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, 1997                                               0-11088
For the fiscal year ended                                 Commission file number

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

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

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

Registrant's telephone number, including area code:               (973) 748-8082
Securities registered pursuant to Section 12(b) of the Act:                 None
Securities registered pursuant to Section 12(g) of the Act:

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

--------------------------------------------------------------------------------

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

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

     The aggregate  market value of the Common Stock, par value $.001 per share,
held by  non-affiliates  based upon the  average of the bid and asked  prices as
reported by the Nasdaq SmallCap Market on October 10, 1997 was  $48,764,742.  As
of October  10, 1997 there were  14,847,793  shares of Common  Stock,  par value
$.001 per share, outstanding.

               The Index to Exhibits appears on page 12.

                       Documents Incorporated by Reference

     The  registrant's  definitive  Proxy  Statement  for the Annual  Meeting of
Stockholders  scheduled  to be held on  December  9, 1997,  to be filed with the
Commission  not later than 120 days after the close of the  registrant's  fiscal
year ended July 31, 1997,  has been  incorporated  by reference,  in whole or in
part, into Part III Items 10, 11, 12 and 13 of this Annual Report on Form 10-K.

<PAGE>



                                Table of Contents
<TABLE>
<CAPTION>
                                                                                                   Page
                                                                                                   ----
<S>                                                                                                 <C>
PART I

               Item  1.   Business                                                                   1

               Item  2.   Properties                                                                 6

               Item  3.   Legal Proceedings                                                          7

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

PART II

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

               Item  6.   Selected Financial Data                                                    8

               Item  7.   Management's Discussion and Analysis of Financial
                           Condition and Results of Operations                                       9

               Item  7A.  Quantitative and Qualitative Disclosure About Market Risk                 11

               Item  8.   Financial Statements and Supplementary Data                               11

               Item  9.   Changes in and Disagreements with Accountants
                            on Accounting and Financial Disclosure                                  11

PART III

               Item 10.   Directors and Executive Officers of the Registrant                        11

               Item 11.   Executive Compensation                                                    12

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

               Item 13.   Certain Relationships and Related Transactions                            12

PART IV

               Item 14.   Exhibits, Financial Statement Schedules, and
                           Reports on Form 8-K                                                      12

</TABLE>


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


                                       (i)

<PAGE>



                                     Part I

Item 1. BUSINESS.

Overview

Alfacell  Corporation  ("Alfacell"  or  the  "Company")  is a  biopharmaceutical
company  organized  in  1981  to  engage  in the  discovery,  investigation  and
development of a new class of anti-cancer  drugs isolated from leopard frog eggs
and early embryos.  The Company's first product under development is ONCONASE(R)
which targets solid tumors, most of which are known to become resistant to other
chemotherapeutic  drugs.  To date, the most  significant  clinical  results with
ONCONASE have been observed in advanced  pancreatic cancer,  non-small cell lung
cancer,  malignant  mesothelioma and metastatic breast cancer.  According to the
American Cancer  Society,  in 1997,  approximately  386,000 people in the United
States  will  be  diagnosed  with  pancreatic,   lung,  and  breast  cancer  and
approximately 233,000 will die.

ONCONASE has been used to treat  patients  with  advanced  stages of  pancreatic
cancer, malignant mesothelioma, non-small cell lung cancer and metastatic breast
cancer on a weekly basis.  Encouraging results have been observed in Phase I and
II  clinical  trials in  patients  with these tumor  types,  warranting  further
trials,  some of which are underway.  Side effects associated with ONCONASE have
been modest,  are primarily  renal and are reversible upon reduction of dose, or
temporary or  permanent  discontinuation  of  treatment.  Patients  treated with
ONCONASE have shown no evidence of myelosuppression  (bone marrow  suppression),
alopecia  (hair  loss) or other  severe  toxicities  frequently  observed  after
treatment with most other  chemotherapeutic  drugs.  In November 1995,  Alfacell
began a randomized  multicenter Phase III clinical trial to test the combination
of ONCONASE and tamoxifen versus  5-fluorouracil  ("5-FU") in approximately  120
patients with advanced  pancreatic cancer. A subsequent Phase III clinical trial
was  initiated  in August  1996,  to compare the  combination  of  ONCONASE  and
tamoxifen  with  Eli  Lilly  &  Co.'s  Gemzar(R)  ("Gemzar"),  a Food  and  Drug
Administration ("FDA") approved drug for pancreatic cancer, in approximately 120
patients.  In June 1997,  a Phase III  clinical  trial was  initiated  comparing
ONCONASE  as  a  single  agent  to   doxorubicin   in  patients  with  malignant
mesothelioma.

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

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


                                        1

<PAGE>


Information contained herein contains "forward-looking  statements" which can be
identified  by the  use  of  forward-looking  terminology  such  as  "believes,"
"expects,"  "may," "will," "should," or "anticipates" or the negative thereof or
other  variations  thereon  or  comparable  terminology,  or by  discussions  of
strategy.  No  assurance  can be given  that the future  results  covered by the
forward-looking  statements  will be achieved.  The matters set forth in Exhibit
99.1 hereto constitute cautionary statements  identifying important factors with
respect  to  such  forward-looking  statements,   including  certain  risks  and
uncertainties,  that could  cause  actual  results to vary  materially  from the
future results indicated in such forward-looking statements. Other factors could
also cause actual results to vary materially  from the future results  indicated
in such forward-looking statements.

ONCONASE(R)

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

Postulated Mechanism of Action

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

Binding of ONCONASE to cell surface receptors followed by:

     o  Cellular internalization;

     o  Ribonucleolytic degradation of RNAs;

     o  Inhibition of protein synthesis;

     o  Inhibition of the cell growth; and

     o  Cell death.

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

Clinical Trials

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


                                       2
<PAGE>

Reported  toxicities in Phase I and II clinical  trials,  were primarily  renal,
dose-related  and  reversible.  There has been no evidence  of  myelosuppression
(bone  marrow  suppression),  alopecia  (hair loss) or other  severe  toxicities
frequently  observed  after  treatment with most other  chemotherapeutic  drugs.
Alfacell  has two  on-going  Phase III  clinical  trials in advanced  pancreatic
cancer patients.  The Company began a randomized  multicenter Phase III clinical
trial in November 1995. In May 1996,  the FDA approved  Gemzar for the treatment
of advanced pancreatic cancer.  Therefore, in August 1996, the Company broadened
the criteria for inclusion in its study to include patients  previously  treated
with  Gemzar.  The trial is designed to compare the survival and quality of life
of patients  treated  with the  combination  of ONCONASE  and  tamoxifen  versus
5-fluorouracil  (5-FU),  an FDA approved  chemotherapy.  Additionally,  Alfacell
initiated a new Phase III multicenter  clinical trial in August 1996,  comparing
ONCONASE  plus  tamoxifen  with  Gemzar  in newly  diagnosed  pancreatic  cancer
patients.

In June  1997,  Alfacell  initiated  a Phase III  clinical  trial for  malignant
mesothelioma comparing ONCONASE with doxorubicin,  an FDA approved chemotherapy.
No  standard  therapy  exists to treat this  deadly  cancer,  and most  advanced
malignant mesothelioma patients die of progressive disease within 6-12 months of
diagnosis.  Phase I/II  clinical  trial  results to date have been  encouraging;
however,  there can be no assurance that previous clinical trial results will be
reflective  of future  clinical  results  or will be  sufficient  to obtain  FDA
approval.

Research and Development

Research  and  development  expenses  for the fiscal  years ended July 31, 1997,
1996, and 1995 were $3,862,716, $2,188,890 and $1,205,523,  respectively. During
fiscal 1997,  the  Company's  research and  development  efforts were  primarily
focused on conducting the two Phase III clinical trials in pancreatic cancer and
completing the Phase II clinical trial in malignant mesothelioma.

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

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

Collaborative research is being conducted at The Cancer Research Institute,  New
York Medical College regarding  synergistic  interactions of ONCONASE with other
chemotherapeutic  agents and further studies of ONCONASE'S  mechanism of action.
At the  University  of Medicine and  Dentistry of New Jersey,  ONCONASE is being
studied  as a  radiation  sensitizer  and an agent  capable  of  lowering  tumor
interstitial  fluid  pressure.  This latter effect may  facilitate  tumor tissue
penetration by various anti-cancer agents..

The Company is further developing other proteins from the same natural source as
ONCONASE  which may play a role in  inducing  cell  maturation,  differentiation
and/or cell death and which may become additional  products for the treatment of
cancer. At present, the Company is characterizing these proteins.

Raw Materials

The major  active  ingredient  derived  from early stage  leopard  frog eggs and
embryos is the  protein,  ONCONASE.  Although  Alfacell  currently  acquires its
natural source material from a single supplier,  management  believes that it is
abundantly  available from other sources. The Company believes it has sufficient

                                       3
<PAGE>

egg  inventory  on hand to produce  enough  ONCONASE  to  complete  the  current
clinical trials and supply ONCONASE for up to two years after commercialization.
In addition,  the Company is conducting  research  concerning the alternative of
manufacturing ONCONASE through recombinant technology.  However, there can be no
assurance that alternative manufacturing methods will be viable.

Manufacturing

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

Marketing

Neither the Company nor any of its  officers  or  employees  has  pharmaceutical
marketing  experience.  If the  Company  were to  market  its  products  itself,
significant  additional  expenditures and management resources would be required
to  develop  an  internal  sales  force and there can be no  assurance  that the
Company  would  be  successful  in  penetrating  the  markets  for any  products
developed or that internal marketing capabilities would be developed at all. The
Company  intends,  in some  instances,  to enter into  development and marketing
agreements with third parties.  The Company expects that under such arrangements
it would act as a co-marketing partner or would grant exclusive marketing rights
to its corporate  partners in return for up-front fees,  milestone  payments and
royalties on sales. Under these agreements,  the Company's marketing partner may
have the responsibility for a significant  portion of development of the product
and  regulatory  approval.  In the event  that the  marketing  partner  fails to
develop a  marketable  product  or fails to market a product  successfully,  the
Company's business may be adversely affected.

Government Regulation

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

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



                                       4
<PAGE>

human  trials  are  submitted  to the FDA in a New Drug  Application  ("NDA") or
Product  License  Application   ("PLA").   Preparing  an  NDA  or  PLA  involves
considerable data collection, verification and analysis.

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

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

Patents

The Company  believes it is important to develop new  technology  and to improve
its existing technology. When appropriate, the Company files patent applications
to protect inventions in which it has an ownership interest.

The Company owns five U.S. Patents:

     a)   U.S.   Patent  No.   4,888,172   issued  in  1989,   which   covers  a
          pharmaceutical  produced from fertilized frog eggs and methodology for
          so producing it.

     b)   U.S. Patent No.  5,559,212 issued in 1996, which covers the amino acid
          sequence of ONCONASE.

     c)   U.S. Patents Nos. 5,529,775,  5,540,925 issued in 1996 and U.S. Patent
          No.  5,595,734  issued in 1997,  which cover  combinations of ONCONASE
          with certain other chemotherapeutic agents.

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

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

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

The Company also relies on proprietary  know-how and on trade secrets to develop
and maintain its competitive  position.  Others may  independently  develop such
know-how or trade  secrets or may  otherwise  obtain  access  thereto.  Although
Company employees and consultants having access to proprietary  information they
are


                                       5
<PAGE>

required  to  sign  agreement  which  require  them  to  keep  such  information
confidential, such agreements may be breached or held to be unenforceable.

Competition

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

Employees

As of October 10, 1997, Alfacell employed seventeen persons, of whom eleven were
engaged  in  research  and  development  activities  and  six  were  engaged  in
administration and management.  The Company has four employees who hold Ph.D. or
M.D.  degrees.  All of the Company's  employees  are covered by  confidentiality
agreements.  Alfacell  considers  relations  with its employees to be very good.
None  of  the  Company's  employees  are  covered  by  a  collective  bargaining
agreement.

Environmental Matters

The Company's operations are subject to comprehensive regulation with respect to
environmental,  safety and similar  matters by the United  States  Environmental
Protection  Agency  ("EPA") and  similar  state and local  agencies.  Failure to
comply with  applicable  laws,  regulations and permits can result in injunctive
actions,  damages and civil and criminal  penalties.  If the Company  expands or
changes its  existing  operations  or  proposes  any new  operations,  it may be
required to obtain additional or amended permits or authorizations.  The Company
spends time,  effort and funds in operating its facilities to ensure  compliance
with  environmental  and  other  regulatory   requirements.   Such  efforts  and
expenditures  are common  throughout  the  biotechnology  industry and generally
should  have  no  material   adverse  effect  on  the  Company.   The  principal
environmental regulatory requirements and matters known to the Company requiring
or  potentially  requiring  capital  expenditures  by the  Company do not appear
likely,  individually or in the aggregate,  to have a material adverse effect on
the Company's financial condition. The Company believes that it is in compliance
with all current laws and regulations.

Item 2. PROPERTIES.

The Company owns no real property.  The Company leases a total of  approximately
17,000 square feet in an industrial and office  building  located in Bloomfield,
New Jersey.  The Company leases its facility  under a five year operating  lease
which is due to expire  December 31, 2001. The annual rental  obligation,  which
commenced January 1, 1997 is $96,775 and is subject to escalation  amounts.  The
Company  believes  that  the  facility  is  sufficient  for  its  needs  in  the
foreseeable future.


                                       6
<PAGE>

Item 3. LEGAL PROCEEDINGS.

None.

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

None.

                                     Part II

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

The  Company's  Common Stock is traded under the symbol  "ACEL".  The  Company's
Common Stock has been quoted on the Nasdaq  SmallCap  Market  since  December 5,
1996. As of October 10, 1997,  there were  approximately  1,513  stockholders of
record of the Company's Common Stock.

The following  table sets forth the range of high and low bid  quotations of the
Common  Stock  for the two  fiscal  years  ended  July 31,  1997 and  1996.  The
quotation  for the periods  commencing  December 5, 1996 were  obtained from the
Nasdaq SmallCap Market and the quotation for the periods prior to such date were
obtained  from the National  Quotation  Bureau.  These quotes are believed to be
representative of inter-dealer quotations,  without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.


                                             High                     Low
                                             ----                     ---
Year Ended July 31, 1997:
               First Quarter                 5-5/16                  4-5/16
               Second Quarter                8-3/8                   4-1/4
               Third Quarter                 7                       4-5/8
               Fourth Quarter                6-5/8                   4

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

The Company has paid no dividends on its Common  Stock since its  inception  and
does not plan to pay  dividends on its Common Stock in the  foreseeable  future.
Any  earnings  which the  Company  may  realize  will be retained to finance the
growth of the Company.




                                       7
<PAGE>


Recent Sales of Unregistered Securities

On May 1997,  70,300  warrants  received  in  connection  with  certain  private
placement transactions were exercised to purchase Common Stock, for an aggregate
consideration  of $351,500.  This  transaction was consummated as a private sale
pursuant to Section 4 (2) of the Securities Act of 1933, as amended.

On June 1997,  6,150  warrants  received  in  connection  with  certain  private
placement transactions were exercised to purchase Common Stock, for an aggregate
consideration  of $30,750.  This  transaction  was 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 the  Company for the five
fiscal years ended July 31, 1997.

<TABLE>
<CAPTION>

Year Ended                                             July 31,
----------              ------------------------------------------------------------------------
                             1997           1996          1995            1994          1993
                             ----           ----          ----            ----          ----
<S>                     <C>            <C>            <C>            <C>            <C>         
Revenue                    $442,572       $184,250        $20,992         $6,064           $489

Net Loss                $(5,018,867)   $(2,942,152)   $(1,993,123)   $(2,234,428)   $(2,357,350)

Net Loss Per Share            $(.34)         $(.25)         $(.21)         $(.26)         $(.31)

Dividends                      None           None           None           None           None

At Year End:
------------

Total Assets             $8,034,954     $8,487,711     $1,616,170       $779,763       $335,332

Long-term Obligations       $15,902     $1,398,760         $7,129     $1,593,976     $5,439,531

Total Equity
(Deficiency)             $5,566,091     $6,650,266      $(832,566)   $(1,774,418)   $(6,647,124)
</TABLE>


                                       8
<PAGE>




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

Results of Operations

Fiscal Years Ended July 31, 1997, 1996 and 1995

Revenues

The  Company  is a  development  stage  company  as  defined  in  the  Financial
Accounting  Standards Board's Statement of Financial Accounting Standards No. 7.
As such,  the Company is devoting  substantially  all of its present  efforts to
establishing  a new business and  developing  new drug  products.  The Company's
planned principal operations of marketing and/or licensing of new drugs have not
commenced and,  accordingly,  no significant revenue has been derived therefrom.
The Company  focuses  most of its  productive  and  financial  resources  on the
development  of ONCONASE and as such has not had any sales in fiscal 1997,  1996
and 1995.  Investment  income for fiscal 1997 was $443,000  compared to $184,000
for fiscal  1996,  an  increase of  $259,000.  This  increase  was due to higher
balances  of cash and cash  equivalents.  Investment  income for fiscal 1996 was
$184,000 compared to $21,000 for fiscal 1995, an increase of $163,000.

Research and Development

Research  and  development  expense for fiscal 1997 was  $3,863,000  compared to
$2,189,000  for fiscal 1996, an increase of $1,674,000 or 76%. This increase was
primarily  due to  increases  in costs in support of on-going  clinical  trials,
including the Phase III clinical  trials for pancreatic  cancer and the Phase II
and III clinical trials for malignant  mesothelioma,  costs  associated with the
purchase  of raw  materials  for  anticipated  future  production  of  ONCONASE,
regulatory  costs  in  preparation  for an  NDA  for  ONCONASE,  and  hiring  of
additional personnel.

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

General and Administrative

General and  administrative  expense for fiscal 1997 was $1,476,000  compared to
$807,000  for fiscal  1996,  an increase of $669,000 or 83%.  This  increase was
primarily  due to hiring of  additional  personnel,  an  increase in legal fees,
public relations activities and insurance expense.

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

Interest

Interest  expense  for fiscal 1997 was  $123,000  compared to $131,000 in fiscal
1996, a decrease of $8,000 or 6%. The decrease was  primarily due to a reduction
in the  principal  balance of the  Company's  Term Loan (as defined  herein) and
reductions in related party and other short term payables.


                                       9
<PAGE>

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

Net Loss

The Company has incurred net losses  during each year since its  inception.  The
net loss for fiscal 1997 was $5,019,000 as compared to $2,942,000 in fiscal 1996
and $1,993,000 in fiscal 1995.  The cumulative  loss from the date of inception,
August 24,  1981,  to July 31,  1997  amounted to  $45,410,000.  Such losses are
attributable to the fact that the Company is still in the development  stage and
accordingly  has not derived  sufficient  revenues from operations to offset the
development stage expenses.

Liquidity and Capital Resources

During  fiscal 1997,  the Company had a net  decrease in cash of $589,000.  This
decrease  resulted from net cash used in operating  activities of $4,107,000 and
net cash  used in  investing  activities  of  $252,000,  principally  due to the
purchase of property and equipment, offset by the net cash provided by financing
activities  of  $3,770,000,  primarily  from proceeds from the exercise of stock
options and  warrants  and the private  placement  of common  stock.  Total cash
resources as of July 31, 1997 were $7,542,000 compared to $8,131,000 at July 31,
1996.

The Company's term loan  agreement  with its bank,  (the "Term Loan") matured on
August 31, 1997. The entire principal amount  outstanding on the Term Loan as of
July 31, 1997 was reflected as a current  liability.  This is the primary reason
for a significant  increase in current  liabilities as of July 31, 1997 compared
to July 31, 1996 and a  significant  decrease in  long-term  debt as of July 31,
1997 compared to July 31, 1996. The Company had a verbal agreement with the bank
to extend the  maturity  date of the loan until  December 1, 1997,  provided the
Company deposited a compensating  balance in the amount of the principal balance
as of the date the extension was  negotiated  with the bank. On October 3, 1997,
the Company elected to pay the entire loan balance,  including accrued interest,
in the amount of $1,376,646 out of its cash resources.

The  Company's  continued  operations  will  depend  on  its  ability  to  raise
additional  funds  through  several  potential  sources  such as  equity or debt
financing,  collaborative agreements,  strategic alliances and revenues from the
commercial  sale  of  ONCONASE.  The  Company  is in  discussions  with  several
potential  collaborative  partners  for further  development  and  marketing  of
ONCONASE,  however there can be no assurance that any such  arrangements will be
consummated.  In addition, the Company expects that its cash needs in the future
will increase due to the on-going clinical trials. The Company believes that its
cash and cash  equivalents  as of July 31,  1997,  after  giving  effect  to the
repayment of the Term Loan,  will be  sufficient  to meet its  anticipated  cash
needs  through  the fiscal year ending July 31,  1998.  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 exercised and
services rendered,  debt financing and financing provided by the Company's Chief
Executive Officer.  The Company's long-term liquidity will depend on its ability
to raise substantial additional funds. There can be no assurance that such funds
will be available to the Company on acceptable terms, if at all.

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


                                       10
<PAGE>

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting Standards No. 128, "Earnings Per Share". The new statement
replaces the  calculations  currently used with "basic  earnings per share" that
includes  only actual  weighted  shares  outstanding  and "diluted  earnings per
share" that includes the effect of any common stock  equivalents  or other items
that dilute  earnings per share.  The new rules are effective for the Company in
the  upcoming  year and are  retroactively  applied  to the  previous  quarterly
periods. The adoption of this statement is not expected to be material.

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.  ("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 KPMG Peat Marwick LLP with respect to
the financial statements of the Company from inception to July 31, 1997 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 of 1933, as amended (the  "Securities  Act") on
the basis of the use of such report in any registration statement of the Company
into which such report is incorporated by reference.  In addition,  in the event
any persons seek to assert a claim against AHC for false or misleading financial
statements and disclosures in documents  previously  filed by the Company,  such
claim will be adversely affected and possibly barred.  Furthermore,  as a result
of the lack of a consent from AHC to the use of its audit report  herein,  or to
its incorporation by reference into a registration  statement,  the officers and
directors  of the  Company  will be  unable to rely on the  authority  of AHC as
experts in auditing  and  accounting  in the event any claim is brought  against
such persons under Section 11 of the  Securities  Act based on alleged false and
misleading  Financial  Statements  and  disclosures  attributable  to  AHC.  The
discussion  regarding  certain  effects of the AHC  termination is not meant and
should  not be  construed  in any  way as  legal  advice  to any  party  and any
potential purchaser should consult with his, her or its own counsel with respect
to the effect of the AHC  termination  on a potential  investment  in the Common
Stock of the Company or otherwise.

                                    Part III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information with regards to the Directors and Executive  Officers of the Company
is  incorporated  herein by reference  from the  discussions  under the headings
"Business  Experience  of Nominees"  and  "Compliance  with Section 16(a) of the
Exchange Act" in the Company's  Proxy  Statement for its 1997 Annual  Meeting of
Shareholders.


                                       11
<PAGE>

Item 11. EXECUTIVE COMPENSATION.

Information  with regard to executive  compensation  is  incorporated  herein by
reference from the discussion under the heading "Executive  Compensation" in the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.  

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

Information with regard to security  ownership of certain  beneficial owners and
management is  incorporated  by reference from the discussion  under the heading
"Security  Ownership  of  Certain  Beneficial  Owners  and  Management"  in  the
Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information  with regard to certain  relationships  and related  transactions is
incorporated  herein by reference from the discussion under the heading "Certain
Relationships and Related Transactions" in the Company's Proxy Statement for its
1997 Annual Meeting of Shareholders.

                                     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).



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

3.1     Certificate of Incorporation                                       *

3.2     By-Laws                                                            *

3.3     Amendment to Certificate of Incorporation                          #

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                                                              ***

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         ****


                                 12
<PAGE>

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

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.                                           ###

21.1    Subsidiaries of Registrant                                         **

23.1    Consent of KPMG Peat Marwick LLP                                  ####

27.1    Financial Data Schedule                                           ####
 
99.1    Factors to Consider in Connection with Forward-Looking
        Statements                                                        ####

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

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

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

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

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

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

#      Previously  filed as  exhibits  to the  Company's  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.

####   Filed herewith.


                                       13
<PAGE>

(b)            Reports on Form 8-K.

               None


                                       14
<PAGE>


                                    Signature



Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                      ALFACELL CORPORATION


Dated: October 29, 1997               By: /s/ KUSLIMA SHOGEN
                                      Kuslima Shogen, Chief
                                      Executive Officer and
                                      Chairman of the Board


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


Dated: October 29, 1997               /s/ KUSLIMA SHOGEN
                                      Kuslima Shogen, Chief
                                      Executive Officer (Principal Executive 
                                      Officer) and Chairman of the Board


Dated: October 29, 1997               /s/ GAIL E. FRASER
                                      Gail E. Fraser, Chief Financial Officer, 
                                      Vice President of Finance, (Principal 
                                      Financial Officer and Principal Accounting
                                      Officer) and Director


Dated: October 29, 1997               /s/ STANISLAW M. MIKULSKI
                                      Stanislaw M. Mikulski, M.D., Executive
                                      Vice President and Director


Dated:  __________________            
                                      Alan Bell, Director


Dated: October 29, 1997               /s/ STEPHEN K. CARTER
                                      Stephen K. Carter, M.D., Director


Dated: October 29, 1997               /s/ DONALD R. CONKLIN
                                      Donald R. Conklin, Director


                                       15
<PAGE>



Dated: October 29, 1997               /s/ ROBERT R. HENRY
                                      Robert R. Henry, Director


Dated:  __________________            
                                      Allen Siegel, D.D.S., Director





                                       16
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)




                                      Index

                                                                            Page
                                                                            ----

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


  Financial Statements:
           Balance Sheets - July 31, 1997 and 1996 ......................   F-5
           Statements of Operations - Years ended July 31, 1997, 1996
             and 1995 and the Period from August 24, 1981 (Date of
             Inception) to July 31, 1997 ................................   F-6
           Statement of Stockholders' Equity (Deficiency) - Period from
            August 24, 1981 (Date of Inception) to July 31, 1997 ........   F-7
           Statements of Cash Flows - Years ended July 31, 1997, 1996
            and 1995 and the Period from August 24, 1981 (Date of
            Inception) to July 31, 1997 .................................   F-11
           Notes to Financial Statements - Years ended July 31, 1997,
            1996 and 1995 and the Period from August 24, 1981
            (Date of Inception) to July 31, 1997 ........................   F-14



                                       F-1

<PAGE>











                          Independent Auditors' Report


The Stockholders and Board of Directors
Alfacell Corporation:


We have  audited the  accompanying  balance  sheets of Alfacell  Corporation  (a
development  stage  company)  as of July 31,  1997  and  1996,  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, 1997 and the period
from August 24,  1981 (date of  inception)  to July 31,  1997.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.  The financial  statements of Alfacell  Corporation  (a  development
stage  company) for the period from August 24, 1981 (date of  inception) to July
31, 1992 were audited by other  auditors  whose  report dated  December 9, 1992,
except  as to note 18  which is July 19,  1993 and note 3 which is  October  28,
1993,  expressed an unqualified  opinion on those statements with an explanatory
paragraph regarding the Company's ability to continue as a going concern.

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

In our  opinion,  based on our audits  and,  for the  effect on the period  from
August 24,  1981 (date of  inception)  to July 31,  1997 of the  amounts for the
period from August 24, 1981 (date of  inception) to July 31, 1992, on the report
of other auditors, the financial statements referred to above present fairly, in
all  material  respects,  the  financial  position  of Alfacell  Corporation  (a
development  stage company) as of July 31, 1997 and 1996, and the results of its
operations  and its cash  flows for each of the years in the  three-year  period
ended July 31, 1997 and the period from August 24, 1981 (date of  inception)  to
July 31, 1997 in conformity with generally accepted accounting principles.





                                                  /s/ KPMG PEAT MARWICK LLP
                                                  KPMG Peat Marwick LLP

Short Hills, New Jersey
October 10, 1997


                                       F-2

<PAGE>



ON  DECEMBER  1, 1993,  CERTAIN  SHAREHOLDERS  OF ARMUS  HARRISON & CO.  ("AHC")
TERMINATED THEIR  ASSOCIATION WITH AHC (THE "AHC  TERMINATION"),  AND AHC CEASED
PERFORMING  ACCOUNTING  AND  AUDITING  SERVICES,  EXCEPT FOR LIMITED  ACCOUNTING
SERVICES TO BE PERFORMED ON BEHALF OF THE COMPANY.  IN JUNE 1996,  AHC DISSOLVED
AND  CEASED ALL  OPERATIONS.  THE  REPORT OF AHC WITH  RESPECT TO THE  FINANCIAL
STATEMENTS  OF THE COMPANY FROM  INCEPTION TO JULY 31, 1992 IS INCLUDED  HEREIN,
ALTHOUGH AHC HAS NOT  CONSENTED TO THE USE OF SUCH REPORT HEREIN AND WILL NOT BE
AVAILABLE  TO PERFORM ANY  SUBSEQUENT  REVIEW  PROCEDURES  WITH  RESPECT TO SUCH
REPORT. ACCORDINGLY,  INVESTORS WILL BE BARRED FROM ASSERTING CLAIMS AGAINST AHC
UNDER  SECTION 11 OF THE  SECURITIES  ACT OF 1933,  AS AMENDED (THE  "SECURITIES
ACT") ON THE BASIS OF THE USE OF SUCH REPORT IN ANY  REGISTRATION  STATEMENT  OF
THE COMPANY INTO WHICH SUCH REPORT IS INCORPORATED BY REFERENCE. IN ADDITION, IN
THE EVENT ANY PERSONS SEEK TO ASSERT A CLAIM AGAINST AHC FOR FALSE OR MISLEADING
FINANCIAL  STATEMENTS  AND  DISCLOSURES  IN  DOCUMENTS  PREVIOUSLY  FILED BY THE
COMPANY, SUCH CLAIM WILL BE ADVERSELY AFFECTED AND POSSIBLY BARRED. FURTHERMORE,
AS A RESULT  OF THE LACK OF A CONSENT  FROM AHC TO THE USE OF ITS  AUDIT  REPORT
HEREIN, OR, TO ITS INCORPORATION BY REFERENCE INTO A REGISTRATION STATEMENT, THE
OFFICERS AND DIRECTORS OF THE COMPANY WILL BE UNABLE TO RELY ON THE AUTHORITY OF
AHC AS  EXPERTS IN  AUDITING  AND  ACCOUNTING  IN THE EVENT ANY CLAIM IS BROUGHT
AGAINST SUCH PERSONS  UNDER  SECTION 11 OF THE  SECURITIES  ACT BASED ON ALLEGED
FALSE AND MISLEADING FINANCIAL  STATEMENTS AND DISCLOSURES  ATTRIBUTABLE TO AHC.
THE DISCUSSION REGARDING CERTAIN EFFECTS OF THE AHC TERMINATION IS NOT MEANT AND
SHOULD  NOT BE  CONSTRUED  IN ANY  WAY AS  LEGAL  ADVICE  TO ANY  PARTY  AND ANY
POTENTIAL PURCHASER SHOULD CONSULT WITH HIS, HER OR ITS OWN COUNSEL WITH RESPECT
TO THE EFFECT OF THE AHC  TERMINATION  ON A POTENTIAL  INVESTMENT  IN THE COMMON
STOCK OF THE COMPANY OR OTHERWISE.




                         REPORT OF INDEPENDENT AUDITORS


Board of Directors
Alfacell Corporation
Bloomfield, New Jersey

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


                                       F-3

<PAGE>



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

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

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



                                              -------------------------
                                              Armus, Harrison & Co.

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


                                       F-4

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


                                 Balance Sheets

                             July 31, 1997 and 1996

<TABLE>
<CAPTION>
                                      ASSETS                                                1997            1996
                                      ------                                            ------------    ------------
<S>                                                                                     <C>             <C>
Current assets:
               Cash and cash equivalents                                                $  7,542,289    $  8,131,442
               Loan receivable, related party                                                   --           112,250
               Prepaid expenses                                                              165,106          63,850
                                                                                        ------------    ------------
                             Total current assets                                          7,707,395       8,307,542
                                                                                        ------------    ------------
Property and equipment, net of accumulated depreciation and
  amortization of $742,319 in 1997 and $688,325 in 1996                                      326,003         127,930
                                                                                        ------------    ------------

Other assets:
               Deferred debt costs, net                                                        1,556          20,362
               Other                                                                            --            31,877
                                                                                        ------------    ------------
                                                                                               1,556          52,239
                                                                                        ------------    ------------

                             Total assets                                               $  8,034,954    $  8,487,711
                                                                                        ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:
               Current portion of long-term debt                                        $  1,381,416    $     86,936
               Accounts payable                                                              377,704         189,536
               Accrued expenses                                                              693,841         162,213
                                                                                        ------------    ------------
                             Total current liabilities                                     2,452,961         438,685

Long-term debt, less current portion                                                          15,902       1,398,760
                                                                                        ------------    ------------
                             Total liabilities                                             2,468,863       1,837,445
                                                                                        ------------    ------------


Commitments and contingencies
Stockholders' equity:
            Preferred stock, $.001 par value.  Authorized and unissued,
                1,000,000 shares at July 31, 1997 and 1996                                      --              --
               Common stock $.001 par value.  Authorized 25,000,000 shares;
                issued and outstanding 14,847,793 shares in 1997 and
                13,859,209 shares in 1996                                                     14,848          13,859
               Capital in excess of par value                                             50,961,382      47,023,529
               Common stock to be issued, 89,634 shares in 1996                                 --           258,335
               Subscription receivable, 89,634 shares in 1996                                   --          (254,185)
            Deficit accumulated during development stage                                 (45,410,139)    (40,391,272)
                                                                                        ------------    ------------
                                                                                           5,566,091       6,650,266
                                                                                        ------------    ------------
                             Total stockholders' equity
                             Total liabilities and stockholders' equity                 $  8,034,954    $  8,487,711
                                                                                        ============    ============
</TABLE>

See accompanying notes to financial statements.


                                       F-5

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)





                            Statements of Operations


                    Years ended July 31, 1997, 1996 and 1995,
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 1997

<TABLE>
<CAPTION>
                                        August 24,
                                           1981
                                         (date of
                                        inception)
                                            to
                                         July 31,
                                           1997               1997               1996               1995
                                       ------------       ------------       ------------       ------------
<S>                                    <C>                   <C>                  <C>                <C>    
Revenues:
       Sales                           $    553,489               --                 --                 --
       Investment income                    827,826            442,572            184,250             14,992
       Other income                          60,103               --                 --                6,000
                                       ------------       ------------       ------------       ------------
                                          1,441,418            442,572            184,250             20,992
                                       ------------       ------------       ------------       ------------

Costs and expenses:
       Cost of sales                        336,495               --                 --                 --
       Research and development          26,422,106          3,862,716          2,188,890          1,205,523
       General and administrative        17,181,406          1,475,624            806,962            664,435
       Interest:
                Related parties           1,033,960               --                1,801             14,982
                Others                    1,877,590            123,099            128,749            129,175
                                       ------------       ------------       ------------       ------------
                                         46,851,557          5,461,439          3,126,402          2,014,115
                                       ------------       ------------       ------------       ------------

                         Net loss      $(45,410,139)        (5,018,867)        (2,942,152)        (1,993,123)
                                       ============       ============       ============       ============

       Loss per common share           $      (7.69)             (0.34)             (0.25)             (0.21)
                                       ============       ============       ============       ============

Weighted average number of shares
outstanding                               5,907,000         14,597,000         11,969,000          9,598,000
                                       ============       ============       ============       ============
</TABLE>

See accompanying notes to financial statements.



                                       F-6

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


            Statement of Stockholders' Equity (Deficiency), Continued

                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 1997

<TABLE>
<CAPTION>
                                                                                          Common Stock                              
                                                                                ---------------------------------       Capital in  
                                                                                  Number of                            excess of par
                                                                                   Shares                Amount            value    
                                                                                -------------         -----------     ------------- 
<S>                                                                                   <C>            <C>                    <C>     
Issuance of shares to officers and stockholders for equipment, research and                                      
         development, and expense reimbursement                                       712,500        $        713           212,987 
Issuance of shares for organizational legal services                                   50,000                  50             4,950 
Sale of shares for cash, net                                                           82,143                  82           108,418 
Adjustment for 3 for 2 stock split declared September 8, 1982                         422,321                 422              (422)
Net loss                                                                                 --                 --                 --   
                                                                                -------------         -----------     ------------- 
Balance at July 31, 1982                                                            1,266,964               1,267           325,933 
                                                                                                                                    
Issuance of shares for equipment                                                       15,000                  15            13,985 
Sale of shares to private investors                                                    44,196                  44            41,206 
Sale of shares in public offering, net                                                660,000                 660         1,307,786 
Issuance of shares under stock grant program                                           20,000                  20           109,980 
Exercise of warrants, net                                                               1,165                   1             3,494 
Net loss                                                                                 --                 --                 --   
                                                                                -------------         -----------     ------------- 
Balance at July 31, 1983                                                            2,007,325               2,007         1,802,384 

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

Issuance of shares under stock grant program                                           48,332                  48           478,057 
Issuance of shares under stock bonus plan for directors and consultants                99,163                  99           879,379 
Shares canceled                                                                       (42,500)                (42)        (105,783) 
Exercise of warrants, net                                                             334,957                 335         1,971,012 
Net loss                                                                                 --                 --                 --   
                                                                                -------------         -----------     ------------- 
Balance at July 31, 1985                                                            2,884,843               2,885         6,445,730 

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

<CAPTION>
                                                                                                        Deficit      
                                                                                                      accumulated    
                                                                                  Common                during      
                                                                                stock to be           development      Subscription 
                                                                                  issued                 stage          Receivable  
                                                                                -----------          -------------    ------------- 
<S>                                                                                   <C>                <C>                   <C>
Issuance of shares to officers and stockholders for equipment, research and
         development, and expense reimbursement                                       --                    --                 --   
Issuance of shares for organizational legal services                                  --                    --                 --   
Sale of shares for cash, net                                                          --                    --                 --   
Adjustment for 3 for 2 stock split declared September 8, 1982                         --                    --                 --   
Net loss                                                                              --                (121,486)              --   
                                                                                -----------          -------------    ------------- 
Balance at July 31, 1982                                                              --                (121,486)              --   
                                                                                                                              
Issuance of shares for equipment                                                      --                    --                 --   
Sale of shares to private investors                                                   --                    --                 --   
Sale of shares in public offering, net                                                --                    --                 --   
Issuance of shares under stock grant program                                          --                    --                 --   
Exercise of warrants, net                                                             --                    --                 --   
Net loss                                                                              --                (558,694)              --   
                                                                                -----------          -------------    ------------- 
Balance at July 31, 1983                                                              --                (680,180)              --   
                                                                                                 
Exercise of warrants, net                                                             --                    --                 --   
Issuance of shares under stock grant program                                          --                    --                 --   
Issuance of shares under stock bonus plan for directors and consultants               --                    --                 --   
Net loss                                                                              --              (1,421,083)              --   
                                                                                -----------          -------------    ------------- 
Balance at July 31, 1984                                                              --              (2,101,263)              --   
                                                                                                 
Issuance of shares under stock grant program                                          --                    --                 --   
Issuance of shares under stock bonus plan for directors and consultants               --                    --                 --   
Shares canceled                                                                       --                    --                 --   
Exercise of warrants, net                                                             --                    --                 --   
Net loss                                                                              --              (2,958,846)              --   
                                                                                -----------          -------------    ------------- 
Balance at July 31, 1985                                                              --              (5,060,109)              --   
                                                                                                 
Issuance of shares under stock grant program                                          --                    --                 --   
Issuance of shares under stock bonus plan for directors and consultants               --                    --                 --   
Exercise of warrants, net                                                             --                    --                 --   
Net loss                                                                              --              (2,138,605)              --   
                                                                                -----------          -------------    ------------- 
Balance at July 31, 1986 (carried forward)                                            --              (7,198,714)              --   
                                                                                            
<CAPTION>
                                                                                   Deferred                             
                                                                                    compen-          Total stock-       
                                                                                    sation,            holders'         
                                                                                  restricted            equity          
                                                                                     stock           (deficiency)       
                                                                                ----------------    -------------
<S>                                                                                     <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 services                                    --                  5,000
Sale of shares for cash, net                                                            --                108,500
Adjustment for 3 for 2 stock split declared September 8, 1982                           --                   --
Net loss                                                                                --               (121,486)
                                                                                ----------------    -------------
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)
                                                                 
                                                                                                       (Continued)
</TABLE>



                                       F-7

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


            Statement of Stockholders' Equity (Deficiency), Continued


<TABLE>
<CAPTION>
                                                                                          Common Stock                              
                                                                                ---------------------------------       Capital in  
                                                                                  Number of                            excess of par
                                                                                   Shares                Amount            value    
                                                                                -------------         -----------     ------------- 
<S>                                                                                <C>                      <C>          <C>     
Balance at July 31, 1986 (brought forward)                                          2,933,052               2,933         6,849,112 

Exercise of warrants at $10.00 per share                                               14,745                  15           147,435 
Issuance of shares under stock bonus plan for directors and consultants                 5,000                   5            74,995 
Issuance of shares for services                                                       250,000                 250           499,750 
Sale of shares to private investors, net                                                5,000                   5            24,995 
Net loss                                                                                 --                 --                --    
                                                                                -------------         -----------     ------------- 
Balance at July 31, 1987                                                            3,207,797               3,208         7,596,287 

Issuance of shares for legal and consulting services                                  206,429                 207           724,280 
Issuance of shares under employment incentive program                                 700,000                 700         2,449,300 
Issuance of shares under stock grant program                                           19,000                  19            66,481 
Exercise of options at $3.00 per share                                                170,000                 170           509,830 
Issuance of shares for litigation settlement                                           12,500                  12            31,125 
Exercise of warrants at $7.06 per share                                                63,925                  64           451,341 
Sale of shares to private investors                                                    61,073                  61           178,072 
Amortization of deferred compensation, restricted stock                                  --                 --                --    
Net loss                                                                                 --                 --                --    
                                                                                -------------         -----------     ------------- 
Balance at July 31, 1988                                                            4,440,724               4,441        12,006,716 

Sale of shares for litigation settlement                                              135,000                 135         1,074,703 
Conversion of debentures at $3.00 per share                                           133,333                 133           399,867 
Sale of shares to private investors                                                   105,840                 106           419,894 
Exercise of options at $3.50 per share                                                  1,000                   1             3,499 
Issuance of shares under employment agreement                                         750,000                 750         3,749,250 
Issuance of shares under the 1989 Stock Plan                                           30,000                  30           149,970 
Amortization of deferred compensation, restricted stock                                  --                 --                --    
Net loss                                                                                 --                 --                --    
                                                                                -------------         -----------     ------------- 
Balance at July 31, 1989                                                            5,595,897               5,596        17,803,899 

Issuance of shares for legal and consulting services                                   52,463                  52           258,725 
Issuance of shares under the 1989 Stock Plan                                           56,000                  56           335,944 
Sale of shares for litigation settlement                                               50,000                  50           351,067 
Exercise of options at $3.00--$3.50 per share                                         105,989                 106           345,856 
Sale of shares to private investors                                                    89,480                  90           354,990 
Issuance of shares under employment agreement                                         750,000                 750         3,749,250 
Conversion of debentures at $5.00 per share                                           100,000                 100           499,900 
Amortization of deferred compensation, restricted stock                                  --                 --                --    
Net loss                                                                                 --                 --                --    
                                                                                -------------         -----------     ------------- 
Balance at July 31, 1990 (carried forward)                                          6,799,829               6,800        23,699,631 

<CAPTION>
                                                                                                        Deficit      
                                                                                                      accumulated    
                                                                                  Common                during      
                                                                                stock to be           development      Subscription 
                                                                                  issued                 stage          Receivable  
                                                                                -----------          -------------    ------------- 
<S>                                                                                   <C>            <C>                       <C>
Balance at July 31, 1986 (brought forward)                                            --              (7,198,714)              --   
                                                                                                     
Exercise of warrants at $10.00 per share                                              --                 --                    --   
Issuance of shares under stock bonus plan for directors and consultants               --                 --                    --   
Issuance of shares for services                                                       --                 --                    --   
Sale of shares to private investors, net                                              --                 --                    --   
Net loss                                                                              --              (2,604,619)              --   
                                                                                -----------          -------------    ------------- 
Balance at July 31, 1987                                                              --              (9,803,333)              --   
                                                                                                     
Issuance of shares for legal and consulting services                                  --                 --                    --   
Issuance of shares under employment incentive program                                 --                 --                    --   
Issuance of shares under stock grant program                                          --                 --                    --   
Exercise of options at $3.00 per share                                                --                 --                    --   
Issuance of shares for litigation settlement                                          --                 --                    --   
Exercise of warrants at $7.06 per share                                               --                 --                    --   
Sale of shares to private investors                                                   --                 --                    --   
Amortization of deferred compensation, restricted stock                               --                 --                    --   
Net loss                                                                              --              (3,272,773)              --   
                                                                                -----------          -------------    ------------- 
Balance at July 31, 1988                                                              --             (13,076,106)              --   
                                                                                                     
Sale of shares for litigation settlement                                              --                 --                    --   
Conversion of debentures at $3.00 per share                                           --                 --                    --   
Sale of shares to private investors                                                   --                 --                    --   
Exercise of options at $3.50 per share                                                --                 --                    --   
Issuance of shares under employment agreement                                         --                 --                    --   
Issuance of shares under the 1989 Stock Plan                                          --                 --                    --   
Amortization of deferred compensation, restricted stock                               --                 --                    --   
Net loss                                                                              --              (2,952,869)              --   
                                                                                -----------          -------------    ------------- 
Balance at July 31, 1989                                                              --             (16,028,975)              --   
                                                                                                     
Issuance of shares for legal and consulting services                                  --                 --                    --   
Issuance of shares under the 1989 Stock Plan                                          --                 --                    --   
Sale of shares for litigation settlement                                              --                 --                    --   
Exercise of options at $3.00--$3.50 per share                                         --                 --                    --   
Sale of shares to private investors                                                   --                 --                    --   
Issuance of shares under employment agreement                                         --                 --                    --   
Conversion of debentures at $5.00 per share                                           --                 --                    --   
Amortization of deferred compensation, restricted stock                               --                 --                    --   
Net loss                                                                              --              (4,860,116)              --   
                                                                                -----------          -------------    ------------- 
Balance at July 31, 1990 (carried forward)                                            --             (20,889,091)              --   

<CAPTION>
                                                                                   Deferred                             
                                                                                    compen-          Total stock-       
                                                                                    sation,            holders'         
                                                                                  restricted            equity          
                                                                                     stock           (deficiency)       
                                                                                ----------------    -------------
<S>                                                                                <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)
                                                                                
                                                                                                       (Continued)
</TABLE>


                                       F-8

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                                                          Common Stock                              
                                                                                ---------------------------------       Capital in  
                                                                                  Number of                            excess of par
                                                                                   Shares                Amount            value    
                                                                                -------------         -----------     ------------- 
<S>                                                                               <C>                      <C>          <C>     
Balance at July 31, 1990 (brought forward)                                          6,799,829               6,800        23,699,631 

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

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

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

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





<CAPTION>
                                                                                                        Deficit      
                                                                                                      accumulated    
                                                                                  Common                during      
                                                                                stock to be           development      Subscription 
                                                                                  issued                 stage          Receivable  
                                                                                -----------          -------------    ------------- 
<S>                                                                                <C>                <C>                    <C>
Balance at July 31, 1990 (brought forward)                                            --              (20,889,091)            --    

Exercise of options at $6.50 per share                                                --                     --               --    
Issuance of shares for legal consulting services                                      --                     --               --    
Issuance of shares under the 1989 Stock Plan                                          --                     --               --    
Amortization of deferred compensation, restricted stock                               --                     --               --    
Net loss                                                                              --               (5,202,302)            --    
                                                                                ----------------     -------------    -----------   
Balance at July 31, 1991                                                              --              (26,091,393)            --    

Exercise of options at $3.50 per share                                                --                     --               --    
Sale of shares to private investors                                                   --                     --               --    
Conversion of debentures at $5.00 per share                                           --                     --               --    
Issuance of shares for services                                                       --                     --               --    
Issuance of shares under the 1989 Stock Plan                                          --                     --               --    
Amortization of deferred compensation, restricted stock                               --                     --               --    
Net loss                                                                              --               (4,772,826)            --    
                                                                                ----------------     -------------    -----------   
Balance at July 31, 1992                                                              --              (30,864,219)            --    

Sale of share to private investors                                                    --                     --               --    
Issuance of shares for legal services                                                 --                     --               --    
Issuance of shares for services                                                       --                     --               --    
Issuance of shares under the 1989 Stock Plan                                          --                     --               --    
Amortization of deferred compensation, restricted stock                               --                     --               --    
Net loss                                                                              --               (2,357,350)            --    
                                                                                ----------------     -------------    -----------   
Balance at July 31, 1993                                                              --              (33,221,569)            --    

Conversion of debentures at $2.75 per share to $6.00 per share                        --                     --               --    
Sale of shares to private investors, net                                              --                     --               --    
Conversion of short-term borrowings                                                   --                     --               --    
Issuance of shares for services                                                       --                     --               --    
Issuance of shares under the 1989 Stock Plan, for services                            --                     --               --    
Issuance of options to related parties upon conversion of
  accrued interest, payroll and expenses                                              --                     --               --    
Repurchase of stock options from related party                                        --                     --               --    
Issuance of options upon conversion of accrued interest                               --                     --               --    
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)                                           50,000          (35,455,997)             --    

<CAPTION>
                                                                                   Deferred                             
                                                                                    compen-          Total stock-       
                                                                                    sation,            holders'         
                                                                                  restricted            equity          
                                                                                     stock           (deficiency)       
                                                                                ----------------    -------------
<S>                                                                                <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)

                                                                                                     (Continued)
</TABLE>


                                       F-9

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


            Statement of Stockholders' Equity (Deficiency), Continued


<TABLE>
<CAPTION>

                                                                                                                          Deficit   
                                                                    Common Stock                                        accumulated 
                                                          ---------------------------    Capital in       Common          during   
                                                            Number of                   excess of par   stock to be     development 
                                                             Shares         Amount         value          issued           stage    
                                                          ------------   ------------   ------------   ------------    ------------ 
<S>                                                        <C>           <C>            <C>            <C>             <C>          
Balance at July 31, 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)
                                                          ============   ============   ============   ============    ============ 
<CAPTION>

                                                                                Deferred                    
                                                                                compen-      Total stock-   
                                                                                sation,        holders'     
                                                             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
                                                             ============    ============    ============

                                                                                              (Continued)
</TABLE>


See accompanying notes to financial statements.

                                      F-10

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


                            Statements of Cash Flows


                    Years ended July 31, 1997, 1996 and 1995,
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 1997

<TABLE>
<CAPTION>
                                                                             August 24,
                                                                             1981 (date
                                                                              of incep-
                                                                              tion) to
                                                                              July 31,
                                                                                1997          1997           1996           1995
                                                                            ------------   -----------    -----------    ----------
<S>                                                                         <C>             <C>            <C>           <C>        
Cash flows from operating activities:
  Net loss                                                                  $(45,410,139)   (5,018,867)    (2,942,152)   (1,993,123)
  Adjustments to reconcile net loss to net cash used in
   operating activities:
     Gain on sale of marketable securities                                       (25,963)         --             --            --
     Depreciation and amortization                                             1,120,028        72,799         69,236        69,699
     Loss on disposal of property and equipment                                   18,926          --             --            --
     Noncash operating expenses                                                4,964,465        76,504        116,950         4,800
     Amortization of deferred compensation                                    11,442,000          --             --          58,500
     Amortization of organization costs                                            4,590          --             --            --
     Changes in assets and liabilities:
       (Increase) decrease  in loan receivable, related party                       --         112,250       (112,250)         --
       (Increase) decrease in prepaid expenses                                  (165,106)     (101,256)       (25,243)       30,060
       (Increase) decrease in other assets                                        36,184        31,877        (24,176)       39,877
       Increase (decrease) in loans and interest payable, related party          744,539          --         (138,638)      (65,085)
       Increase (decrease) in accounts payable                                   454,969       188,168          6,314      (152,538)
       Increase (decrease) in accrued payroll and expenses, related parties    2,348,145          --         (414,996)      256,731
       Increase in accrued expenses                                            1,235,354       531,628         60,436        48,944
                                                                            ------------   -----------    -----------    ----------
              Net cash used in operating
                activities                                                   (23,232,008)   (4,106,897)    (3,404,519)   (1,702,135)
                                                                            ------------   -----------    -----------    ----------

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                                     (1,293,946)     (252,066)       (45,693)      (31,879)
       Patent costs                                                              (97,841)         --             --            --
                                                                            ------------   -----------    -----------    ----------

                Net cash used in investing
                  activities                                                  (1,365,824)     (252,066)       (45,693)      (31,879)
                                                                            ------------   -----------    -----------    ----------

                                                                                                                         (Continued)
</TABLE>


                                      F-11

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)



                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                        August 24,
                                                                        1981 (date
                                                                         of incep-
                                                                         tion) to
                                                                         July 31,
                                                                           1997            1997            1996            1995
                                                                       ------------    ------------    ------------    ------------
<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                                          2,410,883           4,200          29,540          17,595
  Reduction of bank debt and long-term debt                              (1,528,137)        (92,578)       (153,947)        (89,827)
  Proceeds from common stock to be issued                                   433,358            --            44,350         339,008
  Proceeds from issuance of common stock, net                            22,172,561         504,000       8,605,484       1,974,202
  Proceeds from exercise of stock options and warrants, net               5,449,588       3,354,188       1,658,200         437,200
  Proceeds from issuance of convertible debentures                          347,000            --              --              --
                                                                       ------------    ------------    ------------    ------------
         Net cash provided by financing
         activities                                                      32,140,121       3,769,810      10,183,627       2,678,178
                                                                       ------------    ------------    ------------    ------------

         Net increase (decrease) in cash                                  7,542,289        (589,153)      6,733,415         944,164
Cash and cash equivalents at beginning of period                               --         8,131,442       1,398,027         453,863
                                                                       ------------    ------------    ------------    ------------

Cash and cash equivalents at end of period                             $  7,542,289       7,542,289       8,131,442       1,398,027
                                                                       ============    ============    ============    ============

Supplemental disclosure of cash flow information - interest paid       $  1,624,573         134,845         130,224         129,477
                                                                       ============    ============    ============    ============
Noncash financing activities:
  Issuance of convertible subordinated debenture for
           loan payable to officer                                     $  2,725,000            --              --              --
                                                                       ============    ============    ============    ============
  Issuance of common stock upon the conversion of convertible
          subordinated debentures, related party                       $  2,945,000            --              --              --
                                                                       ============    ============    ============    ============

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

                                                                                                                         (Continued)
</TABLE>


                                      F-12

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)



                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                               August 24,
                                                                               1981 (date
                                                                                of incep-
                                                                                tion) to
                                                                                July 31,
                                                                                  1997           1997          1996          1995
                                                                               ----------     ----------    ----------    ----------
<S>                                                                            <C>                 <C>          <C>           <C>   
  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          --           --             --
                                                                               ==========     ==========    ==========    ==========

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

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

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

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

See accompanying notes to financial statements.
                      



                                      F-13

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

                    Years ended July 31, 1997, 1996 and 1995
                       and the Period From August 24, 1981
                      (Date of Inception) to July 31, 1997

(1)  Summary of Significant Accounting Policies

     Business Description

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

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

     Basis of Financial Statements

     As shown in the financial  statements,  the Company has reported net losses
     of $5,018,867,  $2,942,152,  and $1,993,123 for the fiscal years ended July
     31, 1997,  1996 and 1995,  respectively.  The loss from date of  inception,
     August 24, 1981, to July 31, 1997 amounts to $45,410,139.

     The  Company's  continued  operations  will  depend on its ability to raise
     additional funds through several  potential  sources such as equity or debt
     financings, collaborative agreements, strategic alliances and revenues from
     the  commercial  sale of ONCONASE.  The Company  believes  that its current
     resources will be sufficient to meet its anticipated cash needs through the
     fiscal year ending July 31,  1998.  To date, a  significant  portion of the
     Company's financing has been through private placements of common stock and
     warrants  to  purchase  common  stock,  the  issuance  of common  stock for
     services  rendered,  debt financing and financing provided by the Company's
     Chief Executive Officer.

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

     Certain reclassifications to the prior year financial information were made
     to conform with the July 31, 1997 presentation.


                                                                     (Continued)
                                      F-14

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(1)  Summary of Significant Accounting Policies (Continued)

     Property and Equipment

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

     Patents

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

     Deferred Debt Costs

     Deferred debt costs associated with the Company's  long-term debt are being
     amortized  using  the  straight  line  method  over  the  life of the  debt
     agreement.  Accumulated  amortization  as of July  31,  1997  and  1996 was
     $156,394 and $137,588, respectively.

     Research and Development

     Research and development costs are expensed as incurred.

     Fair Value of Financial Instruments

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



                                                                     (Continued)
                                      F-15

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(1)  Summary of Significant Accounting Policies (Continued)

     Net Loss Per Share

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

     Long-Lived Assets

     Effective  August 1, 1996,  the  Company  adopted  Statement  of  Financial
     Accounting  Standards  ("SFAS") No. 121,  Accounting  for the Impairment of
     Long-Lived  Assets  and  for  Long-Lived  Assets  to  be  Disposed  Of.  In
     accordance  with SFAS No. 121, 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.  Adoption  of SFAS  No.  121 did not have a
     material impact on the Company's financial  position,  operating results or
     cash flows.

     Stock Option Plans

     Prior to August 1, 1996,  the Company  accounted for its stock option plans
     in accordance  with the  provisions of  Accounting  Principles  Board (APB)
     Opinion  No. 25,  Accounting  for Stock  Issued to  Employees,  and related
     interpretations.  As such,  compensation  expense  would be recorded on the
     date of grant only if the  current  market  price of the  underlying  stock
     exceeded the exercise  price.  On August 1, 1996, the Company  adopted SFAS
     No. 123, Accounting for Stock-Based Compensation, which permits entities to
     recognize  as  expense  over  the  vesting  period  the  fair  value of all
     stock-based awards on the date of grant.  Alternatively,  SFAS No. 123 also
     allows  entities to continue to apply the  provisions of APB Opinion No. 25
     and  provide  pro  forma  net  income  and pro  forma  earnings  per  share
     disclosures  for employee stock option grants as if the  fair-value  method
     defined  in SFAS No.  123 had been  applied.  The  Company  has  elected to
     continue  to apply the  provisions  of APB  Opinion  No. 25 and provide pro
     forma disclosure in accordance with the provisions of SFAS No. 123.

(2)  Property and Equipment

     Property and equipment consists of the following at July 31:


                                                      1997               1996
                                                   ----------         ----------
         Laboratory equipment                      $  702,481            593,408
         Office equipment                             271,866            169,871
         Leasehold improvements                        93,975             52,976
                                                   ----------         ----------
                                                   $1,068,322            816,255
                                                   ==========         ==========



                                                                     (Continued)
                                      F-16

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(3)  Long-term Debt

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

<TABLE>
<CAPTION>
                                                                          1997            1996
                                                                       ----------      ----------
<S>                                                                    <C>             <C>       
First Union National Bank, New Jersey, interest of 8.375%              $1,373,090      $1,453,290

Notes payable, interest at 6.3%-10.4%, maturing through
      June 1999, secured by equipment                                       2,916           4,822

Note  payable in monthly  installments of $729, including
      principal and interest commencing April 1996 and each month
      thereafter until May 2000, secured by equipment                      21,312          27,584
                                                                       ----------      ----------
                                                                        1,397,318       1,485,696
Less current portion                                                    1,381,416          86,936
                                                                       ----------      ----------
                                                                       $   15,902      $1,398,760
                                                                       ==========      ==========
</TABLE>

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


                          1998                           $1,381,416
                          1999                                9,175
                          2000                                6,727
                                                         ----------
                                                         $1,397,318
                                                         ==========

     On October 3, 1997, the entire principal balance of the term loan including
     accrued interest was paid in full in the amount of $1,376,646.

(4)  Loans Receivable, Related Party

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

(5)  Leases

     The Company leases its facility under a five-year  operating lease which is
     due to expire on December 31, 2001.  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 $76,000,  $66,000,  and
     $66,000 in 1997, 1996 and 1995, respectively.

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





                                                                     (Continued)
                                      F-17

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(5)  Leases, Continued

                                                   Operating
                                                     leases
                                                     ------
                             1998                  $   96,778
                             1999                     107,754
                             2000                     127,497
                             2001                     136,000
                             2002                      56,667

(6)  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  exercising  of the  warrants  amounted to
     $934,000.  Each common stock purchase  warrant was not detachable  from its
     common stock or  exercisable  until six months  after the issuance  date of
     January 17, 1983. Each warrant entitled the holder to purchase one share


                                                                     (Continued)
                                      F-18

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(6)  Stockholders' Equity (Continued)

     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.

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

     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.



                                                                     (Continued)
                                      F-19

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(6)  Stockholders' Equity (Continued)

     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.

     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.





                                                                     (Continued)
                                      F-20

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(6)  Stockholders' Equity (Continued)

     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.

     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 expire during fiscal 1998. The common stock and


                                                                     (Continued)
                                      F-21

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(6)  Stockholders' Equity (Continued)

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

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

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

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

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

     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.





                                                                     (Continued)
                                      F-22

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(6)  Stockholders' Equity (Continued)

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

     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.

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

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

     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 in the United States.  The Company recorded  research
     and development  expense of $48,604 which was the fair value on the date of
     issuance of that  portion of the stock  options  that had vested as of July
     31, 1997.


                                                                     (Continued)
                                      F-23

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(6)  Stockholders' Equity (Continued)

     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.

     On  September  9, 1997 the Company  filed an  amendment  to a  registration
     statement  previously  filed on June 16,  1997  for the  offer  and sale by
     certain  stockholders  of up to 4,232,577  shares of common stock. Of these
     shares (i) an  aggregate  of  2,936,010  shares  were issued to the private
     placement  investors  in the  private  placement  transactions  which  were
     completed during the period from March 1994 through June 1996 (the "Earlier
     Private Placements"), (ii) an aggregate of 698,251 shares are issuable upon
     exercise  of the  warrants  which  were  issued  to the  private  placement
     investors  in the Earlier  Private  Placements  and (iii) an  aggregate  of
     588,316  shares may be issued,  or have been issued,  upon  exercise of the
     options  which were issued to the option  holders in certain  other private
     transactions.  As of October 1997, the  Securities and Exchange  Commission
     had not declared this registration statement effective.

(7)  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,
     1995 and 1996:

<TABLE>
<CAPTION>
                                                       Warrants   Exercise Price     Expiration
                                                       --------   --------------     ----------

<S>                                                    <C>          <C>          <C>  
Sold in March 1994 Private Placement                     800,000      $5.00      3/21/97 to 6/21/97
                                                      ----------   -----------

Outstanding at July 31, 1994                             800,000       5.00      3/21/97 to 6/21/97

Sold in September 1994 Private Placement                 288,506       5.50      12/9/97 to 12/14/97
Sold in October 1994 Private Placement                    40,000       5.50      1/21/98
Sold in September 1995 Private Placement                  47,405       4.00      10/1/98
                                                      ----------   -----------

Outstanding and exercisable at July 31, 1995           1,175,911   4.00 - 5.50   3/21/97 to 10/1/98

Issued to bank in connection with an amendment to
 the Company's term loan                                  10,000       4.19      8/31/97
Sold in September 1995 Private Placement                   8,540       4.00      10/1/98
Sold in June 1996 Private Placement                      313,800       7.50      8/29/99 to 9/10/99
                                                      ----------   -----------

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




                                                                     (Continued)
                                      F-24

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(7)  Common Stock Warrants, Continued

<TABLE>
<CAPTION>
                                                                        Warrants        Exercise Price        Expiration
                                                                        --------        --------------        ----------
<S>                                                                       <C>           <C>              <C>  
          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
                                                                       ==========       ============
</TABLE>

(8)  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  Board of Directors  adopted the 1997 Stock Option Plan (the
     "Plan") in May 1997. The total number of shares of common stock  authorized
     for issuance upon exercise of options  granted under the Plan is 2,000,000.
     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, 1997  including  options issued under the 1997 and 1993
     stock option plans and the 1989 stock plan:


                                                              Weighted Average
                            Shares Available                 Exercise Price Per
                               for Grant          Shares           Share
                               ---------          ------           -----

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
                               ==========       ==========         =====


                                                                     (Continued)
                                      F-25

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)  Stock Options (Continued)

     The options  outstanding at July 31, 1997 will expire between  November 10,
     1997 and April 28, 2007.

     The weighted-average fair value per option at the date of grant for options
     granted  during  the  fiscal  years  1997 and 1996 were  $3.02  and  $2.67,
     respectively.  The fair value was estimated using the Black-Scholes options
     pricing model based on the following assumptions:


                                                       1997              1996
                                                       ----              ----

     Expected dividend yield                              0%               0%
     Risk-free interest rate                           6.00%            6.00%
     Expected stock price volatility                  59.78%           65.86%
     Expected term until exercise (years)              6.20             5.44

     Pro forma net loss and loss per share reflecting  approximate  compensation
     cost for the fair  value of stock  options  awarded in 1997 and 1996 are as
     follows:


                                                  1997                  1996
                                                  ----                  ----
       Net Loss:
           As reported                    $   (5,018,867)      $    (2,942,152)
           Pro forma                          (5,724,076)           (3,297,152)
       Loss per common share:
           As reported                    $        (0.34)      $         (0.25)
           Pro forma                               (0.39)                (0.28)

     The pro forma  effects on net loss and loss per share for 1997 and 1996 may
     not be  representative  of the pro  forma  effects  in future  years  since
     compensation  cost is allocated on a  straight-line  basis over the vesting
     periods of the grants, which extends beyond the reported years.

     The following table summarizes  information  concerning options outstanding
     at July 31, 1997:

<TABLE>
<CAPTION>
                                   Options Outstanding                                                      Options Exercisable
-------------------------------------------------------------------------------------------            -----------------------------
                                                 Weighted Average                                                          Weighted
                             Number                Remaining                    Weighted                  Number           Average
     Range of             Outstanding at         Contractual Term                Average               Exercisable at      Exercise
  Exercise Prices            7/31/97                (Years)                  Exercise Price               7/31/97           Price
-----------------            -------                -------                  --------------               -------           -----
<S>                         <C>                      <C>                         <C>                    <C>                  <C>   
$ 2.00 - 2.99                 297,600                 3.00                       $  2.58                  277,600            $ 2.59
  3.00 - 3.99               2,519,170                 3.88                          3.19                1,958,648              3.20
  4.00 - 4.99                 736,360                 4.32                          4.39                  413,523              4.39
  5.00 - 5.99                 286,250                 4.95                          5.10                  113,750              5.03
  6.00 - 6.99                  45,000                 5.42                          6.97                        0               --
                                                                                                                  
</TABLE>


                                                                     (Continued)
                                      F-26

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)  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:

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

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

<TABLE>
<CAPTION>
                                                                  Shares       Price Range
                                                                  ------       -----------
<S>                                                               <C>          <C>
         Granted (42,167 options were repriced and extended       894,887      $2.50-7.00
          as described in note 8)
         Exercised                                                (81,000)      3.97-6.50
         Expired                                                 (201,720)      3.97-6.50
                                                               ----------      ----------
         Balance at July 31, 1994                                 612,167       2.50-7.00
                                                               ==========      ==========
</TABLE>

     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  amount of
     shares of common  stock that could have been issued  pursuant to the option
     plan was 2,000,000.



                                                                     (Continued)
                                      F-27

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)  Stock Options (Continued)

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

     The stock option activity is as follows:

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

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

(9)  Stock Grant and Compensation Plans

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


          Year                                                        Amount
         ended                                      Fair                of
        July 31,               Shares               Value          Compensation
        --------               ------               -----          ------------
          1983                 20,000          $     5.50            $110,000
          1984                 19,750                5.125            101,219
          1985                 48,332             5.125-15.00         478,105
          1986                 11,250             5.125-15.00         107,032
          1988                 19,000          $     3.50            $  6,500
                               ======          ==============        ========

     On January 26, 1984,  the Company  adopted a stock bonus plan for directors
     and  consultants.  The plan was  amended on  October  6,  1986,  to reserve
     500,000  shares for  issuance  under the plan and to clarify a  requirement
     that 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:



                                                                     (Continued)
                                      F-28

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)  Stock Grant and Compensation Plans, Continued


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

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

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

     1989 Stock Plan

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

          1989                 30,000          $  5.00          $  150,000
          1990                 56,000             6.00             336,000
          1991                119,000             4.00             476,000
          1992                104,000             2.75             286,000
          1993                117,000             2.00             234,000
          1994                  5,000          $  3.00          $   15,000
                              =======          =======          ==========

     Compensation expense is recorded for the fair value of all stock awards and
     grants  over the  vesting  period.  The 1994  stock  award was  immediately
     vested. There were no stock awards in fiscal 1997, 1996 or 1995.

(10) Income Taxes

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


                                                                     (Continued)
                                      F-29

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(10) Income Taxes, Continued

     At July 31, 1997 and 1996,  the tax effects of temporary  differences  that
     give rise to the deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                                             1997               1996
                                                                         ------------       ------------
<S>                                                                      <C>                <C>         
       Deferred tax assets:
                Excess of book over tax depreciation                     $      4,112       $     23,141
                Accrued expenses                                              138,243              1,032
                Federal and state net operating loss carry forwards        10,187,188          8,988,988
                Research and experimentation and investment tax
                    credit carry forwards                                     443,064            479,287
                                                                         ------------       ------------
       Total gross deferred tax assets                                     10,772,607          9,492,448

       Valuation allowance                                                (10,772,607)        (9,492,448)
                                                                         ------------       ------------
       Net deferred tax assets                                           $       --         $       --
                                                                         ============       ============
</TABLE>


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

     At July 31, 1997, the Company has federal net operating loss carry forwards
     of  approximately  $27,700,000  that expire in the years 1998 to 2012.  The
     Company  also has  investment  tax credit  carry  forwards  of $51,634  and
     research and  experimentation  tax credit carry  forwards of $391,430  that
     expire in the years 1998 to 2012. Ultimate utilization/availability of such
     net  operating  losses and  credits  may be  significantly  curtailed  if a
     significant change in ownership occurs in accordance with the provisions of
     the Tax Reform Act of 1986.

(11) Other Financial Information

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


                                                          1997            1996
                                                        --------        --------
               Payroll and payroll taxes                $185,840        $ 90,347
               Interest                                     --            10,496
               Professional fees                         199,745          23,581
               Clinical trial grants                     290,887            --
               Other                                      17,369          37,789
                                                        --------        --------
                                                        $693,841        $162,213
                                                        ========        ========


                                                                     (Continued)
                                      F-30

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(11) Other Financial Information, Continued

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


                                                    1997                  1996
                                                  --------              --------

Insurance                                         $ 65,782              $ 31,092
NIH research                                        37,198                 4,824
Other                                               62,126                27,934
                                                  --------              --------
                                                  $165,106              $ 63,850
                                                  ========              ========

(12) Commitments and Contingencies

     On July 23, 1991,  the Board of Directors  authorized the Company to pay to
     the Chief  Executive  Officer of the Company an amount  equal to 15% of any
     gross  royalties  which may be paid to the Company from any license(s) with
     respect to the Company's principal product, ONCONASE, or any other products
     derived  from  amphibian  source  extract,  produced  either as a  natural,
     synthesized,  and/or  genetically  engineered drug for which the Company is
     the owner or  co-owner  of the  patents,  or  acquires  such  rights in the
     future,  for a period not to exceed the life of the patent.  If the Company
     manufactures and markets its own drugs, then the Company will pay an amount
     equal to 5% of gross  sales from any  products  sold during the life of the
     patents.  In  addition,  the  agreement  provides  for a  reduction  of any
     indebtedness to the Chief Executive  Officer in the amount of $200,000 upon
     the Company entering into a licensing agreement for its principal product.

     The  Company  has  product  liability  insurance  coverage in the amount of
     $6,000,000 for clinical trials. No product liability claims have been filed
     against the  Company.  If a claim arises and the Company is found liable in
     an amount  that  significantly  exceeds  the policy  limits,  it may have a
     material adverse effect upon the financial condition of the Company.

(13) Research and Development Agreement

     In November  1992,  the Company  entered  into a  Cooperative  Research and
     Development Agreement (CRADA) with the National Institutes of Health (NIH).
     In  accordance  with this  CRADA,  the NIH will  perform  research  for the
     Company on potential uses for its drug technology.  During the term of this
     research and  development  agreement,  which expires in January  1999,  the
     Company  is  obligated  to pay  approximately  $5,000 per month to the NIH.
     Total research and development  expenses under this arrangement amounted to
     $64,000,  $64,000,  and $43,000 during the years ended July 31, 1997, 1996,
     and 1995, respectively.

     In August 1995, the Company  entered into a CRADA with the National  Cancer
     Institute  (NCI).  In  accordance  with this  CRADA,  the NCI will  perform
     research for the Company on potential uses for its drug technology.  During
     the term of this  research  and  development  agreement,  which  expires in
     August 1998, the Company is obligated to pay approximately $4,825 per month
     to the NCI. Total research and development  expenses under this arrangement
     amounted to $58,000 during each of the fiscal years ended July 31, 1997 and
     1996.



                                      F-31