Different subchannel computer codes have been successfully used for the thermal-hydraulic analysis of coolant flow in vertical fuel channels. None of these methods, however, is suitable for two-phase flow in horizontal fuel channels, such as those of the CANDU nuclear reactors, due to the lack of appropriate constitutive relationships that can correctly account for the gravity separation effects. A transverse vapor drift model that accounts for the combined effect of gravity separation and turbulent diffusion has been incorporated into the existing subchannel computer code SAGA. Although the basic structure of the code remains similar to SAGA III, some modifications in both the mathematical formulation and numerical solution have been incorporated. These modifications resulted in significant improvements in the code’s ability to model horizontal two-phase subchannel flow. The new version of the code was tested and found to be capable of simulating the complex exchange phenomenon between adjacent horizontal subchannels caused by the interaction of turbulent diffusion, pressure gradient, and gravity-induced cross flows. The code predictions were compared with experimental data obtained from two different sources and showed good agreement.