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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-QSB

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

For the quarter ended September 30, 2001

|/ / | 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: 000-31961

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PHAGE THERAPEUTICS INTERNATIONAL INC.(Exact name of registrant as specified in its charter)

Florida(State or other jurisdiction of incorporation or organization)

91-1930691(I.R.S. Employer Identification No.)19017 120th Avenue NE, Suite 102 Bothell, Washington 98011(Address of Principal Executive Offices; Zip Code)


(425) 481-6255(Registrant's telephone number, including area code)

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Check
whether the issuer (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 / /

Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

Check
whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by court. Yes / /  No / /

Applicable only to corporate issuers:

State
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:As of November 9, 2001, there
were 13,975,398 shares outstanding of the Company's common stock.

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PHAGE THERAPEUTICS INTERNATIONAL INC.  (A Development Stage Company)  CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)  SEPTEMBER 30, 2001

TABLE OF CONTENTS

|                                                                        |  | Page No.
|----------------------------------------------------------------------- |  | --------
|Consolidated balance sheets                                             |  | 1       
|Consolidated statements of operations                                   |  | 2       
|Consolidated statements of cash flows                                   |  | 3       
|Consolidated statements of changes in stockholders' equity (deficiency) |  | 4 & 5   
|Notes to the consolidated financial statements                          |  | 6 to 21 

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ITEM 1. FINANCIAL STATEMENTS

PHAGE THERAPEUTICS INTERNATIONAL INC.  (A Development Stage Company)  CONSOLIDATED BALANCE SHEETS  (Unaudited)

|                                                        |                                                  | September 30,
2001     |                                                     | December 31,
2000 |  
|------------------------------------------------------- | ------------------------------------------------ | ---------------------- | --------------------------------------------------- | ----------------- | -
|ASSETS                                                  |                                                  |                        |                                                     |                   |  
|Current                                                 |                                                  |                        |                                                     |                   |  
|                                                        | Cash and cash equivalents                        |                        | $                                                   | 51,350            |  
|                                                        | Prepaid expenses and other current assets        |                        |                                                     | 193,492           |  
|                                                        |                                                  |                        |                                                     |                   |  
|Total current assets                                    |                                                  |                        | 244,842                                             |                   |  
|Capital assets(Note 4)                                  |                                                  |                        | 307,405                                             |                   |  
|Deposit, non-current(Note 11)                           |                                                  |                        | 75,000                                              |                   |  
|                                                        |                                                  |                        |                                                     |                   |  
|Total assets                                            |                                                  | $                      | 627,247                                             |                   | $
|                                                        |                                                  |                        |                                                     |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)       |                                                  |                        |                                                     |                   |  
|Current                                                 |                                                  |                        |                                                     |                   |  
|                                                        | Accounts payable                                 |                        | $                                                   | 422,647           |  
|                                                        | Accrued liabilities                              |                        |                                                     | 167,355           |  
|                                                        | Due to related parties (Note 9)                  |                        |                                                     | 18,164            |  
|                                                        | Notes payable (Note 5)                           |                        |                                                     | 160,941           |  
|                                                        |                                                  |                        |                                                     |                   |  
|Total current liabilities                               |                                                  |                        | 769,107                                             |                   |  
|Minority interest                                       |                                                  |                        | (3,689                                              | )                 |  
|                                                        |                                                  |                        |                                                     |                   |  
|                                                        |                                                  |                        | 765,418                                             |                   |  
|                                                        |                                                  |                        |                                                     |                   |  
|Stockholders' equity (deficiency)                       |                                                  |                        |                                                     |                   |  
|                                                        | Capital stock (Note 6)                           |                        |                                                     |                   |  
|                                                        |                                                  | Authorized             |                                                     |                   |  
|                                                        |                                                  |                        | 50,000,000 common shares with a par value of $0.001 |                   |  
|                                                        |                                                  | Issued and outstanding |                                                     |                   |  
|                                                        |                                                  |                        | September 30, 200113,975,398                       |                   |  
|                                                        |                                                  |                        | December 31, 200010,895,444                        |                   |  
|                                                        | Additional paid-in capital                       |                        |                                                     | 7,612,461         |  
|                                                        | Subscriptions received in advance (Note 13)      |                        |                                                     | 125,000           |  
|                                                        | Non-qualified stock options outstanding (Note 7) |                        |                                                     | 337,203           |  
|                                                        | Deficit accumulated during the development stage |                        |                                                     | (8,226,810        | )
|                                                        |                                                  |                        |                                                     |                   |  
|Total stockholders' equity (deficiency)                 |                                                  |                        | (138,171                                            | )                 |  
|                                                        |                                                  |                        |                                                     |                   |  
|Total liabilities and stockholders' equity (deficiency) |                                                  | $                      | 627,247                                             |                   | $
|                                                        |                                                  |                        |                                                     |                   |  

Nature and continuance of operations(Note 1)

Commitments and contingencies(Note 12)

The
accompanying notes are an integral part of these consolidated financial statements.

1

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PHAGE THERAPEUTICS INTERNATIONAL INC.  (A Development Stage Company)  CONSOLIDATED STATEMENTS OF OPERATIONS  (Unaudited)

|                                              |                                                              | Cumulative
Amounts
From Date of
Inception on
December 24,
1996 to
September 30,
2001 |            | Three Month
Period Ended
September 30,
2001 |   | Three Month
Period Ended
September 30,
2000 |         | Nine Month
Period Ended
September 30,
2001 |           | Nine Month
Period Ended
September 30,
2000 |  
|--------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ---------- | ------------------------------------------- | - | ------------------------------------------- | ------- | ------------------------------------------ | --------- | ------------------------------------------ | -
|EXPENSES                                      |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|                                              | General and administrative                                   |                                                                                      | $          | 4,753,400                                   |   | $                                           | 382,526 |                                            | $         | 182,626                                    |  
|                                              | Research and development                                     |                                                                                      |            | 3,186,525                                   |   |                                             | 632,286 |                                            |           | 60,446                                     |  
|                                              |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|Loss from operations                          |                                                              |                                                                                      | (7,939,925 | )                                           |   | (1,014,812                                  | )       |                                            | (243,072  | )                                          |  
|                                              |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|OTHER INCOME (EXPENSE)                        |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|                                              | Interest income                                              |                                                                                      |            | 56,016                                      |   |                                             | 1,479   |                                            |           |                                           |  
|                                              | Loss on disposal of capital assets                           |                                                                                      |            | (376,392                                    | ) |                                             |        |                                            |           |                                           |  
|                                              |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|                                              |                                                              |                                                                                      | (320,376   | )                                           |   | 1,479                                       |         |                                            |          |                                            |  
|                                              |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|Loss before extraordinary item                |                                                              |                                                                                      | (8,260,301 | )                                           |   | (1,013,333                                  | )       |                                            | (243,072  | )                                          |  
|EXTRAORDINARY ITEM                            |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|                                              | Gain on extinguishment of debts, net of income taxes of $Nil |                                                                                      |            | 33,491                                      |   |                                             |        |                                            |           |                                           |  
|                                              |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|Loss for the period                           |                                                              | $                                                                                    | (8,226,810 | )                                           | $ | (1,013,333                                  | )       | $                                          | (243,072  | )                                          | $
|                                              |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|Basic and diluted loss per share              |                                                              |                                                                                      |            |                                             | $ | (0.07                                       | )       | $                                          | (0.03     | )                                          | $
|                                              |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  
|Weighted average number of shares outstanding |                                                              |                                                                                      |            |                                             |   | 13,972,259                                  |         |                                            | 8,752,587 |                                            |  
|                                              |                                                              |                                                                                      |            |                                             |   |                                             |         |                                            |           |                                            |  

The
accompanying notes are an integral part of these consolidated financial statements.

2

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PHAGE THERAPEUTICS INTERNATIONAL INC.  (A Development Stage Company)  CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)

|                                                      |                                                                             | Cumulative
Amounts
From Date of
Inception on
December 24,
1996 to
September 30,
2001 |            | Nine Month
Period Ended
September 30,
2001 |          | Nine Month
Period Ended
September 30,
2000 |           
|----------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ---------- | ------------------------------------------ | -------- | ------------------------------------------ | ----------
|CASH FLOWS FROM OPERATING ACTIVITIES                  |                                                                             |                                                                                      |            |                                            |          |                                            |           
|                                                      | Loss for the period                                                         |                                                                                      | $          | (8,226,810                                 | )        | $                                          | (2,693,213
|                                                      | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                                      |            |                                            |          |                                            |           
|                                                      |                                                                             | Amortization                                                                         |            |                                            | 210,298  |                                            |           
|                                                      |                                                                             | Compensation expense from vesting of non-qualified stock options                     |            |                                            | 337,203  |                                            |           
|                                                      |                                                                             | Loss on disposal of capital assets                                                   |            |                                            | 376,392  |                                            |           
|                                                      |                                                                             | Interest note payable                                                                |            |                                            | 32,743   |                                            |           
|                                                      |                                                                             | Consulting                                                                           |            |                                            | 160,000  |                                            |           
|                                                      | Changes in non-cash working capital items:                                  |                                                                                      |            |                                            |          |                                            |           
|                                                      |                                                                             | Increase in prepaid expenses and other current assets                                |            |                                            | (191,492 | )                                          |           
|                                                      |                                                                             | Increase (decrease) in accounts payable                                              |            |                                            | 383,629  |                                            |           
|                                                      |                                                                             | Increase (decrease) in accrued liabilities                                           |            |                                            | 167,355  |                                            |           
|                                                      |                                                                             | Increase (decrease) in due to related parties                                        |            |                                            | 18,164   |                                            |           
|                                                      |                                                                             |                                                                                      |            |                                            |          |                                            |           
|Net cash used in operating activities                 |                                                                             |                                                                                      | (6,732,518 | )                                          |          | (2,525,584                                 | )         
|                                                      |                                                                             |                                                                                      |            |                                            |          |                                            |           
|CASH FLOWS FROM INVESTING ACTIVITIES                  |                                                                             |                                                                                      |            |                                            |          |                                            |           
|                                                      | Acquisition of cash on purchase of subsidiary                               |                                                                                      |            | 173                                        |          |                                            |          
|                                                      | Purchases of capital assets                                                 |                                                                                      |            | (901,376                                   | )        |                                            | (297,751  
|                                                      | Deposit                                                                     |                                                                                      |            | (75,000                                    | )        |                                            |          
|                                                      |                                                                             |                                                                                      |            |                                            |          |                                            |           
|                                                      | Net cash used in investing activities                                       |                                                                                      |            | (976,203                                   | )        |                                            | (297,751  
|                                                      |                                                                             |                                                                                      |            |                                            |          |                                            |           
|CASH FLOWS FROM FINANCING ACTIVITIES                  |                                                                             |                                                                                      |            |                                            |          |                                            |           
|                                                      | Proceeds from sale of capital assets                                        |                                                                                      |            | 7,281                                      |          |                                            |          
|                                                      | Notes payable (repayment)                                                   |                                                                                      |            | 128,198                                    |          |                                            | (12,000   
|                                                      | Net proceeds received from stock issuances                                  |                                                                                      |            | 7,499,592                                  |          |                                            | 1,732,551 
|                                                      | Subscriptions received in advance                                           |                                                                                      |            | 125,000                                    |          |                                            | 125,000   
|                                                      |                                                                             |                                                                                      |            |                                            |          |                                            |           
|                                                      | Net cash provided by financing activities                                   |                                                                                      |            | 7,760,071                                  |          |                                            | 1,845,551 
|                                                      |                                                                             |                                                                                      |            |                                            |          |                                            |           
|Change in cash and cash equivalents during the period |                                                                             |                                                                                      | 51,350     |                                            |          | (977,784                                   | )         
|Cash and cash equivalents, beginning of period        |                                                                             |                                                                                      |           |                                            |          | 1,029,134                                  |           
|                                                      |                                                                             |                                                                                      |            |                                            |          |                                            |           
|Cash and cash equivalents, end of period              |                                                                             | $                                                                                    | 51,350     |                                            | $        | 51,350                                     |           
|                                                      |                                                                             |                                                                                      |            |                                            |          |                                            |           

Supplemental disclosure with respect to cash flows(Note 10)

The
accompanying notes are an integral part of these consolidated financial statements.

3

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PHAGE THERAPEUTICS INTERNATIONAL INC.  (A Development Stage Company)  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)  (Unaudited)

|                                                                                  |  | Common Stock |   |   |        |   |   | Non-
qualified
Stock
Options
Outstanding |   | Deficit
Accumulated
During the
Development
Stage |   |  |  
|--------------------------------------------------------------------------------- |  | ------------ | - | - | ------ | - | - | ---------------------------------------- | - | ------------------------------------------------ | - |  | -
|
|
|Stock issued for expenses incurred by founder                                     |  | 571,429      |   | $ | 571    |   | $ | 39,429                                   |   | $                                                |  |  | $
|Stock issued for cashDecember 1996                                               |  | 1,785,707    |   |   | 1,786  |   |   | 98,214                                   |   |                                                  |  |  |  
|Stock issued for cashMarch through July 1997                                     |  | 1,600,000    |   |   | 1,600  |   |   | 638,400                                  |   |                                                  |  |  |  
|Stock issued for cashAugust through December 1997                                |  | 735,000      |   |   | 735    |   |   | 734,265                                  |   |                                                  |  |  |  
|Issuance of non-qualified stock options                                           |  |             |   |   |       |   |   |                                         |   |                                                  |  |  |  
|Loss for the period                                                               |  |             |   |   |       |   |   |                                         |   |                                                  |  |  |  
|                                                                                  |  |              |   |   |        |   |   |                                          |   |                                                  |   |  |  
|Balance at December 31, 1997                                                      |  | 4,692,136    |   |   | 4,692  |   |   | 1,510,308                                |   |                                                  |  |  |  
|Stock issued for cashFebruary through March 1998                                 |  | 165,000      |   |   | 165    |   |   | 264,835                                  |   |                                                  |  |  |  
|Stock issued as compensation for bridge loan financing                            |  | 22,857       |   |   | 23     |   |   | 79,977                                   |   |                                                  |  |  |  
|Stock issued for cashApril through May 1998, net of offering expenses of $66,959 |  | 500,000      |   |   | 500    |   |   | 432,541                                  |   |                                                  |  |  |  
|Contribution of capital by shareholders                                           |  |             |   |   |       |   |   | 300,000                                  |   |                                                  |  |  |  
|Investment banking fee paid by shareholders                                       |  |             |   |   |       |   |   | (300,000                                 | ) |                                                  |  |  |  
|Advances on merger letter of intent converted to common stock November 1998       |  |             |   |   |       |   |   | 332,000                                  |   |                                                  |  |  |  
|Deferred compensation from non-qualified stock options outstanding                |  |             |   |   |       |   |   |                                         |   |                                                  |  |  |  
|Loss for the year                                                                 |  |             |   |   |       |   |   |                                         |   |                                                  |  |  |  
|                                                                                  |  |              |   |   |        |   |   |                                          |   |                                                  |   |  |  
|Balance at December 31, 1998                                                      |  | 5,379,993    |   |   | 5,380  |   |   | 2,619,661                                |   |                                                  |  |  |  
|Advances on merger converted to common stockFebruary 1999                        |  |             |   |   |       |   |   | 50,000                                   |   |                                                  |  |  |  
|Assumption of debt by parent converted to common stock, February 1999             |  |             |   |   |       |   |   | 150,000                                  |   |                                                  |  |  |  
|Acquisition of parent                                                             |  | 2,028,375    |   |   | 2,028  |   |   | (36,873                                  | ) |                                                  |  |  |  
|Minority interest recorded at March 25, 1999                                      |  | (1,486,852   | ) |   | (1,486 | ) |   | 16,022                                   |   |                                                  |  |  |  
|Shares issued for cash and receivablesApril 1999                                 |  | 187,500      |   |   | 188    |   |   | 149,812                                  |   |                                                  |  |  |  

The accompanying notes are an integral part of these consolidated financial statements.

4

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PHAGE THERAPEUTICS INTERNATIONAL INC.  (A Development Stage Company)  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)  (Unaudited)

|                                                                              |  | Common Stock |  |   |        | Subscrip-
tions
Received
In
Advance |   | Non-
qualified
Stock
Options
Outstanding |   | Deficit
Accumulated
During the
Development
Stage |         |   |  
|----------------------------------------------------------------------------- |  | ------------ |  | - | ------ | ----------------------------------- | - | ---------------------------------------- | - | ------------------------------------------------ | ------- | - | -
|
|Continued...                                                                  |  |              |  |   |        |                                     |   |                                          |   |                                                  |         |   |  
|Shares issued for acquisition of additional shares of subsidiary April 1999  |  | 629,284      |  |   | 628    |                                     |   | (6,795                                   | ) |                                                  |        |   |  
|Shares issued for consulting                                                  |  | 71,429       |  |   | 71     |                                     |   | 79,929                                   |   |                                                  |        |   |  
|Deferred compensation from non-qualified stock options outstanding            |  |             |  |   |       |                                     |   |                                         |   |                                                  |        |   |  
|Loss for the year                                                             |  |             |  |   |       |                                     |   |                                         |   |                                                  |        |   |  
|                                                                              |  |              |  |   |        |                                     |   |                                          |   |                                                  |         |   |  
|Balance at December 31, 1999                                                  |  | 6,809,729    |  |   | 6,809  |                                     |   | 3,021,756                                |   |                                                  |        |   |  
|Shares issued for cash in March 2000                                          |  | 1,942,858    |  |   | 1,943  |                                     |   | 1,358,057                                |   |                                                  |        |   |  
|Shares issued for cash in December 2000                                       |  | 2,142,857    |  |   | 2,143  |                                     |   | 1,497,857                                |   |                                                  |        |   |  
|Deferred compensation from non-qualified stock options outstanding            |  |             |  |   |       |                                     |   |                                         |   |                                                  |        |   |  
|Subscriptions received in advance                                             |  |             |  |   |       |                                     |   |                                         |   |                                                  | 10,000  |   |  
|Loss for the year                                                             |  |             |  |   |       |                                     |   |                                         |   |                                                  |        |   |  
|                                                                              |  |              |  |   |        |                                     |   |                                          |   |                                                  |         |   |  
|Balance at December 31, 2000                                                  |  | 10,895,444   |  |   | 10,895 |                                     |   | 5,877,670                                |   |                                                  | 10,000  |   |  
|Shares issued for cash in May 2001                                            |  | 2,142,857    |  |   | 2,143  |                                     |   | 1,497,857                                |   |                                                  | (10,000 | ) |  
|Shares issued for cash in June 2001                                           |  | 304,446      |  |   | 304    |                                     |   | 202,141                                  |   |                                                  |        |   |  
|Shares issued for acquisition of additional shares of subsidiary in June 2001 |  | 600,566      |  |   | 601    |                                     |   | (5,281                                   | ) |                                                  |        |   |  
|Shares issued for cash in July 2001                                           |  | 32,085       |  |   | 32     |                                     |   | 40,074                                   |   |                                                  |        |   |  
|Deferred compensation from non-qualified stock options outstanding            |  |             |  |   |       |                                     |   |                                         |   |                                                  |        |   |  
|Subscriptions received in advance                                             |  |             |  |   |       |                                     |   |                                         |   |                                                  | 125,000 |   |  
|Loss for the period                                                           |  |             |  |   |       |                                     |   |                                         |   |                                                  |        |   |  
|                                                                              |  |              |  |   |        |                                     |   |                                          |   |                                                  |         |   |  
|Balance at September 30, 2001                                                 |  | 13,975,398   |  | $ | 13,975 |                                     | $ | 7,612,461                                |   | $                                                | 125,000 |   | $
|                                                                              |  |              |  |   |        |                                     |   |                                          |   |                                                  |         |   |  

The accompanying notes are an integral part of these consolidated financial statements.

5

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PHAGE THERAPEUTICS INTERNATIONAL INC.  (A Development Stage Company)  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)  SEPTEMBER 30, 2001

1.  NATURE AND CONTINUANCE OF OPERATIONS

Phage Therapeutics International Inc. ("Phage", or the "Company") is a development stage company focused on the development, manufacturing and marketing
of bacteriophage therapeutic agents as pharmaceutical products. The products will be developed specifically for the treatment of antibiotic-resistant and other bacterial infectious agents. The Company
was originally incorporated in the State of Florida on July 8, 1997 under the name All Products Distribution Corporation, and changed its name to Phage Therapeutics International Inc. on
August 19, 1998. The consolidated Company's date of inception is considered to be December 24, 1996, the date of inception of Phage Therapeutics, Inc. ("PhageTx" or the
"Subsidiary"), the Company's legally owned subsidiary.

The
Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. As at September 30, 2001 the Company had a working capital deficiency of $(524,265) and has incurred losses of $8,226,810 from the date of inception on
December 24, 1996 to September 30, 2001. The Company anticipates expending approximately $5,000,000 over the next twelve month period in pursuing its anticipated plan of operations. The
Company anticipates covering these costs by additional equity financing. During the period ended September 30, 2001, the Company completed an offering of 2,142,857 units at $0.70 per unit
pursuant to Regulation D, Rule 506 of the United States Securities Act of 1933, as amended. The total proceeds of $1,500,000 will help the Company complete its anticipated plan of
operations. If the Company is unable to complete its further financing requirements, it will then modify its expenditures and plan of operations to coincide with the actual financing completed. The
financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.

The
accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, changes in stockholders' equity and cash flows
at September 30, 2001 and for the periods then ended have been made. These financial statements should be read in conjunction with the audited financial statements of the Company for the year
ended December 31, 2000. The results of operations for the period ended September 30, 2001 are not necessarily indicative of the results to be expected for the year ending
December 31, 2001.

2.  SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles. The significant
accounting policies adopted by the Company are as follows:

Use of estimates

In preparing these consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for the period. Actual results in the
future periods could be different from these estimates made in the current period.

6

---

Basis of consolidation and presentation

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiary Phage Tx, a Washington corporation. As of
September 30, 2001, the Company owned approximately 95% of the outstanding common stock of Phage Tx. All significant inter-company transactions have been eliminated on consolidation.

Effective
March 25, 1999, the Company acquired 71% of the outstanding common stock of Phage Tx through a series of share exchange agreements with certain PhageTx shareholders
(see Note 3). Added to the Company's previous share holdings of PhageTx, this transaction increased the Company's interest in PhageTx, to approximately 80%. As a result of this transaction, the
former shareholders of PhageTx obtained control of the Company. For accounting purposes, this acquisition has been treated as a recapitalization of the Company. The accounting for this
recapitalization is similar to a reverse take-over in which the financial statements presented include the accounts of PhageTx since inception (December 24, 1996) and the accounts
of the company since the date of acquisition, March 25, 1999 to September 30, 2001.

Cash and cash equivalents

All short-term investments, which consist entirely of bank repurchase agreements and certificates of deposit, with maturities of three months or
less at date of purchase are considered to be cash equivalents. The amounts are recorded at cost, which approximates fair market value.

Concentration of credit risk

The Company maintains a significant amount of its cash accounts in primarily one commercial bank in Vancouver, British Columbia, Canada. The Company's cash
account is a business chequing account maintained in U.S. dollars, which totaled at September 30, 2001$8,795 (December 31, 2000$876,846). This account is not
insured, however, management does not anticipate any loss from this concentration of credit risk.

Capital assets

Capital assets are recorded at cost and are amortized over their useful lives using the straight-line method, which range from three to five years.

Research and development costs

Research and development costs are expensed as incurred.

Accounting for impairment of long-lived assets and for long-lived assets to be disposed of

Long-lived assets to be held and used by the Company are continually reviewed to determine whether any events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on such impairment indicators as the nature of the
assets, the future economic benefit of the assets, any historical or future profitability measurements, as well as other external market conditions or factors that may be present. In the event that
facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss will be recognized. As at December 31, 2000, the Company's analysis indicated that there was an impairment of its long-lived assets as outlined in Note 4.
Management has estimated that the research and experimentation costs to date are greater than the estimated future undiscounted cash flows. Therefore, research and experimentation costs to date have
been expensed during the development stage period.

7

---

Financial instruments

The Company's financial instruments consist of cash and cash equivalents, deposit, non-current, accounts payable, accrued liabilities, due to
related parties and notes payable. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial
instruments. The fair value of these financial instruments approximate their carrying values, unless otherwise noted.

Loss per share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding in the period.
Diluted earnings per share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive common shares. The Company is a development stage
company and has recorded a loss per share. The weighted average number of shares outstanding for 2001, 12,438,639 and 2000, 8,212,904, do not include the 4,003,630 (20002,028,572)
warrants outstanding, the stock options of 1,790,554 (20001,285,000) as their effect would be anti-dilutive. Of the total 3,079,954 (20001,942,858) shares issued
in the nine month period ended September 30, 2001, 1,543,195 (20001,403,175) shares are included in the weighted average number of 12,438,639
(2000 - 8,212,904) shares outstanding at September 30.

Income taxes

A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred
tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities.

Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Stock-based compensation

SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and has adopted the disclosure only provisions of SFAS 123. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee is required to pay for the stock.

The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and the Emerging Issues Task
Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with
Selling, Goods or Services".

Accounting for derivative instruments and hedging instruments

In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income,
depending on the derivative designation. The effective date of SFAS 133 was deferred by FASB Statement No. 137, "Accounting for Derivative Instruments and Hedging

8

---

ActivitiesDeferral of the Effective Date of FASB Statement No. 133", and further amended by FASB Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Transactions". Since the Company does not have derivative instruments and hedging activities, pursuant to SFAS 133, there would be no impact on its financial position or the
results of its operations from the adoption of this accounting policy.

New accounting pronouncements

In June, 2001, FASB approved the issuance of SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS
No. 141 states that all business combinations should be accounted for using the purchase method of accounting making the use of the pooling-of-interest method
prohibited. SFAS No. 141 is effective for business combinations completed
after June 30, 2001. SFAS No. 142 addresses the accounting for all purchased intangible assets, but not the accounting for internally developed intangible assets. Goodwill will no longer
be amortized and will be reviewed for impairment in accordance with SFAS No. 142. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early adoption is
permitted for entities with fiscal years beginning after March 15, 2001.

In
July 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" that records the fair value of the liability for closure and removal costs
associated with the legal obligations upon retirement or removal of any tangible long-lived assets. The initial recognition of the liability will be capitalized as part of the asset cost
and depreciated over its estimated useful life. SFAS 143 is required to be adopted effective January 1, 2003.

In
August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" that supersedes SFAS No. 121 "Accounting
for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 is required to be adopted effective January 1,
2002.

The
adoption of these new pronouncements is not expected to have a material effect on the Company's financial position or results of operations.

9

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3.  RECAPITALIZATION

During March 1999 the Company issued 3,393,141 common shares to acquire 71% of the issued and outstanding shares of Phage Therapeutics, Inc. (the
"PhageTx Acquisition"). This transaction increased the Company's ownership of PhageTx to approximately 80%.

As
a result of this transaction the former shareholders of PhageTx acquired control over a majority of shares of the Company. Accordingly, the transaction has been treated for
accounting purposes as a recapitalization of the Company and, therefore, these financial statements represent a continuation of the legal subsidiary, PhageTx, not the Company, as the legal parent. In
accounting for this transaction:

Cash and equivalents

$
173Account receivable


4,000Accounts payable


(39,018
)Net assets acquired

$
(34,845
)


Since
March 1999, the Company has issued a total of 1,229,850 common shares to acquire a further 15% of PhageTx. These share issues have increased the ownership in PhageTx to
approximately 95%.

4.  CAPITAL ASSETS

|                                   |  | September 30,
2001 |          | December 31,
2000 |  
|---------------------------------- |  | ------------------ | -------- | ----------------- | -
|Research and development equipment |  | $                  | 244,769  |                   | $
|Computer and office equipment      |  |                    | 82,972   |                   |  
|Furniture and fixtures             |  |                    | 25,605   |                   |  
|Leasehold improvements             |  |                    | 54,732   |                   |  
|                                   |  |                    |          |                   |  
|                                   |  |                    | 408,078  |                   |  
|Accumulated amortization           |  |                    | (100,673 | )                 |  
|                                   |  |                    |          |                   |  
|                                   |  | $                  | 307,405  |                   | $
|                                   |  |                    |          |                   |  

As
at December 31, 2000, the Company's analysis of its capital assets determined an impairment value of $6,598 on research and development equipment, computer and office
equipment and furniture and fixtures. The amount of $6,598 was the net book value of $104,529 in capital cost minus accumulated amortization of $97,931. The amount was recorded as a loss on disposal
of capital assets.

10

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5.  NOTES PAYABLE

|                 |  | September 30,
2001 |         | December 31,
2000
|---------------- |  | ------------------ | ------- | -----------------
|Principal amount |  | $                  | 140,198 |                  
|Accrued interest |  |                    | 20,743  |                  
|                 |  |                    |         |                  
|                 |  | $                  | 160,941 |                  
|                 |  |                    |         |                  

In
1999, the Company received several loans from Prostar Limited which totalled $140,198. The loans bear interest at 11% per annum and are repayable on demand.

6.  CAPITAL STOCK

As a result of the PhageTx Acquisition transaction, all historical stockholders' equity amounts have been retroactively restated to reflect the number of
shares received in the business combination. Accordingly, the historical equity amounts shown in the Consolidated Statement of Changes in Stockholders' Equity reflect the equity transactions completed
by PhageTx, with share amounts restated to reflect the equivalent number of shares of the Company's common stock, issued in exchange for the respective shares of PhageTx stock. Equity transactions are
shown as if the Company had acquired 100% of the issued and outstanding shares of PhageTx common stock, an adjustment is recorded to indicate the number of shares of the legal parent outstanding as of
the date of the acquisition, and a non-controlling interest is deducted from the total share amount to reflect the number of shares of PhageTx not yet owned by the Company as of the date
of the acquisition.

At
inception of PhageTx, 2,357,136 shares of common stock were issued at an average price of approximately $0.06 per share, as restated. Consideration for issuance of the shares
consisted of $100,000 in cash and $40,000 as reimbursement of expenses paid on behalf of PhageTx by a founder.

11

---

Between April 1997 and July 1997 an additional 1,600,000 shares of common stock were issued for cash consideration at a price of $0.40 per share, as restated. Under the
terms of an employment agreement, the President and CEO of PhageTx was granted the right to purchase 100,000 shares of common stock (which is included in the 1,600,000 shares), at a price of $0.40 per
share, as restated, representing the market price of the stock at the time employment commenced. Beginning April 1997, a monthly amount of $5,000 was withheld from salary payments as
consideration for the stock purchase. All consideration related to this stock purchase had been received by PhageTx as of December 31, 1997.

In
August 1997 PhageTx initiated a financing round which raised $1.0 million. As of December 31, 1997, 735,000 shares of common stock had been issued in
connection with this round at a price of $1.00 per share. Subsequent to December 31, 1997, an additional 265,000 shares of common stock were subscribed to complete the minimum specified in the
offering, with 100,000 of these shares purchased by the Company. The amount paid by the Company for these shares is treated as a contribution of capital to PhageTx in the consolidated financial
statements.

During
April and May 1998, PhageTx completed a private placement financing round raising an additional $500,000 to fund PhageTx's short-term operations. PhageTx
engaged a placement agent to assist with the financing round. In connection with this financing, the placement agent received approximately 13% of the cash raised in the offering as commission and
expense reimbursement and was to receive approximately 85,000 post-consolidated common shares, as restated of the Company. Certain founders of PhageTx transferred to the placement agent,
for a total value of $300,000, the 85,000 common shares of PhageTx from their shareholdings. This transaction was recorded as a contribution of capital.

Prior
to the beginning of the financing round described above, PhageTx completed a bridge debt financing of $200,000 which consisted of promissory notes, each with a term of
40 days, paying interest at 10% per annum. These notes were repaid in April 1998. The note holders also received, as consideration for entering into the note agreements, 22,857 shares of
newly issued common stock, as restated, for a total value of $80,000.

Between
June and October 1998 Phage advanced to PhageTx a total of $332,000 as pre-payment on letters of intent to merge the two entities. Under the terms of the
letters of intent, if a merger transaction was not completed within a specified period of time, the advances converted to common stock of PhageTx at a price of $1.00 per share. In
November 1998, these advances were converted to PhageTx common stock. Upon restatement for the PhageTx Acquisition transaction effective March 25, 1999, this amount is treated as a
contribution of capital to PhageTx by the Company.

During
February 1999, pursuant to the letters of intent, the advances of $50,000 to PhageTx were converted to common stock of PhageTx.

During
February 1999, certain shareholder notes payable and expenses paid by shareholders on behalf of PhageTx were assigned by the shareholders to the Company. PhageTx issued
to the Company 150,000 shares of PhageTx common stock in satisfaction of the debt of $150,000. Similar to the above transaction, this amount is treated as a contribution of capital to PhageTx by the
Company upon restatement for the PhageTx Acquisition transaction.

During
April 1999 the Company sold an additional 187,500 shares of common stock at a price of $0.80 per share.

Under
the terms of private placement and investment banking agreements entered into by PhageTx in March 1998, upon the completion of certain placement milestones the placement
agent was to receive (1) warrants for 300,000 shares of PhageTx common stock with an exercise price of $1.25 per share for a three-year term beginning at the first public trade of
PhageTx stock; and (2) upon a merger with a public company or completion of an initial public offering the placement agent would receive

12

---

500,000 shares of PhageTx common stock. These agreements were terminated in June 1998. Based on completion of the PhageTx Acquisition transaction, the former placement agent asserted that the
Company was liable under the aforementioned agreements to issue common shares and warrants in satisfaction of the stated terms. During July 1999, in settlement of the liability, the Company
issued to the placement agent 71,429 shares of common stock, plus warrants to purchase 85,714 shares of common stock at an exercise price of $1.25 per share until March 25, 2001. Because these
shares were issued in settlement of a debt owed by PhageTx, an amount of $80,000, calculated by multiplying the number of common shares issued by a price of $1.119 per share, has been recorded as
consulting fees in general and administrative expense.

In
March 2000, the Company issued pursuant to a private placement 1,942,858 units at $0.70 per unit, for total proceeds of $1,360,000. Each unit consists of one common share of
the Company and a warrant, which entitles the holder thereof, to purchase another common share of the Company at $1.25 per share until February 22, 2001 and $2.00 per share until
February 22, 2002. Subsequent to year end, on February 12, 2001, these warrants were amended and extended from their expiry dates to June 2, 2001 and June 2, 2002. The
private placement was issued in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as amended.

In
October 2000, the Company entered into a securities purchase agreement with seven purchasers to purchase 4,285,714 units at $0.70 per unit for total proceeds of $3,000,000.
Each unit consists of one common share of the Company and a warrant. For every one and a half warrants, the holder thereof, is
entitled to purchase another common share of the Company at an exercise price of $0.70 per share. The Company has received $1,500,000. As payment for the first part of this agreement, the 2,142,857
common shares associated with this payment have been issued and the warrants attached to this issuance exercisable until August 15, 2001. At September 30, 2001, the Company has received
the second payment of $1,500,000. The 2,142,857 common shares were issued in May 2001, in accordance with Regulation D, Rule 506 of the United States Securities Act of 1933, as
amended. The warrants attached to this second issue are exercisable until January 15, 2002.

In
June 2001, the Company issued 304,446 common shares of the Company for total proceeds of $202,445. This issue was comprised of 254,446 common shares which related to the
exercise of stock options at $0.55 per share and 50,000 common shares which relate to the exercise of warrants at $1.25 per share.

In
June 2001, the Company issued 600,566 common shares for the acquisition of additional shares of Phage Tx. This acquisition reduced minority interest in Phage Tx from
$(8,369) to $(3,689).

In
July 2001, the Company issued 32,085 common shares of the Company for total proceeds of $40,106. This issue was the exercise of 32,085 warrants at $1.25 per share.

Warrants

|                             |           | September 30,
2001 |            | December 31,
2000
|---------------------------- | --------- | ------------------ | ---------- | -----------------
|Balance, beginning of period |           | 2,028,572          |            | 85,714           
|                             | Issued    |                    | 4,285,714  |                  
|                             | Exercised |                    | (82,085    | )                
|                             | Expired   |                    | (2,228,571 | )                
|                             |           |                    |            |                  
|Balance, end of period       |           | 4,003,630          |            | 2,028,572        
|                             |           |                    |            |                  

13

---

As
at September 30, 2001 there were 4,003,630 warrants outstanding that are exercisable into commons shares as follows:

Number
of Shares

Exercise
Price

Expiry Date1,860,773

$
2.00

June 2, 20022,142,857


0.70

January 15, 2002


7.  STOCK OPTIONS

Phage Therapeutics International Inc.

Stock option plan

In January 2000, the board of directors modified the existing stock option plan of the Company and adopted an incentive stock option plan providing for
the granting of stock options to officers, directors, employees and key consultants of the Company and its subsidiaries or affiliates. Under the modified plan, the Company is authorized to issue
options up to a total of 10% of the shares of the common stock of the Company outstanding from time to time. The options under the modified plan are non-assignable (except in the event of
death) and are exercisable for a term of five years. Options granted under the modified plan terminate within 30 days, in respect of any optionee, in the event that such optionee ceases to be a
full-time employee. The board of directors may, at its sole discretion, determine the time during which options shall vest and the method of vesting, or that no vesting restriction shall
exist.

14

---

Following is a summary of the stock option activity:

|                                 |           | Nine Month Period Ended
September 30, 2001 |          | Nine Month Period Ended
September 30, 2000
|-------------------------------- | --------- | ------------------------------------------ | -------- | ------------------------------------------
|
|Outstanding, beginning of period |           | 1,405,000                                  |          | $                                         
|                                 | Granted   |                                            | 775,000  |                                           
|                                 | Exercised |                                            | (254,446 | )                                         
|                                 | Cancelled |                                            | (135,000 | )                                         
|                                 |           |                                            |          |                                           
|Outstanding, end of period       |           | 1,790,554                                  |          | $                                         
|                                 |           |                                            |          |                                           

The
weighted average fair value of options granted to employees, non-employees and consultants during the nine month period ended September 30, 2001 was $0.78
(2000$0.16) per share.

Had
compensation cost been recognized on the basis of fair value pursuant to SFAS 123, net loss and loss per share would have been adjusted as follows:

Nine Month
Period Ended
September 30,
2001

Nine Month
Period Ended
September 30,
2000Net lossAs reported

$
(2,693,213
)
$
(578,177
)Pro-forma

$
(2,764,131
)
$
(596,258
)Basic and diluted loss per shareAs reported loss per share

$
(0.22
)
$
(0.07
)Pro-forma

$
(0.22
)
$
(0.07
)


SFAS 123,
"Accounting for Stock-Based Compensation", encourages but does not require companies to record compensation cost for employee stock-based compensation plans at fair
value. The Company has chosen to account for the employee stock-based compensation using APB 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is
measured as the excess, if any, of quoted market price of the Company's stock at the date of the grant over the option price. During the nine month period ended September 30, 2001, $118,700 has
resulted from the use of this standard. The stock based compensation expensed during the period was $37,325, the balance to be expensed over the vesting period of the stock option.

The
Company granted 360,000 (2000 - 845,000) options to consultants and non-employees during the period, which are accounted for under
SFAS 123 and EITF 96-18. The stock compensation recognized using FASB 123 for the nine month period ended September 30, 2001 was $299,462 (2000$36,092), using
the Black-Scholes option-pricing model. The options will be amortized over a one to four year period which is the expected period that the services will be performed over the vesting periods of the
stock options by the consultants and non-employees. The stock compensation expensed during the period was $160,935 (2000$13,533), of which $88,102 (2000$6,786)
was allocated to general and administrative and $72,833 (2000$6,747) was allocated to research and experimentation.

15

---

Following is a summary of the status of options outstanding at September 30, 2001:

|      |  | Outstanding Options |  |      |  |  
|----- |  | ------------------- |  | ---- |  | -
|
|
|
|$0.55 |  | 1,025,554           |  | 3.25 |  | $
|0.75  |  | 125,000             |  | 4.08 |  |  
|0.75  |  | 535,000             |  | 4.59 |  |  
|1.00  |  | 105,000             |  | 5.90 |  |  
|      |  |                     |  |      |  |  
|      |  | 1,790,554           |  |      |  |  
|      |  |                     |  |      |  |  

16

---

The assumptions used in calculating the fair value of options granted during the current period using the Black-Scholes option-pricing model are as follows:

|                             |  | Nine Month
Period Ended
September 30,
2001 |  | Nine Month
Period Ended
September 30,
2000
|---------------------------- |  | ------------------------------------------ |  | ------------------------------------------
|Risk free interest rate      |  | 3.97% - 4.30%                              |  | 6.43%                                     
|Expected life of the options |  | 2-4 years                                  |  | 2 years                                   
|Expected volatility          |  | 63.26% - 109.83%                           |  | 218.42%                                   
|Expected dividend yield      |  |                                           |  |                                          

Phage Therapeutics, Inc.

During 1997 PhageTx's Board of Directors adopted a Stock Option Plan under which an aggregate of 2,000,000 shares of common stock were reserved for grants to
employees, advisors and consultants. Shareholder approval of the Plan was granted as of March 30, 1998. Options granted under this plan were designated as incentive or nonqualified at the
discretion of the Plan Administrator.

Generally,
the options vest ratably over three and four-year periods. All options expire no later than ten years from the date of grant. Incentive stock options are
exercisable at not less than the fair market value of the stock at the date of grant, and nonqualified stock options are exercisable at prices determined at the discretion of the Plan Administrator,
but not less than 85% of the fair market value of the stock at the date of grant.

The
Plan contains a clause specifying terms of the conversion of options on a stock for stock exchange. Under the Plan, if the shareholders of PhageTx receive capital stock of another
corporation ("Exchange Stock") in exchange for their shares of common stock in any transaction involving a merger, all options granted under the Plan shall be converted into options to purchase shares
of Exchange Stock unless PhageTx and the corporation issuing the Exchange Stock, in their sole discretion, determine that any or all such options granted under this Plan shall not be converted into
options to purchase Exchange Stock, but instead shall terminate. The amount and price of converted options shall be determined by adjusting the amount and price of the options granted under the Plan
in the same proportion as used for determining the number of shares of Exchange Stock the holders of the common stock receive in such merger, consolidation, acquisition of property or stock,
separation or reorganization. Unless provided otherwise in the Optionee's original individual option agreement, the vesting schedule set forth in the option agreement shall accelerate, and reflect
100% vesting immediately prior to the conversion to an option for the Exchange Stock.

As
of the date of these financial statements, no corporate action has been taken with regard to the outstanding options by the Company's Board of Directors. In October 1999,
management presented the Company with a proposal to exercise all outstanding options in a cashless or net exercise transaction, with subsequent conversion into common shares. The Company has not yet
determined the resolution of this proposal, or how the outstanding options will be treated. In compliance with the terms of the

17

---

PhageTx Plan, the vesting schedule for all remaining outstanding options has been assumed to accelerate and reflect 100% vesting as of the date of the PhageTx Acquisition.

|                                                    |                    | Shares
Under
Outstanding
Options |          | Price
Per Share |           | Weighted
Average
Exercise
Price
|--------------------------------------------------- | ------------------ | -------------------------------- | -------- | --------------- | --------- | -------------------------------
|Balance at December 31, 1998                        |                    | 1,599,000                        |          | $               | 0.201.00 |                                
|                                                    | Options granted    |                                  | 100,000  |                 |           | 1.00                           
|                                                    | Options terminated |                                  | (224,000 | )               |           | 0.201.00                      
|                                                    |                    |                                  |          |                 |           |                                
|Balance at December 31, 1999                        |                    | 1,475,000                        |          |                 | 0.201.00 |                                
|                                                    | Options granted    |                                  |         |                 |           |                               
|                                                    | Options terminated |                                  |         |                 |           |                               
|                                                    |                    |                                  |          |                 |           |                                
|Balance at September 30, 2001 and December 31, 2000 |                    | 1,475,000                        |          |                 |           |                                

As
of September 30, 2001 all outstanding options were fully vested as a result of the PhageTx Acquisition transaction. No options granted have been exercised as of
September 30, 2001. The weighted average contractual life of options outstanding as of September 30, 2001 was 6.6 years.

8.  INCOME TAXES

The Company's total deferred tax asset is as follows:

Net tax benefit resulting from loss carry forward

$
1,953,776Valuation allowance


(1,953,776
)$



At
December 31, 2000 the Company had net operating loss carryforwards for income tax purposes of approximately $5.7 million that will expire between 2012 and 2021. Since
utilization of deferred tax assets resulting from loss carryforwards and temporary differences is dependent on future profits, which is not assured, a valuation allowance equal to the deferred taxes
has been provided. Utilization of the Company's tax loss carryforwards may be subject to annual limitations if there is deemed to be a change in control.

9.  RELATED PARTY TRANSACTIONS

During the period PhageTx paid wages of $90,000 (2000$Nil) and paid consulting fees of $Nil (2000$56,000) to the president and
director of the Company. As at September 30, 2001, the Company owed $Nil (December 31, 2000$75,413).

During
the period PhageTx paid wages of $63,000 (2000$Nil) to the treasurer of the Company.

On
September 1, 1998, the Company entered into a management agreement with Stealth Investment Corp. ("Stealth") to provide day-to-day management
services to the Company (the "Management Agreement"). A director and officer of the Company, is the sole shareholder and director of Stealth. The Management Agreement is terminable by either party
with two months notice (which occurred on October 4, 2001, therefore contract ends December 31, 2001) and provides for a base fee of $10,000 per month until October 31, 2000,
thereafter increased to $15,000 per month plus related expenses. The Company paid or accrued during the period, management fees of $67,500 (2000$45,000), consulting fees of $67,500
(2000$45,000), office expenses of $14,870 (2000$7,622), office administration of $17,899 (2000$22,383) and investor relations of $Nil (2000$1,575).
As at September 30, 2001 the Company owed Stealth $3,164 (December 31, 2000$68,798).

18

---

During the period, the Company paid $3,464 (2000$Nil) in consulting fees to a director of the Company.

During
the period, the Company received a cash advance of $15,000 (2000$Nil) from a director of the Company.

10.  SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS

|                           |  | Nine Month
Period Ended
September 30,
2001 |        | Nine Month
Period Ended
September 30,
2000
|-------------------------- |  | ------------------------------------------ | ------ | ------------------------------------------
|Cash paid for income taxes |  | $                                          |       |                                           
|                           |  |                                            |        |                                           
|Cash paid for interest     |  | $                                          | 12,000 |                                           
|                           |  |                                            |        |                                           

The
following non-cash transaction occurred during the period ended September 30, 2001:

The
Company issued 600,566 common shares for the acquisition of additional shares of its subsidiary, Phage Tx. This acquisition reduced minority interest in Phage Tx from $(8,369) to
$(3,689).

There
were no significant non-cash transactions for the period ended September 30, 2000.

11.  SEGMENTED INFORMATION

The Company operates in one business segment in two geographic areas: Canada and the United States.

19

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|                    |               | Nine Month
Period Ended
September 30,
2001 |           | Nine Month
Period Ended
September 30,
2000
|------------------- | ------------- | ------------------------------------------ | --------- | ------------------------------------------
|Loss for the period |               |                                            |           |                                           
|                    | Canada        |                                            | $         | 652,375                                   
|                    | United States |                                            |           | 2,040,838                                 
|                    |               |                                            |           |                                           
|                    |               | $                                          | 2,693,213 |                                           
|                    |               |                                            |           |                                           

|                    |               | September 30, 2001 |         | December 31, 2000
|------------------- | ------------- | ------------------ | ------- | -----------------
|Identifiable assets |               |                    |         |                  
|                    | Canada        |                    | $       | 57,690           
|                    | United States |                    |         | 569,557          
|                    |               |                    |         |                  
|                    |               | $                  | 627,247 |                  
|                    |               |                    |         |                  

12.  COMMITMENTS AND CONTINGENCIES

Lease Agreement

On November 1, 2000 and revised on July 1, 2001 (for additional space), the Company signed a lease agreement for office and research facilities
which expires November 30, 2005. The lease contains an option to renew for an additional 5 years. Minimum future lease payments under this agreement are as follows:

December 31001

$
35,8112002


145,6482003


156,6452004


165,0752005


155,452$
658,631


The
Company was required to pay a security deposit of $75,000 as part of its lease agreement. The security deposit is a certificate of deposit at a financial institution in favor of
the Company, but is pledged to the lessor if the Company defaults in its lease agreement.

Contractual Agreements

On September 11, 2000, the Company entered into an agreement with Intelligene Expressions, Inc. ("Intelligene") for contract services to scale up
manufacturing for the Company's first bacteriophage product. Intelligene is an Alberta company with a laboratory located in Edmonton, Alberta, Canada. The total amount of the contract was for
$520,000. The Company has paid $410,000 and the remaining $110,000 is to be paid as follows:

Upon completion of Phase 6

$
55,000Upon completion of Phase 7


55,000$
110,000


The
Company has agreed to several research and development contracts with various universities and research institutes. The Company is contracted to pay for this year $306,253, of
which $228,298 has

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been paid and $121,500 is prepaid at September 30, 2001. In addition, the Company has agreed to a total of $1,205,350 in contracts which are based on performance, controlled by management of
the Company, which could be completed more than a year from now. The Company has advanced $509,273 on these contracts.

Contingencies

An individual whom PhageTx engaged on a limited basis to assist with introductions related to raising private equity capital has asserted that certain private
placement funds were received by PhageTx as a result of introductions made by that individual. The Company is in the process of determining the validity of the claims asserted. Should the claims be
determined valid, PhageTx would be expected to pay approximately $10,000 in cash as a finder's fee, issue 35,000 PhageTx common shares, and issue warrants to purchase an additional 25,000 shares of
common stock at $1.00 per share for a term of seven years. As the probability of outcome is not certain, no accrual has been made in the financial statements nor shares reserved in connection with
this contingency.

Prior
to inception of PhageTx, a founder entered into a consulting agreement with an individual to assist with the setup of licensing arrangements between PhageTx and certain research
institutions. A dispute has arisen regarding the amount of payment required under the consulting arrangement, which terminated in June 1997. The Company's exposure in relation to this
consulting agreement is a cash amount owed of approximately $17,000, which has been accrued in the financial statements, 25,000 PhageTx common shares, and an option for 41,668 additional common shares
of PhageTx. As the probability of outcome is not certain, no accrual has been made in the financial statements for the common shares and the option for additional common shares.

13.  SUBSCRIPTIONS RECEIVED IN ADVANCE

During the period, the Company received $125,000 in advance for the exercise of 100,000 warrants at $1.25 per share. The 100,000 common shares have not been
issued yet.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NOTE:The following discussion contains or may contain forward-looking statements based on current expectations, estimates and projections about the
Company's industry, management's beliefs and certain assumptions made by management. All statements, trends, analyses and other information contained herein relative to trends in net sales, gross
margin, anticipated expense levels, liquidity and capital resources, as well as other statements, including, but not limited to, words such as "anticipate," "believe," "plan," "estimate," "expect,"
"seek" and "intend," and other similar expressions, constitute forward-looking statements. These forward-looking statements involve risks and uncertainties, and actual results may differ materially
from those anticipated or expressed in such statements. Except as required by law, the Company undertakes no obligation to update any forward-looking statement, whether as a result of new information,
future events or otherwise. Readers, however, should carefully review the factors set forth in other reports or documents that the Company files from time to time with the Securities and Exchange
Commission (the "SEC").

Overview

Phage Therapeutics International Inc. (the "Company") is a development-stage biotechnology company that, through its controlling interest in Phage
Therapeutics, Inc. ("Phage Therapeutics"), is focused on developing certain bacterial virus products which can be used to treat individuals infected with bacteria that are resistant to
traditional antibiotics and other bacterial infectious diseases. The type of viruses on which the Company is focusing its development efforts are called "bacteriophage," "phage", or "phage therapeutic
agents". The Company's goal is to establish itself as a leader in the discovery, development and regulatory approval of bacteriophage-based therapeutic products.

Bacteriophage
are bacterial viruses that infect and destroy bacteria. Bacteriophage are highly specific, with each kind of bacteriophage typically infecting only one bacterial
species. A bacteriophage virus infects a host bacterial cell by attaching itself to the bacterial cell surface and then injecting its viral nucleic acid into the bacterial cell. Hundreds of new
bacteriophage viruses are formed within the bacterial cell as the virus replicates. The bacterial cell is subsequently destroyed, releasing the newly formed bacteriophage viruses to infect additional
bacterial cells. This process is repeated within the bacterial population about every 20 minutes until the bacteria are eliminated.

The
Company has isolated and is currently in the process of developing three bacteriophage product candidates which demonstrate clinical utility against the following infectious
agents: Staphylococcus aureus and other Staphylococcus species ("Staph"), Mycobacterium tuberculosis ("Tuberculosis"), and Pseudomonas aeruginosa ("Pseudomonas"). The Company's first Staph product
candidate is currently in preclinical testing. The Company anticipates that its Tuberculosis and Pseudomonas product candidates will be ready for preclinical testing by the end of 2001. After the
completion of preclinical testing, the Company intends to manufacture and seek regulatory approval for each of these product candidates, at least through Phase II clinical trials.

The
Company's strategy for commercializing its products, if and when they are developed and approved by the United States Food and Drug Administration ("USFDA"), is to license
successful product lines to third parties for marketing, sales and distribution, so that the Company may remain focused on the discovery, development and regulatory approval of additional
bacteriophage-based therapeutic products.

Phage
Therapeutics was incorporated in the State of Washington on December 24, 1996, to pursue the development of bacteriophage products. The Company was originally
incorporated in the State of Florida on July 8, 1997, under the name All Products Distribution, Corp. for the purpose of owning and operating beauty salons. This business venture was not
successful and was discontinued in February 1998. On August 19, 1998, the Company changed its name to Phage Therapeutics International Inc. Since that time, the Company has
acquired 95% of Phage Therapeutics' outstanding

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common stock through a combination of purchasing newly-issued common stock directly from Phage Therapeutics plus a series of stock exchanges with individual shareholders of Phage Therapeutics. See"Item
4. Recent Sales of Unregistered Securities." The Company's goal is to acquire 100% of Phage Therapeutics. All references to the Company in
this Form 10-QSB include Phage Therapeutics unless the context indicated otherwise.

Plan of Operation

Since August 1998, the Company has been involved in research and developing its products and has had no revenues from operations. The Company estimates
that it has spent approximately $1,587,354 on research and development from August 1998 to December 31, 2000, approximately $596,692 over the twelve-month period ending
December 31, 2000, and approximately $1,599,171 during the nine-month period ending September 30, 2001. As a result, the Company has reported a loss in each of year of its
existence. To date, the Company has financed its operations through the private sale of its securities and loans from shareholders.

The
Company anticipates spending approximately $5,000,000 over the next 12-month period as follows:

Use of Funds

AmountRepayment of Indebtedness(1)

$
296,000Personnel Costs (salaries, taxes and benefits)

$
1,350,000Pharmaceutical R&D:(2)Manufacturing Development

$
0Manufacturing Scale-Up

$
620,000Analytical Methods Development

$
200,000Formulations Development

$
75,000Preclinical Safety and Efficacy Testing

$
385,000Preclinical "Proof of Principle" Tests

$
285,000Clinical Supplies Manufacturing

$
50,000cGMP Documentation

$
75,000Initial Stability Studies

$
50,000Phase I Clinical Trials(2)

$
100,000Phase II Clinical Trials(2)

$
100,000USFDA Regulatory Costs:(2)Internal

$
100,000Outsourced

$
125,000Laboratory Operations:(2)Internal

$
170,000Outsourced

$
150,000Internal (Tuberculosis and Pseudomonas)

$
45,000Facilities (rent, telephones, maintenance)

$
144,000Equipment (lab and office)

$
200,000Legal (Intellectual Property)

$
150,000Legal (Corporate and Securities)

$
100,000Accounting (Tax and Audit)

$
30,000Investor and Public Relations

$
20,000Stealth Fees(3)

$
30,000Total

$
5,000,000


---

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The
Company intends to cover these costs by additional equity financings. If the Company is unable to raise all of these funds, the Company plans to cut back its operations by
reducing the amount spent on personnel costs, and on research and development, in particular, preclinical safety and efficacy testing, preclinical 'proof of principle' tests, and Phase I and II
clinical trials. Management believes these tests can still be conducted with less funding. If the Company is unable to raise sufficient capital to continue its plan of operations, then the Company may
be required to delay, scale back or eliminate some or all of its research and development programs or to cease operations.

Results of Operations

Quarter ended September 30, 2001 as compared to quarter ended September 30, 2000

Net Revenues.The Company had no revenue in the quarter ended September 30, 2001 or 2000, due to its continuing
status as a development stage company.

Research and Development.Research and development costs were $632,286 in the quarter ended September 30, 2001,
up $571,840 from $604,446 for third quarter 2000. This increase is due in large part to (a) $121,500 prepaid to three universities under research and development contracts, and
(b) $266,322 paid on a projected $2,364,741 worth of CRO fee for service contracts.

General and Administrative Expenses.General and administrative expenses, before charges for stock compensation, were
$368,993 in the quarter ended September 30, 2001, up 351% from $105,165 for the same period in 2000.

Stock Compensation Expense.Stock compensation expense was $77,461 in the quarter ended September 30, 2001, an
increase of $63,928, over third quarter 2000. Stock compensation expense is a non-cash expense that reflects the fair value of common stock or warrants granted to non-employees
of the Company.See"Part II. Item 2Changes in Securities and Use of Proceeds."

Net Loss.The Company's net loss was approximately $1,013,333 for the quarter ended September 30, 2001, an
increase of $770,261 compared with $243,072 for third quarter 2000. The main elements contributing to the increase in losses include higher general and administrative expenses, and increased research
and development costs.

Nine months ended September 30, 2001 as compared to nine months ended September 30, 2000

Net Revenues.The Company had no revenue in the nine months ended September 30, 2001 or 2000, due to its
continuing status as a development stage company.

Research and Development.Research and development costs were $1,599,171 in the nine months ended September 30,
2001, up $1,503,158 from $96,013 for the same period in 2000. This increase is due in
large part to (a) $158,298 prepaid to three universities under research and development contracts, and (b) $830,792 paid on a projected $2,364,741 worth of CRO fee for service contracts.

General and Administrative Expenses.General and administrative expenses, before charges for stock compensation, were
$914,505 in the nine months ended September 30, 2001, up 204% from $448,131 for the same period in 2000.

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Stock Compensation Expense.Stock compensation expense was $198,260 in the nine months ended September 30, 2001,
an increase of $184,727, over the same period in 2000. Stock compensation expense is a non-cash expense that reflects the fair value of common stock or warrants granted to
non-employees of the Company.See"Part IIItem 2. Changes in Securities and Use of Proceeds."

Net Loss.The Company's net loss was approximately $2,693,213 for the nine months ended September 30, 2001, an
increase of $2,115,036 compared with $578,177 for the same period in 2000. The main elements contributing to the increase in losses include higher general and administrative expenses, and increased
research and development costs.

Liquidity and Capital Resources

Quarter ended September 30, 2001 as compared to quarter ended September 30, 2000

Cash Position.At September 30, 2001, the Company had $51,350 in cash or cash equivalents (including the $75,000
long-term certificate of deposit pledged as security for its facilities lease), down 76.6% from cash of $219,353 at September 30, 2000.

Working Capital.At September 30, 2001, the Company had working capital of ($524,265) and a working capital
ratio of .32 to 1, as compared with working capital of ($277,233) and a working capital ratio of .67 to 1 at September 30, 2000.

Cash used in Operating Activities.Net cash used in operations for the quarter ended September 30, 2001 was
$771,477, an increase of $186,389 from $585,088 in the comparable period of 2000. These operating cash outflows resulted primarily from increases in general operations and research and development
activities.

Cash received from Financing Activities.During the quarter ended September 30, 2001, the Company received $0.00
from financing activities.

Nine months ended September 30, 2001 as compared to nine months ended September 30, 2000

Cash used in Operating Activities.Net cash used in operations for the nine months ended September 30, 2001 was
$2,525,584, an increase of $1,387,423 from $1,138,161in the comparable period of 2000. These operating cash outflows resulted primarily from increases in general operations and research and
development activities.

Cash received from Financing Activities.During the nine months ended September 30, 2001, the Company received
$1,845,551 from financing activities, up $485,551, or 35.7%, from $1,360,000 in third quarter 2000. Of this amount, $1,490,000 was received from private placements of its common stock, $102,606 was
received through the exercise of warrants, and $139,945 through the exercise of stock options, and $125,000 from subscriptions received in advance.See"Part IIItem 2. Changes in Securities and Use of Proceeds."

Going Concern Qualification.The Company's auditor issued a "going concern" opinion in its reports for each of 2000 and
1999, which raises substantial doubt as to the Company's ability to continue as a going concern due to the losses from operations, unless the Company achieves future profitable operations or obtains
additional financing.

Commitments and Contingencies

Research and Development.As of September 31, 2001, the Company became obligated to pay Intelligene
Expressions, Inc. $55,000 upon completion of stages 5, 6, and 7 of the manufacturing contract for the Company's Staph product candidate. In addition, the Company is obligated to pay $147,955 to
three
universities and research institutes by December 31, 2001. Also, the Company is obligated to pay approximately $1,027,900 under pending CRO fee-for-service arrangements
through year end 2001.

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Lease.The Company is obligated to pay $11,773 per month under its lease for the Bothell facility, which increases to
$14,132 by its expiration November 2005.

Need for Future Capital

The Company requires substantial capital in order to meet its ongoing corporate obligations and in order to continue and expand its current and strategic
business plan. At current operating rates, the Company believes that it can only satisfy its cash requirements over the next 12 months from the sale of additional equity and funds received upon
warrant and option exercises.

The
Company's long-term capital requirements beyond the next 12 months will depend on many factors, including, but not limited to, the rate of development of the
Company's product, the Company's ability to develop and maintain its research and development program, the level of resources required to test the Company's products and other factors, some of which
may be beyond the Company's control. A slower than expected rate of development of the Company's products, extraordinary costs associated with the Company's research and development program, would
materially adversely affect the Company's liquidity. The Company will need to continue seeking additional sources of capital, including an additional offering of its equity securities, an offering of
debt securities or obtaining financing through a bank or other entity, in order to fund its long-term capital requirements.

The
Company currently has no commitments for short- or long-term financing, and there can be no assurances that any such additional financing will be available in a timely
manner, or, if available, will be on terms acceptable to the Company. The inability of the Company to raise additional equity capital or borrow funds required to effect its business plan may have a
material adverse effect on the Company's financial condition and future prospects. Additionally, to the extent that further funding ultimately proves to be available, both debt and equity financing
involve risks. Debt financing may require the Company to pay significant amounts of interest and principal payments, reducing the resources available to the Company's business operations. Equity
financing may be highly dilutive to the Company's stockholders' interest in the Company. Any debt financing or other financing of securities senior to common stock will likely include financial and
other covenants that will restrict the Company's flexibility.

Recent Accounting Pronouncements

FASB 133.In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133, "Accounting
for Derivative Instruments and Hedging Activity," which was subsequently amended by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities: Deferral of Effective Date of FASB
133" and Statement No.138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities: an amendment of FASB Statement No. 133." SFAS 137 requires adoption of SFAS 133
in fiscal years beginning after June 15, 2000. SFAS 138 establishes accounting and reporting standards for derivative instruments and addresses a limited number of issues causing
implementation difficulties for numerous entities. SFAS 133 requires the recognition of all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be recorded at
fair value through earnings. If the derivative qualifies as a hedge, depending on the nature of the exposure being hedged, changes in the fair value of derivatives are either offset against the change
in fair value of hedged assets, liabilities, or firm commitments through earnings or are recognized in other comprehensive income until the hedged cash flow is recognized in earnings. The ineffective
portion of a derivative's change in fair value is recognized in earnings. SFAS 133 permits early adoption as of the beginning of any fiscal quarter. SFAS 133 became effective for the
Company in first quarter 2001. The Company does not expect adoption of SFAS 133 to have a material effect on its financial statements.

FIN 44.The Company has elected to adopt FIN 44, "Accounting for Certain Transactions Involving Stock
Compensationan Interpretation of APB No. 25, Accounting for Stock Issued to Employees," which the FASB issued in March 2000. FIN 44 clarifies (a) the definition of
"employee"

26

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for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective
July 1, 2000, but certain conclusions in FIN 44 cover specific events that occur after either December 15, 1998, or January 12, 2000. To the extent that FIN 44 covers events
occurring during the period after December 15, 1998, or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying FIN 44 are recognized on a
prospective basis from July 1, 2000. The Company's adoption of FIN 44 is not expected to have a material effect on the Company's financial statements.

27

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PART II  OTHER INFORMATION

Item 1.Legal Proceedings

From time to time, the Company may be subject to legal proceedings and claims, which may have a material adverse effect on its business. The Company is not
aware of any current legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on its business, prospects, financial condition or results of operations.

Item 2.Changes in Securities and Use of Proceeds

Stock Option Issuances

During third quarter 2001, the Company issued options to purchase 85,000 shares of common stock under its 2000 Stock Plan.

Option and Warrant Exercises

During third quarter 2001, the Company issued 32,085 shares of common stock upon the exercise of warrants for subscriptions of $40,106.25, pursuant to the
exemption from registration set forth in Rule 506 of Regulation D under the Securities Act of 1933. The Company also issued 0 shares of common stock upon the exercise of stock options
for an aggregate exercise price of $0.00, pursuant to the exemption from registration set forth in Rule 701 under the Securities Act of 1933.

Phage
intends to use all funds received by through the exercise of stock options and warrants received in this quarter for general working capital.

Item 3.Defaults upon Senior Securities

None.

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

We held our annual meeting of shareholders, which had been adjourned on June 4, 2001, on September 10, 2001. At the meeting, our shareholders
voted on the following:

Proposal No. 1.Election of Directors

6,740,196
in favor, 0 against, 0 abstained, 0 broker non-votes

Proposal No. 2.Ratification of Selection of Davidson & Company Chartered Accountants, as the Company's Independent Auditors.

6,740,196
in favor, 0 against, 0 abstained, 0 broker non-votes

Item 5.Other Information

On October 4, 2001, the Company advised Stealth Investments Corp. ("Stealth") that it was terminating its management consulting contract effective
December 31, 2001. The Company currently engages four management consultants that provide management and administrative services to the Company through Stealth for an aggregate monthly
consulting fee of $15,000 paid to Stealth plus hourly fees for administrative and other services.

28

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Item 6.Exhibits and Reports on Form 8-K

None.

The
Company filed the following reports on Form 8-K during the third quarter of fiscal 2001:



29

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the registrant has caused this report on Form 10-QSB to be signed on its behalf by the
undersigned, thereunto duly authorized.

|Date: November 14, 2001 |  |                                                                                                   
|----------------------- |  | --------------------------------------------------------------------------------------------------
|                        |  | /s/RICHARD HONOURRichard Honour Chairman and Chief Executive Officer
(Principal executive officer)
|                        |  | /s/DARREN PYLOTDarren Pylot Chief Financial Officer
(Principal financial and accounting officer)  

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