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

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

                                    FORM 10-Q

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

       October 31, 2004                                         0-11088
For the quarterly period 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 Identification No.)
         organization)

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

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

                                 NOT APPLICABLE
            (Former name, former address, and former fiscal year, if
                          changed since last report.)

      Indicate by check mark whether the registrant has (1) 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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

      The number of shares of common stock, $.001 par value, outstanding as of
December 6, 2004 was 35,242,445 shares.

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

                            CONDENSED BALANCE SHEETS
                       October 31, 2004 and July 31, 2004

<TABLE>
<CAPTION>
                                                                                               October 31,           July 31,
                                                                                                   2004                2004
                                     ASSETS                                                    (Unaudited)         (See Note 1)
                                                                                              ------------         ------------
<S>                                                                                           <C>                  <C>
Current assets:
    Cash and cash equivalents                                                                 $  8,699,025         $ 10,147,694
    Receivable from the sale of net operating loss carryforwards                                   287,975                   --
    Other current assets                                                                           389,761               64,771
                                                                                              ------------         ------------
         Total current assets                                                                    9,376,761           10,212,465

Property and equipment, net                                                                         54,522               56,783

Loan receivable, related party                                                                     154,230              151,815
                                                                                              ------------         ------------

         Total assets                                                                         $  9,585,513         $ 10,421,063
                                                                                              ============         ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Notes payable, net of discount of $10,062 at October 31, 2004 and $34,120
       at July 31, 2004                                                                       $    294,203         $    372,611
    Accounts payable                                                                               555,964              541,600
    Accrued expenses                                                                               612,949              625,205
                                                                                              ------------         ------------

         Total liabilities                                                                       1,463,116            1,539,416
                                                                                              ------------         ------------

Stockholders' equity:
    Preferred stock, $.001 par value;
       Authorized and unissued, 1,000,000 shares at October 31, 2004 and July 31, 2004                  --                   --
    Common stock, $.001 par value;
       Authorized 100,000,000 shares at October 31, 2004 and July 31, 2004;
       Issued and outstanding, 34,994,514 shares at October 31, 2004 and 34,347,885
         shares at July 31, 2004                                                                    34,995               34,348
    Capital in excess of par value                                                              78,212,768           77,891,815
    Deficit accumulated during development stage                                               (70,125,366)         (69,044,516)
                                                                                              ------------         ------------

         Total stockholders' equity                                                              8,122,397            8,881,647
                                                                                              ------------         ------------

         Total liabilities and stockholders' equity                                           $  9,585,513         $ 10,421,063
                                                                                              ============         ============
</TABLE>

See accompanying notes to condensed financial statements.


                                     - 2 -
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       CONDENSED STATEMENTS OF OPERATIONS

                  Three months ended October 31, 2004 and 2003,
                       and the Period from August 24, 1981
                     (Date of Inception) to October 31, 2004

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                         Three Months Ended            August 24, 1981
                                                             October 31,              (Date of Inception)
                                                             -----------                       to
                                                       2004               2003         October 31, 2004
                                                       ----               ----         ----------------
<S>                                                <C>                <C>                <C>
Revenue:
     Sales                                         $         --       $         --       $    553,489
     Investment income                                   29,178              3,700          1,458,291
     Other income                                            --                 --             90,103
                                                   ------------       ------------       ------------
     Total revenue                                       29,178              3,700          2,101,883
                                                   ------------       ------------       ------------

Costs and expenses:
     Cost of sales                                           --                 --            336,495
     Research and development                           921,149            637,197         45,876,061
     General and administrative                         445,597            227,945         24,311,806
     Interest:
         Related parties                                     --                 --          1,147,547
         Others                                          31,257            118,614          2,857,500
                                                   ------------       ------------       ------------
Total costs and expenses                              1,398,003            983,756         74,529,409
                                                   ------------       ------------       ------------

Loss before state tax benefit                        (1,368,825)          (980,056)       (72,427,526)

State tax benefit                                       287,975            221,847          2,302,160
                                                   ------------       ------------       ------------

Net loss                                           $ (1,080,850)      $   (758,209)      $(70,125,366)
                                                   ============       ============       ============

Loss per basic and diluted common share            $      (0.03)      $      (0.03)
                                                   ============       ============

Weighted average number of shares outstanding        34,660,441         26,911,796
                                                   ============       ============
</TABLE>

See accompanying notes to condensed financial statements.


                                     - 3 -
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       CONDENSED STATEMENTS OF CASH FLOWS

                  Three months ended October 31, 2004 and 2003,
                       and the Period from August 24, 1981
                     (Date of Inception) to October 31, 2004

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                     Three Months Ended            August 24, 1981
                                                                         October 31,             (Date of Inception)
                                                                         -----------                       to
                                                                    2004              2003         October 31, 2004
                                                                    ----              ----         ----------------
<S>                                                            <C>                <C>                <C>
Cash flows from operating activities:
  Net loss                                                     $ (1,080,850)      $   (758,209)      $(70,125,366)
  Adjustments to reconcile net loss to
        net cash used in operating activities:
       Gain on sale of marketable securities                             --                 --            (25,963)
       Depreciation and amortization                                  6,209              1,550          1,562,976
       Loss on disposal of property and equipment                        --                 --             18,926
       Noncash operating expenses                                        --              5,235          6,686,724
       Amortization of debt discount                                 24,058             88,542            584,157
       Amortization of deferred compensation                             --                 --         11,442,000
       Amortization of organization costs                                --                 --              4,590
Changes in assets and liabilities:
        Increase in receivable from the sale of net
            operating loss carryforwards                           (287,975)          (221,847)          (287,975)
       Increase in other current assets                            (324,990)           (97,294)          (449,628)
       Increase in loan receivable-related party                     (2,415)            (3,146)           (58,179)
       Increase in interest payable-related party                        --                 --            744,539
       Increase (decrease) in accounts payable                       14,364            (57,239)         1,062,599
       Increase in accrued payroll and
          expenses, related parties                                      --                 --          2,348,145
       Increase (decrease) in accrued expenses                         (202)          (489,744)         1,279,389
                                                               ------------       ------------       ------------
       Net cash used in operating activities                     (1,651,801)        (1,532,152)       (45,213,066)
                                                               ------------       ------------       ------------
Cash flows from investing activities:
       Purchase of marketable equity securities                          --                 --           (290,420)
       Proceeds from sale of marketable equity securities                --                 --            316,383
       Purchase of property and equipment                            (3,948)            (2,251)        (1,464,321)
       Patent costs                                                      --                 --            (97,841)
                                                               ------------       ------------       ------------

Net cash used in investing activities                                (3,948)            (2,251)        (1,536,199)
                                                               ------------       ------------       ------------
</TABLE>

                                                                     (continued)

See accompanying notes to condensed financial statements.


                                     - 4 -
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                  CONDENSED STATEMENTS OF CASH FLOWS, Continued

                  Three months ended October 31, 2004 and 2003
                       and the Period from August 24, 1981
                     (Date of Inception) to October 31, 2004

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                             Three Months Ended           August 24, 1981
                                                                                 October 31,                 (Date of
                                                                                 -----------               Inception) to
                                                                            2004              2003       October 31, 2004
                                                                            ----              ----       ----------------
<S>                                                                     <C>               <C>              <C>
Cash flows from financing activities:
 Proceeds from short-term borrowings                                    $         --      $        --      $    874,500
 Payment of short-term borrowings                                                 --               --          (653,500)
 Increase in loans payable - related party, net                                   --               --         2,628,868
 Proceeds from bank debt and other long-term debt, net of
 costs                                                                            --               --         3,667,460
 Reduction of bank debt and long-term debt                                    (2,465)          (1,676)       (2,962,302)
 Proceeds from issuance of common stock, net                                      --        1,527,925        40,750,316
 Proceeds from exercise of stock options and warrants, net                   209,545        1,047,271        10,428,955
  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                           207,080        2,573,520        55,448,290
                                                                        ------------      -----------      ------------
Net increase (decrease) in cash and cash equivalents                      (1,448,669)       1,039,117         8,699,025
Cash and cash equivalents at beginning of period                          10,147,694          330,137                --
                                                                        ------------      -----------      ------------
Cash and cash equivalents at end of period                              $  8,699,025      $ 1,369,254      $ 8, 699,025
                                                                        ============      ===========      ============
Supplemental disclosure of cash flow information - interest
 paid                                                                   $        163      $    30,072      $  1,713,876
                                                                        ============      ===========      ============
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
                                                                        ============      ===========      ============
 Conversion of accounts payable to common stock                         $         --      $        --      $    506,725
                                                                        ============      ===========      ============
 Conversion of notes payable, bank and accrued interest
  to long-term debt                                                     $         --      $        --      $  1,699,072
                                                                        ============      ===========      ============
 Conversion of loans and interest payable, related party and
  accrued payroll and expenses, related parties to long-term
  accrued payroll and other, related party                              $         --      $        --      $  1,863,514
                                                                        ============      ===========      ============
 Issuance of common stock upon the conversion of convertible
  subordinated debentures, other                                        $    112,055      $        --      $  1,231,920
                                                                        ============      ===========      ============
 Issuance of common stock for services rendered                         $         --      $        --      $      2,460
                                                                        ============      ===========      ============
 Issuance of warrants with notes payable                                $         --      $        --      $    594,219
                                                                        ============      ===========      ============
</TABLE>

See accompanying notes to condensed financial statements.


                                     - 5 -
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                                   (Unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION

      In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's financial position as of
October 31, 2004 and its results of operations and cash flows for the three
month periods ended October 31, 2004 and 2003 and the period from August 24,
1981 (date of inception) to October 31, 2004. The results of operations for the
three months ended October 31, 2004 are not necessarily indicative of the
results to be expected for the full year. The condensed balance sheet presented
herein has been derived from the audited financial statements included in the
Form 10-K for the fiscal year ended July 31, 2004, filed with the Securities and
Exchange Commission.

      Certain footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted in accordance with the published
rules and regulations of the Securities and Exchange Commission. The condensed
financial statements in this report should be read in conjunction with the
financial statements and notes thereto included in the Form 10-K for the year
ended July 31, 2004.

      The Company is a development stage company as defined in the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 7.
The Company is devoting substantially all of its present efforts to developing
new drug products. Its planned principal operations have not commenced and,
accordingly, no significant revenue has been derived therefrom.

      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 October
31, 2004 amounts to $70,125,000.

      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 net operating
loss carryforwards, revenues from the commercial sale of ONCONASE(R), licensing
of its proprietary RNase technology and its ability to realize the full
potential of its technology and its drug candidates via out-licensing agreements
with other companies. Such additional funds may not become available as needed
or be available on acceptable terms. Through November 30, 2004, a significant
portion of the Company's financing has been through the sale of equity
securities and convertible debentures in registered offerings and private
placements and exercise of stock options and warrants. Additionally, the Company
has raised capital through debt financings, sale of net operating loss
carryforwards and research 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 its operations
from the sources of capital previously described. There can be no assurance that
the Company will be able to raise the capital needed on terms which are
acceptable, if at all. As of October 31, 2004, 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 in the US and Europe and other
ongoing operations of the Company. However, the Company will continue to seek
additional capital financing through the sale of equity in private placements,
sale of net operating loss carryforwards and exercise of stock options and
warrants but cannot be sure that the Company will be able to raise capital on
favorable terms or at all.


                                       6
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

               NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued

                                   (Unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION, Continued

      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.

2.    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 and warrants would be anti-dilutive. The outstanding
options and warrants that could dilute earnings per share in future periods were
14,896,098 and 9,565,519 at October 31, 2004 and 2003, respectively. This also
excludes the potential dilution that could occur upon the conversion of
convertible notes into 1,424,822 shares of common stock and warrants to purchase
1,624,822 shares of common stock.

3.    STOCK-BASED COMPENSATION

      The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method. As the exercise price of
all options granted under these plans was equal to the fair market price of the
underlying common stock on the grant date, no stock-based employee compensation
cost is recognized in the condensed statements of operations.

      In accordance with Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123" (SFAS 148) and Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (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.

<TABLE>
<CAPTION>
                                                                                       Three Months Ended
                                                                                           October 31,
                                                                                           -----------
                                                                                      2004              2003
                                                                                      ----              ----
<S>                                                                               <C>               <C>
Net loss applicable to common shares
       As reported                                                                $(1,080,850)      $  (758,209)
       Less total stock-based employee compensation expense determined
          under fair value method for all awards, net of related tax effects         (619,271)          (71,179)
                                                                                  -----------       -----------
       Pro forma                                                                  $(1,700,121)      $  (829,388)
                                                                                  ===========       ===========
Basic and diluted loss per common share
       As reported                                                                $     (0.03)      $     (0.03)
       Pro forma                                                                        (0.05)            (0.03)
</TABLE>


                                       7
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

               NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued

                                   (Unaudited)

3.    STOCK-BASED COMPENSATION, Continued

      The fair value was estimated using the Black-Scholes options pricing model
based on the following assumptions:

                                                      Three Months Ended
                                                         October 31,
                                                         -----------
                                                    2004            2003
                                                    ----            ----

      Expected dividend yield                          0%            0%
      Risk-free interest rate                       4.25%          2% - 6%
      Expected stock price volatility                100%      40.79% - 114.54%

      Expected term until exercise (years)          7.02            6.53

4.    LOAN RECEIVABLE, RELATED PARTY

      Amounts due from the Company's CEO totaling $154,230 and $151,815 at
October 31, 2004 and July 31, 2004, respectively, are classified as a long-term
asset as the loans have no specified due dates, and the Company does not expect
repayment of these amounts within one year. The Company earns interest at a rate
of 8% per annum on the unpaid principal balance.

5.    CAPITAL STOCK

      During the quarter ended October 31, 2004, the Company issued 320,157
shares of restricted common stock and five-year warrants to purchase 420,157
shares of common stock with an exercise price of $1.00 per share upon the
conversion of notes payable and accrued interest in the amount of $112,055 by an
unrelated party.

      During the quarter ended October 31, 2004, the Company also issued an
aggregate of 326,472 shares of common stock upon the exercise of warrants and
stock options by unrelated parties, employees and a director at per share
exercise prices ranging from $0.29 to $1.50. The Company realized aggregate net
proceeds of $209,545 from these exercises.

6.    SALE OF NET OPERATING LOSS CARRYFORWARDS

      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 net operating loss carryforwards, in order to obtain tax
benefits. For the state fiscal year 2005 (July 1, 2004 to June 30, 2005), the
Company had approximately $1,335,000 total available net operating loss
carryforwards that were saleable; of which New Jersey permitted the Company to
sell approximately $339,000. Based on an agreement the Company entered into, the
Company will receive approximately $288,000 from the sale of the $339,000 net
operating loss carryforwards, which was recognized as tax benefits for the
quarter ended October 31, 2004.


                                       8
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

               NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued

                                   (Unaudited)

6.    SALE OF NET OPERATING LOSSES, Continued

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

      If still available under New Jersey law, the Company will attempt to sell
the remaining $996,000 of its net operating loss carryforwards between July 1,
2005 and June 30, 2006. This amount, which is a carryover of the Company's
remaining net operating loss carryforwards from state fiscal year 2005, may
increase if the Company incurs additional net losses and research and
development credits during state fiscal year 2006. The Company can not estimate,
however, what percentage of its saleable net operating loss carryforwards New
Jersey will permit it to sell, how much money will be received in connection
with the sale, if the Company will be able to find a buyer for its net operating
loss carryforwards or if such funds will be available in a timely manner.

7.    SUBSEQUENT EVENTS

      In November 2004, the Company issued 20,000 shares of common stock to an
unrelated party upon the exercise of warrants at an exercise price of $1.25 per
share. The Company realized gross proceeds of $25,000.

      In November 2004, the Company issued 224,931 shares of restricted common
stock and five-year warrants to purchase 224,931 shares of common stock with an
exercise price of $1.00 per share upon the conversion of notes payable in the
amount of $112,465 by an unrelated party.


                                       9
<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations.

      Information 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 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. We cannot assure you that the future results covered by
these forward-looking statements will be achieved. 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.

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
$45,876,000 have 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 were 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 calendar 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 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 the filing is data driven as to
when we will be able to file for marketing registrations in the US and EU.
Therefore, we cannot predict with certainty what our total cost will be
associated with obtaining marketing approvals, or when and if such approvals
will be granted, and 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.


                                       10
<PAGE>

Additionally, we have raised capital through debt financings, the sale of our
net operating loss carryforwards 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 net operating loss
carryforwards 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

Three month periods ended October 31, 2004 and 2003

      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 of 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) and as
such we have not had any sales in the three months ended October 31, 2004 and
2003. For the three months ended October 31, 2004, our investment income was
$29,000.

      Research and Development. Research and development expense for the three
months ended October 31, 2004 was $921,000 compared to $637,000 for the same
period last year, an increase of $284,000, or 45%. This increase was primarily
due to the increase in data management and consulting fees related to our Phase
III clinical trial for malignant mesothelioma of approximately $230,000 and an
increase in patent and trademark expenses of approximately $54,000.

      General and Administrative. General and administrative expense for the
three months ended October 31, 2004 was $446,000 compared to $228,000 for the
same period last year, an increase of $218,000, or 96%. This increase was
primarily due to increases in personnel expenses of approximately $107,000,
Nasdaq re-listing fees of approximately $50,000, professional fees of
approximately $30,000, insurance expenses of approximately $21,000 and public
relations expenses of approximately $10,000.

      Interest. Interest expense for the three months ended October 31, 2004 was
$31,000 compared to $119,000 for the same period last year, a decrease of
$88,000. The decrease was primarily due to the maturity of the convertible notes
payable.

      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 net operating loss carryforwards, in
order to obtain tax benefits. For the state fiscal year 2005 (July 1, 2004 to
June 30, 2005), we had approximately $1,335,000 total available net operating
loss carryforwards that were saleable; of which New Jersey permitted us to sell
approximately $339,000. Based on an agreement we entered into, we will receive
approximately $288,000 from the sale of the $339,000 net operating loss
carryforwards, which was recognized as tax benefits for the quarter ended
October 31, 2004.

      For the state fiscal year 2004 (July 1, 2003 to June 30, 2004), we had
approximately $1,378,000 total available net operating loss carryforwards that
were saleable; of which New Jersey permitted us to sell approximately $261,000.
In December 2003, we received approximately $222,000 from the sale of


                                       11
<PAGE>

the $261,000 net operating loss carryforwards, which we recognized as tax
benefits for the quarter ended October 31, 2003.

      If still available under New Jersey law, we will attempt to sell the
remaining $996,000 of our net operating loss carryforwards between July 1, 2005
and June 30, 2006. This amount, which is a carryover of our remaining net
operating loss carryforwards from state fiscal year 2005, may increase if we
incur additional net losses and research and development credits during state
fiscal year 2006. We can not estimate, however, what percentage of our saleable
net operating loss carryforwards 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 net operating loss carryforwards 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 the three months ended October 31, 2004 was
$1,081,000 as compared to $758,000 for the same period last year, an increase of
$323,000. The cumulative loss from the date of inception, August 24, 1981 to
October 31, 2004, amounted to $70,125,000. Such losses are attributable to the
fact that we are still in the development stage and accordingly have not derived
sufficient revenues from operations to offset the development stage expenses.

Liquidity and Capital Resources

      We have financed our operations since inception 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 net operating loss carryforwards and research products, interest
income and financing received from our Chief Executive Officer. During the three
months ended October 31, 2004, we had a net decrease in cash and cash
equivalents of $1,449,000, which resulted primarily from net cash used in
operating activities of $1,652,000 and net cash used in investing activities of
$4,000, offset by net cash provided by financing activities of $207,000 from
warrant and stock option exercises. Total cash resources as of October 31, 2004
were $8,699,000 compared to $10,148,000 at July 31, 2004.

      Our current liabilities as of October 31, 2004 were $1,463,000 compared to
$1,539,000 at July 31, 2004, a decrease of $76,000. The decrease was primarily
due to maturity of convertible notes payable of approximately $79,000 and
decreased accrued expenses of approximately $11,000 offset by increased accounts
payable of approximately $14,000.

      Our long-term 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 net operating
loss carryforwards, 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 November 30, 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 net operating loss carryforwards 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


                                       12
<PAGE>

ongoing operations of the Company. However, we continue to seek additional
capital financing through the sale of equity in private placements, sale of our
net operating loss carryforwards 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.

      In November 2004, we issued 20,000 shares of common stock upon the
exercise of warrants by an unrelated party, at an exercise price of $1.25 per
share. We realized aggregate gross proceeds of $25,000.

      In November 2004, we issued 224,931 shares of restricted common stock and
five-year warrants to purchase 224,931 shares of common stock with an exercise
price of $1.00 per share upon the conversion of notes payable in the amount of
$112,465 by an unrelated party.

      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
variable interest entities or VIE, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes. As of October 31, 2004, we are not involved in any
material unconsolidated VIE transactions.

Critical Accounting Policies and Estimates

      Critical accounting policies are those that involve subjective or complex
judgments, often as a result of the need to make estimates. The following areas
all require the use of judgments and estimates: research and development
expenses, accounting for stock-based compensation, accounting for warrants
issued with convertible debt and current and income taxes. Estimates in each of
these areas are based on historical experience and various assumptions that we
believe are appropriate. Actual results may differ from these estimates. Our
accounting practices are discussed in more detail in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1 of
"Notes to Consolidated Financial Statements" in our Annual Report on Form 10-K
for the year ended July 31, 2004.

Contractual Obligations and Commercial Commitments

      Our outstanding contractual obligations relate to our equipment operating
lease. The following table presents our contractual obligations and commercial
commitments as of October 31, 2004:


                                       13
<PAGE>

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

      Operating lease                         $8,760      $8,760      $    - 0 -
                                              ------      ------      ----------
      Total contractual cash obligations      $8,760      $8,760      $    - 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-Q 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 $1,081,000 for the three months ended October 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.


                                       14
<PAGE>

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 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 net operating loss carryforwards 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 net operating loss carryforwards, in
order to obtain tax benefits. The aggregate amount of net operating loss
carryforwards 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 net operating loss carryforwards 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 net operating loss carryforwards for a
reasonable price. Our historical results of operations have been improved by our
sale of net operating loss carryforwards and if we continue to generate a
limited amount of revenue and are unable in the future to sell our net operating
loss carryforwards, our results of operations will be negatively impacted.

      For the state fiscal year 2005 (July 1, 2004 to June 30, 2005), we had
approximately $1,335,000 total available net operating loss carryforwards that
were saleable; of which New Jersey permitted us to sell approximately $339,000.
We anticipate receiving approximately $288,000 from the sale of the $339,000 net
operating loss carryforwards, which we recognized as tax benefits for the
quarter ended October 31, 2004. For the state fiscal year 2003 (July 1, 2003 to
June 30, 2004), we had approximately $1,378,000 total available net operating
loss carryforwards that were saleable; of which New Jersey permitted us to sell
approximately $261,000. In December 2003, we received approximately $222,000
from the sale of the $261,000 net operating loss carryforwards, which we
recognized as tax benefits for the fiscal year ended July 31, 2004.


                                       15
<PAGE>

      If still available under New Jersey law, we will attempt to sell the
remaining $996,000 of our net operating loss carryforwards, between July 1, 2005
and June 30, 2006. This amount, which is a carryover of our remaining net
operating loss carryforwards from state fiscal year 2005, may increase if we
incur additional net losses and research and development credits during state
fiscal year 2006. We can not estimate, however, what percentage of our saleable
net operating loss carryforwards 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 net operating loss carryforwards 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.

      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


                                       16
<PAGE>

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.

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


                                       17
<PAGE>

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.

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


                                       18
<PAGE>

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 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


                                       19
<PAGE>

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 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


                                       20
<PAGE>

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

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

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

      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


                                       21
<PAGE>

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.

      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 34,994,514 shares of common stock outstanding as of
October 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
October 31, 2004:

      o     Options. Stock options to purchase 3,331,245 shares of our common
            stock at a weighted average exercise price of approximately $3.56
            per share.

      o     Warrants. Warrants to purchase 11,564,853 shares of our common stock
            at a weighted average exercise price of approximately $2.52 per
            share.

      o     Convertible Notes. Notes which will convert into 1,424,822 shares of
            our common stock at an average conversion price of $0.25 per share
            and warrants which are convertible into 1,624,822 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


                                       22
<PAGE>

effect of discouraging any attempt by a person, through the acquisition of a
substantial number of shares of common stock, to acquire control of our company.
Accordingly, the accomplishment of a tender offer may be more difficult. This
may be beneficial to management in a hostile tender offer, but have an adverse
impact on stockholders who may want to participate in the tender offer or
inhibit a stockholder's ability to receive an acquisition premium for his or her
shares.

The ability of our stockholders to recover against Armus Harrison & Co., or AHC,
may be limited because we have not been able to obtain the reissued reports of
AHC with respect to the financial statements included in our Form 10-K for the
fiscal year ended July 31, 2004, nor have we been able to obtain AHC's consent
to the use of such report therein.

      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 the Form
10-K for the fiscal year ended July 31, 2004. In addition, the ability of AHC to
satisfy any claims properly brought against it may be limited as a practical
matter due to AHC's dissolution in 1996.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. 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 October 31, 2004, the end of the period covered by this report
(the "evaluation date"). Based upon the evaluation, the Chief Executive Officer
and 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.


                                       23
<PAGE>

      (b)   Changes in internal controls.

      There were no significant changes made in our internal controls over
financial reporting during the three months ended October 31, 2004 or, to our
knowledge, in other factors that has materially affected, or is materially
likely to affect, these controls.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

      (a) Recent Sales of Unregistered Securities

      The following transactions were exempt from registrations under Section
4(2) of the Securities Act of 1933, as amended. The net proceeds from these
transactions will be used for general corporate purposes.

      During the quarter ended October 31, 2004, we issued 320,157 shares of
restricted common stock and five-year warrants to purchase 420,157 shares of
common stock with an exercise price of $1.00 per share upon the conversion of
notes payable in the amount of $112,055 by an unrelated party.

      During the quarter ended October 31, 2004, we issued an aggregate of
227,272 shares of common stock upon the exercise of warrants by unrelated
parties, which resulted in aggregate gross proceeds of $170,454 to us. We have
previously registered the resale of these shares by the stockholders on a Form
S-1 registration statement.

Item 6. Exhibits

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

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


                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                                                    Exhibit No. or
Exhibit                                                                            Incorporation by
  No.                               Item Title                                         Reference
  ---                               ----------                                         ---------
<S>       <C>                                                                             <C>

3.6       Certificate of Elimination of Series A Preferred Stock, dated
          February 3, 2004 (incorporated by reference to 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)          *

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

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

*     Previously filed; incorporated herein by reference.

+     Filed herewith.


                                       25
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements 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
                                                --------------------
                                                     (Registrant)


December 10, 2004                               /s/ Andrew P. Savadelis
                                                --------------------------------
                                                Chief Financial Officer
                                                (Principal Financial Officer and
                                                Chief Accounting Officer)


                                       26