U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-QSB

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

                  For the quarterly period ended June 30, 2001

               [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
                                THE EXCHANGE ACT

                       For the transition period from to

                           Commission File No. 0-30440

                              THE AUXER GROUP, INC.
                 (Name of Small Business Issuer in Its Charter)

                                    Delaware
                        (State or Other Jurisdiction of
                         Incorporation or Organization)

                                   22-3537927
                                (I.R.S. Employer
                              Identification No.)

               12 Andrews Drive, West Paterson, New Jersey 07424
              (Address of Principal Executive Offices) (Zip Code)

                                 (973) 890-4925
                (Issuer's Telephone Number, Including Area Code)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 14, 2001, the Company
had 131,475,066 shares of Common Stock outstanding, $0.001 par value.

<PAGE>

                          Index to Financial Statements
                              The Auxer Group, Inc.

<TABLE>
<S>                                           <C>
Accountant's Report                            2

Consolidated Balance Sheets                    3-4

Consolidated Statement of Income
 and Retained Earnings                         5

Consolidated Statement of Cash Flows           6

Notes to Consolidated Financial
 Statements                                    7-15

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 2.  Changes in Securities.

Item 3.  Defaults Upon Senior Securities.

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

Item 5.  Other Information

Item 6. Exhibits and Reports of Form 8-K. None

Signatures

</TABLE>

<PAGE>

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements:


                             THE AUXER GROUP, INC.

                              FINANCIAL STATEMENTS

                          Index to Financial Statements

                              The Auxer Group, Inc.
<TABLE>
<CAPTION>
                                                                                 Page
<S>                                                                              <C>
         Accountant's Report                                                     F-2

         Condensed Consolidated Balance Sheets                                   F-3-4

         Condensed Consolidated Statement of Accumulated Deficit                 F-5

         Consolidated Statement of Changes in Stockholders' Equity               F-6

         Condensed Consolidated Statement of Cash Flows                          F-7

         Notes to Consolidated Financial Statements                              F-8-18

</TABLE>

<PAGE>

To the Board of Directors
of The Auxer Group, Inc.
West Paterson, NJ 07424

                         Independent Accountant's Report

We have reviewed the accompanying balance sheet of The Auxer Group, Inc. and
consolidated subsidiaries as of June 30, 2001 and the related statements of
income, retained earnings and cash flows for the three months ended June 30,
2001 and June 30, 2000. These financial statements are the responsibility of the
company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquires of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.

KALOSIEH, SHACKIL & MEOLA, CPAs PA

July 28, 2001

<PAGE>

                              THE AUXER GROUP, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 2001
                                   (UNAUDITED)
<TABLE>
Current assets:
<S>                                                                          <C>
        Cash                                                                 $ 331,969

        Accounts receivable (net of allowances $24,090)                        412,977

        Note receivable                                                        131,012

        Inventory                                                              770,222

        Prepaid expenses                                                         4,945
                                                                    -------------------
        Total current assets                                                 1,651,125
                                                                    -------------------
Property and Equipment

        Vehicles                                                                42,347

        Furniture and fixtures                                                  23,027

        Machinery and equipment                                                652,649

        Leasehold improvements                                                   2,121
                                                                    -------------------
                                                                               720,144

        Less:        accumulated depreciation                                 (167,599)
                                                                    -------------------
        Property and equipment (Net)                                           552,545
                                                                    -------------------
Other assets:

        Security deposit                                                       102,005

        Other receivables                                                       74,389
                                                                    -------------------
        Total other assets                                                     176,394
                                                                    -------------------
Total assets                                                               $ 2,380,064
                                                                    ===================
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-3

<PAGE>

                              THE AUXER GROUP, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 2001
                                   (UNAUDITED)

                      Liabilities and Stockholders' Equity

<TABLE>
Current liabilities
<S>                                                               <C>
       Accounts payable and accrued expenses                        $ 542,076

       Credit line                                                     81,867

       Deferred sales                                                 251,443

       Notes payable                                                  540,131

       Notes payable-shareholders                                      76,951
                                                          --------------------
Total current liabilities                                           1,492,468

Long-term liabilities

       Notes payable, less current maturities                           1,954

       Notes payable-convertible debt                                 911,685
                                                          --------------------
       Total long-term liabilities                                    913,639
                                                          --------------------

Total liabilities                                                   2,406,107

Stockholders' equity

       Capital stock - authorized 1,000,000,000 shares                131,447
       $.001 par value per share, 131,437,030 shares
       outstanding

       Preferred stock - authorized 25,000,000 shares                   2,750
       $.001 par value per share, 2,750,000 shares
       outstanding

       Additional paid in capital                                  10,035,378

       Accumulated deficit                                        (10,195,618)
                                                          --------------------
Total stockholders' equity                                            (26,043)
                                                          --------------------
Total liabilities and stockholders' equity                        $ 2,380,064
                                                          ====================
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-4

<PAGE>

                              THE AUXER GROUP, INC.

             CONDENSED CONSOLIDATED STATEMENT OF ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
                                                       Three Months Ended           Six Months Ended
                                                       ------------------           ----------------
                                                   June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
                                                   ------------  ------------  ------------  -------------
<S>                                                 <C>          <C>           <C>            <C>
Income                                                 $ 990,768    $ 515,378    $ 1,581,722  $ 1,050,918

Less:  Cost of goods sold                                829,055      341,247      1,382,462      705,453
                                                   --------------------------- ---------------------------
Gross profit                                             161,713      174,131        199,260      345,465
                                                   --------------------------- ---------------------------
Operations:

      General and administrative                         651,097      644,735      2,190,305      904,008

      Depreciation and amortization                       34,600        4,811         69,059        8,846

      Interest expense                                    15,282        5,667        437,744        8,005
                                                   --------------------------- ---------------------------
      Total expenses                                     700,979      655,213      2,697,108      920,859
                                                   --------------------------- ---------------------------

Income (loss) from operations                           (539,266)    (481,082)    (2,497,848)    (575,394)

Other income (expense)

      Interest income                                        920            -          2,104            -

      Loss on abandonment of leasehold improvements            -            -              -       (2,518)
                                                   --------------------------- ---------------------------
Income (loss) from continuing operations                (538,346)    (481,082)    (2,495,744)    (575,394)

Discontinued operations

      Income from operations of discontinued subsidiary   72,533            -         72,533            -

      Loss on disposal of subsidiary                    (147,757)           -       (147,757)           -
                                                   --------------------------- ---------------------------
                                                         (75,224)           -        (75,224)           -
                                                   --------------------------- ---------------------------
Net income (loss)                                       (613,570)    (481,082)    (2,570,968)    (577,912)

Accumulated deficit at beginning                      (9,582,048)  (4,925,648)    (7,624,650)  (4,828,818)
                                                   --------------------------- ---------------------------

Accumulated deficit at end                          $(10,195,618)$ (5,406,730) $ (10,195,618) $(5,406,730)
                                                   =========================== ===========================

Net income (loss) per common share                       $ (0.01)     $ (0.01)       $ (0.02)     $ (0.01)
                                                   =========================== ===========================

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-5

<PAGE>

                              THE AUXER GROUP, INC.

            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                Preferred   Preferred Stock  Common Stock   Common Stock     Additional  Accumulated
                                  Stock     Par Value $.001     Shares    Par Value $.001    Paid in      Deficit
                                 Shares        Amount                          Amount        Capital
                                   (A)                           (B)
                              --------------------------------------------------------------------------------------
<S>                             <C>               <C>       <C>             <C>       <C>            <C>
Balances at December 31, 1998             -    $        -     36,361,097     $ 36,361   $3,657,004    $(3,853,690)

Common stock issued for cash                                  17,950,000       17,960      732,099

Common stock issued for services                                 589,000          589       43,651

Common Stock Issued for debt

extinguishments                                                1,000,000        1,000        9,220

Common stock issued for
acquisition                                                      836,700          837       89,108

Stock issued                      2,750,000         2,750                                  409,750

Net loss for the year                                                                                   (975,127)
                              -----------------------------------------------------------------------------------

Balances at December 31, 1999     2,750,000       $ 2,750     56,736,797     $ 56,747   $ 4,940,832  $(4,828,817)
                              ===================================================================================

Common stock issued for cash                                  36,225,233       36,225     1,401,661

Common stock issued for goods
and services                                                   8,075,000        8,075     1,604,563

Common stock issued for
acquisition                                                    3,000,000        3,000       261,000

Net loss for the year
                              -----------------------------------------------------------------------------------

Balances at December 31, 2000    2,750,000        $ 2,750    104,037,030     $104,047  $   8,208,056 $(7,624,650)
                              ===================================================================================

Common stock issued for cash                                   7,000,000     $  7,000  $     343,000

Common stock issued for services                              17,988,000       17,988        915,112

Common stock issued for debt                                   2,412,000        2,412        178,488
extinguishment

Interest expense on issuance of                                     -             -          390,722
convertible debt

Net loss for six months ended
June 30,2001                                                                                         (2,570,968)
                              ----------------------------------------------------------------------------------

Balances at June 30, 2001       $ 2,750,000       $ 2,750   131,437,030     $131,447  $    10,035,37 $(10,195,618)
==================================================================================================================
</TABLE>

Preferred stock, par value $.001, convertible to 10 shares of common stock,
25,000,000 shares authorized, 2,750,000 shares and outstanding at June 30, 2001.

Common stock, par value $.001, 1,000,000,000 shares authorized, 131,437,030
shares issued and outstanding at June 30, 2001.

          See accompanying notes to consolidated financial statements.

                                       F-6

<PAGE>
                              THE AUXER GROUP, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                           Six Months Ended
                                                                June 30, 2001           June 30, 2000
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                 <C>                       <C>
Net income (loss)                                                   $ (2,570,968)             $ (577,912)
Depreciation and amortization                                             69,059                   8,846
Common stock issued for services                                         933,100                 589,313
Interest expense on issuance of convertible debt                         390,722                       -
Loss on abandonment                                                            -                   2,518
                                                              -------------------     -------------------
                                                                      (1,178,087)                 22,765
(Increase) decrease in:

       Accounts receivable                                             1,834,711                (270,326)
       Inventory                                                         456,585                (348,661)
       Prepaid expenses                                                   28,160                       -
       Other receivables                                                 (32,055)                      -
                                                                        (131,012)
Increase (decrease) in:

       Accounts payable and accrued expense                           (1,608,530)                243,061
       Deferred sales                                                   (594,920)                      -
                                                              -------------------     -------------------
TOTAL CASH FLOW FROM OPERATIONS                                       (1,225,148)               (353,161)

CASH FLOWS FROM INVESTING ACTIVITIES

       Proceeds from sale of discontinued operations                     804,592                       -
       Purchase property, inventory and equipment                          8,776                 (58,555)
       Security deposit                                                   38,477                   2,186
                                                              -------------------     -------------------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES                               851,845                 (56,369)
                                                              -------------------     -------------------
CASH FLOWS FROM FINANCING ACTIVITIES

       Borrowings/payments under line of credit agreement (net)           17,018                  32,835
       Payments on short-term debt                                      (843,322)                      -
       Proceeds from long-term debt                                      911,685                   6,478
       Payments on long-term debt                                         (1,224)                 (2,176)
       Shareholder loan payable                                          (10,908)                  7,978
       Sale of common stock                                              350,000                 375,435
                                                              -------------------     -------------------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES                               423,249                 420,550

NET INCREASE (DECREASE) IN CASH                                           49,946                  11,020

CASH BALANCE BEGINNING OF PERIOD                                         282,023                   8,400
                                                              -------------------     -------------------
CASH BALANCE END OF PERIOD                                             $ 331,969                $ 19,420
                                                              ===================     ===================
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       F-7

<PAGE>


Note 1 - Organization of Company
---------------------------------

     a. Creation of the Company

     Auxer Industries, Inc. (the "Company") was formed on June 20, 1920 under
the laws of the State of Idaho as The Auxer Gold Mines. On May 2, 1995, the
certificate of incorporation was amended to change the name of the Company to
Auxer Industries, Inc.

     On August 11, 1997 the Company incorporated in the State of Delaware under
the name The Auxer Group, Inc. In September 1997 the shareholders of the company
voted to exchange their shares on a one for one basis for shares in the new
company, The Auxer Group, Inc. The new corporate name was effective January 1,
1998 for accounting and tax purposes.

     On November 3, 2000. the certificate of incorporation was amended to change
the number of authorized shares to 1 billion of common stocks, at $.001 par
value.

     b. Description of the Company

     The Company is an investment holding company that is comprised of six
subsidiaries: the Harvey Westbury Corporation, Hardyston Distributors, Inc., CT
Industries, Auxer Telecom, Inc., Clifton Telecard, Inc. and Universal Filtration
Industries.

     On April 18, 1995, the Company acquired CT Industries, Inc. ("CT"), a New
Jersey corporation based in West Paterson, New Jersey. CT is a distributor of
various automotive products. Effective March 9, 2001, the business focus was
expanded to include telecommunications related business.

     On February 8, 1996, the Company acquired Universal Filtration Industries,
Inc. ("Universal Filtration") a New York corporation. Based in West Paterson,
New Jersey, Universal Filtration has developed the "Fiona Micro Screen Filter",
a replacement upgrade to a component of machinery used by the dry cleaning
industry.

     On October 25, 1996, the Company acquired Harvey Westbury Corp. ("Harvey
Westbury"), a New York corporation. Based in West Paterson, New Jersey, Harvey
Westbury is a manufacturer and wholesaler of various automotive, marine and
aviation products.

     On April 22, 1999, the Company formed Hardyston Distributors, Inc., d/b/a
The Mechanics Depot, a Nevada corporation. Based in northern New Jersey,
Hardyston Distributors is an automotive parts distributor.

     On August 7, 2000, the Company formed Auxer Telecom Inc., a Delaware
corporation. Auxer Telecom is a reseller of telecommunications access services
with operations based in Los Angeles, CA.

     On August 7, 2000, the Company formed Clifton Telecard Inc., a Delaware
corporation. Based in Northern New Jersey, Clifton Telecard is a wholesale
distributor of prepaid phone cards. On May 16, 2001, the Company sold Clifton
Telecard.

     Note 2 - Summary of Significant Accounting Policies
     ----------------------------------------------------

     a.  Basis of Financial Statement Presentation

     The accompanying condensed financial statements are unaudited. These
statements have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in

                                       F-8

<PAGE>
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
all adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation have been included. These financial statements
should be read in conjunction with the Company's financial statements and notes
thereto for the year ended December 31, 2000, included in the Company's Form
10-KSB as filed with the SEC.

     The consolidated financial statements presented consist of the company and
its wholly owned subsidiaries CT, Universal Filtration, Harvey Westbury,
Hardyston Distributors Inc. and Auxer Telecom, Inc., all of which are under
common control. Material inter-company transactions and balances have been
eliminated in the consolidation.

     b.  Earnings (Loss) per share

     Basic earnings (loss) per share is based on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net income
by the weighted average shares outstanding during the period. Diluted earnings
(loss) per share is calculated by dividing net income by the weighted average
number of common shares used in the basic earnings per share calculation plus
the number of common shares that would be issued assuming conversion of all
potentially dilutive common shares outstanding.

     Diluted earnings (loss) per share are not presented since diluted
securities have an anti-dilutive effect.

     c.  Receivables

     Allowances against receivables are provided equal to the estimated
collection losses that will be incurred in collection of all receivables and a
reserve for returns and discounts traditionally taken. Estimated allowances are
based on historical collection experience coupled with review of current status
of the existing receivables and amounted to $24,090 at June 30, 2001.

     d.  Property and Equipment

     Property and equipment are recorded at cost and are depreciated under the
straight-line methods over the estimated useful lives of the related assets.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.

     e. Revenue recognition

     The Company recognizes revenues as earned. Amounts billed in advance of the
period in which service is rendered are recorded as a liability under "deferred
revenue." The Company's revenue recognition policy for each product and
subsidiary are the same.

     f.  Research and development expenses

     Research and development costs are charged to operations when incurred.

     g.  Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Accordingly, actual results could differ from those estimates.
                                       F-9
<PAGE>

     h.  Impairment of Long-Lived Assets

     In the event that facts and circumstances indicate that the carrying value
of long lived assets, including associated intangibles, may be impaired, an
evaluation of recoverability is performed by comparing the estimated future
undiscounted cash flows associated with the asset to the assets carrying amount
to determine if a write down to market value or discounted cash flows is
required.

     j. Off Balance Sheet Risk

     The Company purchased prepaid phone cards from various telephone companies
who agree to provide long distance phone service to the cardholder after the
Company activates the phone card when it is sold. In the event the long distance
service provider does not provide the service or goes out of business the
Company would be responsible for refunding the purchase price of the phone card.

     The Company mitigates its risk by dealing with well-capitalized long
distance service providers.

     Note 3 - Acquisitions
     ---------------------

     a.  Acquisition of CT Industries, Inc.

     On April 18, 1995, the Company acquired all the capital stock of CT, owned
equally by Eugene Chiaramonte, Jr. and Howard Tapen, for 4,000,000 shares of
common stock. The transaction has been accounted for as a reverse acquisition
and using the purchase method of accounting with historic costs being the basis
of valuation.

     b.  Acquisition of Universal Filtration Industries, Inc.

     On August 7, 1996, the Company acquired all of the common shares of
Universal Filtration for 1,100,000 shares of common stock.

     c.  Acquisition of Harvey Westbury Corp.

     On October 25, 1996, the Company acquired all of the common shares of
Harvey Westbury for 170,000 shares of common stock.

     d.  Acquisition of the assets of Hardyston Distributors

          On April 22, 1999 the Company issued 836,700 shares of common stock at
$.1075 per share plus $15,000 for the purchase of inventory and sundry equipment
from Mr. Ernest DeSaye, a sole proprietor.

     e.   Acquisition of Telecommunications Switch Operations

     On August 24, 2000 the Company acquired telecommunications equipment.

     f.   Acquisition of Wholesale Prepaid Phone Distribution Operation

     On September 22, 2000 the Company acquired the assets of Clifton Telecard
Alliance Inc., (CTA), a New Jersey based telecommunications company for a total
purchase price of $964,000

     The Company paid $500,000 to the shareholders of CTA at closing, issued 3
million shares of common stock valued at $264,000, and issued a note payable to
them for $200,000 due in 2001, as more fully described in Note 5.

                                      F-10

<PAGE>

     The excess of the amount paid over the fair value of CTA's identifiable net
assets was $846,939, which has been reflected in the balance sheets as goodwill.
The Company expects to benefit from the goodwill acquired in this transaction
over a period of five years, and is amortizing the amount recorded using the
straight-line method over that period.

     Note 4 - Inventory
     ------------------

     Inventory consists of raw materials, work in process and finished goods and
is valued at the lower of cost determined on the first-in, first-out method or
market.

     Note 5 - Debt
     -------------

     a.  Security Agreement

     The Company has entered into a security agreement with Merchant Financial
Corp. to borrow money secured by the receivables evidenced by invoices of Harvey
Westbury Corp. and personal guarantees of certain officers. Merchant agreed to
lend an amount equal to 75% of the net value of all Harvey Westbury's accounts
receivable at an interest rate of prime plus 5%. The balance outstanding on the
line of credit at June 30, 2001 was $81,867.

     b.  Notes Payable

     The following is a summary of short-term-term debt at June 30, 2001:
<TABLE>
     Notes Payable to Creative Capital, payable on
<S>                                                                     <C>
     demand plus interest at a rate of 8%                               $         80,000

     Note payable to Colbie Pacific Capital, due August 1,
     2001, payable in 10 monthly principal and interest
     payments of $10,000, one principal and interest
     payment of $458,000, secured by equipment                                   458,000
                                                                                 -------
                                                                                $538,000
                                                                                ========
     Long-term debt is as follows:

     11.5% installment note, collateralized by vehicle,
     payable in monthly installments of  $188 with the
     final payment due May, 2003                                                   4,085

                           Less current maturities                                (2,131)
                                                                                  ------
                                                                               $   1,954
                                                                               =========
</TABLE>

                                      F-11

<PAGE>

     c. Notes Payable - Convertible Debt

     In January 2001, the Company refinanced its note payable to certain
shareholders in the amount of $551,685 and borrowed an additional $360,000 as
part of an issuance of 8% convertible debentures, due on January 16, 2006,
totaling $911,685. The notes are convertible by the holders into shares of the
Company's common stock at any time at a conversion price per share equal to the
lesser of seventy percent (65%) (The "Discount Multiplier") of the Market Price.
In the event that the Registration Statement has not been declared effective by
the SEC within one hundred and twenty (120) days after the Closing Date (the
"Due Date"), then the Discount Multiplier shall decrease by two and one-half
percent (2.5%) effective as of the Due Date to sixty-seven and one-half percent
(62.5%) and shall further decrease by two and one-half percent (2.5%) for each
thirty-day period occurring after the Due Date that the Registration Statement
has not been declared effective by the SEC, to not less than fifty percent
(50%). The notes are redeemable at the option of the Company at 130% of the
principle amount plus accrued interest. The proceeds were primarily used for
general corporate purposes.

     In connection with the issuance, the Company recorded interest expenses
related to the conversion feature in the amount of $390,722 for the six months
ended June 30, 2001.

     Note 6 - Related Party Transactions
     -----------------------------------

     Issuance of Common Shares

     On April 18, 1995, the Company acquired all the capital stock of CT, owned
equally by Eugene Chiaramonte, Jr. and Howard Tapen, for 4,000,000 shares of
common stock.

     Note 7 - Income Taxes
     ---------------------

     The Company provides for the tax effects of transactions reported in the
financial statement. The provision, if any, consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets and
liabilities, if any, represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of December 31, 2000, the Company had
no material current tax liability, deferred tax assets, or liabilities to impact
on the Company's financial position because the deferred tax asset related to
the Company's net operating loss carry forward and was fully offset by a
valuation allowance.

     The Company has net operating loss carry forwards for income tax purposes
of $9,190,077 at December 31, 2000. These carry forward losses are available to
offset future taxable income, if any, and expires starting in the year 2011. The
Company's utilization of this carry forward against future taxable income may
become subject to an annual limitation due to a cumulative change in ownership
of the company of more than 50 percent.
<TABLE>
<CAPTION>
         Deferred tax asset:
         -------------------
<S>                                                   <C>
         Net operating loss carry forward             $3,124,627

         Valuation allowance                          (3,124,627)
                                                       ----------

         Net deferred tax assets                      $       -0-
                                                      ===============
</TABLE>

     The Company recognized no income tax benefit for the loss generated for the
periods through December 31, 2000.

                                      F-12

<PAGE>

     SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion of all of a deferred tax asset will not be
realized. The Company's ability to realize benefit of its deferred tax asset
will depend on the generation of future taxable income. Because the Company has
yet to recognize significant revenue from the sale of its products, the Company
believes that a full valuation allowance should be provided.

     Note 8 - Business and Credit Concentrations
     -------------------------------------------

     The amount reported in the financial statements for cash, trade accounts
receivable and investments approximates fair market value. Because the
difference between cost and the lower of cost or market is immaterial, no
adjustment has been recognized and investments are recorded at cost.

     Financial instruments that potentially subject the company to credit risk
consist principally of trade receivables. Collateral is generally not required.

     Note 9 - Commitments and Contingencies
     --------------------------------------

     a. Lease agreement for office space

The Company entered into a three-year lease agreement with a nonaffiliated party
beginning on November 1, 1996 at 30 Galesi Drive, Wayne, New Jersey for office
space.

     Effective November 30, 1999, the Company continued to lease the property on
a month-to-month basis at $1,981.42 per month through February 29, 2000 at which
time the lease expired.

     The Company entered into a six month 15 day lease agreement with a new
affiliated party beginning September 1, 2000 and expiring on March 15, 2001 at a
monthly rate of $7,766 for office space in Los Angeles, California. Effective
March 15, 2001, the lease was extended on a month-to-month basis at the same
rate.

     b. Lease Agreement for Industrial Facility

     The Company entered into a three-year lease agreement with a non-affiliated
party beginning on April 1, 1995 and expiring April 1, 1998, at 15 Heisser
Court, Farmingdale, New York, for the Harvey Westbury operations. On February
23, 1998, the lease was extended to expire on April 30, 1999. On March 29, 1999
the lease was extended to expire on April 30, 2000. A $5,770 security deposit
was required with minimum monthly rental payments to be paid as follows:
<TABLE>
<CAPTION>
                                                Annual Rent            Monthly Rent
                                                -----------            ------------
    Period
    ------
<S>                                              <C>                    <C>
    May 1, 1999 to April 30, 2000                $36,024.00             $3,002.00

</TABLE>

      The Company assumed the lease agreement with a non affiliated party
entered into by Mr. Ernest DeSaye, Jr. beginning March 1, 1999 and expiring on
February 28, 2000, at 22B Lasinski Road, Franklin, NJ. The option to renew for
an additional two years was invoked extending the expiration of the lease to
February 28, 2001. A $750.00 security deposit was required with minimum monthly
rental payments to be paid as follows:
<TABLE>
<CAPTION>
    Period                                                 Annual Rent           Monthly Rent
    ------                                                 -----------           ------------
<S>                                                         <C>                    <C>
    March 1, 1999 to February 28, 2000                      $8,700.00              $725.00
    March 1, 2000 to February 28, 2001                      $9,000.00              $750.00
</TABLE>

                                      F-13

<PAGE>

Effective March 1, 2001, the Franklin operation was moved to 12 Andrews Drive,
West Paterson, New Jersey.

The Company entered into a five-year lease agreement with a non-affiliated party
beginning on February 1, 2000 and expiring January 31, 2005, at 12 Andrews
Drive, West Paterson, NJ for their Wayne, NJ and Farmingdale, NY operations. A
$15,583 security deposit was required with minimum monthly payments to be paid
as follows:
<TABLE>
<CAPTION>
              Period                              Annual Rent                   Monthly Rent
              ------                              -----------                   ------------
<S>                                                 <C>                          <C>
     Feb. 1, 2000 - Jan. 31, 2001                   $85,000                      $7,083.34
     Feb. 1, 2001 - Jan. 31, 2002                    89,250                       7,437.50
     Feb. 1, 2002 - Jan. 31, 2003                    93,500                       7,791.67
     Feb. 1, 2003 - Jan. 31, 2004                    97,850                       8,145.84
     Feb. 1, 2004 - Jan. 31, 2005                   102,000                       8,250.00

</TABLE>

In addition to the minimum monthly rental payments, the Company must pay real
estate taxes, insurance, and utilities

The Company entered into a month-to-month lease agreement with a non-affiliated
party beginning August 1, 2000 at a monthly rate of $2,500 for facility space in
Los Angeles, California.

     c. Equipment Leases

     The Company leases equipment under several non-cancelable operating leases
with unrelated parties, which expire from September 2001 through October 2003.

     The following is a schedule of future minimum rental payments required
under the above non-cancelable operating leases:
<TABLE>
<CAPTION>
         Year Ending December 31:
         ------------------------
<S>                                  <C>
         2001                        $        24,380
         2002                                 11,140
         2003                                  8,067
         2004                                  3,006
                                              ------

         Total                       $        46,593
                                              ======
</TABLE>

     Note 10 - Development Stage Company
     -----------------------------------

     The Company was considered to be a development stage company with little
operating history and having conducted research and development and test market
activities, funded the production of multiple sales videos of the Company's
expanded product lines for television and cable presentation, obtained
financing, hired personnel and developed consulting relationships for the period
April 18, 1995 to December 31, 1997. The Company will also be dependent upon its
ability to raise additional capital to complete its marketing program, acquiring
additional equipment, management talent, inventory and working capital to engage
in profitable business activity. Subsequent to December 31, 1997, the Company's
primary attention turned to routine, on-going activities and ceased to be a
development stage enterprise.

                                      F-14

<PAGE>

     Note 11 - Segment Information
     -----------------------------

     Management Policy in Identifying Reportable Segments
     ----------------------------------------------------

     The Company reportable business segments are strategic business units that
offer distinctive products and services that are marketed through different
channels. They are managed separately because of their unique technology,
marketing, and distribution requirements.

     Types of Products and Services
     ------------------------------

     The Company is an investment holding company that is comprised of six
subsidiaries: The Harvey Westbury Corp., Hardyston Distributors Inc., CT
Industries, Auxer Telecom Inc., Clifton Telecard Inc. and Universal Filtration
Industries, Inc. Harvey Westbury is a manufacturer and wholesaler of various
automotive, marine and aviation products. Hardyston Distributors is a Northern
New Jersey based automotive parts distributor. Auxer Telecom is a reseller of
telecommunications access services. CT Industries is a Northern New Jersey based
wholesale distributor of prepaid phone cards. Universal Filtration has in the
past manufactured and distributed filters used by the dry cleaning industry and
is currently inactive.

     Segment Profit or Loss
     ----------------------

     The Company's accounting policies for segments are the same as those
described in the summary of significant accounting policies. Management
evaluates segment performance based on segment profit or loss before income
taxes and nonrecurring gains and losses. Transfers between segments are
accounted for at market value. Operating expenses attached to a segment are
identified and allocated accordingly.

                                      F-15

<PAGE>

The Company's condensed consolidated balance sheet consists of the following
subsidiary components as of June 30, 2001:
<TABLE>
<CAPTION>
                                                                                                   Intercompany  Auxer Group, Inc.
                                                      Parent   Automotive Group    Telecom Group    Eliminations   Consolidated
                                                      ------   ----------------    -------------    ------------   ------------
Balance Sheet
<S>                                                  <C>            <C>               <C>                   <C>      <C>
Current Assets                                       $ 101,064      $ 1,194,618       $ 355,443.00          $ -      $ 1,651,125
Fixed Assets (net)                                      11,478           59,129            481,938            -          552,545
Other Assets                                         4,077,306            2,429             79,493   (3,982,834)         176,394
                                       -----------------------------------------------------------------------------------------
Total Assets                                         4,189,848        1,256,176            916,874   (3,982,834)       2,380,064
                                       =========================================================================================

Liabilities & Stockholders' Equity

Current Liabilities                                    365,470        2,687,714          2,322,059   (3,882,775)       1,492,468
Long Term liabilities                                  913,639                -                  -            -          913,639
Stockholders' Equity                                 2,910,739       (1,431,538)        (1,405,185)    (100,059)         (26,043)
                                       -----------------------------------------------------------------------------------------

Total liabilities and stockholders' equity           4,189,848        1,256,176            916,874   (3,982,834)       2,380,064
                                       =========================================================================================

The Company's condensed consolidated statement of operations for the six months
ended June 30, 2001:

Statement of operations

Revenues                                                 -              657,783            923,939            -        1,581,722
Costs of goods sold                                      -              428,479            953,983            -        1,382,462
                                       -----------------------------------------------------------------------------------------
Gross profit                                             -              229,304            (30,044)           -          199,260
Operating expenses                                   1,832,001          254,911            610,196            -        2,697,108
                                       -----------------------------------------------------------------------------------------
Income (loss) from operations                       (1,832,001)         (25,607)          (640,240)           -       (2,497,848)
Other income (expense):
Interest income                                            949                -              1,155            -            2,104
                                       -----------------------------------------------------------------------------------------
Income (loss) from continuing operations            (1,831,052)               -                  -                   (2,495,744)
Discontinued operations                                (75,224)               -                  -            -         (75,224)
                                       -----------------------------------------------------------------------------------------
Net Income (loss)                                   (1,906,276)         (25,607)          (639,085)           -      (2,570,968)
                                       =========================================================================================

The Company's condensed consolidated statement of operations for the six months
ended June 30, 2000:

Statement of operations

Revenues                                               -              1,050,918                  -            -        1,050,918
Costs of goods sold                                    -                705,452                  -            -          705,452
                                       -----------------------------------------------------------------------------------------
Gross profit                                           -                345,466                  -            -          345,466
Operating expenses                                     585,252          335,608                  -            -          920,860
                                       -----------------------------------------------------------------------------------------
Income (loss) from operations                         (585,252)           9,858                  -            -        (575,394)
Other income (expense)                                  (2,518)               -                  -            -          (2,518)
Interest Income                                        -                      -                  -            -                -
                                       -----------------------------------------------------------------------------------------
Net Income (loss) before extraordinary items          (587,770)           9,858                  -            -        (577,912)
                                       =========================================================================================

The Company's condensed consolidated statement of operations for the three
months ended June 30, 2001:

Statement of operations

Revenues                                               -                463,179            527,589            -          990,768
Costs of goods sold                                    -                311,503            517,552            -          829,055
                                       -----------------------------------------------------------------------------------------
Gross profit                                           -                151,676             10,037            -          161,713
Operating expenses                                     347,990          127,375            225,614            -          700,979
                                       -----------------------------------------------------------------------------------------
Income (loss) from operations                         (347,990)          24,301           (215,577)           -        (539,266)
Other income (expense):
Interest income                                            250                -                670            -              920
                                       -----------------------------------------------------------------------------------------
Income (loss) from continuing operations              (347,740)               -                  -                     (538,346)
Discontinued operations                                (75,224)               -                  -            -         (75,224)
                                       -----------------------------------------------------------------------------------------
Net Income (loss)                                     (422,964)          24,301           (214,907)           -        (613,570)
                                       =========================================================================================

The Company's condensed consolidated statement of operations for the three
months ended June 30, 2000:

Statement of operations

Revenues                                              -                 515,378                  -            -          515,378
Costs of goods sold                                   -                 341,247                  -            -          341,247
                                       -----------------------------------------------------------------------------------------
Gross profit                                          -                 174,131                  -            -          174,131
Operating expenses                                     471,035          184,178                  -            -          655,213
                                       -----------------------------------------------------------------------------------------
Income (loss) from operations                         (471,035)         (10,047)                 -            -         (481,082)
Other income (expense)                                -                       -                  -            -                -
Interest Income                                       -                       -                  -            -                -
                                       -----------------------------------------------------------------------------------------
Net Income (loss) before extraordinary items        $ (471,035)       $ (10,047)     $           -          $ -     $   (481,082)
                                       =========================================================================================
</TABLE>

                                      F-16

<PAGE>

         Note 12  Stock Option Plan

         The Company has a Stock Option Plan (Plan) under which selected
individuals may be granted options to purchase shares of the Company's
authorized but unissued common stock. The maximum numbers of shares available
for issuance under the Plan is 2 million shares. As of June 30, 2001 the maximum
number of shares available for future grants under the Plan is 0 shares. Under
the Plan, the option exercise price may be more, equal to or less than the fair
market value of the Company's common stock at the date of grant. Options
currently expire no later than 5 years from the grant date and are 100% vested.
Proceeds received by the Company from exercises of stock options are credited to
common stock and additional paid in capital. Additional information with respect
to the Plan's stock option activity is as follows:
<TABLE>
<CAPTION>
                                                          Number of         Weighted Average Exercise
                                                           Shares                    Price
<S>                                                        <C>                       <C>
         Outstanding at December 31, 2000                          0                     0
         Granted                                           2,000,000                    05
         Exercised                                                 0                     0
         Cancelled                                                 0                     0
                                                     ---------------                --------
         Outstanding at June 30, 2001                      2,000,000                 $0.05

         Options exercisable at

                  December 31, 2000                                0                     0
                                                         ===========               ========
         Options exercisable at
                  June 30, 2001                            2,000,000                 $0.05
                                                         ===========               ========
</TABLE>

         The following tables summarize information about stock options
         outstanding and exercisable at June 30, 2001:
<TABLE>
<CAPTION>
                            Stock Options Outstanding
                            -------------------------
Range of Exercise       Number of Share       Weighted Average           Weighted Average
Price                   Outstanding           Remaining Contractual      Exercise Price
                                              Life in Years
<S>                      <C>                         <C>                    <C>
$0.05                    2,000,000                   4.0                    $0.05
=====                    =========                 =======                  =====
</TABLE>

<TABLE>
<CAPTION>
                            Stock Options Exercisable
                            -------------------------
Range of Exercise       Number of Shares      Weighted Average
Price                   Outstanding           Exercise Price
<S>                     <C>                               <C>
$0.05                   2,000,000                         $0.05
=====                   =========                         =====
</TABLE>

     The Company accounts for its plan under APB Option No. 25 (Accounting for
Stock Issued to Employees). Accordingly, compensation expense is recognized in
the Company's financial statements when the exercise price of the Company's
employee stock options is less than the market price of the Company's common
stock on the date of grant. There were no compensation costs related to the
stock option plan recorded for the six months ended June 30, 2001 and June 30,
2000, respectively.

     The pro forma net income impact under Financial Accounting Standards Board
Statement No. 123 (Accounting for Stock-Based Compensation) is not material.

                                      F-17

<PAGE>

     Note 13 Stockholders Equity
     ---------------------------

     On January 2, 1999, the Company issued 1,500,000 shares and 1,250,000
shares of the Company's preferred stock valued at $.15 per share to Eugene
Chiaramonte, Jr. and Ronald Shaver respectively as repayment of loans in the
amount of $15,000, reimbursement of expenses of $12,500, and deferred
compensation of $208,500 and $173,750 respectively.

     The Preferred Stock is convertible, at the holder's option, at any time
into shares of the Company's Common Stock at a rate of ten shares of Common
Stock for each share of Preferred Stock.

     Note 14 - Disposal of Subsidiary
     --------------------------------

     On May 16, 2001, the Company entered into an stock agreement to sell
Clifton Telecard Inc., a wholly owned subsidiary. Accordingly, the operations of
the distribution division as well as the loss on the sale have been reported
separately as discontinued operations in the accompanying financial statements.

     Summarized results of operations for the subsidiary at June 30, 2001
consist of the following:
<TABLE>
<S>                                                  <C>
         Net Sales                                   $9,964,767
         Income from Discontinued Operations         $   72,533
</TABLE>

                                      F-18

<PAGE>

Item 2. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------

The following discussion should be read in conjunction with the consolidated
financial statements and notes. In addition to historical information, this
discussion and analysis contains forward-looking statements that involve risks,
uncertainties and assumptions, which could cause actual results to differ
materially from Management's expectations. Factors that could cause differences
include, but are not limited to, expected market demand for the Auxer Group's
products, fluctuations in pricing for products distributed by the Auxer Group
and products offered by competitors, as well as general conditions of the
telecommunications marketplace.

The Auxer Group is a holding company that has formed a  Telecommunications Group
and established two (2) subsidiaries,  CT Industries, Inc., a wholesale
distributor of prepaid phone cards and Auxer Telecom Inc., which provides
telecommunication services from telecommunications carriers to the
telecommunications industry. Additionally, Auxer owns an Automotive Group with
two (2) active subsidiaries: The Harvey Westbury Corporation Inc., and Hardyston
Distributors, Inc., doing business as The Mechanics Depot. Harvey Westbury
assembles and packages automotive accessories under the name, Easy Test, sells
engine treatment under the name, Formula 2000 Ultimate and sells waxes and
polishes under the name, Garry's Royal Satin to the automotive, marine and
aviation industries. Hardyston Distributors, Inc., doing business as The
Mechanics Depot, is a specialty distributor of automotive parts and accessories
to local mechanics, service stations and dealers.

Results of Operations for the Three Months Ended March 31, 2000 and 2001.

The Auxer Group had sales of $990,768 for the quarter ended June 30, 2001 as
compared to sales of $515,378 for the quarter ended June 30, 2000. The increase
in sales was attributed to the prepaid phone card sales. The Auxer Group had net
losses of $613,570 for the quarter ended June 30, 2001 as compared to net losses
of $481,082 for the quarter ended June 30, 2000. The increase in net losses was
primarily attributed to the Auxer Telecom operation in Los Angeles, California,
the sale of Clifton Telecard, Inc. and the development of the X-Factor product
line.

The Auxer Group had general and administrative expenses of $651,097 for the
quarter ended June 30, 2001 as compared to general and administrative expenses
of $644,735 for the quarter ended June 30, 2000. The increase in these expenses
was attributed to the additional general and administrative expenses related to
the telecom group, which includes Auxer Telecom, Inc. and CT Industries, Inc.
The Auxer Group had interest expenses of $15,282 for the quarter ended June 30,
2001 as compared to $5,667 for the quarter ended June 30, 2000. The increase in
these expenses was due to the interest expense related to the convertible note
financing in January 2001. A substantial part of our growth has been achieved
through acquisition within the telecommunications industry. Given the
acquisition and sale of Clifton Telecard, the results from operations from
period to period are not necessarily comparable.

<PAGE>

Our principle source of revenue has been the telecom group's prepaid phone
Cards and Harvey Westbury's Easy Test Line. The telecom group markets and
distributes branded prepaid phone cards produced by a variety of
telecommunications long distance carriers and resellers, as well as private
label proprietary prepaid phone cards produced for the Auxer Group by various
long distance carriers and/or resellers.

Prepaid phone cards are distributed through a vast network of retail outlets,
including convenience stores, newsstands, grocery stores and discount stores.
The retail outlets are serviced by independent distributors, which often
purchases large volumes of branded prepaid phone cards from the long distance
carrier or reseller and sells the cards in smaller quantities, together with
cards from other carriers and/or private label cards distributed by the telecom
group, to the independent distributor, for ultimate distribution to retailer
outlet.

Branded cards are purchased by the telecom group at a discount from the face
value of the card, and result to the distributor at a slightly lower discount.
The difference between the two discount rates, typically from 1% to 3%,
represents the growth margin retained by the telecom group. Purchases of branded
cards by the Auxer Group are made on varying terms, from C.O.D. to a net 21
basis, although the majority of the Auxer Group's purchases are made on credit
terms of 10 days or less. Sales by the telecom group of its product are
generally made on a net 30 basis.

Private label cards are generally designed and produced by the Auxer Group,
utilizing card numbers and PINs provided by the telecommunications' carrier or
reseller providing the long distance service for the card. The Auxer Group
incurs the upfront expense of printing the phone cards. However, the Auxer Group
does not pay the long distance carrier until it activates the cards, which
occurs upon the sale by the Auxer Group to the distributor. Accordingly, through
the use of private label cards, the Auxer Group's cost of inventory is
significantly reduced, as purchases are effectively made on an as-needed basis.

Our automotive sales of air conditioning products can be effected by the
intensity of the weather during the 2nd and 3rd quarter of the year.

Our subsidiary, Harvey Westbury signed a new credit facility agreement on July
11, 2000 with Merchant Financial Corporation and terminated its credit facility
agreement with Finova Capital, formerly United Credit Corp. The new credit
facility currently permits borrowings of up to $400,000 against a fixed
percentage of 75% of eligible accounts receivable and up to 40% of the eligible
inventory. The interest rate on the line of credit is basic interest on the
daily unpaid cash balances outstanding during each month at a rate equal to the
prime rate plus 5% per annum above the prime rate. The prime rate was effective
June 28, 2001. The credit facility agreement requires a commitment fee of 1% of
the maximum credit line per annum each anniversary date of the signing of the
agreement, July 11, 2000. The agreements were completed with an understanding
that the credit line would be increased to several million as needed. To date,
the Auxer Group has not increased the line of credit. As of the first quarter
2001, The Auxer Group and Harvey Westbury Corp. currently are not in compliance
with a covenant of the Merchant agreement which states that Harvey Westbury
shall at all times maintain the tangible net worth shall be at least $500,000 at
all times and The Auxer Group shall at all times maintain tangible net worth of
at least $400,000. By not being in compliance with this covenant, Merchant
Financial could terminate this agreement at any time and/or deny Harvey Westbury
funding based on terms of the agreement. Harvey Westbury and Merchant Financial
mutually agreed not to renew the agreement after July 11, 2001, and this could
prevent Harvey Westbury from receiving adequate funding to properly operate and
pay for product on a timely basis.

<PAGE>

Our ability to achieve profitability will depend, in part, on our ability to
successfully increase our revenue from our operating groups. We will require
additional funding through external sources to achieve profitability. There is
no assurance that we will be able to successfully raise the additional funding
or increase its revenue in order to achieve profitability.

On November 28, 2000, the Auxer Group unveiled its twelve month strategy. First,
the Auxer Group planeds to complete the transition of Clifton's traffic to Auxer
Telecom over the next 60 days. Auxer Telecom was able to transfer all cards by
the end of January 2001. The African Talk and Original phone cards remained with
their original carriers due to cost. Second, the Auxer Group expecteds to enter
into formal negotiations with at least one, and possibly two more acquisition
candidates in the telecommunications industry, which it intends to complete in
the first and second quarters of 2001. During the first and second quarters of
2001, the negotiations were postponed until the fall of 2001. Third, Auxer Group
planed to invest in several beta test programs being developed by Auxer Telecom
in the areas connected to broadband, virtual private networks, and ATM/prepaid
phone card combinations. These plans were put on hold in the second quarter
after management decided to restructure operations in Los Angeles. And lastly,
the Auxer Group believes it will be properly developed and in position to apply
for listing on the NASDAQ during the next fiscal year which is its final
objective for the next coming year. While the end of the year has not arrived,
management believes that this objective may be difficult to achieve by year end.
The Auxer Group's vision in the coming year is to have Auxer on a sales pace of
$180 Million per annum and assets under management in excess of $20 Million.
While the end of the year has not arrived, management believes that this
objective may be difficult to achieve by year end.

On April 14, 2001, the X-Factor debuted on NBC Sports in two thirty second
commercials, which telecast during the European Le Mans Series from England's
Donington Park circuit. The commercials were advertising the X-Factor Grand Prix
Sonoma, a North American Series race to be held on July 22, 2001.

On May 16, 2001 the Auxer Group sold 100% of the stock of Clifton Telecard, Inc.
to Kattosko Communications. For the consideration of the sale of shares, The
Auxer Group received value and ownership of the current bank account,
forgiveness of inter-company debts, a note payable in the amount of $100,000,
and rights to all trademarks containing service by Auxer Telecom, Inc., with the
exception of Original and African Voice. In addition, Mustafa Qattous resigned
as President of Operations and terminated his employment contract. Under the
terms of this termination, he retains the initial 1,000,000 shares of common
stock received, but forfeits any remaining options and/or cash compensation
outlined in his employment agreement.

The Auxer Group's decision to divest of Clifton Telecard was strategic in
nature. After reviewing the first quarter of 2001's financial results,
management believed that the growing sales of CT Industries, combined with its
stronger gross profit margins demonstrated that the Telecom Group could afford
to divest of Clifton Telecard and it would be in The Auxer Group's best
interests. During the second and third quarters of 2001, management expects the
impact of the sale of Clifton Telecard to be approximately $3.5 Million
reduction in revenues during the second quarter of 2001 and approximately $5 to
7 Million dollar reduction in revenue during the third quarter of 2001. Clifton
Telecard represented approximately 96 percent or $7 Million of The Auxer Group's
revenue base during the first quarter of 2001. Management believes that under
the terms of the agreement for sale of Clifton Telecard that CT Industries can
achieve similar revenues during the fourth quarter of 2001. These projections
are based on CT Industries current and potential client base and its plans to
develop and introduce new products. Management expects the impact of the Clifton
sale on expenses to be approximately $3.5 Million reduction in the second
quarter of 2001 and a $5 to 7 Million reduction in the third quarter of 2001.
Clifton Telecard represented approximately 97 percent or $6.9 Million of Auxer's
cost of goods and approximately 15 percent or $281,000 of Auxer's general and
administrative expenses. Management estimates the impact of the sale of Clfiton
on the assets of Auxer to be a reduction of approximately $800,000 and on the
liabilities of Auxer to be a reduction of approximately $2,000,000 based on the
terms of the sale agreement and the forgiveness of intercompany debts.

<PAGE>

On May 22, 2001 The Auxer Group announced revenues for the first quarter of 2001
of $7.4 Million, compared with revenues of $535,540 for the first quarter 2000.
The increase in revenues was primarily attributed to the prepaid phone card
business of CT Industries, Auxer Telecom and Clifton Telecard. The Auxer Group
also reported losses of $1,957,333 for the first quarter 2001. These losses were
primarily related to new product development, consulting, and one-time financing
related expenses. The revenues reported were based on financial review conducted
by The Auxer Group's auditors.

On June 12, 2001 The Auxer Group announced its decision to reduce overhead by
restructuring several areas of its operation. Since June, The Auxer Group has
reduced its staff in Los Angeles to five personnel and reduced its facility
costs by relocating its staff. Additionally, CT Industries has implemented a
direct sales and marketing approach in an effort to minimize its costs. Also,
the Automotive Group has trimmed its operations and delivery staff in an effort
to cover its overhead.

For the period ending December 31, 2000, we began accounting for our segmented
information by groups due to the formation and acquisition related to the
telecommunications industry. Effective since the 3rd quarter of 2000, we segment
our information by automotive and telecom groups. The financial condition and
results of operations for Auxer Telecom, Inc. began to be reflected in The Auxer
Group's financial statements effective August 24, 2000. The financial condition
and results of operations for Clifton Telecard, Inc. began to be reflected in
The Auxer Group's financial statements effective September 22, 2000.

Sources of Liquidity
--------------------

The Company's subsidiary, Harvey Westbury had a credit facility agreement with
Merchant Financial Corporation. The credit facility currently permits borrowings
of up to $400,000 against a fixed percentage of 75% of eligible accounts
receivable and up to 40% of the eligible inventory. The interest rate on the
line of credit is basic interest on the daily-unpaid cash balances outstanding
during each month at a rate equal to the prime rate plus 5% per annum above the
prime rate of 9.5%. The credit facility agreement requires a commitment fee of
1% of the maximum credit line per annum on each anniversary date of the signing
of the agreement, July 11, 2000. Harvey Westbury and Merchant mutually agreed
not to renew the agreement after July 11, 2001. In January 2001, the Company
refinanced its note payable to certain shareholders in the amount of $551,685
and borrowed an additional $360,000 as part of an issuance of 8% convertible
debentures, due on January 16, 2006, totaling $911,685. The notes are
convertible by the holders into shares of the Company's common stock at any time
at a conversion price per share equal to the lesser of seventy percent (70%)
(the "Discount Multiplier") of the Market Price and Seven and Seven-Tenths Cents
($0.077). In the event that the Registration Statement has not been declared
effective by the SEC within one hundred and twenty (120) days after the Closing
Date (the "Due Date"), then the Discount Multiplier shall decrease by two and
one-half percent (2.5%) effective as of the Due Date to sixty-seven and one-half
percent (67.5%) and shall further decrease by two and one-half percent (2.5%)
for each thirty-day period occurring after the Due Date that the Registration
Statement has not been declared effective by the SEC, to not less than fifty
percent (50%). The notes are redeemable at the option of the Company at 130% of
the principle amount plus accrued interest. The proceeds were primarily used for
general corporate purposes.

<PAGE>

For the six months ended June 30, 2001, the Company paid for operations by
raising $423,249 through common stock issuance and debt borrowings after
payments to short term debts. The Company had Notes Payable to shareholders of
$76,951, had other notes payable of $540,131, and notes payable convertible debt
of $911,685 on June 30, 2001. The Company had loans outstanding against its
credit line of $81,867 under a security agreement with Merchant Financial
Corporation to borrow money secured by the receivable evidenced by invoices of
Harvey Westbury Corp. The Company has provided guarantees of the repayment of
loans. Merchant Financial Corporation agreed to lend an amount equal to 75% of
the net value of all Harvey Westbury accounts. The Company issued common stock
of $933,100 to provide for services rendered and consulting requirements.

In comparison for the six months ended June 30, 2000, the Company paid for
operations by raising $420,550 through common stock issuance and debt borrowing
after payment to short term debts. The Company had Other Notes Payable of
$84,278 on June 30, 2000. The Company had loans outstanding against its credit
line of $64,203 under a security agreement with Finova Capital to borrow money
secured by the receivable evidenced by invoices of Harvey Westbury Corp. The
Company has provided guarantees of the repayment of loans. Finova agreed to lend
an amount equal to 75% of the net value of all Harvey Westbury accounts. The
Company issued common stock of $589,313 to provide for services rendered,
consulting requirements and operating and investment activities during the
quarter ended June 30, 2000.

ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB REFLECT MANAGEMENT'S
BEST JUDGEMENT BASED ON FACTORS CURRENTLY KNOWN AND INVOLVE RISKS AND
UNCERTAINIES. ACTUAL RESULTS MAY VARY MATERIALLY.

<PAGE>

                          PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

The Auxer Group has the following pending or threatened litigation:

Ross & Craig Solicitors v. Auxer Industries, Inc. - Superior Court of New
Jersey, Law Division, Passaic County - Index No. L1598-98, filed on February 10,
1998. This is a case brought by an English partnership against us. Ross & Craig
is requesting the sum of $46,666.23 plus interest accruing from 1997 for work,
labor and services rendered. In January 2001, the Ross & Craig Solicitors case
was settled and the parties signed a settlement agreement. The Auxer Group
agreed to pay the sum of $35,000 in 18 monthly installments with an initial
payment of $5,000 and 17 payments of $1,764.70 subsequently. Payments commenced
in February 2001 and will be completed in August 2002.

Eileen M. Huff, et. al. v. Harvey Westbury Corp. and Auxer Industries, Inc. -
Supreme Court of the State of New York, Suffolk County, Index No. 29090-97,
filed on November 24, 1997, and Suffolk County District Court, First District
Civil Court of New York, Index No. CEC67098, filed on November 24, 1997; and
Lorraine Duff v. Harvey Westbury & (Auxer) and Suffolk County District Court,
First District Civil Court of New York, Index No.CEC67-98, filed on November 11,
1997. These cases all involved the Auxer Group's purchase of Harvey Westbury.
They are about the "wrongful termination" of one employee, seeking damages of
$13,427.95, and the alleged non-payment of insurance premiums for another,
seeking damages of $175,000. The Auxer Group filed answers to all lawsuits. In
July 1999, the Lorraine Duff case was settled and the parties signed a
settlement agreement; the Stipulation of Settlement document does not disclose
the reason for settlement. The Auxer Group agreed to pay the sum of $5,000 in 10
monthly installments of $500 each. Payments commenced in August 1999 and
continued until May 2000. All payments have been made and this case is
completed. In August 2000 both cases involving Eileen M. Huff were settled and
the parties signed a settlement agreement; the Stipulation of Settlement
document does not disclose the reason for settlement. The Auxer Group agreed to
pay the sum of $15,000 in 13 monthly installments with an initial payment of
$3,000 and 12 payments of $1,000 subsequently. Payments commenced in September
2000 and will be completed in September 2001.

Interdynamics, Inc. v. Harvey Westbury Corp and The Auxer Group, Inc. - United
States District Court, Eastern District of New York, Case No. 00-CV-7115, filed
on November 29, 2000. This case is an action for patent infringement seeking
monetary damages and injunctive relief, and desires that the Court order an
accounting for damages, and that the Court award interest, costs, and attorneys'
fees. Interdynamics alleges that at least two of Harvey Westbury's air
conditioner retrofitting kits, models number RC88500 and RC88700, directly
infringe on Interdynamics U.S. Patent No. 6,089,032 , entitled "Method of
Retrofitting Air Conditioner and System Therefor." We have counterclaimed for
antitrust violations. On or about December 1999, plaintiff stated to customers
and potential customers of Harvey Westbury that Interdynamics was about to
commence litigation against Harvey Westbury for offering for sale and selling
Harvey Westbury's line of air conditioning recharge kits containing R134 and
that any company that would do business with Harvey Westbury would become
involved in that litigation. These statements were made with the intent to cause
the persons and business entities to whom such statements were made to cease
doing business with Harvey Westbury, or if they were not customers of Harvey
Westbury at that time to prevent such business entities from buying from Harvey
Westbury. Plaintiff Interdynamics, Inc. actions constitute a violation of
Section 2 of the Sherman Act, 15 U.S.C. Sec. 2, in that these actions constitute
an attempt to monopolize and monopolization of the market both regionally and
throughout the United State for R134 recharge and/or retrofitting kits and kit
components. The case is presently in the discovery phase. A motion for
preliminary injunctive relief was held in January 2001 and the Magistrate Judge
denied the Plaintiff's injunction in all respects. The Auxer Group intends to
vigorously defend this action and pursue its antitrust case against the
Plaintiff. In the event that a monetary judgment is eventually rendered against
the Auxer Group that judgment could be as high as 3 times the number of units
sold multiplied by the difference between the Auxer Group's selling price and
the price at which the Plaintiff could have sold its product but for the Auxer
Group's sales.

The Auxer Group is not currently aware of any other pending, past or present
litigation that would be considered to have a material effect on the Auxer
Group. The Auxer Group considers that any litigation under 10% of its current
assets is not material. There are no known bankruptcy or receivership issues
outstanding and has no known securities law violations. Additionally, the Auxer
Group has no known legal proceedings in which certain corporate insiders or
affiliates of the issuer are in a position that is adverse to the issuer.

<PAGE>

Item 2. Changes in Securities.   None

Item 3. Defaults Upon Senior Securities.  Not Applicable.

Item 4. Submission of Matters to a Vote of Security Holders.    None

Item 5. Other Information.

On May 16, 2001, we sold all of the issued and outstanding shares of Clifton
Telecard, Inc., our wholly owned subsidiary to Kattosko Communications, Inc.
("Kattosko"). Kattosko's sole shareholder is Mohd Qattous, the father of Mustafa
Qattous, the former President of Operations of Clifton Telecard, Inc. A Form 8-K
describing the transaction in detail filed on May 31, 2001.

Item 6. Exhibits and Reports of Form 8-K.

On May 31, 2001, a Form 8-K was filed regarding the sale of the issued and
outstanding shares of Clifton Telecard, Inc. On July 25, 2001, we filed an
amended Form 8-K regarding this transaction to include the required financial
information pursuant to SEC rules and regulations. See Item 5 above for details.

<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this 10-QSB report to be signed on
its behalf by the undersigned thereunto duly authorized.

                              THE AUXER GROUP, INC.
                              (Registrant)

Date: August 14, 2001        /s/Eugene Chiaramonte, Jr.
                            ---------------------------
                                Eugene Chiaramonte, Jr.
                                President, Chief Executive
                                Officer and Director