The site-selective modification of chitosan to form N-phthalolyl- (PhCh) and N-phthalolyl-3,6-di-O-acetyl chitosan (AcPhCh) derivatives was studied. It was determined that a preswelling of chitosan was required to carry out the phthaloylation reaction. furthermore, the PhCh and AcPhCh derivatives formed herein showed significant repeal unit substitution heterogeneity, which was unexpected based on previous literature reports. PhCh and AcPhCh were further investigated in regards to their formation of liquid crystalline phases. Optical techniques such as circular dichroism optical absorption spectroscopy, and polarized light microscopy were employed to study the critical concentration and the nature of the liquid crystalline ordering present in the above systems. It was determined that these derivatives formed lyotropic liquid crystal phases in a number of organic solvents including dimethyl sulfoxide (DMSO) and dioxane. The critical concentrations (in polymer weight fraction) at which liquid crystalline ordering was found to be present for PhCh in DMSO, AcPhCh in DMSO, and AcPhCh in dioxane were 0.25-0.27, 0.1, and 0.07, respectively. Therefore, lower polymer weight fractions were required for the formation of mesophases by AcPhCh relative to PhCh. The handedness of the cholesteric helical sense for AcPhCh was reversed from left- to right-handed when the solvent was changed from DMSO to dioxane. Also, acetylation on PhCh (forming AcPhCh) causes a reversal of the cholesteric helicoidal twist sense from left- to right-handed for lyotropic DMSO solutions.