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, 1998                                            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. [X ]

     The aggregate  market value of the Common Stock, par value $.001 per share,
held by non-affiliates based upon the average of the high and low sale prices as
reported by the Nasdaq SmallCap Market on October 21, 1998 was $8,725,354. As of
October 21, 1998 there were 17,253,610  shares of Common Stock,  par value $.001
per share, outstanding.

     The Index to Exhibits appears on page 15.

                       Documents Incorporated by Reference

     The  registrant's  definitive  Proxy  Statement  for the Annual  Meeting of
Stockholders  scheduled  to be held on  January  21,  1999 to be filed  with the
Commission  not later than 120 days after the close of the  registrant's  fiscal
year ended July 31, 1998,  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

PART I                                                                      Page
                                                                            ----
     Item  1.   Business                                                       1

     Item  2.   Properties                                                     8

     Item  3.   Legal Proceedings                                              9

     Item  4.   Submission of Matters to a Vote of Security Holders            9

PART II

     Item  5.   Market for Common Equity and Related Stockholder Matters       9

     Item  6.   Selected Financial Data                                       10

     Item  7.   Management's Discussion and Analysis of Financial
                Condition and Results of Operations                           11

     Item  7A.  Quantitative and Qualitative Disclosure About Market Risk     14

     Item  8.   Financial Statements and Supplementary Data                   14

     Item  9.   Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosure                        14

PART III

     Item 10.   Directors and Executive Officers of the Registrant            15

     Item 11.   Executive Compensation                                        15

     Item 12.   Security Ownership of Certain Beneficial Owners
                and Management                                                15

     Item 13.   Certain Relationships and Related Transactions                15

PART IV

     Item 14.   Exhibits, Financial Statement Schedules, and
                Reports on Form 8-K                                           15


The  following  trademarks  appear  in  this  Annual  Report:   ONCONASE(R)  and
VIRONASE(R) are registered trademarks of Alfacell Corporation

                                       (i)

<PAGE>



                                     Part I

Item 1.  BUSINESS.

Overview

Alfacell  Corporation  ("Alfacell"  or  the  "Company")  is a  biopharmaceutical
company  organized  in  1981  and is  primarily  engaged  in the  discovery  and
development  of a new class of anti-cancer  drugs from  amphibian  ribonucleases
("RNases").  RNases degrade ribonucleic acids ("RNA") causing an interruption in
protein  synthesis  resulting  in  inhibition  of cell growth and  induction  of
apoptosis (programmed cell death). 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.

ONCONASE has been used to treat patients with advanced stages of solid tumors on
a weekly basis. Based upon Phase II clinical data, the most significant clinical
results to date with  ONCONASE  have been  observed  in  unresectable  malignant
mesothelioma,  advanced  pancreatic  cancer,  non-small  cell lung  cancer,  and
metastatic  breast cancer.  According to the American Cancer  Society,  in 1998,
approximately  365,100  people  in the  United  States  will be  diagnosed  with
pancreatic, lung, and breast cancer and approximately 232,500 will die.

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 June 1997, a Phase III clinical trial was initiated  comparing  ONCONASE as a
single  agent  to   doxorubicin   in  patients   with   unresectable   malignant
mesothelioma.  Unresectable  malignant  mesothelioma is a cancer often linked to
asbestos  exposure  and  afflicts  approximately   2,500-3,500   newly-diagnosed
patients in the U.S. each year.  The disease is often found in the lining of the
lungs  or  the  abdomen.   There  is   currently  no  standard   Food  and  Drug
Administration ("FDA") approved drug for this disease. In July 1998, the Company
discontinued  two Phase III clinical trials testing ONCONASE in combination with
tamoxifen in pancreatic  cancer.  This drug  combination  did not  demonstrate a
statistically significant survival benefit in this indication.

Alfacell has established two major scientific  collaborations  with the National
Institutes of Health (the "NIH"): i) in 1989, a collaboration  with the National
Institute of Neurological  Disorders and Stroke (the "NINDS") and ii) in 1992, a
collaboration with the National Cancer Institute (the "NCI"). Research primarily
focuses on ONCONASE mechanism of action studies,  in vivo synergisms of ONCONASE
with other anti-cancer  agents,  conjugates and other routes of  administration.
Alfacell has produced a modified  recombinant  version of ONCONASE which enables
other moieties to be attached to it. This has resulted in an ONCONASE  conjugate
produced by the NINDS being  developed for primary  brain  tumors.  The NINDS is
also in  preclinical  testing of  ONCONASE  as a single  agent in primary  brain
tumors.  The NCI  collaboration  has  produced a conjugate  of  ONCONASE  with a
monoclonal antibody which has demonstrated preclinical activity in Non-Hodgkin's
lymphoma.  Further  preclinical  testing  by the  NINDS  and NCI is  ongoing  in
preparation for commencing clinical trials.

The Company believes that ONCONASE may also be used as an anti-viral  agent. The
National  Institutes of Health has performed an  independent  in vitro screen of
ONCONASE  against the HIV virus type 1 ("HIV").  The results showed  ONCONASE to
inhibit  replication of HIV by up to 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  HIV  in  several   persistently   infected   human  cell  lines,
preferentially degrading viral RNA and cellular transfer RNA while not affecting
normal  cellular  ribosomal  RNA and  messenger  RNAs.  In  addition,  the NIH -
Division of AIDS found ONCONASE to have in vitro anti-viral  activity.  Although
the Company plans to conduct further research  concerning  anti-viral  activity,
there can be no assurance that ONCONASE will show any level of anti-HIV activity
in humans.

                                        1

<PAGE>



Beyond the  development  of ONCONASE,  Alfacell has also  discovered a series of
biologically  active  proteins from the same natural  source from which ONCONASE
was  isolated.  All of the  proteins  characterized  to date are  RNases.  These
proteins  appear to be involved in the  regulation  of both early  embryonic and
malignant cell growth. However, significant additional research and funding will
be required in order to develop them into therapeutics.

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 which demonstrated  potent anti-tumor  activity.  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.  The Company retains all commercial
rights to ONCONASE.

Postulated Mechanism of Action

Anti-Tumor Activity

Although the  mechanism of action of ONCONASE has not been fully  elucidated,  a
series of studies have been  performed  and the results  imply that ONCONASE has
several  mechanisms of action.  The enzymatic activity of ONCONASE appears to be
essential for its broad spectrum of biological activities. In the 9L glioma cell
system,  ONCONASE is able to induce a chain of events that lead to inhibition of
tumor cell proliferation and tumor cell destruction. ONCONASE:

                      binds to tumor cell surface receptors
                                        |
              becomes internalized by energy-dependent endocytosis
                                        |
                               reaches the cytosol
                                        |
       degrades various species of intracellular RNA (preferentially tRNA)
                                        |
                           inhibits protein synthesis
                                        |
         inhibits cell growth and proliferation (primarily blocking the
                          G1 phase of the cell cycle)
                                        |
 may induce tumor cell differentiation and/or programmed cell death (apoptosis)


                                        2

<PAGE>



The  inhibitory  effects of ONCONASE in the G1 phase of the cell cycle appear to
be due to its  inhibition of the  expression of cyclin D3 and an increase in the
expression of several  inhibitors of  cyclin-dependent  kinases ("CDKs") such as
p16INK4A,  p21WAF1,  p27KIP1  and  hypophosphorylated  form of pRb  protein,  as
demonstrated  in the human  U937  lymphoma  cell  line.  Inhibiting  cell  cycle
progression  in the G1 phase  prevents  cells from  entering  the  proliferative
DNA-synthetic  (S-phase) phase of the cell cycle. The parallel  ONCONASE-induced
cell differentiation and apoptosis observed in this model may reflect a shift in
growth  signal   transduction   pathways  from   primarily   anti-apoptotic   to
differentiation-inducing and pro-apoptotic.

Preclinical research

Preclinical  data to date have shown that  ONCONASE  has the  capacity  to enter
cancer cells and overcome  multiple drug  resistance  ("MDR") and is synergistic
with many other anti-cancer agents against numerous tumor cell lines.

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

Clinical Trials

ONCONASE has been tested as a single  agent in patients  with a variety of solid
tumors and in  combination  with  tamoxifen  in  prostate  cancer  and  advanced
pancreatic and renal cell carcinoma  patients.  In vitro results showed ONCONASE
to be synergistic  with  tamoxifen in inhibiting  tumor cell growth in the tumor
cell lines originating from these types of cancers.

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. Due
to its limited  funding,  the Company has had to be very  selective in designing
its Phase III  regulatory  strategy  for gaining FDA  approval.  Therefore,  the
selection  criteria  focused on those tumor types,  which in addition to showing
evidence of  preclinical  and  clinical  efficacy  that:  i) have small  patient
populations,  resulting in the number of patients treated in the Phase III study
being  small;  ii)  generally  cause  patients to die in less than one year from
diagnosis,  resulting in the duration of the study being two years or less,  and
iii) are life-threatening with limited competition. The two indications that met
all of the above criteria were advanced unresectable  malignant mesothelioma and
advanced pancreatic cancer.

In June 1997,  Alfacell  initiated a Phase III clinical  trial for  unresectable
malignant  mesothelioma  comparing  ONCONASE with  doxorubicin,  an FDA approved
chemotherapy.  No  standard  FDA  approved  therapy  exists to treat this deadly
cancer, and most advanced  unresectable  malignant  mesothelioma patients die of
progressive disease within 6-12 months of diagnosis.  The disease is often found
in the lining of the lungs or the abdomen.  Phase II clinical  trial results for
this indication 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.   In  July  1998,  the  Company
discontinued  two Phase III clinical trials testing ONCONASE in combination with
tamoxifen in pancreatic  cancer.  This drug  combination  did not  demonstrate a
statistically significant survival benefit in this indication.

Phase I/II clinical  studies testing  ONCONASE in combination  with tamoxifen in
prostate cancer and renal cell carcinoma have been completed.  Further  clinical
trials are warranted however, due to lack of resources, the Company is unable to
pursue additional studies in these two tumor types at this time.

                                        3

<PAGE>




Research and Development Programs

Research  and  development  expenses  for the fiscal  years ended July 31, 1998,
1997,  and  1996  were  $5,265,000,  $3,863,000  and  $2,189,000,  respectively.
Alfacell's research and development  programs focus primarily on the development
of therapeutics from amphibian ribonucleases.  These proteins have been shown to
be involved in the regulation of cell proliferation, maturation, differentiation
and  apoptosis.  Therefore,  they may be ideal  candidates  for  development  as
therapeutics,  such as treatments for cancer and other life-threatening diseases
(including  HIV  infections),  that  require  anti-proliferative  and  apoptotic
properties.

The following table outlines the various programs in the Company's  research and
development   portfolio.   Alfacell   is   pursuing   some  of  these   programs
independently, while others are being undertaken in collaboration with the NIH.

================================================================================
                Program                                  Indication
================================================================================
Cancer:
     ONCONASE(R) (ranpirnase)               Unresectable malignant mesothelioma 
                                              (lining of the lungs and abdomen)
     ONCONASE (1)                           Primary Brain Tumors
     AC-RD-3002 (2)                         Non-Hodgkin's Lymphoma ("NHL")
     AC-RD-3003 (1)                         Primary Brain Tumors
     Novel Amphibian Ribonucleases          Solid Tumors
     Proteasome Inhibitors                  Solid Tumors and NHL
================================================================================
Viral Disease:
     VIRONASE(R) (ranpirnase)               HIV Infection
================================================================================

(1)  In collaboration with the NIH - NINDS

(2)  In collaboration with the NIH - NCI

ONCONASE Conjugates and Fusion Proteins:  AC-RD-3002 and AC-RD-3003

In addition to use in its native form, ONCONASE is being conjugated to targeting
molecules to improve its specificity.  Several conjugates are being developed by
the  NIH  in  collaboration  with  Alfacell  scientists  and  have  demonstrated
significant activity. In addition,  several genes of ONCONASE,  its variants and
other amphibian ribonucleases are being synthesized for making fusion genes. The
Company intends to focus its efforts on developing novel therapeutics from these
genes that selectively  target specific  tumors.  Production of these engineered
genes may also lead to their use in gene therapy.

AC-RD-3002  is  comprised  of ONCONASE  conjugated  to an  anti-CD22  monoclonal
antibody  for  the  treatment  of  Non-Hodgkin's   Lymphoma.   The  Company,  in
collaboration  with the NCI,  is  developing  this  product.  AC-  RD-3002 is in
preclinical testing at the NCI.

AC-RD-3003  is a  recombinant  variant of ONCONASE  conjugated  to  transferrin.
Transferrin   receptors  tend  to  be  expressed  at  higher  concentrations  in
proliferating  cells,  such as tumor cells.  Studies have shown that transferrin
targets  malignant  glial  cells  on  primary  brain  tumors.  The  Company,  in
collaboration  with the NINDS,  is  developing  this  product.  AC-RD-3003 is in
preclinical testing at the NINDS. In preclinical studies performed by the NINDS,
ONCONASE as a single agent has shown activity in primary brain tumors.



                                        4

<PAGE>



Novel Amphibian Ribonucleases

In addition to ONCONASE,  Alfacell has isolated several other proteins from eggs
of the leopard frog (Rana pipiens).  All of the proteins  characterized  to date
are RNases.  RNases are enzymes that  catalyze  the  cleavage of  phosphodiester
bonds of RNAs. RNases mediate several important  biological  functions in nature
including regulation of angiogenesis, anti-viral and anti-parasitic defenses. In
addition to taking  advantage  of the natural  biological  functions  of RNases,
amphibian  ribonucleases  may be more  therapeutically  effective in humans than
mammalian  RNases as they do not appear to be inhibited by endogenous  mammalian
RNAs   inhibitors.    Therefore,   developing   amphibian   ribonucleases   into
therapeutics,  and thereby taking  advantage of the natural role of RNases,  may
result in a new  class of  compounds  for  anti-proliferative  diseases  such as
cancer  and AIDS.  The  Company  retains  all  commercial  rights  to  compounds
resulting from this program.

Proteasome Inhibitors

Cyclins  and CDKs are two  major  groups of  protein  regulators  of cell  cycle
progression.  Cancer can be defined as the uncontrolled growth and proliferation
of cells often  associated with a de-regulated  pattern of expression of cyclins
and  other  regulatory  proteins,  and the  deficient  elimination  of  cells by
apoptosis.  In vitro  studies of ONCONASE have shown its ability to perturb cell
cycle  progression  by  decreasing  expression  of cyclin  D3 and by  increasing
expression of several inhibitors of CDKs.

Cell growth and  viability  are  dependent  on the  function of the  proteasome.
Proteasomal  activity is necessary for cell growth by  regulating  the entry and
exit to and from the mitotic cycle  through  timely  degradation  of cyclins and
CDKs. Proteasome inhibitors interfere with normal proteasome function, resulting
in interruption of cell cycle progression and induction of apoptosis. Given that
ONCONASE  and  proteasome  inhibitors  have  both  shown in  vitro  to  modulate
fundamental  mechanisms  governing tumor cell growth,  proliferation  and death,
Alfacell  is testing  these two  classes of  compounds  in  combination  and has
discovered synergistic anti-tumor effects. The Company believes that a new class
of anti-cancer  compounds can be developed  combining  ONCONASE and its variants
with  proteasome  inhibitors.  The  Company  retains  all  commercial  rights to
compounds resulting from this program.

HIV Infection

The drugs currently approved in the United States for treatment of HIV infection
consist primarily of reverse  transcriptase  inhibitors and protease inhibitors.
There is an extremely  high rate of  resistance  developing  to several of these
currently  available  anti-viral  drugs,  primarily  due  to  the  exponentially
increasing  rate of  mutations  of HIV that  occur  during  infection.  In vitro
studies performed by independent scientific  collaborators  (including the NIH -
Division of AIDS) have demonstrated that ONCONASE,  (trademarked VIRONASE(R) for
anti-viral applications):

o    acts  directly  by  degrading  viral  genomic  RNA  prior  to  its  reverse
     transcription (during the pre-integration complex phase), and indirectly by
     degrading  the  tRNA(Lys3)  isoform  which  functions as a primer for viral
     reverse transcriptase;

o    degrades viral RNA of HIV-1  intracellularly,  with a dramatic reduction in
     the levels of viral transcripts which is sustained for 2-4 days;

o    inhibits replication of HIV-1 in a dose-dependent manner by up to 99.9%, as
     measured  by the p24 antigen  capture  assay,  in acutely and  persistently
     infected  cells,  at  concentrations  that are only minimally  cytotoxic to
     uninfected H9 cells;

o    was  found  to  have   highly   significant   anti-HIV   activity   in  the
     monocyte/macrophage system.


                                        5

<PAGE>



The Company  retains all  commercial  rights to  compounds  resulting  from this
program.  However, the Company does not currently possess the funds necessary to
conduct further research for this indication.

Raw Materials

The major  active  ingredient  derived  from  leopard  frog eggs is the protein,
ONCONASE.  Although Alfacell currently acquires its natural source material from
a single  supplier,  management  believes that it is abundantly  available  from
other sources.  The Company  believes it has sufficient 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.  There can be no assurance  that the Company  would be
able to find substitute  manufacturers,  if necessary.  The Company is dependent
upon its  contract  manufacturers  to comply  with cGMPs and to meet  production
requirements.   There  can  be  no  assurance   that  the   Company's   contract
manufacturers will comply with cGMPs or timely deliver sufficient  quantities of
the Company's products.

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.

                                        6

<PAGE>




As an initial step in the FDA regulatory  approval process,  preclinical 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  typically  involves  up to three  phases.  Data from  human  trials are
submitted  to the FDA in a New Drug  Application  ("NDA") or  Biologics  License
Application  ("BLA").  Preparing  an  NDA  or  BLA  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 and Trademarks

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 six U.S. Patents:

a)   U.S. Patent No.  4,888,172  issued in 1989,  which covers a  pharmaceutical
     produced from  fertilized  frog eggs (Rana pipiens) 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 and 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 pharmaceuticals.

d)   U.S. Patent No.  5,728,805 issued in 1998 which covers a family of variants
     of ONCONASE.

The Company owns three  European  patents,  which have been validated in certain
European  countries.  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. Additionally,  the Company owns
an undivided interest in two applications that are pending in the United States.
Each of these  applications  relate  to a  Subject  Invention  (as that  term is
defined in CRADAs to which the  Company and the NIH are  parties).  

The generic name for ONCONASE is ranpirnase. The Company has applied to register
the mark  VIRONASE in  anticipation  of the use of  ranpirnase  as an anti-viral
agent.

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.


                                        7

<PAGE>



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 required to sign  agreements  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 21, 1998, Alfacell employed seventeen persons, of whom twelve were
engaged  in  research  and  development  activities  and five  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.


                                        8

<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 traded on the Nasdaq  SmallCap  Market  ("Nasdaq")  since
December  5, 1996.  As of October  20,  1998,  there  were  approximately  1,498
stockholders of record of the Company's Common Stock.

In October 1998,  the Company  received a notice from Nasdaq that the price data
of the prior thirty consecutive trade dates of the Company's common stock failed
to meet the minimum Nasdaq SmallCap requirement of a $1.00 bid price. Alfacell's
common stock will be subject to delisting,  effective with the close of business
on January 6, 1999, if the Company is unable to demonstrate  compliance with the
minimum $1.00 bid price requirement on or before the end of January 6, 1999. The
Company is exploring alternatives that might allow its stock to remain listed on
Nasdaq but there can be no  assurance  that  Nasdaq  will allow such  listing to
continue if the common stock price does not trade above $1.00 bid.

The  following  table  sets  forth the range of high and low sale  prices of the
Common Stock  obtained  from Nasdaq for the two fiscal years ended July 31, 1998
and 1997.  These  prices  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, 1998:
           First Quarter                    4-5/8             3
           Second Quarter                   3-25/32           2-1/4
           Third Quarter                    4-1/2             2-1/4
           Fourth Quarter                   4-5/8               3/8
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

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.

Recent Sales of Unregistered Securities

In October 1997,  the Company  issued 75,000 stock options to a director with an
exercise price of $3.66 per share as payment for non-board  related  services to
be rendered.  These  options  will vest as follows  provided he has been serving
continuously on the Company's board of directors at the time of vesting:  10,000
vested  immediately;  10,000 after one full calendar year;  10,000  annually for
each of the following  three years;  and 25,000 on October 31, 2002. The vesting
and exercisability of the 25,000 options which vest in October 2002

                                        9

<PAGE>



may be accelerated  upon the good faith  determination of the Company's Board of
Directors   that  a   substantive   collaborative   agreement   with   a   major
pharmaceutical/biotechnology  company  was a  direct  result  of the  director's
efforts.

In March 1998,  the Company  issued  75,000 stock  options to a director with an
exercise price of $2.80 per share as payment for non-board  related  services to
be rendered.  These  options  will vest as follows  provided he has been serving
continuously on the Company's board of directors at the time of vesting:  10,000
vested  immediately;  10,000 after one full calendar year;  10,000  annually for
each of the following three years; and 25,000 on March 24, 2003. The vesting and
exercisability of the 25,000 options which vest in March 2003 may be accelerated
upon the good faith  determination  of the Company's  Board of Directors  that a
substantive  collaborative agreement and licensing or financing arrangement with
a  major  pharmaceutical/biotechnology  company  was  a  direct  result  of  the
director's efforts.

During  the  fiscal  year  ended  July 31,  1998,  4,950  warrants  received  in
connection  with  certain  private  placement  transactions  were  exercised  to
purchase  Common  Stock,  for  an  aggregate   consideration  of  $11,085.  This
transaction  was  consummated as a private sale pursuant to Section 4 (2) of the
Securities Act.

Item 6.  SELECTED FINANCIAL DATA.

Set forth  below is the  selected  financial  data for the  Company for the five
fiscal years ended July 31, 1998.


<TABLE>
<CAPTION>
Year Ended                                          July 31,
----------           -----------------------------------------------------------------------
                         1998           1997           1996           1995           1994
                     -----------    -----------    -----------    -----------    -----------
<S>                  <C>            <C>            <C>            <C>            <C>        
Revenue              $   311,822    $   442,572    $   184,250    $    20,992    $     6,064

Net Loss             $(6,387,506)   $(5,018,867)   $(2,942,152)   $(1,993,123)   $(2,234,428)

Net Loss Per Basic
and Diluted Share    $      (.40)   $      (.34)   $      (.25)   $      (.21)   $      (.26)

Dividends                   None           None           None           None           None

<CAPTION>
At Year End:                                        July 31,
------------         -----------------------------------------------------------------------
                         1998          1997           1996           1995           1994
                     -----------    -----------    -----------    -----------    -----------
<S>                  <C>            <C>            <C>            <C>            <C>        
Total Assets         $ 5,516,678    $ 8,034,954    $ 8,487,711    $ 1,616,170    $   779,763

Long-term            $     6,727    $    15,902    $ 1,398,760    $     7,129    $ 1,593,976
Obligations

Total Equity
(Deficiency)         $ 3,691,838    $ 5,566,091    $ 6,650,266    $  (832,566)   $(1,774,418)
</TABLE>


                                       10

<PAGE>



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

Overview

Alfacell  has  focused the  majority of its  resources  since  inception  on the
research  and  development  of  ONCONASE.  After it obtained  the results of its
preliminary  analysis  of the Phase III  clinical  trial  results  for  advanced
pancreatic   cancer,  the  Company  closed  the  pancreatic  cancer  trials  and
redirected  its  resources  towards  the  completion  of the  ongoing  Phase III
clinical trial for unresectable  malignant  mesothelioma.  The Company is now in
the process of  re-evaluating  its operations to conserve cash and to direct its
efforts  towards  the  rapid  completion  of the Phase  III  clinical  trial for
unresectable  malignant  mesothelioma.  The  Company is also  exploring  various
strategic alternatives for its business and research and development operations.

The Company is currently  funding  research and development of its products from
cash reserves.  The  termination  of the Phase III clinical  trials for advanced
pancreatic  cancer is expected to have a significant and  detrimental  impact on
the Company's  ability to raise additional  capital for future  operations.  See
"Management's Discussion and Analysis - Liquidity and Capital Resources."

Results of Operations

Fiscal Years Ended July 31, 1998, 1997 and 1996

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 1998,  1997
and 1996.  Investment  income for fiscal 1998 was $312,000  compared to $443,000
for fiscal 1997, a decrease of $131,000. This decrease was due to lower balances
of cash and cash  equivalents.  Investment  income for fiscal 1997 was  $443,000
compared to $184,000 for fiscal 1996, an increase of $259,000.

Research and Development

Research  and  development  expense for fiscal 1998 was  $5,265,000  compared to
$3,863,000  for fiscal 1997, an increase of $1,402,000 or 36%. This increase was
primarily due to a 74% increase in costs in support of on-going clinical trials,
including the Phase III clinical trials for pancreatic  cancer which were closed
in July 1998 and the Phase II and III clinical trials for unresectable malignant
mesothelioma,  a 42% increase in costs  related to the  manufacture  of clinical
supplies of ONCONASE and an 86% increase in expenses in  preparation  for an NDA
for ONCONASE, offset by a 5% decrease in personnel costs.

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 a 135%  increase  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 unresectable malignant mesothelioma, a 269%
increase in costs  associated with the purchase of raw materials for anticipated
future  production  of  ONCONASE,   a  394%  increase  in  regulatory  costs  in
preparation for an NDA for ONCONASE, and a 49% increase in personnel costs.


                                       11

<PAGE>



General and Administrative

General and  administrative  expense for fiscal 1998 was $1,413,000  compared to
$1,476,000  for fiscal  1997,  a decrease  of $63,000 or 4%. This  decrease  was
primarily due to a 28% decrease in personnel  costs and a 28% decrease in public
relations activities, offset by a 26% increase in legal costs and a 72% increase
in insurance expense.

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 an 84%  increase in personnel  costs,  a 34% increase in legal
fees,  a 139%  increase  in public  relations  expenses  and a 330%  increase in
insurance expense.

Interest

Interest  expense  for fiscal  1998 was  $22,000  compared to $123,000 in fiscal
1997,  a decrease of $101,000 or 82%.  The  decrease  was  primarily  due to the
payment of the entire  principal  amount of the Company's  Term Loan (as defined
herein) on October 3, 1997.

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.

Net Loss

The Company has incurred net losses  during each year since its  inception.  The
net loss for fiscal 1998 was $6,388,000 as compared to $5,019,000 in fiscal 1997
and $2,942,000 in fiscal 1996.  The cumulative  loss from the date of inception,
August 24,  1981,  to July 31,  1998  amounted to  $51,798,000.  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.

Year 2000

The Company is in the process of reviewing its business  systems,  including its
computer  systems and computer  controlled  equipment,  and is in the process of
querying  its  suppliers  and vendors as to their  progress in  identifying  and
addressing  problems that their systems may face in correctly  interpreting  and
processing date information as the Year 2000 approaches and is reached. Based on
this review, the Company has implemented a plan to achieve Year 2000 compliance.
While there may be other  areas that may affect the  Company's  operations  upon
commercialization  of the Company's products under development,  the Company has
identified  three  major areas where Year 2000  compliance  is critical  for the
normal functioning of the Company's  business:  Business and Accounting Computer
Systems, Clinical Data Management Systems and Product Manufacturing Systems.

Business and Accounting Computer Systems

The Company utilizes standard, widely-available software packages to perform its
word processing,  spreadsheet and accounting duties.  Preliminary inquiries have
revealed  that  software  upgrades  are or will be available to ensure Year 2000
compliance.  The Company expects to upgrade its Business and Accounting Computer
Systems by the third  quarter of 1999.  While there is no assurance at this time
that such  upgrades  will be Year 2000  compliant,  the Company does not believe
that  non-compliance  would have a material  effect on the  Company's  business.
Since the risks of  non-compliance  are  minimal,  the Company  does not plan to
create a contingency plan for these systems at this time.

                                       12

<PAGE>



Clinical Data Management Systems

The Company utilizes the services of an outside vendor to handle all of its data
management  needs with regard to collection  and reporting of its clinical trial
data. Two major software  systems are utilized to process the data, one of which
has been validated and is Year 2000 compliant.  The other system,  which handles
collection of the Company's  ongoing clinical trial data, is expected to be Year
2000 compliant  with some minor  modifications.  The vendor  believes that these
modifications  deal only with  display  and not  storage of the dates.  While it
appears that the computer  systems  utilized to process the  Company's  clinical
trial  data is or  will be Year  2000  compliant,  non-compliance  could  have a
material impact on the Company's  ability to process the data in a timely manner
for submission to the FDA, if necessary.  Since the likelihood of non-compliance
is minimal,  the Company  does not plan to create a  contingency  plan for these
systems at this time.

Product Manufacturing Systems

The Company utilizes the services of outside  suppliers to manufacture  ONCONASE
and  perform  many of the  FDA-required  related  testing of such  product.  The
Company has sent  written  requests to such  suppliers in an effort to determine
the status of Year 2000  compliance.  Responses  are expected  through the first
quarter of 1999.  The Company  will develop  contingency  plans,  if  necessary,
during  the  first  half of 1999 in  response  to  assessments  of the Year 2000
readiness of these suppliers.

Year 2000 Summary

The Company has determined that Year 2000 compliance  should not have a material
adverse  effect on the Company,  including  the Company's  financial  condition,
results of operations or cash flow.  The Company  estimates the cost of its Year
2000 efforts to be  approximately  $50,000.  The total cost estimate is based on
management's current assessment and is subject to change.

The Company may  encounter  problems  with  vendors  and  suppliers  which could
adversely  affect the Company's  financial  condition,  results of operations or
cash flow. The Company cannot  accurately  predict the occurrence and or outcome
of any  such  problems,  nor can the  cost of such  problems  be  estimated.  In
addition,  there  can be no  assurance  that the  failure  to  ensure  Year 2000
compliance by a third party would not have a material effect on the Company.

Liquidity and Capital Resources

During fiscal 1998, the Company had a net decrease in cash and cash  equivalents
of $2,443,000. This decrease resulted from net cash used in operating activities
of $5,200,000 and net cash used in investing activities of $75,000,  principally
due to the purchase of property and  equipment,  offset by the net cash provided
by financing  activities of $2,832,000,  primarily from the private placement of
common stock and warrants and proceeds from the exercise of warrants, reduced by
the payment of the entire  balance of the Company's term loan agreement with its
bank (the "Term Loan") and reduction of long-term debt.  Total cash resources as
of July 31, 1998 were $5,099,000 compared to $7,542,000 at July 31, 1997.

The Term Loan matured on August 31, 1997.  On October 3, 1997,  the Company paid
the entire loan balance, including accrued interest, in the amount of $1,376,646
out of its cash resources. This is the primary reason for a $635,000 decrease in
current  liabilities as of July 31, 1998 compared to July 31, 1997,  offset by a
$399,000  increase in the Company's  accrued expenses and a $338,000 increase in
accounts  payable,  primarily  due to increased  patient  enrollment in on-going
clinical trials, increased costs related to the manufacture of clinical supplies
of  ONCONASE  and  increased  regulatory  costs  in  preparation  of an NDA  for
ONCONASE.


                                       13

<PAGE>



Until the Company's operations generate significant revenues, cash reserves will
continue to fund  operations.  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. Based
upon reduced  spending levels as described  below, the Company believes that its
cash and cash  equivalents  as of July 31, 1998 will be  sufficient  to meet its
anticipated  cash needs  through the fiscal year ending July 31, 1999.  However,
there  can be no  assurance  that  the  Company  will be  able  to  successfully
implement the reduced spending measures. The report of the Company's independent
auditors on the  Company's  financial  statements,  included  elsewhere  herein,
includes an  explanatory  paragraph  which states that the  Company's  recurring
losses and limited liquid resources raise  substantial doubt about the Company's
ability to continue as a going concern.  The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

The Company is currently taking steps to significantly reduce the amount of cash
used to fund ongoing  operations.  These steps include  postponement  of certain
clinical  and  regulatory  costs  associated  with  preparation  of an  NDA  for
ONCONASE,  closing  its Phase III  program for  advanced  pancreatic  cancer and
postponement of planned  clinical trials for ONCONASE in indications  other than
unresectable  malignant  mesothelioma.  The Company's continued  operations will
depend  on its  ability  to raise  additional  funds  through  various  sources,
including collaborative agreements or strategic alliances. However, there can be
no assurance that such additional funds will become available.  The Company does
not  anticipate  it will be able to  raise  additional  capital  through  equity
markets in the near future because of the  termination of its Phase III clinical
trials for pancreatic  cancer.  Over the longer term, the ability of the Company
to raise additional capital through the sale of its securities will primarily be
dependent  on the  outcome  of the Phase  III  clinical  trial for  unresectable
malignant  mesothelioma.  However, the ability to raise funding at that time may
be dependent upon other factors including without  limitation market conditions,
and there can be no  assurance  that such funds will be  available.  Preliminary
results of the Phase III trial are  expected in the second  calendar  quarter of
1999. The Company is currently exploring various strategic  alternatives for its
business and research and development operations.

The market price of the Company's common stock is volatile, and the price of the
stock could be  dramatically  affected one way or another  depending on numerous
factors.   Following  the  Company's  announcement  on  July  15,  1998  of  the
termination of the Phase III clinical trials for pancreatic cancer, the price of
the Company's stock price dropped by approximately 70 percent.  The market price
of the Company's  common stock could also be materially  affected by the results
of the Phase III clinical trial for unresectable malignant mesothelioma.

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, 1998 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

                                       14

<PAGE>



any  subsequent  review  procedures  with respect to such  report.  Accordingly,
investors will be barred from  asserting  claims against AHC under Section 11 of
the  Securities  Act on the basis of the use of such report in any  registration
statement 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 regard 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 1998 Annual  Meeting of
Shareholders.

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 1998 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 1998 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
1998 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).



                                       15

<PAGE>





                                                                    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                          #

3.4     Amendment to Certificate of Incorporation                         +++

4.1     Form of Convertible Debenture                                      **

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

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

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

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

10.5    1993 Stock Option Plan and Form of Option  Agreement             *****

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

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

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

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

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

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

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

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

10.15   1997 Stock Option Plan                                            ###

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

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

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

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

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.

                                       16

<PAGE>



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

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

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

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

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

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

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

#      Previously  filed as  exhibits  to the  Company's  Annual  Report on Form
       10-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.

(b)  Reports on Form 8-K.

     On July 15,  1998 the  Company  filed a report on Form 8-K  which  reported
     under Item 5 thereof that preliminary  analyses of the Company's randomized
     Phase III trials for ONCONASE in  pancreatic  cancer did not  demonstrate a
     survival  benefit  over  GEMZAR or  5-fluorouracil  (5-FU).  Based upon the
     results of the pancreatic  cancer trials,  the Company has closed its Phase
     III  program  for  pancreatic  cancer  and  will  not be  filing a New Drug
     Application for this indication.




                                       17

<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, 1998        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, 1998             /s/ KUSLIMA SHOGEN
                                     -------------------------------------------
                                     Kuslima Shogen, Chief Executive Officer 
                                     (Principal Executive Officer) and Chairman
                                     of the Board


Dated:  October 29, 1998             /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, 1998             /s/ STANISLAW M. MIKULSKI
                                     -------------------------------------------
                                     Stanislaw M. Mikulski, M.D., Executive Vice
                                     President and Director


Dated:  October 29, 1998             /s/ STEPHEN K. CARTER
                                     -------------------------------------------
                                     Stephen K. Carter, M.D., Director


Dated:  October 29, 1998             /s/ DONALD R. CONKLIN
                                     -------------------------------------------
                                     Donald R. Conklin, Director


Dated:  October 29, 1998             /s/ MARTIN F. STADLER
                                     -------------------------------------------
                                     Martin F. Stadler, Director





                                       18

<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, 1998 and 1997 ........................    F-5
        Statements of Operations - Years ended July 31, 1998, 1997
          and 1996 and the Period from August 24, 1981 (Date of
          Inception) to July 31, 1998 ..................................    F-6
        Statement of Stockholders' Equity (Deficiency) - Period from
         August 24, 1981 (Date of Inception) to July 31, 1998 ..........    F-7
        Statements of Cash Flows - Years ended July 31, 1998, 1997
         and 1996 and the Period from August 24, 1981 (Date of
         Inception) to July 31, 1998 ...................................    F-11
        Notes to Financial Statements - Years ended July 31, 1998,
         1997 and 1996 and the Period from August 24, 1981
         (Date of Inception) to July 31, 1998 ..........................    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,  1998  and  1997,  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, 1998 and the period
from August 24,  1981 (date of  inception)  to July 31,  1998.  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,  1998 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, 1998 and 1997, and the results of its
operations  and its cash  flows for each of the years in the  three-year  period
ended July 31, 1998 and the period from August 24, 1981 (date of  inception)  to
July 31, 1998 in conformity with generally accepted accounting principles.

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



                                                       /s/ KPMG PEAT MARWICK LLP
                                                       KPMG Peat Marwick LLP

Short Hills, New Jersey
October 7, 1998

                                       F-2

<PAGE>

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

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

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

                         REPORT OF INDEPENDENT AUDITORS


Board of Directors
Alfacell Corporation
Bloomfield, New Jersey

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

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

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



                                       F-3

<PAGE>



The  accompanying  financial  statements  have been  prepared on a going concern
basis which  contemplates  the  realization  of assets and the  satisfaction  of
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, 1998 and 1997


<TABLE>
<CAPTION>
                                     ASSETS                                        1998            1997
                                                                               ------------    ------------
<S>                                                                            <C>             <C>
Current assets:
           Cash and cash equivalents                                           $  5,099,453    $  7,542,289
           Prepaid expenses                                                         117,187         165,106
                                                                               ------------    ------------
                     Total current assets                                         5,216,640       7,707,395
Property and equipment, net of accumulated depreciation and
  amortization of $843,599 in 1998 and $742,319 in 1997                             300,038         326,003
Deferred debt costs, net                                                               --             1,556
                                                                               ------------    ------------

                     Total assets                                              $  5,516,678    $  8,034,954
                                                                               ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:
           Current portion of long-term debt                                   $      9,175    $  1,381,416
           Accounts payable                                                         716,040         377,704
           Accrued expenses                                                       1,092,898         693,841
                                                                               ------------    ------------
                     Total current liabilities                                    1,818,113       2,452,961

Long-term debt, less current portion                                                  6,727          15,902
                                                                               ------------    ------------
                     Total liabilities                                            1,824,840       2,468,863
                                                                               ------------    ------------


Commitments and contingencies 
Stockholders' equity:
           Preferred stock, $.001 par value.  Authorized and unissued,
              1,000,000 shares at July 31, 1998 and 1997                               --              --
           Common stock $.001 par value.  Authorized 40,000,000 shares
              and 25,000,000 shares at July 31, 1998 and 1997, respectively;
              issued and outstanding 17,239,893 shares and 14,847,793
              shares at July 31, 1998 and 1997, respectively                         17,240          14,848
           Capital in excess of par value                                        55,472,243      50,961,382
           Deficit accumulated during development stage                         (51,797,645)    (45,410,139)
                                                                               ------------    ------------
                     Total stockholders' equity                                   3,691,838       5,566,091
                                                                               ------------    ------------

                     Total liabilities and stockholders' equity                $  5,516,678    $  8,034,954
                                                                               ============    ============
</TABLE>

See accompanying notes to financial statements.


                                       F-5

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)


                            Statements of Operations

                    Years ended July 31, 1998, 1997 and 1996,
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 1998

<TABLE>
<CAPTION>
                                          August 24,     
                                             1981        
                                          (date of       
                                          inception)     
                                             to
                                          July 31,
                                            1998            1998            1997            1996
                                        ------------    ------------    ------------    ------------
<S>                                     <C>                <C>             <C>             <C>
Revenues:
           Sales                        $    553,489            --              --              --
           Investment income               1,139,648         311,822         442,572         184,250
           Other income                       60,103            --              --              --
                                        ------------    ------------    ------------    ------------
                                           1,753,240         311,822         442,572         184,250
                                        ------------    ------------    ------------    ------------

Costs and expenses:
           Cost of sales                     336,495            --              --              --
           Research and development       31,686,684       5,264,578       3,862,716       2,188,890
           General and administrative     18,594,374       1,412,968       1,475,624         806,962
           Interest:
             Related parties               1,033,960            --              --             1,801
             Others                        1,899,372          21,782         123,099         128,749
                                        ------------    ------------    ------------    ------------
                                          53,550,885       6,699,328       5,461,439       3,126,402
                                        ------------    ------------    ------------    ------------

                      Net loss          $(51,797,645)     (6,387,506)     (5,018,867)     (2,942,152)
                                        ============    ============    ============    ============

           Loss per basic and diluted
              common share              $      (7.97)          (0.40)          (0.34)          (0.25)
                                        ============    ============    ============    ============

Weighted average number of shares
   outstanding                             6,496,000      15,926,000      14,597,000      11,969,000
                                        ============    ============    ============    ============
</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, 1998

<TABLE>
<CAPTION>
                                                                           Common Stock
                                                                      ---------------------------       Capital in        Common
                                                                       Number of                       excess of par     stock to be
                                                                        Shares           Amount           value            issued   
                                                                      ----------       ----------       ----------       ----------
<S>                                                                   <C>              <C>               <C>                   <C>
Issuance of shares to officers and stockholders for
   equipment, research and  development, and expense reimbursement       712,500       $      713          212,987             --   
Issuance of shares for organizational legal 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                           Deferred       
                                                                     accumulated                          compen-         Total
                                                                       during                             sation,      stockholders'
                                                                     development      Subscription      restricted        equity
                                                                        stage          Receivable         stock        (deficiency)
                                                                      ----------       ----------       ----------     -----------
<S>                                                                   <C>                      <C>             <C>        <C>
Issuance of shares to officers and stockholders for
   equipment, research and  development, and expense reimbursement            --               --              --          213,700
Issuance of shares for organizational legal services                          --               --              --            5,000
Sale of shares for cash, net                                                  --               --              --          108,500
Adjustment for 3 for 2 stock split declared September 8, 1982                 --               --              --             --
Net loss                                                                  (121,486)            --              --         (121,486)
                                                                        ----------       ----------      ----------     ----------
Balance at July 31, 1982                                                  (121,486)            --              --          205,714

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

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

Issuance of shares under stock grant program                                  --               --              --          478,105
Issuance of shares under stock bonus plan
   for directors and consultants                                              --               --              --          879,478
Shares canceled                                                               --               --              --         (105,825)
Exercise of warrants, net                                                     --               --              --        1,971,347
Net loss                                                                (2,958,846)            --              --       (2,958,846)
                                                                        ----------       ----------      ----------     ----------
Balance at July 31, 1985                                                (5,060,109)            --              --        1,388,506

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


                                                                     (Continued)

                                       F-7

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

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

Exercise of warrants 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                           Deferred       
                                                             accumulated                          compen-            Total
                                                               during                             sation,         stockholders'
                                                             development      Subscription      restricted           equity
                                                                stage          Receivable         stock           (deficiency)
                                                             -----------       -----------      -----------       -----------
<S>                                                          <C>                      <C>        <C>              <C>
Balance at July 31, 1986 (brought forward)                    (7,198,714)             --               --            (346,669)

Exercise of warrants at $10.00 per share                            --                --               --             147,450
Issuance of shares under stock bonus plan
   for directors and consultants                                    --                --               --              75,000
Issuance of shares for services                                     --                --               --             500,000
Sale of shares to private investors, net                            --                --               --              25,000
Net loss                                                      (2,604,619)             --               --          (2,604,619)
                                                             -----------       -----------      -----------       -----------
Balance at July 31, 1987                                      (9,803,333)             --               --          (2,203,838)

Issuance of shares for legal and consulting services                --                --               --             724,487
Issuance of shares under employment incentive program               --                --         (2,450,000)             --
Issuance of shares under stock grant program                        --                --               --              66,500
Exercise of options at $3.00 per share                              --                --               --             510,000
Issuance of shares for litigation settlement                        --                --               --              31,137
Exercise of warrants at $7.06 per share                             --                --               --             451,405
Sale of shares to private investors                                 --                --               --             178,133
Amortization of deferred compensation, restricted stock             --                --            449,167           449,167
Net loss                                                      (3,272,773)             --               --          (3,272,773)
                                                             -----------       -----------      -----------       -----------
Balance at July 31, 1988                                     (13,076,106)             --         (2,000,833)       (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)             --               --          (2,952,869)
                                                             -----------       -----------      -----------       -----------
Balance at July 31, 1989                                     (16,028,975)             --         (4,850,077)       (3,069,557)

Issuance of shares for legal and consulting services                --                --               --             258,777
Issuance of shares under the 1989 Stock Plan                        --                --           (336,000)             --
Sale of shares for litigation settlement                            --                --               --             351,117
Exercise of options at $3.00 - $3.50 per share                      --                --               --             345,962
Sale of shares to private investors                                 --                --               --             355,080
Issuance of shares under employment agreement                       --                --         (3,750,000)             --
Conversion of debentures at $5.00 per share                         --                --               --             500,000
Amortization of deferred compensation, restricted stock             --                --          3,015,561         3,015,561
Net loss                                                      (4,860,116)             --               --          (4,860,116)
                                                             -----------       -----------      -----------       -----------
Balance at July 31, 1990 (carried forward)                   (20,889,091)             --         (5,920,516)       (3,103,176)
</TABLE>


                                       F-8
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

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

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

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

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

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

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

Exercise of options at $6.50 per share                                       --               --              --          108,680
Issuance of shares for legal consulting services                             --               --              --          358,714
Issuance of shares under the 1989 Stock Plan                                 --               --          (476,000)          --
Amortization of deferred compensation, restricted stock                      --               --         2,891,561      2,891,561
Net loss                                                               (5,202,302)            --              --       (5,202,302)
                                                                       ----------       ----------      ----------     ----------
Balance at July 31, 1991                                               (26,091,393)           --        (3,504,955)    (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)            --              --       (4,772,826)
                                                                       ----------       ----------      ----------     ----------
Balance at July 31, 1992                                               (30,864,219)           --          (744,229)    (5,822,233)

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

Conversion of debentures at $2.75 per share to $6.00 per share               --               --              --        1,702,000
Sale of shares to private investors, net                                     --               --              --        1,710,791
Conversion of short-term borrowings                                          --               --              --          182,000
Issuance of shares for services                                              --               --              --           43,350
Issuance of shares under the 1989 Stock Plan, for services                   --               --              --           15,000
Issuance of options to related parties upon conversion of
  accrued interest, payroll and expenses                                     --               --              --        3,194,969
Repurchase of stock options from related party                               --               --              --         (198,417)
Issuance of options upon conversion of accrued interest                      --               --              --          142,441
Common stock to be issued                                                    --               --              --           50,000
Amortization of deferred compensation, restricted stock                      --               --           265,000        265,000
Net loss                                                               (2,234,428)            --              --       (2,234,428)
                                                                       ----------       ----------      ----------     ----------
Balance at July 31, 1994 (carried forward)                             (35,455,997)           --           (58,500)    (1,774,418)
</TABLE>

                                                                     (Continued)

                                       F-9
<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                                              Common Stock
                                                                        --------------------------      Capital in        Common
                                                                         Number of                     excess of par     stock to be
                                                                          Shares          Amount          value            issued   
                                                                        ----------      ----------      ----------       ----------
<S>                                                                      <C>            <C>             <C>                    <C>
Balance at July 31, 1994 (brought forward)                               9,124,681      $    9,125      33,680,954          50,000

Sale of shares to private investors, net                                   961,000             961       2,023,241         (50,000)
Conversion of short-term borrowings                                         17,600              17          43,983            --   
Issuance of shares for services                                             30,906              31          77,234            --   
Exercise of options at $2.27 - $2.50 per share                             185,000             185         437,015            --   
Common stock to be issued                                                     --              --              --           339,008
Common stock to be issued, for services                                       --              --              --             4,800
Amortization of deferred compensation, restricted stock                       --              --              --              --   
Net loss                                                                      --              --              --              --   
                                                                        ----------      ----------      ----------      ----------
Balance at July 31, 1995                                                10,319,187          10,319      36,262,427         343,808

Sale of shares to private investors, net                                 2,953,327           2,953       8,969,655        (339,008)
Issuance of shares for services                                             19,995              20          70,858          (4,800)
Exercise of options at $2.50 - $3.87 per share                             566,700             567       1,657,633            --   
Sale of warrants                                                              --              --            12,084            --   
Issuance of options/warrants for services                                     --              --            50,872            --   
Common stock to be issued                                                     --              --              --           258,335
Subscription receivable                                                       --              --              --              --   
Net loss                                                                      --              --              --              --   
                                                                        ----------      ----------      ----------      ----------
Balance at July 31, 1996                                                13,859,209          13,859      47,023,529         258,335

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                                                                      --              --              --              --   
                                                                        ----------      ----------      ----------      ----------
Balance at July 31, 1997                                                14,847,793          14,848      $50,961,382           --   

Sale of shares to private investors, net                                 2,337,150           2,337       4,199,877            --   
Issuance of options for services                                              --              --           199,954            --   
Exercise of warrants at $2.20 - $2.50 per share                              4,950               5          11,080            --   
Issuance of shares for services                                             50,000              50          99,950            --   
Net loss                                                                      --              --              --              --   
                                                                        ----------      ----------      ----------      ----------
Balance at July 31, 1998                                                17,239,893      $   17,240      $55,472,243     $     --   
                                                                        ==========      ==========      ==========      ==========

<CAPTION>
                                                                 Deficit                              Deferred       
                                                               accumulated                            compen-             Total
                                                                 during                               sation,          stockholders'
                                                               development       Subscription        restricted           equity
                                                                  stage           Receivable           stock           (deficiency)
                                                              ------------       ------------       ------------       ------------
<S>                                                            <C>                <C>                <C>                <C>
Balance at July 31, 1994 (brought forward)                     (35,455,997)              --              (58,500)        (1,774,418)

Sale of shares to private investors, net                              --                 --                 --            1,974,202
Conversion of short-term borrowings                                   --                 --                 --               44,000
Issuance of shares for services                                       --                 --                 --               77,265
Exercise of options at $2.27 - $2.50 per share                        --                 --                 --              437,200
Common stock to be issued                                             --                 --                 --              339,008
Common stock to be issued, for services                               --                 --                 --                4,800
Amortization of deferred compensation, restricted stock               --                 --               58,500             58,500
Net loss                                                        (1,993,123)              --                 --           (1,993,123)
                                                              ------------       ------------       ------------       ------------
Balance at July 31, 1995                                       (37,449,120)              --                 --             (832,566)

Sale of shares to private investors, net                              --                 --                 --            8,633,600
Issuance of shares for services                                       --                 --                 --               66,078
Exercise of options at $2.50 - $3.87 per share                        --                 --                 --            1,658,200
Sale of warrants                                                      --                 --                 --               12,084
Issuance of options/warrants for services                             --                 --                 --               50,872
Common stock to be issued                                             --                 --                 --              258,335
Subscription receivable                                               --             (254,185)              --             (254,185)
Net loss                                                        (2,942,152)              --                 --           (2,942,152)
                                                              ------------       ------------       ------------       ------------
Balance at July 31, 1996                                       (40,391,272)          (254,185)              --            6,650,266

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)              --                 --           (5,018,867)
                                                              ------------       ------------       ------------       ------------
Balance at July 31, 1997                                       (45,410,139)              --                 --            5,566,091

Sale of shares to private investors, net                              --                 --                 --            4,202,214
Issuance of options for services                                      --                 --                 --              199,954
Exercise of warrants at $2.20 - $2.50 per share                       --                 --                 --               11,085
Issuance of shares for services                                       --                 --                 --              100,000
Net loss                                                        (6,387,506)              --                 --           (6,387,506)
                                                              ------------       ------------       ------------       ------------
Balance at July 31, 1998                                      $(51,797,645)      $       --         $       --         $  3,691,838
                                                              ============       ============       ============       ============
</TABLE>

See accompanying notes to financial statements.


                                      F-10
<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                            Statements of Cash Flows

                         Years ended July 31, 1998, 1997
                          and 1996, and the Period from
                                 August 24, 1981
                      (Date of Inception) to July 31, 1998

<TABLE>
<CAPTION>
                                                                     August 24,          
                                                                     1981 (date          
                                                                     of incep-           
                                                                      tion) to           
                                                                      July 31,           
                                                                        1998             1998             1997             1996
                                                                    ------------     ------------     ------------     ------------
<S>                                                                 <C>                <C>              <C>              <C>        
Cash flows from operating activities:
  Net loss                                                          $(51,797,645)      (6,387,506)      (5,018,867)      (2,942,152)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
       Gain on sale of marketable securities                             (25,963)            --               --               --
       Depreciation and amortization                                   1,222,864          102,836           72,799           69,236
       Loss on disposal of property and equipment                         18,926             --               --               --
       Noncash operating expenses                                      5,164,419          199,954           76,504          116,950
       Amortization of deferred compensation                          11,442,000             --               --               --
       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                        (117,187)          47,919         (101,256)         (25,243)
         (Increase) decrease in other assets                              36,184             --             31,877          (24,176)
         Increase (decrease) in loans and
           interest payable, related party                               744,539             --               --           (138,638)
         Increase in accounts payable                                    893,305          438,336          188,168            6,314
         Increase (decrease) in accrued payroll
           and expenses, related parties                               2,348,145             --               --           (414,996)
         Increase in accrued expenses                                  1,634,411          399,057          531,628           60,436
                                                                    ------------     ------------     ------------     ------------
             Net cash used in operating
               activities                                            (28,431,412)      (5,199,404)      (4,106,897)      (3,404,519)
                                                                    ------------     ------------     ------------     ------------

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                             (1,369,261)         (75,315)        (252,066)         (45,693)
       Patent costs                                                      (97,841)            --               --               --
                                                                    ------------     ------------     ------------     ------------

             Net cash used in investing
               activities                                             (1,441,139)         (75,315)        (252,066)         (45,693)
                                                                    ------------     ------------     ------------     ------------
</TABLE>

                                                                     (Continued)


                                      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,           
                                                                        1998             1998             1997             1996
                                                                    ------------     ------------     ------------     ------------
<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
  Reduction of bank debt and long-term debt                           (2,909,553)      (1,381,416)         (92,578)        (153,947)
  Proceeds from common stock to be issued                                433,358             --               --             44,350
  Proceeds from issuance of common stock, net                         26,374,775        4,202,214          504,000        8,605,484
  Proceeds from exercise of stock options and warrants, net            5,460,673           11,085        3,354,188        1,658,200
  Proceeds from issuance of convertible debentures                       347,000             --               --               --
                                                                    ------------     ------------     ------------     ------------
       Net cash provided by financing
       activities                                                     34,972,004        2,831,883        3,769,810       10,183,627
                                                                    ------------     ------------     ------------     ------------

       Net increase (decrease) in cash and cash equivalents            5,099,453       (2,442,836)        (589,153)       6,733,415
Cash and cash equivalents at beginning of period                            --          7,542,289        8,131,442        1,398,027
                                                                    ------------     ------------     ------------     ------------

Cash and cash equivalents at end of period                          $  5,099,453        5,099,453        7,542,289        8,131,442
                                                                    ============     ============     ============     ============

Supplemental disclosure of cash flow information - interest paid    $  1,646,355           21,782          134,845          130,224
                                                                    ============     ============     ============     ============
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             --               --               --
                                                                    ============     ============     ============     ============
</TABLE>

                                                                     (Continued)



                                      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,           
                                                                        1998             1998             1997             1996
                                                                    ------------     ------------     ------------     ------------
<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                      $    177,265          100,000             --               --
                                                                    ============     ============     ============     ============

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, 1998, 1997 and 1996
                      and the Period From August 24, 1981
                      (Date of Inception) to July 31, 1998

(1)  Summary of Significant Accounting Policies

     Business Description

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

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

     Use of Estimates

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

     Property and Equipment

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

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

     Cash Equivalents

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



                                                                     (Continued)
                                      F-14

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(1)  Summary of Significant Accounting Policies (Continued)

     Research and Development

     Research and development costs are expensed as incurred.

     Fair Value of Financial Instruments

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

     Earnings Per Common Share

     Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
     Share," became effective for financial  statements for periods ending after
     December  15,  1997,  and  requires  presentation  of two  calculations  of
     earnings  per common  share.  "Basic"  earnings per common share equals net
     income  divided by weighted  average common shares  outstanding  during the
     period.  "Diluted"  earnings per common share equals net income  divided by
     the sum of weighted  average  common shares  outstanding  during the period
     plus common stock  equivalents.  The Company's  Basic and Diluted per share
     amounts  are the same  since the  assumed  exercise  of stock  options  and
     warrants are all anti-dilutive. The amount of options and warrants excluded
     from the  calculation  was  5,911,557,  4,592,631 and 5,584,476 at July 31,
     1998, 1997 and 1996,  respectively.  The Company  restated all prior period
     amounts to reflect these calculations.

     Long-Lived Assets

     The Company  reviews  long-lived  assets for impairment  whenever events or
     changes in business  circumstances  occur that  indicate  that the carrying
     amount of the assets  may not be  recoverable.  The  Company  assesses  the
     recoverability   of  long-lived  assets  held  and  to  be  used  based  on
     undiscounted  cash  flows,  and  measures  the  impairment,  if any,  using
     discounted  cash flows.  SFAS No. 121 has not had a material  impact on the
     Company's financial position, operating results or cash flows.

     Stock Option Plans

     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.



                                                                     (Continued)
                                      F-15

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(2)  Liquidity

     The  Company  has  reported  net  losses  of  $6,387,506,  $5,018,867,  and
     $2,942,152  for the  fiscal  years  ended  July 31,  1998,  1997 and  1996,
     respectively. The loss from date of inception, August 24, 1981, to July 31,
     1998  amounts  to  $51,797,645.   Also,  the  Company  has  limited  liquid
     resources.  These  factors  raise  substantial  doubt  about its ability to
     continue as a going  concern.  The financial  statements do not include any
     adjustments  relating to the  recoverability and classification of reported
     asset amounts or the amounts or  classification  of liabilities which might
     result from the outcome of this uncertainty.

     Until the Company's operations generate significant revenues, cash reserves
     will continue to fund  operations.  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.  Based upon reduced  spending levels as described
     below,  the Company  believes that its cash and cash equivalents as of July
     31, 1998 will be sufficient to meet its anticipated  cash needs through the
     fiscal year ending July 31, 1999.  However,  there can be no assurance that
     the Company will be able to successfully  implement these reduced  spending
     measures.

     The Company is currently taking steps to significantly reduce the amount of
     cash used to fund ongoing operations.  These steps include  postponement of
     certain clinical and regulatory costs associated with preparation of an NDA
     for ONCONASE,  closing its Phase III program for advanced pancreatic cancer
     and  postponement  of planned  clinical  trials for ONCONASE in indications
     other than unresectable  malignant  mesothelioma.  The Company's  continued
     operations  will depend on its ability to raise  additional  funds  through
     various sources, including collaborative agreements or strategic alliances.
     However,  there can be no assurance that such additional  funds will become
     available.  The  Company  does  not  anticipate  it will  be able to  raise
     additional capital through equity markets in the near future because of the
     termination of its Phase III clinical  trials for pancreatic  cancer.  Over
     the longer  term,  the ability of the Company to raise  additional  capital
     through the sale of its  securities  will  primarily  be  dependent  on the
     outcome  of  the  Phase  III  clinical  trial  for  unresectable  malignant
     mesothelioma.  However,  the  ability to raise  funding at that time may be
     dependent  upon  other  factors   including   without   limitation   market
     conditions,  and  there  can  be no  assurance  that  such  funds  will  be
     available.  Preliminary  results of the Phase III trial are expected in the
     second calendar quarter of 1999. The Company is currently exploring various
     strategic  alternatives  for its  business  and  research  and  development
     operations.

(3)  Property and Equipment

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


                                                  1998              1997
                                               ----------        ----------

     Laboratory equipment                      $  755,040           702,481
     Office equipment                             290,764           271,866
     Leasehold improvements                        97,833            93,975
                                               ----------        ----------
                                               $1,143,637         1,068,322
                                               ==========        ==========

                                                                     (Continued)
                                      F-16

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(4)  Long-term Debt

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

<TABLE>
<CAPTION>
                                                                            1998          1997
                                                                         ----------    ----------
<S>                                                                      <C>           <C>       
     First Union National Bank, New Jersey, interest of 8.375%           $     --      $1,373,090

     Notes payable, interest at 8.45%, maturing through
          July 1999, secured by equipment                                     1,520         2,916

     Note payable in monthly installments of $729, including
          principal and interest commencing April 1996 and each month
          thereafter until May 2000, secured by equipment                    14,382        21,312
                                                                         ----------    ----------
                                                                             15,902     1,397,318
     Less current portion                                                     9,175     1,381,416
                                                                         ----------    ----------
                                                                         $    6,727    $   15,902
                                                                         ==========    ==========
</TABLE>

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


                        1999                         $         9,175
                        2000                                   6,727
                                                     ---------------
                                                     $        15,902
                                                     ===============

     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.

(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 $97,000,  $76,000,  and
     $66,000 in 1998, 1997 and 1996, respectively.

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


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



                                                                     (Continued)
                                      F-17

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(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 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.




                                                                     (Continued)
                                      F-18

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(6)  Stockholders' Equity (Continued)

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

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

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

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

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

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

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



                                                                     (Continued)
                                      F-19

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(6)  Stockholders' Equity (Continued)

     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.

     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.


                                                                     (Continued)
                                      F-20

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(6)  Stockholders' Equity (Continued)

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

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



                                                                     (Continued)
                                      F-21

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(6)  Stockholders' Equity (Continued)

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

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

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

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

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

     In June 1996, the Company sold in a private  placement  1,515,330 shares of
     common stock and three-year  warrants to purchase  313,800 shares of common
     stock at an exercise price of $7.50 per share. Of these shares, 12,000 were
     issued for  services  rendered to the  Company.  The common  stock was sold
     alone at a per share price of $3.70, in combination  with warrants at a per
     unit price of $12.52 and warrants were sold alone at a per warrant price of
     $1.42. Each unit consisted of three shares of common stock and one warrant.
     The Company received proceeds of approximately  $5.7 million.  The warrants
     will expire in August and September 1999.

     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.



                                                                     (Continued)
                                      F-22

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(6)  Stockholders' Equity (Continued)

     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.

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

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

     In October 1997, the Company issued 75,000 stock options to a director with
     an  exercise  price of $3.66 per share as  payment  for  non-board  related
     services to be rendered. These options will vest as follows provided he has
     been serving  continuously  on the Company's board of directors at the time
     of vesting: 10,000 vested immediately; 10,000 after one full calendar year;
     10,000  annually  for each of the  following  three  years;  and  25,000 on
     October 31,  2002.  The vesting and  exercisability  of the 25,000  options
     which  vest  in  October  2002  may be  accelerated  upon  the  good  faith
     determination  of the  Company's  Board  of  Directors  that a  substantive
     collaborative agreement with a major  pharmaceutical/biotechnology  company
     was a  direct  result  of the  director's  efforts.  A  total  general  and
     administrative  expense of  $185,600  is being  amortized  over a five-year
     period which  commenced in October 1997.  As of July 31, 1998,  the Company
     recorded general and administrative expense of $48,900, based upon the fair
     value of such  75,000  options  on the  date of  issuance,  amortized  on a
     straight-line basis over the vesting period of the grant.



                                                                     (Continued)
                                      F-23

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(6)  Stockholders' Equity (Continued)

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

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

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

     On January 23, 1998 the  Securities  and  Exchange  Commission  (the "SEC")
     declared  effective  a  registration  statement  for the  offer and sale by
     certain  stockholders  of up to 3,734,541  shares of common stock. Of these
     shares  (i) an  aggregate  of  2,737,480  shares  were  issued  to  private
     placement investors in private placement  transactions which were completed
     during the period from March 1994 through March 1997 (the "Earlier  Private
     Placements"),  (ii) an  aggregate  of  409,745  shares  are  issuable  upon
     exercise of warrants  which were issued to private  placement  investors in
     the Earlier Private Placements and (iii) an aggregate of 587,316 shares may
     be issued, or have been issued,  upon exercise of options which were issued
     to option holders in certain other private transactions.

     In February 1998, the Company completed the February 1998 Private Placement
     primarily  to  institutional  investors  which  resulted in the issuance of
     1,168,575  units at a unit price of $4.00.  Each unit  consisted of two (2)
     shares of the Company's common stock, par value $.001 per share and one (1)
     three-year warrant to purchase one (1) share of common stock at an exercise
     price of $2.50 per share.  The Company  received  proceeds of approximately
     $4,202,000,   net  of  costs  associated  with  the  private  placement  of
     approximately  $472,000.  The  placement  agent also  received  warrants to
     purchase an additional  116,858 units comprised of the same securities sold
     to  investors  at an  exercise  price  of  $4.40  per  unit  as part of its
     compensation.

     In March 1998, the Company entered into a conversion  agreement with one of
     its raw  material  suppliers  (the  "Supplier")  for the  conversion  of an
     outstanding payable (the "Conversion  Agreement") into 50,000 shares of the
     Company's Common Stock. Pursuant to the Conversion  Agreement,  the Company
     issued 50,000 shares of Common Stock to the Supplier. The fair value of the
     Common Stock approximated the outstanding payable amount of $100,000.

     In March 1998,  the Company  issued 75,000 stock options to a director with
     an  exercise  price of $2.80 per share as  payment  for  non-board  related
     services to be rendered. These options will vest as follows provided he has
     been serving  continuously  on the Company's board of directors at the time
     of vesting: 10,000 vested immediately; 10,000 after one full calendar year;
     10,000 annually for each of the following three years;  and 25,000 on March
     24, 2003. The vesting and exercisability of the 25,000 options which


                                                                     (Continued)
                                      F-24

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(6)  Stockholders' Equity (Continued)

     vest in March 2003 may be accelerated upon the good faith  determination of
     the Company's Board of Directors that a substantive collaborative agreement
     and     licensing    or    financing     arrangement     with    a    major
     pharmaceutical/biotechnology  company was a direct result of the director's
     efforts.  A total general and  administrative  expense of $138,100 is being
     amortized over a five-year period which commenced in March 1998. As of July
     31,  1998,  the  Company  recorded  general and  administrative  expense of
     $24,700,  based upon the fair value of such  75,000  options on the date of
     issuance, amortized on a straight-line basis over the vesting period of the
     grant.

     On April 20, 1998 the SEC declared  effective a registration  statement for
     the offer and sale by certain  stockholders  of up to  3,918,299  shares of
     common  stock.  Of these shares (i) an  aggregate  of  2,337,150  shares of
     Common Stock were issued to the private placement investors in the February
     1998 Private Placement, (ii) an aggregate of 1,168,575 shares may be issued
     upon  exercise of the Warrants  which were issued to the private  placement
     investors in the February 1998 Private Placement,  (iii) 350,574 shares may
     be issued upon the exercise of the Placement Agent Warrant which was issued
     to the  placement  agent in the  February  1998 Private  Placement  and the
     Warrants issuable upon exercise of the Placement Agent Warrant, (iv) 50,000
     shares  of Common  Stock  were  issued to a  Supplier  in  connection  with
     conversion of an outstanding accounts payable, and (v) 12,000 shares may be
     issued  upon the  exercise  of  options  which were  issued as payment  for
     services to be rendered.

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

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

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

(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.



                                                                     (Continued)
                                      F-25

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(7)  Common Stock Warrants (Continued)

     The following table summarizes the activity of common stock warrants issued
     in connection  with the Private  Placements  completed in fiscal years 1994
     through 1998:

<TABLE>
<CAPTION>
                                                                  Warrants         Exercise Price                Expiration
                                                                  --------         --------------                ----------
<S>                                                              <C>                <C>                        <C>
       Sold in March 1994 Private Placement                        800,000          $   5.00                   3/21/97 to 6/21/97

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

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

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

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

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

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

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

       Sold in February 1998 Private Placement                   1,168,575              2.50                   5/19/01
       Issued to the Placement Agent in connection with the
             February 1998 Private Placement (see note 6)          350,574           2.20 - 2.50               5/19/01
       Exercised                                                     4,950           2.20 - 2.50               5/19/01
       Expired                                                     338,506           4.19 - 5.50               8/31/97 to 1/21/98
                                                                ----------

       Outstanding and exercisable at July 31, 1998              1,883,944           2.20 - 7.50               10/1/98 to 5/19/01
                                                                ==========          ============
</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  stockholders  approved the 1997 stock option plan  totaling
     2,000,000  shares,  which  provide that options maybe 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.


                                                                     (Continued)
                                      F-26

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(8)  Stock Options (Continued)

     The following table  summarizes stock option activity for the period August
     1, 1994 to July 31, 1998  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
     Granted                      (234,333)         234,333         3.31
     Canceled                       91,100          (91,100)        3.81
                                ----------       ----------       
Balance July 31, 1998            2,227,398        4,027,613         3.54
                                ==========       ==========        =====

     The options  outstanding  at July 31, 1998 will expire  between  August 31,
     1998 and July 6, 2008.

     The weighted-average fair value per option at the date of grant for options
     granted during the fiscal years 1998,  1997 and 1996 were $2.03,  $3.02 and
     $2.67,  respectively.  The fair value was estimated using the Black-Scholes
     options pricing model based on the following assumptions:


                                              1998        1997        1996
                                             -------     -------     -------

     Expected dividend yield                       0%          0%          0%
     Risk-free interest rate                    6.00%       6.00%       6.00%
     Expected stock price volatility           88.15%      59.78%      65.86%
     Expected term until exercise (years)       6.17        6.20        5.44







                                                                     (Continued)
                                      F-27

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(8)  Stock Options (Continued)

     Pro forma net loss and loss per share reflecting  approximate  compensation
     cost for the fair  value of stock  options  awarded in 1998 and 1997 are as
     follows:

                                   1998              1997              1996
                              -------------     -------------     -------------
     Net Loss:
       As reported            $  (6,387,506)    $  (5,018,867)    $  (2,942,152)
       Pro forma                 (6,697,066)       (5,724,076)       (3,297,152)
     Loss per common share:
       As reported            $       (0.40)    $       (0.34)    $       (0.25)
       Pro forma                      (0.42)            (0.39)            (0.28)

     The pro forma  effects  on net loss and loss per  share for 1998,  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 extend beyond the reported years.

     The following table summarizes  information  concerning options outstanding
     at July 31, 1998:

<TABLE>
<CAPTION>
                               Options Outstanding                                   Options Exercisable
      ------------------------------------------------------------------          --------------------------
                                        Weighted Average        Weighted                            Weighted
        Range of            Number         Remaining             Average             Number          Average
        Exercise          Outstanding     Contractual           Exercise           Exercisable      Exercise
         Prices            at 7/31/98     Term (Years)            Price            at 7/31/98        Price
      ------------         ----------     ------------            -----           ------------      --------
<S>                         <C>               <C>                 <C>                <C>             <C>  
      $2.00 - 2.99            370,250         3.21                $2.63                282,750       $2.60
       3.00 - 3.99          2,599,920         3.13                 3.20              2,371,420        3.20
       4.00 - 4.99            751,193         3.24                 4.39                606,443        4.39
       5.00 - 5.99            261,250         3.68                 5.11                151,250        5.07
       6.00 - 6.99             45,000         4.42                 6.97                  5,000        6.97
       ===========         ----------         ====                 ====            -----------        ====
                            4,027,613                                                3,456,863
                           ==========                                              ===========
</TABLE>

     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.





                                                                     (Continued)
                                      F-28

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(8)  Stock Options (Continued)

     Non-Qualified Stock Options

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

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

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


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

       Granted (42,167 options were repriced
         and extended as described in note 8)              894,887    $2.50-7.00
           
       Exercised                                           (81,000)    3.97-6.50
       Expired                                            (201,720)    3.97-6.50
                                                        ----------
       Balance at July 31, 1994                            612,167     2.50-7.00
                                                        ==========    ==========

     1989 Stock Plan

     On February 14, 1989,  the Company  adopted the Alfacell  Corporation  1989
     Stock  Plan  (the  "1989  Stock  Plan"),  pursuant  to which  the  Board of
     Directors  could issue awards,  options and grants.  The maximum  number of
     shares of common  stock that could have been issued  pursuant to the option
     plan was 2,000,000.

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




                                                                     (Continued)
                                      F-29

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(8)  Stock Options (Continued)

     The stock option activity is as follows:

                                                     Shares         Price Range
                                                     ------         -----------
     Granted, February 14, 1989                     3,460,000       $3.50-5.00
     Options issued in connection with share       
       purchase                                        36,365           2.75
     Expired                                       (1,911,365)       2.75-5.00
      Canceled                                        (10,000)          5.00
                                                   ----------
     Balance at July 31, 1994                       1,575,000        3.50-5.00
                                                   ==========       ==========
                                               
     As of fiscal year ended July 31, 1994, 1,703,159 options were granted under
     the 1993 stock option plan.

(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:

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



                                                                     (Continued)
                                      F-30

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(9)  Stock Grant and Compensation Plans (Continued)

     *    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 1998, 1997 or 1996.

(10) Income Taxes

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

     At July 31, 1998 and 1997,  the tax effects of temporary  differences  that
     give rise to the deferred tax assets are as follows:




                                                                     (Continued)
                                      F-31

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(10) Income Taxes (Continued)

<TABLE>
<CAPTION>
                                                                      1998             1997
                                                                  ------------     ------------
<S>                                                               <C>              <C>
     Deferred tax assets:
            Excess of book over tax depreciation                  $     21,035     $      4,112
            Accrued expenses                                           159,623          138,243
            Federal and state net operating loss carryforwards      14,407,990       10,187,188
            Research and experimentation and investment tax
                credit carry forwards                                  753,314          443,064
                                                                  ------------     ------------
     Total gross deferred tax assets                                15,341,962       10,772,607

     Valuation allowance                                           (15,341,962)     (10,772,607)
                                                                  ------------     ------------
     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, 1998, the Company has federal net operating loss  carryforwards
     of  approximately  $38,140,000  that expire in the years 1999 to 2013.  The
     Company  also has  investment  tax  credit  carryforwards  of  $51,634  and
     research and  experimentation  tax credit  carryforwards  of $701,680  that
     expire in the years 1999 to 2013. 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:


                                                   1998             1997
                                                ----------       ----------

     Payroll and payroll taxes                  $   38,147       $  185,840
     Professional fees                              98,568          199,745
     Clinical trial grants                         781,883          290,887
     Clinical supplies                             171,600             --
     Other                                           2,700           17,369
                                                ----------       ----------
                                                $1,092,898       $  693,841
                                                ==========       ==========

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


                                                  1998               1997
                                                --------           --------

     Insurance                                  $ 65,661           $ 65,782
     NIH research                                 31,625             37,198
     Other                                        19,901             62,126
                                                --------           --------
                                                $117,187           $165,106
                                                ========           ========



                                                                     (Continued)
                                      F-32

<PAGE>


                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(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 to the
     Chief  Executive  Officer  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 CRADA  with the 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 for the
     three years ended July 31, 1998, 1997 and 1996.

     In  August  1995,  the  Company  entered  into a CRADA  with  the  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 1999,  the Company is
     obligated to pay approximately  $5,200 per month to the NCI. Total research
     and  development  expenses under this  arrangement  amounted to $62,000 and
     $58,000  during  each of the fiscal  years  ended  July 31,  1998 and 1997,
     respectively.





                                      F-33