indebtedness  under the loan
agreement  remains  unpaid,  the Company may not declare or pay any dividends or
set apart any sum for the payment of dividends without the prior written consent
of the bank.

                                        7

<PAGE>



Item 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.
         ----------------------

Results of Operations
---------------------

Fiscal Years Ended July 31, 1996, 1995 and 1994
-----------------------------------------------

Revenues
--------

The  Company  is a  development  stage  company  as  defined  in  the  Financial
Accounting  Standards Board's Statement of Financial Accounting Standards No. 7.
As such,  the Company is devoting  substantially  all of its present  efforts to
establishing  a new business and  developing  new drug  products.  The Company's
planned principal operations of marketing and/or licensing of new drugs have not
commenced and,  accordingly,  no significant revenue has been derived therefrom.
The Company continues to marshall all its productive and financial  resources to
proceed  with its  development  of ONCONASE and as such has not had any sales in
fiscal  1996,  1995 and 1994.  Investment  income for fiscal  1996 was  $184,250
compared to $14,992 for fiscal 1995, an increase of $169,258.  This increase was
due to higher balances of cash and cash equivalent. Investment income for fiscal
1995 was $14,992 compared to $6,064 for fiscal 1994, an increase of $8,928.

Research and Development
------------------------

Research  and  development  expense for fiscal 1996 was  $2,189,000  compared to
$1,206,000  for fiscal 1995,  an increase of $983,000 or 82%.  This increase was
primarily due to an increase in costs  associated  with  manufacturing  clinical
supplies of ONCONASE and costs in support of on-going clinical trials, including
the initial  Phase III  clinical  trial for  pancreatic  cancer and the Phase II
clinical trial for malignant mesothelioma.

Research  and  development  expense for fiscal 1995 was  $1,206,000  compared to
$1,114,000  for fiscal  1994,  an increase of $92,000 or 8%. This  increase  was
primarily  due  to an  increase  in  consulting  fees  for  the  preparation  of
chemistry,  manufacturing and clinical submissions to the FDA in preparation for
Phase III  clinical  trials and a write-off  of  previously  capitalized  patent
costs,  which were  partially  offset by a  decrease  in  non-cash  compensation
expense attributable to the amortization of expense related to stock awards made
in prior years to the Company's Chief Executive Officer and Medical Director.

General and Administrative
--------------------------

General and  administrative  expense for fiscal  1996 was  $807,000  compared to
$664,000  for fiscal  1995,  an increase of $143,000 or 22%.  This  increase was
primarily  due to an  increase  in  public  relations  activities  and legal and
accounting fees.

General and  administrative  expense for fiscal  1995 was  $664,000  compared to
$903,000  for fiscal  1994,  a decrease of $239,000 or 26%.  This  decrease  was
primarily  due to a  decrease  over  the same  period  last  year in  legal  and
accounting fees and a decrease in non-cash  compensation expense attributable to
the  amortization of expenses related to stock awards made in prior years to the
Company's Chief Executive Officer.



                                        8

<PAGE>



Interest
--------

Interest  expense  for fiscal 1996 was  $131,000  compared to $144,000 in fiscal
1995, a decrease of $13,000 or 9%. The decrease in fiscal 1996 was primarily due
to the conversion of convertible  subordinated  debentures to common stock and a
reduction in short-term loans payable over the prior period.

Interest  expense  for fiscal 1995 was  $144,000  compared to $223,000 in fiscal
1994, a decrease of $79,000 or 35%.  The  decrease in fiscal 1995 was  primarily
due to the conversion of convertible subordinated debentures to common stock.


Net Loss
--------

The Company has incurred net losses  during each year since its  inception.  The
net loss for fiscal 1996 was $2,942,000 as compared to $1,993,000 in fiscal 1995
and $2,234,000 in fiscal 1994.  The cumulative  loss from the date of inception,
August 24,  1981,  to July 31,  1996  amounted to  $40,391,000.  Such losses are
attributable to the fact that the Company is still in the development  stage and
accordingly  has not derived  sufficient  revenues from operations to offset the
development stage expenses.

Liquidity and Capital Resources
-------------------------------

During fiscal 1996, the Company had a net increase in cash of  $5,783,000.  This
increase resulted from net cash provided by financing activities of $10,184,000,
primarily  from  private  placements  of common  stock and  warrants to purchase
common stock and proceeds from the exercise of stock options  offset by net cash
used in  operating  activities  of  $3,405,000  and net cash  used in  investing
activities of $996,000 principally due to the purchase of marketable securities.
Total cash resources,  including marketable securities, as of July 31, 1996 were
$8,131,000  compared to $1,398,000 at July 31, 1995. In addition,  approximately
$2,200,000  was  received  in the  aggregate  in August  and  September  1996 in
connection with option exercises.

The Company's term loan  agreement with its bank,  (the "Term Loan") was amended
effective as of October 1, 1995. Among other things,  the amendment extended the
maturity  date of the Term Loan from May 31, 1996 to August 31, 1997,  which has
enabled the Company to reflect  substantially the entire principal amount of the
Term Loan outstanding as of July 31, 1996 as long-term debt. This is the primary
reason for the significant  decrease in current  liabilities as of July 31, 1996
compared to July 31, 1995 and the  significant  increase in long-term debt as of
July 31, 1996  compared to July 31, 1995. It is estimated  that the  outstanding
balance on August 31, 1997 will be $1,369,000. At that time, the Company intends
to  refinance  the Term Loan or use its current  cash  resources  to pay off the
unpaid balance. However, there can be no assurance that the Company will be able
to successfully conclude a refinancing.

Pursuant to the terms of the Term Loan, without the bank's consent,  the Company
is prohibited from incurring any additional  indebtedness except as follows: (i)
additional  indebtedness  to the bank,  (ii)  indebtedness  having a priority of
payment  which is  expressly  junior to and  inferior in right of payment to the
prior  payment in full to the bank,  (iii)  indebtedness  arising as a result of
obligations of the Company over the life of its leases which in the aggregate do
not exceed  $200,000,  and (iv) unsecured  indebtedness  arising in the ordinary
course of the Company's business which at no time exceeds  $1,452,000.  Pursuant
to the Term Loan, the Company is required to make  prepayments to the extent its
gross  revenues  exceed  certain  levels.  Pursuant to a pledge  agreement,  the
Company's Chief Executive Officer has pledged the shares of the Company's Common
Stock  owned by her to secure the  repayment  of the Term Loan.  The pledgor may
from time to time request  that the bank release a portion of the pledged  stock
when market conditions are favorable in order to permit the

                                        9

<PAGE>



sale of such stock  whereupon the proceeds  will be used to make payments  under
the pledgor's  term loan  agreement  with the bank.  The Term Loan prohibits the
issuance of any shares,  or right to purchase any shares of the Company's  stock
if the  result of such  issuance  would be to  decrease  the ratio of the market
value of such pledged stock to the aggregate outstanding debt of the Company and
the Company's Chief Executive Officer, as pledgor, to the bank, below 1:1.

The  Company's  continued  operations  will  depend  on  its  ability  to  raise
additional   funds   through  a  combination   of  equity  or  debt   financing,
collaborative  agreements,  strategic alliances and revenues from the commercial
sale  of  ONCONASE.  The  Company  is  in  discussions  with  several  potential
collaborative  partners  for further  development  and  marketing  of  ONCONASE,
however  there  can  be  no  assurance  that  any  such   arrangements  will  be
consummated.  In addition, the Company expects that its cash needs in the future
will increase due to the on-going clinical trials. The Company believes that its
cash on hand, including marketable securities,  as of July 31, 1996 coupled with
the proceeds  from the exercise of stock  options in August and  September  1996
will be sufficient to meet its anticipated cash needs for approximately the next
two years.  To date, a significant  portion of the Company's  financing has been
through private placements of common stock and warrants,  the issuance of common
stock for  services  rendered,  debt  financing  and  financing  provided by the
Company's Chief Executive Officer. The Company's long-term liquidity will depend
on its ability to raise substantial  additional funds. There can be no assurance
that such funds will be available to the Company on acceptable terms, if at all.

The Company's working capital and capital  requirements may depend upon numerous
factors  including  the  progress  of the  Company's  research  and  development
programs, the timing and cost of obtaining regulatory approvals,  and the levels
of resources that the Company  devotes to the development of  manufacturing  and
marketing capabilities.

In October 1995,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 123,  Accounting for
Stock-Based  Compensation.  This statement  establishes an alternative method of
accounting  for  stock-based  compensation  awarded to employees,  such as stock
options  granted by the  Company to  employees.  SFAS No. 123  provides  for the
recognition of  compensation  expense based on the fair value of the stock-based
award,  but  allows  companies  to  continue  to measure  compensation  costs in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to  Employees.  Companies  electing to retain this method must make
pro forma disclosures of net income and earnings per share as if the fair market
value based method had been  applied.  The Company  plans to continue to use the
APB No. 25 which does not require the Company to record compensation expense for
the stock options it awards to employees. In 1997, the Company will disclose the
pro  forma  effect of the fair  value  method  on 1996 and 1997 net  income  and
earnings per share.

Item 7.  FINANCIAL STATEMENTS.
-------  ---------------------

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




                                       10

<PAGE>



Item 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.
         ---------------------

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,  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.


                                    Part III


The information  required by Item 9 - Directors,  Executive Officers,  Promoters
and Control Persons;  Compliance with Section 16(a) of the Exchange Act; Item 10
- Executive  Compensation;  Item 11 - Security  Ownership of Certain  Beneficial
Owners  and  Management;  and  Item  12  -  Certain  Relationships  and  Related
Transactions is incorporated  into Part III of this Annual Report on Form 10-KSB
by  reference  to the  Company's  Proxy  Statement  for the  Annual  Meeting  of
Stockholders scheduled to be held on November 21, 1996.




                                       11

<PAGE>



Item 13. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------

(a)      Exhibits (numbered in accordance with Item 601 of Regulation S-B).
<TABLE>
<CAPTION>

                                                                                                         Exhibit No.
                                                                                                              or
  Exhibit                                                                                               Incorporation
    No.                                             Item Title                                           by Reference
   -----                                            ----------                                           ------------
       <C>     <S>                                                                                           <C>
       3.1     Certificate of Incorporation                                                                   *
       3.2     By-Laws                                                                                        *
       3.3     Amendment to Certificate of Incorporation                                                      #
       4.1     Form of Convertible Debenture                                                                  **
      10.1     Form of Stock and Warrant Purchase Agreements used in private placements
               completed in April 1996 and June 1996                                                          ##
      10.2     Lease, as amended - 225 Belleville Avenue, Bloomfield, New Jersey                              **
      10.3     Amendment to Lease - 225 Belleville Avenue, Bloomfield, New Jersey                             #
      10.4     Term Loan Agreement dated as of May 31, 1993 by and between the
               Company and First  Fidelity  Bank,  N.A., New Jersey                                           **
      10.5     Term Note dated as of May 31, 1993 issued by the Company to First
               Fidelity Bank, N.A., New Jersey                                                                **
      10.6     Patent Security Agreement dated as of May 31, 1993 by and between the
               Company and First Fidelity Bank, N.A., New Jersey                                              **
      10.7     Security Agreement dated as of May 31, 1993 by and between the Company
               and First Fidelity Bank, N.A., New Jersey                                                      **
      10.8     Subordination Agreement dated as of May 31, 1993 by and among the
               Company,  Kuslima  Shogen,  and First  Fidelity  Bank,  N.A., New
               Jersey                                                                                         **
      10.9     Amendment to  Subordination  Agreement  dated as of May 31, 1993 by and
               among the Company, Kuslima Shogen, and First Fidelity Bank, N.A., New
               Jersey dated June 30, 1995                                                                     #
      10.10    Form of Stock Purchase Agreement and Certificate used in connection with
               various private placements                                                                    ***
      10.11    Form of Stock and Warrant Purchase Agreement and Warrant Agreement
               used in Private Placement completed on March 21, 1994                                         ***
      10.12    The Company's 1993 Stock Option Plan and Form of Option Agreement                            *****
      10.13    Debt Conversion Agreement dated March 30, 1994 with Kuslima Shogen                            ****
      10.14    Accrued Salary Conversion Agreement dated March 30, 1994 with Kuslima
               Shogen                                                                                        ****
      10.15    Accrued Salary Conversion Agreement dated March 30, 1994 with
               Stanislaw Mikulski                                                                            ****
      10.16    Debt Conversion Agreement dated March 30, 1994 with John Schierloh                            ****
      10.17    Option Agreement dated March 30, 1994 with Kuslima Shogen                                     ****
      10.18    Amendment No. 1 dated June 20, 1994 to Option Agreement dated March
               30, 1994 with Kuslima Shogen                                                                  ****
      10.19    Amendment No. 1 dated June 17, 1994 to Term Loan Agreement dated May
               31, 1993 between Kuslima Shogen and First Fidelity Bank, N.A., New
               Jersey                                                                                        ****
      10.20    Second Pledge Agreement dated June 17, 1994 by and among the Company,
               Kuslima Shogen and First Fidelity Bank, N.A., New Jersey                                      ****

</TABLE>

                                       12


<TABLE>
<CAPTION>



     <C>       <S>                                                                                         <C>   
      10.21    Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
               March 30, 1994 with Kuslima Shogen                                                           *****
      10.22    Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated
               March 30, 1994 with Stanislaw Mikulski                                                       *****
      10.23    Form of Stock and Warrant Purchase Agreement and Warrant Agreement
               used in Private Placement completed on September 13, 1994                                      +
      10.24    Form of Subscription Agreements and Warrant Agreement used in Private
               Placements closed in October 1994 and September 1995.                                          #
      10.25    Amendment No. 1 dated as of October 1,1995 to Term Loan Agreement
               dated as of May 31, 1993 by and between the Company and First Fidelity
               Bank, N.A. New Jersey                                                                         ####
      10.26    Amended and Restated Term Note dated as of October 1, 1995 issued by the
               Company to First Fidelity Bank, N.A. New Jersey                                               ####
      10.27    Warrant dated as of October 1, 1995 issued by the Company to First
               Fidelity Bank, N.A. New Jersey                                                                ####
      21.1     Subsidiaries of Registrant                                                                     **
      23.1     Consent of KPMG Peat Marwick LLP                                                              ###
      27.1     Financial Data Schedule                                                                       ###
      99.1     Factors to Consider in Connection with Forward-Looking Statements                             ###

</TABLE>

*         Previously filed as exhibit to the Company's  Registration Statement
          on Form  S-18  (File  No.  2-79975-  NY) and  incorporated  herein  by
          reference thereto.

**       Previously  filed as exhibits to the  Company's  Annual  Report on Form
         10-K for the year  ended  July 31,  1993  and  incorporated  herein  by
         reference thereto.

***      Previously filed as exhibits to the Company's  Quarterly Report on Form
         10-QSB for the quarter ended January 31, 1994 and  incorporated  herein
         by reference thereto.

****     Previously filed as exhibits to the Company's  Quarterly Report on Form
         10-QSB for the quarter ended April 30, 1994 and incorporated  herein by
         reference thereto.

*****    Previously  filed as  exhibits  to the  Company's  Registration
         Statement  Form SB-2 (File No.  33-76950) and  incorporated  herein by
         reference thereto.

+        Previously filed as exhibits to the Company's Registration Statement
         on Form SB-2 (File No. 33-83072) and incorporated  herein by reference
         thereto.

++       Previously filed as exhibits to the Company's  Quarterly Report on Form
         10-QSB for the quarter ended April 30, 1995 and incorporated  herein by
         reference thereto.

####     Previously  filed  as  exhibits  to the  Company's  Registration
         Statement on Form SB-2 (File No. 33- 63341) and incorporated herein by
         reference thereto.


                                       13

<PAGE>



#        Previously  filed as exhibits to the  Company's  Annual  Report on Form
         10-KSB  for the year  ended July 31,  1995 and  incorporated  herein by
         reference thereto.

##       Previously  files  as  exhibits  to  the  Company's   Registration
         statement on Form SB-2 (File No. 333- 11575) and  incorporated  herein
         by reference thereto.

###      Filed herewith.

(b)      Reports on Form 8-K.

         On July 16, 1996,  the Company filed with the  Securities  and Exchange
         Commission a Current Report on Form 8-K dated June 11, 1996 (Item 5).



                                       14

<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 18, 1996                   By:      /s/ KUSLIMA SHOGEN
                                                         Kuslima Shogen, Chief
                                                         Executive Officer

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 18, 1996                            /s/ KUSLIMA SHOGEN
                                                         Kuslima Shogen, Chief
                                                         Executive Officer
                                                        (Principal Executive
                                                         Officer) and Chairman
                                                        of the Board

Dated:   October 18, 1996                            /s/ MICHAEL C. LOWE
                                                         Michael C. Lowe,
                                                         President and Director

Dated:   October 18, 1996                            /s/ GAIL E. FRASER
                                                         Gail E. Fraser, Chief
                                                         Financial Officer, Vice
                                                         President of Finance,
                                                        (Principal Financial
                                                         Officer and Principal 
                                                         Accounting Officer) 
                                                         and Director

Dated:   October 18, 1996                           /s/ STANISLAW M. MIKULSKI
                                                    Stanislaw M. Mikulski, M.D.,
                                                    Executive Vice President 
                                                    and Director


Dated:   October 18, 1996                            /s/ ALLEN SIEGEL
                                                         Allen Siegel, D.D.S., 
                                                         Director


Dated:   October 18, 1996                            /s/ ALAN BELL
                                                         Alan Bell, Director


Dated:   October 18, 1996                            /s/ ROBERT R. HENRY
                                                      Robert R. Henry, Director

                                       15

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)



                                      Index

                                                                          Page

Independent Auditors' Report of KPMG Peat Marwick LLP.......................F-2
Independent Auditors' Report of Armus, Harrison & Co. ......................F-3


      Financial Statements:
           Balance Sheets - July 31, 1996 and 1995..........................F-5
           Statements of Operations - Years ended July 31, 1996, 1995
             and 1994 and the Period from August 24, 1981 (Date of
             Inception) to July 31, 1996....................................F-6
           Statement of Stockholders' Equity (Deficiency) - Period from
            August 24, 1981 (Date of Inception) to July 31, 1996............F-7
           Statements of Cash Flows - Years ended July 31, 1996, 1995
            and 1994 and the Period from August 24, 1981 (Date of
            Inception) to July 31, 1996....................................F-11
           Notes to Financial Statements - Years ended July 31, 1996,
            1995 and 1994 and the Period from August 24, 1981
            (Date of Inception) to July 31, 1996...........................F-14




                                       F-1

<PAGE>










                          Independent Auditors' Report


The Stockholders and Board of Directors
Alfacell Corporation:


We have  audited the  accompanying  balance  sheets of Alfacell  Corporation  (a
development  stage  company)  as of July 31,  1996  and  1995,  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, 1996 and the period
from August 24,  1981 (date of  inception)  to July 31,  1996.  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  (a  development
stage  company) for the period from August 24, 1981 (date of  inception) to July
31, 1992 were audited by other  auditors  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  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit 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 (date of  inception)  to July 31,  1996 of the  amounts for the
period from August 24, 1981 (date of  inception) to July 31, 1992, on the report
of other auditors, the financial statements referred to above present fairly, in
all  material  respects,  the  financial  position  of Alfacell  Corporation  (a
development  stage company) as of July 31, 1996 and 1995, and the results of its
operations  and its cash  flows for each of the years in the  three-year  period
ended July 31, 1996 and the period from August 24, 1981 (date of  inception)  to
July 31, 1996 in conformity with generally accepted accounting principles.





                                                     /s/ KPMG PEAT MARWICK LLP
                                                         KPMG Peat Marwick LLP

Short Hills, New Jersey
September 24, 1996

                                       F-2

<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, 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.





                         REPORT OF INDEPENDENT AUDITORS


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.

                                       F-3

<PAGE>




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.

The  accompanying  financial  statements  have been  prepared on a going concern
basis which  contemplates  the  realization  of assets and the  satisfaction  of
liabilities  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 of the
Notes to 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 of  classification  of  liabilities  that might be
necessary should the Company be unable to continue its existence.

                                                   -------------------------
                                                     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-4

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

<TABLE>
<CAPTION>

                                 Balance Sheets

                             July 31, 1996 and 1995

                                     ASSETS                                           1996                1995
                                     ------                                           ----                ----
<S>                                                                                   <C>                    <C>

Current assets:
         Cash and cash equivalents                                             $     6,431,442    $         648,027
         Marketable securities                                                       1,700,000              750,000
         Loan receivable, related party                                                112,250                  -
         Prepaid expenses                                                               63,850               38,607
                                                                                        ------           ----------
                  Total current assets                                               8,307,542            1,436,634
                                                                                     ---------            ---------
Property and equipment, net of accumulated depreciation and
  amortization of $688,325 in 1996 and $666,261 in 1995                                127,930              104,301
                                                                                       -------              -------

Other assets:
         Deferred debt costs, net                                                       20,362               31,500
         Other                                                                          31,877               43,735
                                                                                    ----------           ----------
                                                                                        52,239               75,235
                                                                                       -------           ----------

                  Total assets                                                 $     8,487,711    $       1,616,170
                                                                                    ==========            =========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
                 -------------------------------------------------


Current liabilities:
         Current portion of long-term debt                                     $        86,936    $       1,602,974
         Loans and interest payable, related party                                         -                138,638
         Accounts payable                                                              189,536              183,222
         Accrued payroll and expenses, related parties                                     -                414,996
         Accrued expenses                                                              162,213              101,777
                                                                                   -----------          -----------
                  Total current liabilities                                            438,685            2,441,607

Long-term debt, less current portion                                                 1,398,760                7,129
                                                                                     ---------          -----------
                  Total liabilities                                                  1,837,445            2,448,736
                                                                                     ---------            ---------


Commitments and contingencies Stockholders' equity (deficiency):
         Preferred stock, $.001 par value.  Authorized and unissued,
          1,000,000 shares at July 31, 1996 and 1995                                    -                  -
         Common stock $.001 par value.  Authorized 25,000,000 shares;
          issued and outstanding 13,859,209 shares in 1996 and
          10,319,187 shares in 1995                                                     13,859               10,319
         Capital in excess of par value                                             47,023,529           36,262,427
         Common stock to be issued, 89,634 shares in 1996 and 139,080
          shares in 1995                                                               258,335              343,808
         Subscription receivable, 89,634 shares in 1996                               (254,185)                  -
         Deficit accumulated during development stage                              (40,391,272)         (37,449,120)
                                                                                   ------------        ------------
                                                                                     6,650,266             (832,566)
                  Total stockholders' equity (deficiency)                                     
                                                                                   
                  Total liabilities and stockholders' equity (deficiency)      $     8,487,711  $         1,616,170
                                                                                   --------------      ------------

See accompanying notes to financial statements.

</TABLE>


                                       F-5

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)




                            Statements of Operations

                         Years ended July 31, 1996, 1995
                            and 1994, and the Period
                              from August 24, 1981
                      (Date of Inception) to July 31, 1996

<TABLE>
<CAPTION>

                                                                August 24,
                                                                     1981
                                                                  (date of
                                                                 inception)
                                                                     to
                                                                  July 31,
                                                                    1996       1996             1995              1994
                                                                    ----       ----             ----              ----
<S>                                                             <C>            <C>              <C>              <C>

Revenues:
         Sales                                            $      553,489        -                  -                -
         Investment income                                       385,254      184,250           14,992            6,064
         Other income                                             60,103        -                6,000              -
                                                               -----------    ----------       -------              -----
                                                                 998,846      184,250           20,992            6,064
                                                               -----------    -----------      -------             -------

Costs and expenses:
         Cost of sales                                           336,495        -                  -                -
         Research and development                             22,559,390    2,188,890        1,205,523        1,114,455
         General and administrative                           15,705,782      806,962          664,435          903,350
         Interest:
                  Related parties                              1,033,960        1,801           14,982           74,221
                  Others                                       1,754,491      128,749          129,175          148,466
                                                               ----------     ----------      ----------       ---------
                                                              41,390,118    3,126,402        2,014,115        2,240,492
                                                               ----------     ---------       ---------        ---------

                           Net loss                       $  (40,391,272)  (2,942,152)      (1,993,123)      (2,234,428)
                                                              ==========      =========        =========       =========

         Loss per common share                 $                  (7.58)         (.25)            (.21)            (.26)
                                                          ==============   =============    =============     ==========

Weighted average number of shares
outstanding                                                   5,327,000    11,969,000        9,598,000        8,466,000
                                                            ===========       ===========       ==========   ==========

See accompanying notes to financial statements.

</TABLE>



                                       F-6

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 1996

<TABLE>
<CAPTION>
                                                                              Common Stock              Capital in         Common   
                                                                          -------------------------     excess of       stock to be 
                                                                           Number of                    par value          issued   
                                                                            Shares              Amount                              
                                                                                                                                    
                                                                                                                                    
<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 services                              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         - 



                                                                                  Deficit    Subscription   Deferred   Total stock- 
                                                                                accumulated   Receivable    compen-     holders'    
                                                                                  during                    sation,      equity     
                                                                                development                 restricted  (deficiency)
                                                                                  stage                     stock                  
                                                                                  -----                     -----                  
                                                                                
Issuance of shares to officers and stockholders for equipment, research and
      development, and expense reimbursement                                        --          -              -        213,700
Issuance of shares for organizational legal services                                --          -              -          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)


                                   (Continued)

</TABLE>


                                       F-7

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


            Statement of Stockholders' Equity (Deficiency), Continued



<TABLE>
<CAPTION>
                                                                              Common Stock              Capital in         Common   
                                                                          -------------------------     excess of       stock to be 
                                                                           Number of                    par value          issued   
                                                                            Shares          Amount                                  
                                                                                                                                    
                                                                                                                                    
<S>                                                                             <C>            <C>           <C>             <C>    

Balance at July 31, 1986 (brought forward)                                  2,933,052         2,933     6,849,112            - 

Exercise of warrants at $10.00 per share                                       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 at $3.00 per share                                        170,000           170       509,830            - 
Issuance of shares for litigation settlement                                   12,500            12        31,125            - 
Exercise of warrants at $7.06 per share                                        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 at $3.00 per share                                   133,333           133       399,867            - 
Sale of shares to private investors                                           105,840           106       419,894            - 
Exercise of options at $3.50 per share                                          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 $3.00 - $3.50 per share                                105,989           106       345,856            - 
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 at $5.00 per share                                   100,000           100       499,900            - 
Amortization of deferred compensation, restricted stock                          --            --            --              - 
Net loss                                                                         --            --            --              - 
                                                                          -----------   -----------   -----------            -
Balance at July 31, 1990 (carried forward)                                  6,799,829         6,800    23,699,631




                                                                           Deficit    Subscription      Deferred        Total stock-
                                                                          accumulated   Receivable       compen-        holders'    
                                                                            during                      sation,         equity      
                                                                          development                  restricted     (deficiency) 
                                                                             stage                       stock                   
                                                                             -----                       -----                   
                                                                                
Balance at July 31, 1986 (brought forward)                                 (7,198,714)      --            --            (346,669)

Exercise of warrants at $10.00 per share                                         --         --            --             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 at $3.00 per share                                           --         --            --             510,000
Issuance of shares for litigation settlement                                     --         --            --              31,137
Exercise of warrants at $7.06 per share                                          --         --            --             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)

Sale of shares for litigation settlement                                         --         --            --           1,074,838
Conversion of debentures at $3.00 per share                                      --         --            --             400,000
Sale of shares to private investors                                              --         --            --             420,000
Exercise of options at $3.50 per share                                           --         --            --               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)

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 $3.00 - $3.50 per share                                   --         --            --             345,962
Sale of shares to private investors                                              --         --            --             355,080
Issuance of shares under employment agreement                                    --         --      (3,750,000)             --
Conversion of debentures at $5.00 per share                                      --         --            --             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 (carried forward)                                       --      (20,889,091)     --          (5,920,516)


                                   (Continued)

</TABLE>


                                       F-8

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


            Statement of Stockholders' Equity (Deficiency), Continued


<TABLE>
<CAPTION>
                                                                         Common Stock              Capital in         Common    
                                                                      -------------------------     excess of       stock to be  
                                                                    Number of                        par value          issued    
                                                                    Shares        Amount                                       
                                                                                                                                    
                                                                                                                                    
<S>                                                                <C>            <C>                    <C>             <C>        

Balance at July 31, 1990 (brought forward)                         6,799,829         6,800               23,699,631           --   

Exercise of options at $6.50 per share                                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 $3.50 per share                                 1,000             1                    3,499           --   
Sale of shares to private investors                                   70,731            71                  219,829           --   
Conversion of debentures at $5.00 per share                           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 share 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 at $2.75 per share to $6.00 per share       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           --   
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 (carried forward)                         9,124,681         9,125               33,680,954        50,000



                                                                    Deficit    Subscription    Deferred                 Total stock-
                                                                  accumulated   Receivable     compen-                  holders'    
                                                                    during                     sation,                  equity      
                                                                  development                  restricted               (deficiency)
                                                                    stage                       stock                    
                                                                    -----                       -----                    
                                                                    <C>           <C>          <C>                      <C>         
                                                                 
Balance at July 31, 1990 (brought forward)                       (20,889,091)     -            (5,920,516)              (3,103,176)

Exercise of options at $6.50 per share                                  --        -                --                      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)

Exercise of options at $3.50 per share                                  --        -                --                        3,500
Sale of shares to private investors                                     --        -                --                      219,900
Conversion of debentures at $5.00 per share                             --        -                --                      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 share 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 at $2.75 per share to $6.00 per share          --        -                --                   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
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 (carried forward)                       (35,455,997)     -             (58,500)               (1,774,418)


                                   (Continued)
</TABLE>


                                       F-9

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


            Statement of Stockholders' Equity (Deficiency), Continued



<TABLE>
<CAPTION>
                                                               Common Stock              Capital in         Common     
                                                           -------------------------     excess of       stock to be   
                                                            Number of                    par value          issued     
                                                             Shares           Amount                                        
                                                                                                                       
                                                                                                                                 
<S>                                                         <C>              <C>      <C>              <C>          
Balance at July 31, 1994 (brought forward)                  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 at $2.27 - $2.50 per share                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 at $2.50 - $3.87 per share                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
                                                          ===========   ===========   ===========   ===========



                                                              Deficit    Subscription    Deferred        Total stock- 
                                                            accumulated   Receivable     compen-           holders'    
                                                              during                     sation,           equity     
                                                            development                  restricted       (deficiency)
                                                              stage                       stock                  
                                                              -----                       -----                  
                                                            

Balance at July 31, 1994 (brought forward)                (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 at $2.27 - $2.50 per share                   --             --             --          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 at $2.50 - $3.87 per share                   --             --             --        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
                                                          ===========    ===========    ===========    ===========




See accompanying notes to financial statements.

</TABLE>


                                      F-10

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


                            Statements of Cash Flows

                         Years ended July 31, 1996, 1995
                          and 1994, and the Period from
                                 August 24, 1981
                      (Date of Inception) to July 31, 1996



<TABLE>
<CAPTION>
                                                                        August 24,
                                                                        1981 (date
                                                                        of incep-
                                                                        tion) to
                                                                        July 31,
                                                                           1996          1996           1995            1994
                                                                       ------------   -----------    -----------     -----------
<S>                                                                       <C>            <C>            <C>            <C>     

Cash flows from operating activities:
  Net loss                                                            $(40,391,272)   (2,942,152)    (1,993,123)     (2,234,428)
  Adjustments to reconcile net loss to net cash used in
      operating activities:
      Gain on sale of marketable securities                                (25,963)             -              -               -
      Depreciation and amortization                                       1,047,229        69,236         69,699          75,157
      Loss on disposal of property and equipment                             18,926             -              -               -
      Noncash operating expenses                                          4,887,961       116,950          4,800          58,350
      Amortization of deferred compensation                              11,442,000             -         58,500         265,000
      Amortization of organization costs                                      4,590             -              -               -
      Changes in assets and liabilities:
        Increase in loan receivable, related party                        (112,250)     (112,250)              -               -
        Increase (decrease) in prepaid expenses                            (63,850)      (25,243)         30,060        (13,091)
        (Increase) decrease in other assets                                   4,307      (24,176)         39,877         (1,723)
        Increase (decrease) in loans and interest payable,
        related party                                                       744,539     (138,638)       (65,085)           5,306
        Increase (decrease) in accounts payable                             266,801         6,314      (152,538)        (61,388)
        Increase (decrease) in accrued payroll and expenses,
        related parties                                                   2,348,145     (414,996)        256,731         386,246
        Increase (decrease) in accrued expenses                             703,726        60,436         48,944        (10,318)
                                                                       ------------   -----------    -----------     -----------
           Net cash used in operating activities                        (19,125,111)   (3,404,519)    (1,702,135)     (1,530,889)
                                                                       ------------   -----------    -----------     -----------

Cash flows from investing activities:
      Purchase of marketable securities                                 (1,990,420)     (950,000)      (750,000)       (251,209)
      Proceeds from sale of marketable equity securities                    316,383             -        251,209               -
      Purchase of property and equipment                                (1,041,880)      (45,693)       (31,879)        (13,660)
      Patent costs                                                         (97,841)             -         -             (37,251)
                                                                       ------------   -----------    -----------     -----------

           Net cash used in investing
             activities                                                 (2,813,758)     (995,693)      (530,670)       (302,120)
                                                                       ------------   -----------    -----------     -----------

                                   (Continued)

</TABLE>


                                      F-11

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


                       Statement of Cash Flows, Continued


<TABLE>
<CAPTION>

                                                                August 24,
                                                                1981 (date
                                                                of incep-
                                                                 tion) to
                                                                 July 31,
                                                                   1996               1996               1995             1994
                                                                   ----               ----               ----             -----
<S>                                                                   <C>                 <C>            <C>                 <C>

Cash flows from financing activities:
  Proceeds from short-term borrowings                          $   849,500                   -            -               169,500
  Payment of short-term borrowings                                (623,500)                  -            -                -
  Increase (decrease) in loans payable, related party,
    net                                                          2,628,868                  -            -                175,798
  Proceeds from bank debt and other long-term debt,
    net of deferred debt costs                                   2,406,683             29,540            17,595             4,028
  Reduction of bank debt and long-term debt                     (1,435,559)          (153,947)          (89,827)          (67,285)
  Proceeds from common stock to be issued                          433,358             44,350           339,008            50,000
  Proceeds from issuance of common stock and warrants,
   net                                                          21,668,561          8,605,484         1,974,202         1,710,791
  Proceeds from exercise of stock options                        2,095,400          1,658,200           437,200             -
  Proceeds from issuance of convertible debentures                 347,000                  -             -                 -
  (Decrease) increase in bank overdraft                             -                       -             -                (7,169)
                                                              --------------      -------------      ------------    --------------
      Net cash provided by financing
      activities                                                 28,370,311         10,183,627         2,678,178        2,035,663
                                                              --------------      -------------      ------------    --------------

      Net increase (decrease) in cash                             6,431,442          5,783,415           445,373          202,654
Cash and cash equivalents at beginning of period                    -                  648,027           202,654           -
                                                              --------------      -------------      ------------    --------------

Cash and cash equivalents at end of period                  $     6,431,442          6,431,442           648,027          202,654
                                                              ==============      =============      ============    ==============

Supplemental disclosure of cash flow information -
  interest paid                                             $     1,489,728            130,224           129,477          144,322
                                                              ==============      =============      ============    ==============
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        $     2,945,000                  -            -             1,575,000
                                                              ==============      =============      ============    ==============

  Conversion of short-term borrowings to common stock       $       226,000                  -            44,000          182,000
                                                              ==============      =============      ============    ==============

                                   (Continued)



</TABLE>


                                      F-12

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)


                       Statement of Cash Flows, Continued


<TABLE>
<CAPTION>

                                                                                 August 24,
                                                                                 1981 (date
                                                                                 of incep-
                                                                                  tion) to
                                                                                  July 31,
                                                                                    1996            1996      1995          1994
                                                                                   ---------     -------     -------     ----------

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

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

Conversion of accrued interest to stock options                                $     142,441           -        -           142,441
                                                                                ============     =======     =======     ==========

Conversion of accounts payable to common stock                                 $      77,265           -      77,265         -
                                                                                ============     =======     =======     ==========

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 upon the conversion of convertible subordinated
   debentures, other                                                           $     127,000           -        -           127,000
                                                                                ============     =======     =======     ==========


</TABLE>

      See accompanying notes to financial statements.



                                      F-13

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)

                          Notes to Financial Statements

                    Years ended July 31, 1996, 1995 and 1994
                       and the Period From August 24, 1981
                      (Date of Inception) to July 31, 1996


(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  anticancer  drugs and
      antiviral  agents.  To date,  the Company is in the  initial  stage of its
      operations  and  has  not  yet  engaged  in  any  significant   commercial
      activities.

      The Company is a  development  stage  company as defined in the  Financial
      Accounting  Standards Board's 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.

      Basis of Financial Statements
      -----------------------------

      As shown in the financial statements,  the Company has reported net losses
      of $2,942,152,  $1,993,123, and $2,234,428 for the fiscal years ended July
      31, 1996,  1995 and 1994,  respectively.  The loss from date of inception,
      August 24, 1981, to July 31, 1996 amounts to $40,391,272.

      The  Company's  continued  operations  will depend on its ability to raise
      additional  funds  through a  combination  of  equity or debt  financings,
      collaborative  agreements,  strategic  alliances  and  revenues  from  the
      commercial  sale of  ONCONASE.  The  Company  believes  that  its  current
      resources (including proceeds from the exercise of stock options in August
      and  September  1996,  see  note  6),  will  be  sufficient  to  meet  its
      anticipated  cash needs for the next two  years.  To date,  a  significant
      portion of the Company's  financing has been through private placements of
      common stock and warrants to purchase common stock, the issuance of common
      stock for services rendered,  debt financing and financing provided by the
      Company's Chief Executive Officer.

      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.


                                   (Continued)

                                      F-14

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

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

      Property and Equipment
      ----------------------

      Property and equipment is stated at cost.  Depreciation  is computed using
      the straightline  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.

      Marketable Securities
      ---------------------

      The Company's  investments in marketable securities are available for sale
      to fund  current  operations.  The  Company,  subject to changes in market
      conditions,  does not intend to hold all  marketable  securities  to their
      maturity dates and,  accordingly,  the portfolio has been  classified as a
      current  asset.  The  portfolio  primarily  consists  of  U.S.  government
      securities and preferred equity securities.  The market value approximates
      cost due to the variable  interest rate and short term reset period. As of
      July 31, 1996 and 1995, there were no unrealized holding gains or losses.

      Patents
      -------

      Costs related to patents are expensed  when  incurred.  Previously,  costs
      related to approved  patents were capitalized and were amortized using the
      straightline  method over the life of the patent,  usually 17 years.  As a
      result  of this  change  in  policy,  the  Company  wrote-off  $76,807  of
      capitalized patent costs during the fiscal year ended July 31, 1995.

      Deferred Debt Costs
      -------------------

      Deferred debt costs associated with the Company's long-term debt are being
      amortized  using  the  straightline  method  over  the  life  of the  debt
      agreement.  Accumulated  amortization  as of July  31,  1996  and 1995 was
      $137,588 and $90,416 respectively.

      Research and Development
      ------------------------

      Research and development costs are expensed as incurred.


                                   (Continued)
                                      F-15

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

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

      Fair Value of Financial Instruments
      -----------------------------------

      The fair value of the long-term debt  approximates  its carrying value due
      to its short term  maturity and the  interest  rate  approximates  current
      market rates.  For all other financial  instruments,  their carrying value
      approximates fair value due to the short maturity of those instruments.

      Net Loss Per Share
      ------------------

      Net loss per  share is based on the  weighted  average  number  of  common
      shares outstanding during the period and shares to be issued at the end of
      the period.  Common stock equivalents are not included in the computations
      since the effect would be antidilutive for all periods presented.

(2)   Property and Equipment
---   ----------------------

      Property and equipment consists of the following at July 31:




                                                 1996          1995
                                                 ----          ----

      Laboratory equipment                $        593,408      587,443
      Office equipment                             169,871      130,143
      Leasehold improvements                        52,976       52,976
                                                  --------     --------
                                          $        816,255      770,562
                                                   =======      =======



                                   (Continued)
                                      F-16

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(3)   Long-term Debt
---   --------------

      Long-term debt consists of the following at July 31:
<TABLE>
<CAPTION>

                                                                                               1996             1995
                                                                                               ----             ----
<S>                                                                                            <C>                 <C>   

  First Union  National  Bank, New Jersey,  payable in monthly  installments  of
    $16,213,  including  principal  and  interest of 8.375%  which  commenced on
    October 1, 1993.  The term loan was amended  effective as of October 1, 1995
    to extend the maturity date from May 31, 1996 to August 31, 1997. Subject to
    other  provisions,  the entire  unpaid  amount  shall be due and  payable on
    August 31, 1997. The note is secured by  substantially  all of the assets of
    the Company and contains restrictive covenants including restrictions on the
    payment of dividends to  stockholders.  The Chief  Executive  Officer of the
    Company  has  personally   guaranteed  the  note  and  has  pledged  certain
    additional  collateral  including  substantially all of the shares of common
    stock and options to purchase common
    stock of the Company owned by her.                                         $          1,453,290     $        1,577,049

Notes payable, interest at 6.3%-10.4%, maturing through
    January 1997, secured by equipment.                                                       4,822                 33,054

  Note payable in monthly installments of $729, including principal and interest
  commencing April 1996 and each month
  thereafter until May 2000, secured by equipment.                                           27,584                      -
                                                                                      -------------            -----------
                                                                                          1,485,696              1,610,103

Less current portion                                                                         86,936              1,602,974
                                                                                      -------------            -----------
                                                                               $          1,398,760     $            7,129
                                                                                       ============          =============

</TABLE>

      Principal  maturities  for the next  four  years  ending  July 31,  are as
follows:

1997                $          86,936
1998                        1,377,651
1999                           14,382
2000                            6,727
                           ----------
                    $       1,485,696



                                   (Continued)
                                      F-17

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(4)   Related Party Transactions
---   --------------------------

      Loans and Interest Payable, Related Parties
      -------------------------------------------

      From time to time, the Company's Chief Executive Officer has advanced sums
      of money to the Company in the form of unsecured  obligations,  payable on
      demand.  The following table provides a summary of the related-party  loan
      activity involving the Chief Executive Officer at July 31:

<TABLE>
<CAPTION>
                                                                               1996           1995
                                                                           ------------   -------------
<S>                                                                             <C>                 <C>

      Loans and interest payable, related party at beginning
                of year                                                   $    138,638  $      203,723
      Reduction in loan balance and interest paid                             (140,439)        (80,067)
      Accrued interest                                                           1,801          14,982
                                                                             ----------      ----------
      Loans and interest payable, related party at end of year            $      -      $      138,638
                                                                           ============      ==========

</TABLE>

      On May 1, 1994, the Company, with its bank's consent, reinstituted certain
      advances  of  $198,417  from the  Company's  Chief  Executive  Officer  as
      short-term  debt that was  previously  converted  into 102,807  options on
      March 30, 1994.  Such options were returned to the Company.  During fiscal
      year 1996 and 1995,  $139,512  and $80,067 were repaid  respectively.  The
      Company's bank has consented to allow repayment of such advances including
      interest under certain circumstances.

      During the year ended July 31, 1996,  the Company paid $414,996 to related
      parties as payment in full of accrued salaries.

      Loans Receivable, Related Party
      -------------------------------

      In July 1996, the Company advanced its Chief Executive Officer $112,250 in
      anticipation  of proceeds due her from the exercise of stock options.  The
      principal amount plus interest were repaid in full.

(5)   Leases
---   ------

      The Company  leases its facility under a five-year  operating  lease which
      was due to expire on October 31, 1993,  but has been  extended to November
      11, 1996 at a reduced annual rental  obligation  commencing April 1, 1993,
      of $66,000. In addition to the basic rent, the Company is obligated to pay
      its pro rata share of increases in real estate  taxes and  utilities  over
      the base year 1988.  Rent  expense  charged  to  operations  was  $66,000,
      $66,000, and $66,500 in 1996, 1995 and 1994, respectively.


                                   (Continued)
                                      F-18

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(5)   Leases, (Continued)
---   -------------------

      Future   minimum   lease   payments   under   noncancellable   leases  are
approximately as follows:

                                                      Operating
                                                        leases

Year ending July 31, 1997                          $    16,500
                                                        ======


      The Company expects to lease its current facility  directly from the owner
      of the  building  upon  expiration  of its sublease in November  1996.  An
      agreement  in  principle  has  been  reached;  however,  there  can  be no
      assurance that such lease will be consummated.

(6)   Stockholders' Equity (Deficiency)
---   ---------------------------------

      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 have been 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 have been 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

                                   (Continued)
                                      F-19

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(6)   Stockholders' Equity (Deficiency), (Continued)
---   ----------------------------------------------

      and 1984,  the net  proceeds to the  Company  from the  exercising  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.  As of 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 exercising of the
      warrants.

      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 shares of common
      stock were issued on November 16, 1987. The fair value of these shares has
      been 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 on 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 has been 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.

                                   (Continued)
                                      F-20

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued


(6)   Stockholders' Equity (Deficiency), (Continued)
---   ----------------------------------------------

      During the year ended July 31, 1988,  the Company issued 206,429 shares of
      common stock for payment of legal and consulting services.  The fair value
      of such shares was charged to operations.

      During  fiscal 1988,  the Company  issued 12,500 shares of common stock in
      connection  with the settlement of certain  litigation.  The fair value of
      these 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.  The
      fair value of the common stock was charged to operations.

      During the fiscal  year ended July 31,  1990,  the Company  issued  50,000
      shares  of common  stock in  connection  with the  settlement  of  certain
      litigation. The fair value of these shares 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.

      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.




                                   (Continued)
                                      F-21

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(6)   Stockholders' Equity (Deficiency), (Continued)
---   ----------------------------------------------

      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 this 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  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  year ended July 31,  1995,  322,500  options
      expired.  A total of 30,167  options  due to expire on July 31,  1995 were
      extended to July 31, 1996, their exercise price was reduced to $2.50.

      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 shares issued 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. The options expire during fiscal 1997.

      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. The warrants expire 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.



                                   (Continued)
                                      F-22

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(6)   Stockholders' Equity (Deficiency), (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 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.

      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 this
      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.

      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 expire on August 31, 1997.

                                   (Continued)
                                      F-23

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued


(6)   Stockholders' Equity (Deficiency), (Continued)
---   ----------------------------------------------

      In June 1996,  the  Company  sold in a private  placement  (the "June 1996
      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.

      On June 1996, the Company issued 10,000 five-year stock options as payment
      for services rendered. The options vested immediately and have an exercise
      price of $4.95 per share.  The Company  recorded  research and development
      expense of $28,260.

      On September 13, 1996,  the Securities  and Exchange  Commission  declared
      effective  a  registration  statement  for the offer  and sale by  certain
      stockholders  of up to 2,042,506  shares of common stock.  Of these shares
      (i) 1,722,646 were issued in several private placement transactions during
      the period  October 1995  through  April 1996 and in the June 1996 Private
      Placement,  (ii) 313,800 are issuable upon exercise of the warrants  which
      were  issued in the June 1996  Private  Placement,  and (iii)  6,060  were
      issued to one of the Company's raw material suppliers.

      Also on  September  13,  1996,  the  Securities  and  Exchange  Commission
      declared effective another  registration  statement for the offer and sale
      by certain  stockholders of up to 3,767,787  shares of common stock of the
      Company.  Of these shares (i) an aggregate of 1,951,020 shares were issued
      to the private placement  investors in the private placement  transactions
      which were completed  during the period from March 1994 through  September
      1995 (the "Earlier  Private  Placements"),  (ii) an aggregate of 1,184,451
      shares are issuable upon exercise of the warrants which were issued to the
      private placement  investors in the Earlier Private  Placements,  (iii) an
      aggregate  of  622,316  shares may be issued,  or have been  issued,  upon
      exercise of the options which were issued to the option holders in certain
      other private  transactions  and (iv) up to 10,000 shares may be issued to
      the Company's  bank upon exercise of the bank warrant issued in connection
      with the term loan amendment.

      During the fiscal year ended July 31, 1996, 207,316 shares of common stock
      were sold from  October 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.

      In August and  September  1996, a total of 576,000  shares of common stock
      were issued to related  parties  upon the exercise of stock  options.  The
      exercise price of the options was $3.87,  resulting in net proceeds to the
      Company of approximately $2.2 million.

                                   (Continued)
                                      F-24

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued


(7)   Common Stock Warrants
---   ---------------------

      The following  table  summarizes the activity of the common stock warrants
      issued in connection with the public stock offering during 1983:

                                                       Shares      Price Range
                                                       ------      -----------

Sold in public offering                                 330,000     $3.00-3.50
Sold to underwriters                                     60,000        3.00
Exercised                                               (1,165)        3.00
                                                      ---------
Outstanding at July 31, 1983                            388,835     3.00-3.50

Exercised                                             (287,566)     2.00-3.50
Expired                                                (41,269)        3.50
Issued (one-year warrants)                              288,731        6.50
Issued (two-year warrants)                              288,731       10.00
                                                      ---------
Outstanding at July 31, 1984                            637,462     3.00-10.00

Additional underwriters' warrants
  pursuant to antidilution provisions                     7,415        2.67
Exercised                                             (334,957)     2.67-10.00
Expired                                                 (4,359)        6.50
                                                      ---------
Outstanding and exercisable at July 31, 1985            305,561     2.67-10.00

Reinstated                                                2,000        6.50
Exercised                                              (21,565)     2.67-10.00
                                                      ---------
Outstanding and exercisable at July 31, 1986            285,996       10.00

Exercised                                              (14,745)       10.00
                                                      ---------
Outstanding and exercisable at July 31, 1987            271,251       10.00

Exercised                                              (63,925)      $ 7.06
                                                                       ====
Expired                                               (207,236)
                                                      ---------
Outstanding at July 31, 1988                              -
                                                      =========

      Stock Purchase Warrants
      -----------------------

      On July 28, 1988, the Board of Directors  granted stock purchase  warrants
      to acquire a maximum of 200,000  shares of common stock at $5.00 per share
      which were not exercised and expired.

      On July 23, 1991, the Board of Directors  granted stock purchase  warrants
      to purchase  200,000  shares of common stock at $5.00 per share which were
      not exercised and expired.



                                   (Continued)
                                      F-25

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(7)   Common Stock Warrants, (Continued)
---   ----------------------------------

      Warrants sold in 1994, 1995 and 1996 Private Placements
      -------------------------------------------------------

<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
                                               ===========        ============
</TABLE>


(8)   Stock Options
---   -------------

      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.  The maximum  amount  exercisable  in any one year was
      one-fifth of the options granted which  accumulated if not exercised.  The
      options  were  issuable  in such  amounts  as  determined  by the Board of
      Directors and such prices as determined by the Board of Directors,  except
      that no single  recipient  would be granted  options to purchase more than
      15,000 shares.

      The following table summarizes stock options outstanding:

                                          Shares               Price Range
                                          ------               -----------

      Granted, August 24, 1984            15,000          $           5.00
      Granted, August 1, 1985             45,000                     15.00
                                          ------
                                                            ------------------
      Subtotal                            60,000                5.00-15.00

      Cancelled                         (45,000)                5.00-15.00
                                         ------
      Outstanding, July 31, 1990          15,000                     15.00
      Expired                           (15,000)          $          15.00
                                         ------
                                                            ==================
      Outstanding, July 31, 1991           -
                                         =====



                                   (Continued)
                                      F-26

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(8)   Stock Options, (Continued)
---   --------------------------

      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                                              1,032,000       $  3.00-3.50
      Exercised                                            (170,000)             3.00
      Cancelled                                             (6,000)              3.50
                                                    ---------------         --------------
      Balance at July 31, 1988                              856,000           3.00-3.50


      Exercised                                             (1,000)              3.50
                                                    ---------------         --------------
      Balance at July 31, 1989                              855,000           3.00-3.50

      Cancelled                                            (100,000)             3.00
      Expired                                              (59,011)              3.50
      Exercised                                            (105,989)          3.00-3.50
                                                    ---------------         --------------
      Balance at July 31, 1990, 1991 and 1992               590,000           3.00-3.50

      Expired                                              (590,000)          3.00-3.50
      Granted                                               750,000              3.87
                                                    ---------------         --------------
      Balance at July 31, 1993                              750,000              3.87

      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 and 1995                   2,045,011          3.20 - 3.87

      Exercised                                            (174,000)             3.87
                                                    ---------------         --------------
      Balance at July 31, 1996                            1,871,011       $ 3.20 - 3.87
                                                    ===============         ==============

      Exercisable at July 31, 1996                        1,306,593       $ 3.20 - 3.87
                                                    ===============         ==============


</TABLE>

      The options outstanding at July 31, 1996 will expire between September 16,
1996 and March 30, 2004.


                                   (Continued)
                                      F-27

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(8)   Stock Options, (Continued)
---   --------------------------

      In connection with certain private placements, the Board of Directors have
      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                                                               126,000  $    3.97
      Exercised (included in 1989 proceeds from sale to
       private investors)                                                  (25,200)       3.97
                                                                        -----------
      Balance at July 31, 1989                                             100,800

      Granted                                                               61,720        6.50
      Exercised (included in 1990 proceeds from sale to
       private investors)                                                  (39,080)       3.97
      Expired                                                              (61,720)       3.97
                                                                        -----------
      Balance at July 31, 1990                                              61,720

      Granted                                                               45,000        6.50
      Exercised (included in 1991 proceeds from sale to
       private investors)                                                  (16,720)       6.50
      Expired                                                              (45,000)       6.50
                                                                        -----------
      Balance at July 31, 1991                                              45,000

      Granted                                                               50,000        5.00
      Expired                                                              (45,000)       6.50
                                                                        -----------
      Balance at July 31, 1992                                              50,000

      Granted (30,167 options were repriced and extended                   587,167     2.50-7.00
       as described in note 8)
      Expired                                                              (50,000)       5.00
                                                                        -----------
      Balance at July 31, 1993                                             587,167

      Granted                                                               25,000        4.00
                                                                        -----------
      Balance at July 31, 1994                                             612,167     2.50-7.00

      Expired                                                             (322,500)       3.00
                                                                        -----------
      Balance outstanding and exercisable at July 31, 1995                 289,667     2.50-7.00

      Expired                                                             (228,833)     2.50-5.00
      Exercised                                                            (35,834)       2.50
                                                                        -----------   -------------
      Balance outstanding and exercisable at July 31, 1996                  25,000   $    4.00
                                                                        ===========   =============

</TABLE>

      The  options  outstanding  at July 31,  1996 were due to  expire  and were
exercised on September 9, 1996.



                                   (Continued)
                                      F-28

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(8)   Stock Options, (Continued)
---   --------------------------

      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  shall issue awards,  options and grants.  The maximum amount of
      shares of common  stock that may be issued  pursuant to the option plan is
      2,000,000.  The per share option exercise price shall be determined by the
      Board of  Directors.  All options  and shares  issued  upon  exercise  are
      nontransferable  and  forfeitable  in the event  employment  is terminated
      within two years of the date of hire. In the event the option is exercised
      and said shares are forfeited, the Company will 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:


                                            Shares               Price Range
                                            ------               -----------

      Granted, February 14, 1989              230,000      $         5.00
      Granted, April 27, 1990                 450,000                5.00
      Granted, November 2, 1990               260,000                5.00
      Granted, April 23, 1991                 945,000                5.00
                                           ----------
                                            1,885,000
      Options issued in connection with
      share purchase                           36,365                2.75
      Expired                                (680,000)               5.00
      Cancelled                               (10,000)               5.00
                                             ----------
      Balance at July 31, 1992              1,231,365             2.75-5.00

      Expired                              (1,195,000)               5.00
      Granted                               1,575,000             3.50-5.00
                                          -----------
      Balance at July 31, 1993              1,611,365             2.75-5.00

      Expired                                 (36,365)                2.75
                                           ---------
      Balance at July 31, 1994              1,575,000             3.50-5.00

      Expired                               (945,000)             3.50-5.00
      Exercised                             (185,000)             2.27-2.50
                                          -----------
      Balance at July 31, 1995               445,000              2.50-2.68


      Exercised                             (445,000)      $      2.50-2.68
                                             -------              =========
      Balance at July 31,1996                  -
                                            ======




                                   (Continued)
                                      F-29

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(8)   Stock Options, (Continued)
---   --------------------------

      In order to induce the  exercise  of options  due to expire,  the Board of
      Directors approved the extension and repricing of certain options.  Except
      as indicated,  all options were repriced at the fair market value or above
      the common stock price at the time of extension.

<TABLE>
<CAPTION>
                                         Exercise Price
                           ------------------------------------------
                                                                         No. of Options
      No. of Options             Original             Revised               Exercised           Expiration Date
      --------------             --------             -------               ---------             ---------------
<S>                                <C>                 <C>                 <C>              <C>    
             110,000               $ 3.50              $   2.27            110,000             January 9, 1995
            *320,000                 5.00                  2.50            320,000              July 31, 1996
             200,000                 5.00                  2.68            200,000              July 31, 1996
             750,000                 3.50                  3.87            174,000           September 16, 1996
           ---------                                                       ---------
           1,380,000                                                       804,000
           =========                                                       =========

</TABLE>

      *Options  held by unrelated  parties  were  repriced  slightly  below fair
market value at time of extension.


      1993 Stock Option Plan
      ----------------------

      The Company's  Board of Directors  adopted the 1993 Stock Option Plan (the
      "Plan") in November 1993 and the stockholders ratified the plan in January
      1994.  The total number of shares of common stock  authorized for issuance
      upon exercise of options granted under the Plan is 3,000,000.

      The stock options activity is as follows:

                                                      Options      Price Range
                                                      -------      -----------

      Granted                                       1,371,750   $  2.71 - 5.00
      Granted pursuant to conversion of certain
      liabilities, related party                      331,409          3.12
                                                    ---------
      Balance at July 31, 1994                      1,703,159      2.71 - 5.00

      Granted                                         188,850      2.27 - 5.00
                                                    ---------
      Balance at July 31, 1995                      1,892,009      2.27 - 5.00

      Granted                                         296,205      2.23 - 4.95
      Exercised                                       (1,500)      3.12 - 3.51
      Expired                                         (6,500)      3.12 - 3.51
                                                   ---------       -----------
      Balance at July 31, 1996                      2,180,214   $  2.23 - 5.00
                                                    =========      ===========

      Exercisable at July 31, 1996                  1,263,661   $  2.23 - 5.00
                                                    =========      ===========


      These options become exercisable over five years starting at various dates
      from date of grant, up to one year after the grant date.

      The options  outstanding  at July 31, 1996 will expire from  November  10,
      1997 to February 26, 2006.

                                   (Continued)
                                      F-30

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(8)   Stock Options, (Continued)
---   --------------------------

      On August 1, 1996,  the Company hired a new President who was granted five
      year options under the 1993 Stock Option Plan to purchase  650,000  shares
      of common stock at an exercise  price of $4.70 per share,  the fair market
      value of the common stock on the date of grant. Of these options,  100,000
      shares vested immediately,  75,000 shares vest each year for the next four
      years  starting  one year from the date of the grant and 250,000 vest upon
      Food and Drug Administration approval of ONCONASE.


(9)   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                                                  Amount
     ended                               Fair                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
                  ======                ======                =======


      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 a stock cannot 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                                                        Amount
     ended                                  Fair                    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 cancelled as a
           result of the recipient's termination.


                                   (Continued)
                                      F-31

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(9)   Stock Grant and Compensation Plans, (Continued)
---   -----------------------------------------------

      Alfacell Corporation 1989 Stock Plan
      ------------------------------------

      Under the 1989 Stock Plan,  one  million  shares of the  Company's  common
      stock have been  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 10).  In  addition,  the 1989  Stock Plan
      provides for the issuance of one million  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 and be
      ineligible to receive an award or option.

      During  the fiscal  years  ended,  the  following  awards and grants  were
      authorized under the 1989 Stock Plan:

     Year                                           Amount
     ended                        Fair                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 1995 or 1996.

(10)  Income Taxes
----  ------------

      The Company accounts for income taxes under the provisions of Statement of
      Financial  Accounting  Standards  No. 109,  "Accounting  for Income Taxes"
      (SFAS No. 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.








                                   (Continued)
                                      F-32

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(10)  Income Taxes, (Continued)
----  -------------------------

      At July 31, 1996 and 1995, the tax effects of temporary  differences  that
      give rise to the deferred tax assets are as follows:
<TABLE>
<CAPTION>
                                                                              1996                      1995
                                                                              ----                      ----
<S>                                                                             <C>                      <C>
Deferred tax assets:
      Excess of book over tax depreciation                      $            23,141           $         26,223
      Deferred compensation                                                       -                    165,999
      Other                                                                   1,032                      7,993
      Federal and state net operating loss carry forwards                10,312,089                  8,926,338
      Research and experimentation and investment tax
       credit carry forwards                                                479,287                    473,287
                                                                           ---------                 ---------
Total gross deferred tax assets                                          10,815,549                  9,599,840

Valuation allowance                                                     (10,815,549)                (9,599,840)
                                                                            ----------              ---------
Net deferred tax assets                                         $              -           $              -
                                                                           =============             ========

</TABLE>


      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.

      At July 31,  1996,  the  Company  has  federal  net  operating  loss carry
      forwards  of  approximately  $27,660,000  that expire in the years 1997 to
      2011. The Company also has investment tax credit carry forwards of $63,076
      and research  and  experimentation  tax credit carry  forwards of $416,211
      that expire in the years 1998 to 2011.  Ultimate  utilization/availability
      of such net operating losses and credits may be significantly curtailed if
      a significant change in ownership occurs in accordance with the provisions
      of the Tax Reform Act of 1986.

(11)  Other Financial Information
----  ---------------------------

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

                                                     1996              1995
                                                     ----              ----

            Payroll and payroll taxes      $           90,347    $   27,539
            Interest                                   10,496        10,196
            Professional fees                          23,581        23,800
            Other                                      37,789        40,242
                                                       ------       -------
                                           $          162,213    $  101,777
                                                      =======       =======



                                   (Continued)
                                      F-33

<PAGE>



                              ALFACELL CORPORATION
                          (A Development Stage Company)




                    Notes to Financial Statements, Continued

(11)  Other Financial Information, (Continued)
----  ----------------------------------------

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

                                           1996                  1995
                                           ----                  ----

Insurance                        $       31,092       $        31,607
NIH research                              4,824                     -
Other                                    27,934                 7,000
                                         ------                 -----
                                 $       63,850       $        38,607
                                         ======                ======


(12)  Commitments and Contingencies
----  -----------------------------

      On July 23, 1991, the Board of Directors  authorized the Company to pay to
      the Chief  Executive  Officer of the Company 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,  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 patent.  If the
      Company  manufactures and markets its own drugs, then the Company will pay
      an amount  equal to 5% of gross  sales from any  products  sold during the
      life of the patents.  In addition,  the agreement provides for a reduction
      of any  indebtedness  to the  Chief  Executive  Officer  in the  amount of
      $200,000  upon the Company  entering  into a licensing  agreement  for its
      principal product.

      The  Company  has product  liability  insurance  coverage in the amount of
      $6,000,000  for clinical  trials.  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.

(13)  Research and Development Agreement
----  ----------------------------------

      In November  1992,  the Company  entered into a  Cooperative  Research and
      Development  Agreement  (CRADA)  with the  National  Institutes  of Health
      (NIH).  In accordance with this CRADA,  the NIH will perform  research for
      the Company on potential uses for its drug technology.  During the term of
      this research and  development  agreement,  which expires in January 1999,
      the Company is obligated to pay approximately $5,000 per month to the NIH.
      Total research and development expenses under this arrangement amounted to
      $64,000,  $64,000, and $43,000 during the years ended July 31, 1996, 1995,
      and 1994, respectively.

      In August 1995, the Company  entered into a CRADA with the National Cancer
      Institute  (NCI).  In  accordance  with this CRADA,  the NCI will  perform
      research for the Company on potential uses for its drug technology. During
      the term of this  research and  development  agreement,  which  expires in
      August  1998,  the Company is obligated  to pay  approximately  $4,825 per
      month to the NCI.  Total  research  and  development  expenses  under this
      arrangement  amounted  to $58,000  during  the fiscal  year ended July 31,
      1996.

                                      F-34