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


                                    FORM 10-K



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

        July 31, 2001                                            0-11088
For the fiscal year ended                                 Commission file number

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

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

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

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

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

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

                          Common Stock, $.001 par value
                                (Title of Class)

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of  registrant's  knowledge,  in definitive  proxy or any amendment to this
Form 10-K. [ ]

     The aggregate  market value of the Common Stock, par value $.001 per share,
held by non-affiliates based upon the average of the high and low sale prices as
reported by the OTC Bulletin  Board on October 25, 2001 was  $12,279,537.  As of
October 25, 2001 there were 19,971,501  shares of common stock,  par value $.001
per share, outstanding.

     The Index to Exhibits appears on page 23.

                       Documents Incorporated by Reference

                                      None


<PAGE>


                                Table of Contents

PART I                                                                      Page
                                                                            ----

     Item 1    Business                                                        1

     Item 2    Properties                                                      9

     Item 3    Legal Proceedings                                              10

     Item 4    Submission of Matters to a Vote of Security Holders            10

PART II

     Item 5.   Market for Common Equity and Related Stockholder Matters       10

     Item 6.   Selected Financial Data                                        11

     Item 7.   Management's Discussion and Analysis of Financial
               Condition and Results of Operations                            12

     Item 7A.  Quantitative and Qualitative Disclosure About Market Risk      15

     Item 8.   Financial Statements and Supplementary Data                    15

     Item 9.   Changes in and Disagreements with Accountants
               on Accounting and Financial Disclosure                         15

PART III

     Item 10.  Directors and Executive Officers of the Registrant             16

     Item 11.  Executive Compensation                                         18

     Item 12.  Security Ownership of Certain Beneficial Owners
               and Management                                                 21

     Item 13.  Certain Relationships and Related Transactions                 22

PART IV

     Item 14.  Exhibits, Financial Statement Schedules, and
               Reports on Form 8-K                                            23


The  following  trademark  appear  in this  Annual  Report:  ONCONASE(R)  is the
registered  trademark of Alfacell  Corporation,  exclusively for the anti-cancer
indications.

                                       2




<PAGE>


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 in Exhibit 99.1
hereto  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

We are a biopharmaceutical  company, organized in 1981, primarily engaged in the
discovery  and  development  of new drugs for the  treatment of cancer and other
pathological  conditions.  In 1987, we completed the molecular  characterization
(which is the  determination  of the molecular  structure and other physical and
chemical characteristics) of a specific protein, which we named P-30 Protein. In
October  1998,  the  United  States  Adapted  Names  Council  adapted  the  name
ranpirnase  as the United States  adaptive name for P-30 Protein,  which we have
trademarked as ONCONASE(R).

ONCONASE(R),  which has been  isolated  from the eggs of the leopard  frog, is a
novel   ribonuclease   that  is  unique  among  the  superfamily  of  pancreatic
ribonuclease.  We have  determined  that,  thus far,  ranpirnase is the smallest
known  protein   belonging  to  the  superfamily  of  pancreatic   ribonuclease.
Ribonucleases  are  enzymes  that  break  certain  bonds of  ribonucleic  acids.
Ribonucleases serve several important biological functions in nature,  including
regulation  of  angiogenesis,  which  is the  formation  of new  blood  vessels,
anti-viral and anti-parasitic  defenses, and restrictive  pollination in plants.
In  addition  to  taking  advantage  of  the  natural  biological  functions  of
ribonucleases,  frog  ribonucleases  may be more  therapeutically  effective  in
humans than human  ribonuclease  as they do not appear to be  inhibited by human
ribonuclease  inhibitors.  Therefore, the development of amphibian ribonucleases
into  therapeutics  may result in a new class of compounds  for the treatment of
diseases such as cancer and AIDS.

Based on our preclinical and clinical  testing,  we believe that ONCONASE(R) and
related compounds may have utility:

     o    as a single agent,

     o    in combination with other anti-cancer agents,

     o    as the  active  ingredient  in a  targeted  conjugate,  which is a new
          compound  resulting from  chemically  joining two different  molecules
          with targeted specificity, and

     o    in a variety of delivery systems.

During clinical trials,  patients with advanced stages of solid tumors have been
treated with ONCONASE(R) on a weekly basis. Data from these clinical trials show
that the most  significant  clinical  results  to date  have  been  observed  in
unresectable malignant mesothelioma, an inoperable cancer found in the lining of
the lung and abdomen.  Unresectable  malignant  mesothelioma  is often linked to
asbestos  exposure and  afflicts  approximately  3,500 to 5,000 newly  diagnosed
patients in the United States each year.  Epidemiologists  have  predicted  that
over the next 35 years over 250,000 people will die from malignant  mesothelioma
in Europe alone.  There is currently no standard approved drug for this disease.
We have also conducted pilot clinical trials in non-small cell lung cancer,

                                       3

<PAGE>


metastatic  breast cancer and renal cell cancer. We intend to initiate trials of
ONCONASE(R) in other cancer indications.

Side  effects  associated  with  ONCONASE(R),  as observed in over 700  patients
treated to date, have been modest.  The most significant side effect has been in
kidney function,  which has been observed to be reversible upon the reduction of
dose or temporary or permanent  discontinuation  of treatment.  Patients treated
with  ONCONASE(R)  have shown little evidence of bone marrow  suppression,  hair
loss or other severe organ damage frequently  observed after treatment with most
other chemotherapeutic  drugs. This safety profile may result from the fact that
ranpirnase is structurally similar to several human ribonucleases.

We are currently  conducting a two-part  Phase III clinical trial of ONCONASE(R)
as a treatment for malignant  mesothelioma.  The first part compares ONCONASE(R)
to doxorubicin in patients with unresectable malignant mesothelioma. Doxorubicin
is considered by opinion leaders to be the most effective drug for the treatment
of malignant mesothelioma. The second part of the trial compares the combination
of  ONCONASE(R)  and  doxorubicin  versus  doxorubicin  by itself.  The  patient
enrollment for the first part of the clinical trial has been completed  however,
the  trial  is  still  ongoing.  The  second  part of the  trial is still in the
enrollment phase.

We have had a series of meetings with the Food and Drug Administration  (FDA) to
establish  mutually agreed upon parameters for the New Drug Application (NDA) to
obtain marketing approval for ONCONASE(R).  In order to file the NDA, we have to
complete the current clinical trial, as well as provide the FDA with information
regarding  the  methods  used  to  manufacture  ONCONASE(R),  evaluation  of the
therapeutic and toxic doses of ONCONASE(R) in animals and studies  regarding the
detection  of  ONCONASE(R)  in human  blood and  antibody  formation.  We cannot
estimate  if or when we will  file  the NDA.  Even if we file an NDA,  marketing
approval for  ONCONASE(R) as a treatment for malignant  mesothelioma  may not be
granted by the FDA.

In February  2001,  we  received an Orphan  Medicinal  Product  Designation  for
ONCONASE(R)  from The European  Agency for the Evaluation of Medicinal  Products
(EMEA).  We are currently in  discussions  with the EMEA regarding the Marketing
Authorization Application (MAA) registration requirements of ONCONASE(R) for the
treatment  of  malignant  mesothelioma.  We must  establish or designate a legal
partner in the  European  Union  (EU),  which is  considered  to be a  qualified
pharmaceutical  company (has  qualified  individuals)  for at least three months
prior to filing the MAA. We cannot predict whether this marketing  approval will
be granted.

We  have  established  a  scientific  collaboration  with  the  National  Cancer
Institute  (NCI).  This  collaboration  has  produced a  conjugate,  or chemical
construct,  of ranpirnase with a monoclonal antibody that demonstrated  activity
in  treating  non-Hodgkin's  lymphoma  in  preclinical  studies.   Additionally,
preclinical  studies  are  ongoing  at the  NCI in  preparation  for  commencing
clinical trials for the treatment of patients with  non-Hodgkin's  lymphoma with
this new conjugate.

We believe that  ranpirnase may also be used in the development of an anti-viral
agent. The National  Institutes of Health (NIH) have performed an independent in
vitro screen of  ONCONASE(R)  against the HIV virus type 1. In vitro studies are
those performed in artificial laboratory vessels. 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
and cellular transfer RNA while not affecting normal cellular  ribosomal RNA and
messenger RNAs. Moreover,  the NIH - Division of AIDS found that ONCONASE(R) has
in  vitro  anti-viral  effects.  Subject  to the  availability  of the  required
capital, we plan to conduct further research concerning anti-viral effects.


                                       4
<PAGE>

Other Products

We have also  discovered  another  series of proteins that may have  therapeutic
uses.  These  proteins  appear to be  involved in the  regulation  of both early
embryonic  and  malignant  cell growth.  However,  it will  require  significant
additional research and funding to develop these proteins into therapeutics.  At
this time,  we are unable to fund such research and we do not know if we will be
able to raise sufficient  capital in the future for such research;  however,  we
are in early  discussions  with potential  collaborators  for the development of
these new compounds.

Research and Development Programs

Research  and  development  expenses  for the fiscal  years ended July 31, 2001,
2000, and 1999 were $1,901,000,  $1,880,000, and $2,402,000,  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  HIV  infection,  that
require anti-proliferative and pro-apoptotic properties.

Our research and  development  programs  relate to the  development  of drugs to
treat the following cancers and other diseases:

     o    unresectable malignant mesothelioma,
     o    renal cell carcinoma,
     o    other cancers (epithelial malignancies),
     o    non-Hodgkin's lymphoma,
     o    primary brain tumors,
     o    viral diseases,
     o    anti-inflammatory diseases, and
     o    other pathological conditions such as organ transplantation.

We are pursuing  some of these  programs  independently,  while others are being
undertaken in collaboration with the NIH and other institutions.

Clinical Development and Clinical Trials

ONCONASE(R)  has been tested in Phase I, Phase II and Phase III clinical  trials
in more than 35 cancer  centers  across the United States and Europe,  including
major  centers  such  as  Columbia-Presbyterian,  University  of  Chicago,  M.D.
Anderson and Cedars-Sinai  Cancer Centers.  Due to limited capital, 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 there are few or no approved treatments.

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

ONCONASE(R)  is  currently  in a  Phase  III  clinical  trial  for  unresectable
malignant mesothelioma, comparing ONCONASE(R) alone to doxorubicin and comparing
ONCONASE(R)  with  doxorubicin to doxorubicin  alone. The trial is a randomized,
controlled  study.  No  standard  approved  therapy  exists to treat this deadly
cancer, and most advanced,  unresectable  malignant mesothelioma patients die of
progressive disease within six to 12 months of diagnosis.

                                       5
<PAGE>

We have had a series of meetings with the FDA to establish  mutually agreed upon
parameters for the NDA to obtain marketing approval for ONCONASE(R). In February
2001, we received an Orphan Medicinal  Product  Designation for ONCONASE(R) from
the EMEA. We are currently in discussions  with the EMEA on the MAA registration
requirements  for  ONCONASE(R)  for the malignant  mesothelioma  indication.  We
cannot predict  whether  marketing  approval of ONCONASE(R) for the treatment of
unresectable  malignant  mesothelioma  will be  granted  by the  FDA or  foreign
regulatory agencies.

ONCONASE(R)  has  demonstrated  to be  synergistic  with tamoxifen in inhibiting
tumor cell  growth in  prostate  and renal cell  cancers in in vitro  tests.  We
completed Phase I/II clinical  studies testing  ONCONASE(R) in combination  with
tamoxifen in prostate  cancer and renal cell carcinoma.  Reported  toxicities in
these trials were primarily renal,  dose-related and reversible.  There has been
little  evidence of bone marrow  suppression,  hair loss or other  severe  organ
damage  frequently  observed after  treatment  with most other  chemotherapeutic
drugs.  We intend to proceed with prostate and renal cell cancer research in the
future either on our own or in collaboration  with others however,  at this time
we are not certain if we will have the financings for such research.

A  collaboration  with the NCI has  produced a conjugate  of  ranpirnase  with a
monoclonal  antibody  which has been  deemed  active  in vivo for  non-Hodgkin's
lymphoma.  The  conjugate is currently  being  evaluated by the NCI for clinical
trials.

Preclinical Research

The  results of our  preclinical  research  have been  presented  at  scientific
meetings or have been published in peer-reviewed journals.

In Vitro Anti-Cancer Activity

ONCONASE(R)  has  demonstrated a broad spectrum of anti-tumor  effects in vitro.
The NCI Cancer  Screen has  determined  that  ONCONASE(R)  kills  cancer  cells,
therefore,  was judged to be what is called an "active" drug in accordance  with
NCI criteria.  Scientists at Harvard  Medical School  demonstrated in vitro that
ONCONASE(R) interferes with new blood vessel formation in tumors.

In vitro,  ONCONASE(R),  in combination  with other drugs shown below,  has been
shown to have a synergistic  effect,  which means that the effect of ONCONASE(R)
with these drugs  acting  together is greater than if used alone with respect to
the following:

     Drug Combination                        Cancer
     ----------------                        ------
ONCONASE(R) + Tamoxifen                 Prostatic, Ovarian, Renal Cell Carcinoma

ONCONASE(R) + Phenothiazine             Non-Small Cell Lung Carcinoma

ONCONASE(R) + Lovastatin                Non-Small Cell Lung Carcinoma, Ovarian

ONCONASE(R) + Cisplatin                 Ovarian

ONCONASE(R)+ All-trans-retionoic acid   Glioma


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<PAGE>


     Drug Combination                        Cancer
     ----------------                        ------
ONCONASE(R) + Vincristine               Colorectal, Breast

ONCONASE(R) + Doxorubicin               Colorectal, Resistant Breast

ONCONASE(R) + Taxol                     Resistant Breast


In Vivo Anti-Cancer Activity

There is in vivo  data  which  indicates  that the use of  ONCONASE(R)  with the
following drugs is synergistic:

     o    vincristine,
     o    doxorubicin, and
     o    tamoxifen.

These  synergisms  suggest  a  potential  for  broader  therapeutic  utility  of
ONCONASE(R) in cancer treatments. The 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.

ONCONASE(R) as a Radiosensitizing and Anti-Angiogenic Agent

Collaborative research at the University of Medicine and Dentistry of New Jersey
at Camden and the  University  of  Pennsylvania  Medical  Center,  Department of
Radiation  Oncology,  demonstrated that ranpirnase makes tumors more susceptible
to be killed by  radiation  treatment  and  interferes  with tumor blood  vessel
supply.

Ranpirnase Conjugates and Fusion Proteins

In addition to using it in its native form,  we are  conjugating,  or chemically
linking,  ranpirnase with targeting molecules,  resulting in various conjugates,
to ensure its delivery to specific tissue targets.  Several conjugates are being
developed by the NIH in collaboration  with our scientists and have demonstrated
significant anti-tumor activity, reflecting significant prolongation of survival
of treated  animals as  compared  to  untreated  animals.  In  addition,  we are
synthesizing  several  genes of  ranpirnase,  its variants  and other  amphibian
ribonucleases  using  recombinant,  or cloning,  technologies.  We intend to use
these genes to develop  novel  therapeutics  that  selectively  target  specific
tumors. Production of these engineered genes and products may also lead to their
use in gene  therapy  and other  therapeutic  applications  in cancer  and other
diseases.

Ranpirnase Variant Conjugates

We have developed a variant of ranpirnase  and  conjugated,  or linked,  it to a
variety of clinically  important  proteins and peptides.  These  conjugates  are
designed to specifically target selected molecular structures in the body. These
conjugates   may   have   therapeutic   applications   in   the   treatment   of
anti-inflammatory diseases, such as arthritis, and other autoimmune diseases.

Proteasome Inhibitors

Cyclins and cyclin-dependent  kinases are two major groups of protein regulators
of the cell cycle  progression.  This means that each dividing  cell,  such as a
tumor  (malignant)  cell,   undergoes   cyclical   metabolic  and  morphological
(structural)  changes which are defined as the cell cycle. Cancer can be defined
as the  uncontrolled  growth and  proliferation of cells often associated with a
de-regulated pattern of cell growth maturation and division. In vitro



                                       7
<PAGE>

studies  of  ONCONASE(R)   have  shown  its  ability  to  interrupt  cell  cycle
progression.  Given that  ONCONASE(R)  and proteasome  inhibitors both have been
shown in vitro to modulate  fundamental  mechanisms governing tumor cell growth,
proliferation and death, we are testing ONCONASE(R) and proteasome inhibitors in
combination and have discovered  synergistic anti-tumor effects. We believe that
a new class of anti-cancer  compounds can be developed combining  ranpirnase and
its variants with proteasome inhibitors.

HIV Infection

The drugs  currently  approved in the United States for the treatment of the HIV
infection  consist  primarily of reverse  transcriptase  inhibitors and protease
inhibitors.  There is an extremely high rate of resistance developing to several
currently  available  anti-viral  drugs,  primarily  due  to  the  exponentially
increasing rate of mutations of HIV that occur during  infection and to patients
not taking drugs as prescribed.

Experimental   data  shows  that  anti-HIV  effects  of  ONCONASE(R)  are  quite
selective,  resulting in a likelihood  to inhibit  replication  of the different
HIV-1 subtypes.  In vitro studies have been performed by independent  scientific
collaborators,  including  the NIH - Division of AIDS.  Ranpirnase  is an enzyme
highly  specialized  in the breakdown of RNA molecules and might be an effective
anti-HIV  agent,  irrespective  of viral  mutations that render other  antiviral
agents ineffective.

We do not  currently  possess the funds  necessary to conduct  further  research
relating to most, if not all, of our preclinical  research and cannot be certain
that we will be able to obtain the financing to do so.

Raw Materials

The major  active  ingredient  derived  from  leopard  frog eggs is the  protein
ranpirnase.  Although we currently  acquire our natural  source  material from a
single supplier,  we believe that it is abundantly available from other sources.
We have  sufficient  egg  inventory  on hand to produce  enough  ONCONASE(R)  to
complete the current  Phase III clinical  trial for malignant  mesothelioma  and
supply ONCONASE(R) for up to two years after commercialization.  In addition, we
have  successfully  completed  the  cloning of the gene of the  natural  protein
ranpirnase; however, the use of this recombinant technology may not be more cost
effective than the natural source.

Manufacturing

We have signed an agreement with Scientific Protein  Laboratories,  a subsidiary
of  a  division  of  American  Home  Products  Corp.,  which  will  perform  the
intermediary  manufacturing process of purifying ranpirnase.  Scientific Protein
Laboratories  sends the intermediate  product to a contract filler for the final
manufacturing step and vial filling.  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.  Both
Scientific Protein Laboratories and the contract filler to whom the intermediate
product is sent,  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 might
not be able to find  substitute  manufacturers,  if necessary.  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 timely deliver sufficient quantities of our products.

Marketing

Neither we nor any of our officers or  employees  has  pharmaceutical  marketing
experience.  If we  were  to  market  our  products  ourselves,  we  would  need
significant  additional  expenditures  and  management  resources  to develop an
internal sales force. We may not be able to  successfully  penetrate the markets
for any  products  developed  or develop  internal  marketing  capabilities.  We
intend,  in some instances,  to enter into development and marketing

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<PAGE>

agreements with third parties.  We expect that under such  arrangements we would
act as a co-marketing  partner or would grant exclusive  marketing rights to our
corporate  partners  in  return  for  possibly  assuming  further  research  and
development  cost,  up-front  fees,  milestone  payments and royalties on sales.
Under these agreements,  our marketing partner may have the responsibility for a
significant  portion of development of the product 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
which  apply  to  the  clinical   testing,   manufacturing   and   marketing  of
pharmaceutical  products.  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 an 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. The results of these studies
are submitted to the FDA as a part of the IND, which is filed to obtain approval
to begin human clinical  testing.  The human clinical testing program  typically
involves up to three phases.  Data from human trials as well as other regulatory
requirements  such as chemistry,  manufacturing  and controls,  pharmacology and
toxicology  sections,  are  submitted to the FDA in an NDA or Biologics  License
Application,  or  BLA.  Preparing  an  NDA  or BLA  involves  considerable  data
collection, verification and analysis. A similar process in accordance with EMEA
regulations  is  required to gain  marketing  approval  in Europe.  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 MAA in the EU in preparation
for the commercialization of ONCONASE(R).

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

We believe it is important to develop new technology and to improve our existing
technology.  When appropriate, we file patent applications to protect inventions
in which we have an ownership interest.

We own nine patents in the United States:

     o    U.S.   Patent  No.   4,888,172,   issued  in  1989,   which  covers  a
          pharmaceutical  produced from  fertilized frog eggs (Rana pipiens) and
          the methodology for producing it.
     o    U.S. Patent No. 5,559,212, issued in 1996, which covers the amino acid
          sequence of ONCONASE(R).
     o    U.S.  Patents Nos.  5,529,775 and 5,540,925,  issued in 1996, and U.S.
          Patent No.  5,595,734,  issued in 1997,  which cover  combinations  of
          ONCONASE(R)with certain other pharmaceuticals.
     o    U.S. Patent No.  5,728,805,  issued in 1998,  which covers a family of
          variants of ONCONASE(R).
     o    Patent No. US 6,175,003 B1, issued January 16, 2001,  which covers the
          genes of ONCONASE(R)and a variant of ONCONASE(R).
     o    Patent No. US 6,239,257  B1,  issued on May 29,  2001,  which covers a
          family of variants of ONCONASE(R).
     o    Patent No. US 6,290,951 B1 issued in September 18, 2001,  which covers
          alteration  of the  cell  cycle  in vivo,  particularly  for  inducing
          apoptosis of tumor cells.

                                       9
<PAGE>

We own four  European  patents,  which have been  validated in certain  European
countries.  These patents cover ONCONASE(R),  a variant of ONCONASE(R),  process
technology for making ONCONASE(R),  and combinations of ONCONASE(R) with certain
other chemotherapeutics.  We also have patent applications pending in the United
States, Europe, and Japan. Additionally,  we own one Japanese patent and have an
undivided  interest in two  applications  that are pending in the United States.
Each of these  applications  relate  to a  Subject  Invention  (as that  term is
defined in CRADAs to which we and the NIH are parties).

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  uninfringed  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  declared  uninfringed.  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 which 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

Currently, there are no approved systemic treatments for malignant mesothelioma.
To our  knowledge,  no other  company  is  developing  a  product  with the same
mechanism of action as ONCONASE(R).  There are several companies,  universities,
research  teams and  scientists,  both private and  government-sponsored,  which
engage in research  similar,  or potentially  similar,  to that performed by us.
These include Eli Lilly and Sugen which are developing  agents for the malignant
mesothelioma  indication.  Eli  Lilly is  conducting  a Phase  III  trial of the
combination of the multi-targeted  antifolate (MTA) with cisplatin vs. cisplatin
alone, and Sugen is conducting a Phase II trial of the VEGF antagonist. There is
no comparable survival data available on the foregoing studies at this time.

Some of our competitors have far greater  financial  resources,  larger research
staffs and more extensive  physical  facilities.  These  competitors 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  which  would  indicate  that  others  are  currently
employing this method or producing such an anti-tumor  agent.  There are several
chemotherapeutic  agents  currently  used to treat  the  forms of  cancer  which
ONCONASE(R) is being used to treat.  ONCONASE(R) may not prove to be as safe and
as effective as  currently-used  drugs.  Others may develop new treatments which
are more effective than ONCONASE(R).

Employees

As of October 26,  2001,  we employed  14  persons,  of whom 11 were  engaged in
research and development activities and three were engaged in administration and
management.  We have five employees who hold Ph.D. or M.D.  degrees.  All of our
employees are covered by confidentiality  agreements. We consider relations with
our employees to be very good. None of our employees are covered by a collective
bargaining agreement.

                                       10
<PAGE>


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 2. PROPERTIES.

We lease a total of  approximately  17,000 square feet in an  industrial  office
building  located in  Bloomfield,  New  Jersey.  We lease the  facility  under a
five-year  operating  lease which is due to expire December 31, 2001. We will be
negotiating  our new lease  agreement  under  similar  terms.  The annual rental
obligation is $136,000. We believe that the facility is sufficient for our needs
in the foreseeable future.

Item 3. LEGAL PROCEEDINGS.

We are presently not involved in any legal proceedings.

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

None.
                                     Part II

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

Our common stock is traded on the OTC Bulletin Board, or OTCBB, under the symbol
"ACEL".  At the close of business  April 27,  1999,  we were  delisted  from The
Nasdaq  SmallCap  Market,  or Nasdaq,  for failing to meet the minimum bid price
requirements  set forth in the NASD  Marketplace  Rules. As of October 25, 2001,
there were approximately 1,216 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, 2001 and 2000.  The prices
were obtained from 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, 2001:

          First Quarter               $1.56   $0.75

          Second Quarter               1.38    0.53

          Third Quarter                2.19    0.72

          Fourth Quarter               1.59    0.81

     Year Ended July 31, 2000:

          First Quarter                0.94    0.41

          Second Quarter               1.94    0.38


                                       11
<PAGE>

                                       High     Low
                                       ----     ---
     Year Ended July 31, 2000:

          Third Quarter                3.88    0.72

          Fourth Quarter               2.63    0.69

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.

Recent Sales of Unregistered Securities

In April and July 2001,  we sold an aggregate of 529,999  shares of common stock
to private  investors at a price of $0.90 per share  resulting in gross proceeds
of $477,000.  In addition,  the private  investors  were granted  three-year and
five-year warrants to purchase an aggregate of 529,999 shares of common stock at
per share exercise prices ranging from $1.50 to $2.50.  These  transactions were
consummated  as a private sale pursuant to Section 4(2) of the Securities Act of
1933, as amended.

In July 2001, we issued  330,000  shares of common stock upon the  conversion of
convertible notes by related parties. 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.  These
transactions  were consummated as a private sale pursuant to Section 4(2) of the
Securities Act of 1933, as amended.

In August  2001,  we sold an  aggregate  of  115,000  shares of common  stock to
private  investors at a price of $0.90 per share  resulting in gross proceeds of
$103,500. In addition,  the private investors were granted five-year warrants to
purchase an  aggregate of 103,500  shares of common stock at per share  exercise
price of $1.50.  These  transactions were consummated as a private sale pursuant
to Section 4(2) of the Securities Act of 1933, as amended.

Item 6. SELECTED FINANCIAL DATA.

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

<TABLE>
<CAPTION>

                                            Year Ended July 31,
                     -------------------------------------------------------------------
                         2001         2000          1999          1998          1997
                     -----------   -----------   -----------   -----------   -----------
<S>                  <C>           <C>           <C>           <C>           <C>
Interest Income      $    13,121   $    51,144   $   168,372   $   311,822   $   442,572
Net Loss (1)         $(2,294,936)  $(1,722,298)  $(3,156,636)  $(6,387,506)  $(5,018,867)
Net Loss Per Basic
and Diluted Share    $      (.12)  $      (.10)  $      (.18)  $      (.40)  $      (.34)
Dividends                   None          None          None          None          None

<CAPTION>

                                                As of July 31,
                     -------------------------------------------------------------------
                         2001         2000          1999          1998          1997
                     -----------   -----------   -----------   -----------   -----------
<S>                  <C>           <C>           <C>           <C>           <C>
Total Assets         $   201,609   $   488,099   $ 1,728,648   $ 5,516,678   $ 8,034,954
Long-term Debt       $    23,663   $    30,251          None   $     6,727   $    15,902
Total Equity
(Deficiency)         $  (740,378)  $  (131,860)  $   757,200   $ 3,691,838   $ 5,566,091
</TABLE>

(1)  Included in the net loss of $2,294,936  for fiscal year ended July 31, 2001
     and  $1,722,298  for fiscal  year ended July 31,  2000 are tax  benefits of
     $451,395 and  $755,854,  respectively  related to the sale of certain state
     tax operating loss carryforwards.

                                       12
<PAGE>


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

Overview

Since our  inception,  we have  devoted  the  majority of our  resources  to the
research and  development of  ONCONASE(R).  After we obtained the results of our
preliminary  analysis  of the Phase III  clinical  trial  results  for  advanced
pancreatic  cancer,  we closed the  pancreatic  cancer trials and redirected our
resources  towards the  completion of the ongoing  Phase III clinical  trial for
unresectable  malignant  mesothelioma.  We have had a  series  of  meetings  and
communications  with  the  FDA  and  EMEA  to  establish  mutually  agreed  upon
parameters for the NDA/MAA  submissions.  We must complete the current  clinical
trial for the FDA filing,  as well as provide the FDA and EMEA with  information
regarding  the  methods  used  to  manufacture  ONCONASE(R),  evaluation  of the
therapeutic and toxic doses of ONCONASE(R) in animals and studies  regarding the
detection of  ONCONASE(R) in human blood and antibody  formation.  Additionally,
for the MAA  submission,  we must  establish or designate a legal partner in the
EU, which is considered to be a qualified  pharmaceutical company (has qualified
individuals)  for at least  three  months  prior to filing the MAA.  We are also
exploring various  strategic  alternatives for our business and our research and
development operations.

We are currently  funding the research and development of our products from cash
receipts  resulting  from the private sales of our  securities  and from certain
debt  financings.  The termination of the Phase III clinical trials for advanced
pancreatic  cancer had a significant and detrimental  impact on the price of our
common stock and our ability to raise additional  capital for future operations.
We may not have, or may not be able to obtain, the financial  resources required
to pay for all the  associated  costs of the malignant  mesothelioma  program to
file a Unites States and/or foreign  registration for the marketing  approval of
ONCONASE(R) for this indication.

Results of Operations

Fiscal Years Ended July 31, 2001, 2000 and 1999

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 2001, 2000 and 1999.  Investment income for fiscal 2001
was $13,000  compared to $51,000 for fiscal  2000,  a decrease of $38,000.  This
decrease  was due to lower  balances  of cash and cash  equivalents.  Investment
income for fiscal 2000 was  $51,000  compared to  $168,000  for fiscal  1999,  a
decrease of $117,000.  This decrease was due to lower  balances of cash and cash
equivalents.

Research and Development

Research  and  development  expense for fiscal 2001 was  $1,901,000  compared to
$1,880,000  for fiscal 2000,  an increase of $21,000,  or 1%. This  increase was
primarily due to an increase in costs in support of ongoing  clinical trials and
increase in costs related to ONCONASE(R)  clinical supplies,  both primarily due
to the expansion of our Phase III clinical trials for malignant  mesothelioma in
Europe. These increases were offset by a decrease in expenses related to the NDA
filing for ONCONASE(R) with the FDA.

Research and development expense for fiscal 2000 was $1,880,000 compared to
$2,402,000 for fiscal 1999, a decrease of $522,000, or 22%. This decrease was
primarily due to an 80% decrease in costs in support of ongoing clinical trials,
primarily due to lower clinical costs related to the Phase III clinical trials
for malignant mesothelioma


                                       13
<PAGE>

and  pancreatic  cancer,  an 82%  decrease in costs  related to the  preclinical
research  studies of  ONCONASE(R)  and a 44%  decrease  in costs  related to the
manufacture of clinical supplies of ONCONASE(R).  These decreases were offset by
an increase in expenses in preparation of an NDA filing for  ONCONASE(R)  and an
82%  increase  in  expenses   associated  with  the  new  patent  and  trademark
applications for ONCONASE(R).

General and Administrative

General and  administrative  expense for fiscal  2001 was  $706,000  compared to
$645,000  for fiscal  2000,  an increase of $61,000,  or 9%. This  increase  was
primarily due to a 58% increase in costs related to public relations activities,
a 30%  increase  in  non-cash  expense  relating  to stock  options  issued  for
consulting  services,  a 12% increase in personnel  costs and an 87% increase in
costs associated with business development activities.

General and  administrative  expense for fiscal  2000 was  $645,000  compared to
$921,000  for fiscal 1999, a decrease of  $276,000,  or 29%.  This  decrease was
primarily due to a 45% reduction in  administrative  personnel costs,  primarily
due to the  resignation  of our  chief  financial  officer,  a 46%  decrease  in
consulting  fees and a 55% decrease in public  relations  expenses,  offset by a
$20,000 increase in legal fees.

Interest

Interest expense for fiscal 2001 was $153,000 compared to $5,000 in fiscal 2000,
an increase of $148,000.  The increase was primarily due to the interest expense
on convertible  notes and related  warrants  issued in April 2001 to related and
unrelated  parties.  The interest expense was based on the value of the warrants
using the  Black-Scholes  options-pricing  model,  amortized on a  straight-line
basis over the life of the notes.

Interest  expense for fiscal 2000 was $5,000  compared to $2,000 in fiscal 1999,
an increase of $3,000. The increase was primarily due to the financing of office
equipment during the fiscal year ended July 31, 2000.

Income Taxes

New Jersey has enacted legislation  permitting certain  corporations  located in
New  Jersey  to sell  state  tax  loss  carryforwards  and  state  research  and
development  credits or tax  benefits.  For the state  fiscal year 2001 (July 1,
2000 to June 30, 2001), we have $1,774,000 total available tax benefits of which
$602,000 was  allocated  to be sold  between July 1, 2000 and June 30, 2001.  In
December  2000,  we received  $451,000 from the sale of an aggregate of $602,000
tax  benefits  which was  recognized  as a tax benefit for our fiscal  2001.  In
December 1999, we received  $756,000 from the sale of our tax benefits which was
recognized  as a tax benefit for our fiscal  2000.  We will  attempt to sell the
remaining balance of our tax benefits in the amount of approximately  $1,172,000
between  July 1, 2001 and June 30,  2002,  subject to all  existing  laws of the
State of New  Jersey.  However,  we may not be able to find a buyer  for our tax
benefits or that such funds may not be available in a timely manner.

Net Loss

We have incurred net losses during each year since our  inception.  The net loss
for fiscal 2001 was  $2,295,000  as compared  to  $1,722,000  in fiscal 2000 and
$3,157,000  in fiscal  1999.  The  cumulative  loss from the date of  inception,
August 24,  1981,  to July 31,  2001  amounted to  $58,971,000.  Such losses are
attributable  to the  fact  that  we are  still  in the  development  stage  and
accordingly have not derived  sufficient  revenues from operations to offset the
development stage expenses.

Liquidity and Capital Resources

We have financed our operations  since  inception  primarily  through equity and
debt financing,  research product sales and interest  income.  During the fiscal
year 2001, we had a net decrease in cash and cash equivalents of $213,000.



                                       14
<PAGE>

This decrease primarily  resulted from net cash used in operating  activities of
$1,613,000 offset by net cash provided by financing  activities in the amount of
$1,400,000,  primarily  from the private  placement of common stock and warrants
and proceeds from the exercise of stock options. Total cash resources as of July
31, 2001 were $45,000 compared to $257,000 at July 31, 2000.

Our current  liabilities as of July 31, 2001 were $918,000  compared to $590,000
at July 31, 2000, an increase of $328,000.  The increase was primarily due to an
increase in expenses  related to the expansion of our Phase III clinical  trials
for  malignant  mesothelioma  in  Europe.  As  of  July  31,  2001  our  current
liabilities  exceeded our current assets and we had a working capital deficit of
$831,000.

New Jersey has enacted legislation  permitting certain  corporations  located in
New  Jersey  to sell  state  tax  loss  carryforwards  and  state  research  and
development  credits or tax  benefits.  For the state  fiscal year 2001 (July 1,
2000 to June 30, 2001), we have $1,774,000 total available tax benefits of which
$602,000 was  allocated  to be sold  between July 1, 2000 and June 30, 2001.  In
December  2000,  we received  $451,000 from the sale of an aggregate of $602,000
tax  benefits  which was  recognized  as a tax benefit for our fiscal  2001.  In
December 1999, we received  $756,000 from the sale of our tax benefits which was
recognized  as a tax benefit for our fiscal  2000.  We will  attempt to sell the
remaining balance of our tax benefits in the amount of approximately  $1,172,000
between  July 1, 2001 and June 30,  2002,  subject to all  existing  laws of the
State of New  Jersey.  However,  we may not be able to find a buyer  for our tax
benefits or that such funds may not be available in a timely manner.

Our continued  operations will depend on our ability to raise  additional  funds
through   various   potential   sources  such  as  equity  and  debt  financing,
collaborative agreements,  strategic alliances,  sale of tax benefits,  revenues
from the  commercial  sale of  ONCONASE(R)  and our  ability to realize the full
potential of our technology and our drug  candidates.  Such additional funds may
not become  available as we need them or be available on  acceptable  terms.  To
date, a significant portion of our financing has been through private placements
of common stock and warrants, the issuance of common stock for stock options and
warrants  exercised  and for services  rendered,  debt  financing  and financing
provided by our Chief Executive  Officer.  Additionally,  we have raised capital
through the sale of our tax benefits.  Until our operations generate significant
revenues,  we will continue to fund operations from cash on hand and through the
sources of capital  previously  described.  From August through October 2001, we
received gross proceeds of approximately  $178,500 from the private placement of
various  individual  investors and $100,000 from a note payable upon demand from
an  unrelated  party.  After  taking into  account  these net  proceeds  and the
possible  proceeds from the sale of the balance of our tax benefits,  we believe
that our cash and cash  equivalents  will be sufficient to meet our  anticipated
cash needs through  January 2002. If we are unable to obtain funds from the sale
of our tax  benefits  in a timely  basis,  our  current  cash  reserves  will be
exhausted  in  December  2001.  The report of our  independent  auditors  on our
financial  statements  includes an explanatory  paragraph  which states that our
recurring  losses,  working capital  deficit and limited liquid  resources raise
substantial  doubt  about  our  ability  to  continue  as a going  concern.  Our
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

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 several potential  strategic  alliance partners including major
international   biopharmaceutical  companies  to  further  the  development  and
marketing of ONCONASE(R) and other related products in our pipeline. However, we
cannot be certain that any such alliances will materialize.

Our common stock was delisted from The Nasdaq SmallCap  Market  effective at the
close of  business  April 27,  1999 for  failing to meet the  minimum  bid price
requirements set forth in the NASD Marketplace  Rules. Since April 28, 1999, our
common  stock has traded on the OTC  Bulletin  Board  under the  symbol  "ACEL".
Delisting of our common stock from Nasdaq could have a material  adverse  effect
on our ability to raise additional capital, our stockholders'  liquidity and the
price of our common stock.

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 approval of ONCONASE(R).

                                       15
<PAGE>

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  shareholders  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 KPMG LLP with respect to our financial statements
from  inception  to July 31,  2000 is based on the  report 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 11 of the Securities Act on the
basis of the use of such report in any  registration  statement  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  registration  statement,  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 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 our common stock or otherwise.

                                    Part III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.


<TABLE>
<CAPTION>

Name                            Age  Director Since Position with the Company
------------------------------ ---- --------------- ----------------------------------------------------

<S>                             <C>      <C>        <C>
Kuslima Shogen                  56       1981       Chairman of the Board, Chief Executive Officer and
                                                    Acting Chief Financial Officer

Stanislaw M. Mikulski, M.D.     57       1986       Executive Vice President, Medical Director and
                                                    Director

Stephen K. Carter, M.D.(1)      63       1997       Director and Chairman of the Scientific Advisory
                                                    Board

Donald R. Conklin (1)(2)        65       1997       Director

Martin F. Stadler (1)(2)        59       1997       Director

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

(1)  Member of Compensation Committee
(2)  Member of Audit Committee

                                       16
<PAGE>

Business Experience of Directors and Executive Officers

Kuslima Shogen has served as our Chief  Executive  Officer since September 1986,
as Chairman of the Board since August 1996,  as a Director  since our  inception
and as Acting Chief  Financial  Officer since June 23, 1999.  She also served as
our Chief  Financial  Officer from  September  1986 through July 1994 and as our
President  from  September 1986 through July 1996. Ms. Shogen formed the company
in 1981 to pursue research that she had initiated while a biology student in the
University  Honors  Program  at  Fairleigh  Dickenson  University.  Prior to our
founding,  from  1976 to 1981 she was  founder  and  president  of a  biomedical
research  consortium  specializing  in  Good  Laboratory  Practices  and  animal
toxicology.  During  that time,  she also served as a  consultant  for the Lever
Brothers   Research  Group.   Ms.  Shogen  has  received   numerous  awards  for
achievements in biology,  including the Sigma Xi first prize from the Scientific
Research  Society  of  North  America  in 1974  and  first  prize  for the  most
outstanding research paper in biology at the Eastern College Science Conferences
competitions  in 1972,  1973, and 1974. She earned a B.S.  degree in 1974 and an
M.S. degree in 1976 in biology from Fairleigh Dickenson University,  or FDU, and
also completed  graduate studies in 1978 in embryology.  She is a Phi Beta Kappa
graduate.  In April 1998,  Ms. Shogen  received the Pinnacle Award from FDU, the
highest honor the University bestows on its graduates.

Stanislaw M. Mikulski, M.D., F.A.C.P. has served as our Executive Vice President
and  Medical  Director  since 1987 and as a Director  since  1986.  Prior to his
affiliation  with us, Dr.  Mikulski  was Special  Assistant  to the Chief of the
Investigational   Drug  Branch  of  the  National  Cancer  Institute,   and  the
Coordinator  for  Immunotherapy  Trials in  Cancer  for the  Division  of Cancer
Treatment.  Prior to joining  us, he  maintained  a private  practice in medical
oncology  for over eight  years.  He is a  diplomate  of the  American  Board of
Internal  Medicine  and  Medical  Oncology  as well as a Fellow of the  American
College of Physicians and a member of the American Society of Clinical Oncology,
The American  Association for Cancer  Research and the American  Association for
the  Advancement  of Science.  Dr.  Mikulski is  currently a clinical  assistant
Professor of Medicine at the University of Medicine and Dentistry of New Jersey.
He  received  his M.D.  in 1967 from the  Medical  School of Warsaw,  Poland and
subsequently  performed  post-doctoral  studies in human tumor immunology at the
University of California in Los Angeles.

Stephen K. Carter,  M.D. joined the Board of Directors in May 1997 and serves as
Chairman of our Scientific Advisory Board. In addition to his positions with us,
Dr. Carter also serves as a senior clinical  consultant to Sugen, Inc. From 1995
through 1997, he served as Senior Vice President of Research and Development for
Boehringer-Ingelheim  Pharmaceuticals.  Before  this,  Dr.  Carter spent over 13
years with Bristol-Myers  Squibb, an international  leader in the development of
innovative  anti-cancer  and anti-viral  therapies.  He held a variety of senior
executive research and development  positions while at Bristol-Myers,  including
serving for five years as Senior Vice President of worldwide  clinical  research
and development of its Pharmaceutical Research Institute.  From 1976 to 1982, he
established and directed the Northern California Cancer Program.  Prior to this,
he held a number of positions  during a nine-year  tenure at the National Cancer
Institute,  including the position of Deputy Director at the National Institutes
of Health.  He has also been a member of the faculties of the medical schools of
Stanford University,  the University of California at San Francisco and New York
University.   Dr.  Carter  has  published  extensively  on  the  development  of
anti-cancer  drugs,  was the  co-founding  editor of journals  devoted to cancer
therapeutics or immunology,  and has served on the editorial  boards of a number
of  additional  journals  dedicated to cancer  treatment.  He is a member of the
American  Society of Clinical  Oncology,  the  American  Association  for Cancer
Research, and the Society of Surgical Oncology, as well as several other medical
societies. Dr. Carter earned his B.A. from Columbia University and his M.D. from
New York Medical College. He currently serves on the Board of Directors of Allos
Therapeutics.

Donald R.  Conklin  joined  the  Board of  Directors  in May 1997.  Prior to his
retirement in May 1997, Mr. Conklin was a senior executive with Schering-Plough,
a major  worldwide  pharmaceutical  firm.  During  his more  than 35 years  with
Schering-Plough,  he held a variety of key management positions within the firm.
From 1986 to 1994, he served as President of Schering-Plough Pharmaceuticals and
Executive  Vice-President of Schering-Plough  Corporation.  In this position, he
was responsible for worldwide pharmaceutical operations, including the launch of
INTRON  A(R)  (interferon  alfa-2b).  Prior to this,  Mr.  Conklin had served as
President  of  Schering  USA and  had  held


                                       17
<PAGE>

a variety of executive  marketing  positions in the United States,  Europe,  and
Latin  America.  Immediately  preceding  his  retirement,  he  was  Chairman  of
Schering-Plough  Health  Care  Products  and  an  Executive  Vice  President  of
Schering-Plough  Corporation.  Mr. Conklin received his B.A. with highest honors
from Williams College and his M.B.A.  degree from the Rutgers  University School
of  Business.   He  currently  serves  on  the  Board  of  Directors  of  Vertex
Pharmaceuticals, Inc. and BioTransplant, Inc.

Martin F. Stadler  joined the Board of Directors in November 1997. At the end of
1996,  Mr.  Stadler  retired  from  Hoffmann  La-Roche,  Inc.  after 32 years of
pharmaceutical, chemical and diagnostic experience. Mr. Stadler served as senior
vice  president and chief  financial  officer,  and was a member of the Hoffmann
La-Roche,  Inc. Board of Directors from 1985 through 1996. His  responsibilities
included finance,  information technology,  human resources, quality control and
technical  services.  Prior to 1985,  Mr. Stadler  served as  vice-president  of
strategic  planning  and business  development.  Mr.  Stadler  received his B.S.
degree  from  Rutgers  University  and  his  M.B.A.  from  Fairleigh   Dickenson
University.  In April 1999, he received the Pinnacle Award from FDU, the highest
honor the University  bestows on its  graduates.  Mr. Stadler is a member of the
Finance  Council  of  the  American  Management  Association  and a  trustee  of
Fairleigh Dickenson University.

In March  1998 the SEC  approved  the  settlement  previously  disclosed  in our
November  1997  Proxy  Statement  of  allegations  by the SEC of  violations  of
Sections  13 and 16 of the  Securities  Exchange  Act of 1934,  as amended  (the
Exchange  Act) by Kuslima  Shogen,  Chairman  and Chief  Executive  Officer  and
Stanislaw Mikulski, Executive Vice President. Ms. Shogen and Dr. Mikulski agreed
to the entry of a cease and desist  order and the payment of monetary  penalties
totaling  $40,000  (payable  by us under our  indemnity  agreements  with  these
individuals)   without  admitting  or  denying  any  of  the  SEC's  allegations
concerning  certain  allegedly late filings required to be made by them pursuant
to Sections 13 and 16 of the Exchange Act with respect to changes in  beneficial
ownership of our securities. With the exception of one late filing by Ms. Shogen
in 1996, each of the allegedly unreported transactions occurred during the years
1983 to 1994. The alleged  reporting  violations relate solely to the filings of
required forms.  There was no allegation by the SEC of any fraudulent or willful
misconduct. No action was brought against us.

Section 16(a) Beneficial Ownership Reporting Compliance

Ownership  of and  transactions  in our  stock  by our  executive  officers  and
directors and owners of 10% or more of our outstanding common stock are required
to be reported to the  Securities  and Exchange  Commission  pursuant to Section
16(a) of the Securities  Exchange Act of 1934, as amended (the "Exchange  Act").
During the fiscal year ended July 31,  2001,  all  reports  required to be filed
pursuant to Section  16(a) of the  Exchange  Act were filed in a timely  manner,
except for  Kuslima  Shogen who filed two Form 4's late.  One late filing by Ms.
Shogen was due to an oversight  when a Form 4 was filed in  connection  with the
exercise of options. The options were granted earlier in the year but the option
grant was not required to be reported on Form 4. The exercise was required to be
reported and this was done in a timely  manner by filing a Form 4;  however,  in
such Form 4, the grant of the options  exercised  should  have been  reported as
well as the exercise  itself.  The grant was later  reported by filing a Form 4.
The other late filing was due to the failure of Ms.  Shogen's  brokerage firm to
inform  her in a timely  manner of a sale of stock  held in her  account,  which
stock had originally been purchased by Ms. Shogen in the open market.

Item 11. EXECUTIVE COMPENSATION.

Directors' Compensation

Directors receive no cash compensation in consideration for their serving on the
Board of Directors.

In November 1993 and January 1994, the Board of Directors and the  stockholders,
respectively, approved our 1993 Stock Option Plan (1993 Plan) which, among other
things, provides for automatic grants of options under a formula to non-employee
directors or independent directors on an annual basis.

                                       18
<PAGE>


The formula  provides that (i) on each December 31st each  independent  director
receives  automatically an option to purchase 15,000 shares of our common stock,
or the  regular  grant;  and  (ii) on the  date of each  independent  director's
initial  election  to the  Board of  Directors,  the newly  elected  independent
director automatically receives an option to purchase the independent director's
pro rata share of the regular grant which equals the product of 1,250 multiplied
by the number of whole months  remaining in the calendar  year,  or the pro rata
grant.  Each option  granted  pursuant  to a regular  grant and a pro rata grant
vests and becomes  exercisable on December 30th following the date of grant.  An
option  will not  become  exercisable  as to any shares  unless the  independent
director has served continuously on the Board during the year preceding the date
on which such options are scheduled to vest and become exercisable,  or from the
date the  independent  director  joined  the  Board  until the date on which the
options are scheduled to vest and become exercisable. However, if an independent
director  does  not  fulfill  such  continuous  service  requirement  due to the
independent  director's  death or disability all options held by the independent
director  nonetheless vest and become exercisable as described herein. An option
granted  pursuant to the formula remains  exercisable for a period of five years
after the date the option  first  becomes  exercisable.  The per share  exercise
price of an option granted under the formula is equal to the average of the high
and low trade  prices of our  common  stock for the  twenty  (20)  trading  days
preceding the date of grant.

During the fiscal year ended July 31, 2001, the following  independent directors
listed below were granted  options  under our 1997 Stock Option Plan (1997 Plan)
pursuant  to the same  formula  under  the 1993  Plan as set  forth  above.  The
exercise prices of the options are equal to the formula set forth above.


      Name                    Number of Options     Exercise Price   Expiration
-----------------         -----------------------   --------------   ----------

Stephen K. Carter                  15,000               $0.82         12/30/06

Donald R. Conklin                  15,000               $0.82         12/30/06

Martin F. Stadler                  15,000               $0.82         12/30/06

Additionally,  in April 2001 our board of  directors  approved  the  issuance of
50,000 stock options under the 1997 Plan to Martin Stadler,  which vested on the
date of grant. The exercise price of the stock options was $0.90 per share which
was based on the  average of the high and low trade  prices of our common  stock
for the ten trading days preceding the date of grant.

Compensation Committee Interlocks and Insider Participation

During  the  fiscal  year  ended  July 31,  2001,  the  members  of our Board of
Directors  who served on the  Compensation  Committee  were  Stephen K.  Carter,
Donald R. Conklin and Martin F. Stadler, all of whom are non-employee directors.
As more  fully  described  under  Item 13  "Certain  Relationships  and  Related
Transactions",  Messrs.  Conklin and Stadler were issued convertible notes which
were converted into common stock and warrants to purchase common stock.

Summary Compensation Table

The following  table  provides a summary of cash and non-cash  compensation  for
each of the last three fiscal years ended July 31, 2001, 2000 and 1999 earned by
our Chief  Executive  Officer and  Executive  Vice  President  or our  executive
officers during the last fiscal year.

                                       19
<PAGE>

<TABLE>
<CAPTION>
                                                                                    Long Term
                                         Annual Compensation                       Compensation
--------------------------------------------------------------------------------------------------  ----------------
                                                                                    Securities
                                                               Other Annual         Underlying         All Other
      Name and                      Salary         Bonus       Compensation      Options/SARs(#)     Compensation
 Principal Position       Year        ($)           ($)           ($)(1)                                 ($)(2)
--------------------------------------------------------------------------------------------------------------------

<S>                       <C>        <C>           <C>             <C>                    <C>            <C>
Kuslima Shogen            2001       $150,000      - 0 -           - 0 -                  115,000        $4,154
Chief Executive           2000        150,000      - 0 -           - 0 -                  215,000         3,615
Officer, Chairman of      1999        150,000      - 0 -           - 0 -                    - 0 -         - 0 -
the Board of
Directors and Acting
Chief Financial
Officer

Stanislaw M. Mikulski     2001      $130,000       - 0 -           - 0 -                   55,000        $3,900
Executive Vice            2000       130,000       - 0 -           - 0 -                  130,000         3,600
President and             1999       130,000       - 0 -           - 0 -                    - 0 -         - 0 -
Medical Director
</TABLE>

(1)  Excludes  perquisites and other personal benefits which in the aggregate do
     not exceed 10% of our executive officers' total annual salary and bonus.

(2)  Consists of our contributions to a 401(k) plan.

Option Grants in Last Fiscal Year

The following table contains  information  concerning the grant of stock options
to our executive officers during the fiscal year ended July 31, 2001:

<TABLE>
<CAPTION>
==================================================================================== ===============================
                                                                                     Potential Realizable Value at
                                                                                     Assumed Annual Rates of Stock
                                 Individual Grants                                   Price Appreciation for Option
                                                                                                Term(2)
------------------------------------------------------------------------------------
                        Number of
                        Securities       % of Total
                        Underlying    Options Granted    Exercise or
                         Options      to Employees in    Base Price     Expiration
        Name           Granted (#)      Fiscal Year     ($/Share)(1)       Date
                                                                                     -------------------------------
<S>                     <C>                <C>              <C>            <C>         <C>     <C>         <C>
                                                                                       0%($)     5%($)      10%($)
--------------------- --------------- ----------------- -------------- ------------- -------- ---------- -----------

Kuslima Shogen          115,000(3)         32.67%           $.85           (4)          -      $ 4,888     $ 9,775

Stanislaw M.             55,000(3)         15.63%           $.85           (4)          -      $ 2,338     $ 4,675
Mikulski
====================================================================================================================
</TABLE>

(1)  The  exercise  price of these  options was based on the average of the high
     and low  trade  prices of our  common  stock for the  twenty  trading  days
     preceding the date of grant.

(2)  The amounts set forth in the three  columns  represent  hypothetical  gains
     that might be  achieved  by the  optionees  if the  respective  options are
     exercised at the end of their terms. These gains are based on assumed rates
     of stock price  appreciation of 0%, 5% and 10%. The 0% appreciation  column

                                       20
<PAGE>



     is included  because the  exercise  prices of the options  equal the market
     price of the underlying  common stock on the date the options were granted,
     and thus the options  will have no value  unless our stock price  increases
     above the exercise prices.

(3)  These options vested and became  exercisable as to 20% of the shares on the
     date of the grant and 20% of the shares each year thereafter.  An aggregate
     23,000 options issued to Kuslima Shogen were exercised in March 2001.

(4)  These options will expire five years after the vesting date.

Option Exercises and Fiscal Year-End Values

The  following  table sets forth the  information  with respect to our executive
officers  concerning  the exercise of options  during the fiscal year ended July
31, 2001 and unexercised options held as of July 31, 2001.

<TABLE>
<CAPTION>
=================================================== ================================ ===============================
                                                         Number of Securities             Value of Unexercised
                                                    Underlying Unexercised Options        In-The-Money Options
                                                        at Fiscal Year-End (#)          at Fiscal Year-End($)(2)
---------------------------------------------------
                           Shares         Value
        Name             Acquired on     Realized   Exercisable     Unexercisable    Exercisable    Unexercisable
                        Exercise (#)     ($) (1)
--------------------- ----------------- ----------- ------------- ------------------ ------------- -----------------

<S>                         <C>            <C>           <C>                <C>         <C>            <C>
Kuslima Shogen              55,555         $12,870       780,926            261,000     $4,639         $67,525

Stanislaw M. Mikulski        None             None       275,563            152,000    $30,725         $43,300
====================== ================= ========== ============= ================== ============= =================
</TABLE>

(1)  Based  upon the fair  market  value of the  purchased  shares on the option
     exercise date less the exercise price paid for the shares.

(2)  The fair market  value of the common stock at the fiscal year end was based
     on the  average  of the high and low trade  prices  ($0.89)  for the common
     stock  obtained from the OTC Bulletin  Board on the last trading day of the
     fiscal year July 31, 2001.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information concerning stock ownership of
each  person  who is the  beneficial  owner  of  five  percent  or  more  of our
outstanding common stock, each of the current  directors,  each of our executive
officers and all directors and executive officers as a group as of September 30,
2001.  Except as  otherwise  noted,  each person has sole voting and  investment
power with respect to the shares shown as beneficially owned.

<TABLE>
<CAPTION>

                                                                                Percentage of
                                                                 Number of      Common Stock
Directors, Officers or 5% Stockholders (1)                       Shares(2)      Outstanding(3)
--------------------------------------------------------------   ------------   --------------

<S>                                                              <C>                <C>
Kuslima Shogen                                                   2,295,546(4)       11.0%

Stanislaw M. Mikulski                                              658,813(5)        3.3%

Stephen K. Carter                                                  128,750(6)          *
</TABLE>



                                       21
<PAGE>


<TABLE>
<CAPTION>
                                                                                Percentage of
                                                                 Number of      Common Stock
Directors, Officers or 5% Stockholders (1)                       Shares(2)      Outstanding(3)
--------------------------------------------------------------   ------------   --------------

<S>                                                                <C>               <C>
Donald R. Conklin                                                  414,250(7)        2.1%

Martin F. Stadler                                                  441,250(8)        2.2%

All executive officers and directors as a group (five persons)   3,599,688(9)       18.1%

</TABLE>

*    Less than one percent.

(1)  The address of all  officers and  directors  listed above is in the care of
     the company.

(2)  All shares  listed are common  stock.  Except as discussed  below,  none of
     these  shares are  subject to rights to acquire  beneficial  ownership,  as
     specified in Rule  13d-3(d)(1)  under the Exchange Act, and the  beneficial
     owner has sole voting and investment power,  subject to community  property
     laws where applicable.

(3)  The percentage of stock  outstanding for each  stockholder is calculated by
     dividing (i) the number of shares of Common Stock deemed to be beneficially
     held by such  stockholder  as of September  30, 2001 by (ii) the sum of (A)
     the number of shares of common stock  outstanding  as of September 30, 2001
     plus (B) the number of shares issuable upon exercise of options or warrants
     held by such stockholder which were exercisable as of September 30, 2001 or
     which will become exercisable within 60 days after September 30, 2001.

(4)  Includes  826,926 shares  underlying  options which were  exercisable as of
     September  30, 2001 or which will become  exercisable  within 60 days after
     September  30,  2001 and  110,000  shares  underlying  warrants  which were
     exercisable  as of  September  30,  2001 or which will  become  exercisable
     within 60 days after September 30, 2001.

(5)  Includes  297,563 shares  underlying  options which were  exercisable as of
     September  30, 2001 or which will become  exercisable  within 60 days after
     September 30, 2001.

(6)  Includes  128,750 shares  underlying  options which were  exercisable as of
     September  30, 2001 or which will become  exercisable  within 60 days after
     September 30, 2001.

(7)  Includes  73,750 shares  underlying  options which were  exercisable  as of
     September  30, 2001 or which will become  exercisable  within 60 days after
     September  30,  2001 and  110,000  shares  underlying  warrants  which were
     exercisable  as of  September  30,  2001 or which will  become  exercisable
     within 60 days after September 30, 2001.

(8)  Includes  106,250 shares  underlying  options which were  exercisable as of
     September  30, 2001 or which will become  exercisable  within 60 days after
     September  30,  2001 and  110,000  shares  underlying  warrants  which were
     exercisable  as of  September  30,  2001 or which will  become  exercisable
     within 60 days after September 30, 2001.

(9)  Includes all shares owned  beneficially  by the directors and the executive
     officers named in the table.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

On July 23, 1991, the Board of Directors  authorized us to pay Kuslima Shogen an
amount  equal to 15% of any  gross  royalties  which  may be paid to us from any
license(s)  with respect to our  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  we own or are a
co-owner of the patents,  or acquire such rights in the future,


                                       22
<PAGE>

for a period not to exceed the life of the patents. If we manufacture and market
the drugs  ourselves,  we 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 we and a licensee both market the licensed product.

In  December  1999,  our  compensation  committee  approved  the  issuance of an
aggregate total of 75,000 stock options to our outside board of directors, which
vested on the date of grant.  The exercise  price of the stock options was $0.47
per share which was based on the average of the high and low trade prices of our
common  stock for the  twenty  trading  days  preceding  the date of  grant.  An
aggregate 50,000 of these options were exercised.

In April 2001,  our board of  directors  approved  the  issuance of 50,000 stock
options  under  the 1997  Plan to Martin  Stadler,  which  vested on the date of
grant.  The  exercise  price of the stock  options was $0.90 per share which was
based on the  average of the high and low trade  prices of our common  stock for
the ten trading days preceding the date of grant.

In April  2001,  we  issued  convertible  notes to  Kuslima  Shogen,  our  Chief
Executive  Officer  and a director,  two of our  directors,  Donald  Conklin and
Martin  Stadler,  and  unrelated  parties in the  aggregate  amount of $366,993.
Messrs. Conklin and Stadler are members of our Compensation Committee. The notes
are due within  ninety days  unless the  lenders  elect to exercise an option to
convert their note into common stock at the conversion price of $0.90 per share.
The  related  parties  named above have  elected to convert  their notes into an
aggregate  330,000 shares of common stock. In addition,  upon  conversion,  they
received  three-year  warrants to purchase an aggregate 330,000 shares of common
stock at an exercise  price of $2.50 per share that will expire on July 7, 2004.
The notes issued to unrelated  parties with an aggregate balance of $69,993 were
renewed for one hundred twenty (120) days for the same conversion price of $0.90
per share. In addition, upon conversion, they will receive five-year warrants to
purchase an  aggregate  77,770  shares of common  stock at an exercise  price of
$1.50 per share.

                                     Part IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)(1)and(2)  The  response  to  these  portions  of Item 14 is  submitted  as a
              separate section of this report commencing on page F-1.

(a)(3)and(4)  Exhibits (numbered in accordance with Item 601 of Regulation S-K).

<TABLE>
<CAPTION>

                                                                                             Exhibit No. or
Exhibit                                                                                      Incorporation
  No.                                  Item Title                                             by Reference
-----                                  ----------                                             ------------

<S>     <C>                                                                                     <C>
  3.1   Certificate of Incorporation                                                              *

  3.2   By-Laws                                                                                   *

  3.3   Amendment to Certificate of Incorporation                                                 #

  3.4   Amendment to Certificate of Incorporation                                                +++

  4.1   Form of Convertible Debenture                                                            **

 10.1   Form of Stock and Warrant Purchase Agreements used in private placements completed       ##
        in April 1996 and June 1996

 10.2   Lease Agreement - 225 Belleville Avenue, Bloomfield, New Jersey                          ###

 10.3   Form of Stock Purchase Agreement and Certificate used in connection with various
        private placements                                                                       ***

 10.4   Form of Stock and Warrant Purchase Agreement and Warrant Agreement used in Private       ***
        Placement completed on March 21, 1994
</TABLE>

                                       23
<PAGE>

<TABLE>
<CAPTION>

                                                                                             Exhibit No. or
Exhibit                                                                                      Incorporation
  No.                                  Item Title                                             by Reference
-----                                  ----------                                             ------------

<S>     <C>                                                                                     <C>
 10.5   1993 Stock Option Plan and Form of Option Agreement                                     *****

 10.6   Debt Conversion Agreement dated March 30, 1994 with Kuslima Shogen                      ****

 10.7   Accrued Salary Conversion Agreement dated March 30, 1994 with Kuslima Shogen            ****

 10.8   Accrued Salary Conversion Agreement dated March 30, 1994 with Stanislaw Mikulski        ****

 10.9   Option Agreement dated March 30, 1994 with Kuslima Shogen                               ****

10.10   Amendment No. 1 dated June 20, 1994 to Option Agreement dated March 30, 1994 with       ****
        Kuslima Shogen

10.11   Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated March 30,         *****
        1994 with Kuslima Shogen

10.12   Form of Amendment No. 1 dated June 20, 1994 to Option Agreement dated March 30,         *****
        1994 with Stanislaw Mikulski

10.13   Form of Stock and Warrant Purchase Agreement and Warrant Agreement used in Private        +
        Placement completed on September 13, 1994

10.14   Form of Subscription Agreements and Warrant Agreement used in Private Placements          #
        closed in October 1994 and September 1995

10.15   1997 Stock Option Plan                                                                   ###

10.16   Separation Agreement with Michael C. Lowe dated October 9, 1997                          ++

10.17   Form of Subscription Agreement and Warrant Agreement used in Private Placement           +++
        completed on February 20, 1998

10.18   Form of Warrant Agreement issued to the Placement Agent in connection with the           +++
        Private Placement completed on February 20, 1998

10.19   Placement Agent Agreement dated December 15, 1997                                        +++

10.20   Separation Agreement with Gail Fraser dated August 31, 1999                             ####

10.21   Form of Subscription Agreement and Warrant Agreement used in Private Placements
        completed in February 2000                                                              ++++

10.22   Form of Subscription Agreement and Warrant Agreement used in the August and
        September 2000 Private Placements                                                       +++++

10.23   Form of Subscription Agreement and Warrant Agreement used in the April 2001
        Private Placements                                                                        ^

10.24   Form of Convertible Note entered into in April 2001                                       ^

10.25   Form of Subscription Agreement and Warrant Agreement used in the July 2001 Private
        Placements                                                                                ^

 21.1   Subsidiaries of Registrant                                                               **

 23.1   Consent of KPMG LLP                                                                     #####

 99.1   Factors to Consider in Connection with Forward-Looking Statements                       #####
</TABLE>

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

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


                                       24
<PAGE>


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

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

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

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

++   Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
     for the quarter ended October 31, 1997 and incorporated herein by reference
     thereto.

+++  Previously filed as exhibits to the Company's Quarterly Report on Form 10-Q
     for the quarter ended January 31, 1998 and incorporated herein by reference
     thereto.

++++ Previously  filed as exhibits to the  Company's  Annual Report on Form 10-K
     for the year  ended  July 31,  2000 and  incorporated  herein by  reference
     thereto.

+++++Previously  filed as exhibits  to the  Company's  Quarterly  Report on Form
     10-Q for the quarter  ended  October 31,  2000 and  incorporated  herein by
     reference thereto.

^    Previously  filed as exhibits to the  Company's  Registration  Statement on
     Form S-1 (File No. 333-38236) and incorporated herein by reference thereto.

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

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

###  Previously  filed as exhibits  to the  Company's  Quarterly  Report on Form
     10-QSB for the  quarter  ended April 30,  1997 and  incorporated  herein by
     reference thereto.

#### Previously  filed as exhibits to the  Company's  Annual Report on Form 10-K
     for the year  ended  July 31,  1999 and  incorporated  herein by  reference
     thereto.

##### Filed herewith.

(b)  Reports on Form 8-K.

      None

                                       25
<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 29, 2001             By: /s/ KUSLIMA SHOGEN
                                        Kuslima Shogen, Chief Executive Officer,
                                        Acting Chief Financial 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 29, 2001                /s/ KUSLIMA SHOGEN
                                        Kuslima Shogen, Chief Executive Officer,
                                        Acting Chief Financial Officer
                                        (Principal Executive Officer,  Principal
                                        Accounting Officer) and Chairman of
                                        the Board


Dated: October 29, 2001                 /s/ STANISLAW M. MIKULSKI
                                        Stanislaw M. Mikulski, M.D., Executive
                                        Vice President and Director


Dated: October 29, 2001                 /s/ STEPHEN K. CARTER
                                        Stephen K. Carter, M.D., Director


Dated: October 29, 2001                 /s/ DONALD R. CONKLIN
                                        Donald R. Conklin, Director

Dated: October 29, 2001                 /s/ MARTIN F. STADLER
                                        Martin F. Stadler, Director




                                       26
<PAGE>


                                      Index

                                                                            Page

     Audited Financial Statements:

     Independent Auditors' Report of KPMG LLP ...........................   F-2

     Independent Auditors' Report of Armus, Harrison & Co. ..............   F-3

     Balance Sheets - July 31, 2001 and 2000 ............................   F-5

     Statements of Operations - Years ended July 31, 2001, 2000, and 1999
          and the Period from August 24, 1981
          (Date of Inception) to July 31, 2001 ..........................   F-6

     Statement of Stockholders' Equity (Deficiency)
          Period from August 24, 1981
          (Date of Inception) to July 31, 2001 ..........................   F-7

     Statements of Cash Flows - Years ended July 31, 2001, 2000, and 1999
          and Period from August 24, 1981
          (Date of Inception) to July 31, 2001 ..........................   F-12

     Notesto Financial Statements - Years ended July 31, 2001, 2000 and
          1999 and the Period from August 24, 1981
          (Date of Inception) to July 31, 2001 ..........................   F-15


                                       F-1

<PAGE>


                          Independent Auditors' Report

The Stockholders and Board of Directors
Alfacell Corporation:


We have  audited the  accompanying  balance  sheets of Alfacell  Corporation  (a
development  stage  company)  as of July 31,  2001  and  2000,  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, 2001 and the period
from August 24,  1981 (date of  inception)  to July 31,  2001.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits. The financial statements of Alfacell Corporation for the period from
August 24, 1981 to July 31, 1992 were  audited by other  auditors  whose  report
dated  December 9, 1992,  except as to note 18 which is July 19, 1993 and note 3
which is October 28, 1993,  expressed an unqualified opinion on those statements
with an explanatory  paragraph  regarding the Company's ability to continue as a
going concern.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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,  2001 of the amounts for the period from August 24,
1981 to July 31, 1992, on the report of other auditors, the financial statements
referred to above  present  fairly,  in all  material  respects,  the  financial
position of Alfacell  Corporation  as of July 31, 2001 and 2000, and the results
of its  operations  and its cash  flows for each of the years in the  three-year
period  ended July 31, 2001 and the period from August 24, 1981 to July 31, 2001
in conformity with accounting principles generally accepted in the United States
of America.

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
October 12, 2001

                                      F-2
<PAGE>

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


                         REPORT OF INDEPENDENT AUDITORS

Board of Directors
Alfacell Corporation
Bloomfield, New Jersey

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

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-3

<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 of  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-4

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                                 Balance Sheets

                             July 31, 2001 and 2000
<TABLE>
<CAPTION>
                                                                        2001           2000
                                                                   ------------    ------------
<S>                                                                <C>             <C>
ASSETS
Current assets:
    Cash and cash equivalents                                      $     44,781    $    257,445
    Other assets                                                         42,933          28,617
                                                                   ------------    ------------
        Total current assets                                             87,714         286,062

Property and equipment, net of accumulated depreciation and
    amortization of $1,081,423 in 2001 and $1,006,808 in 2000            67,555         142,170

Other assets                                                             46,340          59,867
                                                                   ------------    ------------

        Total assets                                               $    201,609    $    488,099
                                                                   ============    ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
    Current portion of long-term debt                              $      7,057    $      7,074
    Note payable - convertible debt - unrelated party, less debt
    discount of $34,511                                                  35,482              --
    Accounts payable                                                    409,972         170,788
    Accrued expenses                                                    465,813         411,846
                                                                   ------------    ------------
        Total current liabilities                                       918,324         589,708

Long-term debt, less current portion                                     23,663          30,251
                                                                   ------------    ------------
        Total liabilities                                               941,987         619,959
                                                                   ------------    ------------

Stockholders' deficiency:
    Preferred stock, $.001 par value.  Authorized and unissued,
       1,000,000 shares at July 31, 2001 and 2000                            --              --
    Common stock $.001 par value.  Authorized 40,000,000 shares;
       issued and outstanding 19,802,245 shares and 18,431,559
       shares at July 31, 2001 and 2000, respectively                    19,802          18,431
    Capital in excess of par value                                   58,211,335      56,526,288
    Deficit accumulated during development stage                    (58,971,515)    (56,676,579)
                                                                   ------------    ------------
        Total stockholders' deficiency                                 (740,378)       (131,860)
                                                                   ------------    ------------

        Total liabilities and stockholders' deficiency             $    201,609    $    488,099
                                                                   ============    ============
</TABLE>

See accompanying notes to financial statements.

                                      F-5
<PAGE>


                            Statements of Operations

                    Years ended July 31, 2001, 2000 and 1999,
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 2001

<TABLE>
<CAPTION>
                                               August 24, 1981
                                                  (date of
                                                  inception)
                                               to July 31, 2001      2001          2000           1999
                                                 ------------    -----------    -----------    ----------
<S>                                              <C>              <C>           <C>            <C>
Revenues:
    Sales                                        $    553,489             --             --            --
    Investment income                               1,372,285         13,121         51,144       168,372
    Other income                                       60,103             --             --            --
                                                 ------------    -----------    -----------    ----------
                                                    1,985,877         13,121         51,144       168,372
                                                 ------------    -----------    -----------    ----------

Cost and expenses:
    Cost of sales                                     336,495             --             --            --
    Research and development                       37,869,035      1,900,678      1,879,728     2,401,945
    General and administrative                     20,865,393        705,745        644,588       920,686
    Interest:
       Related parties                              1,142,860        108,900             --            --
       Others                                       1,950,858         44,129          4,980         2,377
                                                 ------------    -----------    -----------    ----------
                                                   62,164,641      2,759,452      2,529,296     3,325,008
                                                 ------------    -----------    -----------    ----------

Net loss before state tax benefit                $(60,178,764)    (2,746,331)    (2,478,152)   (3,156,636)

 State tax benefit                                  1,207,249        451,395        755,854            --
                                                 ------------    -----------    -----------    ----------

           Net loss                              $(58,971,515)    (2,294,936)    (1,722,298)   (3,156,636)
                                                 ============    ===========    ===========    ==========

 Loss per basic and diluted common share                         $     (0.12)   $     (0.10)   $    (0.18)
                                                                 ===========    ===========    ==========

 Weighted average number of shares outstanding                    18,927,000     17,812,000    17,271,000
                                                                 ===========    ===========    ==========
</TABLE>


See accompanying notes to financial statements.


                                      F-6

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 2001
<TABLE>
<CAPTION>
                                                                   Common Stock
                                                              ----------------------
                                                                                                                       Deficit
                                                                                                                     Accumulated
                                                                                          Capital In     Common        During
                                                                Number                  Excess of par   Stock to     Development
                                                              of Shares      Amount         Value       be 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>
                                                                              Deferred         Total
                                                                            compensation,  Stockholders'
                                                             Subscription    restricted        Equity
                                                               Receivable      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-7

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)


                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 2001
<TABLE>
<CAPTION>
                                                                   Common Stock
                                                              ----------------------
                                                                                                                       Deficit
                                                                                                                     Accumulated
                                                                                          Capital In     Common        During
                                                                Number                  Excess of par   Stock to     Development
                                                              of Shares      Amount         Value       be 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 at $10.00 per share                          14,745          15         147,435           --              --
Issuance of shares under stock bonus plan for directors
  and consultants                                                  5,000           5          74,995           --              --
Issuance of shares for services                                  250,000         250         499,750           --              --
Sale of shares to private investors, net                           5,000           5          24,995           --              --
Net loss                                                              --          --              --           --      (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 at $3.00 per share                           170,000         170         509,830           --              --
Issuance of shares for litigation settlement                      12,500          12          31,125           --              --
Exercise of warrants at $7.06 per share                           63,925          64         451,341           --              --
Sale of shares to private investors                               61,073          61         178,072           --              --
Amortization of deferred compensation, restricted stock               --          --              --           --              --
Net loss                                                              --          --              --           --      (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 at $3.00 per share                     133,333         133         399,867           --              --
Sale of shares to private investors                              105,840         106         419,894           --              --
Exercise of options at $3.50 per share                             1,000           1           3,499           --              --
Issuance of shares under employment agreement                    750,000         750       3,749,250           --              --
Issuance of shares under the 1989 Stock Plan                      30,000          30         149,970           --              --
Amortization of deferred compensation, restricted stock               --          --              --           --              --
Net loss                                                              --          --              --           --      (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 $3.00 - $3.50 per share                   105,989         106         345,856           --              --
Sale of shares to private investors                               89,480          90         354,990           --              --
Issuance of shares under employment agreement                    750,000         750       3,749,250           --              --
Conversion of debentures at $5.00 per share                      100,000         100         499,900           --              --
Amortization of deferred compensation, restricted stock               --          --              --           --              --
Net loss                                                              --          --              --           --      (4,860,116)
                                                             -----------    --------    ------------    ---------    ------------
Balance at July 31, 1990 (carried forward)                     6,799,829       6,800      23,699,631           --     (20,889,091)



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

Exercise of warrants at $10.00 per share                                --             --        147,450
Issuance of shares under stock bonus plan for directors
  and consultants                                                       --             --         75,000
Issuance of shares for services                                         --             --        500,000
Sale of shares to private investors, net                                --             --         25,000
Net loss                                                                --             --     (2,604,619)
                                                               -----------    -----------    -----------
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 at $3.00 per share                                  --             --        510,000
Issuance of shares for litigation settlement                            --             --         31,137
Exercise of warrants at $7.06 per share                                 --             --        451,405
Sale of shares to private investors                                     --             --        178,133
Amortization of deferred compensation, restricted stock                 --        449,167        449,167
Net loss                                                                --             --     (3,272,773)
                                                               -----------    -----------    -----------
Balance at July 31, 1988                                                --     (2,000,833)    (3,065,782)

Sale of shares for litigation settlement                                --             --      1,074,838
Conversion  of debentures at $3.00 per share                            --             --        400,000
Sale of shares to private investors                                     --             --        420,000
Exercise of options at $3.50 per share                                  --             --          3,500
Issuance of shares under employment agreement                           --     (3,750,000)            --
Issuance of shares under the 1989 Stock Plan                            --       (150,000)            --
Amortization of deferred compensation, restricted stock                 --      1,050,756      1,050,756
Net loss                                                                --             --     (2,952,869)
                                                               -----------    -----------    -----------
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 $3.00 - $3.50 per share                          --             --        345,962
Sale of shares to private investors                                     --             --        355,080
Issuance of shares under employment agreement                           --     (3,750,000)            --
Conversion of debentures at $5.00 per share                             --             --        500,000
Amortization of deferred compensation, restricted stock                 --      3,015,561      3,015,561
Net loss                                                                --             --     (4,860,116)
                                                               -----------    -----------    -----------
Balance at July 31, 1990 (carried forward)                              --     (5,920,516)    (3,103,176)
</TABLE>


                                      F-8

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)


                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 2001
<TABLE>
<CAPTION>
                                                                   Common Stock
                                                              ----------------------
                                                                                                                       Deficit
                                                                                                                     Accumulated
                                                                                          Capital In     Common        During
                                                                Number                  Excess of par   Stock to     Development
                                                              of Shares      Amount         Value       be Issued       Stage
                                                             -----------    --------    ------------    ---------    ------------
<S>                                                          <C>            <C>         <C>             <C>          <C>
Balance at July 31, 1990 (brought forward)                     6,799,829    $  6,800    $ 23,699,631           --    $(20,889,091)

Exercise of options at $6.50 per share                            16,720          16         108,664           --              --
Issuance of shares for legal consulting services                  87,000          87         358,627           --              --
Issuance of shares under the 1989 Stock Plan                     119,000         119         475,881           --              --
Amortization of deferred compensation, restricted stock               --          --              --           --              --
Net loss                                                              --          --              --           --      (5,202,302)
                                                             -----------    --------    ------------    ---------    ------------
Balance at July 31, 1991                                       7,022,549       7,022      24,642,803           --     (26,091,393)

Exercise of options at $3.50 per share                             1,000           1           3,499           --              --
Sale of shares to private investors                               70,731          71         219,829           --              --
Conversion of debentures at $5.00 per share                       94,000          94         469,906           --              --
Issuance of shares for services                                   45,734          46         156,944           --              --
Issuance of shares under the 1989 Stock Plan                     104,000         104         285,896           --              --
Amortization of deferred compensation, restricted stock               --          --              --           --              --
Net loss                                                              --          --              --           --      (4,772,826)
                                                             -----------    --------    ------------    ---------    ------------
Balance at July 31, 1992                                       7,338,014       7,338      25,778,877           --     (30,864,219)

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

Conversion of debentures at $2.75 per share to $6.00 per
  share                                                          425,400         425       1,701,575           --              --
Sale of shares to private investors, net                         743,000         743       1,710,048           --              --
Conversion of short-term borrowings                               72,800          73         181,927           --              --
Issuance of shares for services                                   16,200          16          43,334           --              --
Issuance of shares under the 1989 Stock Plan, for services         5,000           5          14,995           --              --
Issuance of options to related parties upon conversion of
  accrued interest, payroll and expenses                              --          --       3,194,969           --              --
Repurchase of stock options from related party                        --          --        (198,417)          --              --
Issuance of options upon conversion of accrued interest               --          --         142,441           --              --
Common stock to be issued                                             --          --              --       50,000              --
Amortization of deferred compensation, restricted stock               --          --              --           --              --
Net loss                                                              --          --              --           --      (2,234,428)
                                                             -----------    --------    ------------    ---------    ------------
Balance at July 31, 1994 (carried forward)                     9,124,681       9,125      33,680,954       50,000     (35,455,997)


<CAPTION>
                                                                              Deferred         Total
                                                                            compensation,  Stockholders'
                                                             Subscription    restricted        Equity
                                                               Receivable      stock        (Deficiency)
                                                              -----------    -----------    -----------
<S>                                                           <C>            <C>            <C>
Balance at July 31, 1990 (brought forward)                    $        --    $(5,920,516)   $(3,103,176)

Exercise of options at $6.50 per share                                 --             --        108,680
Issuance of shares for legal consulting services                       --             --        358,714
Issuance of shares under the 1989 Stock Plan                           --       (476,000)            --
Amortization of deferred compensation, restricted stock                --      2,891,561      2,891,561
Net loss                                                               --             --     (5,202,302)
                                                              -----------    -----------    -----------
Balance at July 31, 1991                                               --     (3,504,955)    (4,946,523)

Exercise of options at $3.50 per share                                 --             --          3,500
Sale of shares to private investors                                    --             --        219,900
Conversion of debentures at $5.00 per share                            --             --        470,000
Issuance of shares for services                                        --             --        156,990
Issuance of shares under the 1989 Stock Plan                           --       (286,000)            --
Amortization of deferred compensation, restricted stock                --      3,046,726      3,046,726
Net loss                                                               --             --     (4,772,826)
                                                              -----------    -----------    -----------
Balance at July 31, 1992                                               --       (744,229)    (5,822,233)

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

Conversion of debentures at $2.75 per share to $6.00 per
  share                                                                --             --      1,702,000
Sale of shares to private investors, net                               --             --      1,710,791
Conversion of short-term borrowings                                    --             --        182,000
Issuance of shares for services                                        --             --         43,350
Issuance of shares under the 1989 Stock Plan, for services             --             --         15,000
Issuance of options to related parties upon conversion of
  accrued interest, payroll and expenses                               --             --      3,194,969
Repurchase of stock options from related party                         --             --       (198,417)
Issuance of options upon conversion of accrued interest                --             --        142,441
Common stock to be issued                                              --             --         50,000
Amortization of deferred compensation, restricted stock                --        265,000        265,000
Net loss                                                               --             --     (2,234,428)
                                                              -----------    -----------    -----------
Balance at July 31, 1994 (carried forward)                             --        (58,500)    (1,774,418)
</TABLE>


                                      F-9

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)


                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 2001
<TABLE>
<CAPTION>
                                                                   Common Stock
                                                              ----------------------
                                                                                                                       Deficit
                                                                                                                     Accumulated
                                                                                          Capital In     Common        During
                                                                Number                  Excess of par   Stock to     Development
                                                              of Shares      Amount         Value       be Issued       Stage
                                                             -----------    --------    ------------    ---------    ------------
<S>                                                          <C>            <C>         <C>             <C>          <C>
Balance at July 31, 1994 (brought forward)                     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 at $2.27 - $2.50 per share                   185,000         185         437,015           --              --
Common stock to be issued                                             --          --              --      339,008              --
Common stock to be issued, for services                               --          --              --        4,800              --
Amortization of deferred compensation, restricted stock               --          --              --           --              --
Net loss                                                              --          --              --           --      (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 at $2.50 - $3.87 per share                   566,700         567       1,657,633           --              --
Sale of warrants                                                      --          --          12,084           --              --
Issuance of options/warrants for services                             --          --          50,872           --              --
Common stock to be issued                                             --          --              --      258,335              --
Subscription receivable                                               --          --              --           --              --
Net loss                                                              --          --              --           --      (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 at $2.45 - $4.00 per share, net              729,134         729       2,620,359     (258,335)             --
Exercise of warrants at $5.00 per share, net                     147,450         148         737,102           --              --
Net loss                                                              --          --              --           --      (5,018,867)
                                                             -----------    --------    ------------    ---------    ------------
Balance at July 31, 1997                                      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 at $2.20 - $2.50 per share                    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 (carried forward)                    17,286,594    $ 17,286    $ 55,694,195    $      --    $(54,954,281)


<CAPTION>
                                                                               Deferred         Total
                                                                             compensation,  Stockholders'
                                                              Subscription    restricted        Equity
                                                                Receivable      stock        (Deficiency)
                                                               -----------    -----------    -----------
<S>                                                            <C>            <C>            <C>
Balance at July 31, 1994 (brought forward)                     $        --    $   (58,500)   $(1,774,418)

Sale of shares to private investors, net                                --             --      1,974,202
Conversion of short-term borrowings                                     --             --         44,000
Issuance of shares for services                                         --             --         77,265
Exercise of options at $2.27 - $2.50 per share                          --             --        437,200
Common stock to be issued                                               --             --        339,008
Common stock to be issued, for services                                 --             --          4,800
Amortization of deferred compensation, restricted stock                 --         58,500         58,500
Net loss                                                                --             --     (1,993,123)
                                                               -----------    -----------    -----------
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 at $2.50 - $3.87 per share                          --             --      1,658,200
Sale of warrants                                                        --             --         12,084
Issuance of options/warrants for services                               --             --         50,872
Common stock to be issued                                               --             --        258,335
Subscription receivable                                           (254,185)            --       (254,185)
Net loss                                                                --             --     (2,942,152)
                                                               -----------    -----------    -----------
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 at $2.45 - $4.00 per share, net                254,185             --      2,616,938
Exercise of warrants at $5.00 per share, net                            --             --        737,250
Net loss                                                                --             --     (5,018,867)
                                                               -----------    -----------    -----------
Balance at July 31, 1997                                                --             --      5,566,091

Sale of shares to private investors, net                                --             --      4,202,214
Issuance of options for services                                        --             --        199,954
Exercise of warrants at $2.20 - $2.50 per share                         --             --         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 (carried forward)                     $        --    $        --    $   757,200
</TABLE>


                                      F-10

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)


                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 2001
<TABLE>
<CAPTION>
                                                                   Common Stock
                                                              ----------------------
                                                                                                                       Deficit
                                                                                                                     Accumulated
                                                                                          Capital In     Common        During
                                                                Number                  Excess of par   Stock to     Development
                                                              of Shares      Amount         Value       be Issued       Stage
                                                             -----------    --------    ------------    ---------    ------------
<S>                                                          <C>            <C>         <C>             <C>          <C>
Balance at July 31, 1999 (brought forward)                    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 at $0.43 - $1.43 per share                    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 at $0.29 - $0.85 per share                   165,555         166          83,565           --              --
Issuance of shares for services, net                              11,800          12          10,018           --              --
Exercise of convertible debentures at $0.90 per share            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)
                                                             ===========    ========    ============    =========    ============


<CAPTION>
                                                                               Deferred         Total
                                                                             compensation,  Stockholders'
                                                              Subscription    restricted        Equity
                                                                Receivable      stock        (Deficiency)
                                                               -----------    -----------    -----------
<S>                                                            <C>            <C>            <C>


Balance at July 31, 1999 (brought forward)                     $        --    $        --    $   757,200

Sale of shares to private investors, net                                --             --        548,292
Exercise of options at $0.43 - $1.43 per share                          --             --         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 at $0.29 - $0.85 per share                          --             --         83,731
Issuance of shares for services, net                                    --             --         10,030
Exercise of convertible debentures at $0.90 per share                   --             --        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)
                                                               ===========    ===========    ===========
</TABLE>

See accompanying notes to financial statements.


                                      F-11

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                            Statements of Cash Flows

                    Years ended July 31, 2001, 2000 and 1999,
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 2001
<TABLE>
<CAPTION>
                                                                          August 24, 1981
                                                                             (date of
                                                                           inception) to
                                                                              July 31,
                                                                                2001           2001           2000          1999
                                                                          ------------    -----------    -----------    -----------
<S>                                                                       <C>             <C>            <C>            <C>
Cash flows from operating activities:
  Net loss                                                                $(58,971,515)   $(2,294,936)   $(1,722,298)   $(3,156,636)

  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Gain on sale of marketable securities                                    (25,963)            --             --             --
      Depreciation and amortization                                          1,492,458         74,615         93,748        101,231
      Loss on disposal of property and equipment                                18,926             --             --             --
      Noncash operating expenses                                             5,824,106        304,722        146,912        208,053
      Amortization of deferred compensation                                 11,442,000             --             --             --
      Amortization of organization costs                                         4,590             --             --             --
      Changes in assets and liabilities:
       (Increase) decrease in other current assets                            (102,800)       (14,316)        58,224        (29,521)
       Decrease in other assets                                                 49,711         13,527             --             --
       Increase in loans and interest payable, related party                   744,539             --             --             --
       Increase (decrease) in accounts payable                                 706,082        249,214         76,901       (513,338)
       Increase in accrued payroll and expenses, related parties             2,348,145             --             --             --
       Increase (decrease) in accrued expenses                               1,007,326         53,967       (366,804)      (314,248)
                                                                          ------------    -----------    -----------    -----------
           Net cash used in operating activities                           (35,462,395)    (1,613,207)    (1,713,317)    (3,704,459)
                                                                          ------------    -----------    -----------    -----------

Cash flows from investing activities:
      Purchase of marketable securities                                       (290,420)            --             --             --
      Proceeds from sale of marketable equity securities                       316,383             --             --             --
      Purchase of property and equipment                                    (1,406,836)            --        (37,575)            --
      Patent costs                                                             (97,841)            --             --             --
                                                                          ------------    -----------    -----------    -----------
           Net cash used in investing activities                            (1,478,714)            --        (37,575)            --
                                                                          ------------    -----------    -----------    -----------
</TABLE>

                                      F-12

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                          August 24, 1981
                                                                             (date of
                                                                           inception) to
                                                                              July 31,
                                                                                2001           2001           2000          1999
                                                                          ------------    -----------    -----------    -----------
<S>                                                                       <C>             <C>            <C>            <C>
Cash flows from financing activities:
  Proceeds from short-term borrowings                                     $    849,500    $        --    $        --    $        --
  Payment of short-term borrowings                                            (623,500)            --             --             --
  Increase in loans payable, related party, net                              2,628,868             --             --             --
  Proceeds from bank debt and other long-term debt, net of
    deferred debt costs                                                      2,452,460             --         41,577             --
  Reduction of bank debt and long-term debt                                 (2,935,848)        (6,605)       (10,515)        (9,175)
  Proceeds from issuance of common stock, net                               28,310,163        956,424        548,292         (2,686)
  Proceeds from exercise of stock options and warrants, net                  5,590,254         83,731         45,850             --
  Proceeds from issuance of convertible debentures, related party              297,000        297,000             --             --
  Proceeds from issuance of convertible debentures, unrelated party            416,993         69,993             --             --
                                                                          ------------    -----------    -----------    -----------
      Net cash provided by financing activities                             36,985,890      1,400,543        625,204        (11,861)
                                                                          ------------    -----------    -----------    -----------
      Net increase (decrease) in cash and cash equivalents                      44,781       (212,664)    (1,125,688)    (3,716,320)
Cash and cash equivalents at beginning of period                                    --        257,445      1,383,133      5,099,453
                                                                          ------------    -----------    -----------    -----------
Cash and cash equivalents at end of period                                $     44,781    $    44,781    $   257,445    $ 1,383,133
                                                                          ============    ===========    ===========    ===========

Supplemental disclosure of cash flow information - interest paid          $  1,662,446    $     8,733    $     4,980    $     2,378
                                                                          ============    ===========    ===========    ===========

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

  Issuance of common stock upon the conversion of convertible
       subordinated debentures, related party                             $  3,242,000    $   297,000    $        --    $        --
                                                                          ============    ===========    ===========    ===========

  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    $        --    $        --    $        --
                                                                          ============    ===========    ===========    ===========

  Conversions of accounts payable to common stock                         $    296,200    $    10,030    $    92,184    $    16,631
                                                                          ============    ===========    ===========    ===========

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

                                      F-13

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                          August 24, 1981
                                                                             (date of
                                                                           inception) to
                                                                              July 31,
                                                                                2001           2001           2000          1999
                                                                          ------------    -----------    -----------    -----------
<S>                                                                       <C>             <C>            <C>            <C>
Conversion of loans and Interest Payable, related party and
       accrued payroll and expenses, related parties to long-term
       accrued payroll and other, related party                           $  1,863,514    $        --    $        --    $        --
                                                                          ============    ===========    ===========    ===========

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

  Issuance of common stock for services rendered                          $      2,460    $        --    $        --    $     2,460
                                                                          ============    ===========    ===========    ===========
</TABLE>


See accompanying notes to financial statements.

                                      F-14

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                          Notes to Financial Statements

                    Years ended July 31, 2001, 2000 and 1999
                       and the Period From August 24, 1981
                      (Date of Inception) to July 31, 2001

(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  the  Financial
     Accounting  Standards Board's Statement of Financial  Accounting  Standards
     No. 7. The Company is devoting  substantially all of its present efforts to
     establishing  its  business.  Its  planned  principal  operations  have not
     commenced  and,  accordingly,  no  significant  revenue  has  been  derived
     therefrom.

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

     Use of Estimates

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

     Property and Equipment

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

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

     Cash Equivalents

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

     Research and Development

     Research and development costs are expensed as incurred.

     Fair Value of Financial Instruments

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

                                      F-15


<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

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

     Comprehensive Income (Loss)

     The net loss of  $2,295,000,  $1,722,000 and  $3,157,000,  recorded for the
     years ended July 31,  2001,  2000 and 1999,  respectively,  is equal to the
     comprehensive  loss for those  periods  in  accordance  with  Statement  of
     Financial Accounting Standards No. 130, Reporting Comprehensive Income.

     Earnings (Loss) Per Common Share

     "Basic"  earnings per common  share  equals net income  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 plus common stock equivalents.
     The  Company's  Basic and Diluted per share  amounts are the same since the
     Company is in a loss position and the assumed exercise of stock options and
     warrants would be all anti-dilutive.  The number of outstanding options and
     warrants  that  could  dilute  earnings  per  share in future  periods  was
     6,445,748,  6,156,195  and  5,894,875  at July 31,  2001,  2000  and  1999,
     respectively.

     Long-Lived Assets

     The Company  reviews  long-lived  assets for impairment  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.  SFAS No. 121 has not had a material  impact on the
     Company's financial position, operating results or cash flows.

     Stock Option Plans

     Stock based  compensation  is recognized  using the intrinsic value method.
     For disclosure  purposes,  proforma net income (loss) and net income (loss)
     per  share  data are  provided  in  accordance  with  Financial  Accounting
     Standards No. 123, "Accounting for Stock-Based Compensation" as if the fair
     value method had been applied.

     The  Company  records  compensation  expense  equal  to the  value of stock
     options  granted  for  consulting  services  rendered  to  the  Company  by
     non-employees.  The  value  of the  options  granted  to  non-employees  is
     determined by the Black Scholes option pricing model.

     (2) Liquidity

     The  Company  has  reported  net  losses  of  $2,295,000,  $1,722,000,  and
     $3,157,000  for the  fiscal  years  ended  July 31,  2001,  2000 and  1999,
     respectively. The loss from date of inception, August 24, 1981, to July 31,
     2001  amounts to  $58,971,000.  Also,  the  Company  has a working  capital
     deficit and limited liquid resources. These factors raise substantial doubt
     about its ability to continue as a going concern.  The financial statements
     do  not  include  any  adjustments   relating  to  the  recoverability  and
     classification  of reported asset amounts or the amounts or  classification
     of liabilities which might result from the outcome of this uncertainty.

                                      F-16


<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(2)  Liquidity, (Continued)

     The  Company's  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) and its ability
     to realize the full potential of its  technology  and its drug  candidates.
     Such  additional  funds  may  not  become  available  or  be  available  on
     acceptable terms. To date, a significant portion of the Company's financing
     has been  through  private  placements  of common stock and  warrants,  the
     issuance of common stock for stock  options and warrants  exercised and for
     services  rendered,  debt financing and financing provided by the Company's
     Chief Executive Officer.  Additionally,  the Company raised capital through
     the sale of a portion of its tax benefits.  Until the Company's  operations
     generate significant revenues, the Company will continue to fund operations
     from cash on hand and through the sources of capital previously  described.
     From August through October 4, 2001, the Company received gross proceeds of
     approximately  $178,500  from the private  placement of various  individual
     investors and $100,000 note payable upon demand from an unrelated party. No
     assurances can be provided that the  additional  capital will be sufficient
     to meet the Company's needs.

     The Company will continue to incur costs in  conjunction  with its U.S. and
     foreign registrations for marketing approval of ONCONASE(R). The Company is
     currently in discussion with several potential  strategic alliance partners
     including major  international  biopharmaceutical  companies to further the
     development and marketing of ONCONASE(R) and other related  products in its
     pipeline.  However,  there can be no assurance that any such alliances will
     materialize.  The Company intends to seek foreign  marketing  approvals for
     ONCONASE(R)  for the treatment of malignant  mesothelioma.  Therefore,  the
     Company expanded its ongoing clinical trial internationally.  The Company's
     ability to raise  funding at this time may be dependent  upon other factors
     including, without limitation, market conditions, and such funds may not be
     available or be available on acceptable terms.

     The  Company's  common stock was delisted from The Nasdaq  SmallCap  Market
     effective  at the close of business  April 27, 1999 for failing to meet the
     minimum bid price  requirements set forth in the NASD Marketplace Rules. As
     of April 28, 1999,  the  Company's  common stock trades on the OTC Bulletin
     Board under the symbol "ACEL". Delisting of the Company's common stock from
     Nasdaq  could  have a  material  adverse  effect  on its  ability  to raise
     additional capital, its stockholders' liquidity and the price of its common
     stock.

(3)  Property and Equipment

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

                                                  2001          2000
                                                ---------      ------

     Laboratory equipment                      $  755,040     755,040
     Office equipment                             296,105     296,105
     Leasehold improvements                        97,833      97,833
                                               ----------   ---------
     Total                                      1,148,978   1,148,978
     Less accumulated depreciation              1,081,423   1,006,808
                                               ----------   ---------
     Property and equipment, net               $   67,555     142,170
                                               ==========   =========

                                      F-17

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(4)  Long-term Debt

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

                                                               2001     2000
                                                             -------   -------
Note payable, in monthly installments of $1,459, including
  principal and interest commencing April 2000 and each
  month thereafter until March 2005, secured by equipment    $30,720   $37,325
Less current portion                                           7,057     7,074
                                                             -------   -------
                                                             $23,663   $30,251
                                                             =======   =======

(5)  Note Payable - Convertible Note

     In April 2001,  the Company  entered into  convertible  notes  payable with
     certain related and unrelated  parties in the aggregate amount of $366,993.
     The notes were due within  ninety (90) unless the lenders elect to exercise
     an option to convert the note into Alfacell  common stock,  par value $.001
     per share at a  conversion  price of $0.90 per share  (the  estimated  fair
     market  value of the stock  based on the  average of the high and low trade
     prices  of the  Company's  common  stock  for the  ten  (10)  trading  days
     preceding the loan date). In addition,  upon  conversion,  the lender would
     receive a three-year  warrant for each share of converted  Alfacell  common
     stock at an  exercise  price of $2.50 per share that will expire on July 7,
     2004.  The  estimated  value  of  the  warrants  of  $133,793,   using  the
     Black-Scholes  options-pricing model, was recorded as interest expense over
     the ninety day note term.  In July 2001,  an  aggregate  of  $297,000  note
     payables were converted which resulted in the issuance of 330,000 shares of
     the  Company's  common stock.  In addition,  upon  conversion,  the Company
     issued the agreed to  three-year  warrants  to  purchase  an  aggregate  of
     330,000 shares of common stock at an exercise price of $2.50 per share.  An
     aggregate  balance of the  convertible  notes in the amount of $69,993  was
     renewed for one hundred twenty (120) days for the same conversion  price of
     $0.90 per share. In addition,  upon conversion,  the lender would receive a
     five-year  warrant for each share of converted  Alfacell common stock at an
     exercise price of $1.50 per share.  The estimated  value of the warrants of
     $45,000,  using the Black-Scholes  options-pricing  model, was treated as a
     debt discount  which will accrete as interest  expense over the one hundred
     twenty day note term through October 31, 2001.

(6)  Leases

     The Company leases its facility under a five-year  operating lease which is
     due to expire on  December  31,  2001 and will be  negotiating  a new lease
     agreement  under  similar  terms.  The  annual  rental  obligation,   which
     commenced  January 1, 1997, is $96,775 and is subject to annual  escalation
     amounts.  Rent expense  charged to operations was $136,000,  $127,000,  and
     $108,000 in 2001, 2000 and 1999, respectively.

     Future minimum lease payments under noncancellable leases for the next year
     ending July 31 are as follows:

                                              Operating leases

                               2002                     56,667


                                      F-18

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)  Stockholders' Equity

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

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

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

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

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

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

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

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

                                      F-19

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)  Stockholders' Equity, (Continued)

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

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

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

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

     During the fiscal  year ended July 31,  1988,  the  Company  issued  12,500
     shares  of  common  stock in  connection  with the  settlement  of  certain
     litigation. The fair value of these shares was charged to operations.

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

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

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

     During the fiscal  year ended July 31,  1990,  the  Company  issued  52,463
     shares of common stock for payment of legal and  consulting  services.  The
     fair value of the common stock was charged to operations.

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

                                      F-20

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)  Stockholders' Equity, (Continued)

     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.

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

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

                                      F-21

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)  Stockholders' Equity, (Continued)

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

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

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

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

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

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

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

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

                                      F-22

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)  Stockholders' Equity, (Continued)

     In June 1996, the Company issued 10,000  five-year stock options as payment
     for services rendered.  The options vested immediately and have 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.  Of these options,  an aggregate  total of
     1,666 expired in September and October 2001.

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

     In May 1997, the Company issued 100,000 stock options to 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 will vest as follows
     provided the director is then serving as Chairman of the SAB at the time of
     vesting:  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  vesting  of the  50,000  options  which vest in May 2002 may be
     accelerated  upon the  occurrence of the following  events:  25,000 options
     upon the good faith  determination by the Company's Board of Directors that
     a  substantive  collaborative  agreement  with  a  major  biopharmaceutical
     company was a result of Dr.  Carter's  efforts and 25,000  options upon the
     good faith  determination  by the  Company's  Board of  Directors  that Dr.
     Carter  made a material  contribution  towards  the  approval by the United
     States  Food and Drug  Administration  of a New  Drug  Application  for the
     marketing  of  ONCONASE(R)  in the  United  States.  The  Company  recorded
     research and  development  expense of $326,500  which was the fair value on
     the date of issuance of that  portion of the stock  options that had vested
     as of July 31, 2001.

     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.

                                      F-23

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)  Stockholders' Equity, (Continued)

     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 will vest as follows provided he has
     been serving  continuously  on the Company's board of directors at the time
     of vesting: 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.  The vesting and  exercisability  of the 25,000  options
     which  vest  in  October  2002  may be  accelerated  upon  the  good  faith
     determination  of the  Company's  Board  of  Directors  that a  substantive
     collaborative agreement with a major  pharmaceutical/biotechnology  company
     was a  direct  result  of the  director's  efforts.  A  total  general  and
     administrative  expense of  $185,600  is being  amortized  over a five-year
     period which  commenced in October 1997.  As of July 31, 2001,  the Company
     recorded  general and  administrative  expense of $162,500,  based upon the
     fair value of such 75,000  options on the date of issuance,  amortized on a
     straight-line basis over the vesting period of the grant.

     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 vest monthly and
     are to be 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.

     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 is
     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  are  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 has not yet been
     declared effective.

                                      F-24

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)  Stockholders' Equity, (Continued)

     In February 1998, the Company completed the February 1998 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  proceeds of approximately
     $4,202,000,   net  of  costs  associated  with  the  private  placement  of
     approximately  $472,000.  The  placement  agent also  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 entered into a conversion  agreement with one of
     its raw  material  suppliers  (the  "Supplier")  for the  conversion  of an
     outstanding payable (the "Conversion  Agreement") into 50,000 shares of the
     Company's Common Stock. Pursuant to the Conversion  Agreement,  the Company
     issued 50,000 shares of Common Stock to the Supplier. 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 to be rendered. These options will vest as follows provided he has
     been serving  continuously  on the Company's board of directors at the time
     of vesting: 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. The vesting and  exercisability  of the 25,000 options which vest
     in March 2003 may be accelerated  upon the good faith  determination of the
     Company's Board of Directors that a substantive collaborative agreement and
     licensing      or      financing      arrangement      with     a     major
     pharmaceutical/biotechnology  company was a direct result of the director's
     efforts.  A total general and  administrative  expense of $138,100 is being
     amortized over a five-year period which commenced in March 1998. As of July
     31,  2001,  the  Company  recorded  general and  administrative  expense of
     $109,300,  based upon the fair value of such 75,000  options on the date of
     issuance, amortized on a straight-line basis over the vesting period of the
     grant.

     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 has not yet been declared effective.

     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 have 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.

                                      F-25


<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)  Stockholders' Equity, (Continued)

     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 to be rendered. An equal portion of these options vest
     monthly and a total general and administrative  expense of $30,000 is being
     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  to be  rendered.  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 it 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 will vest as follows:
     an aggregate of 20,000 shall vest on October 1, 1999 or upon signing of the
     first corporate  partnering deal, whichever shall occur first; an aggregate
     of 2,500 of such options  shall vest on the last day of each month over the
     first  twelve  months  after  the  Effective  Date  of the  Agreement;  the
     remaining  150,000  options  will  vest  on the  third  anniversary  of the
     Effective  Date of the  Agreement  provided  that the  consultant  is still
     providing  consulting  services to the Company  under the Agreement at that
     time.  The  vesting  of such  remaining  options  shall be  accelerated  as
     follows:  50,000 of such options or the remainder of the unvested  options,
     whichever is less, shall vest upon the signing of each corporate partnering
     deal in which the total  consideration  provided in the  Agreement  is less
     than  $5,000,000;  100,000 of such options or the remainder of the unvested
     options,  whichever is less,  shall vest upon the signing of each corporate
     partnering deal in which the total consideration  provided in the Agreement
     is  greater  than  $5,000,000  but less than  $10,000,000;  200,000 of such
     options or the remainder of the unvested options,  whichever is less, shall
     vest upon the signing of each corporate  partnering deal in which the total
     consideration provided in the Agreement is greater than $10,000,000. Should
     the Company sell a controlling  interest in its assets and/or equity at any
     time after the  signature  of the  Agreement,  all options  will vest.  The
     Company has recorded  approximately  $49,300 of general and  administrative
     expense  based upon the fair value of the vested  options  through July 31,
     2000.  Additional  expense will be recorded in subsequent  periods  through
     October 1, 2001 as the  remainder  of the options  vest.  During the fiscal
     year ended July 31 2000, the Agreement was terminated which resulted in the
     cancellation of 150,000 options.

     During  the fiscal  year ended July 31,  1999,  the  Company  issued  5,000
     three-year  stock  options as payment for  services  rendered.  The options
     vested immediately and have an exercise price of $1.43 per share. 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.

     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.

                                      F-26

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(7)  Stockholders' Equity, (Continued)

     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.  The warrants  will expire  during the period
     commencing May 2003 and ending in May 2005.

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

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

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

     During the fiscal  year ended July 31,  2001,  the  Company  issued  50,000
     five-year  stock  options to a director  as payment for  non-board  related
     services.  These options vested  immediately  and have 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. In addition,
     the  director  will  receive a  contingent  award of  50,000  shares of the
     Company's common stock should the Company complete a strategic  partnership
     or receive an investment from the prospective partner or its affiliates.

     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.  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.

(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 expired.

     The following table summarizes the activity of common stock warrants issued
     in connection  with the Private  Placements  completed in fiscal years 1994
     through 2001:

                                      F-27

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)  Common Stock Warrants, (Continued)
     ----------------------------------
<TABLE>
<CAPTION>
                                                               Warrants    Exercise Price          Expiration

      <S>                                                     <C>          <C>               <C>
      Sold in 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

      Outstanding and exercisable at July 31, 1996            1,508,251      4.00 - 7.50       3/21/97 to 9/10/99

      Exercised                                                 147,450         5.00           3/21/97 to 6/21/97
      Expired                                                   652,550         5.00           3/21/97 to 6/21/97
                                                                -------

      Outstanding and exercisable at July 31, 1997              708,251      4.00 - 7.50       12/9/97 to 9/10/99

      Sold in February 1998 Private Placement                 1,168,575         2.50                8/17/01
      Issued to the Placement Agent in connection with
      the February 1998 Private placement (see note 7)          350,574      2.20 - 2.50            8/17/01
      Exercised                                                   4,950      2.20 - 2.50           5/19/01
      Expired                                                   338,506      4.19 - 5.50     8/31/97 to 1/21/98
                                                                -------

      Outstanding and exercisable at July 31, 1998            1,883,944      2.20 - 7.50     10/1/98 to 8/17/01

      Expired                                                    55,945         4.00               10/1/98
                                                                 ------

      Sold in February 2000 Private Placement                   875,000     $ 1.03 - 4.55    5/28/03 to 5/28/05
      Expired                                                   313,800         7.50         8/30/99 to 9/11/99
                                                                -------

      Outstanding and exercisable at July 31, 2000            2,389,199      1.03 - 4.55     5/19/01 to 5/28/05

      Sold in various private placements                        696,665      1.50 - 3.00     7/07/04 to 10/30/06
      Issued to related parties upon conversion of note
      payable                                                   330,000         2.50                7/07/04
                                                                -------

      Outstanding at July 31, 2001                            3,415,864      1.03 - 4.55     8/17/01 to 10/30/06
                                                              =========      ===========
</TABLE>

                                      F-28

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)  Stock Options

     1993 Stock Option Plan

     The  Company's  stockholders  approved the 1993 stock option plan  totaling
     3,000,000  shares,  which provide 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.

     1997 Stock Option Plan

     The  Company's  stockholders  approved the 1997 stock option plan  totaling
     2,000,000  shares,  which provide 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.

     The following table  summarizes stock option activity for the period August
     1, 1994 to July 31, 2001:

<TABLE>
<CAPTION>
                                      Shares Available    Number of    Weighted Average Exercise
                                         for Grant          Shares        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                                   --       (1,897,500)          4.30
                                          ---------       ----------       --------
 Balance July 31, 1995                    1,107,991        4,671,687           3.39
      Granted                              (296,205)         296,205           3.99
      Exercised                                  --         (656,334)          2.92
      Canceled                                6,500         (235,333)          4.89
                                          ---------       ----------       --------
 Balance July 31, 1996                      818,286        4,076,225           3.43
      1997 Plan                           2,000,000               --          --
      Granted                              (932,500)         932,500           4.90
      Exercised                                  --         (639,500)          3.82
      Canceled                              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                               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                              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                              638,395       (1,031,880)          2.73
                                          ---------       ----------       --------
 Balance July 31, 2000                    1,887,727        3,766,996           2.65
      Granted                              (447,000)         447,000           0.85
      Exercised                                  --         (165,555)          0.51
      Canceled                              774,315       (1,018,557)          3.42
                                          ---------       ----------       --------
 Balance July 31, 2001                    2,215,042        3,029,884           2.24
                                         ==========       ==========       ========
</TABLE>

                                      F-29

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)  Stock Options, (Continued)

     The stock  options  granted in fiscal year ended July 31, 2000  included an
     aggregate  total of 75,000 stock options  issued to the  Company's  outside
     board of directors and an aggregate  total of 350,000 stock options  issued
     to the  employees  of the Company,  which will vest and become  exercisable
     upon certain milestones, or these options will terminate, and the employees
     must be actively  employed by  Alfacell  through the date of the  approval.
     Compensation  expense,  if any, will be  determined  based on the Company's
     stock price on the vesting date relative to the options  exercise price. No
     compensation  expense  was  issued in 2000 and 2001.  An  aggregate  50,000
     options  issued to the Company's  outside board of directors were exercised
     during the fiscal year 2001. The options  outstanding at July 31, 2001 will
     expire between August 1, 2001 and August 21, 2009.

     The weighted-average fair value per option at the date of grant for options
     granted during the fiscal years 2001,  2000 and 1999 were $0.74,  $0.45 and
     $0.36,  respectively.  The fair value was estimated using the Black-Scholes
     options pricing model based on the following assumptions:

                                                 2001        2000        1999
                                                ------      ------      ------

Expected dividend yield                              0%          0%          0%
Risk-free interest rate                           5.50%       6.00%       6.00%
Expected stock price volatility                 104.25%     114.50%      93.99%
Expected term until exercise (years)              6.00        6.37        5.59

Pro forma net loss and loss per share reflecting  approximate  compensation cost
for the fair value of stock options awarded are as follows:

                                     2001             2000             1999
                                -------------    -------------    -------------
Net Loss:
 As reported                    $  (2,294,936)   $  (1,722,298)   $  (3,156,636)
 Pro forma                         (2,522,656)      (1,956,667)      (3,429,057)
Loss per common share:
 As reported                    $       (0.12)   $       (0.10)   $       (0.18)
 Pro forma                              (0.13)           (0.11)           (0.20)

The following table summarizes  information  concerning  options  outstanding at
July 31, 2001:

               Options Outstanding                    Options Exercisable
  ---------------------------------------      --------------------------------
                            Weighted Average   Weighted               Weighted
                               Remaining       Average                Average
    Range of                  Contractual      Exercise               Exercise
Exercise Prices   Shares      Term (Years)      Price      Shares      Price
---------------  ---------    -----------      -----     ---------     -----

 $0.00 - 1.99    1,404,445       5.66          $0.62       528,645     $0.61
  2.00 - 2.99       96,550       5.14           2.73        41,550      2.80
  3.00 - 3.99    1,132,794       1.57           3.20     1,097,794      3.19
  4.00 - 4.99      183,595       1.78           4.60       183,595      4.60
  5.00 - 5.99      167,500       3.38           5.17       117,500      5.16
  6.00 - 6.99       45,000       1.42           6.97        45,000      6.97
===============  ---------       ====          =====     ---------     =====
                 3,029,884                               2,014,084
                 =========                               =========

                                      F-30

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)   Stock Options, (Continued)

     Stock option activity prior to adoption of SFAS No. 123 is as follows:

     1981 Non-Qualified Stock Option Plan

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

     Non-Qualified Stock Options

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

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

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:

                                                       Shares   Price Range
                                                     --------   -----------
Granted (42,167 options were repriced and extended    894,887    $2.50-7.00
    as described in note 9)
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
                                                     ========    ==========

All of the above options are 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.  The maximum number of shares of common stock
that could have been issued pursuant to the option plan was 2,000,000.

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.

                                      F-31

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)  Stock Options, (Continued)

     The stock option activity is as follows:

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

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

(10) Stock Grant and Compensation Plans

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

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

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

      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.

                                      F-32

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

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

     1989 Stock Plan

     Under the 1989 Stock Plan, one million shares of the Company's common stock
     were reserved for issuance as awards to employees. The 1989 Stock Plan also
     provides  for the  granting  of options  to  purchase  common  stock of the
     Company  (see note 8). 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                                   Amount of
               July 31,        Shares     Fair Value    Compensation
               -------         ------     ----------    ------------
                1989           30,000       $   5.00      $150,000

                1990           56,000           6.00       336,000

                1991          119,000           4.00       476,000

                1992          104,000           2.75       286,000

                1993          117,000           2.00       234,000

                1994            5,000           3.00        15,000
                             ========          =====       =======

     Compensation expense is recorded for the fair value of all stock awards and
     grants  over the  vesting  period.  The 1994  stock  award was  immediately
     vested. There were no stock awards in fiscal 2001, 2000 or 1999.

(11) Income Taxes

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

     New Jersey has enacted legislation  permitting certain corporations located
     in New Jersey to sell state tax loss  carryforwards  and state research and
     development  credits or tax benefits.  For the state fiscal year 2001 (July
     1, 2000 to June 30, 2001),  the Company had $1,774,000  total available tax
     benefits of which $602,000 was allocated to be sold between July 1, 2000 to
     June 30, 2001. In December  2000,  the Company  received  $451,000 from the
     sale of an aggregate of $602,000 tax benefits which was recognized as a tax
     benefit for the fiscal year 2001. In December  1999,  the Company  received
     $756,000 from the sale of its allocated tax benefits  which was  recognized
     as a tax benefit for the fiscal year 2000. The Company will attempt to sell
     the  remaining  balance of its tax benefits in the amount of  approximately
     $1,172,000  between July 1, 2001 and June 30, 2002, subject to all existing
     laws of the State of New Jersey.  However,  there is no assurance  that the
     Company  will be able to find a buyer  for its tax  benefits  or that  such
     funds will be available in a timely manner.

                                      F-33

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(11) Income Taxes, (Continued)

     At July 31, 2001 and 2000,  the tax effects of temporary  differences  that
     give rise to the deferred tax assets are as follows:

                                                       2001            2000
                                                   ------------    ------------
     Deferred tax assets:
       Excess of book over tax depreciation
           and amortization                       $     83,946    $     72,248
       Accrued expenses                                131,098         171,916
       Federal and state net operating
           loss carryforwards                       14,666,868      14,838,624
       Research and experimentation and
           investment tax credit carry forwards      1,203,536         922,785
                                                  ------------    ------------
     Total gross deferred tax assets                16,085,448      16,005,573
     Valuation allowance                           (16,085,448)    (16,005,573)
                                                  ------------    ------------
     Net deferred tax assets                      $         --    $         --
                                                  ============    ============

     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 an actual benefit of zero due principally to the  aforementioned
     valuation allowance.

     At July 31, 2001, the Company has federal net operating loss  carryforwards
     of  approximately  $40,185,440  that expire in the years 2002 to 2021.  The
     Company  also has  investment  tax  credit  carryforwards  of  $17,719  and
     research and  experimentation  tax credit  carryforwards  of $913,149  that
     expire in the years 2002 to 2021. Ultimate utilization/availability of such
     net  operating  losses and  credits  may be  significantly  curtailed  if a
     significant change in ownership occurs in accordance with the provisions of
     the Tax Reform Act of 1986.

(12) Other Financial Information

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

                                   2001       2000
                                 --------   --------

     Payroll and payroll taxes   $ 43,876   $ 34,926
     Professional fees             50,690     51,007
     Clinical trial grants        327,745    308,070
     Other                         43,502     17,844
                                 --------   --------
                                 $465,813   $411,847
                                 ========   ========

     Other current assets as of July 31, consist of the following:

                           2001      2000
                         -------   -------

     Prepaid insurance   $35,380   $15,963
     Other                 7,553    12,654
                         -------   -------
                         $42,933   $28,617
                         =======   =======

                                      F-34

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(13) Commitments and Contingencies

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

     The  Company  has  product  liability  insurance  coverage in the amount of
     $6,000,000 for clinical trials in the U.S.  Additionally,  the Company also
     maintains  product   liability   insurance  in  Europe  in  the  amount  of
     DM20,000,000.  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.

(14) Research and Development Agreement

     In  November  1992,  the  Company  entered  into a CRADA  with the NIH.  In
     accordance with this CRADA,  the NIH performed  research for the Company on
     potential  uses for its drug  technology.  During the term of this research
     and development agreement,  which expired in July 31, 1999, the Company was
     obligated to pay approximately  $5,300 per month to the NIH. Total research
     and development expenses under this arrangement amounted to $64,000 for the
     year ended July 31, 1999.

     In  August  1995,  the  Company  entered  into a CRADA  with  the  NCI.  In
     accordance with this CRADA,  the NCI performed  research for the Company on
     potential  uses for its drug  technology.  During the term of this research
     and  development  agreement,  which expired in August 1999, the Company was
     obligated  to pay  approximately  $5,200 per month to the NCI. In September
     1999,  this  research and  development  agreement  was amended to expire in
     August  2000 and in June  2000 the  expiration  was  extended  to expire in
     August 2001. Both extensions were without  additional cost for the Company.
     Total research and development  expenses under this arrangement amounted to
     $5,200 and  $62,400  for the  fiscal  years  ended July 31,  2000 and 1999,
     respectively.

(15) 401 (K) Savings Plan

     Effective  October 1, 1998, the Company  adopted a 401(K) Savings Plan (the
     "Plan").  Qualified  employees may  participate by contributing up to 6% of
     their  gross  earnings  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, 2001, 2000 and 1999, the Company's contribution to the Plan amounted to
     $23,826, $21,714 and $16,052, respectively.

                                      F-35

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(16) Quarterly Financial Data (Unaudited)

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                             2001                                                    2000
                       First     Second      Third     Fourth      Totals       First     Second     Third      Fourth      Totals
-----------------------------------------------------------------------------------------------------------------------------------

<S>                   <C>        <C>        <C>        <C>        <C>          <C>        <C>        <C>        <C>        <C>
Interest
   income               $3.8       $3.0       $1.5       $4.8        $13.1      $15.0      $11.3      $13.0      $11.8        $51.1

Operating  loss       (511.9)    (688.4)    (762.2)    (783.8)    (2,746.3)    (714.2)    (731.5)    (728.2)    (304.2)    (2,478.1)
-----------------------------------------------------------------------------------------------------------------------------------
Net income
   (loss)              (60.5)    (688.4)    (762.2)    (783.8)    (2,294.9)    (714.2)      24.3     (728.2)    (304.2)    (1,722.3)

Loss per
  share - basic
  and diluted          $0.00     $(0.04)    $(0.04)    $(0.04)      $(0.12)    $(0.04)     $0.00     $(0.04)    $(0.02)      $(0.10)
</TABLE>


                                      F-36