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, 2004                                             0-11088
 For the fiscal year ended                                Commission file number

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

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

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

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

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

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

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

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

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

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

      The aggregate market value of the common stock, par value $.001 per share,
held by non-affiliates based upon the reported last sale price of the Common
Stock on January 31, 2004 was approximately $128,365,000. As of October 8, 2004
there were 34,980,314 shares of common stock, par value $.001 per share,
outstanding.

                       Documents Incorporated by Reference

      Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of the Stockholders scheduled to be held on January 27, 2005, to be
filed with the Commission not later than 120 days after the close of the
registrant's fiscal year, have been incorporated by reference, in whole or in
part, into Part III Items 10, 11, 12, 13 and 14 of this Annual Report on Form
10-K.

<PAGE>

                               Table of Contents

PART I                                                                  Page
                                                                        ----

   Item  1.   Business                                                     3

   Item  2.   Properties                                                  16

   Item  3.   Legal Proceedings                                           16

   Item  4.   Submission of Matters to a Vote of Security Holders         16

PART II

   Item  5.   Market for Common Equity and Related Stockholder Matters    16

   Item  6.   Selected Financial Data                                     18

   Item  7.   Management's Discussion and Analysis of Financial
              Condition and Results of Operations                         19

   Item  7A.  Quantitative and Qualitative Disclosure About Market Risk   32

   Item  8.   Financial Statements and Supplementary Data                 32

   Item  9.   Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure                      32

   Item 9A.   Controls and Procedures                                     32

PART III

   Item 10.   Directors and Executive Officers of the Registrant          33

   Item 11.   Executive Compensation                                      33

   Item 12.   Security Ownership of Certain Beneficial Owners
              and Management                                              33

   Item 13.   Certain Relationships and Related Transactions              33

   Item 14.   Principal Accounting Fees and Services                      33

PART IV

   Item 15.   Exhibits, Financial Statement Schedules, and
              Reports on Form 8-K                                         33

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

All information on this Form 10-K is as of October 14, 2004 and we undertake no
obligation to update this information.


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<PAGE>

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

Our Board of Directors has adopted a Code of Business Conduct that is applicable
to all of our directors, officers and employees. Any material changes made to
our Code of Business Conduct or any waivers granted to any of our directors and
executive officers will be publicly disclosed by filing a current report on Form
8-K within five business days of such material change or waiver. We intend to
make the Code of Business Conduct available on our website at www.alfacell.com.
Although our Board of Directors has not established a nominating committee, our
formal nominating procedures will be described in our definitive proxy statement
for the Annual Meeting of Stockholders to be held on January 27, 2005. In
addition, copies of such documents are available to our shareholders upon
request either by contacting our Investor Relations Department at 973-748-8082
or through an e-mail request from our website at www.alfacell.com/info.htm.

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

                                     Part I

Item 1. BUSINESS.

Overview

      Alfacell Corporation is a biopharmaceutical company primarily engaged in
the discovery and development of a new class of therapeutic drugs for the
treatment of cancer and other pathological conditions. Based on our proprietary
Ribonuclease, or RNase, which is a type of biological enzyme that splits RNA
molecules and is the basis of our technology platform, our drug discovery and
development program consists of novel therapeutics developed from amphibian
ribonucleases. These are very basic RNA enzymes which play important roles in
nature in the development of an organism's cells and in cell functions. RNA is
an essential bio-chemical cellular component necessary to support life. There
are various types of RNA, all of which have specific functions in a living cell.
They help control several essential biological activities, namely, regulation of
cell proliferation, maturation, differentiation and cell death. Therefore, they
are ideal candidates for the development of therapeutics for cancer and other
life-threatening diseases, including HIV and autoimmune diseases, that require
anti-proliferative and apoptotic, or programmed cell death, properties. We have
co-sponsored and been a key participant in the International Ribonuclease
Meetings which are held every three years.

      ONCONASE(R), our trademark name for our lead product, is currently in an
international, centrally randomized Phase III trial. The first part of the trial
has been completed and the second confirmatory part of the trial is ongoing for
which patient enrollment is expected to be completed in the first quarter of
2005. The primary endpoint of the trial is survival, and as such, a sufficient
number of deaths must occur in order to perform the


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required statistical analyses to determine the efficacy of ONCONASE(R) in
patients with unresectable (inoperable) malignant mesothelioma. If the results
of the clinical trials are positive, we expect to file for marketing
registrations (NDA and MAA) for ONCONASE(R) within six months of completion of
the statistical analyses. However, at this time, we cannot predict with
certainty when a sufficient number of deaths will occur to achieve statistical
significance. Hence, the timing of when we will be able to file for marketing
registrations in the US and EU is data driven. Therefore, we cannot predict with
certainty what our total cost associated with obtaining marketing approvals will
be, or when and if such approvals will be granted, or when actual sales will
occur. We have also conducted other randomized and non-randomized trials with
patients with advanced stages of solid tumors in other types of cancers.

      ONCONASE(R), unlike most cancer drugs that attack all cells regardless of
their phenotype, malignant versus normal, and produce a variety of severe
toxicities, is not an indiscriminate cytotoxic, or cell killing agent, but
rather, its activity is controlled through unique and specific molecular
mechanisms. ONCONASE(R) affects primarily exponentially growing malignant cells.
ONCONASE(R) is a novel amphibian ribonuclease, unique among the superfamily of
pancreatic ribonuclease that has been isolated from the eggs of the Rana pipiens
frog, commonly called the leopard frog. We have determined that, thus far,
ranpirnase, the generic name of ONCONASE(R), is the smallest known protein
belonging to the superfamily of pancreatic ribonuclease and has been shown, on a
molecular level, to re-regulate the unregulated growth and proliferation of
cancer cells.

      In December 2002, we received Fast Track Designation from the FDA for
ONCONASE(R) for the treatment of malignant mesothelioma. Fast Track Designation
is an FDA program designed to expedite the review of new drugs that are intended
to treat serious or life threatening conditions and that demonstrate the
potential to address unmet medical needs. In February 2001, we received an
Orphan Medicinal Product Designation for ONCONASE(R) from the European Agency
for the Evaluation of Medicinal Products, or the EMEA. Orphan Medicinal Product
Designation is a program designed to provide marketing, protocol and other
incentives for pharmaceutical companies to develop and market products in the
European Community that address life threatening or very serious conditions that
affect not more than 5 in 10,000 persons in the European Community. Orphan
designation in Europe entitles the Company to 10 years of marketing exclusivity,
reduced filing fees and regulatory guidance from the EMEA.

      These FDA and EMEA designations for ONCONASE(R) may serve to expedite its
regulatory review, assuming the clinical trials yield a positive result. Future
clinical trials, however, may not demonstrate that ONCONASE(R) is effective.
Thus, our applications for FDA or EMEA approval to market ONCONASE(R), which are
dependent upon the success of our clinical trials, may be affected. The efficacy
and safety of ONCONASE(R) for malignant mesothelioma will ultimately be
determined by the FDA. In the interim, our Fast Track Designation allows us to
continue to have meetings and discussions with the FDA to establish mutually
agreed upon parameters for the NDA to obtain marketing approval for ONCONASE(R),
based on the assumption that the clinical trials will continue to yield
favorable results.

      Our drug discovery program forms the basis for the development of specific
recombinant RNases for chemically linking drugs and other compounds such as
monoclonal antibodies, growth factors, etc. and gene fusion products with the
goal of targeting various molecular functions. This program provides for joint
design and generation of new products with outside partners. We may own these
new products along with a partner(s), or we may grant an exclusive license to
the collaborating partner(s).

      We have established a number of scientific collaborations with academic
and research institutions including the National Cancer Institute, or NCI that
are designed to develop new therapeutic applications for ONCONASE(R). One
collaboration has produced RN321, a conjugate of ranpirnase, with a monoclonal
antibody that demonstrated activity in treating non-Hodgkin's lymphoma in
preclinical studies. These results were presented by the NCI investigators at
the 2002 Ribonuclease Meeting in Bath, England. The NCI has undertaken the
manufacturing of RN321 (the conjugate) according to Good Manufacturing
Practices, or GMP regulations in preparation for commencing clinical trials for
the treatment of patients with non-Hodgkin's lymphoma with RN321. Currently, the
NIH has produced RN321 clinical grade like material. Clinical grade production
of RN321 and Investigational New Drug Application, or IND, directed toxicology
studies will require further approval from the Drug Development Group of the NIH
prior to commencing human clinical trials.


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<PAGE>

      We have also discovered another series of proteins, collectively named
amphinases that may have therapeutic uses. These proteins are bioactive in that
they have an effect on living cells and organisms and have both anti-cancer and
anti-viral activity. All of the proteins characterized to date are RNases. These
products are currently undergoing preclinical testing. We are currently in
discussions with potential pharmaceutical partners for the development of these
new compounds as conjugates and fusion proteins.

      We have entered into a research and development collaboration with a major
US privately held stent and drug delivery company. ONCONASE(R) is being
evaluated in stents and other delivery platforms to treat cardiovascular disease
and cancer via direct site delivery. This collaboration may result in licensing
agreement between the companies, however; there is no assurance that such
agreement will be reached.

      We have entered into a collaborative agreement (anti-viral screening,
non-SARS) with the National Institute of Allergy and Infectious Diseases, or
NIAID in which five potential drug candidates (natural and genetically
engineered) are under evaluation against various RNA viruses.

      Our research and development collaboration with Wyeth Pharmaceuticals is
ongoing to develop a number of designer drugs such as conjugates and fusion
proteins for a variety of indications using our technology. This collaboration
may result in a licensing agreement between the companies, however; there is no
assurance that such an agreement will be reached.

      We have signed confidentiality agreements and have entered into
discussions and due diligence with a number of companies for US or non-US
marketing rights for ONCONASE(R) and for out-licensing some of our early drug
candidates.

      We are engaged in the research, development and clinical trials of our
products both independently and through research collaborations. We have
financed our operations since inception through the sale of our equity
securities and convertible debentures in registered offerings and private
placements. Additionally, we have raised capital through debt financings, the
sale of our tax benefits and research products, interest income and financing
received from our Chief Executive Officer. These funds provide us with the
resources to acquire staff, facilities, capital equipment, finance our
technology, product development, manufacturing and clinical trials. We have
incurred losses since inception and to date we have not consummated any
licensing, marketing or development arrangements. Presently, our cash balance is
sufficient to fund our expanded operations through October 31, 2005 based on our
expected level of expenditures in relation to activities in preparing
ONCONASE(R) for an NDA filing and other ongoing operations of the company.
However, we continue to seek additional capital financing through the sale of
equity in private placements, sale of our tax benefits and exercise of stock
options and warrants but cannot be sure that we will be able to raise capital on
favorable terms or at all.

Research and Development Programs

      Research and development expenses for the fiscal years ended July 31,
2004, 2003, and 2002 were $3,353,000, $1,700,000, and $2,033,000, respectively.
Our research and development programs focus primarily on the development of
therapeutics from amphibian ribonucleases. Because ribonucleases have been shown
to be involved in the regulation of cell proliferation, maturation,
differentiation and programmed cell death, known as apoptosis, ribonucleases may
be ideal candidates for the development of therapeutics for the treatment of
cancer and other life-threatening diseases, including viral and autoimmune
diseases that require anti-proliferative and pro-apoptotic properties.

Technology Platform and Pipeline

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


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<PAGE>

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

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

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

Apoptosis

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

ONCONASE(R) (ranpirnase) Pro-Apoptotic Mechanisms

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

      Many cancer cells become resistant to most types of cancer treatment,
including chemotherapy, radiation and monoclonal antibodies. Overcoming
resistance to chemotherapy remains a major challenge for cancer therapy.
ONCONASE(R) has been shown to overcome multiple drug resistance or prevent
resistance to cancer therapy, thereby dramatically increasing the sensitivity of
certain cancer cells to chemotherapy and radiation therapy.

      It remains unknown whether or not ONCONASE(R) targets and binds
preferentially to tumor cells, rather than normal cells of the respective
tissues. It is possible that there is no differential targeting and/or binding,
but that tumor cells are more susceptible to the cytostatic (suppresses cancer
cells from further dividing) and cytotoxic (kills cancer cells) effects of
ONCONASE(R). The cytostatic effects are manifested by the inhibition of
progression in the cell cycle. These effects have been associated with induction
of parallel differentiation and apoptosis. The cytostatic and
differentiation-inducing effects are reflected in the stabilization of
previously progressive tumors observed in our clinical trials.

Clinical Studies and Preclinical Development of ONCONASE(R)

      We have been very selective in our product development strategy, which is
focused on the use of ONCONASE(R) alone or in combination with drugs which have
shown evidence of preclinical and clinical efficacy on


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tumor types for which median survivals are typically less than a year and for
which there are few or no approved treatments.

      ONCONASE(R) has been tested in Phase I, Phase II and Phase III clinical
trials in more than 40 cancer centers across the United States since 1991 and in
Europe since 2000, including major centers such as Columbia-Presbyterian,
University of Chicago, M.D. Anderson and Cedars-Sinai Cancer Centers.

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

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

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

In Vitro

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

      o     ONCONASE(R) + phenothiazine for non-small cell lung cancer;

      o     ONCONASE(R) + lovastatin in pancreatic, ovarian, and two types of
            non-small cell lung cancer;

      o     ONCONASE(R) + cisplatin in ovarian cancer;

      o     ONCONASE(R) + all-trans-retinoic acid in glioma (brain) cancer;

      o     ONCONASE(R) + vincristine in colorectal cancer and ;

      o     ONCONASE(R) + doxorubicin in breast cancer including resistant
            variants, malignant mesothelioma.

In Vivo Anti-Cancer Activity

      ONCONASE(R) as a Single Agent

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

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

      o     In mice bearing M109 Madison lung carcinoma cells, time to
            appearance of ascites and survival were significantly prolonged in
            ONCONASE(R) treated animals as compared to controls. Several
            histologically (microscopic study of cells) confirmed cures were
            noted.

      o     In nude mice bearing human DU-145 prostate carcinoma and pancreatic
            ASPC-1 carcinoma, ONCONASE(R) inhibited growth of the subcutaneously
            transplanted tumor.

      o     In several mouse tumor models, ONCONASE(R) not only demonstrated
            direct anti-tumor activity but also increased the potential for
            other drugs to penetrate the tumor tissue as well as increased the
            tumor sensitivity to radiation therapy.


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<PAGE>

      ONCONASE(R) in Combination With Other Agents

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

      o     vincristine

      o     doxorubicin

      o     tamoxifen

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

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

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

Clinical Trials

Onconase(R) Phase III Randomized Clinical Trials

      We are currently conducting a two-part Phase III clinical trial of
ONCONASE(R) as a treatment for malignant mesothelioma. The first part of the
Phase III trial compares ONCONASE(R) alone to doxorubicin. Doxorubicin has been
considered by opinion leaders to be the most effective drug for the treatment of
malignant mesothelioma. The second part of the trial compares the combination of
ONCONASE(R) and doxorubicin versus doxorubicin alone. The trial is an open
label, centrally randomized, controlled study. The patient enrollment for the
first part of the clinical trial has been completed and the trial is on-going.
The second part is currently in the enrollment stage and is being conducted in
the United States, Europe, Canada and Australia.

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

Phase III Single Agent Results

      An interim subset analysis of the results of this Phase III clinical trial
according to the Cancer Adult Leukemia Group B, or CALGB, prognostic groups
revealed a marked excess of poor prognosis patients (groups 5 and 6) in the
ONCONASE(R) arm of the trial (32 patients or 38.1% of the patients treated with
ONCONASE(R)) as compared to the doxorubicin arm of the trial (12 patients or 17%
of the patients treated with doxorubicin). By excluding these patients and the
10 patients whose central pathology review did not confirm a diagnosis of
malignant mesothelioma (N=5) from the 154 intent-to-treat patients, we defined a
target treatment group, or TTG, consisting of 104 patients who met the criteria
for CALGB prognostic groups 1-4. Of these patients, 47 were treated with
ONCONASE(R) and 57 were treated with doxorubicin. The single agent Phase III
results of the TTG showed a median survival benefit, or MST, of 2 months for
ONCONASE(R) treated patients, 11.6 months versus 9.6 months.


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      This two month median survival difference favoring ONCONASE(R) represents
a 20% advantage over the active agent, doxorubicin. Moreover, the clinical
activity of ONCONASE(R) is also evident from the overall 1-year and 2-year
survival rates of ONCONASE(R) versus doxorubicin, 46.8% versus 38.6% and 20.2%
versus 12.3%, respectively. Doxorubicin treatment was associated with a 60%
higher risk of death compared to ONCONASE(R) treatment. Tumor assessment by an
independent radiologist for evaluable patients (had a baseline and follow-up
radiological assessment) revealed evidence of objective clinical activity in 17
patients in each treatment arm. Four partial responses and 13 stabilization of
previously progressive disease were reported in the ONCONASE(R) treated patients
and 7 partial responses and 10 stabilization of previously progressive disease
were reported in the doxorubicin treated patients. Despite the small number of
patients, the analysis revealed a statistically significant difference, log rank
test, p. = 0.037, in survival of the responders favoring ONCONASE(R) treated
patients with an MST 23.3 versus 14.4 months for doxorubicin treated patients as
well as the 2 year survival rates of 40% for ONCONASE(R) and 9% for doxorubicin.
Preliminary results were presented at the 2000 American Society of Clinical
Oncologists, or ASCO, meeting.

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

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

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

      In part two of the ongoing Phase III trial, interim analyses based on the
occurrence of 105 deaths and at 210 deaths are planned. Based upon the results
of these analyses, we may be able to file an NDA and an MAA within six months
after the completion of the analyses. However, we cannot assure you that
marketing approval for ONCONASE(R) as a treatment for malignant mesothelioma
will be granted by the FDA or EMEA.

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


                                       9
<PAGE>

ONCONASE(R) Phase II Clinical Trials

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

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

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

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

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

      A series of pilot Phase II studies to evaluate ONCONASE(R) as a single
agent, and ONCONASE(R) and tamoxifen in previously treated patients with
unresectable, or inoperable, renal cell cancer were conducted. The results of
both the Phase II single agent and ONCONASE(R) and tamoxifen were published.
Although the single agent study did not demonstrate evidence of clinical
activity, the regimen of ONCONASE(R) and tamoxifen did demonstrate evidence of
clinical activity which indicated further evaluation in untreated patients was
warranted.

Research And Development Pipeline Of Targeted Therapies

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

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

Ranpirnase Conjugates and Fusion Proteins

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


                                       10
<PAGE>

      We have established a number of scientific collaborations with academic
and research institutions including the NCI. The objective of our collaboration
with the NCI is to develop new therapeutic applications for ONCONASE(R). This
collaboration has produced RN321, a conjugate of ranpirnase, with a monoclonal
antibody that demonstrated activity in treating non-Hodgkin's lymphoma in
preclinical studies. The relative benefit in killing targeted tumor cells versus
non-targeted healthy cells, or the therapeutic index, is greater than
200,000-fold with this conjugate. These "proof-of-concept" results were
presented at the 2002 Ribonuclease Meeting in Bath, England. The NCI has
undertaken the manufacturing of RN321 (the conjugate) according to Good
Manufacturing Practices, or GMP regulations in preparation for commencing
clinical trials for the treatment of patients with non-Hodgkin's lymphoma with
RN321. Clinical grade production of RN321 and Investigational New Drug
Application, or IND, directed toxicology studies will require further approval
from the Drug Development Group of the NIH prior to commencing human clinical
trials.

      Although ranpirnase is active against a variety of human cancers, its
activity is not uniform across different tumor types. However, whether the tumor
is more or less sensitive to ranpirnase as a single agent, its anti-tumor
activity can be greatly augmented by conjugation to different targeting
moieties, or groups. One of these moieties is the epidermal growth factor, or
EGF, which is a ligand for the EGF receptor often hyperexpressed on malignant
cells. The genetically engineered ranpirnase conjugates with EGF (rRNP-EGF)
exerted significant anti-tumor activity in human cell types of the head and neck
and pancreatic carcinomas, and human D54MG glioblastoma, a cancerous brain tumor
cell. Other constructs target tumor blood vessel formation, which could be
potentially used in a broad spectrum of solid tumors. They are in pre-clinical
evaluation by our European collaborator.

Novel Amphibian Ribonucleases

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

Research Collaborations

      In addition to the above programs, we are pursuing some programs in
collaboration with the NIH, NCI and The University of Pennsylvania Medical
Center, Metabolic Magnetic Resonance Research and Computing Center.

      We have established a number of scientific collaborations with the NIH and
NCI. The objective of our collaborations with the NIH and NCI is to develop new
therapeutic applications for ONCONASE(R) as well as other drug candidates.

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

Evaluation Of ONCONASE(R) As A Radiation Enhancer

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

      The University of Pennsylvania Medical Center, Metabolic Magnetic
Resonance Research and Computing Center will further evaluate ONCONASE(R) in
combination with radiation and cisplatin, an anti-cancer drug, in human lung
adenocarcinoma, a form of lung cancer, in a series of animal models as well as
look at the effects of


                                       11
<PAGE>

ONCONASE(R) in the inhibition of sub-lethal damage repair (SLDR) and potentially
lethal damage repair (PLDR) in human lung carcinoma cells.

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

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

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

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

      A collaborative agreement (anti-viral screening, non-SARS) with the
National Institute of Allergy and Infectious Diseases, or NIAID, has yielded
positive results, which have been confirmed with one of our amphinases. Further
evaluation of this potential therapeutic is ongoing.

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

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

Commercial Collaborations with Pharmaceutical/Drug Delivery Companies

      A research and development collaboration with a major US privately held
stent and drug delivery company is ongoing. ONCONASE(R) is being evaluated in
stents and other delivery platforms to treat cardiovascular disease and cancer
via direct site delivery. This collaboration may result in licensing agreement
between the companies, however; there is no assurance that such agreement will
be reached.

      Our research and development collaboration with Wyeth Pharmaceuticals is
ongoing to develop a number of designer drugs such as conjugates and fusion
proteins for a variety of indications using our proprietary technology. This
collaboration may result in a licensing agreement between the companies,
however; there is no assurance that such an agreement will be reached.


                                       12
<PAGE>

Raw Materials

      The major active ingredient derived from leopard frog eggs is the protein
ranpirnase. We have sufficient egg inventory on hand to produce enough
ONCONASE(R) to complete the current Phase III clinical trial for malignant
mesothelioma and supply ONCONASE(R) for up to two years after commercialization.
In addition, we can successfully produce ranpirnase by using recombinant
technology; however, it may not be more cost effective.

Manufacturing

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

Marketing

      We do not plan to market our products at this time. We have entered into a
number of Confidential Disclosure Agreements and have been in discussions with
several United States and multinational biopharmaceutical companies for the
selection of suitable marketing partners for our lead product ONCONASE(R), our
proprietary RNA interference technology pipeline, as well as several patented
product candidates.

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

Government Regulation

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

      As the initial step in the FDA regulatory approval process, preclinical
studies are conducted in laboratory dishes and animal models to assess the
drug's efficacy and to identify potential safety problems. Moreover
manufacturing processes and controls for the product are required. The
manufacturing information along with the results of these studies is submitted
to the FDA as a part of the IND, which is filed to obtain approval to begin
human clinical testing. The human clinical testing program typically involves up
to three phases. Data from human trials as well as other regulatory requirements
such as chemistry, manufacturing and controls, pharmacology and toxicology


                                       13
<PAGE>

sections, are submitted to the FDA in an NDA or Biologics License Application,
or BLA. Preparing an NDA or BLA involves considerable data collection,
verification and analysis. A similar process in accordance with EMEA regulations
is required to gain marketing approval in Europe. Moreover, a commercial entity
must be established and approved by the EMEA in a member state of the EU at
least three months prior to filing the Marketing Authorization Application, or
MAA.

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

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

Patents and Proprietary Technology

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

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

      We own the following U.S. patents:

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

----------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>             <C>                                                                     <C>
       6,423,515 B1          July 2002      covers methodology for synthesizing gene sequences of                   Sept. 2019
                                            ranpirnase and a genetically engineered variant of ranpirnase
----------------------------------------------------------------------------------------------------------------------------------
       6,290,951 B1         Sept. 2001      covers alteration of the cell cycle in vivo, particularly for           Aug. 2018
                                            inducing apoptosis of tumor cells
----------------------------------------------------------------------------------------------------------------------------------
       6,239,257 B1           May 2001      covers a family of variants of ONCONASE(R)                              Dec. 2018
----------------------------------------------------------------------------------------------------------------------------------
       6,175,003 B1          Jan. 2001      covers the genes of ONCONASE(R) and a variant of ONCONASE(R)            Sept. 2019
----------------------------------------------------------------------------------------------------------------------------------
       5,728,805             Mar. 1998      covers a family of variants of ONCONASE(R)                              Mar. 2015
----------------------------------------------------------------------------------------------------------------------------------
       5,595,734             Jan. 1997      covers combinations of ONCONASE(R) with certain other                   Jan. 2014
                                            pharmaceuticals
----------------------------------------------------------------------------------------------------------------------------------
       5,559,212            Sept. 1996      covers the amino acid sequence of ONCONASE(R)                           Sept. 2013
----------------------------------------------------------------------------------------------------------------------------------
       5,540,925             July 1996      covers combinations of ONCONASE(R) with certain other                   July 2013
                                            pharmaceuticals
----------------------------------------------------------------------------------------------------------------------------------
       5,529,775             June 1996      covers combinations of ONCONASE(R) with certain other                   Jan. 2013
                                            pharmaceuticals
----------------------------------------------------------------------------------------------------------------------------------
       4,888,172             Dec. 1989      covers a pharmaceutical produced from fertilized frog eggs              Dec. 2006
                                            (Rana pipiens) and the methodology for producing it
----------------------------------------------------------------------------------------------------------------------------------
       6,649,392 B1*         Nov. 2003      covers a family of recombinant variants of ONCONASE(R)                  Apr. 2016
----------------------------------------------------------------------------------------------------------------------------------
       6,649,393 B1*         Nov. 2003      covers nucleic acids encoding recombinant variants of ONCONASE(R)       Apr. 2016
                                            and methodology for producing such variants
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

      *We own this patent jointly with the U.S. Government.


                                       14
<PAGE>

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

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

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

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

      These patents cover ONCONASE(R), a variant of ONCONASE(R), process
technology for making ONCONASE(R), and combinations of ONCONASE(R) with certain
other chemotherapeutics. We also have patent applications pending in the United
States, Europe, and Japan.

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

Competition

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

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

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

Employees


                                       15
<PAGE>

      As of September 30, 2004, we have 15 employees, of whom 8 were engaged in
research and development activities and 7 were engaged in administration and
management. We have 6 employees who hold Ph.D. degrees. All of our employees are
covered by confidentiality agreements. We consider relations with our employees
to be good. None of our employees are covered by a collective bargaining
agreement.

Environmental Matters

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

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

Item 2. PROPERTIES.

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

Item 3. LEGAL PROCEEDINGS.

      We are presently not involved in any legal proceedings.

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

      None.

                                     Part II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
        PURCHASES OF EQUITY SECURITIES.

      Our common stock is listed on the The Nasdaq SmallCap Market, or Nasdaq,
and has traded under the symbol "ACEL" since September 9, 2004. As of October 8,
2004, there were approximately 1,112 stockholders of record of our common stock.

      The following table sets forth the range of high and low sale prices of
our common stock for the two fiscal years ended July 31, 2004 and 2003. The
prices were obtained from OTCBB and are believed to be representative of
inter-dealer quotations, without retail mark-up, mark-down or commission, and
may not necessarily represent actual transactions.

                                                     High             Low
                                                     ----             ---

          Year Ended July 31, 2004:

               First Quarter                        $4.51           $1.25

               Second Quarter                        5.14            2.65


                                       16
<PAGE>

                                                     High             Low
                                                     ----             ---

               Third Quarter                         9.97            3.70

               Fourth Quarter                       10.07            5.50

          Year Ended July 31, 2003:

               First Quarter                         0.36          $ 0.18

               Second Quarter                        1.01            0.19

               Third Quarter                         0.85            0.39

               Fourth Quarter                        1.45            0.64

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

      The following table provides additional information on the Company's
equity based compensation plans as of July 31, 2004:

<TABLE>
<CAPTION>
                                                                                             Number of securities
                                                                                            remaining available for
                                         Number of securities to     Weighted-average        future issuance under
                                         be issued upon exercise     exercise price of     equity compensation plans
                                         of outstanding options,   outstanding options,      (excluding securities
             Plan Category                 warrants and rights      warrants and rights     reflected in column a)
             -------------                 -------------------      -------------------     ----------------------
                                                   (a)                      (b)                       (c)
<S>                                             <C>                       <C>                      <C>
Equity compensation plans approved by
security holders                                2,957,445                 $ 2.95                   9,030,000
Equity compensation plans not approved
by security holders                                55,556 (1)             $ 1.50                       -0-
</TABLE>

      (1)   In August 2001, we converted $50,000 of our accounts payable into
            55,556 shares of common stock. In addition, we issued 55,556
            five-year warrants to purchase 55,556 shares of common stock at an
            exercise price of $1.50 per share.

Recent Sales of Unregistered Securities

      The following is a summary of transactions involving our securities from
May 1, 2004 to July 31, 2004. Each of the following was exempt from
registrations under Section 4(2) of the Securities Act of 1933, as amended,
based upon the fact that each issuance was to an accredited investor. The net
proceeds from these transactions were used for general corporate purposes,
including the funding of research and development.

      In May 2004, we issued 1,210,654 shares of Common Stock to an existing
institutional investor, resulting in gross proceeds of $10,000,000 to us. In
addition, the institutional investor was granted five-year warrants to purchase
1,210,654 shares of Common Stock at an exercise price of $12.39 per share. We
paid a 5% finder's fee and granted a five-year warrant to purchase 60,533 shares
of Common Stock at an exercise price of $12.39 per share to a third party in
connection with the private placement.

      In May and June 2004, we issued, an aggregate of 785,000 shares of
restricted common stock upon the exercise of warrants by unrelated parties, at
per share exercise prices ranging from $0.75 to $1.50. We realized aggregate
gross proceeds of $1,051,250 from these exercises.

      In May 2004, we issued 25,000 shares of restricted common stock as payment
for services rendered in the amount of $198,500.


                                       17
<PAGE>

      In June 2004, we issued 2,099 restricted shares of common stock as payment
of accounts payable in the amount of $9,447.

      From June 2004 through July 15, 2004, we issued an aggregate of 1,574,424
shares of restricted common stock and 1,815,466 shares of common stock
underlying five-year warrants with exercise prices ranging from $1.00 to $1.10
per share upon the conversion of notes payable by unrelated parties in an
aggregate amount of $413,275.

Issuer Purchases of Equity Securities

      We did not repurchase any shares of our common stock during the fourth
quarter of fiscal 2004.

Item 6. SELECTED FINANCIAL DATA.

      Set forth below is the selected financial data for our company for the
five fiscal years ended July 31, 2004.

<TABLE>
<CAPTION>
                                                          Year Ended July 31,

                                --------------------------------------------------------------------------
                                        2004           2003           2002           2001           2000
                                        ----           ----           ----           ----           ----
<S>                             <C>             <C>            <C>            <C>            <C>
Investment Income               $     42,113    $     9,877    $     4,838    $    13,121    $    51,144

Other Income                              --         30,000             --             --             --

Net Loss (1)                      (5,070,307)    (2,411,532)    (2,591,162)    (2,294,936)    (1,722,298)

Net Loss Per Basic and
Diluted Share                           (.17)          (.10)          (.12)          (.12)          (.10)

Dividends                               None           None           None           None           None

Total Assets                      10,421,063        495,322        228,871        201,609        488,099

Long-term Debt                            --        242,516        315,929         23,663         30,251

Total Equity
(Deficiency)                       8,881,647     (2,491,681)   $(1,885,437)      (740,378)      (131,860)
</TABLE>

      (1)   Included in the net loss of $5,070,307, $2,411,532 and $2,591,162
            for fiscal years ended July 31, 2004, 2003 and 2002, respectively,
            are tax benefits of $221,847, $231,357 and $353,732, respectively,
            related to the sale of certain state tax operating loss
            carryforwards.


                                       18
<PAGE>

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

Overview

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

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

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

      Almost all of our research and development expenses since our inception of
$44,954,912 has gone toward the development of ONCONASE(R) and related drug
candidates. For the fiscal years 2004, 2003 and 2002 our research and
development expenses were $3,353,000, $1,700,000 and $2,033,000, respectively,
almost all of which was used for the development of ONCONASE(R) and related drug
candidates. ONCONASE(R) is currently in an international, centrally randomized
Phase III trial. The first part of the trial has been completed and the second
confirmatory part of the trial is ongoing for which patient enrollment is
expected to be completed in the first quarter of 2005. The primary endpoint of
the trial is survival, and as such, a sufficient number of deaths must occur in
order to perform the required statistical analyses to determine the efficacy of
ONCONASE(R) in patients with unresectable (inoperable) malignant mesothelioma.
If the results of the clinical trials are positive, we expect to file for
marketing registrations (NDA and MAA) for ONCONASE(R) within six months of
completion of the statistical analyses. However, at this time, we cannot predict
with certainty when a sufficient number of deaths will occur to achieve
statistical significance. Hence, the timing of when we will be able to file for
marketing registrations in the US and EU is data driven. Therefore, we cannot
predict with certainty what our total cost associated with obtaining marketing
approvals will be, or when and if such approvals will be granted, or when actual
sales will occur.

      We fund the research and development of our products from cash receipts
resulting from the sale of our equity securities and convertible debentures in
registered offerings and private placements. Additionally, we have raised
capital through debt financings, the sale of our tax benefits and research
products, interest income and financing received from our Chief Executive
Officer. Presently, our cash balance is sufficient to fund our expanded
operations at least through October 31, 2005 based on our expected level of
expenditures in relation to activities in preparing ONCONASE(R) for marketing
registrations and other ongoing operations of the Company. However, we continue
to seek additional capital financing through the sale of equity in private
placements, sale of our tax benefits and exercise of stock options and warrants
but cannot be sure that we will be able to raise capital on favorable terms or
at all.

Results of Operations

Fiscal Years Ended July 31, 2004, 2003 and 2002

Revenues

      We are a development stage company as defined in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 7. We are
devoting substantially all our present efforts to establishing a new business
and developing new drug products. Our planned principal operations of marketing
and/or licensing of new drugs have not commenced and, accordingly, we have not
derived any significant revenue from these operations. We focus most of our
productive and financial resources on the development of ONCONASE(R). We did not
have


                                       19
<PAGE>

any sales in fiscal 2004, 2003 and 2002. Investment income for fiscal 2004 was
$42,000 compared to $10,000 for fiscal 2003, an increase of $32,000. Investment
income for fiscal 2003 was $10,000 compared to $5,000 for fiscal 2002, an
increase of $5,000. These increases were due to higher balances of cash and cash
equivalents. Other income for fiscal 2003 was related to investigational
research we performed for a pharmaceutical company.

Research and Development

      Research and development expense for fiscal 2004 was $3,353,000 compared
to $1,700,000 for fiscal 2003, an increase of $1,653,000, or 97%. This increase
was primarily due to increases in data management, consulting fees and clinical
expenses related to our pivotal Phase III clinical trial for malignant
mesothelioma of approximately $1,302,000, sponsored research and development
expenses of approximately $236,000, regulatory consulting costs of approximately
$142,000, non cash expense related to stock options issued for consulting
services of approximately $94,000, offset by a decrease in personnel and
insurance expenses of approximately $121,000.

      Research and development expense for fiscal 2003 was $1,700,000 compared
to $2,033,000 for fiscal 2002, a decrease of $333,000, or 16.4%. This decrease
was primarily due to decreases in regulatory and clinical costs, personnel
costs, and a reduction of non-cash expenses relating to stock options issued for
consulting services of approximately $236,000, $114,000 and $23,000,
respectively. These decreases were partially offset by increases in costs
relating to patent and trademark applications for ONCONASE(R) of approximately
$40,000.

General and Administrative

      General and administrative expense for fiscal 2004 was $1,578,000 compared
to $624,000 for fiscal 2003, an increase of $954,000, or 153%. The increase was
due primarily to an increase in non-cash expense related to stock and stock
options issued for consulting services associated with business development
activities of approximately $402,000, increases in legal, public relations,
personnel, insurance, and accounting expenses of approximately $230,000,
$109,000, $106,000, $77,000 and $30,000, respectively.

      General and administrative expense for fiscal 2003 was $624,000 compared
to $798,000 for fiscal 2002, a decrease of $174,000, or 21.8%. This decrease was
primarily due to decreases in costs related to public relations activities,
insurance expenses, reduction in non-cash expense relating to stock options
issued for consulting services, legal, personnel costs and other miscellaneous
office expenses of approximately $71,000, $54,000, $34,000, $10,000 and $5,000,
respectively.

Interest

      Interest expense for fiscal 2004 was $403,000 compared to $358,000 in
fiscal 2003, an increase of $45,000 or 12.6%. The increase was primarily due to
the interest expense on the beneficial conversion feature of the notes payable
and its related warrants issued to unrelated parties. The interest expense was
based on the value of the warrants using the Black-Scholes options-pricing
model, amortized on a straight-line basis over the term of the notes.

      Interest expense for fiscal 2003 was $358,000 compared to $119,000 in
fiscal 2002, an increase of $239,000. The increase was primarily due to the
interest expense on the beneficial conversion feature of the notes payable
issued to unrelated parties, the related warrants and the increase in total
borrowing levels. The interest expense was based on the value of the warrants
using the Black-Scholes options-pricing model, amortized on a straight-line
basis over the term of the notes.

Income Taxes

      New Jersey has enacted legislation permitting certain corporations located
in New Jersey to sell state tax loss carryforwards and state research and
development credits, or tax benefits. For the state fiscal year 2004 (July 1,
2003 to June 30, 2004), we had approximately $1,378,000 total available tax
benefits that were saleable; of which New Jersey permitted us to sell
approximately $261,000. We received approximately $222,000 from the sale of the
$261,000 of tax benefits, which we recognized as tax benefits for the fiscal
year ended July 31, 2004.


                                       20
<PAGE>

      For the state fiscal year 2003 (July 1, 2002 to June 30, 2003), we had
approximately $1,373,000 in total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately $273,000. We received
approximately $231,000 from the sale of the $273,000 of tax benefits, which we
recognized as tax benefits for the fiscal year ended July 31, 2003.

      For the state fiscal year 2002 (July 1, 2001 to June 30, 2002), we had
approximately $1,535,000 total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately $426,000. We received
approximately $354,000 from the sale of the $426,000 of tax benefits, which we
recognized as tax benefits for fiscal 2002.

      If still available under New Jersey law, we will attempt to sell the
remaining $1,117,000 of our tax benefits, between July 1, 2004 and June 30,
2005. This amount, which is a carryover of our remaining tax benefits from state
fiscal year 2004, may increase if we incur additional tax benefits during state
fiscal year 2005. We can not estimate, however, what percentage of our saleable
tax benefits New Jersey will permit us to sell, how much money we will receive
in connection with the sale, if we will be able to find a buyer for our tax
benefits or if such funds will be available in a timely manner.

Net Loss

      We have incurred net losses during each year since our inception. The net
loss for fiscal 2004 was $5,070,000 as compared to $2,411,000 in fiscal 2003 and
$2,591,000 in fiscal 2002. The cumulative loss from the date of inception,
August 24, 1981, to July 31, 2004 amounted to $69,045,000. Such losses are
attributable to the fact that we are still in the development stage and,
accordingly, have not derived sufficient revenues from operations to offset the
development stage expenses.

Liquidity and Capital Resources

      We have reported net losses of approximately $5,070,000, $2,411,000, and
$2,591,000 for the fiscal years ended July 31, 2004, 2003 and 2002,
respectively. The loss from date of inception, August 24, 1981, to July 31, 2004
amounts to $69,045,000.

      We have financed our operations since inception through the sale of our
equity securities and convertible debentures in registered offerings and private
placements. Additionally, we have raised capital through debt financings, the
sale of our tax benefits and research products, and interest income and
financing received from our Chief Executive Officer. During the fiscal year
2004, we had a net increase in cash and cash equivalents of $9,818,000, which
resulted primarily from net cash provided by financing activities of
$14,886,000, which resulted from $10,736,000 in net proceeds from private
placements of common stock and warrants with several institutional investors,
$4,158,000 in net proceeds from warrants and stock options exercises and a
reduction in short term debt of $9,000, offset by net cash used in operating
activities of $5,015,000, principally for research and development activities,
and net cash used in investing activities of $54,000. Total cash resources as of
July 31, 2004 were $10,148,000 compared to $330,000 at July 31, 2003.

      Our current liabilities as of July 31, 2004 were $1,539,000 compared to
$2,744,000 at July 31, 2003, a decrease of $1,205,000. The decrease was
primarily due to the payment of accrued payroll of $644,000 and payroll taxes of
$241,000, maturity of short-term notes payable of approximately $264,000 and
decreased accounts payable and other accrued expenses of approximately $56,000.

The following transactions occurred after July 31, 2004:


                                       21
<PAGE>

      o     In September 2004, we issued 320,157 shares of restricted common
            stock and an aggregate of 420,157 shares of common stock underlying
            five year warrants with an exercise price of $1.00 per share upon
            the conversion of notes payable in the amount of $112,055.

      o     In September 2004, we issued an aggregate of 292,272 shares of
            restricted common stock upon the exercise of warrants and stock
            options by a board member and unrelated parties at exercise prices
            ranging from $0.29 to $1.50 per share. We realized aggregate gross
            proceeds of $224,054 from these exercises.

      Our continued operations will depend on our ability to raise additional
funds through various potential sources such as equity and debt financing,
collaborative agreements, strategic alliances, sale of tax benefits, revenues
from the commercial sale of ONCONASE(R), licensing of our proprietary RNase
technology and our ability to realize revenues from our technology and our drug
candidates via out-licensing agreements with other companies. Such additional
funds may not become available as we need them or be available on acceptable
terms. Through October 14, 2004, a significant portion of our financing has been
through the sale of our equity securities and convertible debentures in
registered offerings and private placements and exercise of stock options and
warrants. Additionally, we have raised capital through debt financings, the sale
of our tax benefits and research products, interest income and financing
received from our Chief Executive Officer. Until and unless our operations
generate significant revenues, we expect to continue to fund operations from the
sources of capital previously described. There can be no assurance that we will
be able to raise the capital we need on terms which are acceptable, if at all.
Presently, our cash balance is sufficient to fund our expanded operations at
least through October 31, 2005, based on our expected level of expenditures in
relation to activities in preparing ONCONASE(R) for marketing registrations and
other ongoing operations of the Company. However, we continue to seek additional
capital financing through the sale of equity in private placements, sale of our
tax benefits and exercise of stock options and warrants but cannot be sure that
we will be able to raise capital on favorable terms or at all.

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

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

Off-balance Sheet Arrangements

      As part of our ongoing business, we do not participate in transactions
that generate relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities or SPE, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of July 31, 2004, we are not involved in any
material unconsolidated SPE transactions.

Critical Accounting Policies

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

Use of Estimates


                                       22
<PAGE>

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

Research and Development

      Research and development costs are expensed as incurred.

Accounting For Stock-Based Compensation

      Statements of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), provides for the use of a fair value
based method of accounting for employee stock compensation. However, SFAS 123
also allows an entity to continue to measure compensation cost for stock options
granted to employees and directors using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("APB 25"), which only requires charges to
compensation expense for the excess, if any, of the fair value of the underlying
stock at the date a stock option is granted (or at an appropriate subsequent
measurement date) over the amount the employee must pay to acquire the stock, if
such amounts differ materially from the historical amounts. We have elected to
continue to account for employee stock options using the intrinsic value method
under Opinion 25.

      Pursuant to SFAS 123, shares, warrants or options issued in connection
with debt financing agreements or to non-employees for services are accounted
for based on their fair market value determined using the Black-Scholes option
pricing model.

Accounting For Warrants Issued With Convertible Debt

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

Income Taxes

      We account 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. 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.

Contractual Obligations and Commercial Commitments

      Our major outstanding contractual obligations relate to our equipment
operating lease. Below is a table that presents our contractual obligations and
commercial commitments as of July 31, 2004:


                                       23
<PAGE>

                                                     Payments Due by Fiscal Year
                                                     ---------------------------
                                                                     2006 and
                                             Total          2005    Thereafter
                                             -----          ----    ----------

       Research and development            $72,398       $72,398    $      -0-
       Operating lease                      13,100        13,100           -0-
                                           -------       -------    ---------
       Total contractual cash obligations  $85,498       $85,498    $      -0-
                                           =======       =======    =========

                                  RISK FACTORS

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

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

      We are a development stage company and since our inception our source of
working capital has been public and private sales of our stock. We incurred a
net loss of approximately $5,070,000 for the fiscal year ended July 31, 2004. We
have continued to incur losses since July 2004. We may never achieve revenue
sufficient for us to attain profitability.

      We incurred net losses of approximately $5,070,000, $2,411,000 and
$2,591,000 for the fiscal years ended July 31, 2004, 2003 and 2002,
respectively.

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

      o     Our ability to demonstrate clinically that our products have utility
            and are safe;

      o     Delays or refusals by regulatory authorities in granting marketing
            approvals;

      o     Our limited financial resources relative to our competitors;

      o     Our ability to obtain an appropriate marketing partner;

      o     The availability and level of reimbursement for our products by
            third party payors;

      o     Incidents of adverse reactions to our products;

      o     Side effects or misuse of our products and unfavorable publicity
            that could result; and

      o     The occurrence of manufacturing or distribution disruptions.

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

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

      We need additional financing in order to continue operations, including
completion of our current clinical trials and filing marketing registrations for
ONCONASE(R) in the United States with the FDA and in Europe with the


                                       24
<PAGE>

EMEA. If the results from our current clinical trial do not demonstrate the
efficacy and safety of ONCONASE(R) for malignant mesothelioma, our ability to
raise additional capital will be adversely affected. Even if regulatory
applications for marketing approvals are filed, we will need additional
financing to continue operations. In connection with the recent private
placement from which we realized $10.0 million in gross proceeds from an
institutional investor, we plan to expand our operations in preparing
ONCONASE(R) for marketing registrations in the US and outside the US as well as
fund our ongoing operations. Presently, our cash balance is sufficient to fund
our expanded operations at least through October 31, 2005, based on our expected
level of expenditures. However, taking into consideration all of the
uncertainties related to drug development and our industry, we continue to seek
additional capital financing through the sale of equity in private placements,
sale of our tax benefits and exercise of stock options and warrants but cannot
be sure that we will be able to raise capital on favorable terms or at all.

We may be unable to sell certain state tax benefits in the future and if we are
unable to do so, it would eliminate a source of financing that we have relied on
in the past.

      At July 31, 2004, we had federal net operating loss carryforwards of
approximately $47,326,000 that expire from 2005 to 2024. We also had research
and experimentation tax credit carryforwards of approximately $1,426,000 that
expire from 2005 to 2024. New Jersey has enacted legislation permitting certain
corporations located in New Jersey to sell state tax loss carryforwards and
state research and development credits or tax benefits. The aggregate amount of
tax benefits that New Jersey allows corporations to sell each state fiscal year
(July 1st through June 30th) is determined annually and if New Jersey reduces
such aggregate amount in any fiscal year we may be unable to sell some or all of
our available tax benefits as we have in the past. In addition, there is a
limited market for these types of sales and we may not be able to find someone
to purchase our tax benefits for a reasonable price. Our historical results of
operations have been improved by our sale of tax benefits and if we continue to
generate a limited amount of revenue and are unable in the future to sell our
tax benefits, our results of operations will be negatively impacted.

      For the state fiscal year 2004 (July 1, 2003 to June 30, 2004), we had
approximately $1,378,000 total available tax benefits that were saleable; of
which New Jersey permitted us to sell approximately $261,000. We received
approximately $222,000 from the sale of the $261,000 of tax benefits, which we
recognized as tax benefits for the fiscal year ended July 31, 2004. For the
state fiscal year 2003 (July 1, 2002 to June 30, 2003), we had approximately
$1,373,000 in total available tax benefits that were saleable; of which New
Jersey permitted us to sell approximately $273,000. We received approximately
$231,000 from the sale of the $273,000 of tax benefits, which we recognized as
tax benefits for the fiscal year ended July 31, 2003.

      If still available under New Jersey law, we will attempt to sell the
remaining $1,117,000 of our tax benefits, between July 1, 2004 and June 30,
2005. This amount, which is a carryover of our remaining tax benefits from state
fiscal year 2004, may increase if we incur additional tax benefits during state
fiscal year 2005. We can not estimate, however, what percentage of our sellable
tax benefits New Jersey will permit us to sell, how much money we will receive
in connection with the sale, if we will be able to find a buyer for our tax
benefits or if such funds will be available in a timely manner.

We cannot predict how long it will take us nor how much it will cost us to
complete our Phase III trial because it is a survival study and we are still in
patient enrollment in part two of this Phase III trial.

      We currently have ongoing a two-part Phase III trial of ONCONASE(R) as a
treatment for malignant mesothelioma. The first part of the clinical trial has
been completed and the second, confirmatory part is still ongoing for which
patient enrollment is expected to be completed in the first quarter of 2005. The
primary endpoint of the Phase III clinical trial is survival, which tracks the
length of time patients enrolled in the study live. According to the protocol, a
sufficient number of patient deaths must occur in order to perform the required
statistical analyses to determine the efficacy of ONCONASE(R) in patients with
unresectable (inoperable) malignant mesothelioma. Since it is impossible to
predict with certainty when these terminal events in the Phase III trial will
occur, we do not have the capability of reasonably determining when a sufficient
number of deaths will occur, nor when we will be able to file for marketing
registrations with the FDA and EMEA.


                                       25
<PAGE>

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

      The FDA and comparable regulatory agencies in foreign countries impose
substantial pre-market approval requirements on the introduction of
pharmaceutical products. These requirements involve lengthy and detailed
pre-clinical and clinical testing and other costly and time consuming
procedures. Satisfaction of these requirements typically takes several years
depending on the type, complexity and novelty of the product. We cannot apply
for FDA or EMEA approval to market ONCONASE(R) until the clinical trials and all
other registration requirements have been met.

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

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

      In December 2002, we received Fast Track Designation from the Food and
Drug Administration, or the FDA for ONCONASE(R) for the treatment of malignant
mesothelioma. In February 2001, we received an Orphan Medicinal Product
Designation for ONCONASE(R) from the European Agency for the Evaluation of
Medicinal Products, or the EMEA.

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

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

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


                                       26
<PAGE>

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

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

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

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

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

      We currently have no sales, marketing or distribution capabilities. In
order to commercialize any product candidates for which we receive FDA approval,
we expect to rely on established third party strategic partners to perform these
functions. For example, if we are successful in our Phase III clinical trials
with ONCONASE(R), and are granted marketing approval for the commercialization
of ONCONASE(R), we will be unable to introduce the product to market without
establishing a marketing collaboration with a pharmaceutical company with those
resources. If we establish relationships with one or more biopharmaceutical or
other marketing companies with existing distribution systems and direct sales
forces to market any or all of our product candidates, we cannot assure you that
we will be able to enter into or maintain agreements with these companies on
acceptable terms, if at all. Further, it is likely that we will have limited or
no control over the manner in which product candidates are marketed or the
resources devoted to such markets.

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

      o     the extent to which we are successful in securing collaborative
            partners to offset some or all of the funding obligations with
            respect to product candidates;

      o     the extent to which our agreement with our collaborators permits us
            to exercise marketing or promotion rights with respect to the
            product candidate;

      o     how our product candidates compare to competitive products with
            respect to labeling, pricing, therapeutic effect, and method of
            delivery; and

      o     whether we are able to establish agreements with third party
            collaborators, including large biopharmaceutical or other marketing
            companies, with respect to any of our product candidates on terms
            that are acceptable to us.

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


                                       27
<PAGE>

Our product candidates may not be accepted by the market.

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

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

      We are highly dependent upon our founder, Chairman and Chief Executive
Officer, Kuslima Shogen. Kuslima Shogen's talents, efforts, personality, vision
and leadership have been, and continue to be, critical to our success. The
diminution or loss of the services of Kuslima Shogen, and any negative market or
industry perception arising from that diminution or loss, would have a material
adverse effect on our business. While our other employees have substantial
experience and have made significant contributions to our business, Kuslima
Shogen is our senior executive and also our primary supporter because she
represents the Company's primary means of accessing the capital markets.

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

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

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

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

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

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


                                       28
<PAGE>

conditions our products are intended to treat before we are able to complete the
development of our competing product.

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

We may be sued for product liability.

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

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

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

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

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

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


                                       29
<PAGE>

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

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

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

We have only recently been relisted on the Nasdaq SmallCap Market and our stock
is thinly traded and you may not be able to sell our stock when you want to do
so.

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

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

      The market price of our common stock, like that of the securities of many
other development stage biotechnology companies, has fluctuated over a wide
range and it is likely that the price of our common stock will fluctuate in the
future. Over the past three years, the sale price for our common stock, as
reported by Nasdaq and the OTC Bulletin Board has fluctuated from a low of $0.18
to a high of $10.07. The market price of our common stock could be impacted by a
variety of factors, including:

      o     announcements of technological innovations or new commercial
            products by us or our competitors,

      o     disclosure of the results of pre-clinical testing and clinical
            trials by us or our competitors,

      o     disclosure of the results of regulatory proceedings,

      o     changes in government regulation,

      o     developments in the patents or other proprietary rights owned or
            licensed by us or our competitors,

      o     public concern as to the safety and efficacy of products developed
            by us or others,

      o     litigation, and

      o     general market conditions in our industry.

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

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


                                       30
<PAGE>

      Sales of substantial amounts of our common stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our common stock. We had 34,347,885 shares of common stock outstanding as of
July 31, 2004. The following securities that may be exercised for, or are
convertible into, shares of our common stock were issued and outstanding as of
July 31, 2004:

      o     Options. Stock options to purchase 2,957,445 shares of our common
            stock at a weighted average exercise price of approximately $2.95
            per share.

      o     Warrants. Warrants to purchase 11,371,968 shares of our common stock
            at a weighted average exercise price of approximately $2.54 per
            share.

      o     Convertible Notes. Notes which will convert into 1,744,978 shares of
            our common stock at an average conversion price of $0.27 per share
            and warrants which are convertible into 2,044,978 shares of our
            common stock at an exercise price of $1.00 per share.

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

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

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

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

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

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


                                       31
<PAGE>

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

Not Applicable.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

      As described in the current report on Form 8-K we filed on December 12,
2002, on December 6, 2002, KPMG LLP resigned as our independent registered
public accounting firm and was replaced by J.H. Cohn LLP as our independent
registered public accounting firm for fiscal 2003. The engagement of J.H. Cohn
LLP was approved by our Audit Committee. The reports of KPMG LLP on the
financial statements for the two fiscal years prior to their resignation as our
independent registered public accounting firm contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle except that the report on our financial
statements for the fiscal years ended July 31, 2002 and 2001 contained a
separate paragraph stating that "the Company has suffered recurring losses from
operations, has a working capital deficit and has limited liquid resources which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty." During our fiscal years ended July 31, 2002 and
July 31, 2001 and through December 6, 2002, there were no disagreements between
us and KPMG LLP on any matter of accounting principles or practices, financial
statement disclosures or auditing scope or procedures, which disagreements if
not resolved to the satisfaction of KPMG LLP would have caused them to make
reference thereto in their report on the financial statements for such years.

      On December 1, 1993, certain stockholders of Armus Harrison & Co., or AHC,
terminated their association with AHC, or the AHC termination, and AHC ceased
performing accounting and auditing services, except for limited accounting
services to be performed on our behalf. In June 1996, AHC dissolved and ceased
all operations. The report of J.H. Cohn LLP with respect to our financial
statements from inception to July 31, 2004 is based on the report of KPMG LLP
from August 1, 1992 to July 31, 2002 and of AHC for the period from inception to
July 31, 1992, although AHC has not consented to the use of such report herein
and will not be available to perform any subsequent review procedures with
respect to such report. Accordingly, investors will be barred from asserting
claims against AHC under Section 18 of the Exchange Act on the basis of the use
of such report in any Form 10-K into which such report is incorporated by
reference. In addition, in the event any persons seek to assert a claim against
AHC for false or misleading financial statements and disclosures in documents
previously filed by us, such claim will be adversely affected and possibly
barred. Furthermore, as a result of the lack of a consent from AHC to the use of
its audit report herein, or to its incorporation by reference into a Form 10-K,
our officers and directors will be unable to rely on the authority of AHC as
experts in auditing and accounting in the event any claim is brought against
such persons under Section 18 of the Exchange Act based on alleged false and
misleading Financial Statements and disclosures attributable to AHC. The
discussion regarding certain effects of the AHC termination is not meant and
should not be construed in any way as legal advice to any party and any
potential purchaser should consult with his, her or its own counsel with respect
to the effect of the AHC termination on a potential investment in our Common
Stock or otherwise.

Item 9A. CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of July 31, 2004, the evaluation date. Based upon the evaluation,
the Chief Executive Officer and


                                       32
<PAGE>

Chief Financial Officer concluded that, as of the evaluation date, our
disclosure controls and procedures are effective in timely alerting them to the
material information relating to us required to be included in our periodic SEC
filings.

(b) Changes in internal controls.

There were no significant changes made in our internal controls during the three
months ended July 31, 2004 or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.

                                    Part III

The information required by Item 10 - Directors and Executive Officers of the
Registrant; Item 11 - Executive Compensation; Item 12 - Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters; Item
13 - Certain Relationships and Related Transactions and Item 14 - Principal
Accountant Fees and Services is incorporated into Part III of this Annual Report
on Form 10-K by reference to the Proxy Statement for our Annual Meeting of
Stockholders scheduled to be held on January 27, 2005.

                                     Part IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

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

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

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

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

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

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

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

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

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


                                       33
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    Filed Herewith
Exhibit                                                                                             or Incorporated
No.            Item Title                                                                             by Reference
---            ----------                                                                             ------------
<S>            <C>                                                                                         <C>
10.1           1993 Stock Option Plan and Form of Option Agreement (incorporated by reference to
               Exhibit 10.10 to Registration Statement on Form SB-2, File No. 33-76950, filed on
               August 1, 1994)                                                                             *

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

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

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

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

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

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

10.8           Form of Subscription Agreement and Warrant Agreement used in the July 2001
               Private Placements (incorporated by reference to Exhibit 10.25 to Registration
               Statement on Form S-1, File No. 333-38136, filed on July 30, 2001)                          *

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

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

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

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

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

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


                                       34
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    Filed Herewith
Exhibit                                                                                             or Incorporated
No.            Item Title                                                                             by Reference
---            ----------                                                                             ------------
<S>            <C>                                                                                         <C>
10.15          Form of Note Payable and Warrant Certificate entered into November 2001, January,
               March and May 2003 (incorporated by reference to Exhibit 10.23 to the Company's
               Annual Report on Form 10-K, filed on October 29, 2003)                                      *

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

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

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

10.19          Registration Rights Agreement used in September 2003 private placement with SF
               Capital Partners Ltd. (incorporated by reference to Exhibit 10.26 to the
               Company's Annual Report on Form 10-K, filed on October 29, 2003)                            *

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

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

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

21.1           Subsidiaries of Registrant                                                                  +

23.1           Consent of J.H. Cohn LLP                                                                    +

23.2           Consent of KPMG LLP                                                                         +

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

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

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


                                       35
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    Filed Herewith
Exhibit                                                                                             or Incorporated
No.            Item Title                                                                             by Reference
---            ----------                                                                             ------------
<S>            <C>                                                                                         <C>
32.2           Certification of Principal Financial Officer pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002                                                                  +
</TABLE>

*     Previously filed; incorporated herein by reference

+     Filed herewith

(b) Reports on Form 8-K.

      On May 12, 2004, we filed a report on Form 8-K which reported under Item 5
thereof that we completed a private placement to an existing institutional
investor resulting in the issuance of 1,210,654 shares of common stock at a
price of $8.26 per share and warrants to purchase an additional 1,210,654 shares
of common stock at an exercise price of $12.39 per share. We received gross
proceeds of $10,000,000 from such private placement.

      On June 3, 2004, we filed a report on Form 8-K, which reported under Item
5 thereof the appointment of Dr. David Sidransky to our Board of Directors
effective as of May 28, 2004.


                                       36
<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 14, 2004                   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 14, 2004                  /s/ KUSLIMA SHOGEN
                                          Kuslima Shogen, Chief Executive
                                          Officer and Chairman of the Board
                                          (Principal Executive Officer)


Dated:  October 14, 2004                  /s/ JOHN P. BRANCACCIO
                                          John P. Brancaccio, Director


Dated:  October 14, 2004                  /s/ STEPHEN K. CARTER
                                          Stephen K. Carter, M.D., Director


Dated:  October 14, 2004                  /s/ DONALD R. CONKLIN
                                          Donald R. Conklin, Director


Dated:  October 14, 2004                  /s/ JAMES J. LOUGHLIN
                                          James J. Loughlin, Director


Dated:  October 14, 2004                  /s/ ANDREW P. SAVADELIS
                                          Andrew P. Savadelis, Director, Chief
                                          Financial Officer (Principal
                                          Accounting Officer)


Dated:  October 14, 2004                  /s/ DAVID SIDRANSKY
                                          David Sidransky, M.D., Director


Dated:  October 14, 2004                  /s/ PAUL M. WEISS
                                          Paul M. Weiss, Ph.D., Director


                                       37
<PAGE>

                                      Index

                                                                            Page
                                                                            ----

Audited Financial Statements:

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

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

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

Balance Sheets - July 31, 2004 and 2003 .................................   F-6

Statements of Operations - Years ended July 31, 2004, 2003,
     and 2002 and the Period from August 24, 1981
     (Date of Inception) to July 31, 2004 ...............................   F-7

Statement of Stockholders' Equity (Deficiency)
     Period from August 24, 1981
     (Date of Inception) to July 31, 2004 ...............................   F-8

Statements of Cash Flows - Years ended July 31, 2004, 2003,
     and 2002 and Period from  August 24, 1981
     (Date of Inception) to July 31, 2004 ...............................  F-14

Notes to Financial Statements - Years ended July 31, 2004,
     2003 and 2002 and the Period from August 24, 1981
     (Date of Inception) to July 31, 2004 ...............................  F-17


                                      F-1
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Alfacell Corporation

We have audited the accompanying balance sheets of ALFACELL CORPORATION (A
Development Stage Company) as of July 31, 2004 and 2003, and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
the years then ended and for the period from August 24, 1981 (date of inception)
to July 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of Alfacell
Corporation for the period from August 24, 1981 to July 31, 2002 were audited by
other auditors whose reports dated November 4, 2002 and December 9, 1992, except
for Note 18 which is as of July 19, 1993 and Note 3 which is as of October 28,
1993, expressed unqualified opinions on those statements with explanatory
paragraphs relating to the Company's ability to continue as a going concern.

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

In our opinion, based on our audits and, for the effect on the period from
August 24, 1981 to July 31, 2004 of the amounts for the period from August 24,
1981 to July 31, 2002, on the reports of other auditors, the financial
statements referred to above present fairly, in all material respects, the
financial position of Alfacell Corporation as of July 31, 2004 and 2003, and its
results of operations and cash flows for the years then ended and for the period
from August 24, 1981 to July 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.

                                                               /s/ J.H. Cohn LLP

Roseland, New Jersey
September 17, 2004, except for Note 18,
   which is as of September 23, 2004


                                      F-2
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors
Alfacell Corporation:

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

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

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

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

                                                    /s/ KPMG LLP

Short Hills, New Jersey
November 4, 2002


                                      F-3
<PAGE>

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

                          Independent Auditors' Report

Board of Directors
Alfacell Corporation
Bloomfield, New Jersey

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

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

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


                                      F-4
<PAGE>

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


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

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


                                      F-5
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                                 Balance Sheets

                             July 31, 2004 and 2003

<TABLE>
<CAPTION>
                                                                          2004            2003
                                                                      ------------    ------------
<S>                                                                   <C>             <C>
ASSETS

Current assets:
     Cash and cash equivalents                                        $ 10,147,694    $    330,137
     Other assets                                                           64,771          10,103
                                                                      ------------    ------------
         Total current assets                                           10,212,465         340,240

Property and equipment, net of accumulated depreciation and
     amortization of $1,095,412 in 2004 and $1,136,183 in 2003              56,783          12,795

Loan receivable, related party                                             151,815         142,287
                                                                      ------------    ------------

         Total assets                                                 $ 10,421,063    $    495,322
                                                                      ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
    Current portion of long-term debt, net of debt discount of
        $34,120 and $187,121 at July 31, 2004 and 2003,
        respectively
                                                                      $    372,611    $    637,080
     Accounts payable                                                      541,600         699,429
     Accrued expenses                                                      625,205       1,407,978
                                                                      ------------    ------------
         Total current liabilities                                       1,539,416       2,744,487

Long-term debt, less current portion, net of debt discount of
     $163,687 at July 31, 2003                                                  --         242,516
                                                                      ------------    ------------
         Total liabilities                                               1,539,416       2,987,003
                                                                      ------------    ------------

Commitments and contingencies

Stockholders' equity (deficiency):
     Preferred stock, $.001 par value. Authorized and unissued,
         1,000,000 shares at July 31, 2004 and 2003                             --              --
     Common stock $.001 par value.  Authorized 100,000,000
         shares and 40,000,000 shares at July 31, 2004 and 2003,
         respectively; issued and outstanding 34,347,885 shares and
         25,026,129 shares at July 31, 2004 and 2003, respectively..        34,348          25,026
     Capital in excess of par value                                     77,891,815      61,457,502
     Deficit accumulated during development stage                      (69,044,516)    (63,974,209)
                                                                      ------------    ------------
         Total stockholders' equity (deficiency)                         8,881,647      (2,491,681)
                                                                      ------------    ------------

         Total liabilities and stockholders' equity (deficiency)      $ 10,421,063    $    495,322
                                                                      ============    ============
</TABLE>

See accompanying notes to financial statements.


                                      F-6
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                            Statements of Operations

                    Years ended July 31, 2004, 2003 and 2002
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 2004

<TABLE>
<CAPTION>
                                                  August 24,
                                                     1981
                                                   (date of
                                                   inception)
                                                to July 31, 2004       2004             2003             2002
                                                ----------------   ------------     ------------     ------------
<S>                                               <C>              <C>              <C>              <C>
Revenues:
     Sales                                        $    553,489     $         --     $         --     $         --
     Investment income                               1,429,113           42,113            9,877            4,838
     Other income                                       90,103               --           30,000               --
                                                  ------------     ------------     ------------     ------------
                                                     2,072,705           42,113           39,877            4,838
                                                  ------------     ------------     ------------     ------------

Cost and expenses:
     Cost of sales                                     336,495               --               --               --
     Research and development                       44,954,912        3,352,977        1,699,962        2,032,938
     General and administrative                     23,866,209        1,578,357          624,406          798,053
     Interest:
     Related parties                                 1,147,547               --               --            4,687
     Others                                          2,826,243          402,933          358,398          114,054
                                                  ------------     ------------     ------------     ------------
                                                    73,131,406        5,334,267        2,682,766        2,949,732
                                                  ------------     ------------     ------------     ------------

Loss before state tax benefit                      (71,058,701)      (5,292,154)      (2,642,889)      (2,944,894)

 State tax benefit                                   2,014,185          221,847          231,357          353,732
                                                  ------------     ------------     ------------     ------------

      Net loss                                    $(69,044,516)    $ (5,070,307)    $ (2,411,532)    $ (2,591,162)
                                                  ============     ============     ============     ============

 Loss per basic and diluted common share                           $      (0.17)    $      (0.10)    $      (0.12)
                                                                   ============     ============     ============

 Weighted average number of shares outstanding                       29,438,000       23,166,000       21,045,000
                                                                   ============     ============     ============
</TABLE>

See accompanying notes to financial statements.


                                      F-7
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                 Statement of Stockholders' Equity (Deficiency)

                           Period from August 24, 1981
                      (Date of Inception) to July 31, 2004

<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 service                  50,000              50           4,950              --
Sale of shares for cash, net                                         82,143              82         108,418              --
Adjustment for 3 for 2 stock split declared September 8, 1982       422,321             422            (422)             --
Net loss                                                                 --              --              --              --
                                                                 ----------    ------------    ------------    ------------
Balance at July 31, 1982                                          1,266,964           1,267         325,933              --

Issuance of shares for equipment                                     15,000              15          13,985              --
Sale of shares to private investors                                  44,196              44          41,206              --
Sale of shares in public offering, net                              660,000             660       1,307,786              --
Issuance of shares under stock grant program                         20,000              20         109,980              --
Exercise of warrants, net                                             1,165               1           3,494              --
Net loss                                                                 --              --              --              --
                                                                 ----------    ------------    ------------    ------------
Balance at July 31, 1983                                          2,007,325           2,007       1,802,384              --

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

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

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

<CAPTION>

                                                                    Deficit
                                                                  Accumulated                     Deferred        Total
                                                                     During                     compensation,  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 service                        --              --             --          5,000
Sale of shares for cash, net                                               --              --             --        108,500
Adjustment for 3 for 2 stock split declared September 8, 1982              --              --             --             --
Net loss                                                             (121,486)             --             --       (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>


                                      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, 1986 (brought forward)                        2,933,052    $      2,933    $  6,849,112              --

Exercise of warrants, net                                            14,745              15         147,435              --
Issuance of shares under stock bonus plan for directors and
  consultants                                                         5,000               5          74,995              --
Issuance of shares for services                                     250,000             250         499,750              --
Sale of shares to private investors, net                              5,000               5          24,995              --
Net loss                                                                 --              --              --              --
                                                                 ----------    ------------    ------------     -----------
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, net                                            170,000             170         509,830              --
Issuance of shares for litigation settlement                         12,500              12          31,125              --
Exercise of warrants, net                                            63,925              64         451,341              --
Sale of shares to private investors                                  61,073              61         178,072              --
Amortization of deferred compensation, restricted stock                  --              --              --              --
Net loss                                                                 --              --              --              --
                                                                 ----------    ------------    ------------     -----------
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, net                                      133,333             133         399,867              --
Sale of shares to private investors                                 105,840             106         419,894              --
Exercise of options, net                                              1,000               1           3,499              --
Issuance of shares under employment agreement                       750,000             750       3,749,250              --
Issuance of shares under the 1989 Stock Plan                         30,000              30         149,970              --
Amortization of deferred compensation, restricted stock                  --              --              --              --
Net loss                                                                 --              --              --              --
                                                                 ----------    ------------    ------------     -----------
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, net                                         105,989    $        106    $    345,856              --

<CAPTION>

                                                                    Deficit
                                                                  Accumulated                     Deferred         Total
                                                                     During                     compensation,   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, net                                                  --              --             --         147,450
Issuance of shares under stock bonus plan for directors and
  consultants                                                              --              --             --          75,000
Issuance of shares for services                                            --              --             --         500,000
Sale of shares to private investors, net                                   --              --             --          25,000
Net loss                                                           (2,604,619)             --             --      (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, net                                                   --              --             --         510,000
Issuance of shares for litigation settlement                               --              --             --          31,137
Exercise of warrants, net                                                  --              --             --         451,405
Sale of shares to private investors                                        --              --             --         178,133
Amortization of deferred compensation, restricted stock                    --              --        449,167         449,167
Net loss                                                           (3,272,773)             --             --      (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, net                                             --              --             --         400,000
Sale of shares to private investors                                        --              --             --         420,000
Exercise of options, net                                                   --              --             --           3,500
Issuance of shares under employment agreement                              --              --     (3,750,000)             --
Issuance of shares under the 1989 Stock Plan                               --              --       (150,000)             --
Amortization of deferred compensation, restricted stock                    --              --      1,050,756       1,050,756
Net loss                                                           (2,952,869)             --             --      (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, net                                      $         --    $         --   $         --    $    345,962
</TABLE>


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

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

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

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

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

<CAPTION>

                                                                    Deficit
                                                                  Accumulated                     Deferred         Total
                                                                     During                     compensation,   Stockholders'
                                                                  Development    Subscription    restricted        Equity
                                                                     Stage        Receivable        stock       (Deficiency)
                                                                 ------------    ------------   -------------   -------------
<S>                                                               <C>                      <C>    <C>             <C>
Sale of shares to private investors                                        --              --             --         355,080
Issuance of shares under employment agreement                              --              --     (3,750,000)             --
Conversion of debentures, net                                              --              --             --         500,000
Amortization of deferred compensation, restricted stock                    --              --      3,015,561       3,015,561
Net loss                                                           (4,860,116)             --             --      (4,860,116)
                                                                 ------------    ------------   ------------    ------------
Balance at July 31, 1990                                          (20,889,091)             --     (5,920,516)     (3,103,176)

Exercise of options, net                                                   --              --             --         108,680
Issuance of shares for legal consulting services                           --              --             --         358,714
Issuance of shares under the 1989 Stock Plan                               --              --       (476,000)             --
Amortization of deferred compensation, restricted stock                    --              --      2,891,561       2,891,561
Net loss                                                           (5,202,302)             --             --      (5,202,302)
                                                                 ------------    ------------   ------------    ------------
Balance at July 31, 1991                                          (26,091,393)             --     (3,504,955)     (4,946,523)

Exercise of options at, net                                                --              --             --           3,500
Sale of shares to private investors                                        --              --             --         219,900
Conversion of debentures, net                                              --              --             --         470,000
Issuance of shares for services                                            --              --             --         156,990
Issuance of shares under the 1989 Stock Plan                               --              --       (286,000)             --
Amortization of deferred compensation, restricted stock                    --              --      3,046,726       3,046,726
Net loss                                                           (4,772,826)             --             --      (4,772,826)
                                                                 ------------    ------------   ------------    ------------
Balance at July 31, 1992                                          (30,864,219)             --       (744,229)     (5,822,233)

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

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


                                      F-10
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

            Statement of Stockholders' Equity (Deficiency), Continued

<TABLE>
<CAPTION>
                                                                        Common Stock
                                                                 ------------------------

                                                                                             Capital In       Common
                                                                  Number of                 Excess of par   Stock to be
                                                                   Shares        Amount         Value         Issued
                                                                 ----------   -----------   -------------   ------------
<S>                                                              <C>          <C>            <C>                <C>
Issuance of shares under the 1989 Stock Plan, for services            5,000              5         14,995             --
Issuance of options to related parties upon conversion of
  accrued interest, payroll and expenses                                 --   $         --   $  3,194,969             --
Repurchase of stock options from related party                           --             --       (198,417)            --
Issuance of options upon conversion of accrued interest                  --             --        142,441             --
Common stock to be issued                                                --             --             --         50,000
Amortization of deferred compensation, restricted stock                  --             --             --             --
Net loss                                                                 --             --             --             --
                                                                 ----------   ------------   ------------    -----------
Balance at July 31, 1994                                          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, net                                            185,000            185        437,015             --
Common stock to be issued                                                --             --             --        339,008
Common stock to be issued, for services                                  --             --             --          4,800
Amortization of deferred compensation, restricted stock                  --             --             --             --
Net loss                                                                 --             --             --             --
                                                                 ----------   ------------   ------------    -----------
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, net                                            566,700            567      1,657,633             --
Sale of warrants                                                         --             --         12,084             --
Issuance of options/warrants for services                                --             --         50,872             --
Common stock to be issued                                                --             --             --        258,335
Subscription receivable                                                  --             --             --             --
Net loss                                                                 --             --             --             --
                                                                 ----------   ------------   ------------    -----------
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, net                                            729,134            729      2,620,359       (258,335)
Exercise of warrants, net                                           147,450            148        737,102             --
Net loss                                                                 --             --             --             --
                                                                 ----------   ------------   ------------    -----------
Balance at July 31, 1997 (carried forward)                       14,847,793         14,848     50,961,382             --

<CAPTION>

                                                                    Deficit
                                                                  Accumulated                     Deferred         Total
                                                                     During                     compensation,   Stockholders'
                                                                  Development    Subscription    restricted        Equity
                                                                     Stage        Receivable        stock       (Deficiency)
                                                                 ------------    ------------   -------------   -------------
<S>                                                              <C>             <C>             <C>             <C>
Issuance of shares under the 1989 Stock Plan, for services                 --              --              --          15,000
Issuance of options to related parties upon conversion of
  accrued interest, payroll and expenses                         $         --    $         --    $         --    $  3,194,969
Repurchase of stock options from related party                             --              --              --        (198,417)
Issuance of options upon conversion of accrued interest                    --              --              --         142,441
Common stock to be issued                                                  --              --              --          50,000
Amortization of deferred compensation, restricted stock                    --              --         265,000         265,000
Net loss                                                           (2,234,428)             --              --      (2,234,428)
                                                                 ------------    ------------    ------------    ------------
Balance at July 31, 1994                                          (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, net                                                   --              --              --         437,200
Common stock to be issued                                                  --              --              --         339,008
Common stock to be issued, for services                                    --              --              --           4,800
Amortization of deferred compensation, restricted stock                    --              --          58,500          58,500
Net loss                                                           (1,993,123)             --              --      (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, net                                                   --              --              --       1,658,200
Sale of warrants                                                           --              --              --          12,084
Issuance of options/warrants for services                                  --              --              --          50,872
Common stock to be issued                                                  --              --              --         258,335
Subscription receivable                                                    --        (254,185)             --        (254,185)
Net loss                                                           (2,942,152)             --              --      (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, net                                                   --         254,185              --       2,616,938
Exercise of warrants, net                                                  --              --              --         737,250
Net loss                                                           (5,018,867)             --              --      (5,018,867)
                                                                 ------------    ------------    ------------    ------------
Balance at July 31, 1997 (carried forward)                        (45,410,139)             --              --       5,566,091
</TABLE>


                                      F-11
<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, 1997 (brought forward)                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, net                                      4,950              5         11,080            --
Issuance of shares for services, net                          50,000             50         99,950            --
Net loss                                                          --             --             --            --
                                                          ----------   ------------   ------------   -----------
Balance at July 31, 1998                                  17,239,893         17,240     55,472,243            --

Issuance of options for services                                  --             --        205,593            --
Issuance of shares for services, net                          46,701             46         16,359            --
Net loss                                                          --             --             --            --
                                                          ----------   ------------   ------------   -----------
Balance at July 31, 1999                                  17,286,594         17,286     55,694,195            --

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

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

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

<CAPTION>

                                                             Deficit
                                                           Accumulated                     Deferred         Total
                                                              During                     compensation,   Stockholders'
                                                           Development    Subscription    restricted        Equity
                                                              Stage        Receivable        stock       (Deficiency)
                                                          ------------    ------------   -------------   -------------
<S>                                                       <C>             <C>             <C>             <C>
Balance at July 31, 1997 (brought forward)                $(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, net                                           --              --              --          11,085
Issuance of shares for services, net                                --              --              --         100,000
Net loss                                                    (6,387,506)             --              --      (6,387,506)
                                                          ------------    ------------    ------------    ------------
Balance at July 31, 1998                                   (51,797,645)             --              --       3,691,838

Issuance of options for services                                    --              --              --         205,593
Issuance of shares for services, net                                --              --              --          16,405
Net loss                                                    (3,156,636)             --              --      (3,156,636)
                                                          ------------    ------------    ------------    ------------
Balance at July 31, 1999                                   (54,954,281)             --              --         757,200

Sale of shares to private investors, net                            --              --              --         548,292
Exercise of options, net                                            --              --              --          45,850
Issuance of shares for services, net                                --              --              --          92,184
Vesting of options previously issued for services                   --              --              --         146,912
Net loss                                                    (1,722,298)             --              --      (1,722,298)
                                                          ------------    ------------    ------------    ------------
Balance at July 31, 2000                                   (56,676,579)             --              --        (131,860)

Sale of shares to private investors, net                            --              --              --         956,424
Exercise of options, net                                            --              --              --          83,731
Issuance of shares for services, net                                --              --              --          10,030
Exercise of convertible debentures, net                             --              --              --         297,000
Issuance of warrants with convertible debt                          --              --              --         178,807
Issuance of options for services                                    --              --              --         160,426
Net loss                                                    (2,294,936)             --              --      (2,294,936)
                                                          ------------    ------------    ------------    ------------
Balance at July 31, 2001                                   (58,971,515)             --              --        (740,378)

Sale of shares to private investors, net                            --              --              --       1,050,548
Exercise of stock options and warrants                              --              --              --          93,000
Issuance of shares for services, net                                --              --              --          64,126
Exercise of convertible debentures, net                             --              --              --          64,993
Vesting of options previously issued for services                   --              --              --         173,436
Net loss                                                    (2,591,162)             --              --      (2,591,162)
                                                          ------------    ------------    ------------    ------------
Balance at July 31, 2002 (carried forward)                 (61,562,677)             --              --      (1,885,437)
</TABLE>


                                      F-12
<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, 2002 (brought forward)                 22,760,921   $     22,761   $ 59,654,479             --

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

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

<CAPTION>

                                                             Deficit
                                                           Accumulated                     Deferred         Total
                                                              During                     compensation,   Stockholders'
                                                           Development    Subscription    restricted        Equity
                                                              Stage        Receivable        stock       (Deficiency)
                                                          ------------    ------------   -------------   -------------
<S>                                                       <C>             <C>             <C>            <C>
Balance at July 31, 2002 (brought forward)                $(61,562,677)   $         --    $         --   $ (1,885,437)

Sale of shares to private investors, net                            --              --              --        653,627
Exercise of stock options and warrants                              --              --              --        377,660
Issuance of shares for payment of accounts payable                  --              --              --         94,223
Issuance of options for services rendered                           --              --              --         75,521
Vesting of options previously issued for services                   --              --              --         10,038
Issuance of warrants in connection with debt issuances              --              --              --        594,219
Net loss                                                    (2,411,532)             --              --     (2,411,532)
                                                          ------------    ------------    ------------   ------------
Balance at July 31, 2003                                   (63,974,209)             --              --     (2,491,681)

Sale of shares to private investors, net                            --              --              --     10,735,978
Exercise of stock options and warrants                              --              --              --      4,158,497
Issuance of shares for payment of accounts payable                  --              --              --         52,176
Issuance of shares for conversion of subordinated
debentures, other                                                   --              --              --        927,872
Issuance of shares for services rendered                            --              --              --        288,500
Issuance of options for services rendered                           --              --              --        280,612
Net loss                                                    (5,070,307)             --              --     (5,070,307)
                                                          ------------    ------------    ------------   ------------
Balance at July 31, 2004                                  $(69,044,516)   $         --    $         --   $  8,881,647
                                                          ============    ============    ============   ============
</TABLE>

See accompanying notes to financial statements.


                                      F-13
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                            Statements of Cash Flows

                    Years ended July 31, 2004, 2003 and 2002
                       and the Period from August 24, 1981
                      (Date of Inception) to July 31, 2004

<TABLE>
<CAPTION>
                                                                  August 24, 1981
                                                                     (date of
                                                                   inception) to
                                                                      July 31,
                                                                        2004           2004           2003           2002
                                                                  ---------------   -----------    -----------    -----------
<S>                                                                 <C>             <C>            <C>            <C>
Cash flows from operating activities:
  Net loss                                                          $(69,044,516)   $(5,070,307)   $(2,411,532)   $(2,591,162)
  Adjustments to reconcile net loss to net cash used
    in operating activities:
       Gain on sale of marketable securities                             (25,963)            --             --             --
       Depreciation and amortization                                   1,556,767          9,549         15,812         38,948
       Loss on disposal of property and equipment                         18,926             --             --             --
       Noncash operating expenses                                      6,686,724        569,112         85,559        207,947
       Amortization of debt discount                                     560,099        316,688        243,411             --
       Amortization of deferred compensation                          11,442,000             --             --             --
       Amortization of organization costs                                  4,590             --             --             --
       Changes in assets and liabilities:
        (Increase) decrease in other current assets                     (124,638)       (54,668)        35,651         (2,821)
        Increase in other assets                                         (55,764)        (9,528)       (73,620)       (22,327)
        Increase in loans and interest payable, related party            744,539             --             --             --
        (Decrease) increase in accounts payable                        1,048,235       (105,653)        (2,476)       450,282
        Increase in accrued payroll and expenses, related parties      2,348,145             --             --             --
        (Decrease) increase in accrued expenses                        1,279,590       (669,901)       553,700        388,465
                                                                    ------------    -----------    -----------    -----------
             Net cash used in operating activities                   (43,561,266)    (5,014,708)    (1,553,495)    (1,530,668)
                                                                    ------------    -----------    -----------    -----------

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                             (1,460,373)       (53,537)            --             --
       Patent costs                                                      (97,841)            --             --             --
                                                                    ------------    -----------    -----------    -----------
             Net cash used in investing activities                    (1,532,251)       (53,537)            --             --
                                                                    ------------    -----------    -----------    -----------
</TABLE>


                                      F-14
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                     August 24, 1981
                                                                         (date of
                                                                      inception) to
                                                                         July 31,
                                                                           2004             2004            2003           2002
                                                                     ----------------   ------------    ------------    ----------
<S>                                                                     <C>             <C>             <C>             <C>
Cash flows from financing activities:
  Proceeds from short-term borrowings                                   $    874,500    $         --    $     25,000    $       --
  Payment of short-term borrowings                                          (653,500)             --         (25,000)       (5,000)
  Increase (decrease) in loans payable, related party, net                 2,628,868              --        (139,794)      139,794
  Proceeds from bank debt and other long-term debt, net
    of deferred debt costs
                                                                           3,667,460              --         915,000       300,000
  Reduction of bank debt and long-term debt                               (2,959,837)         (8,673)         (8,704)       (6,612)
  Proceeds from issuance of common stock, net                             40,750,316      10,735,978         653,627     1,050,548
  Proceeds from exercise of stock options and warrants, net               10,219,411       4,158,497         377,660        93,000
  Proceeds from issuance of convertible debentures, related party            297,000              --              --            --
  Proceeds from issuance of convertible debentures, unrelated party          416,993              --              --            --
                                                                        ------------    ------------    ------------    ----------
       Net cash provided by financing activities                          55,241,211      14,885,802       1,797,789     1,571,730
                                                                        ------------    ------------    ------------    ----------
       Net increase in cash and cash equivalents                          10,147,694       9,817,557         244,294        41,062
Cash and cash equivalents at beginning of period                                  --         330,137          85,843        44,781
                                                                        ------------    ------------    ------------    ----------
Cash and cash equivalents at end of period                              $ 10,147,694    $ 10,147,694    $    330,137    $   85,843
                                                                        ============    ============    ============    ==========

Supplemental disclosure of cash flow information - interest paid        $  1,713,713    $      6,375    $     24,697    $   20,195
                                                                        ============    ============    ============    ==========

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

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

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

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

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

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


                                      F-15
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       Statements of Cash Flows, Continued

<TABLE>
<CAPTION>
                                                                  August 24, 1981
                                                                      (date of
                                                                   inception) to
                                                                      July 31,
                                                                        2004             2004          2003          2002
                                                                  ----------------    -----------   -----------   -----------
<S>                                                                   <C>             <C>           <C>           <C>
Conversions of accounts payable to common stock                     $   506,725       $    52,176   $    94,223   $    64,126
                                                                    ===========       ===========   ===========   ===========

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 and accrued interest, other             $ 1,119,865       $   927,872   $        --   $    64,993
                                                                    ===========       ===========   ===========   ===========

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

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

See accompanying notes to financial statements.


                                      F-16
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                          Notes to Financial Statements

                    Years ended July 31, 2004, 2003 and 2002
                       and the Period From August 24, 1981
                      (Date of Inception) to July 31, 2004

(1)   Summary of Significant Accounting Policies

      Business Description

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

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

      Use of Estimates

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

      Property and Equipment

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

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

      Cash Equivalents

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

      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. Debt instruments
      have been issued at rates which represent prevailing market rates for
      similar financings.


                                      F-17
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

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

      Comprehensive Income (Loss)

      The net loss of $5,070,000, $2,411,000 and $2,591,000 recorded for the
      years ended July 31, 2004, 2003 and 2002, respectively, is equal to the
      comprehensive loss for those periods in accordance with Statement of
      Financial Accounting Standards No. 130, "Reporting Comprehensive Income".

      Earnings (Loss) Per Common Share

      "Basic" earnings (loss) per common share equals net income (loss) divided
      by weighted average common shares outstanding during the period. "Diluted"
      earnings per common share equals net income divided by the sum of weighted
      average common shares outstanding during the period, adjusted for the
      effects of potentially dilutive securities. The Company's Basic and
      Diluted per share amounts are the same since the Company is in a loss
      position and the assumed exercise of stock options, warrants and
      conversion of convertible notes would be all anti-dilutive. The number of
      outstanding options and warrants that could dilute earnings per share in
      future periods was 14,329,413, 9,663,023 and 9,040,881 at July 31, 2004,
      2003 and 2002, respectively. This excludes the potential dilution that
      could occur upon the conversion of convertible notes into 1,744,978 common
      stock and warrants to purchase 2,044,978 shares of common stock.

      Long-Lived Assets

      The Company reviews long-lived assets for impairment annually or whenever
      events or changes in business circumstances occur that indicate that the
      carrying amount of the assets may not be recoverable. The Company assesses
      the recoverability of long-lived assets held and to be used based on
      undiscounted cash flows, and measures the impairment, if any, using
      discounted cash flows. SFAS No. 144, Accounting for the Impairment or
      Disposal of Long-Lived Assets, has not had a material impact on the
      Company's financial position, operating results or cash flows.

      Stock Option Plans

      Statement of Financial Accounting Standards No. 123, Accounting for
      Stock-Based Compensation ("SFAS 123"), provides for the use of a fair
      value based method of accounting for employee stock compensation. However,
      SFAS 123 also allows an entity to continue to measure compensation cost
      for stock options granted to employees and directors using the intrinsic
      value method of accounting prescribed by Accounting Principles Board
      Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), which
      only requires charges to compensation expense for the excess, if any, of
      the fair value of the underlying stock at the date a stock option is
      granted (or at an appropriate subsequent measurement date) over the amount
      the employee must pay to acquire the stock, if such amounts differ
      materially from the historical amounts. The Company has elected to
      continue to account for employee stock options using the intrinsic value
      method under Opinion 25.

      Pursuant to SFAS 123, shares, warrants or options issued in connection
      with debt financing agreements or to non-employees for services are
      accounted for based on their fair market value determined using the
      Black-Scholes option pricing model.

      In accordance with Statement of Financial Accounting Standards No. 148
      ("SFAS 148") and SFAS 123, the Company's pro forma option expense is
      computed using the Black-Scholes option pricing model. To comply with SFAS
      148, the Company is presenting the following table to illustrate the
      effect on the net loss and loss per share if it had applied the fair value
      recognition provisions of SFAS 123, as amended, to options granted under
      the stock-based employee compensation plans. For purposes of this pro
      forma disclosure, the estimated value of the options is amortized ratably
      to expense over the options' vesting periods.


                                      F-18
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

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

<TABLE>
<CAPTION>
                                                2004           2003           2002
                                            -----------    -----------    -----------
<S>                                         <C>            <C>            <C>
Net Loss:
  As reported                               $(5,070,307)   $(2,411,532)   $(2,591,162)
  Less total stock-based employee
  compensation expense determined
  under a fair value based method for all
  awards, net of related tax effects         (1,489,721)      (152,598)      (169,708)
                                            -----------    -----------    -----------
  Pro forma                                 $(6,560,028)   $(2,564,130)   $(2,760,870)
                                            ===========    ===========    ===========
Basic and diluted loss per common share:
  As reported                               $     (0.17)   $     (0.10)   $     (0.12)
  Pro forma                                       (0.22)         (0.11)         (0.13)
</TABLE>

      Accounting For Warrants Issued With Convertible Debt

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

      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 temporary differences between the financial statement
      carrying amounts and tax bases of assets and liabilities using enacted tax
      rates in effect for all years in which the temporary differences are
      expected to reverse. A valuation allowance is provided when it is more
      likely than not that some portion or all of the deferred tax assets will
      not be realized.

(2)   Liquidity

      The Company has reported net losses of approximately $5,070,000,
      $2,411,000, and $2,591,000 for the fiscal years ended July 31, 2004, 2003
      and 2002, respectively. The loss from date of inception, August 24, 1981,
      to July 31, 2004 amounts to $69,044,000.

      The Company's long-term continued operations will depend on its ability to
      raise additional funds through various potential sources such as equity
      and debt financing, collaborative agreements, strategic alliances, sale of
      tax benefits, revenues from the commercial sale of ONCONASE(R), licensing
      of its proprietary RNase technology and its ability to realize revenues
      from its technology and its drug candidates via out-licensing agreements
      with other companies. Such additional funds may not become available as
      the Company may need them or be available on acceptable terms. Through
      September 17, 2004, a significant portion of the Company's financing has
      been through the sale of its equity securities and convertible debentures
      in registered offerings and private placements and the exercise of stock
      options and warrants. Additionally, the Company has raised capital through
      debt financings, the sale of tax benefits and research


                                      F-19
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(2)   Liquidity, (Continued)

      products, interest income and financing received from its Chief Executive
      Officer. Until and unless the Company's operations generate significant
      revenues, the Company expects to continue to fund operations from the
      sources of capital previously described. There can be no assurance that
      the Company will be able to raise the capital it needs on terms which are
      acceptable, if at all. Presently, the Company's cash balance is sufficient
      to fund its expanded operations at least through October 31, 2005, based
      on its expected level of expenditures in relation to activities in
      preparing ONCONASE(R) for marketing registrations and other ongoing
      operations of the Company. However, the Company continues to seek
      additional capital financing through the sale of equity in private
      placements, sale of its tax benefits and exercise of stock options and
      warrants but cannot be sure that it will be able to raise capital on
      favorable terms or at all.

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

(3)   Property and Equipment

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

<TABLE>
<CAPTION>
                                                                 2004         2003
                                                                 ----         ----
<S>                                                          <C>          <C>
            Laboratory equipment                             $  794,123   $  755,040
            Office equipment                                    260,239      296,105
            Leasehold improvements                               97,833       97,833
                                                             ----------   ----------
            Total                                             1,152,195    1,148,978
            Less accumulated depreciation and amortization    1,095,412    1,136,183
                                                             ----------   ----------
            Property and equipment, net                      $   56,783   $   12,795
                                                             ==========   ==========
</TABLE>

(4)   Long-term Debt

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

<TABLE>
<CAPTION>
                                                                                          2004       2003
                                                                                          ----       ----
<S>                                                                                     <C>        <C>
      Convertible notes payable, unsecured, unrelated party at 8% and 8.5% interest,
      net of debt discount of $34,120 at July 31, 2004 and $350,808 at July 31, 2003,
      with maturity dates during fiscal years July 31, 2004 and 2005                    $365,880   $564,192
      Notes payable, unsecured, unrelated party at 8% interest and due as  follows:
      $100,000 due December 4, 2003, $100,000 due February17, 2004 and $100,000 due
      March 29, 2004                                                                          --    300,000
      Note payable, in monthly installments of $1,459, including principal and
      interest commencing April 2000 and each month thereafter until March 2005,
      collateralized by equipment                                                          6,731     15,404
                                                                                        --------   --------
                                                                                         372,611    879,596
      Less current portion                                                               372,611    637,080
                                                                                        --------   --------
                                                                                        $     --   $242,516
                                                                                        ========   ========
</TABLE>


                                      F-20
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(4)   Long-term Debt, (Continued)

      During the fiscal year ended July 31, 2003, the Company issued 8%
      convertible notes payable to unrelated parties with principal balances
      totaling an aggregate of $915,000. These notes payable mature on various
      dates from April 2004 through May 2005 and are convertible into the
      Company's common stock at conversion prices ranging from $0.20 to $0.50
      per share and an equal number of five year warrants at an exercise price
      of $1.00 per share. With the issuance of the notes payable, the Company
      issued to the unrelated parties five year warrants to purchase an
      aggregate of 665,000 shares of the Company's common stock at an exercise
      price of $0.60 per share. In addition, the Company has issued or will
      issue on the due date of the notes payable five year warrants to purchase
      an aggregate of 915,000 shares of the Company's common stock at per share
      exercise prices of $1.00 and $1.10. The Company valued these warrants at a
      total of $219,259 based on the fair value determined by using the
      Black-Scholes method. At the issuance dates of the notes payable, the fair
      market values of the Company's shares exceeded the effective conversion
      prices.

      Accordingly, the Company initially increased additional paid-in capital by
      $219,259 for the fair value of the warrants and reduced the carrying value
      of the notes payable for the same amount for the debt discount
      attributable to the fair value of the warrants. The Company is amortizing
      the debt discount over the terms of the notes payable.

      Pursuant to the applicable guidance in the consensus for EITF Issue No.
      00-27, the Company valued the beneficial conversion feature using the
      effective conversion price. Accordingly, the Company first allocated
      $219,259 to the detachable warrants and decreased the carrying value of
      the notes payable.

      Based on the effective conversion prices, the Company recorded a
      beneficial conversion charge of $374,960 which was allocated to additional
      paid-in capital and debt discount which is being amortized as interest
      expense over the terms of the notes payable.

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

      The notes require principal payments in each of the years subsequent to
      July 31, 2004 as follows:

                        Year Ending July 31,              Amount
                        --------------------              ------

                                2005                    $ 400,000

(5)   Related Party

      Amounts due from the Company's CEO totaling $151,815 and $142,287 at July
      31, 2004 and 2003, respectively, are classified as a long-term asset in
      Loan receivable, related party as the Company does not expect repayment of
      these amounts within one year. In each of the fiscal years ended July 31,
      2003 and 2004 the Company earned 8% interest in the amount of
      approximately $9,500 on the unpaid principal balance.

(6)   Note Payable - Convertible Note

      In April 2001, the Company entered into convertible notes payable with
      certain related and unrelated parties in the aggregate amount of $366,993.
      The notes were due within ninety (90) days unless the lenders elect to
      exercise an option to convert the note into the Company's common stock,
      par value $.001


                                      F-21
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(6)   Note Payable - Convertible Note, (Continued)

      per share at a conversion price of $0.90 per share (the estimated fair
      market value of the stock based on the average of the high and low trade
      prices of the Company's common stock for the ten (10) trading days
      preceding the loan date). In addition, upon conversion, the lender would
      receive a three-year warrant for each share of converted common stock at
      an exercise price of $2.50 per share that will expire on July 7, 2004. The
      estimated value of the warrants of $133,793, using the Black-Scholes
      options-pricing model, was recorded as interest expense over the original
      ninety day note term. In July 2001, an aggregate of $297,000 note payables
      were converted which resulted in the issuance of 330,000 shares of the
      Company's common stock. In addition, upon conversion, the Company issued
      the agreed three-year warrants to purchase an aggregate of 330,000 shares
      of common stock at an exercise price of $2.50 per share. An aggregate
      balance of the convertible notes in the amount of $69,993 was renewed for
      one hundred twenty (120) days for the same conversion price of $0.90 per
      share. In addition, upon conversion, the lender would receive a five-year
      warrant for each share of converted common stock at an exercise price of
      $1.50 per share. The estimated value of the warrants of $45,000, using the
      Black-Scholes options-pricing model, was treated as a debt discount which
      accreted as interest expense over the one hundred twenty day note term
      through October 31, 2001. In October 2001, an aggregate of $64,993 notes
      payable were converted which resulted in the issuance of 72,214 shares of
      the Company's common stock. In addition, upon conversion, the Company
      issued the agreed five-year warrants to purchase an aggregate of 72,214
      shares of common stock at an exercise price of $1.50 per share. Also, in
      October 2001, the Company's Board of Directors approved the change in the
      exercise price of the 330,000 warrants issued to related parties upon
      conversion of notes from $2.50 per share to $1.50 per share and changed
      the expiration date to July 7, 2006, to conform with the private
      placements to unrelated parties.

(7)   Leases

      The Company leases its facility on a month-to-month basis. Rent expense
      charged to operations was $136,000 in each of 2004, 2003 and 2002.

(8)   Stockholders' Equity

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

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

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

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


                                      F-22
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

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


                                      F-23
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

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

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

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

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

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


                                      F-24
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

      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.

      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.


                                      F-25
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

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

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

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


                                      F-26
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

      In May 1997, the Company issued 100,000 stock options to Dr. Stephen
      Carter, a director, with an exercise price of $5.20 per share as payment
      for serving as Chairman of the Scientific Advisory Board (the "SAB").
      These options vested as follows: 10,000 vested immediately, 10,000 after
      one full calendar year, 10,000 annually for each of the following three
      years and 50,000 on May 13, 2002. The Company recorded a total research
      and development expense of $353,400, which was the fair value on the date
      of issuance of that portion of the stock options that had vested as of
      July 31, 2002. Of these options, 30,000 expired as of the fiscal year
      ended July 31, 2004.

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

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

      In October 1997, the Company issued 75,000 stock options to a director
      with an exercise price of $3.66 per share as payment for non-board related
      services to be rendered. These options vested as follows: 10,000 vested
      immediately; 10,000 after one full calendar year; 10,000 annually for each
      of the following three years; and 25,000 on October 31, 2002. A total
      general and administrative expense of $185,600 was amortized on a straight
      -line basis over a five-year period, which commenced in October 1997. Of
      these options, 20,000 expired as of the fiscal year ended July 31, 2004.

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

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

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

      On January 23, 1998, the Securities and Exchange Commission (the "SEC")
      declared effective a registration statement on Form S-3 for the offer and
      sale by certain stockholders of up to 3,734,541 shares of common stock. Of
      these shares (i) an aggregate of 2,737,480 shares were issued to private
      placement


                                      F-27
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

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

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

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

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


                                      F-28
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

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

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


                                      F-29
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

      During the fiscal year ended July 31, 2000, the Company sold an aggregate
      of 875,000 shares of common stock to private investors at prices ranging
      from $0.50 to $1.00 per share resulting in net proceeds of $548,300 to the
      Company. In addition, the private investors were granted warrants to
      purchase an aggregate of 875,000 shares of common stock, inclusive of
      additional warrants issued so that all investors in the private placements
      received substantially the same securities, at per share exercise prices
      ranging from $1.03 to $4.55. Of these warrants, 437,500 expired in May
      2003 and the balance have an expiration date of May 2005.

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

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

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

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

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

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


                                      F-30
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

      During the fiscal year ended July 31, 2002, the Company issued an
      aggregate of 85,221 five-year stock options as payment for services
      rendered. The options vested immediately and had a per share exercise
      prices of $0.75 as to 70,000 stock options and $0.94 as to 15,221 stock
      options. The Company recorded an aggregate total of $40,747 non-cash
      expenses for these options, based upon the fair value on the date of the
      issuance as estimated by the Black-Scholes options-pricing model. Of these
      options, 65,000 were exercised during the fiscal year ended July 31, 2004.

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

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

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


                                      F-31
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

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

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

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

      During the fiscal year ended July 31, 2003, the Company issued 8%
      convertible notes payable to unrelated parties with principal balances
      totaling an aggregate of $915,000. These notes payable mature on various
      dates from April 2004 through May 2005 and are convertible into the
      Company's common stock at conversion prices ranging from $0.20 to $0.50
      per share and an equal number of five year warrants with an exercise price
      of $1.00 per share. With the issuance of the notes payable, the Company
      issued to the unrelated parties five year warrants to purchase an
      aggregate of 665,000 shares of the Company's common stock, at an exercise
      price of $0.60 per share. In addition, the Company has issued or will
      issue on the due date of the notes payable five year warrants to purchase
      an aggregate of 915,000 shares of the Company's common stock at per share
      exercise prices of $1.00 and $1.10. The Company valued these warrants at a
      total of $219,259 based on the fair value determined by using the
      Black-Scholes method. At the issuance dates of the notes payable, the fair
      market values of the Company's shares exceeded the effective conversion
      prices. Accordingly, the Company initially increased additional paid-in
      capital by $219,259 for the fair value of the warrants and reduced the
      carrying value of the notes payable for the same amount for the debt
      discount attributable to the fair value of the warrants. The Company also
      increased its additional paid-in capital and debt discount by $374,960 for
      beneficial conversion rights issued in connection with the issuances of
      these notes (see note 4).


                                      F-32
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(8)   Stockholders' Equity, (Continued)

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

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

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

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

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

      During the fiscal year ended July 31, 2004, the Company entered into a
      two-part financing agreement with SF Capital Partners, Ltd. for the
      private placement of 1,704,546 shares of common stock and warrants to
      purchase 852,273 shares of common stock, at an exercise price of $1.50 per
      share. As consideration, the Company received $1,500,000. In addition, the
      Company granted SF Capital Partners, Ltd. a warrant to invest an
      additional $1,500,000 to purchase the Company's common stock at an
      exercise price based upon a 20-day trailing average of the closing price
      per share of the Company's common stock (the "Additional Warrants").
      During the fiscal year ended July 31, 2004, SF Capital Partners, Ltd.
      exercised the Additional Warrants at a 20-day trailing average exercise
      price of $3.96 which resulted in gross proceeds of $1,500,000 and the
      issuance of 379,170 shares of common stock and an Exercise Warrant to
      purchase an additional 189,585 shares of common stock at a per share
      exercise price of $4.75. The Company also issued an aggregate of 53,876
      shares of restricted common stock to a third party as finder's fee.

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

      During the fiscal year ended July 31, 2004, the Company issued an
      aggregate of 14,703 restricted shares


                                      F-33
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

      of common stock as payment of accounts payable in the amount of $52,176.

(8)   Stockholders' Equity, (Continued)

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

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

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

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

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

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

(9)   Common Stock Warrants

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

      The following table summarizes the activity of common stock warrants
      issued in connection with the Private Placements completed in fiscal years
      1994 through 2004:

<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
                                                         -------
</TABLE>


                                      F-34
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)   Common Stock Warrants, (Continued)

<TABLE>
<CAPTION>
                                                                       Warrants    Exercise Price       Expiration
                                                                       --------    --------------       ----------
<S>                                                                    <C>           <C>            <C>
      Outstanding and exercisable at July 31, 1996                      1,508,251    4.00 - 7.50    3/21/97 to 9/10/99

      Exercised                                                          (147,450)       5.00       3/21/97 to 6/21/97
      Expired                                                            (652,550)       5.00       3/21/97 to 6/21/97
                                                                        ---------
      Outstanding and exercisable at July 31, 1997                        708,251    4.00 - 7.50    12/9/97 to 9/10/99

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

      Outstanding and exercisable at July 31, 1998                      1,883,944    2.20 - 7.50    10/1/98 to 8/17/01
      Expired                                                             (55,945)       4.00             10/1/98
      Sold in February 2000 Private Placement                             875,000    1.03 - 4.55    5/28/03 to 5/28/05
      Expired                                                            (313,800)       7.50       8/30/99 to 9/11/99
                                                                        ---------

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

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

      Outstanding and exercisable at July 31, 2001                      3,415,864    1.03 - 4.55    8/17/01 to 10/30/06

      Expired                                                          (1,514,199)   2.20 - 2.50          8/17/01
      Sold in various private placements                                2,673,422    0.75 - 1.50    11/03/06 to 9/10/07
      Issued to vendor upon settlement of accounts payable
                                                                           55,556        1.50             8/15/06
      Issued to unrelated party for advisory services                   1,500,000    0.50 - 1.50          2/6/07
      Exercised                                                          (186,000)       0.50             2/6/07
      Issued to unrelated parties upon conversion of notes payable         72,214        1.50            10/31/06
      Issued to unrelated parties in connection with notes payable        300,000        0.60       11/13/06 - 7/29/07
                                                                        ---------

      Outstanding and exercisable at July 31, 2002                      6,316,857    0.50 - 4.55    5/28/03 to 9/10/07

      Expired                                                            (437,500)   1.03 - 3.25          5/28/03
      Sold in various private placements                                1,315,000    1.00 - 1.50    1/24/08 to 10/31/08
      Exercised                                                          (640,000)       0.50              2/6/07
      Issued to unrelated parties in connection with notes payable        665,000        0.60        9/6/07 - 3/14/08
                                                                        ---------

      Outstanding and exercisable at July 31, 2003                      7,219,357    0.50 - 4.55    5/28/05 to 10/31/08
</TABLE>


                                      F-35
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(9)   Common Stock Warrants, (Continued)

<TABLE>
<CAPTION>
                                                                       Warrants           Exercise Price            Expiration
                                                                       --------           --------------            ----------
<S>                                                                    <C>                <C>                   <C>
       Sold in various private placements                               2,372,512          1.25 - 12.39          9/3/08 to 5/9/09
       Exercised                                                       (2,014,273)         0.50 - 1.50          2/6/07 to 10/31/08
       Issued to third party as finder's fee                               60,533             12.39                   5/9/09

       Issued to unrelated and unrelated parties in connection
       with conversion of notes payable                                 3,733,839          1.00 - 1.10          12/4/08 - 7/15/09
                                                                        ---------

       Outstanding and exercisable at July 31, 2004                    11,371,968         $0.50 - $12.39        5/28/05 to 7/15/09
                                                                       ==========         ==============
</TABLE>

(10)  Stock Options

      2004 Stock Incentive Plan

      The Company's stockholders approved the 2004 Stock Incentive Plan (the
      "2004 Plan") totaling 8,500,000 shares, which provides that options may be
      granted to employees, directors and consultants. The 2004 Plan provides
      for the granting of stock options, stock appreciation rights, restricted
      shares, or other share based awards to eligible employees and directors,
      as defined in the 2004 Plan. Options granted under the 2004 Plan are
      granted at market value on the date of the grant, the term, time and
      method of exercise of which are fixed by the Board of Directors or a
      committee thereof.

      1997 Stock Option Plan

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

      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. This plan expired in November 2003
      except to the extent there are outstanding options.

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

      The following table summarizes stock option activity for the period August
      1, 1994 to July 31, 2004:

<TABLE>
<CAPTION>
                                      Shares
                                     Available       Options         Weighted Average
                                     for Grant     Outstanding    Exercise Price Per Share
                                     ---------     -----------    ------------------------
<S>                                  <C>           <C>                     <C>
      Balance August 1, 1994         1,926,841      5,935,337              $3.76
         Granted                      (818,850)       818,850               2.60
         Exercised                          --       (185,000)              2.36
         Canceled                           --     (1,897,500)              4.30
                                     ---------      ---------
      Balance August 1, 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
                                     ---------      ---------
</TABLE>


                                      F-36
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued


(10)  Stock Options, (Continued)

<TABLE>
<CAPTION>
                                              Shares
                                             Available       Options         Weighted Average
                                             for Grant     Outstanding    Exercise Price Per Share
                                             ---------     -----------    ------------------------
<S>                                         <C>            <C>                       <C>
      Balance July 31, 1996                    818,286      4,076,225                3.43
           1997 Plan                         2,000,000             --                  --
           Granted                            (932,500)       932,500                4.90
           Exercised                                --       (639,500)               3.82
           Canceled                            484,845       (484,845)               4.70
                                            ----------     ----------
      Balance July 31, 1997                  2,370,631      3,884,380                3.56
           Granted                            (234,333)       234,333                3.31
           Canceled                             91,100        (91,100)               3.81
                                            ----------     ----------
      Balance July 31, 1998                  2,227,398      4,027,613                3.54
           Granted                            (595,000)       595,000                0.62
           Canceled                            443,934       (555,737)               3.97
                                            ----------     ----------
      Balance July 31, 1999                  2,076,332      4,066,876                3.05
           Granted                            (827,000)       827,000                0.52
           Exercised                                --        (95,000)               0.48
           Canceled                            638,395     (1,031,880)               2.73
                                            ----------     ----------
      Balance July 31, 2000                  1,887,727      3,766,996                2.65
           Granted                            (447,000)       447,000                0.85
           Exercised                                --       (165,555)               0.51
           Canceled                            774,315     (1,018,557)               3.42
                                            ----------     ----------
      Balance July 31, 2001                  2,215,042      3,029,884                2.24
           Granted                            (544,221)       544,221                0.69
           Exercised                                --             --                  --
           Canceled                            655,840       (900,081)               2.31
                                            ----------     ----------
      Balance July 31, 2002                  2,326,661      2,674,024                1.90
           Granted                            (630,000)       630,000                0.50
           Exercised                                --       (124,000)               0.47
           Canceled                            485,118       (736,358)               3.09
                                            ----------     ----------
      Balance July 31, 2003                  2,181,779      2,443,666                1.26
           2004 Stock Incentive Plan         8,500,000             --                  --
           Granted                          (1,388,996)     1,388,996                5.03
           Exercised                                --       (666,717)               0.98
           Canceled                           (262,783)      (208,500)               3.20
                                            ----------     ----------
      Balance July 31, 2004                  9,030,000      2,957,445               $2.95
                                            ==========     ==========               =====
</TABLE>

      The stock options granted in fiscal year ended July 31, 2000 included an
      aggregate total of 75,000 stock options issued to the Company's outside
      Board of Directors and an aggregate total of 350,000 stock options issued
      to the employees of the Company, which will vest and become exercisable
      upon certain milestones, or these options will terminate, and the
      employees must be actively employed by the Company through the date of the
      achievement of the milestones. Compensation expense, if any, will be
      determined based on the Company's stock price on the vesting date relative
      to the options exercise price. No compensation expense was recognized in
      the four fiscal years ended July 31, 2004. An aggregate of 50,000 options
      issued to the Company's outside Board of Directors were exercised during
      the fiscal year 2001. The 350,000 stock options issued to the employees
      expired during the fiscal year ended July 31, 2002. The options
      outstanding at July 31, 2004 will expire between October 17, 2004 and June
      1, 2014.

      The weighted-average fair value per option at the date of grant for
      options granted during the fiscal years 2004, 2003 and 2002 were $4.36,
      $0.21 and $0.40, respectively. The fair value was estimated using the
      Black-Scholes options pricing model based on the following assumptions:


                                      F-37
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(10)  Stock Options, (Continued)

                                                2004         2003         2002
                                                ----         ----         ----
      Expected dividend yield                      0%           0%           0%
      Risk-free interest rate                   4.00%        2.00%        5.50%
      Expected stock price volatility           78.0%        77.8%        88.7%
      Expected term until exercise (years)      6.86         5.50         5.60

      The following table summarizes information concerning options outstanding
      at July 31, 2004:

<TABLE>
<CAPTION>
                                Options Outstanding                                Options Exercisable
        -----------------------------------------------------------------       ---------------------------
                                           Weighted Average      Weighted                        Weighted
                                              Remaining          Average                         Average
            Range of                         Contractual         Exercise                        Exercise
        Exercise Prices          Shares      Term (Years)         Price             Shares         Price
        ---------------          ------      ------------         -----             ------         -----
<S>                            <C>               <C>             <C>               <C>            <C>
         $ 0.00 - 1.99         1,672,945         4.15            $ 0.80            1,099,945      $ 0.75
           2.00 - 2.99            20,000         0.94              2.45                   --          --
           3.00 - 3.99           276,250         4.21              3.59              190,000        3.52
           4.00 - 4.99           437,000         8.88              4.73               87,000        4.67
           5.00 - 5.99            90,000         2.00              5.18               90,000        5.18
           8.00 - 8.99           461,250         8.10              8.28              150,000        8.10
           ===========         ---------         ====              ====            ---------        ====
                               2,957,445                                           1,616,945
                               =========                                           =========
</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.

      Non-Qualified Stock Options

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

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


                                      F-38
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(10)   Stock Options, (Continued)

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

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

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

      1989 Stock Plan

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

            The stock option activity is as follows:

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

(11)  Stock Grant and Compensation Plans

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

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

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


                                      F-39
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

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

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

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

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

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

      1989 Stock Plan

      Under the 1989 Stock Plan, one million shares of the Company's common
      stock were reserved for issuance as awards to employees. The 1989 Stock
      Plan also provides for the granting of options to purchase common stock of
      the Company (see note 10). In addition, the 1989 Stock Plan provided for
      the issuance of 1,000,000 shares of the Company's common stock as grants.
      To be eligible for a grant, grantees must have made substantial
      contributions and shown loyal dedication to the Company.

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

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

            1989           30,000         $5.00              $150,000

            1990           56,000          6.00               336,000

            1991          119,000          4.00               476,000

            1992          104,000          2.75               286,000

            1993          117,000          2.00               234,000

            1994            5,000          3.00                15,000

      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 year ended 1999 and the plan
      expired in 1999.

(12)  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.


                                      F-40
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(12)  Income Taxes, (Continued)

      New Jersey has enacted legislation permitting certain corporations located
      in New Jersey to sell state tax loss carryforwards and state research and
      development credits, or tax benefits. For the state fiscal year 2004 (July
      1, 2003 to June 30, 2004), the Company had approximately $1,378,000 total
      available tax benefits that were saleable; of which New Jersey permitted
      the Company to sell approximately $261,000. The Company received
      approximately $222,000 from the sale of the $261,000 of tax benefits,
      which the Company recognized as tax benefits for the fiscal year ended
      July 31, 2004.

      For the state fiscal year 2003 (July 1, 2002 to June 30, 2003), the
      Company had approximately $1,373,000 total available tax benefits that
      were saleable, of which New Jersey permitted the Company to sell
      approximately $273,000. The Company received approximately $231,000 from
      the sale of the $273,000 of tax benefits, which the Company recognized as
      tax benefits for fiscal 2003.

      For the state fiscal year 2002 (July 1, 2001 to June 30, 2002), the
      Company had approximately $1,535,000 total available tax benefits that
      were saleable, of which New Jersey permitted the Company to sell
      approximately $426,000. The Company received approximately $354,000 from
      the sale of the $426,000 of tax benefits, which the Company recognized as
      tax benefits for fiscal 2002.

      If still available under New Jersey law, the Company will attempt to sell
      the remaining $1,117,000 of its tax benefits, between July 1, 2004 and
      June 30, 2005. This amount, which is a carryover of its remaining tax
      benefits from state fiscal year 2004, may increase if the Company incurs
      additional tax benefits during state fiscal year 2005. The Company can not
      estimate, however, what percentage of its saleable tax benefits New Jersey
      will permit it to sell, how much money it will receive in connection with
      the sale, if it will be able to find a buyer for its tax benefits or if
      such funds will be available in a timely manner.

      At July 31, 2004 and 2003, the tax effects of temporary differences that
      give rise to the deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                                                             2004                 2003
                                                                                             ----                 ----
<S>                                                                                      <C>                  <C>
      Deferred tax assets:
             Excess of book over tax depreciation and amortization                       $     27,016         $     46,605
             Accrued expenses and other                                                       120,910              392,838
             Federal and state net operating loss carryforwards                            17,322,364           14,433,485
             Research and experimentation and investment tax credit carryforwards           1,425,860            1,185,883
                                                                                         ------------         ------------
      Total gross deferred tax assets                                                      18,896,150           16,058,811
      Valuation allowance                                                                 (18,896,150)         (16,058,811)
                                                                                         ------------         ------------
      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. The
      tax benefit assumed using the federal statutory tax rate of 34% has been
      reduced to the actual benefits reflected on the statements of operations
      due principally to the aforementioned valuation allowance. In 2004, 2003
      and 2002 the valuation allowance increased by $2,837,000, decreased by
      $205,000 and increased by $178,000, respectively.

      At July 31, 2004, the Company has federal net operating loss carryforwards
      of approximately $47,326,000 that expire in the years 2005 to 2024. The
      Company also has research and experimentation tax credit carryforwards of
      approximately $1,426,000 that expire in the years 2005 to 2024. 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.


                                      F-41
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(13)  Other Financial Information

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

                                              2004            2003
                                              ----            ----

           Payroll and payroll taxes      $   44,112      $  884,808
           Professional fees                  92,768          38,351
           Clinical trial grants             319,338         379,342
           Other                             168,987         105,477
                                          ----------      ----------
                                          $  625,205      $1,407,978
                                          ==========      ==========

(14)  Commitments and Contingencies

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

      The Company has product liability insurance coverage in the amount of
      $3,000,000 for clinical trials in the U.S. Additionally, the Company also
      maintains product liability insurance in Europe in the amount of
      DM20,000,000. No product liability claims have been filed against the
      Company. If a claim arises and the Company is found liable in an amount
      that significantly exceeds the policy limits, it may have a material
      adverse effect upon the financial condition of the Company.

      Below is a table that presents our contractual obligations and commercial
      commitments as of July 31, 2004:

      --------------------------------------------------------------------------
                                                     Payments Due by Fiscal Year
      --------------------------------------------------------------------------
                                                                     2006 and
                                            Total        2005       Thereafter
                                            -----        ----       ----------
      --------------------------------------------------------------------------
      Research and development             $72,398     $72,398      $        -0-
                                           -------     -------      -----------
      --------------------------------------------------------------------------
      Operating lease                       13,100      13,100               -0-
                                           -------     -------      -----------
      --------------------------------------------------------------------------
      Total contractual cash obligations   $85,498     $85,498      $        -0-
                                           =======     =======      ===========
      --------------------------------------------------------------------------

(15)  Research and Development Agreement

      In October 2002, the Company entered into a research collaboration with
      Wyeth Pharmaceuticals to co-develop a number of designer drugs such as
      conjugates and fusion proteins for a variety of indications using the
      Company's proprietary technology. This collaboration may result in a
      licensing agreement between the companies, however, there is no assurance
      that such agreement will be reached.


                                      F-42
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                    Notes to Financial Statements, Continued

(16)  401(K) Savings Plan

      Effective October 1, 1998, the Company adopted a 401(K) Savings Plan (the
      "Plan"). Qualified employees may participate by contributing up to 6% of
      their gross earnings to the Plan subject to certain Internal Revenue
      Service restrictions. The Company will match an amount equal to 50% of the
      first 6% of each participant's contribution. The Company's contribution is
      subject to a vesting schedule of 0%, 25%, 50%, 75% and 100% for employment
      of less than one year, one year, two years, three years and four years,
      respectively, except for existing employees which vesting schedule was
      based from the date the Plan was adopted. For the fiscal years ended July
      31, 2004, 2003 and 2002, the Company's contribution to the Plan amounted
      to $15,690, $24,956 and $25,717, respectively.

(17)  Quarterly Financial Data (Unaudited)

      (In thousands, except per share amounts)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                             2004                                                  2003
                  ------------------------------------------------------------------------------------------------------------
                    First      Second       Third      Fourth      Totals     First    Second     Third    Fourth      Totals
------------------------------------------------------------------------------------------------------------------------------
<S>               <C>       <C>         <C>         <C>         <C>         <C>       <C>       <C>       <C>       <C>
Investment
  income          $   3.7   $     4.5   $     3.1   $    30.8   $    42.1   $    .1   $    .1   $    --   $   9.7   $     9.9
Other income           --          --          --          --          --      30.0        --        --        --        30.0

Operating  loss    (980.0)   (1,199.6)   (1,350.5)   (1,762.0)   (5,292.1)   (559.4)   (737.4)   (567.7)   (778.4)   (2,642.9)
------------------------------------------------------------------------------------------------------------------------------

Net loss (a)       (758.2)   (1,199.6)   (1,350.5)   (1,762.0)   (5,070.3)   (329.9)   (737.4)   (567.7)   (776.5)   (2,411.5)
------------------------------------------------------------------------------------------------------------------------------

Loss per share -
  basic and
  diluted         $ (0.03)  $   (0.04)  $   (0.05)  $   (0.05)  $   (0.17)  $ (0.01)  $ (0.03)  $ (0.02)  $ (0.04)  $   (0.10)
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)   Included in the net loss of $758.2 and $329.9 for first quarter 2004 and
      2003, are tax benefits of $221.8 and $229.5, respectively, related to the
      sale of certain state tax operating loss carryforwards.

(18)  Subsequent Events

      In September 2004, the Company issued 320,157 shares of restricted common
      stock and an aggregate of 420,157 five year warrants for the purchase of
      common stock with an exercise price of $1.00 per share upon the conversion
      of notes payable in the amount of $112,055.

      In September 2004, the Company issued an aggregate of 292,272 shares of
      restricted common stock upon the exercise of warrants and stock options by
      a board member and unrelated parties at exercise prices ranging from $0.29
      to $1.50 per share and realized gross proceeds of $224,054 from these
      exercises.


                                      F-43