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

                                    FORM 10-Q

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

                For the quarterly period ended: January 31, 2006

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

For the transition period from ______________________ to ______________________

                         Commission File Number: 0-11088

                              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)

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

                                 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 a large accelerated filer,
an accelerated filer or a non-accelerated  filer. See definition of "accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

     Large Accelerated Filer |_| Accelerated Filer |X| Non-accelerated Filer |_|

     Indicate  by check mark  whether  the  registrant  is a shell  company  (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

     The number of shares of common stock,  $.001 par value,  outstanding  as of
March 8, 2005 was 37,390,062 shares.

<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

                            CONDENSED BALANCE SHEETS
                       January 31, 2006 and July 31, 2005

<TABLE>
<CAPTION>
                                                                                         January 31,        July 31,
                                                                                            2006              2005
                                                                                         (Unaudited)      (See Note 1)
                                                                                         ------------     ------------
<S>                                                                                      <C>              <C>
                                ASSETS
Current assets:
   Cash and cash equivalents                                                             $  2,917,146     $  4,462,951
   Other current assets                                                                        80,036          196,936
                                                                                         ------------     ------------
        Total current assets                                                                2,997,182        4,659,887

Property and equipment, net                                                                    75,007           80,395

Loan receivable, related party                                                                166,106          161,342
                                                                                         ------------     ------------
        Total assets                                                                     $  3,238,295     $  4,901,624
                                                                                         ============     ============

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                                                      $    833,502     $    396,263

   Accrued expenses                                                                         1,553,052        1,283,691
                                                                                         ------------     ------------
        Total liabilities                                                                   2,386,554        1,679,954
                                                                                         ------------     ------------

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $.001 par value;
      Authorized and unissued, 1,000,000 shares at January 31, 2006 and July 31, 2005              --               --
   Common stock, $.001 par value;
      Authorized 100,000,000 shares at January 31, 2006 and July 31, 2005;
      Issued and outstanding, 37,103,095 shares at January 31, 2006 and 36,534,235
        shares at July 31, 2005                                                                37,103           36,534
   Capital in excess of par value                                                          80,006,819       78,691,572

   Deficit accumulated during development stage                                           (79,192,181)     (75,506,436)
                                                                                         ------------     ------------
        Total stockholders' equity                                                            851,741        3,221,670
                                                                                         ------------     ------------

        Total liabilities and stockholders' equity                                       $  3,238,295     $  4,901,624
                                                                                         ============     ============
</TABLE>

See accompanying notes to condensed financial statements.


                                     - 2 -
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       CONDENSED STATEMENTS OF OPERATIONS

              Three and six months ended January 31, 2006 and 2005,
                       and the Period from August 24, 1981
                     (Date of Inception) to January 31, 2006

                                   (Unaudited)

<TABLE>
<CAPTION>
                                            Three Months Ended                 Six Months Ended           August 24, 1981
                                                January 31,                       January 31,                (Date of
                                                -----------                       -----------              Inception) to
                                           2006             2005             2006             2005       January 31, 2006
                                       ------------     ------------     ------------     ------------   ----------------
<S>                                    <C>              <C>              <C>              <C>              <C>
Revenue:
   Sales                               $         --     $         --     $         --     $         --     $    553,489
   Investment income                         24,053           33,704           56,048           62,882        1,626,869
   Other income                                  --               --               --               --           99,939
                                       ------------     ------------     ------------     ------------     ------------
Total revenue                                24,053           33,704           56,048           62,882        2,280,297
                                       ------------     ------------     ------------     ------------     ------------

Costs and expenses:
   Cost of sales                                 --               --               --               --          336,495
   Research and development               1,430,041        1,554,443        2,589,431        2,475,592       52,626,682
   General and administrative               879,914          422,406        1,469,724          868,003       27,107,312
   Interest:
       Related parties, net                      --               --               --               --        1,147,547
       Others                                    10           12,165               20           43,422        2,873,984
                                       ------------     ------------     ------------     ------------     ------------
Total costs and expenses                  2,309,965        1,989,014        4,059,175        3,387,017       84,092,020
                                       ------------     ------------     ------------     ------------     ------------

Loss before state tax benefit            (2,285,912)      (1,955,310)      (4,003,127)      (3,324,135)     (81,811,723)

State tax benefit                                --               --          317,382          287,975        2,619,542
                                       ------------     ------------     ------------     ------------     ------------

Net loss                               $ (2,285,912)    $ (1,955,310)    $ (3,685,745)    $ (3,036,160)    $(79,192,181)
                                       ============     ============     ============     ============     ============

Loss per basic and diluted common
   share                               $      (0.06)    $      (0.06)    $      (0.10)    $      (0.09)
                                       ============     ============     ============     ============

Weighted average number of shares
   outstanding                           36,734,042       35,211,954       36,663,531       34,936,198
                                       ============     ============     ============     ============
</TABLE>

See accompanying notes to condensed financial statements.


                                     - 3 -
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                       CONDENSED STATEMENTS OF CASH FLOWS

                   Six months ended January 31, 2006 and 2005,
                       and the Period from August 24, 1981
                     (Date of Inception) to January 31, 2006

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                    Six Months Ended             August 24, 1981
                                                                       January 31,             (Date of Inception)
                                                                       -----------                     to
                                                                 2006               2005        January 31, 2006
                                                             ------------       ------------   -------------------
<S>                                                          <C>                <C>                <C>
Cash flows from operating activities:
  Net loss                                                   $ (3,685,745)      $ (3,036,160)      $(79,192,181)
  Adjustments to reconcile net loss to
     net cash used in operating activities:
     Gain on sale of marketable securities                             --                 --            (25,963)
     Depreciation and amortization                                 13,892             14,220          1,599,576
     Loss on disposal of property and equipment                        --                 --             18,926
     Issuance of common stock, stock options and
       warrants for services rendered                             644,330             13,500          7,361,343
     Amortization of debt discount                                     --             30,061            594,219
     Amortization of deferred compensation                             --                 --         11,442,000
     Amortization of organization costs                                --                 --              4,590
Changes in assets and liabilities:
     Decrease (increase) in other current assets                  116,900           (163,349)          (139,903)
     Increase in loan receivable-related party                     (4,764)            (4,797)           (70,055)
     Increase in interest payable-related party                        --                 --            744,539
     Increase in accounts payable                                 437,239            118,148          1,340,137
     Increase in accrued payroll and expenses,
       related parties                                                 --                 --          2,348,145
     Increase in accrued expenses                                 269,361            293,544          2,271,936
                                                             ------------       ------------       ------------
     Net cash used in operating activities                     (2,208,787)        (2,734,833)       (51,702,691)
                                                             ------------       ------------       ------------

Cash flows from investing activities:
     Purchase of marketable equity securities                          --                 --           (290,420)
     Purchase of short-term investments                                --         (1,978,189)        (1,978,189)
     Proceeds from sale of marketable equity securities                --                 --          2,294,572
     Purchase of property and equipment                            (8,503)           (41,153)        (1,521,405)
     Patent costs                                                      --                 --            (97,841)
                                                             ------------       ------------       ------------

Net cash used in investing activities                              (8,503)        (2,019,342)        (1,593,283)
                                                             ------------       ------------       ------------

</TABLE>
                                                                     (continued)

See accompanying notes to condensed financial statements.


                                     - 4 -
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

                  CONDENSED STATEMENTS OF CASH FLOWS, Continued

                   Six months ended January 31, 2006 and 2005
                       and the Period from August 24, 1981
                     (Date of Inception) to January 31, 2006

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                               Six Months Ended            August 24, 1981
                                                                                  January 31,                 (Date of
                                                                                  -----------               Inception) to
                                                                             2006              2005        January 31, 2006
                                                                         ------------      ------------    ----------------
<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                                        --            (6,730)       (2,966,568)
  Proceeds from issuance of common stock, net                                      --                --        40,750,316
  Proceeds from exercise of stock options and warrants, net                   671,485           244,166        11,198,051
  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                            671,485           237,436        56,213,120
                                                                         ------------      ------------      ------------
Net increase (decrease) in cash and cash equivalents                       (1,545,805)       (4,516,739)        2,917,146
Cash and cash equivalents at beginning of period                            4,462,951        10,147,694                --
                                                                         ------------      ------------      ------------
Cash and cash equivalents at end of period                               $  2,917,146      $  5,630,955      $  2,917,146
                                                                         ============      ============      ============
Supplemental disclosure of cash flow information - interest
    paid                                                                 $         20      $        305      $  1,714,038
                                                                         ============      ============      ============
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                                       $         --      $    224,520      $  1,584,364
                                                                         ============      ============      ============
  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
January 31, 2006 and its results of operations  and cash flows for the three and
six month periods ended January 31, 2006 and 2005 and the period from August 24,
1981 (date of inception) to January 31, 2006.  The results of operations for the
three and six months ended  January 31, 2006 are not  necessarily  indicative of
the results to be expected for the full year. The condensed  balance sheet as of
July 31, 2005  presented  herein has been  derived  from the  audited  financial
statements  included in the Form 10-K for the fiscal  year ended July 31,  2005,
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 fiscal
year ended July 31, 2005.

      The Company is a  development  stage  company as defined in  Statement  of
Financial Accounting Standards No. 7. The Company is devoting  substantially all
of its present  efforts to 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   $6,462,000,
$5,070,000  and  $2,411,000  for the fiscal years ended July 31, 2005,  2004 and
2003, respectively. The loss from date of inception, August 24, 1981, to January
31, 2006 amounts to approximately $79,192,000.

      The Company's long-term continued operations will depend on its ability to
raise additional funds through various potential sources such as equity and debt
financing,  collaborative agreements, strategic alliances, sale of tax benefits,
revenues from the commercial sale of  ONCONASE(R),  licensing of its proprietary
RNase technology and its ability to realize revenues from its technology and its
drug  candidates  via  out-licensing  agreements  with  other  companies.   Such
additional  funds may not become  available  as the Company may need them or may
not be available on acceptable  terms.  Through  January 31, 2006, a significant
portion  of the  Company's  financing  has been  through  the sale of its equity
securities  and  convertible  debentures  in  registered  offerings  and private
placements  and the exercise of stock  options and warrants.  Additionally,  the
Company has raised capital through debt financings, the sale of tax benefits and
research  products,  interest  income  and  financing  received  from its  Chief
Executive  Officer.   Until  and  unless  the  Company's   operations   generate
significant  revenues,  the Company  expects to continue to fund operations from
the sources of capital previously described.  There can be no assurance that the
Company  will  be able to  raise  the  capital  it  needs  on  terms  which  are
acceptable,  if at all. As of January 31,  2006,  management  believes  that the
Company's cash


                                       6
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

               NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued

                                   (Unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION, Continued

balance is sufficient to fund its operations through July 31, 2006, based on its
expected  level  of   expenditures   in  relation  to  activities  in  preparing
ONCONASE(R) for marketing registrations in the U.S. and Europe and other ongoing
operations of the Company.  However, to assure the Company's ability to continue
its  operations  beyond this date,  the  Company  continues  to seek  additional
financing  through equity or debt  financings and the sale of net operating loss
carryforwards,  but  cannot  be sure  that it will be able to raise  capital  on
favorable  terms or at all.  The  Company  may also  obtain  additional  capital
through the exercise of  outstanding  options and  warrants,  although it cannot
provide any  assurance  of such  exercises  or estimate the amount of capital it
will receive,  if any. If the Company is unable to raise additional funds in the
future on acceptable terms, or at all, its operations will be severely curtailed
and its business and financial condition will be adversely affected.

      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  prior to January  31,  2006 would be
anti-dilutive.  The number of outstanding options and warrants that could dilute
earnings per share in future  periods was  16,199,993  and 15,208,029 at January
31, 2006 and 2005, respectively.

3.    STOCK-BASED COMPENSATION

      Statement  of  Financial  Accounting  Standards  No. 123,  Accounting  for
Stock-Based   Compensation  ("SFAS  123"),  provides  for  the  use  of  a  fair
value-based method of accounting for employee stock compensation.  However, SFAS
123 also  allowed an entity to continue to measure  compensation  cost for stock
options  granted to employees and directors  using the intrinsic value method of
accounting  prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock  Issued to  Employees  ("APB  25"),  which  only  required  charges to
compensation expense for the excess, if any, of the fair value of the underlying
stock at the date a stock  option was granted (or at an  appropriate  subsequent
measurement  date) over the amount the employee had to pay to acquire the stock,
if such amounts differed materially from the historical amounts. Prior to August
1, 2005,  the Company had  elected to  continue  to account for  employee  stock
options using the intrinsic  value method under APB 25. As the exercise price of
all options  granted  under the stock option plans was equal to the market value
of the  underlying  common  stock on the grant  date,  no  stock-based  employee
compensation  cost had been recognized in the condensed  statement of operations
for the three and six months ended January 31, 2005.


                                       7
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

               NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued

                                   (Unaudited)

3.    STOCK-BASED COMPENSATION, Continued

      In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R) (revised 2004),  "Share-Based Payment" ("SFAS 123(R)"), which amends SFAS
123. The new standard requires all share-based payments,  including stock option
grants to employees,  to be recognized as an operating  expense in the statement
of operations. The cost is recognized over the requisite service period based on
fair values  measured  on the date of grant.  The  Company  adopted  SFAS 123(R)
effective August 1, 2005 using the modified  prospective method and accordingly,
prior period  amounts  have not been  restated.  Under the modified  prospective
method,  the fair value of all new stock options  issued after July 31, 2005 and
unvested  outstanding  stock  options  at August 1, 2005 will be  recognized  as
expense as services are  rendered.  The Company  recorded  $305,441 or $0.01 per
basic and diluted common share and $514,026 or $.01 per basic and diluted common
share of stock-based  compensation expense for employees under SFAS 123R for the
three and six month  periods  ended  January  31,  2006,  respectively.  Had the
Company accounted for its stock-based awards under the fair value method for the
three  and six  months  ended  January  31,  2005 the  impact  to its  financial
statements would have been as follows:

<TABLE>
<CAPTION>
                                                              Three Months      Six Months
                                                                 Ended            Ended
                                                               January 31,      January 31,
                                                               -----------      -----------
                                                                  2005             2005
                                                               -----------      -----------
<S>                                                            <C>              <C>
Net loss applicable to common shares
    As reported                                                $(1,955,310)     $(3,036,160)
    Less total stock-based employee compensation expense
      determined under fair value method for all awards,
      net of related tax effects                                  (604,671)      (1,223,942)
                                                               -----------      -----------
    Pro forma                                                  $(2,559,981)     $(4,260,102)
                                                               ===========      ===========
Basic and diluted loss per common share
    As reported                                                $     (0.06)     $     (0.09)
    Pro forma                                                        (0.07)           (0.12)
</TABLE>

      For options  granted  during the six months ended  January 31,  2006,  the
weighted-average  fair  value at the grant  date was $1.27  per  option  and the
weighted  average  exercise  price was $1.69 per  option.  The fair value of the
stock options was estimated using the Black-Scholes  options pricing model based
on the following weighted-average assumptions:

                                                   Six Months Ended
                                                      January 31,
                                                      -----------
                                                   2006        2005
                                                   ----        ----

      Expected dividend yield                         0%          0%
      Risk-free interest rate                      4.47%       4.25%
      Expected stock price volatility             84.79%        100%
      Expected term until exercise (years)         5.86        8.67
      Forfeiture rate                             36.61%        N/A


                                       8
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

               NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued

                                   (Unaudited)

3.    STOCK-BASED COMPENSATION, Continued

      The total intrinsic value of options exercised by employees during the six
months ended  January 31, 2006 was $120,894.  As of January 31, 2006,  there was
approximately  $2,319,000  of total  unrecognized  compensation  cost related to
unvested share-based compensation arrangements granted under the Company's stock
option plans,  which is to be recognized over a weighted  average period of 1.62
years.

      Shares,  warrants  and options  issued to  non-employees  for services are
accounted  for in  accordance  with SFAS 123(R) and  Emerging  Issues Task Force
("EITF") Issue No. 96-18,  Accounting for Equity  Instruments that are Issued to
Other Than  Employees  for  Acquiring or In  Conjunction  with Selling  Goods or
Services. Such securities are recorded in expense and additional paid-in capital
in stockholders'  equity  (deficiency) over the applicable service periods using
variable  accounting  through  the  vesting  date based on the fair value of the
securities at the end of each period.

4.    LOAN RECEIVABLE, RELATED PARTY

      Amounts due from the Company's  CEO totaling  $166,106 at January 31, 2006
and  $161,342 at July 31,  2005,  are  classified  as a long-term  asset in loan
receivable,  related  party as the Company  does not expect  repayment  of these
amounts  within one year.  In each of the six months ended  January 31, 2006 and
2005,  the Company earned 8% interest in the amount of  approximately  $4,800 on
the unpaid principal balance.

5.    CAPITAL STOCK

      During the quarter ended October 31, 2005, the Company issued an aggregate
of  132,082  shares of common  stock upon the  exercise  of  warrants  and stock
options by an unrelated party, an employee and an executive officer at per share
exercise  prices  ranging from $0.54 to $0.85.  The Company  realized  aggregate
gross proceeds of $96,738 from these exercises.

      During the quarter ended January 31, 2006, the Company issued an aggregate
of  436,778  shares of common  stock upon the  exercise  of  warrants  and stock
options by unrelated  parties,  employees  and  directors at per share  exercise
prices  ranging  from  $0.26 to $1.50.  The  Company  realized  aggregate  gross
proceeds of $574,747 from these exercises.

      During the quarter  ended  January 31,  2006,  the Company  issued  25,000
ten-year  stock  options to a consultant as payment for services  rendered.  The
options vested  immediately  and have an exercise price of $1.32 per share.  The
Company recorded a total of $23,166 of non-cash expense for these options.

      During the quarter  ended  January 31,  2006,  the Company  issued  50,000
five-year  stock options to a consultant as payment for services to be rendered.
These options vest over a one year period,  50% of which vested  immediately and
12.5% will vest equally for the next four quarters following the grant date. The
stock options have an exercise price of $2.04 per share. The fair value of these
options


                                       9
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

               NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued

                                   (Unaudited)

5.    CAPITAL STOCK, Continued

is being  expensed over the service  period using the  provisions of EITF 96-18.
During the six months ended January 31, 2006,  the Company  recorded  under EITF
96-18, a total of $86,006 of non-cash expense for these options.

      During the six months ended January 31, 2006,  the Company  recorded under
EITF  96-18,  a  total  of  $21,132  non-cash  expense  for  options  issued  to
consultants  during the fiscal  year  ended July 31,  2005.

6.    SALE OF NET OPERATING LOSS CARRYFORWARDS

      New Jersey has enacted legislation permitting certain corporations located
in New  Jersey to sell a portion of its state tax loss  carryforwards  and state
research and development credits in order to obtain tax benefits.  For the state
fiscal year 2006 (July 1, 2005 to June 30, 2006), the Company had  approximately
$1,903,000  of total  available  net  operating  loss  carryforwards  that  were
saleable,  of which New  Jersey  permitted  the  Company  to sell  approximately
$356,000. In December 2005, the Company received approximately $317,000 from the
sale of the $356,000 of net operating loss  carryforwards,  which was recognized
as a tax benefit for the six months ended January 31, 2006.

      For the state  fiscal  year  2005  (July 1,  2004 to June 30,  2005),  the
Company had  approximately  $1,335,000 of total  available  net  operating  loss
carryforwards  that were saleable,  of which New Jersey permitted the Company to
sell   approximately   $339,000.   In  December  2004,   the  Company   received
approximately  $288,000  from the sale of the  $339,000  of net  operating  loss
carryforwards,  which was  recognized  as a tax benefit for the six months ended
January 31, 2005.

      If still  available under New Jersey law, the Company will attempt to sell
the remaining $1,547,000 of its net operating loss carryforwards between July 1,
2006 and June 30,  2007  (state  fiscal  year  2007).  This  amount,  which is a
carryover of the Company's remaining net operating loss carryforwards from state
fiscal year 2006, may increase if the Company  incurs  additional net losses and
research and  development  credits  during  state fiscal year 2007.  The Company
cannot  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.    LITIGATION

      Shogen v. Global Aggressive Growth Fund, Ltd. et al.

      Kuslima Shogen,  the Company's Chief Executive Officer and Chairman of the
Board of  Directors,  filed this action on November 18, 2004, in the US District
Court,  District  of New Jersey.  The  Company  was not a party to this  action.
Several defendants,  however,  sought permission to name the Company and another
defendant in a  third-party  complaint  seeking  payment from the Company of any
sums which may be assessed against them as a result of Ms. Shogen's  claims.  On
December  2, 2005,  the Court  denied  that  request.  Accordingly,  the Company
continues not to be a party to this action.


                                       10
<PAGE>

                              ALFACELL CORPORATION
                          (A Development Stage Company)

               NOTES TO CONDENSED FINANCIAL STATEMENTS, Continued

                                   (Unaudited)

7.    LITIGATION, Continued

      Shogen v. Pisani et al.

      This action was commenced by Ms. Shogen in May 2005 in New Jersey Superior
Court,  Essex  County.  The Company was not a party to this  action.  Defendants
filed   counterclaims   against  Ms.  Shogen,  and  in  conjunction  with  those
counterclaims   named  the  Company  as  a  third-party   defendant,   but  they
subsequently  withdrew  their  claims  against the  Company.  At this time,  the
Company continues not to be a party to this action.

8.    SUBSEQUENT EVENTS

      In February  2006,  the Company  issued an aggregate of 286,967  shares of
common  stock upon the  exercise of warrants  by  unrelated  parties at exercise
prices  ranging  from  $0.75 to $1.50 per  share.  The  Company  realized  gross
proceeds of $310,223 from these exercises.


                                       11
<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 in Item
1A. "Risk Factors" in this quarterly  report on Form 10-Q 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  from  the Food and Drug
Administration, or FDA, 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 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.

      We  received  Orphan  Drug  Designation  for  malignant   mesothelioma  in
Australia from the Therapeutics Goods  Administration,  or TGA. This designation
in Australia  also  entitles us to five years of marketing  exclusivity,  a 100%
waiver of filing fees and regulatory guidance from the TGA.

      Almost all of our research and development expenses since our inception of
$52,627,000  have gone toward the  development of  ONCONASE(R)  and related drug
candidates.  For  the  fiscal  years  2005,  2004  and  2003  our  research  and
development expenses were $5,082,000,  $3,353,000 and $1,700,000,  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  the full
enrollment target of 316 patients has now been reached.  The primary endpoint of
the trial is survival,  and as such, a sufficient number of deaths must occur in
order to perform the required  statistical analyses to determine the efficacy of
ONCONASE(R) in patients with unresectable  (inoperable) malignant  mesothelioma.
If the  results  of the  clinical  trials  are  positive,  we expect to file for
marketing  registrations  (NDA in the U.S. and MAA in Europe and  Australia) 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.  The timing of when we
will be able to file for marketing  registrations in the US, EU and Australia is
data driven. Therefore, we cannot predict with


                                       12
<PAGE>

certainty what our total cost associated with obtaining marketing approvals will
be, or when and if such  approvals  will be granted,  or when actual  sales will
occur.

      We fund the research and  development of our products  primarily from cash
receipts  resulting  from  the sale of our  equity  securities  and  convertible
debentures in registered  offerings and private  placements  and the exercise of
stock options and warrants.  Additionally,  we have raised capital through other
debt financings,  the sale of our tax benefits and research  products,  interest
income and financing  received from our Chief Executive  Officer.  As of January
31,  2006,  we believe our cash  balance is  sufficient  to fund our  operations
through July 31, 2006 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.  To assure  our  ability to  continue  our
operations  beyond this date, we continue to seek additional  financing  through
equity or debt financings and the sale of net operating loss carryforwards,  but
we cannot be sure that we will be able to raise capital on favorable terms or at
all. We may also obtain  additional  capital through the exercise of outstanding
options and warrants, although we cannot provide any assurance of such exercises
or estimate the amount of capital we will  receive,  if any. If we are unable to
raise  sufficient  capital,  our operations  will be severely  curtailed and our
business and financial condition will be adversely affected.

Results of Operations

Three and six month periods ended January 31, 2006 and 2005

      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 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 and six month  periods ended January
31, 2006 and 2005.  For the three and six month  periods ended January 31, 2006,
our  investment  income was $24,000 and $56,000  compared to $34,000 and $63,000
for the same period last year,  a decrease of $10,000 and $7,000,  respectively.
These decreases were due to lower balances of cash and cash equivalents.

      Research and Development.  Research and development  expense for the three
months ended January 31, 2006 was $1,430,000 compared to $1,554,000 for the same
period last year, a decrease of  $124,000,  or 8%. The  decrease  resulted  from
decreases in pre-clinical  sponsored research and development  expenses;  patent
expenses  of   approximately   $91,000;   near   completion  of  key  toxicology
requirements  and key requirements  for chemistry,  manufacturing  and controls,
including the ONCONASE(R) stability program of approximately  $79,000; and costs
related to clinical trials of approximately $67,000. This decrease was offset by
an increase in compensation  expense of approximately  $160,000 which is related
to share-based compensation; non-cash expense related to stock options issued to
consultants of  approximately  $41,000;  and insurance  expense of approximately
$12,000.  The  share-based  compensation  expense is  expected  to continue as a
result of the adoption of SFAS 123(R),  which requires us to charge compensation
expense for all employee stock options.

      Research and development expense for the six months ended January 31, 2006
was $2,589,000 compared to $2,476,000 for the same period last year, an increase
of $113,000,  or 5%. The increase was primarily due to  compensation  expense of
approximately $291,000 of which approximately $261,000 is related to share-based
compensation and non-cash expense related to stock options issued to consultants
of approximately  $44,000 and insurance  expense of approximately  $20,000.  The
share-based


                                       13
<PAGE>

compensation expense is expected to continue as a result of the adoption of SFAS
123(R).  This  increase  was  offset  by  a  decreases  in  patent  expenses  of
approximately  $109,000;  costs  related  to  clinical  trials of  approximately
$73,000;  pre-clinical  sponsored research and development expenses and expenses
in connection with preparing our NDA for  ONCONASE(R),  including the completion
of key toxicology requirements and key requirements for chemistry, manufacturing
and  controls,  including the  ONCONASE(R)  stability  program of  approximately
$21,000.

      General and  Administrative.  General and  administrative  expense for the
three  months ended  January 31, 2006 was $880,000  compared to $422,000 for the
same period last year,  an increase of  $458,000,  or 109%.  This  increase  was
primarily due to an increase in compensation  expense of approximately  $122,000
which is related  to  share-based  compensation.  The  share-based  compensation
expense is expected to continue as a result of the adoption of SFAS 123(R).  The
increase in general and administrative  expense also resulted from legal fees of
approximately  $210,000;  non-cash  expense related to stock options issued to a
consultant of  approximately  $86,000;  board of directors fees of approximately
$24,000  which  is  related  to  share-based   compensation  and  Sarbanes-Oxley
compliance and auditing fees of approximately $16,000.

      General and  administrative  expense for the six months ended  January 31,
2006 was  $1,470,000  compared  to $868,000  for the same  period last year,  an
increase of $602,000,  or 69%.  This  increase was  primarily due to increase in
compensation expense of approximately  $263,000 of which approximately  $229,000
is related to share-based compensation.  The share-based compensation expense is
expected to continue as a result of the adoption of SFAS 123(R). The increase in
general  and   administrative   expense  also   resulted   from  legal  fees  of
approximately  $221,000;  non-cash  expense related to stock options issued to a
consultant of approximately $86,000; Sarbanes-Oxley compliance and auditing fees
of approximately  $68,000;  board of directors fees of approximately  $35,000 of
which approximately  $24,000 is related to share-based  compensation;  offset by
decreases in Nasdaq  membership fees of approximately  $35,000;  public relation
related expenses of approximately $21,000 and insurance expense of approximately
$15,000.

      Interest.  Interest expense for the three and six months ended January 31,
2006 decreased by $12,000, or 100% and $43,000, or 100%, respectively; primarily
due to the maturity and  conversion  of  convertible  notes  payable into common
stock during the last fiscal year ended July 31, 2005.

      Income  Taxes.  New  Jersey has  enacted  legislation  permitting  certain
corporations  located  in New  Jersey  to sell a  portion  of our 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 2006
(July 1,  2005 to June  30,  2006),  we had  approximately  $1,903,000  of total
available net operating  loss  carryforwards  that were  saleable,  of which New
Jersey  permitted  us to sell  approximately  $356,000.  In  December  2005,  we
received  approximately  $317,000 from the sale of the $356,000 of net operating
loss  carryforwards,  which was  recognized  as a tax benefit for the six months
ended January 31, 2006.

      For the state  fiscal  year 2005 (July 1, 2004 to June 30,  2005),  we had
approximately  $1,335,000 of total  available net operating  loss  carryforwards
that were  saleable,  of which New  Jersey  permitted  us to sell  approximately
$339,000. In December 2004, we received  approximately $288,000 from the sale of
the $339,000 of net operating loss  carryforwards,  which we recognized as a tax
benefit for the six months ended January 31, 2005.

      If still  available  under New  Jersey  law,  we will  attempt to sell the
remaining  $1,547,000 of our net operating  loss  carryforwards  between July 1,
2006 and June 30,  2007  (state  fiscal  year  2007).  This  amount,  which is a
carryover of our remaining net operating  loss  carryforwards  from state fiscal
year


                                       14
<PAGE>

2006,  may  increase  if  we  incur  additional  net  losses  and  research  and
development credits during state fiscal year 2007. We cannot 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  January  31,  2006 was
$2,286,000 as compared to $1,955,000  for the same period last year, an increase
of  $331,000.  The net  loss  for the six  months  ended  January  31,  2006 was
$3,686,000 as compared to $3,036,000  for the same period last year, an increase
of $650,000. The cumulative loss from the date of inception,  August 24, 1981 to
January 31, 2006,  amounted to $79,192,000.  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 and the 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.  During the six months ended January 31, 2006, we
had a net decrease in cash and cash  equivalents of  $1,546,000,  which resulted
primarily from net cash used in operating  activities of $2,209,000 and net cash
used in investing activities of $8,000,  offset by net cash receipts of $671,000
from warrant and stock option exercises.  Total cash resources as of January 31,
2006 were $2,917,000 compared to $4,463,000 at July 31, 2005.

      Our current liabilities as of January 31, 2006 were $2,387,000 compared to
$1,680,000 at July 31, 2005, an increase of $707,000. The increase was primarily
due an  increase  in  accounts  payable of  approximately  $437,000  and accrued
expenses of  approximately  $269,000.  These  increases were mainly for expenses
related to clinical trials of approximately  $466,000;  pre-clinical  studies of
approximately  $182,000;  professional fees of approximately $33,000 and payroll
accruals of approximately $25,000.

      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 tax benefits,
revenues from the commercial sale of  ONCONASE(R),  licensing of our proprietary
RNase technology and our ability to realize revenues from our technology and our
drug  candidates  via  out-licensing  agreements  with  other  companies.   Such
additional  funds  may  not  become  available  as we  need  them  or may not be
available  on  acceptable  terms.  As of January 31,  2006,  we believe our cash
balance is sufficient to fund our operations through July 31, 2006, 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,  to assure our ability to continue our operations beyond this
date, we continue to seek additional financing through equity or debt financings
and the sale of net  operating  loss  carryforwards,  but cannot be sure that we
will be able to raise  capital on favorable  terms or at all. We may also obtain
additional  capital  through the exercise of  outstanding  options and warrants,
although we cannot  provide any  assurance  of such  exercises  or estimate  the
amount of capital we will receive,  if any. If we are unable to raise sufficient
capital,  our  operations  will  be  severely  curtailed  and our  business  and
financial condition will be adversely affected.

      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


                                       15
<PAGE>

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 January 31, 2006, we are not involved in any
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 deferred  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, 2005.

Recently Issued Accounting Standards

      In  December  2004,  the FASB  issued  SFAS  No.  123(R)  (revised  2004),
"Share-Based  Payment",  which amends SFAS  Statement  No. 123. The new standard
requires the cost of all share-based payments,  including stock option grants to
employees, to be recognized as an operating expense in the income statement. The
cost is  recognized  over the  requisite  service  period  based on fair  values
measured on the date of grant. We adopted SFAS 123(R)  effective  August 1, 2005
using the modified prospective method and accordingly, prior period amounts have
not been restated.  Under the modified prospective method, the fair value of all
new stock  options  issued  after July 31, 2005 and unvested  outstanding  stock
options at August 1, 2005,  will be  recognized  as services are  rendered.  The
impact  of the  adoption  of SFAS  123(R) on future  period  earnings  cannot be
determined  at this time  because  it will  depend  on the level of  share-based
payments  that may be  granted  in the  future.  Prior to  August  1,  2005,  we
accounted for  stock-based  awards to employees using the intrinsic value method
in accordance with APB 25.

Contractual Obligations and Commercial Commitments

      Our outstanding  contractual obligations relate to our equipment operating
lease.  Since July 31, 2005,  there has been no material  change with respect to
our  contractual  obligations  as  disclosed  in  "Management's  Discussion  and
Analysis  of  Financial  Condition  and  Results  of  Operations  -  Contractual
Obligations  and Commercial  Commitments"  in our annual report on Form 10-K for
the fiscal year ended July 31, 2005.


                                       16
<PAGE>

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 January 31, 2006,  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.

      (b) Changes in internal controls.

      There were no  significant  changes  made in our  internal  controls  over
financial  reporting  during the three months ended  January 31, 2006 or, to our
knowledge,  in other factors that have  materially  affected,  or are reasonably
likely to materially affect, these controls.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Shogen v. Global Aggressive Growth Fund, Ltd. et al.

      Kuslima Shogen,  our Chief Executive  Officer and Chairman of the Board of
Directors,  filed this action on November  18, 2004,  in the US District  Court,
District of New Jersey. This case relates to shares of Alfacell common stock Ms.
Shogen had posted as  collateral  to secure a loan she had taken from certain of
the defendants in this litigation.  Ms. Shogen alleges that her shares were sold
unlawfully in violation of the terms of the loan. Among other things, Ms. Shogen
seeks damages of $9 million plus costs and attorneys'  fees.  Alfacell was not a
party to this action.  Several  defendants,  however,  sought permission to name
Alfacell and another  defendant in a third-party  complaint seeking payment from
Alfacell  of any sums  which  may be  assessed  against  them as a result of Ms.
Shogen's   claims.   On  December  2,  2005,  the  Court  denied  that  request.
Accordingly, Alfacell continues not to be a party to this action.

Shogen v. Pisani et al.

      This action was commenced by Ms. Shogen in May 2005 in New Jersey Superior
Court, Essex County. This lawsuit relates to a loan taken by Ms. Shogen from the
defendants  in this  litigation  that was  secured  by  varying  amounts  of Ms.
Shogen's Alfacell common stock. Ms. Shogen alleges, among other things, that the
loan was usurious and  therefore  should be voided.  Alfacell was not a party to
this  action.   Defendants  filed  counterclaims  against  Ms.  Shogen,  and  in
conjunction with those counterclaims named Alfacell as a third-party  defendant,
but they subsequently  withdrew their claims against Alfacell. At this time, the
Company continues not to be a party to this action.


                                       17
<PAGE>

Item 1A. 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  one of the
principal  sources of our working  capital has been private  sales of our common
stock.  We incurred a net loss of  approximately  $3,686,000  for the six months
ended January 31, 2006 and net losses of  approximately  $6,462,000,  $5,070,000
and  $2,411,000  for the  fiscal  years  ended  July 31,  2005,  2004 and  2003,
respectively.  We have  continued to incur  losses  since July 31, 2005.  We may
never achieve revenue sufficient for us to attain profitability.

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

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

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

      o     Our limited financial resources relative to our competitors;

      o     Our ability to obtain an appropriate marketing partner;

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

      o     Incidents of adverse reactions to our products;

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

      o     The occurrence of manufacturing or distribution disruptions.

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


                                       18
<PAGE>

We will 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) with the FDA in the United States,  with the EMEA in Europe and with
the TGA in  Australia.  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.  As of January 31, 2006, we believe
that our cash  balance is  sufficient  to fund our  operations  through July 31,
2006,  based on our  expected  level of  expenditures.  However,  to assure  our
ability to  continue  our  operations  beyond  this date,  we  continue  to seek
additional  financing  through  equity  or debt  financings  and the sale of net
operating loss carryforwards but we cannot be sure that we will be able to raise
capital on  favorable  terms or at all.  We may also obtain  additional  capital
through the exercise of  outstanding  options and  warrants,  although we cannot
provide any  assurance  of such  exercises  or estimate the amount of capital we
will  receive,  if any.  If we are  unable  to  raise  sufficient  capital,  our
operations will be severely  curtailed and our business and financial  condition
will be materially adversely affected.

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,  2005,  we had federal net  operating  loss  carryforwards  of
approximately   $52,823,000  that  expire  from  2006  to  2025   (approximately
$8,675,000  expires  in the  years  2006 to  2010).  We also  had  research  and
experimentation tax credit carryforwards of approximately $1,955,000 that expire
from 2006 to 2025  (approximately  $152,000  expires in the years 2006 to 2010).
New Jersey has enacted legislation  permitting certain  corporations  located in
New  Jersey to sell a portion  of its  state  tax loss  carryforwards  and state
research and development credits in order to obtain tax benefits.  The aggregate
amount of tax benefits  that New Jersey allows  corporations  to sell each state
fiscal  year (July 1st  through  June 30th) is  determined  annually  and if New
Jersey reduces such aggregate amount in any fiscal year we may be unable to sell
some or all of our  available  tax benefits as we have in the past. In addition,
there is a limited  market  for  these  types of sales and we may not be able to
find someone to purchase our tax benefits for a reasonable price. Our historical
results of  operations  and our cash flows have been improved by our sale of tax
benefits  and if we  continue  to  generate a limited  amount of revenue and are
unable in the future to sell our tax benefits, our results of operations and our
cash flows will be negatively impacted.

      For the state  fiscal  year 2006 (July 1, 2005 to June 30,  2006),  we had
approximately  $1,903,000  total  available tax benefits that were saleable,  of
which New Jersey permitted us to sell approximately  $356,000. In December 2005,
we  received  approximately  $317,000  from  the  sale  of the  $356,000  of tax
benefits,  which we  recognized as tax benefits for the six months ended January
31, 2006. For the state fiscal year 2005 (July 1, 2004 to June 30, 2005), we had
approximately  $1,335,000  total  available tax benefits that were saleable;  of
which New Jersey permitted us to sell approximately  $339,000. In December 2004,
we  received  approximately  $288,000  from  the  sale  of the  $339,000  of tax
benefits,  which we recognized as a tax benefit for the six months ended January
31, 2006.


                                       19
<PAGE>

      If still  available  under New  Jersey  law,  we will  attempt to sell the
remaining  $1,547,000 of our tax benefits between July 1, 2006 and June 30, 2007
(state fiscal year 2007). This amount, which is a carryover of our remaining tax
benefits  from state  fiscal  year 2006 and  earlier,  may  increase if we incur
additional  tax  losses  during  state  fiscal  year 2007.  We cannot  estimate,
however,  what percentage of our saleable tax benefits New Jersey will permit us
to sell, how much money we will receive in connection  with the sale, if we will
be able to find a buyer for our tax  benefits or if such funds will be available
in a timely manner.

We  cannot  predict  how long it will  take us nor how  much it will  cost us to
complete part two of our Phase III trial because it is a survival study.

      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 for which the full  enrollment
target of 316  patients  has now been  reached  is still  ongoing.  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  patient  deaths 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, EMEA and TGA.

      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.

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. We cannot apply
for FDA, EMEA or TGA approval to market  ONCONASE(R)  until the clinical  trials
and all other  registration  requirements have been met. Drugs in late stages of
clinical  development  may fail to show the desired safety and efficacy  results
despite having progressed through initial clinical testing. While limited trials
with our product have produced certain favorable  results,  we cannot be certain
that we will successfully complete Phase I, Phase II or Phase III testing of any
compound within any specific time period, if at all. Furthermore, the FDA or the
company may suspend clinical trials at any time on various grounds,  including a
finding  that the  subjects or  patients  are being  exposed to an  unacceptable
health  risk.  In  addition,  we cannot  apply for FDA,  EMEA or TGA 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


                                       20
<PAGE>

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, EMEA and TGA could stop our trials before completion.

      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  you 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 Laboratories, LLC 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
and Apptuit 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.

      We use FDA GMP licensed  manufacturers for ranpirnase and ONCONASE(R).  We
have identified substantial  alternative service providers for the manufacturing
services  for which we may  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.


                                       21
<PAGE>

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 or non US
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 partner  with
marketing and distribution  capabilities.  To date, we have not entered into any
marketing or licensing agreements for ONCONASE(R).  We cannot assure you we will
be   able  to   establish   or   maintain   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,
on acceptable terms, if at all. Further,  it is likely that we will have limited
or no control  over the manner in which our product  candidates  are marketed or
the resources devoted to such marketing efforts.

      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

      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 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


                                       22
<PAGE>

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,  one Japanese  patent that expires in 2010,  and one
Japanese patent that expires in 2013. 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 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.


                                       23
<PAGE>

We may be sued for product liability.

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

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

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

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

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

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


                                       24
<PAGE>

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

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

      There have been a number of legislative and regulatory  proposals aimed at
changing the healthcare system and pharmaceutical industry, including reductions
in the  cost of  prescription  products  and  changes  in the  levels  at  which
consumers   and   healthcare   providers   are   reimbursed   for  purchases  of
pharmaceutical  products.  For  example,  the  Prescription  Drug  and  Medicare
Improvement  Act of 2003  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 remain listed on the Nasdaq SmallCap Market. In addition, our stock
remains  thinly  traded  and you may be unable to sell our common  stock  during
times when the trading market is limited.

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

      The market price of our common stock,  like that of the securities of many
other  development  stage  biotechnology  companies,  has fluctuated over a wide
range and it is likely that the price of our common stock will  fluctuate in the
future.  Over the past three  years,  the sale price for our  common  stock,  as
reported by Nasdaq and the OTC Bulletin Board has fluctuated from a low of $0.39
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,


                                       25
<PAGE>

      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  37,103,095  shares of common stock  outstanding as of
January 31, 2006. The following  securities that may be exercised into shares of
our common stock were issued and outstanding as of January 31, 2006:

      o     Options.  Stock options to purchase  4,073,400  shares of our common
            stock at a weighted average  exercise price of  approximately  $3.13
            per share.

      o     Warrants. Warrants to purchase 12,126,593 shares of our common stock
            at a weighted  average  exercise  price of  approximately  $2.33 per
            share.

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

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

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

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

      Section 18 of the  Securities  Exchange Act of 1934 (the  "Exchange  Act")
provides  that any  person  acquiring  or selling a security  in  reliance  upon
statements set forth in a Form 10-K may assert a claim against every  accountant
who has with its consent been named as having  prepared or certified any part of
the Form 10-K, or as having  prepared or certified any report or valuation  that
is used in connection with


                                       26
<PAGE>

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 the Form 10-K for the fiscal year ended July
31, 2005 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,  2005.
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 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 January 31, 2006, we issued an aggregate total of
337,778  shares of common  stock upon the  exercise  of  warrants at an exercise
price of $1.50 per share by an unrelated party, which resulted in gross proceeds
of $506,667 to us. We have  previously  registered the resale of these shares by
the stockholders on a Form S-3 registration statement.

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

      (a)   An annual meeting of stockholders was held on January 19, 2006.

      (b)   All of our current  directors,  Kuslima Shogen,  John P. Brancaccio,
            Stephen K.  Carter,  Donald R.  Conklin,  James J.  Loughlin,  David
            Sidransky and Paul M. Weiss, were elected at the annual meeting.

      (c)   The matters voted upon at the annual  meeting and the results of the
            voting,  including broker non-votes where applicable,  are set forth
            below:


                                       27
<PAGE>

            (i)   For the election of directors

<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------------------------
                                Number of Shares of      Number of Shares of Common    Number of Broker
              Director         Common Stock Voted For          Stock Withheld             Non-Votes
     --------------------------------------------------------------------------------------------------
<S>                                  <C>                          <C>                         <C>
     Kuslima Shogen                  30,126,920                   484,709                     0
     --------------------------------------------------------------------------------------------------
     John P. Brancaccio              30,443,046                   168,583                     0
     --------------------------------------------------------------------------------------------------
     Stephen K. Carter               30,524,266                    87,363                     0
     --------------------------------------------------------------------------------------------------
     Donald R. Conklin               30,437,866                   173,763                     0
     --------------------------------------------------------------------------------------------------
     James J. Loughlin               30,527,766                    83,863                     0
     --------------------------------------------------------------------------------------------------
     David Sidransky                 30,498,276                   113,353                     0
     --------------------------------------------------------------------------------------------------
     Paul M. Weiss                   30,336,516                   275,113                     0
     --------------------------------------------------------------------------------------------------
</TABLE>

            (ii)  Proposal  to  ratify  the  appointment  of  J.H.  Cohn  LLP as
                  Alfacell's  independent  registered public accounting firm for
                  the year ending July 31, 2006.

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------------------------------------
     Number of Shares of Common       Number of Shares of         Number of Shares of Common      Number of Broker
           Stock Voted For         Common Stock Voted Against     which Abstained from Voting         Non-Votes
     -------------------------------------------------------------------------------------------------------------
<S>                                          <C>                            <C>                           <C>
             30,386,781                      62,720                         162,128                       0
     -------------------------------------------------------------------------------------------------------------
</TABLE>

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)                                                                            *

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)                                                                            *
</TABLE>


                                       28
<PAGE>

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

                                       29
<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)

March 13, 2006                                /s/ Robert D. Love
                                              ------------------
                                              Robert D. Love
                                              Chief Financial Officer
                                              (Principal Financial Officer and
                                              Chief Accounting Officer)


                                       30

<PAGE>