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

                                   FORM 10-QSB


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

For the quarterly period ended:     June 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
                                    ---------



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




             Florida                                          91-1930691
             -------                                          ----------
  (State or other jurisdiction                      (IRS Employer Identification
        of incorporation)                                      Number)


          19017 120th Avenue NE, Suite 102, Bothwell, Washington 98011
          ------------------------------------------------------------
             (Address of principal executive offices and zip code)


Registrant's telephone number, including area code: (425) 482-9511
                                                    --------------


                                 Not Applicable
         ---------------------------------------------------------------
        (Former name, former address, and former fiscal year, if changed
                              since last report.)

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the last practicable date


          Class                                 Outstanding as of June 30, 2001
          -----                                 -------------------------------
    Common Stock, $0.001                                    13,943,313

<PAGE>

                      PHAGE THERAPEUTICS INTERNATIONAL INC.
                                   FORM 10-QSB



                                  June 30, 2001

                                Table of Contents



PART I - FINANCIAL INFORMATION................................................ 1
         ITEM 1. FINANCIAL STATEMENTS......................................... 1
         ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS........................... 21
                  Overview .................................................. 21
                  Plan  of  Operations....................................... 21
                  Results of Operations...................................... 22
                  Liquidity and Capital Resources............................ 23
                  Recent Accounting Pronouncements........................... 23
                  "Safe Harbor" Statement under the Private Securities
                   Litigation Reform Act of 1995............................. 24
         ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 24

PART II OTHER INFORMATION.................................................... 25
         ITEM 1 LEGAL PROCEEDINGS............................................ 25
         ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDINGS................. 25
                  Recent Sales of Unregistered Securities.................... 25
                  Use of Proceeds............................................ 26
         ITEM 3 DEFAULTS UPON SENIOR SECURITIES.............................. 26
         ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 26
         ITEM 5 OTHER INFORMATION............................................ 26
         ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................ 26
                  Exhibits .................................................. 26
                  Reports on Form 8-K........................................ 26

SIGNATURES................................................................... 27



<PAGE>



                         PART I - FINANCIAL INFORMATION

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

                          ITEM 1. FINANCIAL STATEMENTS

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



The  accompanying  balance  sheets of Phage  Therapeutics  International  Inc. (
development  stage  company) at June 30,  2001,  and the related  statements  of
operations  and the  statement  of cash flows for the six months  ended June 30,
2001 and the period December 24, 1996 (date of inception) to June 30, 2001, have
been prepared by the management of Phage Therapeutic  International Inc. ("Phage
or the  "Company")  and they do not  include  all  information  and notes to the
financial  statements  necessary  for a complete  presentation  of the financial
position,  results  of  operations,  cash  flows,  and  stockholders'  equity in
conformity  with generally  accepted  accounting  principles.  In the opinion of
management,  all adjustments considered necessary for a fair presentation of the
results of  operations  and  financial  position have been included and all such
adjustments are of a normal recurring nature.

Operating results for the quarter ended June 30, 2001, are not necessarily
indicative of the results that can be expected for the year ending December 31,
2001.

                                CONTINUED ON NEXT







                                  Page 1 of 27

<PAGE>
<TABLE>
<CAPTION>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                                             1
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
---------------------------------------------------------------------------------------------------
                                                                             June 30,  December 31,
                                                                                2001           2000
---------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>

Current
    Cash and cash equivalents                                          $     909,197  $   1,029,134
    Prepaid expenses and other current assets                                 87,027         23,720
                                                                       -------------  -------------

Total current assets                                                         996,224      1,052,854
Capital assets (Note 4)                                                      250,471         60,523
Deposit, non-current (Note 11)                                                75,000         75,000
                                                                       -------------  -------------

Total assets                                                           $   1,321,695  $   1,188,377
---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
    Accounts payable                                                   $     198,498  $     222,545
    Accrued liabilities                                                      168,903        164,672
    Due to related parties (Note 9)                                            3,164        144,211
    Notes payable (Note 5)                                                   157,118        161,407
                                                                       -------------  -------------

Total current liabilities                                                    527,683        692,835
Minority interest                                                            (3,689)        (8,369)
                                                                       -------------  -------------
                                                                             523,994        684,466
                                                                       -------------  -------------
Stockholders' equity
    Capital stock (Note 6)
        Authorized
         50,000,000 common shares with a par value of $0.001
        Issued and outstanding
         December 31, 2000 - 10,895,444
         June 30, 2001 - 13,943,313                                           13,943         10,895
    Additional paid-in capital                                             7,572,387      5,877,670
    Subscriptions received in advance (Notes 6 and 12)                       165,106         10,000
    Non-qualified stock options outstanding (Note 7)                         259,742        138,943
    Deficit accumulated during the development stage                      (7,213,477)    (5,533,597)
                                                                       -------------  -------------

Total stockholders' equity                                                   797,701        503,911
                                                                       -------------  -------------

Total liabilities and stockholders' equity                             $   1,321,695  $   1,188,377
---------------------------------------------------------------------------------------------------

Nature and continuance of operations (Note 1)

Commitments and contingencies (Note 11)

Subsequent event (Note 12)
</TABLE>


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

                                    Page 2 of 27

<PAGE>
<TABLE>
<CAPTION>


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

------------------------------------------------------------------------------------------------------------------------------------
                                                 Cumulative
                                                    Amounts
                                               From Date of
                                               Inception on
                                               December 24,       Three Month       Three Month         Six Month         Six Month
                                                    1996 to      Period Ended      Period Ended      Period Ended      Period Ended
                                                   June 30,          June 30,          June 30,          June 30,          June 30,
                                                       2001              2001              2000              2001              2000
------------------------------------------------------------------------------------------------------------------------------------

<S>                                        <C>               <C>                <C>              <C>               <C>
EXPENSES
    General and administrative             $      4,370,874  $        418,565   $       144,162  $        730,239  $        309,080
    Research and development                      2,554,239           667,855            36,486           966,885            47,970
                                           ----------------  ----------------  ----------------  ----------------  -----------------

Loss from operations                             (6,925,113)       (1,086,420)         (180,648)       (1,697,124)         (357,050)
                                           ----------------  ----------------  ----------------  ----------------  -----------------


OTHER INCOME (EXPENSE)
    Interest income                                  54,537             7,309            11,494            17,244            14,864
    Loss on disposal of
        capital assets (Note 4)                    (376,392)                -                 -                 -              (500)
                                           ----------------  ----------------  ----------------  ----------------  -----------------

                                                   (321,855)            7,309            11,494            17,244            14,364
                                           ----------------  ----------------  ----------------  ----------------  -----------------


Loss before extraordinary item                   (7,246,968)       (1,079,111)         (169,154)       (1,679,880)         (342,686)


EXTRAORDINARY ITEM
    Gainon extinguishment of debts,
        net of income taxes of $Nil                  33,491                -                 -                 -                 -
                                           ----------------  ----------------  ----------------  ----------------  -----------------


Loss for the period                        $     (7,213,477) $     (1,079,111)  $      (169,154)  $    (1,679,880) $       (342,686)
------------------------------------------------------------------------------------------------------------------------------------

Basic and diluted loss per share                             $          (0.09)  $         (0.02) $          (0.14) $          (0.04)
------------------------------------------------------------------------------------------------------------------------------------

Weighted average number
    of shares outstanding                                          12,414,403         8,752,587        11,659,120         8,061,378
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

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

                                    Page 3 of 27

<PAGE>
<TABLE>
<CAPTION>



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


--------------------------------------------------------------------------------------------------------------------------
                                                                                Cumulative
                                                                                   Amounts
                                                                              From Date of
                                                                              Inception on
                                                                               December 24,     Six Month      Six Month
                                                                                   1996 to   Period Ended   Period Ended
                                                                                   June 30,       June 30,       June 30,
                                                                                      2001           2001           2000
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Loss for the period                                                     $   (7,213,477)  $ (1,679,880)  $   (342,686)
    Adjustments to reconcile net loss to net cash
    used in operating activities:
        Amortization                                                               180,862         21,433         24,475
        Compensation expense from vesting of non-qualified
         stock options                                                             259,742        120,799             -
        Loss on disposal of capital assets                                         376,392             -              -
        Interest note payable                                                       28,920          7,711             -
        Consulting                                                                 160,000             -              -

    Change in non-cash working capital items:
        (Increase) decrease in prepaid expenses and other current assets           (85,027)       (63,307)           567
        Increase (decrease) in accounts payable                                    159,480        (24,047)      (198,141)
        Increase (decrease) in accrued liabilities                                 168,903          4,231        (37,788)
        Increase (decrease) in due to related parties                                3,164       (141,047)             -
                                                                            ---------------  -------------  ------------

    Net cash used in operating activities                                       (5,961,041)    (1,754,107)      (553,573)
                                                                            ---------------  -------------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Acquisition of cash on purchase of subsidiary                                      173             -              -
    Purchases of capital assets                                                   (815,006)      (211,381)        (3,709)
    Deposit                                                                        (75,000)             -              -
                                                                            ---------------  -------------  ------------


    Net cash used in investing activities                                         (889,833)      (211,381)        (3,709)
                                                                            ---------------  -------------  ------------


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                                   7,459,486      1,692,445      1,360,000
    Subscriptions received in advance                                              165,106        165,106             -
                                                                            ---------------  -------------  ------------


    Net cash provided by financing activities                                    7,760,071      1,845,551      1,360,000
                                                                            ---------------  -------------  ------------

Change in cash position during the period                                          909,197       (119,937)       802,718

Cash and cash equivalents, beginning of period                                          -       1,029,134          1,223
                                                                            ---------------  -------------  ------------


Cash and cash equivalents, end of period                                    $      909,197  $     909,197  $     803,941
--------------------------------------------------------------------------------------------------------------------------

Supplemental disclosure with respect to cash flows (Note 10)
</TABLE>

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

                                  Page 4 of 27

<PAGE>
<TABLE>
<CAPTION>



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



                                                                                Subscrip-         Non-      Deficit
                                           Common Stock                            tions     qualified  Accumulated
                                    --------------------------   Additional     Received         Stock   During the
                                           Number                   Paid-in           In       Options  Development
                                        of Shares     Amount        Capital      Advance   Outstanding        Stage          Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>             <C>         <C>           <C>          <C>          <C>           <C>
Stock issued for expenses
    incurred by founder                   571,429   $    571    $    39,429   $      -     $        -   $         -   $      40,000
Stock issued for cash
    - December 1996                     1,785,707      1,786         98,214          -              -             -         100,000
Stock issued for cash - March
    through July 1997                   1,600,000      1,600        638,400          -              -             -         640,000
Stock issued for cash - August
    through December 1997                 735,000        735        734,265          -              -             -         735,000
Issuance of non-qualified
    stock options                              -          -              -           -           6,494            -           6,494
Loss for the period                            -          -              -           -              -    (1,324,750)     (1,324,750)
                                      -----------   --------    -----------   ----------   -----------  ------------  --------------

Balance at December 31, 1997            4,692,136      4,692      1,510,308          -           6,494   (1,324,750)        196,744

Stock issued for cash - February
    through March 1998                    165,000        165        264,835          -              -             -         265,000
Stock issued as compensation for
    bridge loan financing                  22,857         23         79,977          -              -            -           80,000
Stock issued for cash - April through
    May 1998, net of offering
    expenses of $66,959                   500,000        500        432,541          -              -             -         433,041
Contribution of capital by
    shareholders                               -          -         300,000          -              -             -         300,000
Investment banking fee paid by
    shareholders                               -          -        (300,000)         -              -             -        (300,000)
Advances on merger letter of intent
    converted to common stock
    November 1998                              -          -         332,000          -              -             -         332,000
Deferred compensation from non-
    qualified stock options
    outstanding                                -          -              -           -          31,438            -          31,438
Loss for the year                              -          -              -           -              -    (1,373,505)     (1,373,505)
                                      -----------   --------    -----------   ----------   -----------  ------------  --------------

Balance at December 31, 1998            5,379,993      5,380      2,619,661          -          37,932   (2,698,255)       (35,282)

Advances on merger converted to
    common stock - February 1999               -          -          50,000          -              -             -          50,000
Assumption of debt by parent
    converted to common stock,
    February 1999                              -          -         150,000          -              -             -         150,000
Acquisition of parent                   2,028,375      2,028        (36,873)          -              -             -        (34,845)
Minority interest recorded at
    March 25, 1999                     (1,486,852)    (1,486)        16,022          -              -             -          14,536
Shares issued for cash and
    receivables - April 1999              187,500        188        149,812          -              -             -         150,000


                                                            - continued -

                       The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                            Page 5 of 27

<PAGE>
<TABLE>
<CAPTION>



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


                                                                                Subscrip-         Non-      Deficit
                                           Common Stock                            tions     qualified  Accumulated
                                    --------------------------   Additional     Received         Stock   During the
                                           Number                   Paid-in           In       Options  Development
                                        of Shares     Amount        Capital      Advance   Outstanding        Stage          Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>             <C>         <C>           <C>          <C>          <C>           <C>
Continued...

Shares issued for acquisition of
    additional shares of subsidiary -
    April 1999                            629,284        628         (6,795)          -             -           -            (6,167)
Shares issued for consulting               71,429         71         79,929           -             -           -            80,000
Deferred compensation from non-
    qualified stock options
    outstanding                                -          -             -             -         72,218          -            72,218
Loss for the year                              -          -             -             -             -    (1,487,498)     (1,487,498)
                                      -----------   --------    -----------   ----------   -----------  ------------  --------------
Balance at December 31, 1999            6,809,729      6,809      3,021,756           -        110,150   (4,185,753)     (1,047,038)

Shares issued for cash in
    March 2000                          1,942,858      1,943      1,358,057           -             -           -         1,360,000
Shares issued for cash in
    December 2000                       2,142,857      2,143      1,497,857           -             -           -         1,500,000
Deferred compensation from non-
    qualified stock options
    outstanding                                -          -             -             -         28,793          -            28,793
Subscriptions received in advance              -          -             -         10,000            -           -            10,000
Loss for the year                              -          -             -             -             -    (1,347,844)     (1,347,844)
                                      -----------   --------    -----------   ----------   -----------  ------------  --------------

Balance at December 31, 2000           10,895,444     10,895      5,877,670       10,000       138,943   (5,533,597)        503,911

Shares issued for cash
    in May 2001                         2,142,857      2,143      1,497,857           -             -           -         1,500,000
Subscriptions converted
    to common shares                           -          -             -        (10,000)           -           -           (10,000)
Shares issued for cash
    in June 2001                          304,446        304        202,141           -             -           -           202,445
Shares issued for acquisition
    of additional shares of
    subsidiary in June 2001               600,566        601         (5,281)          -             -           -            (4,680)
Deferred compensation from
    non-qualified stock options
    outstanding                                -          -             -             -        120,799          -           120,799
Subscriptions received in advance              -          -             -        165,106            -           -           165,106
Loss for the period                            -          -             -             -             -    (1,679,880)     (1,679,880)
                                      -----------   --------    -----------   ----------   -----------  ------------  --------------

Balance at June 30, 2001               13,943,313 $   13,943    $ 7,572,387   $  165,106  $    259,742  $(7,213,477)  $     797,701
------------------------------------------------------------------------------------------------------------------------------------


        The accompanying notes are an integral part of these consolidated
                             financial statements.
</TABLE>

                                  Page 6 of 27

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 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 June
     30,  2001 the Company had a working  capital of $468,541  and has  incurred
     losses of $7,213,477 from the date of inception,  December 24, 1996 to June
     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 June 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 in existence.

     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 June 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 June 30, 2001 are not
     necessarily  indicative  of the results to be expected  for the year ending
     December 31, 2001.

2.   SIGNIFICANT ACCOUNTING POLICIES

     In preparing  these  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. The following is
     a summary of the significant accounting policies of the Company.

     Basis of consolidation and presentation

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

                                  Page 7 of 27

<PAGE>



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

2.   SIGNIFICANT ACCOUNTING POLICIES (cont'd...)

     Basis of consolidation and presentation (cont'd...)

     Effective  March 25,  1999,  the Company  acquired  71% of the  outstanding
     common stock of Phage Therapeutics, Inc. 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 June 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.

     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 expenses

     Research and development costs are expensed as incurred.

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

     The Company has adopted Statement of Financial Accounting Standards No. 121
     "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
     Assets to be Disposed of" ("SFAS 121").  In  accordance  with SFAS No. 121,
     Long-Lived  Assets  to be held  and used by the  Company  are  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.


                                  Page 8 of 27

<PAGE>



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

2.   SIGNIFICANT ACCOUNTING POLICIES (cont'd...)

     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 to related party.  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

     In February 1997, the Financial Accounting Standards Board issued Statement
     of Financial  Accounting  Standards  No. 128,  "Earnings  Per Share" ("SFAS
     128").  Under  SFAS 128,  basic and  diluted  earnings  per share are to be
     presented.  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, 11,659,120 and 2000,  8,061,378,  do
     not include the  6,178,572  (2000 - 2,028,572)  warrants  outstanding,  the
     stock options of 3,295,554  (2000 - 2,755,000) and the 32,085 common shares
     issued  subsequent to June 30, 2001 as their effect would be anti-dilutive.
     Of the total  3,047,869  (2000 - 1,942,858)  shares issued in the six month
     period ended June 30, 2001,  763,675 (2000 - 1,251,649) shares are included
     in the weighted  average  number of  11,659,120  (2000 - 8,061,378)  shares
     outstanding at June 30, 2001.

     Income taxes

     Income  taxes are  provided  in  accordance  with  Statement  of  Financial
     Accounting Standards No. 109, "Accounting for 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

     Statement  of  Financial   Accounting   Standards  No.  123  ("SFAS  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 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".

                                  Page 9 of 27

<PAGE>



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

2.   SIGNIFICANT ACCOUNTING POLICIES (cont'd...)

     Accounting for derivative instruments and hedging instruments

     In June 1998, the Financial  Accounting Standards Board ("FASB") issued the
     Statement  of  Financial  Accounting  Standards  No.  133  "Accounting  for
     Derivative  Instruments  and Hedging  Activities"  ("SFAS  133").  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
     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.

     Segment Reporting

     In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
     No.  131,   "Disclosures  About  Segments  of  an  Enterprise  and  Related
     Information."  SFAS No. 131  establishes  standards for the manner in which
     public companies report  information about operating segments in annual and
     interim financial  statements.  The statement is effective for fiscal years
     beginning  after December 15, 1997. The Company does not have any reporting
     requirements as defined by SFAS No. 131.

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:

     i)   PhageTx  is  deemed  to  be  the  purchaser  and  parent  company  for
          accounting purposes.  Accordingly,  its net assets are included in the
          consolidated balance sheet at their historical book values;

     ii)  Phage was formed for the sole purpose of seeking a target  acquisition
          candidate and its net assets as of the Effective  Date were  negative.
          Accordingly,  the  acquisition of the Company will be accounted for at
          the net book value of the net assets of the  Company  recorded  at the
          date of acquisition. The net assets acquired are as follows:


               Cash and equivalents                            $    173
               Account receivable                                 4,000
               Accounts payable                                 (39,018)
                                                               --------

               Net assets acquired                             $(34,845)
                                                               ========


                                   Page 10 of 27

<PAGE>



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

3.   RECAPITALIZATION (cont'd...)

     iii) Historical cost financial  statements  presented are those of PhageTx,
          with equity amounts of PhageTx  retroactively  restated to reflect the
          number of shares received in the business combination.

     iv)  The  consolidated  statements  of  operations  and cash flows  include
          PhageTx's  results of operations and cash flows from December 24, 1996
          (date  of  inception)  and  Phage's  results  of  operations  from the
          Effective Date.

     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


     ---------------------------------------------------------------------------
                                                         June 30,  December 31,
                                                             2001         2000
     ---------------------------------------------------------------------------
     Research and development equipment                 $ 168,600    $  33,499
     Computer and office equipment                         80,537       52,309
     Furniture and fixtures                                23,543       18,178
     Leasehold improvements                                49,028        6,341
                                                        ---------    ---------

                                                          321,708      110,327
     Accumulated amortization                             (71,237)     (49,804)
                                                        ---------    ---------

                                                        $ 250,471    $  60,523
     ---------------------------------------------------------------------------

     In accordance with SFAS No. 121,  Long-Lived  Assets to be held and used by
     the Company,  are  reviewed to  determine  whether any events or changes in
     circumstances  indicate  that the  carrying  amount of the asset may not be
     recoverable.

     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.

5.   NOTES PAYABLE TO RELATED PARTY


     ---------------------------------------------------------------------------
                                                 June 30,      December 31,
                                                    2001             2000
     ---------------------------------------------------------------------------

     Principal amount                         $   140,198        $  140,198
     Accrued interest                              16,920            21,209
                                              -----------        ----------

                                              $   157,118        $  161,407
     ---------------------------------------------------------------------------

    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.

                                  Page 11 of 27

<PAGE>



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

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.

     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.

                                  Page 12 of 27

<PAGE>



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

6.   CAPITAL STOCK (cont'd...)

     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 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 June 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 204,446 common shares of the Company for
     total  proceeds of $147,445.  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.

                                  Page 13 of 27

<PAGE>



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


6.  CAPITAL STOCK (cont'd...)

    Warrants


     ---------------------------------------------------------------------------
                                                        June 30,    December 31,
                                                           2001           2000
     ---------------------------------------------------------------------------
     Balance, beginning of period                     2,028,572          85,714
         Issued                                       4,285,714       1,942,858
         Exercised                                      (50,000)             -
         Expired                                        (85,714)             -
                                                  -------------     ------------

     Balance, end of period                           6,178,572       2,028,572
     ---------------------------------------------------------------------------


     As at June 30,  2001 there were  6,178,572  warrants  outstanding  that are
     exercisable into commons shares as follows:



     ---------------------------------------------------------------------------
            Number           Exercise
         of Shares              Price     Expiry Date
     ---------------------------------------------------------------------------
            82,085            $  1.25     June 2, 2001 (subscriptions received)
         1,810,773               2.00     June 2, 2002
         2,142,857               0.70     August 15, 2001
         2,142,857               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.

                                   Page 14 of 27

<PAGE>



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

7.   STOCK OPTIONS (cont'd...)

     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 three
     month period ended March 31,  2001,  $118,500 has resulted  from the use of
     this standard.  The stock based compensation expensed during the period was
     $41,156,  the balance to be expensed  over the vesting  period of the stock
     option.

     Following is a summary of the stock option activity:
<TABLE>
<CAPTION>


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

                                           Six Month Period Ended   Six Month Period Ended
                                                June 30, 2001          June 30, 2000
                                          ------------------------  --------------------
                                                          Weighted              Weighted
                                                           Average               Average
                                               Number     Exercise     Number   Exercise
                                            of Shares        Price  of Shares      Price
     -------------------------------------------------------------------------------------
     <S>                                 <C>             <C>        <C>        <C>
     Outstanding, beginning of period       1,405,000     $   0.57       --      $   --
         Granted                              670,000         0.75  1,285,000      0.55
         Exercised                           (254,446)        0.55       --          --
                                          -----------               ----------

     Outstanding, end of period             1,820,554     $   0.64  1,285,000    $ 0.55
     -------------------------------------------------------------------------------------
</TABLE>

     The  weighted   average  fair  value  of  options   granted  to  employees,
     non-employees  and  consultants  during the six month period ended June 30,
     2001 was $0.68 (2000 - $0.07) 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:

     ---------------------------------------------------------------------------
                                                 Six Month            Six Month
                                              Period Ended         Period Ended
                                                   June 30,             June 30,
                                                      2001                 2000

     Net loss
         As reported                       $     (1,679,880)   $      (342,686)
                                           =================   ================

         Pro-forma                         $     (1,736,599)   $      (354,790)
                                           =================   ================

     Basic and diluted loss per share
         As reported loss per share        $            0.14)  $         (0.04)
                                           =================   ================

         Pro-forma                         $           (0.15)  $         (0.04)
     ---------------------------------------------------------------------------

                                  Page 15 of 27

<PAGE>



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

7.   STOCK OPTIONS (cont'd...)

     Phage Therapeutics International Inc. (cont'd...)

     Stock option plan (cont'd...)

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



--------------------------------------------------------------------------------
                            Outstanding Options            Exercisable Options
                    -----------------------------------  -----------------------
                                    Weighted
                                     Average   Weighted                Weighted
                                   Remaining    Average                 Average
                                 Contractual   Exercise                Exercise
Exercise Price        Number            Life      Price      Number       Price
--------------------------------------------------------------------------------
$ 0.55              1,025,554           3.5   $   0.55    1,025,554    $   0.55
  0.75                795,000           4.7       0.75      275,000        0.75
                   ----------                            ----------

                    1,820,554                            1,300,554
--------------------------------------------------------------------------------

     The Company granted  670,000 (2000 - 1,285,000)  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 six
     month period ended June 30, 2001 was $458,310  (2000 - $86,695),  using the
     Black-Scholes  option-pricing  model.  The options will be amortized over a
     two year period  which is the  expected  period that the  services  will be
     performed by the  consultants  and  non-employees.  The stock  compensation
     expense for the period was $120,799 (2000 - $9,569), of which $95,492 (2000
     - $5,071) was allocated to general and  administrative  and $25,307 (2000 -
     $4,498) was allocated to research and experimentation.

     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:



     ---------------------------------------------------------------------------
                                                  Six Month            Six Month
                                               Period Ended         Period Ended
                                              June 30, 2001        June 30, 2000
     ---------------------------------------------------------------------------
     Risk free interest rate                          4.30%              6.43%
     Expected life of the options                   2 years            2 years
     Expected volatility                            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.

                                   Page 16 of 27

<PAGE>



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

7.   STOCK OPTIONS (cont'd...)

     Phage Therapeutics Inc. (cont'd...)

     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 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.
<TABLE>
<CAPTION>



-------------------------------------------------------------------------------------------
                                                     Shares                       Weighted
                                                      Under                        Average
                                                Outstanding             Price     Exercise
                                                    Options         Per Share        Price
-------------------------------------------------------------------------------------------
<S>                                            <C>             <C>               <C>
Balance at December 31, 1998                      1,599,000    $  0.20 - 1.00    $    0.69
    Options granted                                 100,000              1.00         1.00
    Options terminated                             (224,000)      0.20 - 1.00         0.56
                                                -----------

Balance at December 31, 1999                      1,475,000       0.20 - 1.00         0.73
    Options granted                                      -               -            -
    Options terminated                                   -               -            -
                                                -----------

Balance at June 30, 2001 and December 31, 2000    1,475,000                           0.73
-------------------------------------------------------------------------------------------
</TABLE>


                                   Page 17 of 27

<PAGE>



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

7.   STOCK OPTIONS (cont'd...)

     Phage Therapeutics, Inc. (cont'd...)

     As of June 30, 2001 all  outstanding  options were fully vested as a result
     of the  PhageTx  Acquisition  transaction.  No  options  granted  have been
     exercised as of June 30, 2001.  The weighted  average  contractual  life of
     options outstanding as of June 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            $   1,953,776
     Valuation 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 or accrued  wages of $60,000  (2000 - $Nil)
     and paid  consulting  fees of $Nil (2000 - $24,000)  to the  president  and
     director  of the  Company.  As at June 30,  2001,  the  Company  owed  $Nil
     (December 31, 2000 - $75,413).

     During the period PhageTx paid or accrued wages of $42,000 (June 30, 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 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 $45,000 (2000
     - $30,000), consulting fees of $45,000 (2000 - $30,000), office expenses of
     $Nil (2000 - $14,838), office administration of $19,943 (2000 - $7,106) and
     investor relations of $Nil (2000 - $1,575). As at June 30, 2001 the Company
     owed Stealth $3,164 (December 31, 2000 - $68,798).


                                   Page 18 of 27

<PAGE>



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

10.  SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS


     ---------------------------------------------------------------------------
                                                    Six Month         Six Month
                                                 Period Ended      Period Ended
                                                     June 30,          June 30,
                                                         2001              2000
     ---------------------------------------------------------------------------
     Cash paid for income taxes             $              -    $            -

     Cash paid for interest                 $          12,000   $            -
     ---------------------------------------------------------------------------

     The following  non-cash  transaction  occurred during the period ended June
     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 June
     30, 2000.


11.  COMMITMENTS AND CONTINGENCIES

     Lease Agreement

     On November 1, 2000,  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:


      36980
       2001                                 $     58,305
       2002                                      119,413
       2003                                      128,058
       2004                                      134,755
       2005                                      126,899
                                            ------------

                                            $    567,430
                                            ============

    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.


                                  Page 19 of 27

<PAGE>



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

11.  COMMITMENTS AND CONTINGENCIES (cont'd.....)

     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                   $    55,000
     Upon 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 $146,649 has been paid and $45,000 is
     prepaid at June 30, 2001. In addition, the Company has agreed to a total of
     $798,358  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  $361,360 on these  contracts and at June 30,
     2001, $16,200 is prepaid.

     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.


12.  SUBSEQUENT EVENT

     Subsequent to June 30, 2001,  the Company  issued  121,085 common shares on
     the exercise of warrants for  subscriptions  of $151,356 and issued  25,000
     common  shares  on the  exercise  of stock  options  for  subscriptions  of
     $13,750, which were received during the period ended June 30, 2001.





                                   Page 20 of 27

<PAGE>



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

                    ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS

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


Overview

Phage was originally incorporated in the State of Florida on July 8, 1997, under
the name All Products Distribution,  Corp. All Products Distribution,  Corp. was
founded with the specific  intent of opening  salons  offering  services such as
manicures,  pedicures,  facials and  hairstyling.  This business venture was not
successful  and was not  continued by previous  management.  On August 19, 1998,
under its present management, All Products Distribution,  Corp. changed its name
to  Phage   Therapeutics   International   Inc.  Phage  switched  its  focus  to
biotechnology when it decided to pursue the acquisition of PhageTx.  PhageTx was
incorporated in the State of Washington on December 24, 1996.

Phage is a development stage biotechnology company that, through its controlling
interest  in  PhageTx,  a  bio-pharmaceutical  corporation,  is  focused  on the
discovery,   development   and   regulatory   approval  of   bacteriophage-based
therapeutic   products  for  the   treatment  of  certain   antibiotic-resistant
infections and other  bacterial  infectious  diseases.  Bacteriophage  (phage or
phage  therapeutic  agents)  are  bacterial  viruses  that  infect  and  destroy
bacteria.  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.  Bacteriophage  are highly
specific, with each kind of bacteriophage typically infecting only one bacterial
species.

Plan  of  Operations.
--------------------

Phage anticipates expending approximately  $5,000,000 over the next twelve month
period as follows:


1.  Repayment of Indebtedness                                         $  296,000
2.  Personnel Costs (Salaries, Taxes & Benefits)                      $1,350,000
3.  Intellectual Property Development                                 $  150,000
4.  Pharmaceutical R&D:
     A.  Manufacturing Development                                    $        0
     B.  Manufacturing Scale-Up                                       $  650,000
     C.  Analytical Methods Development                               $  200,000
     D.  Formulations Development                                     $   75,000
     E.  Preclinical Safety and Efficacy Testing                      $  385,000
     F.  Preclinical 'Proof of Principle' Tests                       $  285,000
     G.  Clinical Supplies Manufacturing                              $  100,000
     H.  CGMP Documentation                                           $   75,000
     I.  Initial Stability Studies                                    $   50,000
     J. 'Phase I in Normals' Clinical Trials                          $  100,000
     K.  Phase I/II Clinical Trials                                   $  100,000
     L.  Phase II Clinical Trials                                     $        0
5.  FDA Regulatory Costs:
     A.  Internal                                                     $  100,000
     B.  Outsourced                                                   $  125,000


                                   Page 21 of 27

<PAGE>




6.  Laboratory Operations:
     A.  Internal                                                     $  170,000
     B.  Outsourced                                                   $  150,000
     C.  Work on Products 2 & 3                                       $   45,000
7.  Facilities (Rent, Telephones, Maintenance)                        $  144,000
8.  Equipment (Lab & Office)                                          $  200,000
9.  Legal (Corporate & Securities)                                    $   50,000
10. Accounting (Corporate, Securities, Tax & Audit)                   $   30,000
11. Investor & Public Relations                                       $   20,000
12. Business Operations                                               $  150,000
                                                Total                 $5,000,000

Phage intends to cover these cover these cost by additional  equity  financings.
During the  quarter  ended June 30,  2001,  Phage  received  $1,617,500  in cash
through the exercise of certain  stock  options and warrants  outstanding  and a
private  placement which raised  $1,500,000.  If Phage 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.  It is anticipated
that if there is any  shortfall in raising  capital to continue  Phage's plan of
operations, then Phage may be required to delay, scale back or eliminate some or
all of its research and development programs or cease operations. Phage plans to
cut-back its plan of operations by reducing the amount spent on personnel costs,
and research and  development,  in particular,  preclinical  safety and efficacy
testing and preclinical  'proof of principle' tests, and Phase I and II clinical
trials.  Management  believes  these  tests  can  still be  conducted  with less
funding.

Results of Operations
---------------------

     Three months ended June 30, 2001 versus Three months ended June 30, 2000

     Loss Per Period.  Phage's net loss for the three months ended June 30, 2001
     was  $1,079,111 or  approximately  $909,957 more than recorded for the same
     period in 2000.  Overall costs and expenses  were higher by some  $905,772.
     This  increase  was due to higher  expenses  incurred by the  Company  with
     regard  to  research  and  development,   and  general  and  administrative
     expenses.

     Research and  Development.  Overall  research and development  costs in the
     three months  ended June 30, 2001 were greater by $631,369  compared to the
     same period in 2000. Most of this increase relates to clinical trials being
     commenced and related costs.

     General and Administrative  Expenses.  General and administrative  expenses
     were $418,565  exclusive of any amounts recorded for stock  compensation in
     the three months ended June 30, 2001 compared to $144,162  recorded for the
     same period in 2000.  The net  increase  in expenses of $274,403  basically
     reflects an increase in professional fees, building lease expenses.

     Six months ended June 30, 2001 versus six months ended June 30,2000

     Loss Per Period. Phage's net loss was approximately  $1,679,880 for the six
     months  ended June 30,  2001.  This  reflects  an increase in losses in the
     amount of $1,337,194 compared to 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.

     Research and Development. Research & development costs were $996,885 in the
     six months ended June 30, 2001 versus  $47,970 for the same period in 2000.
     This  increase of $948,915 is primarily due to higher  laboratory  costs to
     scale up manufacturing for the Phage's first  bacteriophage  product by the
     laboratory  Intelligene  Expressions,  Inc. Phage entered an agreement with
     Intelligene  Expressions,  Inc.  in  September  11,  2000.  The Company has
     already paid $410,000 to

                                  Page 22 of 27

<PAGE>



     Intelligene Expressions, Inc. and will be paying an additional $55,000 upon
     completion  of Phase 5, 6, and 7 for a total of  $165,000.  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 $146,649 has been paid and $45,000 is prepaid
     at June 30,  2001.  In  addition,  the  Company  has  agreed  to a total of
     $798,358  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  $361,360 on these  contracts and at June 30,
     2001, $16,200 is prepaid.

     General and Administrative  Expenses.  General and administrative  expenses
     before  charges  for stock  compensation,  were  $730,239 in the six months
     ended June 30, 2001  compared to expense of $309,080 for the same period in
     2000.

     Stock Compensation Expense.  Stock Compensation expense was $120,799 in the
     six months  ended June 30, 2001.  This is an increase of $111,230  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 Phage.

     Income Taxes.  Phage has realized a net loss from operations in each period
     since  it  began  doing  business.  As of  December  31,  2000,  Phage  had
     accumulated approximately $5.7 million of net operating loss carry forwards
     for federal income tax purposes.  These carry forwards  expire between 2012
     and 2021.  The annual use of these net operating loss carry forwards may be
     limited in the event of a cumulative change in ownership of more than 50%.

Liquidity and Capital Resources
-------------------------------

Since inception Phage has primarily  financed its operations through the sale of
its  equity  stock.  During the  quarter  ended June 30,  2000,  Phage  received
$1,617,500.  Of this  amount,  $1,500,000  was received  from private  placement
activities;  an additional  $62,500 was received  through the exercise of 50,000
private  placement  warrants;  and $55,000 through the exercise of 100,000 stock
options.  Cash provided by equity financing has been and is expected to continue
to be the Company's  primary source of funds.  Since inception,  the Company has
had no revenue from operations.

As at June 30, 2001,  Phage had total assets of $1,321,695 of which $909,197 was
in  cash  or  cash  equivalents  on  hand.  This  amount  includes  a long  term
certificates  of deposit  pledged  under a security  agreement  for an operating
lease amounting to $75,000 at June 30, 2001..

Net cash  used in  operations  for the  three  months  ended  June 30,  2001 was
$1,086,420,  an increase of $905,772 from $180,648 in the  comparable  period of
2000. These operating cash outflows  resulted  primarily from increases  general
operations and increased research and development activities.

Phage  requires  substantial  capital  in order to meet  its  ongoing  corporate
obligations  and in order to  continue  and expand  its  current  and  strategic
business plan.  Initial working capital has been obtained by the private sale of
Phage's  Common Shares from  inception to the present  date.  Phage can meet its
short term cash flow needs from the proceeds  obtained from a recent sale of its
Common Shares.  In the long term, Phage may seek 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.  This may not
be available on a timely basis, in sufficient  amounts or on terms acceptable to
Phage. The inability of Phage to raise additional equity capital or borrow funds
required to effect its  business  plan,  may have a material  adverse  effect on
Phage'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 Phage to pay  significant
amounts of interest and principal payments,  reducing the resources available to
Phage's  business  operations.  Some  types of  equity  financing  may be highly
dilutive to Phage's stockholders'  interest in Phage's assets and earnings.  Any
debt  financing  or other  financing of  securities  senior to common stock will
likely  include  financial  and  other  covenants  that  will  restrict  Phage's
flexibility.

Recent Accounting Pronouncements
--------------------------------

In June 1998, the 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 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. The Statement requires us to recognize 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

                                   Page 23 of 27

<PAGE>



a  derivative's  change in fair value is recognized  in earnings.  The Statement
permits early adoption as of the beginning of any fiscal quarter.  SFAS 133 will
become  effective for our first fiscal quarter of fiscal year 2002 and we do not
expect adoption to have a material effect on our financial statements.

In December  1999,  the SEC issued SAB 101,  "Revenue  Recognition  in Financial
Statements." SAB 101 summarizes certain aspects of the staff's views in applying
generally  accepted  accounting  principles to revenue  recognition in financial
statements. On March 24, 2000 and June 26, 2000, the SEC issued Staff Accounting
Bulletin  No.  101A and No.  101B,  respectively,  which  extend the  transition
provisions  of SAB 101 until no later  than the fourth  quarter of fiscal  years
beginning  after December 15, 1999,  which would be December 31, 2000 for us. We
chose to adopt the  provisions of SAB 101 early  beginning  with the fiscal year
ended December 31, 1999.

In March 2000,  the FASB  issued FIN 44,  "Accounting  for Certain  Transactions
Involving Stock  Compensation - an  Interpretation of APB No. 25, Accounting for
Stock Issued to Employees".  This Interpretation clarifies (a) the definition of
employee for purposes of applying  Opinion 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. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation  cover specific events that occur
after either  December 15,  1998,  or January 12, 2000.  To the extent that this
Interpretation  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 this  Interpretation  are recognized on a prospective  basis
from July 1, 2000.

"Safe Harbor"  Statement under the Private  Securities  Litigation Reform Act of
--------------------------------------------------------------------------------
1995
----

This Report contains, in addition to historical information, statements by Phage
with respect to expectations  about Phage's  business and future results,  which
are  forward-looking  statements under the Private Securities  Litigation Reform
Act of 1995.  These  statements and other statements made elsewhere by us or our
representatives,  which are  identified  or qualified by words such as "likely,"
"will,"  "suggests,"  "expects,"  "might,"  "believe," "could," "should," "may,"
"estimates,"  "potential,"  "predict,"  "continue,"  "would,"  "anticipates"  or
"plans," or similar  expressions,  are based on a number of assumptions that are
subject to risks and uncertainties.  Actual results could differ materially from
those currently  anticipated or suggested due to a number of factors,  including
those set forth herein,  those set forth in our Annual Report on Form 10-KSB and
in our other SEC filings,  and  including  risks  relating to the early stage of
products  under  development,  uncertainties  relating  to  clinical  trials and
regulatory reviews, the need for additional funds, competition and dependence on
collaborative partners. All forward-looking  statements are based on information
available as of the date hereof,  and we do not assume any  obligation to update
forward-looking statements

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

       ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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


Not applicable at this time.  Phage had $909,197 in cash, cash equivalents as at
June 30,  2001.  Currently  we do not invest our  excess  cash in any  financial
instrument.  To the  extent  that we may  chose  to  invest  our  cash  and cash
equivalents which exceed our near term funding needs in the future, we intend to
invest  this  excess  cash  in  three  to  six  month  high  quality   financial
instruments.  Phage will employ  policies and  procedures at that time to manage
any risks with respect to any such investment exposure.



                                   Page 24 of 27

<PAGE>



                            PART II OTHER INFORMATION

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

                            ITEM 1 LEGAL PROCEEDINGS

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


To Phage's  knowledge,  there are no lawsuits  nor were any  lawsuits  commenced
against Phage during the quarter ended June 30, 2001, nor did Phage commence any
lawsuits during the same period.

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

               ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDINGS

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


Recent Sales of Unregistered Securities

During  the  quarter  ended  June 30,  2001,  Phage  has  issued  the  following
securities,  none of which will be registered  under the  Securities Act of 1933
(the "1933 Act"):

     Private  Placement.  Phage issued  2,142,857  common  shares and  2,142,857
     warrants in May 2001 on the receipt of $1,500,000  received pursuant to the
     terms of a share purchase  agreement  entered into with seven purchasers in
     October 2000. Each warrant was exercisable for one share of common stock of
     Phage for $0.70 per share any time on or before  January 15,  2002. . These
     shares were issued under Regulation D, Rule 506.

     Stock Options.

     The stock options issued during this quarter are as follows:
<TABLE>
<CAPTION>


    Date               Name           Price per       Amount of          Vesting Date              Expiry Date
                                        Share          Shares
----------------------------------------------------------------------------------------------------------------
<S>               <C>                 <C>            <C>               <C>                        <C>
April 1, 2001     John Sundsmo         $0.75          50,000 (3)       25% after one year from    April 1, 2004
                                                                       date of grant, with 25%
                                                                       vesting every year
                                                                       following

May 1, 2001       Lisa Goodrich        $0.75          20,000 (3)       25% after one year from    May 1, 2004
                                                                       date of grant, with 25%
                                                                       vesting every year
                                                                       following
</TABLE>

     Stock Options Exercised.

     On May 17, 2001, 50,000 shares each were exercised by Messrs.  Darren Pylot
     and Chris Tomanik for an aggregate purchase price of $55,000.  These shares
     were issued under Regulation D, Rule 506.

     Warrants Exercised.

     On May 30, 2001, David Mills exercised 50,000 warrants for 50,000 shares of
     Common Stock of Phage for an aggregate price of $62,500.  These shares were
     issued under Regulation D, Rule 506.

     Stock Issued as Consideration for Common Shares of PhageTx.

     In June  2001,  Phage  issued  547,995  shares of Common  Stock of Phage in
     connection  with the  acquisition  of the shares of PhageTx held by certain
     stockholders of PhageTX  pursuant to individual  share purchase  agreements
     dated April 20, 1999.  These shares were issued  under  Regulation  D, Rule
     506.


                                   Page 25 of 27

<PAGE>



Sales of Unregistered Securities Subsequent to June 30, 2001
------------------------------------------------------------

     Subsequent to June 30, 2001,  the Company  issued  121,085 common shares on
     the exercise of warrants for  subscriptions  of $151,356 and issued  25,000
     common  shares  on the  exercise  of stock  options  for  subscriptions  of
     $13,750,  which were received during the period ended June 30, 2001.  These
     shares were issued under Regulation D, Rule 506.

Use of Proceeds
---------------

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

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

                     ITEM 3 DEFAULTS UPON SENIOR SECURITIES

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


     Not applicable.


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

           ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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


     Phage Therapeutics  International planned to hold it annual general meeting
     of its  stockholder  on May 22, 2001 to elect a board of directors  for the
     ensuing  year and to ratify  the  appointment  of  Davidson  &  Company  as
     auditor. The meeting failed to have the necessary quorum present to receive
     in person or by proxy.  The meeting was adjourned until September 10, 2001.
     Other  than the  foregoing,  no matters  were put  forward to a vote of the
     security holders of the Phage this quarter.


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

                            ITEM 5 OTHER INFORMATION

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


     Not Applicable


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

                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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


Exhibits
--------

     None.

Reports on Form 8-K
-------------------

     On June 5, 2001, Phage Therapeutics International filed a current report on
     Form 8-K to announce that its annual  general  meeting which was to be held
     on May 22, 2001 was postponed to September 10, 2001.

                                   Page 26 of 27

<PAGE>



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

                                   SIGNATURES

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


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.


PHAGE THERAPEUTIC INTERNATIONAL INC.

/s/ Darren Pylot /s/

Per:
    Darren Pylot
    President

Date: August 17, 2001.



                                   Page 27 of 27