UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON D. C. 20549

                                    FORM 10-Q
                               (Amendment No. 1)

                                   (Mark One)
     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                For the quarterly period ended of March 31, 2001

                                       OR

     [ ] 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


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

                     Florida                               91-1930691
                     -------                               ----------
            (State or other jurisdictions of             (I.R.S. Employer
            incorporation or organization)              Identification No.)


         19017 - 120th Avenue NE, Suite #102, Bothell, Washington 98011
         --------------------------------------------------------------
         (Address of principal executive offices)             (Zip Code)


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

         Check whether the issuer

     (1) has filed all  reports  required  to be filed by Section 13 or 15(d) of
     the Securities  Exchange Act of 1934 during the preceding 12 months (or for
     such shorter period that the registrant was required to file such reports),
     and

     (2) has been subject to such filing requirements for the past 90 days.

                                               Yes X                    No
                                                  ---                       ----


As of March 31,  2001,  the  registrant  had  10,895,444  shares of Common Stock
outstanding with a par value of $0.001 par value.





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                                       PHAGE THERAPEUTICS INTERNATIONAL INC.

                                                       INDEX

                                                                                                             Page No.
<S>               <C>                                                                                        <C>

PART I FINANCIAL INFORMATION......................................................................................1
         ITEM 1. FINANCIAL STATEMENTS.............................................................................1
                  Consolidated Balance Sheets.....................................................................4
                  Consolidated Statements of Operations...........................................................5
                  Consolidated Statements of Cash Flows...........................................................6
                  Consolidated Statements of Cash Flows...........................................................7
                  Consolidated Statement of Stockholders' Equity..................................................8
                  Consolidated Statement of Changes in Stockholders' Equity.......................................9
                  Notes to the Consolidated Financial Statements.................................................10
         ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS...............................................................25
                  General  ......................................................................................25
                  Overview ......................................................................................25
                  Plan of Operation..............................................................................25
                  Liquidity and Capital Resources................................................................27
                  Research and Development.......................................................................28
                  General and Administrative.....................................................................28
                  Loss Per Period................................................................................28
                  Interest and Other Income......................................................................28
                  Financial Outlook..............................................................................28
         ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................29

PART II OTHER INFORMATION........................................................................................29

         ITEM 1.  LEGAL PROCEEDINGS..............................................................................29
         ITEM 2  CHANGES IN SECURITIES AND USE OF PROCEEDINGS....................................................29
         ITEM 3  DEFAULTS UPON SENIOR SECURITIES.................................................................29
         ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................29
         ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................30
                  Exhibits ......................................................................................30
                  Reports on Form 8-K ...........................................................................30
SIGNATURES.......................................................................................................30




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<PAGE>


                         PART I - FINANCIAL INFORMATION


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

                          ITEM 1. FINANCIAL STATEMENTS

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


     The  information  in this report for the three  months ended March 31, 2001
and 2000 is unaudited but includes all  adjustments  (consisting  only of normal
recurring  accruals,   unless  otherwise  indicated)  which  Phage  Therapeutics
International  Inc ("Phage" or the  "Company")  considers  necessary  for a fair
presentation  of the  financial  position,  results  of  operations,  changes in
stockholders' equity and cash flows for those periods.

     The  condensed   consolidated   financial  statements  should  be  read  in
conjunction  with the  Company's  financial  statements  and the  notes  thereto
contained  in the  Company's  Annual  Report  on Form  10-K for the  year  ended
December 31, 2000.

     Interim  results  are not  necessarily  indicative  of results for the full
fiscal year.




                                        1

<PAGE>







                      PHAGE THERAPEUTICS INTERNATIONAL INC.
                          (A Development Stage Company)


                        CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


                                 MARCH 31, 2001








                                        2

<PAGE>



TABLE OF CONTENTS                                              Page No.

Consolidated balance sheets                                           1

Consolidated statements of operations                                 2

Consolidated statements of cash flows                             3 & 4

Consolidated statements of changes in stockholders' equity        5 & 6

Notes to the consolidated financial statements                  7 to 21


                                        3


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<CAPTION>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                                              1
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
========================================================================================================


                                                                            March 31,      December 31,
                                                                                2001              2000
                                                                     ----------------  ----------------
<S>                                                                  <C>               <C>
ASSETS

Current
  Cash and cash equivalents                                          $       1,515,593  $      1,029,134
  Prepaid expenses and other current assets                                    280,348            23,720
                                                                     -----------------  -----------------

Total current assets                                                         1,795,941         1,052,854
Capital assets (Note 4)                                                        188,045            60,523
Deposit, non-current (Note 11)                                                  75,000            75,000
                                                                     -----------------  -----------------

Total assets                                                         $       2,058,986  $      1,188,377
==================================================================== =================  ================
LIABILITIES AND STOCKHOLDERS' EQUITY

Current
  Accounts payable                                                   $         205,879  $        222,545
  Accrued liabilities                                                          167,055           164,672
  Due to related parties (Note 9)                                              133,578           144,211
  Notes payable (Note 5)                                                       153,262           161,407
                                                                     -----------------  -----------------

Total current liabilities                                                      659,774           692,835

Minority interest                                                              (8,369)           (8,369)
                                                                     -----------------  -----------------

                                                                               651,405           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
         March 31, 2001 - 10,895,444                                            10,895            10,895
  Additional paid-in capital                                                 5,877,670         5,877,670
  Subscriptions received in advance (Notes 6 and 12)                         1,500,000            10,000
  Non-qualified stock options outstanding (Note 7)                             153,382           138,943
  Deficit accumulated during the development stage                         (6,134,366)       (5,533,597)
                                                                     -----------------  -----------------

Total stockholders' equity                                                   1,407,581           503,911
                                                                     -----------------  -----------------

Total liabilities and stockholders' equity                           $       2,058,986  $      1,188,377
==================================================================== =================  ================

Nature and continuance of operations (Note 1)

Commitments and contingencies (Note 11)





Subsequent events (Note 12)

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

                                        3
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<CAPTION>

PHAGE THERAPEUTICS INTERNATIONAL INC.                                                                                 2
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
========================================================================================================================


                                                                         Cumulative
                                                                            Amounts
                                                                       From Date of
                                                                       Inception on
                                                                       December 24,       Three Month       Three Month
                                                                            1996 to      Period Ended      Period Ended
                                                                         March  31,         March 31,         March 31,
                                                                               2001              2001              2000
                                                                  -----------------  ----------------  ----------------
<S>                                                               <C>               <C>                <C>

EXPENSES
  General and administrative                                      $       3,952,309 $         311,674 $         164,918
  Research and development                                                1,886,384           299,030            11,484
                                                                  -----------------  ----------------  ----------------

Loss from operations                                                    (5,838,693)         (610,704)         (176,402)
                                                                  -----------------  ----------------  ----------------


OTHER INCOME (EXPENSE)
  Interest income                                                            47,228             9,935             3,370
  Loss on disposal of capital assets (Note 4)                             (376,392)                -              (500)
                                                                  -----------------  ----------------  ----------------

                                                                          (329,164)             9,935             2,870
                                                                  -----------------  ----------------  ----------------


Loss before extraordinary item                                          (6,167,857)         (600,769)         (173,532)


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


Loss for the period                                               $     (6,134,366) $       (600,769) $       (173,532)
================================================================= ================= ================= =================

Basic and diluted loss per share                                                    $          (0.06) $          (0.02)
================================================================= ================= ================= =================


Weighted average number of shares outstanding                                              10,895,444         7,392,586
================================================================= ================= ================= =================










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

                                        4
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<TABLE>
<CAPTION>

PHAGE THERAPEUTICS INTERNATIONAL INC.                                                                                     3
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
=================================================================================================================================

                                                                                   Cumulative
                                                                                      Amounts
                                                                                 From Date of
                                                                                 Inception on
                                                                                 December 24,       Three Month       Three Month
                                                                                      1996 to      Period Ended      Period Ended
                                                                                   March  31,         March 31,         March 31,
                                                                                         2001              2001              2000
                                                                            ----------------  ----------------  ----------------
<S>                                                                        <C>                <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Loss for the period                                                     $     (6,134,366) $       (600,769) $       (173,532)
    Adjustments to reconcile net loss to net cash used in
    operating activities:
       Amortization                                                                   165,307             5,878            12,501
       Compensation expense from vesting of
          non-qualified stock options                                                 153,382            14,439             4,785
       Loss on disposal of capital assets                                             376,392                -                 -
       Interest note payable                                                           25,064             3,855                -
       Consulting                                                                     160,000                -                 -

    Change in non-cash working capital items
       (Increase) decrease in prepaid expenses and other current assets             (278,348)         (256,628)             6,250
       Increase (decrease) in accounts payable                                        166,861          (16,666)          (48,471)
       Increase (decrease) in accrued liabilities                                     167,055             2,383          (68,775)
       Increase (decrease) in due to related parties                                  133,578          (10,633)          (56,284)
                                                                            ----------------  ----------------  ----------------

    Net cash used in operating activities                                         (5,065,075)         (858,141)         (323,526)
                                                                            ----------------  ----------------  ----------------


CASH FLOWS FROM INVESTING ACTIVITIES
    Acquisition of cash on purchase of subsidiary                                         173                -                 -
    Purchases of capital assets                                                     (737,025)         (133,400)           (1,300)
    Deposit                                                                          (75,000)                -                 -
                                                                            ----------------  ----------------  ----------------

    Net cash used in investing activities                                           (811,852)         (133,400)           (1,300)
                                                                            ----------------  ----------------  ----------------


                                  - continued -









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

                                        5
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<CAPTION>

PHAGE THERAPEUTICS INTERNATIONAL INC.                                                         4
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
======================================================================================================


                                                       Cumulative
                                                          Amounts
                                                     From Date of
                                                     Inception on
                                                     December 24,       Three Month       Three Month
                                                          1996 to      Period Ended      Period Ended
                                                       March  31,         March 31,         March 31,
                                                             2001              2001              2000
                                                ----------------- -----------------  -----------------
<S>                                            <C>                <C>                <C>
Continued...


CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from sale of capital assets                    7,281                -                 -
    Notes payable (repayment)                             128,198          (12,000)            56,000
    Net proceeds received from stock issuances          5,757,041                -          1,360,000
    Subscriptions received in advance                   1,500,000         1,490,000                -
                                                ----------------- -----------------  -----------------

    Net cash provided by financing activities           7,392,520         1,478,000         1,416,000
                                                ----------------- -----------------  -----------------


Change in cash position during the period               1,515,593           486,459         1,091,174


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


Cash and cash equivalents, end of period        $       1,515,593 $       1,515,593 $       1,092,397
=============================================== ================= ================= =================



Supplemental disclosure with respect to cash flows (Note 10)
















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

                                        6
</TABLE>

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<TABLE>
<CAPTION>

PHAGE THERAPEUTICS INTERNATIONAL INC.                                                                                     5
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
====================================================================================================================================



                                           Common Stock                       Subscrip-           Non-       Deficit
                                    --------------------------                    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.

                                        7
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<CAPTION>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                                                                     6
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
===================================================================================================================================



                                           Common Stock                       Subscrip-          Non-        Deficit
                                    --------------------------                    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

Deferred compensation from
  non-qualified stock options
  outstanding                                  -           -             -           -         14,439             -         14,439
Subscriptions received in advance              -           -             -     ,490,000            -              -      1,490,000
Loss for the period                            -           -             -           -             -       (600,769)     (600,769)
                                    -------------  ----------  ------------  ----------   -----------  -------------  ------------

Balance at March 31, 2001              10,895,444 $    10,895 $   5,877,670 $  ,500,000  $    153,382  $ (6,134,366) $   1,407,581
=================================== ============= =========== ============= ===========  ============  ============= =============






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


                                       8
</TABLE>

<PAGE>




PHAGE THERAPEUTICS INTERNATIONAL INC.                                          7
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 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 March 31, 2001 the  Company  had a working  capital of
         $1,136,167  and has  incurred  losses  of  $6,134,366  from the date of
         inception  ,  December  24,  1996  to  March  31,  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.  Subsequent  to March 31,  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 March 31, 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  March 31,  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 March 31, 2001, the Company
owned  approximately 88% of the outstanding common stock of Phage  Therapeutics,
Inc.  All  significant  inter-company   transactions  have  been  eliminated  in
consolidation.

                                       9

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                          8
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 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 March 31, 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.


                                       10

<PAGE>

PHAGE THERAPEUTICS INTERNATIONAL INC.                                          9
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 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,
         10,895,444 and 2000,  7,392,586,  do not include the 1,942,858  (2000 -
         2,028,572) warrants outstanding, the stock options of 2,880,000 (2000 -
         2,755,000) and the 2,142,857  common shares issued  subsequent to March
         31, 2001 as their effect would be anti-dilutive. Of the total 1,942,858
         shares  issued in the three month period ended March 31, 2000,  582,857
         shares are included in the weighted  average number of 7,392,586 shares
         outstanding at March 31, 2000.

         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".

                                       11

<PAGE>

PHAGE THERAPEUTICS INTERNATIONAL INC.                                         10
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 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)
                                                            ================


                                       12

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                         11
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 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.


4.       CAPITAL ASSETS


================================================================================

                                                  March 31,      December 31,
                                                       2001              2000
                                          ----------------  ----------------
Research and development equipment        $         111,777 $          33,499
Computer and office equipment                        69,557            52,309
Furniture and fixtures                               20,979            18,178
Leasehold improvements                               41,414             6,341
                                          ----------------  ----------------

                                                    243,727           110,327
Accumulated amortization                           (55,682)          (49,804)
                                          ----------------  ----------------

                                          $         188,045 $          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

================================================================================

                                                 March 31,      December 31,
                                                      2001              2000
                                         -----------------  -----------------
Principal amount                         $         140,198 $         140,198
Accrued interest                                    13,064            21,209
                                         -----------------  -----------------

                                         $         153,262 $         161,407
================================================================================

         In 1999, the Company  received several loans from Prostar Limited which
totalled $140,198. The loans bear interest at

                                       13


         11% per annum and are repayable on demand.



<PAGE>


PHAGE THERAPEUTICS INTERNATIONAL INC.                                         12
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 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.

                                       14

<PAGE>


PHAGE THERAPEUTICS INTERNATIONAL INC.                                         13
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 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 exercise date of the warrants has not yet been  determined
by the Company,  therefore,  the warrants have not been issued.  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. At March
31,  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.

                                       15

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                         14
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2001
================================================================================


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

         Warrants

================================================================================


                                                 March 31,      December 31,
                                                      2001              2000
                                         ----------------  ----------------
Balance, beginning of period                     2,028,572            85,714
  Issued                                                -          1,942,858
  Exercised                                             -                 -
  Expired                                         (85,714)                -
                                         ----------------  ----------------

Balance, end of period                           1,942,858         2,028,572
================================================================================

     As at March 31, 2001 there were  1,942,858  warrants  outstanding  that are
exercisable into commons shares as follows:



================================================================================
    Number                                   Exercise
 of Shares                                      Price           Expiry Date
 ---------                                   ---------          ------------
 1,942,858                                    $  1.25           June 2, 2001
                   if not exercised, then at     2.00           June 2, 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.

         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. No stock-based  compensation has resulted from the use of
         this standard.

                                       16

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                         15
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2001
================================================================================



7.       STOCK OPTIONS (cont'd...)
<TABLE>
<CAPTION>


         Following is a summary of the stock option activity:

======================================================================================================================


                                                       March 31, 2001                      March 31, 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                                                  -                 -          1,285,000            0.55
                                              -----------------                    ----------------

Outstanding, end of period                            1,405,000 $         0.57            1,285,000  $         0.55
======================================================================================================================

</TABLE>

     The  weighted   average  fair  value  of  options   granted  to  employees,
non-employees and consultants during March 31, 2000 was $0.67 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:



================================================================================

                                              Three Month       Three Month
                                             Period Ended      Period Ended
                                                March 31,         March 31,
                                                     2001              2000
                                        ----------------- ------------------
Net loss
    As reported                         $       (600,769) $       (168,747)
                                        ================  =================

    Pro-forma                           $       (606,821) $       (174,799)
                                        ================  =================

Basic and diluted loss per share
    As reported loss per share          $         (0.06)             (0.02)
                                        ================  =================

    Pro-forma                           $          (0.06) $          (0.02)
================================================================================


                                       17

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                         16
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2001
================================================================================


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

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

         Stock option plan (cont'd...)
<TABLE>
<CAPTION>

     Following  is a summary of the status of options  outstanding  at March 31,
2001:

=============================================================================================================

                                   Outstanding Options                         Exercisable Options

                       -----------------------------------------------       -------------------------------
                                              Weighted
                                               Average        Weighted                              Weighted
                                             Remaining         Average                               Average
                                           Contractual        Exercise                              Exercise
Exercise Price                  Number            Life           Price                Number           Price
-------------------------------------------------------------------------------------------------------------
<S>                    <C>                <C>             <C>               <C>                   <C>
$0.55                        1,280,000             3.9        $   0.55             1,280,000        $   0.75
  0.75                         125,000             4.2            0.75                65,000            0.75
                       ---------------                                       ---------------

                             1,405,000                                             1,345,000
=============================================================================================================
</TABLE>

         The Company  granted Nil (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
         March 31,  2000 was  $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 $14,439 (2000 - $4,785), of which $6,558 (2000 - $2,536) was
         allocated to general and  administrative and $7,881 (2000 - $2,249) 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:


Risk free interest rate                                      6.434% - 6.590%
Expected life of the options                                         2 years
Expected volatility                                                    2.18%
Expected dividend yield                                                 -

     Phage Therapeutics, Inc.

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

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

                                       18

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                         17
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2001
================================================================================


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


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

     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 March 31, 2001 and December 31, 2000              1,475,000                              0.73
==================================================== ================= =================== =============
</TABLE>

     As of March 31, 2001 all outstanding  options were fully vested as a result
of the PhageTx Acquisition  transaction.  No options granted have been exercised
as of  March  31,  2001.  The  weighted  average  contractual  life  of  options
outstanding as of March 31, 2001 was 6.6 years.

                                       19

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                         18
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2001
================================================================================

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


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


     The Company applies United States  Accounting  Principles Board Opinion No.
25,   Accounting   for  Stock  Issued  to   Employees   (APB  25),  and  related
interpretations in accounting for its Plan. Accordingly, no compensation expense
has been  recognized for incentive  stock options issued in accordance  with its
stock-based  compensation plan. Had compensation cost for incentive stock option
awards under the Company's Plan been determined based upon the fair value at the
grant date  consistent  with the  methodology  prescribed  under  United  States
Statement of Financial Accounting Standards No. 123, Accounting for Stock- Based
Compensation,  (SFAS 123) the  Company's  net loss and loss per share would have
been adjusted as follows:


================================================================================

                                                Three Month       Three Month
                                               Period Ended      Period Ended
                                                  March 31,         March 31,
                                                       2001              2000
                                          ------------------------------------
Net loss
    As reported                           $       (600,769) $       (168,747)
                                          ================  =================
    Pro-forma                             $       (600,769) $       (168,747)
                                          ================  =================
Basic and diluted loss per share
    As reported                           $          (0.06) $          (0.02)
                                          ================  =================
    Pro-forma                             $          (0.06) $          (0.02)
================================================================================



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.

                                       20

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                         19
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2001
================================================================================


9. RELATED PARTY TRANSACTIONS

         During the period  PhageTx  paid or  accrued  wages of $30,000  (2000 -
         $Nil) and paid consulting fees of $Nil (2000 - $7,000) to the president
         and  director of the Company.  As at March 31,  2001,  the Company owed
         $75,413 (December 31, 2000 - $75,413).

     During the period  PhageTx paid or accrued wages of $21,000 (March 31, 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 $22,500 (2000 - $15,000),  consulting fees of $22,500
(2000  -  $15,000),   office   expenses  of  $3,000  (2000  -  $9,357),   office
administration of $6,314 (2000 - $2,127) and investor  relations of $1,868 (2000
- $2,102).  As at March 31, 2001 the Company owed Stealth $58,164  (December 31,
2000 - $68,798).

10. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS


================================================================================

                                                Three Month       Three Month
                                               Period Ended      Period Ended
                                                  March 31,         March 31,
                                                       2001              2000
                                          ----------------- --------------------
Cash paid for income taxes                $              -  $              -
================================================================================
Cash paid for interest                    $          12,000 $              -
================================================================================

     There were no significant non-cash transactions for the periods ended March
31, 2001 and 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:


March 31
    2001                            $          59,377
    2002                                       83,544
    2003                                       86,906
    2004                                       90,373
    2005                                       85,555
                                    -----------------
                                    $         405,755


                                       21

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                         20
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2001
================================================================================


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


     Lease Agreement (cont'd...)

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

     Contractual Agreements

     On  September  11,  2000,  the  Company  entered  into  an  agreement  with
Intelligene Expressions,  Inc. ("Intelligene") for contract services to scale up
manufacturing for the Company's first bacteriophage  product.  Intelligene is an
Alberta  company with a laboratory  located in Edmonton,  Alberta,  Canada.  The
total amount of the contract was for $520,000. The Company has paid $355,000 and
the remaining $165,000 (of which $65,000 is prepaid) is to be paid as follows:


Upon completion of Phase 5                            $          55,000
Upon completion of Phase 6                                       55,000
Upon completion of Phase 7                                       55,000
                                                      -----------------

                                                      $         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 $102,492 is prepaid
at March 31, 2001. In addition, the Company has agreed to a total of $549,115 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 $178,223 on these contracts and at March 31, 2001, $97,893 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.

                                       22

<PAGE>



PHAGE THERAPEUTICS INTERNATIONAL INC.                                         21
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2001
================================================================================



12.      SUBSEQUENT EVENTS

         The following events occurred subsequent to period end:

             a) On April 1, 2001, the Company  granted  670,000 stock options to
         employees,   consultants   and   advisors.   These  stock  options  are
         exercisable  at $0.75 per share until April 1, 2006.  The stock options
         vest over a period from 1 year to 4 years.

             b) In May 2001,  the  Company  issued  2,142,857  common  shares in
         accordance with Regulation D, Rule 506 of the United States  Securities
         Act of 1933, as amended. These shares relate to the 2,142,857 units the
         Company issued at $0.70 per unit for total proceeds of $1,500,000.

             c) In May 2001, the Company issued 4,284,714  warrants  relating to
         the total 4,285,714 units at $0.70 per unit as disclosed in Note 6. For
         every one and one-half  warrants,  the holder  thereof,  is entitled to
         purchase  another  common share of the Company at $0.70 per share.  The
         expiry dates of these warrants are:

               i)   2,142,857 warrants on August 15, 2001; and
               ii)  2,142,857 warrants on January 15, 2002.






                                       23


<PAGE>


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

                    ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS

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


General

         The following  discussion  and analysis  should be read in  conjunction
with the financial statements,  including the notes thereto, appearing elsewhere
in this document.

Overview

         Since Phage switched its focus to  biotechnology  in August 1998, Phage
has been  involved in research  and  developing  its  bacteriophage  therapeutic
agents as pharmaceutical  products.  The products will be developed specifically
for the treatment of antibiotic-resistant and other bacterial infectious agents.
During this time, there have been no revenues from operations.  Without revenues
to  offset  expenditures,  Phage  has  reported  a loss in each of its  years of
existence.  To date,  Phage has financed its operations  through raising capital
through private placements and loans from shareholders.

Plan of Operation

         Phage  anticipates  expending  approximately  $5,000,000  over the next
twelve  month  period in pursuing  its  anticipated  plan of  operations.  Phage
anticipates covering these costs by additional equity financing.

         The Company anticipates the following expenditures over the next twelve
months:


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
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

                                       24
<PAGE>

         Subsequent  to March 31, 2001,  the Company  completed  its  securities
purchase agreement  ("Securities  Purchase Agreement") which was entered into on
October 23, 2000 with seven  purchasers for $3,000,000 paid to Phage in exchange
for 4,285,714 units ("Unit" or "Units").  Each "Unit" consisting of one share of
Phage's  common stock with a par value of $0.001 per share (the "Common  Stock")
and one Common Stock purchase warrant (the "Warrant").  For every one and a half
Warrants the holder will entitle the holder to acquire one  additional  share of
Common  Stock of Phage at an  exercise  price of  $0.70  per  share.  Phage  has
received the total $3,000,000 as payment and the remaining  2,142,857 Units have
been issued as of May 2001. An additional  $2,000,000  is  anticipated  from the
exercise of the Warrants. The first set of Warrants expire August 15, 2000 which
are  exercisable  for 1,428,571  shares of Common Stock at an exercise  price of
$1,000,000.  The second set of Warrants  expire  January 15, 2002 for  1,428,571
shares of Common Stock at an exercise price of  $1,000,000.  These funds will go
towards the operations of Phage.

         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. 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.
These tests can still be conducted with less funding.

         Phage anticipates that the financing raised to date will be used in the
next twelve months as follows :


1.  Repayment of Indebtedness                                         $  100,000
2.  Personnel Costs (Salaries, Taxes & Benefits)                      $  400,000
3.  Intellectual Property Development                                 $  150,000
4.  Pharmaceutical R&D(1):
                                                                      $        0
     A.  Manufacturing Development
     B.  Manufacturing Scale-Up                                       $  650,000
     C.  Analytical Methods Development                               $  200,000
     D.  Formulations Development                                     $   75,000
     E.  Preclinical Safety and Efficacy Testing                      $  180,350
     F.  Preclinical 'Proof of Principle' Tests                       $  180,350
     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                                   $        0
     L.  Phase II Clinical Trials                                     $        0
5.  FDA Regulatory Costs:
     A.  Internal                                                     $  100,000
     B.  Outsourced                                                   $  125,000
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                                                                 $3,444,700

1.   The  Pharmaceutical  Research and Development is only for the first product
     candidate  bacteriophage.   The  other  two  product  candidates  (for  the
     treatment  of TB and  Pseudomonas  aeruginosa)  are in the early  stages of
     development and very little cost, if any, is anticipated in the next twelve
     months for these two product candidates. The Company anticipates that these
     two additional product candidates will be ready for preclinical  testing by
     the end of the last quarter of 2001. At that time,  the Company will decide
     how much financing will go towards the testing of these two products.


         Phage plans to use more out-sourced contract research  organizations to
reduce  overhead and to contain the burn rate,  plus there is  anticipated to be
more flexibility derived from out-sourcing of the key pharmaceutical development
and manufacturing activities.  The net effect may be realized as an acceleration
of the  pharmaceutical  development time frames, in that Phage should be able to
focus more attention on the development of the first products,  and less time on
financing  and  corporate  development  activities.  The  major  risks  to  this
pharmaceutical  development  plan are related to the  schedules  of the contract
research  organizations,  the ability of Phage to get into the queue at the most
beneficial time for Phage's  purposes,  and the ability of the contract research
organizations  to perform to Phage's  expectations.  An  additional  risk may be
Phage's ability to manage multiple out-sourced activities  concurrently with the
limited staff and advisors.

Liquidity and Capital Resources

         The Company had cash, cash  equivalents and prepaid  expenses and other
current assets of $ 1,795,941 as at the three month period ended March 31, 2001,
compared  with $  1,052,854  at  December  31,  2000.  Cash  provided  by equity
financing has

                                       26

<PAGE>



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.

         The Company  receives cash from the exercise or employee  stock options
and proceeds from the sale of stock by Phage  Therapeutics  International  Inc.,
pursuant to the employee  stock  purchase plan.  Since  inception,  the employee
stock option exercises and proceeds from the sale of stock by Phage Therapeutics
International  Inc., pursuant to the employee stock purchase plan provided no of
cash. Proceeds from the exercise of employee stock options will vary from period
to period based upon,  among other factors,  fluctuations in the market value of
the Company's stock relative to the exercise price of such options.

         Subsequent to March 31, 2001, the Company has received $55,000 from the
exercise of stock options.

         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 December 1996 to present.  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.


Research and Development


         During the three months ended March 31, 2001,  research and development
expenses  increased  to $ 299,030 from $ 11,484 for the three month period ended
March 31, 2000.  This increase was primarily due to higher  laboratory  costs to
scale up  manufacturing  for the Company's  first  bacteriophage  product by the
laboratory Intelligene  Expressions,  Inc. The Company entered an agreement with
Intelligene  Expressions,  Inc. in September  11, 2000.  The Company has already
paid $355,000 to 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 $102,492 is prepaid at March
31,  2001.  In  addition,  the  Company  has  agreed to a total of  $549,115  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 $178,223 on these contracts and at March 31, 2001, $97,893 is prepaid.


General and Administrative


         General and  administrative  expenses  increased to $311,674 during the
three months ended March 31, 2001 from  $164,918 over the same period last year.
This  increase was primarily  due to higher  staff-related  costs as the Company
continues to hire new  employees  to support its existing  products and prepares
for anticipated new product development.


Loss Per Period


         During the three months  ended March 31,  2001,  the Company had a loss
for the period of $600,769 compared with a loss of $173,532 over the same period
last year. This increase was due to higher expenses incurred by the Company with
regard to research and development, and general and administrative expenses. The
basic and diluted  loss per share is $(0.06) for the three  month  period  ended
March 31, 2001 as compared to $(0.02) for the same period last year.


Interest and Other Income


         During the three months ended March 31, 2001, interest and other income
increased  to $9,935 from $3,370 over the same period last year.  This is due to
interest received on cash and cash equivalents.

Financial Outlook

     Estimates  of future  product  sales,  operating  expenses and earnings per
share are necessarily speculative in nature and

                                       27

<PAGE>



are  difficult  to  predict  with  accuracy.   The  Company  is  providing  this
information as of the filing date of this Form 10-Q, and does not plan to update
this  information  until its next  Form  10-Q  filing  with the  Securities  and
Exchange  Commission and expressly  disclaims any duty to update the information
contained in this filing.

         Except for the historical  information  contained  herein,  the matters
discussed  herein are by their nature  forward-looking.  Investors are cautioned
that  forward-looking  statements or projections made by the Company,  including
those made in this  document,  are subject to risks and  uncertainties  that may
cause actual results to differ  materially  from those  projected.  Reference is
made in particular to  forward-looking  statements  regarding earnings per share
and expenses.  Phage operates in a rapidly changing  environment that involves a
number  or  risks,  some of which  are  beyond  the  Company's  control.  Future
operating  results and the Company's  stock price may be affected by a number of
factors,  including,  without  limitation:  (i) the results of  preclinical  and
clinical  trials;  (ii)  regulatory  approvals  or  product  candidates,   (iii)
intellectual property matters (patents);  (iv) competition;  (v) fluctuations in
operating  results and (vi) rapid growth of the Company.  These risk factors are
discussed and  incorporated  herein by reference to Exhibit 99 and the Company's
10SB, the latest amendment filed with the Securities and Exchange  Commission on
April 9, 2001.


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

       ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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



         Phage's  primary  market risk exposure is that of interest rate risk on
borrowings under its credit lines,  which are subject to interest rates based on
the banks' prime rate, and a change in the  applicable  interest rate that would
affect the rate at which we could borrow funds or finance equipment purchases.



                            PART II OTHER INFORMATION



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

                            ITEM 1. LEGAL PROCEEDINGS

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



         To Phage's  knowledge,  no lawsuits were commenced against Phage during
the quarter ended March 31, 2001, nor did Phage commence any lawsuits during the
same period.



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

               ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDINGS

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


         Not applicable.


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

                     ITEM 3 DEFAULTS UPON SENIOR SECURITIES

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



         Not applicable.


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

           ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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



         On March 15, 2001, Phage held an annual general meeting to consider the
following matters:

     1.   to amend the  Articles  of  Incorporation  of Phage to change its name
          from "Phage  Therapeutics  International  Inc., to Phage Therapeutics,
          Inc."
     2.   change the year end of Phage to December 31,


                                       28

<PAGE>



     3.   re-elect Messrs. Darren Pylot, Gaetano Morello, and Dr. Richard Honour
          as directors of Phage, and
     4.   authorize the directors in their  discretion to grant stock options to
          directors, executive officers and employees and to make any amendments
          the board of  directors  considers  necessary to the 2000 Stock Option
          Plan and any outstanding options previously granted.

The meeting was adjourned as only 4,876,692 of the 10,895,444 shares entitled to
vote at the meeting  were  represented  by proxy or in person.  The Articles and
Bylaws of Phage  require  acts of  shareholders  to be approved by 50.01% of the
outstanding votes of shareholders.




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

                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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



Exhibits


(a)      Reference is made to the Index of Exhibits included herein.


Reports on Form 8-K


(b)      Reports on Form 8-K.

         No Form 8-Ks have been filed  during the three month period ended March
         31, 2001. However, the Company wishes to state that as mentioned in the
         Management's  Discussion  and  Analysis,  the Company has  received the
         total  $3,000,00 from the Securities  Purchase  Agreement  entered into
         with seven  purchasers  as of October 23,  2000.  The  purchasers  have
         received 2,142,857 Units in December 2000 and received their additional
         2,142,857 Units on May 3, 2001 for a total of 4,285,714 Units.


                                       29
<PAGE>

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

                                   SIGNATURES

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





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


PHAGE THERAPEUTICS INTERNATIONAL INC.
-------------------------------------
(Registrant)



Date:    May 21, 2001       By: /s/ Richard Honour/s/
     --------------------      ---------------------------------------------
                                RICHARD HONOUR
                                Chief Executive Officer, President, Secretary
                                and Director



Date:      May 21, 2001     By: /s/ Darren Pylot /s/
      -------------------      ----------------------------------------------
                                DARREN PYLOT
                                Chief Financial Officer and Director

Date:     May 21, 2001      By:  /s/ Robert Miller /s/
     --------------------     -----------------------------------------------
                                ROBERT MILLER
                                Chairman of the Board of Directors & Director

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<PAGE>

                      PHAGE THERAPEUTICS INTERNATIONAL INC.

                                INDEX TO EXHIBITS

Exhibit No.                Description

3.1       Articles of Incorporation filed on July 9, 1997 with the Florida
          Department of State(1);

          Certificate  of Amendment  filed August 19, 1999 with the   Florida
          Department   of  State  to   increase authorized capital and change
          name(1);

          Certificate  of  Amendment  filed March 18, 1999 with
          the  Florida  Department  of  State to  Decrease  its
          outstanding capital by 4:1(1).

3.2       By-laws as Adopted on October 7, 1998(1).

10.1      Advisory Agreements with John Majnarich, effective January 1, 2001 and
          Michael Maloney,   effective January 1, 2001(1).  Advisory Agreements
          with Seymour Froman effective January 1, 2001, Luiz Bermudez effective
          January 1, 2001, and Tyler Kokjohn effective December 1, 2000.

10.2      Confidential Disclosure Agreement - Standard Agreement signed by all
          employees, consultants and advisors(1).

10.3      Employee Agreements with: Richard Herman dated November 1, 2000;
          Richard Honour dated November 1, 2000; Tracy Honour dated November 1,
          2000; Douglas Lee dated November 1, 2000; (2 Agreements) Kenneth
          Lehman dated November 1, 2000; and Larry Stylebo dated December 6,
          2000(1).

10.4      Management Agreement dated November 1, 2000 between Phage Therapeutics
          International Inc. and Stealth Investments Corp(1).

10.5      Property Lease Agreement dated October 27, 2000 between Razore Land
          Company and Phage Therapeutics International Inc(1).

10.6      Consulting Agreement dated October 9, 2000 between Phage Therapeutics
          International Inc. and Deirdre E. Sweeney(1).

10.7      Stock Option Plan 2000(1)

10.8      Securities Purchase Agreement dated as of October 23, 2000(1).

21        List of Subsidiaries, State of Incorporation, and Names under which
          Subsidiary Does Business(1);

          Articles of Incorporation as filed with the State of Washington,
          Secretary of State on December   24, 1996(1);

          Articles of Amendment changing name as filed with the  State of
          Washinton,  Secretary of State on March 10, 1997(1);

          Articles of Amendment  changing  registered agent and  name as filed
          with the State of Washington, Secretary of State on July 31, 1997(1).

Documents Incorporated by Reference

(1)      Documents previously filed as exhibits to Form 10SB as filed on April
         4, 2001 and incorporated herein by this  reference.

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