A phage is a virus that parasitises bacteria; they have been a favourite lab device for years (get those bacteria!). However, the concept of using them as scaffolding for a combinatorial protein chemistry is relatively novel. Basically, it works like this:

1. Clone the gene into the virus.
2. Mutagenise the genes.
3. Allow the bacteria to express the gene.
4. Let the phage 'display' the protein on its coat.
5. Select for the best phage.
6. Extract gene and repeat.

The selection step depends on what the protein is for. Say it is a binding protein for sugar - then selection would be pouring the phage library through a sugar loaded column. The ones that stick are the best and are given tiny, tiny cigars.