UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

      For the fiscal year ended July 31, 2006

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

      For the transition period from __________ to __________


                                     0-11088
                             Commission file number

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

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

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

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

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

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 par value
                                (Title of Class)

      Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|

      Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|

      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

<PAGE>

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,  and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|

      Indicate  by check mark  whether  the  registrant  is a large  accelerated
filer,  an accelerated  filer or a  non-accelerated  filer.  See  definitions of
"accelerated  filer" and "large accelerated filer" in Rule 12b-2 of the Exchange
Act.  (Check  one):   Large   Accelerated   Filer  |_|  Accelerated   Filer  |X|
Non-accelerated Filer |_|

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

      The aggregate market value of the common stock, par value $.001 per share,
held by  non-affiliates  based upon the  reported  last sale price of the Common
Stock on January 31, 2006 was approximately $121,102,000. As of October 10, 2006
there  were  44,405,717  shares of common  stock,  par  value  $.001 per  share,
outstanding.

                       Documents Incorporated by Reference

      Portions of the  registrant's  definitive  Proxy  Statement for the Annual
Meeting of the  Stockholders  scheduled  to be held on January 25,  2007,  to be
filed  with the  Commission  not  later  than 120 days  after  the  close of the
registrant's  fiscal year, have been  incorporated by reference,  in whole or in
part,  into Part III Items 10, 11, 12, 13 and 14 of this  Annual  Report on Form
10-K.

<PAGE>

<TABLE>
<CAPTION>
                                            Table of Contents

  PART I                                                                                            Page
                                                                                                    ----

<S>                  <C>                                                                            <C>
         Item  1.    Business                                                                          4

         Item 1A     Risk Factors                                                                     18

         Item  2.    Properties                                                                       25

         Item  3.    Legal Proceedings                                                                26

         Item  4.    Submission of Matters to a Vote of Security Holders                              26

  PART II

         Item  5.    Market for Registrant's Common Equity, Related Stockholder Matters
                     and Issuer Purchases of Equity Securities                                        26

         Item  6.    Selected Financial Data                                                          27

         Item  7.    Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                                              28

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

         Item  8.    Financial Statements and Supplementary Data                                      33

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

         Item 9A.    Controls and Procedures                                                          34

         Item 9B.    Other Information                                                                36

  PART III

         Item 10.    Directors and Executive Officers of the Registrant                               36

         Item 11.    Executive Compensation                                                           36

         Item 12.    Security Ownership of Certain Beneficial Owners
                     and Management and Related Stockholder Matters                                   36

         Item 13.    Certain Relationships and Related Transactions                                   36

         Item 14.    Principal Accounting Fees and Services                                           36

  PART IV

         Item 15.    Exhibits and Financial Statement Schedules                                       36
</TABLE>

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


                                       3
<PAGE>

All  information in this Form 10-K is as of October 12, 2006 and we undertake no
obligation to update this information.

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

Our Board of Directors has adopted a Code of Business Conduct and Ethics that is
applicable to all of our directors, officers and employees. Any material changes
made to our Code of Business Conduct and Ethics or any waivers granted to any of
our  directors and  executive  officers  will be publicly  disclosed by filing a
current report on Form 8-K within five business days of such material  change or
waiver. We make the Code of Business Conduct and Ethics available on our website
at  www.alfacell.com.  Although our Board of  Directors  has not  established  a
nominating committee,  our formal nominating procedures will be described in our
definitive  proxy statement for the Annual Meeting of Stockholders to be held on
January 25, 2007. In addition, copies of our Code of Business Conduct and Ethics
are available to our shareholders upon request either by contacting our Investor
Relations  Department  at  973-748-8082  or through an e-mail  request  from our
website at www.alfacell.com.

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

                                     Part I

Item 1. BUSINESS.

Overview

      Alfacell  Corporation is a biopharmaceutical  company primarily engaged in
the  discovery  and  development  of a new  class of  therapeutic  drugs for the
treatment of cancer and other  pathological  conditions.  Our  proprietary  drug
discovery and development program consists of novel therapeutics which are being
developed from amphibian ribonucleases (RNases).  RNases are biologically active
enzymes that split RNA molecules.  RNases are enzymes which play important roles
in nature,  among which is the development of an organism and in cell functions.
RNA is an essential  bio-chemical  cellular component necessary to support life.
There are various types of RNA, all of which have specific functions in a living
cell.  They  help  control  several  essential  biological  activities,  namely;
regulation of cell  proliferation,  maturation,  differentiation and cell death.
Therefore,  they are ideal  candidates for the development of  therapeutics  for
cancer  and  other  life-threatening  diseases,  including  HIV  and  autoimmune
diseases,  that require  anti-proliferative  and apoptotic,  or programmed  cell
death, properties.  ONCONASE(R),  the trademark name of our lead investigational
drug candidate, is a novel amphibian ribonuclease,  unique among the superfamily
of  pancreatic  ribonuclease  isolated  from the eggs of the Rana  pipiens  (the
Northern  Leopard frog).  Ranpirnase,  the generic name of  ONCONASE(R),  is the
smallest known protein  belonging to the superfamily of pancreatic  ribonuclease
and has been shown, on a molecular level, to re-regulate the unregulated  growth
and  proliferation of


                                       4
<PAGE>


cancer cells. Unlike most anti-cancer agents that attack all cells regardless of
phenotype (malignant versus normal) and cause severe toxicities,  ONCONASE(R) is
not an indiscriminate  cytotoxic drug (cell killing agent).  ONCONASE(R) affects
primarily  exponentially  growing  malignant  cells,  with  activity  controlled
through unique and specific molecular mechanisms.  An extensive compendium of in
vitro (in  cells),  in vivo (in  animals)  and  clinical  data in man shows that
ONCONASE(R) destroys cancer cells.

      ONCONASE(R),  is currently being evaluated as a treatment for unresectable
(inoperable)  malignant  mesothelioma,  a rare cancer  primarily  affecting  the
pleura  (lining of the lungs)  usually  caused by  exposure to  asbestos,  in an
international, centrally randomized, confirmatory Phase IIIb registration trial.
The first part of the trial  which  compared  ONCONASE(R)  alone to  doxorubicin
alone, has been completed. The second confirmatory part of the trial is ongoing.

      The confirmatory Phase IIIb registration trial is designed to evaluate the
efficacy,  safety  and  tolerability  of  the  combination  of  ONCONASE(R)  and
doxorubicin as compared to doxorubicin  alone. The primary endpoint of the trial
is overall  survival.  The first interim  analysis  results of the  confirmatory
registration  trial,  based on one third of the required  events (deaths) of the
study, have been reported. The overall median survival time (MST) demonstrated a
trend favoring the  ONCONASE(R) + doxorubicin  treatment  group (12 months) over
the doxorubicin  group (10 months).  A two month  improvement in median survival
had  previously  been  observed in the Treatment  Target Group  ("TTG")  (n=104)
analysis from the completed  Phase III single agent study that favored  patients
treated with  ONCONASE(R)  alone compared with patients treated with doxorubicin
(11.6 months vs. 9.6 months). The Company's Phase IIIb confirmatory registration
trial was  designed  based on the  conclusions  drawn from the TTG  analysis but
powered to reach a  statistically  significant  difference  in MST  between  the
ONCONASE(R) + doxorubicin treatment group and the doxorubicin treatment group at
316 events.  These  results of the first  interim  analysis of the  confirmatory
registration  trial were  consistent with the results from the first part of the
trial  and  were  the  basis  for our  decision  to  continue  the  confirmatory
registration trial.

      We have also conducted  other  randomized and  non-randomized  trials with
patients with advanced stages of solid tumors in other types of cancers.

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

      In December  2002,  we received  Fast Track  Designation  from the FDA for
ONCONASE(R) for the treatment of malignant mesothelioma.  Fast Track Designation
is an FDA program designed to expedite the review of new drugs that are intended
to  treat  serious  or life  threatening  conditions  and that  demonstrate  the
potential to address unmet medical needs.

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

      The FDA, EMEA and TGA  designations  for ONCONASE(R) may serve to expedite
its regulatory review,  assuming the clinical trials yield a positive result for
malignant  mesothelioma.  The efficacy and safety of  ONCONASE(R)  for malignant
mesothelioma will ultimately be determined by these regulatory agencies based on
the  results of our  ongoing  clinical  trial.  In the  interim,  our Fast Track
Designation  allows us to continue to have meetings and discussions with the FDA
to establish  mutually  agreed upon  parameters for the NDA to obtain  marketing
approval for ONCONASE(R),  based on the assumption that the clinical trials will
continue to yield favorable results.

      Our drug discovery program forms the basis for the development of specific
recombinant  RNases for  chemically  linking drugs and other  compounds  such as
monoclonal  antibodies,  growth factors,  etc. and gene fusion


                                       5
<PAGE>

products with the goal of targeting  various molecular  functions.  This program
provides for joint design and generation of new products with outside  partners.
We may own  these  new  products  along  with a  partner(s),  or we may grant an
exclusive license to the collaborating partner(s).

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

      The positive  results of the initial NCI studies  have been  independently
confirmed.  As a result of these findings and the conclusion of the  Cooperative
Research and Development Agreement (CRADA) between the Company and NIH, Alfacell
has entered  into a new  collaborative  agreement  with the West  German  Cancer
Center at the University of Duisburg-Essen for the development, characterization
and large-scale  production of a novel fusion protein for non-Hodgkin's lymphoma
(NHL).  The fusion  protein  consists of ONCONASE(R)  and a humanized  anti-CD22
monoclonal antibody for non-Hodgkin's  lymphoma.  The new research collaboration
involves  using a recombinant  anti-CD22  antibody  fragment that is genetically
linked to ONCONASE,  hereby creating a homogeneous product and second-generation
drug.

      This humanized single chain anti-CD22  monoclonal antibody was acquired by
the Company under a commercial  evaluation  license with the NIH in 2004.  Under
the agreement,  we received the right to evaluate  commercial  applications  for
this antibody,  such as  immunotherapeutics  derived from the combination of the
antibody  with  Alfacell's  proprietary  family of cytotoxic  RNases,  including
ONCONASE(R).

      We have also  discovered  another series of proteins,  collectively  named
amphinases that may have therapeutic  uses. These proteins are bioactive in that
they have an effect on living cells and organisms and have both  anti-cancer and
anti-viral activity.  All of the proteins  characterized to date are RNases. One
of these  compounds,  AC-03-636 has been  determined to be active against yellow
fever,  Hepatitis C and Dengue Fever.  The same  compound has been  evaluated at
Johns  Hopkins  University  in a  sustained  time  release  formulation  for the
treatment of brain tumors  (gliomas) and the manuscripts have been submitted for
publication.

      In July 2005, we entered into a research collaboration  agreement with the
Novartis Institute for Tropical Diseases for the evaluation of AC-03-636 against
Dengue fever. In August 2006, we announced new data  highlighting the definitive
antiviral  activity of AC 03-636.  The in vitro studies were  conducted  using a
cell-based infection assay based on immunodetection of the Dengue fever antigen.
The researchers found that AC 03-636 displayed  meaningful antiviral activity in
both  animal and human cell lines,  and that its potency was quite  considerable
compared to the reference  compounds.  The objectives of this collaboration have
been successfully completed.

      We are engaged in the  research,  development  and clinical  trials of our
products  both  independently  and  through  research  collaborations.  We  have
financed our operations since inception primarily through the sale of our equity
securities  and  convertible  debentures  in  registered  offerings  and private
placements.  Additionally, we have raised capital through other debt financings,
the  sale of our  tax  benefits  and  research  products,  interest  income  and
financing  received  from our Chief  Executive  Officer.  During the fiscal year
ended July 31, 2006, we received net proceeds of approximately  $12.3 million as
a result of private  placements  of common stock and  warrants and  exercises of
stock options and warrants.  These  proceeds will be used for general  corporate
purposes and, most  importantly,  to support our strategic  plan,  including the
anticipated  filing  of  an  NDA  of  ONCONASE(R)   (ranpirnase)  for  malignant
mesothelioma, assuming satisfactory results from the ongoing clinical trial, the
expansion of the  ONCONASE  oncology  franchise,  and the  development  of other
pipeline  products.  We have incurred losses since inception and to date we have
not consummated any licensing or marketing  agreements for ONCONASE(R) or any of
our early stage drug candidates.


                                       6
<PAGE>

      Research and Development Programs

      Research  and  development  expenses  for the fiscal  years ended July 31,
2006, 2005, and 2004 were $5,230,000, $5,082,000, and $3,353,000,  respectively.
Our research and  development  programs  focus  primarily on the  development of
therapeutics from amphibian ribonucleases. Because ribonucleases have been shown
to  be  involved  in  the   regulation   of  cell   proliferation,   maturation,
differentiation and programmed cell death, known as apoptosis, ribonucleases may
be ideal  candidates for the  development of  therapeutics  for the treatment of
cancer  and other  life-threatening  diseases,  including  viral and  autoimmune
diseases that require anti-proliferative and pro-apoptotic properties.

Technology Platform and Pipeline

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

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

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

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

Apoptosis

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

ONCONASE(R) (ranpirnase) Pro-Apoptotic Mechanisms

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

      Many cancer  cells  become  resistant  to most types of cancer  treatment,
including   chemotherapy,   radiation  and  monoclonal  antibodies.   Overcoming
resistance  to  chemotherapy  remains  a major  challenge  for  cancer  therapy.


                                       7
<PAGE>

ONCONASE(R)  has been shown to  overcome  multiple  drug  resistance  or prevent
resistance to cancer therapy, thereby dramatically increasing the sensitivity of
certain cancer cells to chemotherapy and radiation therapy.

Clinical Studies and Preclinical Development of ONCONASE(R)

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

      ONCONASE(R)  has been  tested in Phase I, Phase II and Phase III  clinical
trials in more than 40 cancer  centers  across the United  States since 1991, in
Europe since 2000 and recently, in Canada,  Australia,  New Zealand,  Mexico and
Turkey.

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

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

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

In Vitro Studies

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

      o     ONCONASE(R) + tamoxifen in pancreatic, prostate, and ovarian tumor;
      o     ONCONASE(R) + cisplatin  for non-small  cell lung cancer and ovarian
            cancer;
      o     ONCONASE(R) + carboplatin for non-small cell lung cancer;
      o     ONCONASE(R) + lovastatin in  pancreatic,  ovarian,  and two types of
            non-small cell lung cancer;
      o     ONCONASE(R) + vincristine in colorectal cancer and ;
      o     ONCONASE(R)  +  doxorubicin  in breast  cancer  including  resistant
            variants, malignant mesothelioma.

In Vivo Anti-Cancer Activity

      ONCONASE(R) as a Single Agent

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

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


                                       8
<PAGE>

      o     In  mice  bearing  M109  Madison  lung  carcinoma  cells,   time  to
            appearance of ascites and survival were  significantly  prolonged in
            ONCONASE(R)  treated  animals  as  compared  to  controls.   Several
            histologically  (microscopic  study of cells)  confirmed  cures were
            noted.
      o     In nude mice bearing human DU-145 prostate  carcinoma and pancreatic
            ASPC-1 carcinoma, ONCONASE(R) inhibited growth of the subcutaneously
            transplanted tumor.
      o     In several mouse tumor  models,  ONCONASE(R)  not only  demonstrated
            direct  anti-tumor  activity but also  increased  the  potential for
            other drugs to penetrate  the tumor tissue as well as increased  the
            tumor sensitivity to radiation therapy.

      ONCONASE(R) in Combination With Other Agents

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

      o     vincristine
      o     doxorubicin
      o     tamoxifen
      o     cisplatin
      o     carboplatin

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

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

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

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

Clinical Trials

Onconase(R) Phase III Randomized Clinical Trials (Malignant Mesothelioma)

      We are  currently  conducting  a  two-part  Phase  III  clinical  trial of
ONCONASE(R)  as a treatment  for malignant  mesothelioma.  The first part of the
Phase III trial compares  ONCONASE(R)  alone to doxorubicin.  The second part of
the trial  compares  the  combination  of  ONCONASE(R)  and  doxorubicin  versus
doxorubicin  alone.  The  trial  is  an  international,   centrally  randomized,
confirmatory Phase IIIb registration trial. The first part of the trial has been
completed. The second confirmatory part of the trial is ongoing.


                                       9
<PAGE>

      The confirmatory Phase IIIb registration trial is designed to evaluate the
efficacy,  safety  and  tolerability  of  the  combination  of  ONCONASE(R)  and
doxorubicin as compared to doxorubicin  alone. The primary endpoint of the trial
is overall  survival.  The first interim  analysis  results of the  confirmatory
registration  trial,  based on one third of the required  events (deaths) of the
study, have been reported. The overall median survival time (MST) demonstrated a
trend favoring the  ONCONASE(R) + doxorubicin  treatment  group (12 months) over
the doxorubicin  group (10 months).  A two month  improvement in median survival
had  previously  been  observed in the Treatment  Target Group  ("TTG")  (n=104)
analysis from the completed  Phase III single agent study that favored  patients
treated with  ONCONASE(R)  alone compared with patients treated with doxorubicin
(11.6 months vs. 9.6 months). The Company's Phase IIIb confirmatory registration
trial was  designed  based on the  conclusions  drawn from the TTG  analysis but
powered to reach a  statistically  significant  difference  in MST  between  the
ONCONASE(R) + doxorubicin treatment group and the doxorubicin treatment group at
316 events.  These  results of the first  interim  analysis of the  confirmatory
registration  trial were  consistent with the results from the first part of the
trial  and  were  the  basis  for our  decision  to  continue  the  confirmatory
registration trial.

            Other results of this interim analysis included:

            o     At  one-year,   47%  of  the  ONCONASE  +  doxorubicin-treated
                  patients were alive as compared to 36% of the patients treated
                  with doxorubicin.
            o     Of the patients evaluable for clinical response, more ONCONASE
                  +  doxorubicin  -treated  patients  showed  evidence  of tumor
                  regression or  stabilization  of disease (minimum of 3 months)
                  and there was a  seven-month  difference in the MST (17 vs. 10
                  months)  for  the  ONCONASE  +   doxorubicin   group  vs.  the
                  doxorubicin group.
            o     The analysis of safety data  revealed that ONCONASE when given
                  with  doxorubicin  did not  increase the number or severity of
                  known  doxorubicin-associated  side effects. The most frequent
                  side  effects  reported  for both  treatment  groups  included
                  nausea,  fatigue and  alopecia.  The incidence of these events
                  was comparable for both treatment groups.

      Since  ONCONASE(R)  has  Fast  Track  Designation  for  the  treatment  of
malignant  mesothelioma  patients,  we continue to have meetings and discussions
with the FDA to  establish  mutually  agreed  upon  parameters  for the New Drug
Application,  or NDA, to seek marketing  approval for ONCONASE(R),  assuming the
Phase III  clinical  trial  yields  favorable  results.  We have  completed  the
chemistry,  manufacturing  and controls (CMC) section of the NDA and will submit
it after completion of a review by external regulatory consultants.

Phase III Single Agent Results(Malignant Mesothelioma)

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


                                       10
<PAGE>

treated  patients  with an MST 23.3 versus 14.4 months for  doxorubicin  treated
patients as well as the 2 year survival rates of 40% for  ONCONASE(R) and 9% for
doxorubicin.  Preliminary results were presented at the 2000 American Society of
Clinical Oncologists, or ASCO, meeting.

Phase II Single Agent Results (Malignant Mesothelioma)

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

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

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

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

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

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

ONCONASE(R)  Clinical Trials (Other Tumor Types)

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

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


                                       11
<PAGE>

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

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

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

Research and Development Pipeline of Targeted Therapies

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

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

Ranpirnase Conjugates and Fusion Proteins

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

      We have  established a number of scientific  collaborations  with academic
and research institutions  including the NCI. The objective of our collaboration
with the NCI is to develop new therapeutic  applications for  ONCONASE(R).  This
collaboration  has produced RN321, a conjugate of ranpirnase,  with a monoclonal
antibody  that  demonstrated  activity  in  treating  non-Hodgkin's  lymphoma in
preclinical studies. The relative benefit in killing targeted tumor cells versus
non-targeted   healthy  cells,  or  the  therapeutic   index,  is  greater  than
200,000-fold  with  this  conjugate.   These  "proof-of-concept"   results  were
presented  at the 2002  Ribonuclease  Meeting  in Bath,  England.  The  positive
results of the initial  NCI  studies  have been  independently  confirmed.  As a
result of these  findings and the  conclusion  of the  Cooperative  Research and
Development  Agreement (CRADA) between the Company and NIH, Alfacell has entered
into a new  collaborative  agreement  with the West German  Cancer Center at the
University  of  Duisburg-Essen   for  the  development,   characterization   and
large-scale  production  of a novel fusion  protein for  non-Hodgkin's  lymphoma
(NHL).  The fusion  protein  consists of ONCONASE(R)  and a humanized  anti-CD22
monoclonal


                                       12
<PAGE>

antibody for non-Hodgkin's  lymphoma.  The new research  collaboration  involves
using a recombinant  anti-CD22  antibody fragment that is genetically  linked to
ONCONASE, hereby creating a homogeneous product and second-generation drug.

      This humanized single chain anti-CD22  monoclonal antibody was acquired by
Alfacell under a commercial  evaluation  license with the NIH in 2004. Under the
agreement,  we received the right to evaluate  commercial  applications for this
antibody,  such  as  immunotherapeutics  derived  from  the  combination  of the
antibody  with  Alfacell's  proprietary  family of cytotoxic  RNases,  including
ONCONASE(R).

      Other conjugates under preclinical  evaluation with outside  collaborators
include a variety of uniquely  designed  versions of  ONCONASE  and  amphinases.
These compounds  target the EGF receptors and  neo-vascularization  (tumor blood
vessel formation) which have potential clinical  application in a broad spectrum
of solid tumors.

Novel Amphibian Ribonucleases

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

      These  products  are  currently  undergoing  preclinical  testing  by  the
National  Institute  of Allergy  and  Infectious  Diseases  against  various RNA
viruses and by outside collaborators. One of these compounds, AC-03-636 has been
determined to be active in yellow fever,  Hepatitis C and Dengue fever. The same
compound has been  evaluated at Johns  Hopkins  University  in a sustained  time
release  formulation  for  the  treatment  of  brain  tumors  (gliomas)  and the
manuscripts have been submitted for publication.

      In July 2005, we entered into a research collaboration  agreement with the
Novartis Institute for Tropical Diseases for the evaluation of AC-03-636 against
Dengue fever. In August 2006, the Company  announced new data  highlighting  the
definitive  antiviral activity of AC 03-636. The in vitro studies were conducted
using a cell-based  infection assay based on immunodetection of the Dengue fever
antigen.  The researchers  found that AC 03-636 displayed  meaningful  antiviral
activity  in both  animal and human cell  lines,  and that its potency was quite
considerable  compared  to the  reference  compounds.  The  objectives  of  this
collaboration have been successfully completed.

Research Collaborations

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

      The results of the following preclinical research have been presented at a
number  of  scientific  meetings  as well  as  have  either  been  published  or
manuscripts submitted for publication.

Evaluation Of ONCONASE(R) As A Radiation Enhancer

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


                                       13
<PAGE>

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

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

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

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

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

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

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

      Moreover, the NIH, Division of AIDS also screened ONCONASE(R) for anti-HIV
activity.  ONCONASE(R)  demonstrated highly significant anti-HIV activity in the
monocyte/macrophage,   or  anti-viral,  system.  Ranpirnase  may  inhibit  viral
replication at several points during the life cycle of HIV,  including its early
phases.  Ranpirnase  may inhibit  replication of all different  HIV-1  subtypes.
These  properties  of  ranpirnase  are  particularly  relevant  in  view  of the
extremely high and exponentially  increasing rate of mutations of HIV that occur
during  infection,  and which are primarily  responsible  for the development of
resistance to several currently available anti-viral drugs. At present, over 50%
of  clinical  isolates  of HIV  are  resistant  to both  reverse  transcriptase,
mechanisms  which combat viral  replication,  and protease  inhibitors  drugs, a
class of anti-viral  drugs. An additional 25%, while being sensitive to protease
inhibitors, are resistant to RT inhibitor(s) drugs, reverse transcriptase drugs.

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

Commercial Collaborations

We have signed confidentiality  agreements and are presently in discussions with
a number of companies regarding the U.S. and/or  international  marketing rights
for ONCONASE(R) and other related products in our pipeline.

Raw Materials

         The major  active  ingredient  derived  from  leopard  frog eggs is the
protein  ranpirnase.  We have sufficient egg inventory on hand to produce enough
ONCONASE(R)  to complete  the current  Phase III  clinical  trial for  malignant


                                       14
<PAGE>

mesothelioma and supply ONCONASE(R) for up to two years after commercialization.
In  addition,  we can  successfully  produce  ranpirnase  by  using  recombinant
technology; however, it may not be more cost effective.

Manufacturing

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

Marketing

      We expect to enter into  development  and marketing  agreements with third
parties.  We have entered into a number of  confidentiality  agreements  and are
currently  in  various  stages  of active  discussions  with  several  major and
mid-size  pharmaceutical  and  biotechnology  companies as potential  commercial
partners  for our lead product  ONCONASE(R)  and other  related  products in our
pipeline.

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

Government Regulation

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

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


                                       15
<PAGE>

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

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

Patents and Proprietary Technology

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

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

      We own the following U.S. patents:

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

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

      *We own this patent  jointly with the U.S.  Government.  Alfacell does not
pay maintenance fees to keep this patent in force.

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


                                       16
<PAGE>

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

---------------------------------------------------------------------------------------------------------------
<S>                 <C>                                                                         <C>
EP 0 440 633        covers ONCONASE(R) and process technology for making it                         Mar. 2009
---------------------------------------------------------------------------------------------------------------
EP 0 500 589        cover combinations of  ONCONASE(R) with certain other pharmaceuticals           Oct. 2010
JP 2972334
---------------------------------------------------------------------------------------------------------------
EP 0 656 783        covers combinations of  ONCONASE(R) with certain other                          July 2013
JP 3655628          pharmaceuticals
---------------------------------------------------------------------------------------------------------------
EP 0 837 878        covers a variant of ONCONASE(R)                                                 June 2016
JP 3779999
---------------------------------------------------------------------------------------------------------------
</TABLE>


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

      We also have patent  applications  pending in the United  States,  Europe,
Japan, and other foreign countries.

      The  scope  of  protection   afforded  by  patents  for   biotechnological
inventions can be uncertain,  and such  uncertainty  may apply to our patents as
well. The patent  applications we have filed, or that we may file in the future,
may not result in patents.  Our patents may not give us competitive  advantages,
may be wholly or partially invalidated or held unenforceable, or may be held not
to have been infringed by products that compete with our products. Patents owned
by others may adversely affect our ability to do business.  Furthermore,  others
may  independently  develop  products  that are similar to our  products or that
duplicate  our  products,  and may  design  around  the  claims of our  patents.
Although we believe that our patents and patent  applications are of substantial
value to us, we cannot assure you that such patents and patent applications will
be of  commercial  benefit to us,  will  adequately  protect  us from  competing
products or will not be challenged,  declared invalid, or found not to have been
infringed by competing  products.  We also rely on  proprietary  know-how and on
trade  secrets to develop and  maintain  our  competitive  position.  Others may
independently  develop  or obtain  access  to such  know-how  or trade  secrets.
Although our employees and consultants having access to proprietary  information
are  required to sign  agreements  that  require  them to keep such  information
confidential,  our employees or consultants may breach these agreements or these
agreements may be held to be unenforceable.

Competition

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

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

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

Employees

      As of July 31, 2006,  we had fourteen full time  employees,  of whom seven
were engaged in research and  development  activities  and seven were engaged in
administration and management. We had five employees who


                                       17
<PAGE>

held  Ph.D.  degrees.  All of  our  employees  are  covered  by  confidentiality
agreements.  We consider  relations  with our employees to be good.  None of our
employees is covered by a collective bargaining agreement.

Environmental Matters

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

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

Item 1A. RISK FACTORS.

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

Risks related to our business.

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

         We are a  development  stage company and since our inception one of the
principal  sources of our working  capital has been private  sales of our common
stock.  We  incurred  net losses of  approximately  $7,810,000,  $6,462,000  and
$5,070,000   for  the  fiscal  years  ended  July  31,  2006,   2005  and  2004,
respectively.  We have  continued to incur  losses  since July 31, 2006.  We may
never achieve revenue sufficient for us to attain profitability.

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

      o     Our ability to demonstrate clinically that our products have utility
            and are safe;
      o     Delays or refusals by regulatory  authorities in granting  marketing
            approvals;
      o     Our limited financial resources relative to our competitors;
      o     Our ability to obtain an appropriate marketing partner;
      o     The  availability  and level of  reimbursement  for our  products by
            third party payors;
      o     Incidents of adverse reactions to our products;
      o     Misuse of our products and unfavorable  publicity that could result;
            and
      o     The occurrence of manufacturing or distribution disruptions.


                                       18
<PAGE>

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

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

      We  may  need  additional  financing  in  order  to  continue  operations,
including  completion  of our  current  clinical  trials  and  filing  marketing
registrations  for ONCONASE(R) with the FDA in the United States,  with the EMEA
in  Europe  and with  the TGA in  Australia.  If the  results  from our  current
clinical trial do not  demonstrate  the efficacy and safety of  ONCONASE(R)  for
malignant  mesothelioma,  our  ability  to  raise  additional  capital  will  be
adversely affected.  Even if regulatory applications for marketing approvals are
filed and approved,  we may need additional  financing to continue operations if
we are unable to generate  sufficient cash flow to support our operations  prior
to the time our current cash reserves are depleted. During the fiscal year ended
July 31,  2006,  we received  approximately  $12.3  million in net proceeds as a
result of private  placements  of common stock and  warrants,  and  exercises of
stock options and warrants.  We expect that such net proceeds  together with our
cash reserves,  will be sufficient to fund our operations  through July 31, 2008
based on our expected level of expenditures.  However,  to assure our ability to
continue our  operations  beyond this date,  we may continue to seek  additional
financing  through equity or debt  financings but we cannot be sure that we will
be able to  raise  capital  on  favorable  terms or at all.  We may also  obtain
additional  capital  through the exercise of  outstanding  options and warrants,
although we cannot  provide any  assurance  of such  exercises  or estimate  the
amount  of  capital  we  will  receive,  if any.  If we are  required  to  raise
additional  capital  to fund  further  operations  and are  unable to do so, our
operations will be severely  curtailed and our business and financial  condition
will be materially adversely affected.

We  cannot  predict  how long it will  take us nor how  much it will  cost us to
complete part two of our Phase III trial because it is a survival study.

      We currently  have ongoing a two-part  Phase III trial of ONCONASE(R) as a
treatment for malignant  mesothelioma.  The first part of the clinical trial has
been  completed and the second  confirmatory  part is still ongoing for which we
have  exceeded the full  enrollment  target of 316  patients.  The first interim
analysis  results based on the 105 events (deaths)  showed a two-month  survival
advantage of ONCONASE(R) + doxorubicin (12 months) vs.  doxorubicin (10 months).
These results were  consistent with the results from the first part of the trial
and were the basis for our decision to continue the trial.  The primary endpoint
of the Phase III  clinical  trial is  survival,  which tracks the length of time
patients  enrolled in the study live.  According to the  protocol,  a sufficient
number of patient deaths must occur in order to perform the required statistical
analyses to determine the efficacy of ONCONASE(R) in patients with  unresectable
(inoperable)  malignant  mesothelioma.  Since it is  impossible  to predict with
certainty when these patient deaths in the Phase III trial will occur, we do not
have the capability of reasonably determining when a sufficient number of deaths
will occur,  nor when we will be able to file for marketing  registrations  with
the FDA, EMEA and TGA.

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


                                       19
<PAGE>

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

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

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

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

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

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

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

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


                                       20
<PAGE>

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

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

      We currently have no sales,  marketing or  distribution  capabilities.  In
order to commercialize any product candidates for which we receive FDA or non US
approval,  we expect to rely on established  third party  strategic  partners to
perform  these  functions.  To date,  we have not entered into any  marketing or
licensing  agreements for  ONCONASE(R).  We cannot assure you we will be able to
establish or maintain  relationships with one or more biopharmaceutical or other
marketing companies with existing  distribution  systems and direct sales forces
to market any or all of our product candidates, on acceptable terms, if at all.

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

      o     the  extent to which we are  successful  in  securing  collaborative
            partners  to  offset  some or all of the  funding  obligations  with
            respect to product candidates;
      o     the extent to which our agreement with our collaborators  permits us
            to  exercise  marketing  or  promotion  rights  with  respect to the
            product candidate;
      o     how our product  candidates  compare to  competitive  products  with
            respect to  labeling,  pricing,  therapeutic  effect,  and method of
            delivery; and
      o     whether  we are  able  to  establish  agreements  with  third  party
            collaborators,  including large biopharmaceutical or other marketing
            companies,  with respect to any of our product  candidates  on terms
            that are acceptable

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

Our product candidates may not be accepted by the market.

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

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

      We are highly  dependent  upon our founder,  Chairman and Chief  Executive
Officer, Kuslima Shogen. Kuslima Shogen's talents, efforts, personality,  vision
and  leadership  have been,  and continue to be,  critical to our  success.  The
diminution or loss of the services of Kuslima Shogen, and any negative market or
industry  perception arising from that diminution or loss, would have a material
adverse effect on our business.

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


                                       21
<PAGE>

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

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

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

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

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

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

We may be sued for product liability.

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


                                       22
<PAGE>

As of July 31, 2006,  we had a material  weakness in our  internal  control over
financial  reporting.  If we fail to  maintain an  effective  system of internal
control, we may not be able to provide timely and accurate financial statements.

      As more fully described in Item 9A, the Company's  management assessed the
effectiveness of the Company's  internal control over financial  reporting as of
July 31, 2006. In making this assessment,  it used the criteria set forth by the
Committee  of  Sponsoring  Organizations  of the Treadway  Commission  (COSO) in
Internal Control - Integrated Framework. As a result of management's assessment,
management has concluded that, as of July 31, 2006, the Company did not maintain
effective internal control over financial reporting.

      The  Public  Company  Accounting  Oversight  Board has  defined a material
weakness  as  a  significant   deficiency,   or   combination   of   significant
deficiencies,  that  results  in more than a remote  likelihood  that a material
misstatement of the annual or interim financial statements will not be prevented
or  detected.  Accordingly,  a  material  weakness  increases  the risk that the
financial information we report contains material errors.

      Management,  with oversight by our Audit  Committee,  is in the process of
implementing  changes to the Company's  internal  control systems and procedures
which are described in detail in Item 9A. The steps we are taking to address the
material weakness may not be effective,  however.  If we are unable to implement
these changes  effectively  or if other material  weaknesses  develop and we are
unable to effectively  address these matters,  there could be a material adverse
effect on our business, financial condition and results of operations.

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

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

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

      Many managed care  organizations  negotiate the price of medical  services
and products and develop  formularies  for that purpose.  Exclusion of a product
from a formulary  can lead to its  sharply  reduced  usage in the  managed  care
organization  patient  population.  If our products  are not included  within an
adequate  number  of  formularies  or  adequate  reimbursement  levels  are  not
provided, or if those policies  increasingly favor generic or OTC products,  our
market  share and  gross  margins  could be  negatively  affected,  as could our
overall business and financial condition.

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

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


                                       23
<PAGE>

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

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

Risks related to our common stock.

We were relisted on the Nasdaq  Capital Market after being delisted in 1999; our
stock is thinly  traded  and you may not be able to sell our stock when you want
to do so.

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

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

      The market price of our common stock,  like that of the securities of many
other  development  stage  biotechnology  companies,  has fluctuated over a wide
range and it is likely that the price of our common stock will  fluctuate in the
future.  Over the past three  years,  the sale price for our  common  stock,  as
reported by Nasdaq and the OTC Bulletin Board has fluctuated from a low of $1.25
to a high of $10.07. The market price of our common stock could be impacted by a
variety of factors, including:

      o     announcements  of   technological   innovations  or  new  commercial
            products by us or our competitors,
      o     disclosure  of the  results of  pre-clinical  testing  and  clinical
            trials by us or our competitors,
      o     disclosure of the results of regulatory proceedings,
      o     changes in government regulation,
      o     developments  in the patents or other  proprietary  rights  owned or
            licensed by us or our competitors,
      o     public  concern as to the safety and efficacy of products  developed
            by us or others,
      o     litigation, and
      o     general market conditions in our industry.

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

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

      Sales of  substantial  amounts of our common stock in the open market,  or
the  availability of such shares for sale,  could adversely  affect the price of
our common stock.  We had  44,289,161  shares of common stock  outstanding


                                       24
<PAGE>

as of July 31, 2006. The following  securities that may be exercised into shares
of our common stock were issued and outstanding as of July 31, 2006:

      o     Options.  Stock options to purchase  3,830,350  shares of our common
            stock at a weighted average  exercise price of  approximately  $3.10
            per share.
      o     Warrants. Warrants to purchase 18,119,598 shares of our common stock
            at a weighted  average  exercise  price of  approximately  $1.91 per
            share.

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

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

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

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

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

      In June 1996, AHC dissolved and ceased all operations.  Therefore, we have
not  been  able to  obtain  the  reissued  reports  of AHC with  respect  to the
financial  statements  included  in the Form 10-K for the fiscal year ended July
31, 2006 nor have we been able to obtain AHC's consent to the use of such report
herein. As a result, in the event any persons seek to assert a claim against AHC
under Section 18 of the Exchange Act for any untrue statement of a material fact
contained in these  financial  statements  or any  omissions to state a material
fact required to be stated  therein,  such persons will be barred.  Accordingly,
you may be unable to assert a claim against AHC under Section 18 of the Exchange
Act for any  purchases  of the  Company's  Common  Stock made in  reliance  upon
statements  set forth in the Form 10-K for the fiscal year ended July 31,  2006.
In addition,  the ability of AHC to satisfy any claims properly  brought against
it may be limited as a practical matter due to AHC's dissolution in 1996.

Item 2. PROPERTIES.

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


                                       25
<PAGE>

Item 3. LEGAL PROCEEDINGS.

      None.

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

      None.

                                    Part II

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

      Our common stock is listed on the The Nasdaq  Capital  Market,  or Nasdaq,
and has traded  under the  symbol  "ACEL"  since  September  9,  2004.  Prior to
September  9,  2004,  our  common  stock was  traded on the OTC  Bulletin  Board
(OTCBB).  As of October 12, 2006, there were approximately 1,010 stockholders of
record of our common stock.

      The  following  table sets forth the range of high and low sale  prices of
our common  stock for the two fiscal  years  ended July 31,  2006 and 2005.  The
prices were obtained from Nasdaq and OTCBB and are believed to be representative
of inter-dealer quotations, without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.

                                                         High         Low
                                                         ----         ---
                Year Ended July 31, 2006:

                     First Quarter                     $ 2.60       $ 1.54

                     Second Quarter                      4.99         1.25

                     Third Quarter                       4.49         2.95

                     Fourth Quarter                      3.94         1.90

                Year Ended July 31, 2005:

                     First Quarter                       7.50         3.06

                     Second Quarter                      5.43         3.33

                     Third Quarter                       3.70         1.50

                     Fourth Quarter                      2.80         1.73

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

      The  following  table  provides  additional  information  on the Company's
equity based compensation plans as of July 31, 2006:

<TABLE>
<CAPTION>
                                                                                             Number of securities
                                                                                            remaining available for
                                         Number of securities to     Weighted-average        future issuance under
                                         be issued upon exercise     exercise price of     equity compensation plans
                                         of outstanding options,   outstanding options,      (excluding securities
             Plan Category                 warrants and rights      warrants and rights    reflected in column (a))
             -------------                 -------------------      -------------------    ------------------------
                                                   (a)                      (b)                       (c)
<S>                                             <C>                       <C>                      <C>
Equity compensation plans approved by
security holders                                3,830,350                 $ 3.10                   7,673,750
Equity compensation plans not approved
by security holders                             12,500 (1)                $ 3.10                     - 0 -
</TABLE>


                                       26
<PAGE>

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

Recent Sales of Unregistered Securities

      None.

Issuer Purchases of Equity Securities

      We did not  repurchase  any shares of our common  stock  during the fiscal
year 2006.

Item 6. SELECTED FINANCIAL DATA.

      Set forth  below is the  selected  financial  data for our company for the
five fiscal years ended July 31, 2006:

<TABLE>
<CAPTION>
                                               Year Ended July 31,

                    -------------------------------------------------------------------------
                            2006           2005            2004           2003           2002
                            ----           ----            ----           ----           ----
<S>                 <C>             <C>            <C>             <C>            <C>
Investment Income   $    107,386    $   141,708    $     42,113    $     9,877    $     4,838

Other Income                  --          9,836              --         30,000             --

Net Loss (1)          (7,810,175)    (6,461,920)     (5,070,307)    (2,411,532)    (2,591,162)

Dividends                   None           None            None           None           None

Total Assets          11,826,428      4,901,624      10,421,063        495,322        228,871

Long-term Debt                --             --              --        242,516        315,929

Total Equity
(Deficiency)           9,233,003      3,221,670       8,881,647     (2,491,681)   $(1,885,437)
</TABLE>

      (1)   Included in the net loss of  $7,810,175,  $6,461,920  and $5,070,307
            for fiscal years ended July 31, 2006,  2005 and 2004,  respectively,
            are tax benefits of $317,382,  $287,975 and $221,847,  respectively,
            related  to  the  sale  of   certain   state  tax   operating   loss
            carryforwards.


                                       27
<PAGE>

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

Overview

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

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

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

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

      Almost all of the $55,267,000 of research and development expenses we have
incurred since our inception has gone toward the  development of ONCONASE(R) and
related drug  candidates.  For the fiscal years 2006, 2005 and 2004 our research
and   development   expenses  were   $5,230,000,   $5,082,000  and   $3,353,000,
respectively,  almost all of which were used for the  development of ONCONASE(R)
and related drug  candidates.  ONCONASE(R)  is  currently  in an  international,
centrally randomized, confirmatory Phase IIIb registration trial. The first part
of the trial has been completed.  The second  confirmatory  part of the trial is
ongoing.  The  primary  endpoint  of the trial is  overall  survival.  The first
interim  analysis  results based on one third of the required events (deaths) of
the  study,  which  evaluates  the  efficacy,  safety  and  tolerability  of the
combination of ONCONASE + doxorubicin as compared to doxorubicin alone have been
reported.  The overall median survival time (MST)  demonstrated a trend favoring
the ONCONASE +  doxorubicin  treatment  group (12 months)  over the  doxorubicin
group (10 months).  A two month  improvement  in median  survival had previously
been observed in the Treatment  Target Group (n=104) analysis from the completed
Phase III  single  agent  study  that  favored  the  ONCONASE  over  doxorubicin
treatments (11.6 months vs. 9.6 months).  The Company's Phase IIIb  confirmatory
registration  trial was  designed  based on the  conclusions  drawn from the TTG
analysis  but powered to reach a  statistically  significant  difference  in MST
between the ONCONASE + doxorubicin treatment group and the doxorubicin treatment
group at 316 events.  The interim data which  represented  only one third of the
planned number of events was sufficient for us to continue the trial as planned,
but was not sufficient for supporting the filing for marketing approvals at that
time. At this time, we cannot predict with certainty when a sufficient number of
deaths  will occur to achieve  statistical  significance.  The timing of when we
will be able to file for marketing  registrations in the US, EU and Australia is
data driven.  Therefore,  we cannot  predict with  certainty what our total cost
associated  with  obtaining  marketing  approvals  will be,  or when and if such
approvals  will be granted,  or when actual sales will occur.  We have completed
the  chemistry,  manufacturing  and controls  (CMC)  section of the NDA and will
submit it after completion of a review by external regulatory consultants.

      We fund the research and  development of our products  primarily from cash
receipts  resulting  from  the sale of our  equity  securities  and  convertible
debentures in registered offerings and private placements. Additionally, we have
raised capital through other debt  financings,  the sale of our tax benefits and
research  products,  interest  income  and  financing  received  from our  Chief
Executive  Officer.  During the fiscal year ended July 31, 2006, we received net
proceeds of  approximately  $12.3  million as a result of private  placements of
common  stock and warrants and from  exercises  of stock  options and  warrants.
These  proceeds  will be used to  support  our  strategic  plan,  including


                                       28
<PAGE>

the  anticipated  filing of an NDA of  ONCONASE(R)  for malignant  mesothelioma,
assuming  satisfactory results from the ongoing clinical trial, the expansion of
the ONCONASE oncology franchise, and the development of other pipeline products.
We have incurred  losses since inception and to date we have not consummated any
licensing,  or marketing  agreements  for  ONCONASE(R)  or any of our early drug
candidates.

Results of Operations

Fiscal Years Ended July 31, 2006, 2005 and 2004

Revenues

      We are a development stage company as defined in the Financial  Accounting
Standards  Board's  Statement of Financial  Accounting  Standards  No. 7. We are
devoting  substantially  all our present  efforts to establishing a new business
and developing new drug products.  Our planned principal operations of marketing
and/or licensing of new drugs have not commenced and,  accordingly,  we have not
derived any  significant  revenue  from these  operations.  We focus most of our
productive and financial resources on the development of ONCONASE(R). We did not
have any sales in fiscal 2006, 2005 and 2004.  Investment income for fiscal 2006
was $107,000  compared to $142,000 for fiscal 2005, a decrease of $35,000 due to
lower  balances  of cash and cash  equivalents  during  the  fiscal  year  2006.
Investment  income for fiscal 2005 was  $142,000  compared to $42,000 for fiscal
2004,  an  increase  of  $100,000  due to  higher  balances  of  cash  and  cash
equivalents.

Research and Development

      Research and development  expense for fiscal 2006 was $5,230,000  compared
to $5,082,000 for fiscal 2005, an increase of $148,000,  or 3%. The increase was
primarily due to the  compensation  expense of  approximately  $458,000 which is
primarily related to share-based  compensation;  and non-cash expense related to
stock options issued to consultants of  approximately  $93,000.  The share-based
compensation expense is expected to continue as a result of the adoption of SFAS
123(R),  which requires us to charge compensation expense for all employee stock
options.  These  increases  were  offset by a  decrease  in patent  expenses  of
approximately  $170,000;  completion  of key  toxicology  requirements  and  key
requirements for chemistry,  manufacturing and controls  resulting in a decrease
in expenses of  approximately  $116,000;  a decrease in  pre-clinical  sponsored
research and development  expenses of approximately  $82,000; and a reduction in
costs related to clinical trials of approximately $35,000.

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

General and Administrative

      General and administrative expense for fiscal 2006 was $3,005,000 compared
to $1,771,000 for fiscal 2005, an increase of $1,234,000,  or 70%. This increase
was  primarily  due to an  increase  in  compensation  expense of  approximately
$710,000 which is primarily related to share-based compensation. The share-based
compensation expense is expected to continue as a result of the adoption of SFAS
123(R).  The increase in general and  administrative  expense also resulted from
legal fees of approximately $287,000;  non-cash share-based compensation expense
related  to  stock  options   issued  to  a  consultant  and  board  members  of
approximately   $253,000;   and


                                       29
<PAGE>

consultant  and board of  directors  fees of  approximately  $83,000;  offset by
decreases in expenses related to investor relations  activities of approximately
$45,000;  Nasdaq re-listing fees and insurance expense of approximately  $32,000
and $22,000, respectively.

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

Interest

      Interest  expense  for fiscal  2006 was lower by $48,000  as  compared  to
fiscal 2005.  Interest  expense for fiscal 2005 was $48,000 compared to $403,000
in fiscal 2004, a decrease of $355,000 or 88%.  These  decreases  were primarily
due to the maturity and  conversion  of  convertible  notes  payable into common
stock.  The interest  expense was based on the value of the  warrants  using the
Black-Scholes option pricing model,  amortized on a straight-line basis over the
term of the notes.

Income Taxes

         New Jersey has  enacted  legislation  permitting  certain  corporations
located in New Jersey to sell a portion of its state tax loss  carryforwards and
state research and development credits in order to obtain tax benefits.  For the
state  fiscal year 2006 (July 1, 2005 to June 30,  2006),  we had  approximately
$1,903,000  of total  available tax benefits  that were  saleable;  of which New
Jersey  permitted  us to sell  approximately  $356,000.  In  December  2005,  we
received  approximately  $317,000 from the sale of the $356,000 of tax benefits,
which we recognized as tax benefits for the fiscal year ended July 31, 2006.

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

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

         If still  available  under New Jersey law, we will  attempt to sell the
remaining  $1,547,000 of our tax benefits between July 1, 2006 and June 30, 2007
(state fiscal year 2007). This amount, which is a carryover of our remaining tax
benefits  from state  fiscal  year 2006 and  earlier,  may  increase if we incur
additional  tax  losses  during  state  fiscal  year 2007.  We cannot  estimate,
however,  what percentage of our saleable tax benefits New Jersey will permit us
to sell, how much money we will receive in connection  with the sale, if we will
be able to find a buyer for our tax  benefits or if such funds will be available
in a timely manner.

Net Loss

         We have incurred net losses during each year since our  inception.  The
net loss for fiscal 2006 was $7,810,000 as compared to $6,462,000 in fiscal 2005
and $5,070,000 in fiscal 2004.  The cumulative  loss from the date of inception,
August 24,  1981,  to July 31,  2006  amounted to  $83,317,000.  Such losses are
attributable  to the  fact  that we are  still  in the  development  stage  and,
accordingly,  have not derived sufficient revenues from operations to offset the
development stage expenses.


                                       30
<PAGE>

Liquidity and Capital Resources

         We have reported net losses of  approximately  $7,810,000,  $6,462,000,
and  $5,070,000  for the  fiscal  years  ended  July 31,  2006,  2005 and  2004,
respectively.  The net losses from date of  inception,  August 24, 1981, to July
31, 2006, amounts to $83,317,000.

         We have financed our operations since inception  primarily  through the
sale of our equity securities and convertible debentures in registered offerings
and private placements.  Additionally, we have raised capital through other debt
financings,  the sale of our tax benefits and  research  products,  and interest
income and  financing  received  from our Chief  Executive  Officer.  During the
fiscal  year  2006,  we had a net  increase  in cash  and  cash  equivalents  of
$7,056,000,  which  resulted from net cash  provided by financing  activities of
$12,332,000,  primarily  from private  placement of common stock and warrants of
$10,984,000  and from  exercises of stock  options and  warrants of  $1,348,000;
offset by net cash used in operating  activities of $5,257,000,  principally for
research and development  activities;  and net cash used in investing activities
due to the purchase of property and equipment of $19,000.  Total cash  resources
as of July 31, 2006 were $11,519,000 compared to $4,463,000 at July 31, 2005.

         Our current liabilities as of July 31, 2006 were $2,593,000 compared to
$1,680,000 at July 31, 2005, an increase of $913,000. The increase was primarily
due an increase in accounts payable of approximately  $890,000 mainly due to the
manufacturing of ONCONASE(R) of approximately $362,000, pre-clinical studies and
clinical trial of approximately  $351,000 and $92,000,  respectively;  and legal
fees of  approximately  $85,000  and a decrease  in  accruals  of  approximately
$23,000.

The following transactions occurred after July 31, 2006:

      o     In August 2006,  we issued an  aggregate of 28,000  shares of common
            stock  upon the  exercise  of stock  options  by an  officer  and an
            employee at an exercise price of $0.85 per share.  We realized gross
            proceeds of $23,800 from these exercises.

         Until and unless  our  operations  generate  significant  revenues,  we
expect to continue to fund  operations  from equity  financing.  There can be no
assurance  that we will be able to raise the  capital we need on terms which are
acceptable,  if at all.  During the fiscal year ended July 31, 2006, we received
net proceeds of approximately $12.3 million as a result of private placements of
common stock and warrants and from  exercises of stock options and warrants.  We
expect  that  such  net  proceeds  together  with  our  cash  reserves,  will be
sufficient  to fund our  operations  through July 31, 2008 based on our expected
level of  expenditures.  These  proceeds  will be used to support our  strategic
plan,  including the  anticipated  filing of an NDA of ONCONASE(R) for malignant
mesothelioma, assuming satisfactory results from the ongoing clinical trial, the
expansion of the  ONCONASE  oncology  franchise,  and the  development  of other
pipeline products. We may also obtain additional capital through the exercise of
outstanding  options and warrants and the sale of our tax benefits,  although we
cannot  provide any assurance of such exercises or the amount of capital we will
receive, if any.

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

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

Off-balance Sheet Arrangements

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


                                       31
<PAGE>

Critical Accounting Policies

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

Use of Estimates

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

Research and Development

      Research and development costs are expensed as incurred.

Accounting For Stock-Based Compensation

      In  December  2004,  the FASB  issued  SFAS  No.  123(R)  (revised  2004),
"Share-Based  Payment" ("SFAS 123(R)"),  which amends SFAS 123 and was effective
beginning  with our fiscal year ended July 31, 2006.  The new standard  requires
all  share-based  payments,  including  stock option grants to employees,  to be
recognized as an operating  expense in the statement of operations.  The cost is
recognized  over the requisite  service period based on fair values  measured on
the date of grant.  We adopted  SFAS 123(R)  effective  August 1, 2005 using the
modified prospective method and, accordingly, prior period amounts have not been
restated. Under the modified prospective method, the fair value of all new stock
options  issued after July 31, 2005 and the  unamortized  fair value of unvested
outstanding  stock  options  at August  1, 2005 are  recognized  as  expense  as
services are rendered.  As of July 31, 2006, there was approximately  $2,318,000
of total unrecognized compensation cost related to unvested options granted that
is expected to be recognized over a weighted average period of 1.16 years.

      Prior to the  adoption of SFAS 123(R),  Statement of Financial  Accounting
Standards  No.  123,  Accounting  for  Stock-Based  Compensation  ("SFAS  123"),
provided for the use of a fair  value-based  method of  accounting  for employee
stock  compensation.  However,  SFAS 123 also  allowed an entity to  continue to
measure  compensation  cost for stock options granted to employees and directors
using  the  intrinsic  value  method  of  accounting  prescribed  by  Accounting
Principles Board Opinion No. 25,  Accounting for Stock Issued to Employees ("APB
25"),  which only required  charges to compensation  expense for the excess,  if
any, of the fair value of the  underlying  stock at the date a stock  option was
granted (or at an appropriate  subsequent  measurement date) over the amount the
employee had to pay to acquire the stock,  if such amounts  differed  materially
from the  historical  amounts.  Prior to our adoption of SFAS  123(R),  employee
stock options were accounted for using the intrinsic value method under APB 25.

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

Accounting Changes and Error Corrections

      The FASB has issued FASB Statement No. 154,  Accounting  Changes and Error
Corrections  ("FAS  154").  The  new  standard  replaces  APB  Opinion  No.  20,
Accounting  Changes and FASB  Statement No. 3, Reporting  Accounting  Changes in
Interim  Financial  Statements.  Among  other  changes,  FAS  154  provides  for
correction of errors in previously issued financial  statements should be termed
"restatement".  The  new  standard  is  effective  for  accounting  changes  and
correction  of errors made in fiscal years  beginning  after  December 15, 2005.
Early  adoption  of this  standard  is  permitted  for  accounting  changes  and
correction  of errors made for fiscal  years  beginning  after June 1, 2005.  We
adopted FAS 154 on August 1, 2005.

Income Taxes

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


                                       32
<PAGE>

Recently Issued Accounting Pronouncements.

      In  July  2006,  the  FASB  issued   Interpretation  No.  48  ("FIN  48"),
"Accounting  for  Uncertainty  in  Income  Taxes  - an  Interpretation  of  FASB
Statement No. 109." FIN 48 clarifies the  accounting  for  uncertainty in income
taxes  recognized  in  a  company's  financial  statements  in  accordance  with
Statement No. 109,  Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold and  measurement  of a tax position taken or expected to be taken in a
company's tax return.  The provisions of FIN 48 will be effective for our fiscal
year ended July 31, 2007. We are currently evaluating the impact of the adoption
of FIN 48 will have, if any, on our financial statements.

Contractual Obligations and Commercial Commitments

      Our major  outstanding  contractual  obligations  relate to our  equipment
operating lease.  During the fiscal year ended July 31, 2006, we entered into an
equipment  operating  lease,  which obligates us to pay  approximately  $630 per
month for  forty-eight  months.  Below is a table that presents our  contractual
obligations and commercial commitments as of July 31, 2006:

<TABLE>
<CAPTION>
                                                  Payments Due by Fiscal Year
                                         ----------------------------------------------------------
                                                                                         2012 and
                              Total       2007      2008      2009      2010    2011    Thereafter
                              -----       ----      ----      ----      ----    ----    -----------

<S>                         <C>         <C>       <C>       <C>       <C>       <C>       <C>
   Operating lease          $  61,392   $16,743   $16,743   $16,743   $11,163   $  --     $     --
                            ---------   -------   -------   -------   -------   -----     --------

   Total contractual cash
       obligations          $  61,392   $16,743   $16,743   $16,743   $11,163   $  --     $     --
                            =========   =======   =======   =======   =======   =====     ========
</TABLE>

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

      Not Applicable.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

      On December 1, 1993, certain stockholders of Armus Harrison & Co., or AHC,
terminated their  association  with AHC, or the AHC termination,  and AHC ceased
performing  accounting  and  auditing  services,  except for limited  accounting
services to be performed on our behalf.  In June 1996,  AHC dissolved and ceased
all  operations.  The  report of J.H.  Cohn LLP with  respect  to our  financial
statements  from  inception  to July 31, 2006 is based on the report of KPMG LLP
from August 1, 1992 to July 31, 2002 and of AHC for the period from inception to
July 31, 1992,  although AHC has not  consented to the use of such report herein
and will not be  available  to perform any  subsequent  review  procedures  with
respect to such report.  Accordingly,  investors  will be barred from  asserting
claims  against AHC under Section 18 of the Exchange Act on the basis of the use
of such  report in any Form 10-K  into  which  such  report is  incorporated  by
reference.  In addition, in the event any persons seek to assert a claim against
AHC for false or misleading  financial  statements and  disclosures in documents
previously  filed by us,  such claim will be  adversely  affected  and  possibly
barred. Furthermore, as a result of the lack of a consent from AHC to the use of
its audit report herein,  or to its incorporation by reference into a Form 10-K,
our officers  and  directors  will be unable to rely on the  authority of AHC as
experts in auditing  and  accounting  in the event any claim is brought  against
such persons  under  Section 18 of the  Exchange Act based on alleged  false and
misleading  Financial  Statements  and  disclosures  attributable  to  AHC.  The
discussion  regarding  certain  effects of the AHC  termination is not meant and
should  not be  construed  in any  way as  legal  advice  to any  party  and any
potential purchaser should consult with his, her or its own counsel with respect
to the effect of the AHC  termination  on a potential  investment  in our Common
Stock or otherwise.


                                       33
<PAGE>

Item 9A. CONTROLS AND PROCEDURES.

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's  "disclosure controls
and procedures" (as defined in Rule 13a-15(e) under the Securities  Exchange Act
of 1934 ("The Exchange Act") as of the end of the period covered by this report.
Based on this  evaluation,  the Chief Executive  Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures were not
effective as of July 31, 2006 due to the material  weakness in internal  control
over financial reporting described below.

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

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

      o     pertain to the  maintenance  of records  that in  reasonable  detail
            accurately and fairly reflect the  transactions  and dispositions of
            the assets of the Company;
      o     provide  reasonable  assurance  that  transactions  are  recorded as
            necessary  to  permit   preparation   of  financial   statements  in
            accordance  with  accounting  principles  generally  accepted in the
            United States of America,  and that receipts and expenditures of the
            Company are being made only in  accordance  with  authorizations  of
            management and directors of the Company; and
      o     provide  reasonable   assurance   regarding   prevention  or  timely
            detection of  unauthorized  acquisition,  use or  disposition of the
            Company's  assets that could have a material effect on the financial
            statements.

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

Management  assessed the  effectiveness  of the Company's  internal control over
financial  reporting as of July 31, 2006. In making this assessment,  management
used the criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring  Organizations  of the Treadway  Commission  (COSO).
Management's  assessment  included an  evaluation  of the design of our internal
control over financial reporting and testing of the operational effectiveness of
our internal control over financial  reporting.  Management reviewed the results
of its assessment with the Audit Committee of our Board of Directors,  and based
on this assessment has determined that as of July 31, 2006, there was a material
weakness  in its  internal  control  due to lack  of  personnel  with  financial
reporting  expertise  sufficient to properly  record and report  non-routine and
complex transactions and accounting pronouncements. Such matters were related to
the  recording  of  share-based  compensation  costs  pursuant to  Statement  of
Financial  Accounting  Standards  No.  123(R),  "Share-Based  Payment"  and  the
timeliness of  consideration of the guidance of Emerging Issues Task Force Issue
No. 00-19,  "Accounting  for Derivative  Financial  Instruments  Indexed to, and
Potentially  Settled  in, A  Company's  Own  Stock".  Such  weakness in controls
resulted in an  understatement  of the amount recorded as  compensation  expense
during the first three  interim  periods of the fiscal year ended July 31, 2006,
offset by a charge during the final fiscal quarter of 2006.  Management believes
the  amount  applicable  to the  non-cash  compensation  expense  in each of the
affected  interim  periods is not material and that  restatement  of its interim
quarterly reports is not required.

Steps and adjustments that the Company will be taking to remediate this weakness
after discovery include:

(i)  Forming  an  accounting   oversight  committee   ("Oversight   Committee"),
comprising  members of our senior  management  and a third  party GAAP  advisor,
charged with the task of discussing and reviewing all  significant  transactions
that  have   financial   recognition,   either  to  be  recorded  or  disclosed.
Additionally,  the Oversight  Committee will consult with our outside  corporate
counsel;


                                       34
<PAGE>

(ii)  Retaining a third  party GAAP  advisor to assist as well as advise the CFO
and Audit Committee on a timely basis, including quarter end and year end review
of proposed accounting for and disclosure of significant financial  transactions
and changes in GAAP; and

(iii) Enhancing staff training, including relevant continuing education seminars
for financial staff on newly issued technical accounting pronouncements.

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Alfacell Corporation

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's Report on Internal Control over Financial Reporting,  that Alfacell
Corporation (A Development Stage Company) maintained  effective internal control
over financial  reporting as of July 31, 2006, based on criteria  established in
Internal  Control - Integrated  Framework  issued by the Committee of Sponsoring
Organizations  of  the  Treadway  Commission  (COSO).   Alfacell   Corporation's
management  is  responsible  for  maintaining  effective  internal  control over
financial  reporting  and for its  assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the Company's
internal control over financial reporting based on our audit.

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

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

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

A  material  weakness  is  a  control  deficiency,  or  combination  of  control
deficiencies,  that  results  in more than a remote  likelihood  that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's  assessment.  This material  weakness was considered in determining
the nature,  timing,  and extent of audit tests applied in our audit of the 2006
financial  statements,  and this report does not affect our report dated October
10, 2006, on those financial statements.

The Company lacks  personnel with financial  reporting  expertise  sufficient to
properly record and report  non-routine and complex  transactions and accounting
pronouncements.


                                       35
<PAGE>

In our  opinion,  management's  assessment  that  Alfacell  Corporation  did not
maintain  effective  internal  control over  financial  reporting as of July 31,
2006, is fairly stated, in all material respects,  based on criteria established
in Internal  Control-Integrated  Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  Also, in our opinion,  because
of the effects of the material  weakness  described  above in the achievement of
the objective of the control criteria,  the Company has not maintained effective
internal control over financial reporting as of July 31, 2006, based on criteria
established in Internal Control-Integrated  Framework issued by the Committee of
Sponsoring Organizations of the Trading Commission (COSO).

We do not  express an opinion or any other  form of  assurance  on  management's
statements relating to new controls being implemented and tested.

/s/ J.H. Cohn LLP

Roseland, New Jersey
October 10, 2006

(c) CHANGES IN INTERNAL CONTROLS

There  has been no change  in the  Company's  internal  control  over  financial
reporting  during the quarter ended July 31, 2006 that has materially  affected,
or is reasonably  likely to materially  affect,  the Company's  internal control
over financial  reporting  subsequent to the date of the evaluation  referred to
above.

Management's  assessment of the effectiveness of the Company's  internal control
over financial  reporting as of July 31, 2006 has been audited by J.H. Cohn LLP,
an  independent  registered  public  accounting  firm, as stated in their report
which is included herein.

Item 9B. OTHER INFORMATION.

 On October 5, 2006, Kuslima Shogen, the Company's Chief Executive Officer,  was
granted a ten-year option pursuant to the Company's 2004 Stock Incentive Plan to
purchase  120,000 shares of the Company's common stock with an exercise price of
$1.29 per share,  the closing price of the Company's common stock on the date of
grant. The stock option will vest as to 24,000 shares on April 5, 2007, and then
in four equal annual  installments  of 24,000 shares on each  anniversary of the
date of grant beginning on October 5, 2007.

On October 5, 2006,  Robert Love, the Company's  Chief  Financial  Officer,  was
granted a ten-year option pursuant to the Company's 2004 Stock Incentive Plan to
purchase  50,000 shares of the Company's  common stock with an exercise price of
$1.29 per share,  the closing price of the Company's common stock on the date of
grant. The stock option will vest as to 10,000 shares on April 5, 2007, and then
in four equal annual  installments  of 10,000 shares on each  anniversary of the
date of grant beginning on October 5, 2007.

                                    Part III

The  information  required by Item 10 - Directors and Executive  Officers of the
Registrant;  Item 11 - Executive  Compensation;  Item 12 - Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder  Matters;  Item
13 - Certain  Relationships  and  Related  Transactions  and Item 14 - Principal
Accounting Fees and Services is incorporated into Part III of this Annual Report
on Form 10-K by  reference  to the Proxy  Statement  for our  Annual  Meeting of
Stockholders scheduled to be held on January 25, 2007.

                                     Part IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

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


                                       36
<PAGE>

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



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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       37
<PAGE>

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

10.9           Form of Subscription Agreement and Warrant Agreement used in the August and
               October 2001 private placement (incorporated by reference to Exhibit 10.26 to
               Registration Statement on Form S-1, File No. 333-38136, filed on December 14,
               2001)                                                                                       *

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

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

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

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

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

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

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

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

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


                                       38
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    Filed Herewith
Exhibit                                                                                             or Incorporated
No.            Item Title                                                                            by Reference
---            ----------                                                                           ---------------
<S>            <C>                                                                                  <C>
10.19          Registration Rights Agreement used in September 2003 private placement with SF
               Capital Partners Ltd. (incorporated by reference to Exhibit 10.26 to the
               Company's Annual Report on Form 10-K, filed on October 29, 2003)                            *

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

10.21          Form of Registration Rights Agreement used in May 2004 private placement with
               Knoll Capital Fund II, Europa International, Inc. and Clifford and Phyllis
               Kalista JTWROS (incorporated by reference to Exhibit 4.4 to Registration
               Statement on Form S-1, File No. 333-112865, filed on May 18, 2004)                          *

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

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

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

10.25          Separation Agreement and General Release with Andrew Savadelis dated May 26, 2005
               (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on               *
               Form 10-K, filed on October 15, 2005)

10.26          Securities Purchase Agreement used in May 2005 private placement with Jeffrey               +
               D'Onofrio dated May 1, 2006

10.27          Form of Warrant (incorporated by reference to Exhibit 4.1 to the Company's
               Current Report on Form 8-K, filed on July 19, 2006)                                         *

10.28          Registration Rights Agreement dated July 17, 2006 (incorporated by reference to
               Exhibit 4.2 to the Company's Current Report on Form 8-K, filed on July 19, 2006)            *

10.29          Agreement to Amend Knoll Warrant dated July 17, 2006 (incorporated by reference
               to Exhibit 4.3 to the Company's Current Report on Form 8-K, filed on July 19,               *
               2006)

10.30          Form of Amended Knoll Warrant (incorporated by reference to Exhibit 4.4 to the
               Company's Current Report on Form 8-K, filed on July 19, 2006)                               *

10.31          Agreement to Amend SF Capital Warrant dated July 17, 2006 (incorporated by
               reference to Exhibit 4.5 to the Company's Current Report on Form 8-K, filed on              *
               July 19, 2006)

10.32          Form of Amended Warrant for SF Capital Partners, Ltd. (incorporated by reference
               to Exhibit 4.6 to the Company's Current Report on Form 8-K, filed on                        *
</TABLE>


                                       39
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    Filed Herewith
Exhibit                                                                                             or Incorporated
No.            Item Title                                                                            by Reference
---            ----------                                                                           ---------------
<S>            <C>                                                                                  <C>

               July 19, 2006)

10.33          Securities Purchase Agreement dated July 17, 2006 (incorporated by reference to
               Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on July 19, 2006)           *

21.1           Subsidiaries of Registrant                                                                  +

23.1           Consent of J.H. Cohn LLP                                                                    +

23.2           Consent of KPMG LLP                                                                         +

31.1           Certification of Principal Executive Officer pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002                                                                  +

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

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

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

*       Previously filed; incorporated herein by reference
+       Filed herewith


                                       40
<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 16, 2006              By: /s/ KUSLIMA SHOGEN
                                         Kuslima Shogen, Chief Executive Officer
                                         and Chairman of the Board


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


Dated:  October 16, 2006             /s/ KUSLIMA SHOGEN
                                     Kuslima  Shogen,  Chief  Executive  Officer
                                     and  Chairman of the Board (Principal
                                     Executive Officer)

Dated:  October 16, 2006             /s/ ROBERT D. LOVE
                                     Robert D. Love, Chief Financial Officer
                                     (Principal  Financial Officer
                                     and Principal Accounting Officer)

Dated:  October 16, 2006             /s/ JOHN P. BRANCACCIO
                                     John P. Brancaccio, Director


Dated:  October 16, 2006             /s/ STEPHEN K. CARTER
                                     Stephen K. Carter, M.D., Director


Dated:  October 16, 2006             /s/ DONALD R. CONKLIN
                                     Donald R. Conklin, Director


Dated:  October 16, 2006             /s/ JAMES J. LOUGHLIN
                                     James J. Loughlin, Director


Dated:  October 16, 2006             /s/ DAVID SIDRANSKY
                                     David Sidransky, M.D., Director


Dated:  October 16, 2006             /s/ PAUL M. WEISS
                                     Paul M. Weiss, Ph.D., Director


                                       41
<PAGE>

                              Alfacell Corporation

                          Index to Financial Statements

<TABLE>
<CAPTION>
                                                                                    Page
                                                                                    ----
Audited Financial Statements:

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

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

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

Balance Sheets - July 31, 2006 and 2005..............................................F-6

Statements of Operations - Years ended July 31, 2006, 2005,
    and 2004 and the Period from August 24, 1981
    (Date of Inception) to July 31, 2006.............................................F-7

Statement of Stockholders' Equity (Deficiency)
    Period from August 24, 1981
    (Date of Inception) to July 31, 2006.............................................F-8

Statements of Cash Flows - Years ended July 31, 2006, 2005,
    and 2004 and Period from  August 24, 1981
    (Date of Inception) to July 31, 2006............................................F-14

Notes to Financial Statements - Years ended July 31, 2006,
    2005 and 2004 and the Period from August 24, 1981
    (Date of Inception) to July 31, 2006............................................F-17
</TABLE>


                                      F-1
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Alfacell Corporation

We have  audited the  accompanying  balance  sheets of ALFACELL  CORPORATION  (A
Development  Stage  Company)  as of July 31,  2006  and  2005,  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,  2006 and for the
period  from  August  24,  1981  (date of  inception)  to July 31,  2006.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits. The financial statements of Alfacell Corporation for the period from
August 24, 1981 to July 31, 2002 were audited by other  auditors  whose  reports
dated  November 4, 2002 and December 9, 1992,  except for Note 18 which is as of
July 19, 1993 and Note 3 which is as of October 28, 1993, expressed  unqualified
opinions  on  those  statements  with  explanatory  paragraphs  relating  to the
Company's ability to continue as a going concern.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our  opinion,  based on our audits  and,  for the  effect on the period  from
August 24,  1981 to July 31,  2006 of the amounts for the period from August 24,
1981 to  July  31,  2002,  on the  reports  of  other  auditors,  the  financial
statements  referred to above  present  fairly,  in all material  respects,  the
financial position of Alfacell Corporation as of July 31, 2006 and 2005, and its
results of  operations  and cash  flows for each of the years in the  three-year
period  ended July 31,  2006 and for the period from August 24, 1981 to July 31,
2006, in conformity with accounting  principles generally accepted in the United
States of America.

As  discussed in Note 1 to the  financial  statements,  the Company  changed the
manner in which it accounts for share-based compensation in fiscal year 2006.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board  (United  States),  the  effectiveness  of Alfacell
Corporation's  internal  control over  financial  reporting as of July 31, 2006,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring  Organizations  of the Treadway  Commission  and our
report dated October 10, 2006, expressed an adverse opinion thereon.


                                                 /s/ J.H. Cohn LLP

Roseland, New Jersey
October 10, 2006


                                      F-2
<PAGE>

             Report Of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors
Alfacell Corporation:

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

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

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

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

                                            /s/ KPMG LLP



Short Hills, New Jersey
November 4, 2002


                                      F-3
<PAGE>

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

                          Independent Auditors' Report


Board of Directors
Alfacell Corporation
Bloomfield, New Jersey

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

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

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


                                      F-4
<PAGE>

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



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


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


                                      F-5
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                                 Balance Sheets

                             July 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                      2006            2005
                                                                  ------------    ------------
<S>                                                               <C>             <C>
ASSETS
Current assets:
   Cash and cash equivalents                                      $ 11,518,540    $  4,462,951
   Other assets                                                         67,090         196,936
                                                                  ------------    ------------
      Total current assets                                          11,585,630       4,659,887

Property and equipment, net of accumulated depreciation and
   amortization of $1,090,715 in 2006 and $1,061,012 in 2005            69,928          80,395

Loan receivable, related party                                         170,870         161,342
                                                                  ------------    ------------

      Total assets                                                $ 11,826,428    $  4,901,624
                                                                  ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                               $  1,286,170    $    396,263
   Accrued expenses                                                  1,307,255       1,283,691
                                                                  ------------    ------------
      Total liabilities                                              2,593,425       1,679,954
                                                                  ------------    ------------

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $.001 par value.  Authorized and unissued,
      1,000,000 shares at July 31, 2006 and 2005                            --              --

    Common stock $.001 par value. Authorized 100,000,000
       shares at July 31, 2006 and 2005; issued and outstanding
       44,289,161 shares and 36,534,235 shares at July 31, 2006
       and 2005, respectively                                           44,289          36,534
    Capital in excess of par value                                  92,505,325      78,691,572
    Deficit accumulated during development stage                   (83,316,611)    (75,506,436)
                                                                  ------------    ------------
        Total stockholders' equity                                   9,233,003       3,221,670
                                                                  ------------    ------------

        Total liabilities and stockholders' equity                $ 11,826,428    $  4,901,624
                                                                  ============    ============
</TABLE>

See accompanying notes to financial statements.


                                      F-6
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                            Statements of Operations

                    Years ended July 31, 2006, 2005 and 2004
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 2006

<TABLE>
<CAPTION>
                                                                                          August 24, 1981
                                                                                              (date of
                                                                                             inception)
                                              2006            2005            2004        to July 31, 2006
                                          ------------    ------------    ------------    ----------------
<S>                                       <C>             <C>             <C>             <C>
Revenues:
   Sales                                  $         --    $         --    $         --    $        553,489
   Investment income                           107,386         141,708          42,113           1,678,207
   Other income                                     --           9,836              --              99,939
                                          ------------    ------------    ------------    ----------------
                                               107,386         151,544          42,113           2,331,635
                                          ------------    ------------    ------------    ----------------

Cost and expenses:
   Cost of sales                                    --              --              --             336,495
   Research and development                  5,229,996       5,082,339       3,352,977          55,267,247
   General and administrative                3,004,835       1,771,379       1,578,357          28,642,423
   Interest:
     Related parties                                --              --              --           1,147,547
     Others                                        112          47,721         402,933           2,874,076
                                          ------------    ------------    ------------    ----------------
                                             8,234,943       6,901,439       5,334,267          88,267,788
                                          ------------    ------------    ------------    ----------------

Loss before state tax benefit               (8,127,557)     (6,749,895)     (5,292,154)        (85,936,153)

State tax benefit                              317,382         287,975         221,847           2,619,542
                                          ------------    ------------    ------------    ----------------

      Net loss                            $ (7,810,175)   $ (6,461,920)   $ (5,070,307)   $    (83,316,611)
                                          ============    ============    ============    ================

Loss per basic and diluted common share   $      (0.21)   $      (0.18)   $      (0.17)
                                          ============    ============    ============

Weighted average number of shares
  outstanding                               37,308,000      35,379,000      29,438,000
                                          ============    ============    ============
</TABLE>

See accompanying notes to financial statements.


                                      F-7
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 2006


<TABLE>
<CAPTION>
                                                      Common Stock
                                                  ---------------------
                                                                                                            Deficit
                                                                                                          Accumulated
                                                                            Capital In        Common        During
                                                   Number of               Excess of par    Stock to be   Development
                                                    Shares      Amount         Value          Issued         Stage
                                                  ----------    -------    -------------    -----------   -----------
<S>                                                <C>          <C>        <C>              <C>            <C>
Issuance of shares to officers and stockholders
  for equipment, research and development, and
  expense reimbursement                              712,500    $   713    $     212,987           --     $        --
Issuance of shares for organizational legal
   service                                            50,000         50            4,950           --              --
Sale of shares for cash, net                          82,143         82          108,418           --              --
Adjustment for 3 for 2 stock split declared
   September 8, 1982                                 422,321        422             (422)          --              --
Net loss                                                  --         --               --           --        (121,486)
                                                  ----------    -------    -------------    ---------     -----------
Balance at July 31, 1982                           1,266,964      1,267          325,933           --        (121,486)

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                                                  --         --               --           --        (558,694)
                                                  ----------    -------    -------------    ---------     -----------
Balance at July 31, 1983                           2,007,325      2,007        1,802,384           --        (680,180)

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                                                  --         --               --           --      (1,421,083)
                                                  ----------    -------    -------------    ---------     -----------
Balance at July 31, 1984                           2,444,891      2,445        3,223,065           --      (2,101,263)

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                                                  --         --               --           --      (2,958,846)
                                                  ----------    -------    -------------    ---------     -----------
Balance at July 31, 1985                           2,884,843      2,885        6,445,730           --      (5,060,109)

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                                                  --         --               --           --      (2,138,605)
                                                  ----------    -------    -------------    ---------     -----------
Balance at July 31, 1986 (carried forward)         2,933,052      2,933        6,849,112           --      (7,198,714)

<CAPTION>

                                                                                        Total
                                                                     Deferred       Stockholders'
                                                  Subscription    compensation,        Equity
                                                   Receivable    restricted stock   (Deficiency)
                                                  ------------   ----------------   -------------
<S>                                               <C>              <C>              <C>
Issuance of shares to officers and stockholders
  for equipment, research and development, and
  expense reimbursement                           $         --     $        --      $     213,700
Issuance of shares for organizational legal
   service                                                  --              --              5,000
Sale of shares for cash, net                                --              --            108,500
Adjustment for 3 for 2 stock split declared
   September 8, 1982                                        --              --                 --
Net loss                                                    --              --           (121,486)
                                                  ------------     -----------      -------------
Balance at July 31, 1982                                    --              --            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)
                                                  ------------     -----------      -------------
Balance at July 31, 1983                                    --              --          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)
                                                  ------------     -----------      -------------
Balance at July 31, 1984                                    --              --          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)
                                                  ------------     -----------      -------------
Balance at July 31, 1985                                    --              --          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)
                                                  ------------     -----------      -------------
Balance at July 31, 1986 (carried forward)                  --              --           (346,669)
</TABLE>


                                      F-8
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued


<TABLE>
<CAPTION>
                                                      Common Stock
                                                  -------------------
                                                                                                         Deficit
                                                                                                       Accumulated
                                                                          Capital In       Common         During
                                                  Number of              Excess of par   Stock to be   Development
                                                    Shares     Amount        Value         Issued         Stage
                                                  ----------   -------   -------------   -----------   ------------

<S>                                                <C>         <C>       <C>             <C>           <C>

Balance at July 31, 1986 (brought forward)         2,933,052   $ 2,933   $   6,849,112           --    $ (7,198,714)

Exercise of warrants,net                              14,745        15         147,435           --              --
Issuance of shares under stock bonus plan for
  directors and consultants                            5,000         5          74,995           --              --
Issuance of shares for services                      250,000       250         499,750           --              --
Sale of shares to private investors, net               5,000         5          24,995           --              --
Net loss                                                  --        --              --           --      (2,604,619)
                                                  ----------   -------   -------------    ---------    ------------
Balance at July 31, 1987                           3,207,797     3,208       7,596,287           --      (9,803,333)

Issuance of shares for legal and consulting
  services                                           206,429       207         724,280           --              --
Issuance of shares under employment incentive
  program                                            700,000       700       2,449,300           --              --
Issuance of shares under stock grant program          19,000        19          66,481           --              --
Exercise of options, net                             170,000       170         509,830           --              --
Issuance of shares for litigation settlement          12,500        12          31,125           --              --
Exercise of warrants,net                              63,925        64         451,341           --              --
Sale of shares to private investors                   61,073        61         178,072           --              --
Amortization of deferred compensation,
  restricted stock                                        --        --              --           --              --
Net loss                                                  --        --              --           --      (3,272,773)
                                                  ----------   -------   -------------    ---------    ------------
Balance at July 31, 1988                           4,440,724     4,441      12,006,716           --     (13,076,106)

Sale of shares for litigation settlement             135,000       135       1,074,703           --              --
Conversion  of debentures, net                       133,333       133         399,867           --              --
Sale of shares to private investors                  105,840       106         419,894           --              --
Exercise of options, net                               1,000         1           3,499           --              --
Issuance of shares under employment agreement        750,000       750       3,749,250           --              --
Issuance of shares under the 1989 Stock Plan          30,000        30         149,970           --              --
Amortization of deferred compensation,
  restricted stock                                        --        --              --           --              --
Net loss                                                  --        --              --           --      (2,952,869)
                                                  ----------   -------   -------------    ---------    ------------
Balance at July 31, 1989                           5,595,897     5,596      17,803,899           --     (16,028,975)

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

<CAPTION>


                                                                                         Total
                                                                     Deferred        Stockholders'
                                                  Subscription    compensation,         Equity
                                                   Receivable    restricted stock    (Deficiency)
                                                  ------------   ----------------    -------------
<S>                                                <C>           <C>                 <C>
Balance at July 31, 1986 (brought forward)         $       --    $             --    $    (346,669)

Exercise of warrants,net                                   --                  --          147,450
Issuance of shares under stock bonus plan for
  directors and consultants                                --                  --           75,000
Issuance of shares for services                            --                  --          500,000
Sale of shares to private investors, net                   --                  --           25,000
Net loss                                                   --                  --       (2,604,619)
                                                   ----------    ----------------    -------------
Balance at July 31, 1987                                   --                  --       (2,203,838)

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

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

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


                                      F-9
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                      Common Stock
                                                  --------------------
                                                                                                         Deficit
                                                                                                       Accumulated
                                                                          Capital In       Common         During
                                                  Number of              Excess of par   Stock to be   Development
                                                    Shares     Amount        Value         Issued         Stage
                                                  ----------   -------   -------------   -----------   ------------

<S>                                                <C>         <C>       <C>             <C>           <C>
Sale of shares to private investors                   89,480   $    90   $     354,990           --    $         --
Issuance of shares under employment agreement        750,000       750       3,749,250           --              --
Conversion of debentures, net                        100,000       100         499,900           --              --
Amortization of deferred compensation,
  restricted stock                                        --        --              --           --              --
Net loss                                                  --        --              --           --      (4,860,116)
                                                  ----------   -------   -------------    ---------    ------------
Balance at July 31, 1990                           6,799,829     6,800      23,699,631           --     (20,889,091)

Exercise of options, net                              16,720        16         108,664           --              --
Issuance of shares for legal consulting
  services                                            87,000        87         358,627           --              --
Issuance of shares under the 1989 Stock Plan         119,000       119         475,881           --              --
Amortization of deferred compensation,
  restricted stock                                        --        --              --           --              --
Net loss                                                  --        --              --           --      (5,202,302)
                                                  ----------   -------   -------------    ---------    ------------
Balance at July 31, 1991                           7,022,549     7,022      24,642,803           --     (26,091,393)

Exercise of options at, net                            1,000         1           3,499           --              --
Sale of shares to private investors                   70,731        71         219,829           --              --
Conversion of debentures, net                         94,000        94         469,906           --              --
Issuance of shares for services                       45,734        46         156,944           --              --
Issuance of shares under the 1989 Stock Plan         104,000       104         285,896           --              --
Amortization of deferred compensation,
  restricted stock                                        --        --              --           --              --
Net loss                                                  --        --              --           --      (4,772,826)
                                                  ----------   -------   -------------    ---------    ------------
Balance at July 31, 1992                           7,338,014     7,338      25,778,877           --     (30,864,219)

Sale of shares to private investors                  352,667       353         735,147           --              --
Issuance of shares for legal services                 49,600        50         132,180           --              --
Issuance of shares for services                        5,000         5           9,995           --              --
Issuance of shares under the 1989 Stock Plan         117,000       117         233,883           --              --
Amortization of deferred compensation,
  restricted stock                                        --        --              --           --              --
Net loss                                                  --        --              --           --      (2,357,350)
                                                  ----------   -------   -------------    ---------    ------------
Balance at July 31, 1993                           7,862,281     7,863      26,890,082           --     (33,221,569)

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

<CAPTION>


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

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

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

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

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


                                      F-10
<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                      Common Stock
                                                  --------------------
                                                                                                           Deficit
                                                                                                         Accumulated
                                                                          Capital In        Common          During
                                                  Number of              Excess of par    Stock to be    Development
                                                    Shares     Amount        Value          Issued          Stage
                                                  ----------   -------   -------------    -----------    ------------
<S>                                               <C>           <C>         <C>           <C>             <C>
Issuance of shares under the 1989 Stock Plan,
  for services                                         5,000   $     5   $      14,995             --    $         --
Issuance of options to related parties upon
conversion of accrued interest, payroll and
  expenses                                                --        --       3,194,969             --              --
Repurchase of stock options from related party            --        --        (198,417)            --              --
Issuance of options upon conversion of accrued
  interest                                                --        --         142,441             --              --
Common stock to be issued                                 --        --              --         50,000              --
Amortization of deferred compensation,
  restricted stock                                        --        --              --             --              --
Net loss                                                  --        --              --             --      (2,234,428)
                                                  ----------   -------   -------------    -----------    ------------
Balance at July 31, 1994                           9,124,681     9,125      33,680,954         50,000     (35,455,997)

Sale of shares to private investors, net             961,000       961       2,023,241        (50,000)             --
Conversion of short-term borrowings                   17,600        17          43,983             --              --
Issuance of shares for services                       30,906        31          77,234             --              --
Exercise of options, net                             185,000       185         437,015             --              --
Common stock to be issued                                 --        --              --        339,008              --
Common stock to be issued, for services                   --        --              --          4,800              --
Amortization of deferred compensation,
  restricted stock                                        --        --              --             --              --
Net loss                                                  --        --              --             --      (1,993,123)
                                                  ----------   -------   -------------    -----------    ------------
Balance at July 31, 1995                          10,319,187    10,319      36,262,427        343,808     (37,449,120)

Sale of shares to private investors, net           2,953,327     2,953       8,969,655       (339,008)             --
Issuance of shares for services                       19,995        20          70,858         (4,800)             --
Exercise of options, net                             566,700       567       1,657,633             --              --
Sale of warrants                                          --        --          12,084             --              --
Issuance of options/warrants for services                 --        --          50,872             --              --
Common stock to be issued                                 --        --              --        258,335              --
Subscription receivable                                   --        --              --             --              --
Net loss                                                  --        --              --             --      (2,942,152)
                                                  ----------   -------   -------------    -----------    ------------
Balance at July 31, 1996                          13,859,209    13,859      47,023,529        258,335     (40,391,272)

Sale of shares to private investors, net             112,000       112         503,888             --              --
Issuance of options for services                          --        --          76,504             --              --
Exercise of options, net                             729,134       729       2,620,359       (258,335)             --
Exercise of warrants, net                            147,450       148         737,102             --              --
Net loss                                                  --        --              --             --      (5,018,867)
                                                  ----------   -------   -------------    -----------    ------------
Balance at July 31, 1997 (carried forward)        14,847,793    14,848      50,961,382             --     (45,410,139)

<CAPTION>

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

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

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

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


                                      F-11
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued


<TABLE>
<CAPTION>

                                                      Common Stock
                                                  --------------------
                                                                                                         Deficit
                                                                                                       Accumulated
                                                                          Capital In       Common         During
                                                  Number of              Excess of par   Stock to be   Development
                                                    Shares     Amount        Value         Issued         Stage
                                                  ----------   -------   -------------   -----------   ------------
<S>                                               <C>          <C>       <C>             <C>           <C>
Balance at July 31, 1997 (brought forward)        14,847,793   $14,848   $  50,961,382            --   $(45,410,139)

Sale of shares to private investors, net           2,337,150     2,337       4,199,877            --             --
Issuance of options for services                          --        --         199,954            --             --
Exercise of warrants, net                              4,950         5          11,080            --             --
Issuance of shares for services, net                  50,000        50          99,950            --             --
Net loss                                                  --        --              --            --     (6,387,506)
                                                  ----------   -------   -------------   -----------   ------------
Balance at July 31, 1998                          17,239,893    17,240      55,472,243            --    (51,797,645)

Issuance of options for services                          --        --         205,593            --             --
Issuance of shares for services, net                  46,701        46          16,359            --             --
Net loss                                                  --        --              --            --     (3,156,636)
                                                  ----------   -------   -------------   -----------   ------------
Balance at July 31, 1999                          17,286,594    17,286      55,694,195            --    (54,954,281)

Sale of shares to private investors, net             875,000       875         547,417            --             --
Exercise of options, net                              95,000        95          45,755            --             --
Issuance of shares for services, net                 174,965       175          92,009            --             --
Vesting of options previously issued for
  services                                                --        --         146,912            --             --
Net loss                                                  --        --              --            --     (1,722,298)
                                                  ----------   -------   -------------   -----------   ------------
Balance at July 31, 2000                          18,431,559    18,431      56,526,288            --    (56,676,579)

Sale of shares to private investors, net             863,331       863         955,561            --             --
Exercise of options, net                             165,555       166          83,565            --             --
Issuance of shares for services, net                  11,800        12          10,018            --             --
Exercise of convertible debentures, net              330,000       330         296,670            --             --
Issuance of warrants with convertible debt                --        --         178,807            --             --
Issuance of options for services                          --        --         160,426            --             --
Net loss                                                  --        --              --            --     (2,294,936)
                                                  ----------   -------   -------------   -----------   ------------
Balance at July 31, 2001                          19,802,245    19,802      58,211,335            --    (58,971,515)

Sale of shares to private investors, net           2,622,122     2,623       1,047,925            --             --
Exercise of stock options and warrants               186,000       186          92,814            --             --
Issuance of shares for services, net                  78,340        78          64,048            --             --
Exercise of convertible debentures, net               72,214        72          64,921            --             --
Vesting of options previously issued for
  services                                                --        --         173,436            --             --
Net loss                                                  --        --              --            --     (2,591,162)
                                                  ----------   -------   -------------   -----------   ------------
Balance at July 31, 2002 (carried forward)        22,760,921    22,761      59,654,479            --    (61,562,677)

<CAPTION>


                                                                                        Total
                                                                     Deferred       Stockholders'
                                                  Subscription    compensation,        Equity
                                                   Receivable    restricted stock   (Deficiency)
                                                  ------------   ----------------   -------------
<S>                                               <C>               <C>             <C>
Balance at July 31, 1997 (brought forward)        $         --      $       --      $   5,566,091

Sale of shares to private investors, net                    --              --          4,202,214
Issuance of options for services                            --              --            199,954
Exercise of warrants, net                                   --              --             11,085
Issuance of shares for services, net                        --              --            100,000

Net loss                                                    --              --         (6,387,506)
                                                  ------------      ----------      -------------
Balance at July 31, 1998                                    --              --          3,691,838

Issuance of options for services                            --              --            205,593
Issuance of shares for services, net                        --              --             16,405

Net loss                                                    --              --         (3,156,636)
                                                  ------------      ----------      -------------
Balance at July 31, 1999                                    --              --            757,200

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

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

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


                                      F-12
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued


<TABLE>
<CAPTION>
                                                      Common Stock
                                                  --------------------
                                                                                                          Deficit
                                                                                                        Accumulated
                                                                          Capital In        Common        During
                                                  Number of              Excess of par   Stock to be    Development
                                                    Shares     Amount        Value          Issued         Stage
                                                  ----------   -------   -------------   -----------   ------------
<S>                                               <C>          <C>       <C>             <C>           <C>
Balance at July 31, 2002 (brought forward)        22,760,921   $22,761   $  59,654,479          --     $(61,562,677)

Sale of shares to private investors, net           1,315,000     1,315         652,312          --               --
Exercise of stock options and warrants               764,000       764         376,896          --               --
Issuance of shares for payment of accounts
  payable                                            186,208       186          94,037          --               --
Issuance of options for services rendered                 --        --          75,521          --               --
Vesting of options previously issued for
  services                                                --        --          10,038          --               --
Issuance of warrants in connection with
  debt issuances                                          --        --         594,219          --               --
Net loss                                                  --        --              --          --       (2,411,532)
                                                  ----------   -------   -------------     -------     ------------
Balance at July 31, 2003                          25,026,129    25,026      61,457,502          --      (63,974,209)

Sale of shares to private investors, net           3,035,200     3,036      10,732,942          --               --
Exercise of stock options and warrants             3,100,160     3,100       4,155,397          --               --
Issuance of shares for payment of accounts
  payable                                             14,703        15          52,161          --               --
Issuance of shares for conversion of
  subordinated debentures                          3,042,817     3,043         924,829          --               --
Issuance of shares for services rendered             128,876       128         288,372          --               --
Issuance of options for services rendered                 --        --         280,612          --               --
Net loss                                                  --        --              --          --       (5,070,307)
                                                  ----------   -------   -------------     -------     ------------
Balance at July 31, 2004                          34,347,885    34,348      77,891,815          --      (69,044,516)

Exercise of stock options and warrants, net          438,372       438         306,717          --               --
Issuance of shares and warrants for conversion
  of subordinated debentures                       1,744,978     1,745         462,754          --               --
Issuance of shares for services rendered               3,000         3          13,497          --               --
Issuance of options and warrants for
  services rendered                                       --        --          16,789          --               --
Net loss                                                  --        --              --          --       (6,461,920)
                                                  ----------   -------   -------------     -------     ------------
Balance at July 31, 2005                          36,534,235    36,534      78,691,572          --      (75,506,436)

Sale of shares to private investors, net           6,632,099     6,632      10,977,288          --               --
Exercise of stock options and warrants, net        1,122,827     1,123       1,347,201          --               --
Issuance of stock options and warrants for
  services rendered                                       --        --       1,489,264          --               --
Net loss                                                  --        --              --          --       (7,810,175)
                                                  ----------   -------   -------------     -------     ------------
Balance at July 31, 2006                          44,289,161   $44,289   $  92,505,325          --     $(83,316,611)
                                                  ==========   =======   =============     =======     ============

<CAPTION>


                                                                                          Total
                                                                      Deferred        Stockholders'
                                                  Subscription      compensation,        Equity
                                                   Receivable     restricted stock    (Deficiency)
                                                  -------------   -----------------   -------------
<S>                                               <C>                <C>              <C>
Balance at July 31, 2002 (brought forward)        $          --      $        --      $  (1,885,437)

Sale of shares to private investors, net                     --               --            653,627
Exercise of stock options and warrants                       --               --            377,660
Issuance of shares for payment of accounts
  payable                                                    --               --             94,223
Issuance of options for services rendered                    --               --             75,521
Vesting of options previously issued for
  services                                                   --               --             10,038
Issuance of warrants in connection with
  debt issuances                                             --               --            594,219
Net loss                                                     --               --         (2,411,532)
                                                  -------------      -----------      -------------
Balance at July 31, 2003                                     --               --         (2,491,681)

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

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

Sale of shares to private investors, net                     --               --         10,983,920
Exercise of stock options and warrants, net                  --               --          1,348,324
Issuance of stock options and warrants for
  services rendered                                          --               --          1,489,264
Net loss                                                     --               --         (7,810,175)
                                                  -------------      -----------      -------------
Balance at July 31, 2006                          $          --      $        --      $   9,233,003
                                                  =============      ===========      =============
</TABLE>


See accompanying notes to financial statements.


                                      F-13
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                            Statements of Cash Flows

                    Years ended July 31, 2006, 2005 and 2004
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 2006

<TABLE>
<CAPTION>
                                                                                                           August 24, 1981
                                                                                                         (date of inception)
                                                                                                                 to
                                                                                                              July 31,
                                                                2006           2005           2004              2006
                                                            -----------    -----------    -----------    -------------------
<S>                                                         <C>            <C>            <C>            <C>
Cash flows from operating activities:
  Net loss                                                  $(7,810,175)   $(6,461,920)   $(5,070,307)   $       (83,316,611)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
        Gain on sale of marketable equity securities                 --             --             --                (25,963)
        Depreciation and amortization                            29,703         28,917          9,549              1,619,977
        Loss on disposal of property and equipment                   --             --             --                 18,926
        Issuance of common stock, stock options
          and warrants for services rendered                  1,489,264         30,289        569,112              8,206,277
        Amortization of debt discount                                --         34,120        316,688                594,219
        Amortization of deferred compensation                        --             --             --             11,442,000
        Changes in assets and liabilities:
         (Increase) decrease in other current assets            129,846       (132,165)       (54,668)              (126,957)
         Increase in loans receivable, related party             (9,528)        (9,527)        (9,528)               (74,819)
         Increase in loans and interest payable,
           related party                                             --             --             --                744,539
         Increase (decrease) in accounts payable                889,907       (145,337)      (105,653)             1,792,805
         Increase in accrued payroll and
           expenses, related parties                                 --             --             --              2,348,145
         Increase (decrease) in accrued expenses                 23,564        722,985       (669,901)             2,026,139
                                                            -----------    -----------    -----------    -------------------
               Net cash used in operating activities         (5,257,419)    (5,932,638)    (5,014,708)           (54,751,323)
                                                            -----------    -----------    -----------    -------------------

Cash flows from investing activities:
        Purchase of marketable equity securities                     --             --             --               (290,420)
        Purchase of short-term investments                           --             --             --             (1,993,644)
        Proceeds from sale of marketable
          equity securities                                          --             --             --                316,383
        Proceeds from sale of short-term investments                 --             --             --              1,993,644
        Purchase of property and equipment                      (19,236)       (52,529)       (53,537)            (1,532,138)
        Patent costs                                                 --             --             --                (97,841)
                                                            -----------    -----------    -----------    -------------------
               Net cash used in investing activities            (19,236)       (52,529)       (53,537)            (1,604,016)
                                                            -----------    -----------    -----------    -------------------
</TABLE>


                                      F-14
<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                                                             August 24, 1981
                                                                                                           (date of inception)
                                                                                                                   to
                                                                                                                July 31,
                                                                     2006          2005          2004             2006
                                                                 -----------   -----------   -----------   -------------------
<S>                                                              <C>           <C>           <C>           <C>
Cash flows from financing activities:
  Proceeds from short-term borrowings                            $        --   $        --   $        --   $           874,500
  Payment of short-term borrowings                                        --            --            --              (653,500)
  Increase in loans payable, related party, net                           --            --            --             2,628,868
  Proceeds from bank debt and other long-term
    debt, net of deferred debt costs                                      --            --            --             3,667,460
  Reduction of bank debt and long-term debt                               --        (6,731)       (8,673)           (2,966,568)
  Proceeds from issuance of common stock, net                     10,983,920            --    10,735,978            51,734,236
  Proceeds from exercise of stock options
    and warrants, net                                              1,348,324       307,155     4,158,497            11,874,890
  Proceeds from issuance of convertible
    debentures, related party                                             --            --            --               297,000
  Proceeds from issuance of convertible
    debentures, unrelated party                                           --            --            --               416,993
                                                                 -----------   -----------   -----------   -------------------
        Net cash provided by financing activities                 12,332,244       300,424    14,885,802            67,873,879
                                                                 -----------   -----------   -----------   -------------------
        Net increase (decrease) in cash and cash
          equivalents                                              7,055,589    (5,684,743)    9,817,557            11,518,540
Cash and cash equivalents at beginning of period                   4,462,951    10,147,694       330,137                    --
                                                                 -----------   -----------   -----------   -------------------
Cash and cash equivalents at end of period                       $11,518,540   $ 4,462,951   $10,147,694   $        11,518,540
                                                                 ===========   ===========   ===========   ===================

Supplemental disclosure of cash flow
  information - interest paid                                    $       112   $       305   $     6,375   $         1,714,130
                                                                 ===========   ===========   ===========   ===================

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

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

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


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

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

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


                                      F-15
<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                                                             August 24, 1981
                                                                                                           (date of inception)
                                                                                                                   to
                                                                                                                July 31,
                                                                     2006          2005          2004             2006
                                                                 -----------   -----------   -----------   -------------------
<S>                                                              <C>           <C>           <C>           <C>
Conversions of accounts payable to common stock                  $        --   $        --   $    52,176   $           506,725
                                                                 ===========   ===========   ===========   ===================

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


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

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

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

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

See accompanying notes to financial statements.


                                      F-16
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                          Notes to Financial Statements

                    Years ended July 31, 2006, 2005 and 2004
                       and the Period From August 24, 1981
                      (Date of Inception) to July 31, 2006

(1)   Summary of Significant Accounting Policies

      Business Description

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

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

      Use of Estimates

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

      Property and Equipment

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

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

      Cash Equivalents

      The Company  considers all  highly-liquid  investments  with maturities of
      three  months or less,  at the time of purchase,  to be cash  equivalents.
      Cash equivalents are in excess of the federally insured amount.

      Research and Development

      Research and development costs are expensed as incurred.

      Fair Value of Financial Instruments

      For all financial instruments,  carrying value approximates fair value due
      to the short maturity of those instruments.


                                      F-17
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

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

      Earnings (Loss) Per Common Share

      "Basic"  earnings (loss) per common share equals net income (loss) divided
      by weighted average common shares outstanding during the period. "Diluted"
      earnings per common share equals net income divided by the sum of weighted
      average  common  shares  outstanding  during the period,  adjusted for the
      effects  of  potentially  dilutive  securities.  The  Company's  Basic and
      Diluted per share amounts are the same since the Company has net losses in
      all periods and the assumed  exercise of stock options and warrants  prior
      to July 31, 2006 would be anti-dilutive. The number of outstanding options
      and warrants  that could dilute  earnings per share in future  periods was
      21,949,948,  16,242,519  and  14,329,413 at July 31, 2006,  2005 and 2004,
      respectively.

      Long-Lived Assets

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

      Stock Option Plans

      Statement of  Financial  Accounting  Standards  No. 123,  "Accounting  for
      Stock-Based  Compensation"  ("SFAS  123"),  provides for the use of a fair
      value-based method of accounting for employee stock compensation. However,
      SFAS 123 also allowed an entity to continue to measure  compensation  cost
      for stock options  granted to employees and directors  using the intrinsic
      value method of  accounting  prescribed  by  Accounting  Principles  Board
      Opinion No. 25,  "Accounting  for Stock Issued to  Employees"  ("APB 25"),
      which only required  charges to  compensation  expense for the excess,  if
      any, of the fair value of the underlying  stock at the date a stock option
      was granted (or at an appropriate  subsequent  measurement  date) over the
      amount the  employee  had to pay to acquire  the  stock,  if such  amounts
      differed materially from the historical amounts.  Prior to August 1, 2005,
      the Company had elected to continue to account for employee  stock options
      using the  intrinsic  value method under APB 25. As the exercise  price of
      all options  granted  under the stock option plans was equal to the market
      value of the  underlying  common stock on the grant date,  no  stock-based
      employee  compensation  cost  had  been  recognized  in the  statement  of
      operations for the years ended July 31, 2005 and 2004.

      In December 2004, the Financial Accounting Standards Board issued SFAS No.
      123(R) (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which amends
      SFAS 123. The new standard  requires all share-based  payments,  including
      stock option grants to employees, to be recognized as an operating expense
      in the statement of operations.  The cost is recognized over the requisite
      service  period  based on fair values  measured on the date of grant.  The
      Company  adopted SFAS 123(R)  effective  August 1, 2005 using the modified
      prospective  method and,  accordingly,  prior period amounts have not been
      restated. Under the modified prospective method, the fair value of all new
      stock options issued after July 31, 2005 and the unamortized fair value of
      unvested  outstanding  stock  options at August 1, 2005 are  recognized as
      expense as  services  are  rendered.  The Company  recorded  approximately
      $1,318,000  or $.04 per  basic and  diluted  common  share of  stock-based
      compensation  expense  for  employees  under SFAS 123R for the fiscal year
      ended July 31, 2006. Had the Company accounted for its stock-based  awards
      under the fair value  method for the fiscal  years ended July 31, 2005 and
      2004 the pro forma impact to its financial  statements  would have been as
      follows:


                                      F-18
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

1)    Summary of Significant Accounting Policies, (Continued)

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

      For options granted to employees  during the fiscal years ended 2006, 2005
      and 2004, the per option weighted-average fair value at the grant date was
      $1.27, $3.87 and $4.36, respectively,  and the per option weighted average
      exercise price was $1.69, $4.40 and $5.26, respectively. The fair value of
      the stock options at the grant date was estimated using the  Black-Scholes
      options pricing model based on the  weighted-average  assumptions as noted
      in the following table. The risk-free interest rate for periods within the
      contractual  life of the option is based on the U.S.  Treasury yield curve
      in effect at the time of grant.  The expected  stock price  volatility  is
      based on historical  volatility of the Company's stock price. The expected
      term until  exercise is derived using the  "simplified"  method as allowed
      under the  provisions of the Securities  and Exchange  Commission's  Staff
      Accounting Bulletin No. 107 and represents the period of time that options
      granted are expected to be  outstanding.  As of July 31,  2006,  there was
      approximately  $2,318,000 of total unrecognized  compensation cost related
      to unvested  options  granted  that is expected  to be  recognized  over a
      weighted average period of 1.16 years.

<TABLE>
<CAPTION>
                                                             2006             2005           2004
                                                             ----             ----           ----
<S>                                                          <C>              <C>            <C>
               Expected dividend yield                        0%               0%             0%
               Risk-free interest rate                       4.4%             4.25%          4.00%
               Expected stock price volatility               95.6%            95.2%          78.0%
               Expected term until exercise (years)          5.33             9.56           6.86
</TABLE>

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

      Accounting For Warrants Issued With Convertible Debt

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


                                      F-19
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

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

      Accounting Changes and Error Corrections

      The FASB has issued FASB Statement No. 154,  Accounting  Changes and Error
      Corrections  ("FAS 154").  The new  standard  replaces APB Opinion No. 20,
      Accounting Changes and FASB Statement No. 3, Reporting  Accounting Changes
      in Interim Financial Statements. Among other changes, FAS 154 provides for
      correction of errors in previously  issued financial  statements should be
      termed "restatement". The new standard is effective for accounting changes
      and correction of errors made in fiscal years beginning after December 15,
      2005. Early adoption of this standard is permitted for accounting  changes
      and  correction  of errors made for fiscal years  beginning  after June 1,
      2005. The Company adopted FAS 154 on August 1, 2005.

      Income Taxes

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

(2)   Liquidity

      The  Company  has  reported  net  losses  of   approximately   $7,810,000,
      $6,462,000,  and $5,070,000 for the fiscal years ended July 31, 2006, 2005
      and 2004, respectively.  The loss from date of inception,  August 24, 1981
      to July 31, 2006, amounts to $83,317,000.

      The Company's long-term continued operations will depend on its ability to
      raise  additional funds through various  potential  sources such as equity
      and debt financing, collaborative agreements, strategic alliances, sale of
      tax benefits, revenues from the commercial sale of ONCONASE(R),  licensing
      of its proprietary  RNase  technology and its ability to realize  revenues
      from its technology and its drug candidates via  out-licensing  agreements
      with other  companies.  Such additional  funds may not become available as
      the Company may need them or be available on acceptable  terms.  Until and
      unless the Company's operations generate significant revenues, the Company
      expects to continue to fund operations from equity financing. There can be
      no  assurance  that the Company will be able to raise the capital it needs
      on terms  which are  acceptable,  if at all.  During the fiscal year ended
      July 31, 2006, the Company  received net proceeds of  approximately  $12.3
      million as a result of private placements of common stock and warrants and
      from  exercises of stock  options and warrants.  The Company  expects that
      such net proceeds  together with its cash reserves,  will be sufficient to
      fund its  operations  through July 31, 2008 based on its expected level of
      expenditures.  The Company may also obtain additional  capital through the
      exercise  of  outstanding  options  and  warrants  and the sale of its tax
      benefits,  although it cannot  provide any assurance of such  exercises or
      sale or the amount of capital it will receive, if any.

(3)   Property and Equipment

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

<TABLE>
<CAPTION>
                                                                  2006           2005
                                                                  ----           ----
<S>                                                            <C>             <C>
      Laboratory equipment                                     $ 774,757       $ 769,760
      Office equipment                                           288,053         273,814
      Leasehold improvements                                      97,833          97,833
                                                               ---------       ---------
      Total                                                    1,160,643       1,141,407
      Less accumulated depreciation and amortization           1,090,715       1,061,012
                                                               ---------       ---------
         Property and equipment, net                           $  69,928       $  80,395
                                                               =========       =========
</TABLE>

(4)   Long-term Debt

      During the fiscal  year ended July 31,  2004,  the  principal  and accrued
      interest on 8%  convertible  notes  payable  (see Note 7) in an  aggregate
      amount of $927,872 were  converted  resulting in the issuance of 3,042,817
      shares of common stock and  3,733,839  five year  warrants  with  exercise
      prices ranging from $1.00 to $1.10 per share.


                                      F-20
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(4)   Long-term Debt, (Continued)

      During the fiscal  year ended July 31,  2005,  the  principal  and accrued
      interest on 8%  convertible  notes  payable  (see Note 7) in an  aggregate
      amount of $464,499 were  converted  resulting in the issuance of 1,744,978
      shares of common stock and  2,044,978  five year warrants with an exercise
      price of $1.00 per share.

(5)   Related Party Transactions

      Amounts due from the Company's CEO totaling  $170,870 and $161,342 at July
      31, 2006 and 2005,  respectively,  are classified as a long-term  asset in
      Loan receivable, related party as the Company does not expect repayment of
      these amounts  within one year. In each of the fiscal years ended July 31,
      2006,  2005 and 2004,  the  Company  earned 8%  interest  in the amount of
      approximately $9,500 on the unpaid principal balance.

(6)   Leases

      The Company leases its facility on a  month-to-month  basis and its office
      equipment for five years  pursuant to a lease which expires in 2010.  Rent
      expense charged to operations was $148,000,  $139,000 and $136,000 in each
      of fiscal years ended July 31, 2006, 2005 and 2004, respectively.

(7)   Stockholders' Equity

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

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

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

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

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

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


                                      F-21
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

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

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


                                      F-22
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

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

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

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

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

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

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


                                      F-23
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      During the fiscal year ended July 31, 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.

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

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

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

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

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

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

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


                                      F-24
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

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

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

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

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


                                      F-25
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

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


                                      F-26
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      On April 20, 1998 the SEC declared  effective a registration  statement on
      Form S-3 for the offer and sale by certain stockholders of up to 3,918,299
      shares of common  stock.  Of these  shares (i) an  aggregate  of 2,337,150
      shares of common stock were issued to the private  placement  investors in
      the February 1998 Private Placement, (ii) an aggregate of 1,168,575 shares
      may be issued  upon  exercise  of the  Warrants  which were  issued to the
      private placement investors in the February 1998 Private Placement,  (iii)
      350,574  shares may be issued  upon the  exercise of the  Placement  Agent
      Warrant  which was  issued to the  placement  agent in the  February  1998
      Private Placement and the Warrants issuable upon exercise of the Placement
      Agent  Warrant,  (iv)  50,000  shares of  common  stock  were  issued to a
      Supplier in connection with conversion of an outstanding accounts payable,
      and (v) 12,000  shares may be issued upon the  exercise  of options  which
      were issued as payment for  services  to be  rendered.  As a result of the
      delisting of the Company's  common stock from the Nasdaq SmallCap  Market,
      the  Company no longer  qualified  for the use of a Form S-3  registration
      statement  for this  offering when it filed its Annual Report on Form 10-K
      for the  fiscal  year  ended  July 31,  1999 and thus,  this  registration
      statement  was no  longer  effective.  The  Company  filed a  registration
      statement  on Form  S-1 to  register  these  shares,  which  was  declared
      effective in February 2002.

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

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

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

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

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


                                      F-27
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

      During the fiscal year ended July 31, 2001,  the Company sold an aggregate
      of 863,331  shares of common stock to private  investors at prices ranging
      from $0.90 to $1.50 per share resulting in net proceeds of $956,000 to the
      Company.  In addition,  the private  investors  were  granted  warrants to
      purchase  an  aggregate  of  696,665  shares of common  stock at per share
      exercise  prices  ranging from $1.50 to $3.00.  The  warrants  will expire
      during the period  commencing  July 2004 and ending in October 2006. As of
      July 31,  2006,  166,666  of  these  warrants  expired  and  222,222  were
      exercised.

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

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

      During the fiscal year ended July 31,  2001,  the Company  issued  330,000
      shares of common  stock  upon the  conversion  of  convertible  notes from
      related  parties at $0.90 per share.  In addition,  upon  conversion,  the
      related parties were granted three-year  warrants to purchase an aggregate
      of 330,000 shares of common stock at an exercise price of $2.50 per share.
      The  estimated  value of these  warrants  in the  amount of  $108,900  was
      recorded by the Company as interest  expense  during the fiscal year ended
      July 31, 2001. In October 2001,  the board of directors  approved a change
      of the 330,000 warrants from three-year warrants to five-year warrants and
      the exercise price from $2.50 per share to $1.50 per share to conform with
      private placements to unrelated parties.  These warrants were exercised as
      of July 31, 2006.


                                      F-28
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

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

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

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

      During the fiscal year ended July 31, 2002,  the Company sold an aggregate
      of 2,622,122 shares of common stock to private investors at prices ranging
      from $0.35 to $0.90 per share  resulting in net proceeds of  $1,050,000 to
      the Company.  In addition,  the private investors were granted warrants to
      purchase an  aggregate  of  2,673,422  shares of common stock at per share
      exercise  prices  ranging from $0.75 to $1.50.  The  warrants  will expire
      during the period  commencing  August 2006 and ending in June 2007.  As of
      July 31, 2006, 1,032,819 of these warrants were exercised.

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

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


                                      F-29
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

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

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

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

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

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


                                      F-30
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      During the fiscal year ended July 31, 2003,  the Company sold an aggregate
      of 1,315,000 shares of common stock to private investors at prices ranging
      from $0.20 to $0.73 per share resulting in net proceeds of $653,627 to the
      Company.  In addition,  the private  investors  were  granted  warrants to
      purchase an  aggregate  of  1,315,000  shares of common stock at per share
      exercise  prices  ranging from $1.00 to $1.50.  The  warrants  will expire
      during the period  commencing  January 2008 and ending in October 2008. As
      of July 31, 2006, 820,000 of these warrants were exercised.

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

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

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

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

      During the fiscal year ended July 31,  2004,  the Company  entered  into a
      two-part  financing  agreement  with SF  Capital  Partners,  Ltd.  for the
      private  placement  of  1,704,546  shares of common  stock and warrants to
      purchase 852,273 shares of common stock, at an exercise price of $1.50 per
      share. As consideration, the Company received $1,500,000. In addition, the
      Company  granted  SF  Capital  Partners,  Ltd.  a  warrant  to  invest  an
      additional  $1,500,000  to  purchase  the  Company's  common  stock  at an
      exercise price based upon a 20-day  trailing  average of the closing price
      per share of the  Company's  common  stock  (the  "Additional  Warrants").
      During the fiscal  year ended July 31,  2004,  SF Capital  Partners,  Ltd.
      exercised the Additional  Warrants at a 20-day trailing  average  exercise
      price of $3.96 which  resulted in gross  proceeds  of  $1,500,000  and the
      issuance  of 379,170  shares of common  stock and an  Exercise  Warrant to
      purchase  an  additional  189,585  shares of  common  stock at a per share
      exercise  price of $4.75.  The Company  also issued an aggregate of 53,876
      shares of restricted common stock to a third party as finder's fee. During
      the fiscal year ended July 31, 2006,  the  exercise  price of the Exercise
      Warrant to  purchase  an  additional  189,585  shares of common  stock was
      reduced from $4.75 to $2.88 per share.  As of July 31, 2006, none of these
      options were exercised.

      During the fiscal  year ended July 31,  2004,  the Company  issued  25,000
      five-year stock options to a board member as payment for non-board related
      services and 110,000  five-year  stock options to various  consultants for
      services  rendered.  The options vested  immediately  and have a per share
      exercise price of $3.46. The Company recorded a total of $275,377 non-cash
      expenses for these  options,  based upon the fair value on the date of the
      issuance as estimated by the  Black-Scholes  options  pricing model. As of
      July 31, 2006, 5,000 of these options were exercised.


                                      F-31
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

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

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

      During the fiscal year ended July 31, 2004, the Company  issued  1,210,654
      shares of common stock to an existing institutional investor, resulting in
      gross  proceeds  of  $10,000,000   to  the  Company.   In  addition,   the
      institutional   investor  was  granted  five-year   warrants  to  purchase
      1,210,654 shares of Common Stock at an exercise price of $12.39 per share.
      The Company paid a 5% finder's fee to a third party in connection with the
      private  placement,  which included a five-year warrant to purchase 60,533
      shares of common  stock at an exercise  price of $12.39 per share.  During
      the fiscal year ended July 31, 2006, the exercise price of the warrants to
      purchase an aggregate of 1,185,000 shares of common stock was reduced from
      $12.39 to $2.88 per share.

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

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

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

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

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

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

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

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


                                      F-32
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      During  the  fiscal  year  ended  July 31,  2005,  the  Company  issued an
      aggregate of 20,000  ten-year  stock options to consultants as payment for
      continuing  services.  The options will vest 25% each year starting on the
      first  anniversary of the  commencement of the services of the consultants
      provided they remain as  consultants on the relevant  vesting  dates.  The
      stock  options  have an  exercise  price of $2.05 per share.  The  Company
      recorded a total of $3,237 of non-cash  expense for these  options,  based
      upon the fair value at July 31,  2005 as  estimated  by the  Black-Scholes
      option  pricing  model.  During the fiscal year ended July 31,  2006,  the
      Company  recorded under EITF 96-18, a total of $15,066 of non-cash expense
      for these options.

      During  the  fiscal  year  ended  July 31,  2006,  the  Company  issued an
      aggregate  of  1,122,827  shares  of common  stock  upon the  exercise  of
      warrants and stock options by unrelated parties,  consultants,  employees,
      directors and an executive  officer at per share  exercise  prices ranging
      from $0.26 to $3.46.  The Company  realized  aggregate  gross  proceeds of
      $1,348,324 from these exercises.

      During the fiscal  year ended July 31,  2006,  the Company  issued  25,000
      ten-year  stock options to a consultant as payment for services  rendered.
      The options  vested  immediately  and have an exercise  price of $1.32 per
      share.  The Company  recorded a total of $23,166 of  non-cash  expense for
      these options.

      During the fiscal  year ended July 31,  2006,  the Company  issued  50,000
      five-year  stock  options to a  consultant  as payment for  services to be
      rendered.  These options vest over a one year period,  50% of which vested
      immediately  and  12.5%  will  vest  equally  for the next  four  quarters
      following  the grant date.  The stock  options  have an exercise  price of
      $2.04 per share and are subject to variable  accounting  under EITF 96-18.
      The fair value of these options is being expensed over the service period.
      During the fiscal year ended July 31, 2006,  the Company  recorded a total
      of $74,253 of non-cash expense for these options.

      During the fiscal  year ended July 31,  2006,  the Company  issued  25,000
      ten-year  stock options to a consultant as payment for services  rendered.
      The options  vested  immediately  and have an exercise  price of $3.37 per
      share.  The Company  recorded a total of $58,387 of  non-cash  expense for
      these options.

      During the fiscal year ended July 31,  2006,  the Company  issued  174,927
      shares of restricted common stock to a private investor resulting in gross
      proceeds of  $600,000  to the  Company  for a purchase  price of $3.43 per
      share.

      During  the fiscal  year ended July 31,  2006,  the  Company  completed  a
      private placement to various institutional investors which resulted in the
      issuance of an aggregate of 6,457,172  shares of  restricted  common stock
      for a purchase price of $1.75 per share. The institutional  investors also
      received  warrants  to purchase up to an  additional  6,457,172  shares of
      common stock of the  Company.  The fair value of the warrants at the grant
      date was  approximately  $12,962,000 as estimated using the  Black-Scholes
      options  pricing  model.  The warrants  have a term of five years and were
      issued in two separate  series.  The first series of warrants (to purchase
      3,228,590 shares of common stock) are exercisable beginning on January 19,
      2007, and the second series of warrants (to purchase  3,228,582  shares of
      common  stock) are also  exercisable  beginning on January 19, 2007.  Both
      sets of warrants have an exercise  price equal to $2.88 per share.  If the
      Company enters into a strategic corporate collaboration as outlined in the
      second  series of warrants  by December  31,  2006,  the second  series of
      warrants will be cancelled upon notification by the Company to the holders
      of the warrants  that it has entered into such an agreement  prior to such
      date. The Company received net proceeds of approximately  $10,384,000 from
      this private placement. The Company filed a registration statement on Form
      S-3 to  register  the resale of the shares  and the shares  issuable  upon
      exercise of the warrants,  which was declared effective in August 2006. If
      the  Company  had  failed  to file  the  registration  statement,  request
      effectiveness  of the registration  statement,  respond to comments of the
      Securities and Exchange Commission, or cause the registration statement to
      be declared effective in a timely manner in accordance with the provisions
      of  the  registration   rights  agreement  between  the  Company  and  the
      investors, or if the registration statement ceases to remain effective, or
      the investors are otherwise not permitted to utilize the prospectus in the
      registration statement to resell the


                                      F-33
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)   Stockholders' Equity, (Continued)

      securities  for more  than 15  consecutive  calendar  days or more than an
      aggregate of 25 calendar  days during any 12-month  period (which need not
      be consecutive  calendar days), then the Company must pay to each investor
      an amount,  in cash, as partial  liquidated  damages and not as a penalty,
      equal to 2% of the aggregate  purchase price paid by such investor for any
      securities registered on the registration  statement that are then held by
      such  investor  monthly until the failure is cured.  However,  the Company
      shall not be required to pay partial liquidated damages to the investor in
      excess of 10% of the purchase  price such investor paid for the registered
      securities.  If the Company fails to pay any partial liquidated damages in
      full  within  seven  days after the date  payable,  the  Company  will pay
      interest  thereon  to the  investor  at a rate of 18% per  annum  (or such
      lesser  maximum  amount that is permitted to be paid by  applicable  law),
      accruing daily from the date such partial liquidated damages are due until
      such amounts, plus all such interest thereon, are paid in full.

(8)   Common Stock Warrants

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

      The  following  table  summarizes  the activity of common  stock  warrants
      issued in connection  with the private  placements and conversion of notes
      payable completed in fiscal years 1994 through 2006:

<TABLE>
<CAPTION>
                                                                Warrants    Exercise Price       Expiration
                                                                --------    --------------       ----------
<S>                                                            <C>          <C>              <C>
          Sold in March 1994 Private Placement                   800,000    $    5.00        3/21/97 to 6/21/97
                                                               ---------
      Outstanding at July 31, 1994                               800,000         5.00        3/21/97 to 6/21/97
          Sold in September 1994 Private Placement               288,506         5.50        12/9/97 to 12/14/97
          Sold in October 1994 Private Placement                  40,000         5.50              1/21/98
          Sold in September 1995 Private Placement                47,405         4.00              10/1/98
                                                               ---------
      Outstanding and exercisable at July 31, 1995             1,175,911     4.00 - 5.50     3/21/97 to 10/1/98
          Issued to bank in connection with an amendment
             to the Company's term loan                           10,000         4.19              8/31/97
          Sold in September 1995 Private Placement                 8,540         4.00              10/1/98
          Sold in June 1996 Private Placement                    313,800         7.50        8/29/99 to 9/10/99
                                                               ---------
      Outstanding and exercisable at July 31, 1996             1,508,251     4.00 - 7.50     3/21/97 to 9/10/99
          Exercised                                             (147,450)        5.00        3/21/97 to 6/21/97
          Expired                                               (652,550)        5.00        3/21/97 to 6/21/97
                                                               ---------
      Outstanding and exercisable at July 31, 1997               708,251     4.00 - 7.50     12/9/97 to 9/10/99
          Sold in February 1998 Private Placement              1,168,575         2.50              8/17/01
          Issued to the Placement Agent in connection
             with the February 1998 Private placement            350,574     2.20 - 2.50           8/17/01
          Exercised                                               (4,950)    2.20 - 2.50           5/19/01
          Expired                                               (338,506)    4.19 - 5.50     8/31/97 to 1/21/98
                                                               ---------
      Outstanding and exercisable at July 31, 1998             1,883,944     2.20 - 7.50     10/1/98 to 8/17/01
          Expired                                                (55,945)        4.00              10/1/98
          Sold in February 2000 Private Placement                875,000     1.03 - 4.55     5/28/03 to 5/28/05
          Expired                                               (313,800)        7.50        8/30/99 to 9/11/99
                                                               ---------
      Outstanding and exercisable at July 31, 2000             2,389,199     1.03 - 4.55     5/19/01 to 5/28/05
          Sold in various private placements                     696,665     1.50 - 3.00     7/07/04 to 10/30/06
          Issued to related parties upon conversion of note
            payable                                              330,000         1.50             7/07/06
                                                               ---------
      Outstanding and exercisable at July 31, 2001             3,415,864     1.03 - 4.55     8/17/01 to 10/30/06
</TABLE>


                                      F-34
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(8)   Common Stock Warrants, (Continued)

<TABLE>
<CAPTION>
                                                               Warrants    Exercise Price        Expiration
                                                               --------    --------------        ----------
<S>                                                           <C>           <C>              <C>
         Expired                                              (1,514,199)    2.20 - 2.50           8/17/01
         Sold in various private placements                    2,673,422     0.75 - 1.50     11/03/06 to 9/10/07
         Issued to vendor upon settlement of accounts
            payable                                               55,556         1.50              8/15/06
         Issued to unrelated party for advisory services       1,500,000     0.50 - 1.50           2/6/07
         Exercised                                              (186,000)        0.50              2/6/07
         Issued to unrelated parties upon conversion of
            notes payable                                         72,214         1.50             10/31/06
         Issued to unrelated parties in connection with
            notes payable                                        300,000         0.60        11/13/06 to 7/29/07
                                                             -----------
     Outstanding and exercisable at July 31, 2002              6,316,857     0.50 - 4.55     5/28/03 to 9/10/07
         Expired                                                (437,500)    1.03 - 3.25           5/28/03
          Sold in various private placements                   1,315,000     1.00 - 1.50     1/24/08 to 10/31/08
          Exercised                                             (640,000)        0.50              2/6/07
          Issued to unrelated parties in connection with
            notes payable                                        665,000         0.60         9/6/07 to 3/14/08
                                                             -----------
      Outstanding and exercisable at July 31, 2003             7,219,357     0.50 - 4.55     5/28/05 to 10/31/08
          Sold in various private placements                   2,372,512     1.25 - 12.39     9/3/08 to 5/9/09
          Exercised                                           (2,014,273)    0.50 - 1.50     2/6/07 to 10/31/08
          Issued to third party as finder's fee                   60,533        12.39              5/9/09
          Issued to unrelated parties in  connection
            with conversion of notes payable                   3,733,839     1.00 - 1.10     12/4/08 to 7/15/09
                                                             -----------
      Outstanding and exercisable at July 31, 2004            11,371,968     0.60 - 12.39    5/28/05 to 7/15/09
          Exercised                                             (247,272)    0.75 - 1.25      7/16/07 to 8/5/08
          Expired                                               (437,500)    2.50 - 4.55           5/28/05
          Issued to unrelated parties in connection with
          conversion of notes payable                          2,044,978         1.00         9/14/09 to 5/6/10

          Issued to a vendor  in connection with services
            rendered                                              12,500     2.50 - 3.50           4/25/08
                                                             -----------
      Outstanding and exercisable at July 31, 2005            12,744,674     0.60 - 12.39    11/29/05 to 5/6/10
          Exercised                                             (915,582)    0.75 - 1.50      7/7/06 to 9/2/08
          Expired                                               (166,666)        3.00        11/29/05 - 12/21/05
          Sold in a private placement                          6,457,172         2.88              7/17/11
                                                             -----------
      Outstanding at July 31, 2006                            18,119,598    $0.60 - $12.39   10/7/06 to 7/17/11
                                                             ===========    ==============   ===================
      Exercisable at July 31,2006                             11,662,426    $0.60 - $12.39    10/7/06 to 5/6/10
                                                             ===========    ==============   ===================
</TABLE>

(9)   Stock Options

      2004 Stock Incentive Plan

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


                                      F-35
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)   Stock Options, (Continued)

      common stock on the date of the grant.  The term,  vesting period and time
      and method of exercise of options granted under the 2004 Plan are fixed by
      the Board of Directors or a committee thereof.

      1997 Stock Option Plan

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

      1993 Stock Option Plan

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

      Option Activity

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

      The following table summarizes stock option activity for the period August
      1, 1994 to July 31, 2006:

<TABLE>
<CAPTION>
                                 Shares Available      Options       Weighted Average Exercise
                                    for Grant        Outstanding          Price Per Share
                                    ---------        -----------          ---------------
<S>                                 <C>              <C>                     <C>
      Balance August 1, 1994        1,926,841         5,935,337              $ 3.76
        Granted                      (818,850)          818,850                2.60
        Exercised                          --          (185,000)               2.36
        Canceled/Expired                   --        (1,897,500)               4.30
                                    ---------         ---------
      Balance August 1, 1995        1,107,991         4,671,687                3.39
        Granted                      (296,205)          296,205                3.99
        Exercised                          --          (656,334)               2.92
        Canceled/Expired                6,500          (235,333)               4.89
                                    ---------         ---------
      Balance July 31, 1996           818,286         4,076,225                3.43
        Authorized by 1997 Plan     2,000,000                --                  --
        Granted                      (932,500)          932,500                4.90
        Exercised                          --          (639,500)               3.82
        Canceled/Expired              484,845          (484,845)               4.70
                                    ---------         ---------
      Balance July 31, 1997         2,370,631         3,884,380                3.56
        Granted                      (234,333)          234,333                3.31
        Canceled/Expired               91,100           (91,100)               3.81
                                    ---------         ---------
      Balance July 31, 1998         2,227,398         4,027,613                3.54
        Granted                      (595,000)          595,000                0.62
        Canceled/Expired              443,934          (555,737)               3.97
                                    ---------         ---------
      Balance July 31, 1999         2,076,332         4,066,876                3.05
        Granted                      (827,000)          827,000                0.52
        Exercised                          --           (95,000)               0.48
        Canceled/Expired              638,395        (1,031,880)               2.73
                                    ---------         ---------
      Balance July 31, 2000         1,887,727         3,766,996                2.65
</TABLE>


                                      F-36
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)   Stock Options, (Continued)

<TABLE>
<CAPTION>
                                   Shares Available      Options      Weighted Average Exercise
                                      for Grant        Outstanding         Price Per Share
                                      ---------        -----------         ---------------
<S>                                    <C>             <C>                 <C>
        Granted                         (447,000)          447,000               0.85
        Exercised                             --          (165,555)              0.51
        Canceled/Expired                 774,315        (1,018,557)              3.42
                                       ---------       -----------
      Balance July 31, 2001            2,215,042         3,029,884               2.24
        Granted                         (544,221)          544,221               0.69
        Canceled/Expired                 655,840          (900,081)              2.31
                                       ---------       -----------
      Balance July 31, 2002            2,326,661         2,674,024               1.90
        Granted                         (630,000)          630,000               0.50
        Exercised                             --          (124,000)              0.47
        Canceled/Expired                 485,118          (736,358)              3.09
                                       ---------       -----------
      Balance July 31, 2003            2,181,779         2,443,666               1.26
        Authorized by 2004 Stock
          Incentive Plan               8,500,000                --                 --
        Granted                       (1,388,996)        1,388,996               5.03
        Exercised                             --          (666,717)              0.98
        Canceled/Expired                (262,783)         (208,500)              3.20
                                       ---------       -----------
      Balance July 31, 2004            9,030,000         2,957,445               2.95
        Granted                       (1,073,000)        1,073,000               4.36
        Exercised                             --          (191,100)              0.75
        Canceled/Expired                 290,500          (341,500)              4.57
                                       ---------       -----------
      Balance July 31, 2005            8,247,500         3,497,845               3.35
        Granted                         (745,000)          745,000               1.76
        Exercised                             --          (207,245)              0.90
        Canceled/Expired                 171,250          (205,250)              4.67
                                       ---------       -----------
      Balance July 31, 2006            7,673,750         3,830,350            $  3.10
                                       =========       ===========            =======
</TABLE>

      The options  outstanding  at July 31, 2006 will expire  between August 21,
      2006 and March 7, 2016 and the weighted average remaining contractual term
      is 5.61 years.  The  options  exercisable  at July 31, 2006 are  2,212,150
      shares,  the weighted  average exercise price per share is $3.11 per share
      and the weighted average remaining contractual term is 3.84 years.

      At July 31, 2006 and 2005, the aggregate  intrinsic value of stock options
      outstanding was approximately $1,801,000 and $2,036,000,  respectively and
      the  aggregate   intrinsic   value  of  stock  options   exercisable   was
      approximately  $1,396,000 and  $1,540,000,  respectively.  Total intrinsic
      value of options  exercised  during the fiscal  years ended July 31, 2006,
      2005  and  2004  was  approximately  $320,000,  $517,000  and  $2,538,000,
      respectively.

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

      1981 Non-Qualified Stock Option Plan

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


                                      F-37
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)   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                                                   1,782,000    $ 3.00-3.87
         Exercised                                                  (276,989)     3.00-3.50
         Canceled                                                   (106,000)     3.00-3.50
         Expired                                                    (649,011)     3.00-3.50
         Granted pursuant to conversion of certain liabilities:
           Related party                                           1,324,014        3.20
           Unrelated party                                            73,804        3.20
         Repurchased stock options                                  (102,807)       3.20
                                                                  ----------
         Balance at July 31, 1994                                  2,045,011    $ 3.20-3.87
                                                                  ==========    ===========
</TABLE>

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

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

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

      1989 Stock Plan

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

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

      The stock option activity is as follows:

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


                                      F-38
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(10)  Stock Grant and Compensation Plans

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

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

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

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

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

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

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

      1989 Stock Plan

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

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

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


                                      F-39
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

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

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

(11)  Income Taxes

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

      New Jersey has enacted legislation permitting certain corporations located
      in New  Jersey to sell a portion of its state tax loss  carryforwards  and
      state  research and  development  credits in order to obtain tax benefits.
      For the state  fiscal  year  2006  (July 1,  2005 to June 30,  2006),  the
      Company had  approximately  $1,903,000  total  available tax benefits that
      were  saleable;  of  which  New  Jersey  permitted  the  Company  to  sell
      approximately   $356,000.   In  December   2005,   the  Company   received
      approximately  $317,000  from the sale of the  $356,000  of tax  benefits,
      which the Company  recognized  as tax  benefits  for the fiscal year ended
      July 31, 2006.

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

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

      If still  available under New Jersey law, the Company will attempt to sell
      the remaining $1,547,000 of its tax benefits between July 1, 2006 and June
      30, 2007 (state  fiscal year 2007).  This amount,  which is a carryover of
      its remaining  tax benefits  from state fiscal year 2006 and earlier,  may
      increase if the Company  incurs  additional tax losses during state fiscal
      year 2007. The Company can not estimate,  however,  what percentage of its
      saleable tax benefits New Jersey will permit it to sell, how much money it
      will  receive in  connection  with the sale,  if it will be able to find a
      buyer for its tax  benefits or if such funds will be available in a timely
      manner.

      At July 31, 2006 and 2005, the tax effects of temporary  differences  that
      give rise to the deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                                     2006             2005
                                                                     ----             ----
<S>                                                              <C>              <C>
      Deferred tax assets:
        Excess of book over tax depreciation and amortization    $     20,141     $     27,499
        Stock options                                                 598,872               --
        Temporary differences                                         282,712          167,324
        Federal and state net operating loss carryforwards         21,015,985*      19,413,740*
        Research and experimentation credit carryforwards           2,187,683*       1,955,172*
                                                                 ------------     ------------
        Total gross deferred tax assets                            24,105,393       21,563,735
        Valuation allowance                                       (24,105,393)     (21,563,735)
                                                                 ------------     ------------
        Net deferred tax assets                                  $         --     $         --
                                                                 ============     ============
</TABLE>

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


                                      F-40
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(11)  Income Taxes, (Continued)

      A valuation  allowance  is  provided  when it is more likely than not that
      some portion or all of the  deferred tax assets will not be realized.  The
      tax benefit  assumed using the federal  statutory tax rate of 34% has been
      reduced to the actual  benefits  reflected on the statements of operations
      due principally to the aforementioned  valuation allowance.  In 2006, 2005
      and 2004 the valuation allowance increased by $2,542,000,  $2,668,000, and
      $2,837,000, respectively.

      At July 31, 2006, the Company has federal net operating loss carryforwards
      of  approximately  $57,122,000  that  expire  in the  years  2007  to 2026
      (approximately $8,195,000 expires in the years 2007 to 2011) and state net
      operating loss  carryforwards of approximately  $26,577,000 that expire in
      years  2010  to  2015.   The  Company   also  has  federal   research  and
      experimentation tax credit carryforwards of approximately  $1,510,000 that
      expire in the years 2007 to 2026  (approximately  $260,000  expires in the
      years 2007 to 2011) and state research and  experimentation tax credits of
      approximately  $678,000  that  expire in the years 2014 to 2021.  Ultimate
      utilization/availability  of such net  operating  losses  and  credits  is
      dependent upon the Company's  ability to generate taxable income in future
      periods and may be  significantly  curtailed  if a  significant  change in
      ownership  occurs in accordance  with the provisions of the Tax Reform Act
      of 1986. For federal income tax purposes,  the federal research tax credit
      expired on December 31, 2005 for new research tax credits.

(12)  Other Financial Information

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

                                                        2006             2005
                                                        ----             ----

              Payroll and payroll taxes              $   87,935      $    85,181
              Professional fees                         217,764          123,200
              Clinical trial                            758,267          609,382
              Pre-clinical studies                      240,322          460,859
              Other                                       2,967            5,069
                                                     ----------      -----------
                                                     $1,307,255      $ 1,283,691
                                                     ==========      ===========

(13)  Commitments and Contingencies

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

      The Company has product liability  insurance  coverage for clinical trials
      in the U.S.  Additionally,  the Company also maintains  product  liability
      insurance in Europe,  in Australia  and in Romania.  No product  liability
      claims have been filed  against  the  Company.  If a claim  arises and the
      Company is found liable in an amount that significantly exceeds the policy
      limits, it may have a material adverse effect upon the financial condition
      of the Company.

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


                                      F-41
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(13)  Commitments and Contingencies, (Continued)

      Below is a table that presents our contractual  obligations and commercial
commitments as of July 31, 2006:

<TABLE>
<CAPTION>
                                                               Payments Due by Fiscal Year
                                              ----------------------------------------------------------

                                                                                               2012 and
                                    Total       2007      2008      2009      2010    2011    Thereafter
                                    -----       ----      ----      ----                      ----------
<S>                               <C>         <C>       <C>       <C>       <C>       <C>     <C>
      Operating lease             $  61,392   $16,743   $16,743   $16,743   $11,163   $  --   $       --
                                  ---------   -------   -------   -------   -------   -----   ----------
      Total contractual
        cash obligations          $  61,392   $16,743   $16,743   $16,743   $11,163   $  --   $       --
                                  =========   =======   =======   =======   =======   =====   ----------
</TABLE>

(14)  401(k) Savings Plan

      Effective  October 1, 1998, the Company adopted a 401(k) Savings Plan (the
      "Plan").  Qualified  employees may participate by contributing to the Plan
      subject to certain Internal Revenue Service restrictions. The Company will
      match  an  amount  equal  to 50% of the  first  6% of  each  participant's
      contribution.  The Company's contribution is subject to a vesting schedule
      of 0%, 25%, 50%, 75% and 100% for  employment  of less than one year,  one
      year,  two years,  three  years and four years,  respectively,  except for
      existing employees which vesting schedule was based from the date the Plan
      was adopted.  For the fiscal years ended July 31, 2006, 2005 and 2004, the
      Company's  contributions  to the Plan  amounted  to  $27,810,  $29,231 and
      $15,690, respectively.

(15)  Unaudited Quarterly Financial Data

      In connection with its audit of the Company's financial statements for the
      fiscal year ended July 31,  2006,  the  Company's  independent  registered
      public  accounting  firm brought to the attention of  management  that the
      Company's  estimate of the impact of forfeitures on non-cash  compensation
      cost was, as a percentage,  significantly  higher than the historical rate
      of such  forfeitures  and that the true-up of the value of options vesting
      during the reporting period was not recorded.  After reviewing the matter,
      management  agreed  to  calculate  the  forfeiture  rate  using  primarily
      historical  experience  and record the value of the  options  that  vested
      during the reporting  period.  The original  computation  had  understated
      non-cash  compensation  costs and net  losses in the  Company's  unaudited
      condensed  financial  statements  included in Forms 10-Q for the  quarters
      ended  October 31, 2005,  January 31, 2006 and April 30, 2006.  Management
      believes  that the  adjustment  to the  amount  of  non-cash  compensation
      expense in each of the affected quarterly periods is not material and that
      the quarterly  reports for those periods do not require  restatement.  The
      Company recorded a charge of approximately $388,900 at year end to reflect
      the adjustment to the interim cost of non-cash compensation expense in the
      fourth quarter and fiscal year ended July 31, 2006.  Additionally,  during
      the fourth  quarter  and fiscal  year ended  July 31,  2006,  the  Company
      changed its estimated  forfeiture rate on performance  based stock options
      issued  during  the  fiscal  year  which  resulted  in  the  reduction  of
      approximately  $213,400  in non-cash  compensation  expense for the fourth
      quarter and fiscal year ended July 31, 2006.

      Although  management  believes  that the  changes in each of the  affected
      quarterly  reports are not  material,  the Company is  presenting  certain
      restated unaudited statement of operations  information.  Presented in the
      following  table are the total  costs and  expenses,  the net loss and the
      loss per basic and diluted  common  share as  originally  reported and the
      adjusted amounts for each quarter.


                                      F-42
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(15)  Unaudited Quarterly Financial Data, (Continued)


<TABLE>
<CAPTION>
                                                       As Originally Reported for         As Restated for the
                                                         the Three Months Ended           Three Months Ended
      Quarter Ended October 31, 2005                        October 31, 2005              October 31, 2005
                                                            ----------------              ----------------
<S>                                                           <C>                            <C>
      Statement of Operations:
      Total costs and expenses                                $ 1,749,000                    $ 1,888,000
      Net loss                                                ( 1,400,000)                    (1,539,000)
      Loss per basic and diluted common share                   $ (0.04)                       $ (0.04)
</TABLE>


<TABLE>
<CAPTION>
                                                          Three Months Ended                Six Months Ended
      Quarter Ended January 31, 2006                       January 31, 2006                 January 31, 2006
                                                           ----------------                 ----------------
                                                    As Originally                    As Originally
                                                       Reported     As Restated        Reported       As Restated
                                                       --------     -----------        --------       -----------
<S>                                                  <C>            <C>              <C>              <C>
      Statement of Operations:
      Total costs and expenses                       $ 2,310,000    $ 2,468,000      $ 4,059,000      $ 4,356,000
      Net loss                                        (2,286,000)    (2,444,000)      (3,686,000)      (3,983,000)
      Loss per basic and diluted common share          $ (0.06)        $ (0.07)         $ (0.10)         $ (0.11)
</TABLE>


<TABLE>
<CAPTION>
                                                          Three Months Ended                Nine Months Ended
      Quarter Ended April 30, 2006                          April 30, 2006                   April 30, 2006
                                                            --------------                   --------------
                                                    As Originally                     As Originally
                                                       Reported      As Restated        Reported       As Restated
                                                       --------      -----------        --------       -----------
<S>                                                  <C>            <C>              <C>              <C>
      Statement of Operations:
      Total costs and expenses                       $ 1,658,000    $ 1,750,000       $ 5,717,000      $ 6,106,000
      Net loss                                        (1,638,000)    (1,730,000)       (5,323,000)      (5,712,000)
      Loss per basic and diluted common share          $ (0.04)        $ (0.05)         $ (0.14)         $ (0.15)
</TABLE>

      Below is the  quarterly  data for the two year period ended July 31, 2006.
      Amounts  for the  first,  second  and  third  quarters  of 2006  have been
      restated as described above.

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                              2006                                              2005
                 -----------------------------------------------------------------------------------------------------
                   First       Second        Third       Fourth       Totals        First       Second        Third
----------------------------------------------------------------------------------------------------------------------
<S>              <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>
Investment
 income          $    32.0    $    24.0    $    20.1    $    31.3    $   107.4    $    29.2    $    33.7    $    41.0
Other income            --           --           --           --           --           --           --          9.8

Operating loss    (1,856.4)    (2,443.8)    (1,729.6)    (2,486.8)    (8,127.6)    (1,368.8)    (1,955.3)    (1,674.6)
----------------------------------------------------------------------------------------------------------------------

Net loss (a)      (1,539.0)    (2,443.8)    (1,729.6)    (2,486.8)    (7,810.2)    (1,080.8)    (1,955.3)    (1,674.6)
----------------------------------------------------------------------------------------------------------------------

Loss per share
- basic and
  diluted        $   (0.04)   $   (0.07)   $   (0.05)   $   (0.07)   $   (0.21)   $   (0.03)   $   (0.06)   $   (0.05)
----------------------------------------------------------------------------------------------------------------------

<CAPTION>

----------------------------------------
                          2005
                 -----------------------
                  Fourth       Totals
----------------------------------------
<S>              <C>          <C>
Investment
 income          $    37.8    $   141.7
Other income            --          9.8

Operating loss    (1,751.2)    (6,749.9)
----------------------------------------

Net loss (a)      (1,751.2)    (6,461.9)
----------------------------------------

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


(a)   Included in the net loss of $1,539.0  and  $1,080.8  for first  quarter of
      2006 and 2005 is net of tax  benefits of $317.4 and $288.0,  respectively,
      related to the sale of certain state tax operating loss carryforwards.


                                      F-43