<PAGE>                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-KSB

(Mark One)
 X       Annual report under section 13 or 15(d) of the Securities Exchange Act
---      of 1934 for the fiscal year ended  December 31, 2000

         Transition report under section 13 or 15(d) of the Securities Exchange
---      Act of 1934 for the transition  period ended ______________

Commission File Number: 2-93277-D

                          MEDIZONE INTERNATIONAL, INC.
                 (Name of small business issuer in its charter)

         Nevada                                         87-0412648
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

144 Buena Vista, P.O. Box 742, Stinson Beach, California            94970
(Address of principal executive offices)                          (Zip code)

Issuer's telephone number (415) 868-0300

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  None

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Securities  Exchange  Act  during the past 12 months (or for
such shorter  period that Medizone was required to file such  reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of Company's knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. Yes __ No X

The issuer is in the  development  stage and had no revenues for its most recent
fiscal year.

The aggregate market value of voting common stock held by  non-affiliates of the
issuer  was  $27,259,536  on April 4, 2001  based on the  average  bid and asked
prices of such stock as reported in the OTC  Electronic  Bulletin  Board and the
"pink sheets" of the National Daily Quotation Bureau.

On April 4, 2001,  Medizone had  154,615,798  shares of common stock,  par value
$.001 per share issued and outstanding.


                     Transitional Small Business Disclosure
                               Format (Check one):
                                    Yes __   No X
                                                -


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<PAGE>


                                TABLE OF CONTENTS


PART I
                                                                           Page

Item 1.  Description of Business                                              1

Item 2.  Properties                                                          12

Item 3.  Legal Proceedings                                                   12

PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder
         Matters                                                             13

Item 6.  Management's Discussion and Analysis or Plan of Operation           14

Item 7.  Financial Statements                                                14

PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act                   14

Item 10. Executive Compensation                                              15

Item 11. Security Ownership of Certain Beneficial Owners and Management      15

Item 12. Certain Relationships and Related Transactions                      16

Item 13. Exhibits and Reports on Form 8-K                                    16

Signatures                                                                   20

Exhibits Index                                                               21

Financial Statements and Schedules                                           F-1





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<PAGE>

                                     PART I



Item 1.           Description of Business


General


         Medizone  International,   Inc.,  a  Nevada  corporation   ("Medizone")
organized  in 1986,  is a  development  stage  company.  To date  the  principal
business of Medizone has been limited to (i) seeking regulatory approval for its
drug,  a precise  mixture  of ozone and  oxygen  called  MEDIZONE(R)  (sometimes
referred to in this report as the "Drug"), and its process of inactivating lipid
enveloped  viruses for the intended purpose of  decontaminating  blood and blood
products and assisting in the treatment of certain diseases; and (ii) developing
or acquiring the related technology and equipment for the medical application of
its products,  including its drug  production and delivery system (the "Medizone
Technology").


         The Drug is  intended  to be used as a  therapeutic  drug in  humans to
inactivate  certain  viruses,  and thereby  afford a treatment for certain viral
diseases  including  Human  Immunodeficiency  Virus  (the  AIDS-related  virus),
Hepatitis B,  Hepatitis C,  Epstein-Barr,  herpes and  cytomegalovirus),  and to
decontaminate blood and blood products.


Patents


         Medizone owns two key patents.  The first is a United States  process
patent (U.S. Patent No. 4,632,980) entitled, "Ozone Decontamination of Blood and
Blood  Products"  ("Patent No. 1"). The second patent is a related United States
equipment  patent  (U.S.  Patent No.  5,052,382)  entitled  "Approaches  for the
Control Generation and Administration of Ozone" ("Patent No. 2").


         Patent No. 1, which  covers a procedure  for ozone  decontamination  of
blood and blood products through the treatment of blood and blood components, is
Medizone's  principal  asset.  It was  purchased  together  with rights to other
ozone-related inventions from Immunologics Limited Partnership,  L.P. ("ILP") in
1987, for 6,000,000  shares of common stock (the "Patent  Purchase  Agreement").
John M. Kells,  the general partner of ILP, was Chairman of Medizone's  Board of
Directors from November 1992 through September 1993.


         The Patent Purchase Agreement requires Medizone to pay to ILP an annual
royalty  equal to 3% of the net  receipts  (defined  as net  receipts  after all
credits,  returns  and  customary  deductions,  and  exclusive  of all taxes) of
Medizone received from the sale of any product,  device, or apparatus  embodying
Patent No. 1. The method  covered by Patent No. 1 is the  principal use of ozone
under  study  by  Medizone  and is the  method  incorporated  in its  regulatory
applications. In June 1990, pursuant to Medizone's request for re-examination of
Patent  No.  1, the U.S.  Patent  Office  issued a  re-examination  certificate,
confirming the  patentability of the claims covered by Patent No. 1. This patent
will expire in 2003, subject to extension based upon the length of time required
to bring it to commercial  fruition.  Medizone has been granted  foreign patents
based on Patent No. 1 in Canada, the European  Community,  Australia,  Malaysia,
Hong Kong and Japan.  Applications are pending in Singapore. The foreign patents
began to be issued in 1990 and will  expire in most cases 17 years  after  their
respective dates of issuance.


         Patent No. 2, which covers  apparatus for the  controlled  generation,
monitoring  and dosage of the Drug was  developed  by a  consultant  engineer to
Medizone and issued and assigned to Medizone in 1991. Patent No. 2 was developed
to  provide  the  physical  means to deploy  Patent  No. 1. The  foreign  patent
coverage of Patent No. 2 parallels the coverage of Patent No. 1.


         In late 1996,  Medizone  became aware that a United  States  patent had
been issued to a Canadian corporation,  which Medizone believed infringed on the
Medizone patents. Through its legal counsel,  Medizone took steps to protect its
patent rights and Medizone  believes that the  infringing  party has stopped its
infringing activities.


         On March 14, 2000,  Medizone was granted U.S. Patent No. 09/126,504 for
External  Application  of  Ozone/Oxygen  for  Pathogenic  Conditions.   Medizone
believes  that this patent will  strengthen  Medizone's  existing  patents as it
addresses advanced developments with ozone generating equipment.


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<PAGE>


         On May 24, 2000,  Medizone  received  recorded  assignment  of U.S.
Provisional Patent Application no. 60/206,660 for Method and Apparatus for Ozone
Decontamination of Biological Liquids. This application deals with protocols for
biological  liquid  decontamination  as  well  as  the  devices  for  conducting
decontamination.


Research and Development


         Medizone  does not own  laboratories  or  other  clinical  research  or
testing facilities.  Medizone's research and development activities to date have
been conducted under contract by outside laboratories and clinicians.  Gerard V.
Sunnen, MD directs Medizone's research and development activities. Dr. Sunnen is
a member of the Board of  Directors  and serves as  President  and  Director  of
Research of Medizone.


Pre-clinical Studies


         Pre-clinical  Studies  are  non-human  studies of the Drug and  related
equipment.  Since 1988,  Medizone has both sponsored and been the beneficiary of
research to (i) determine  whether the use of ozone,  either alone or with other
modalities,  is  efficacious  in the  treatment  of  certain  diseases  and (ii)
establish  additional  scientific  evidence  that ozone,  through the use of the
patents or  applications  of scientific  methodologies  of a similar  nature can
decontaminate  blood  or  lipid  enveloped  viruses  and  thereby  significantly
diminish the degree of transfusion related disease.


         Pre-clinical  projects  sponsored by Medizone  include:  (1) studies to
test ozone's ability to inactivate HIV, conducted at the State University of New
York  Health  Science  Center  at  Syracuse;  (2) a pilot  animal  study  of the
potential toxicity of ozone, conducted by the Arnold & Marie Schwartz College of
Pharmacy  and  Health  Science  at  Long  Island  University;  and  (3)  studies
investigating the effects of ozone/oxygen  admixtures on human peripheral blood,
including  whole  blood,  serum and plasma,  conducted  by the Blood Bank of Mt.
Sinai Medical Center, New York City.


         In 1990,  the  Canadian  Blood Forces  Program  (under the aegis of the
Canadian  Department  of Defense and  Agriculture  and the  Canadian  Red Cross)
requested  that Medizone add the Medizone  Technology  to the other  proprietary
technology  being  investigated as an experimental  arm of an ozone-based  blood
sterilization  investigative  program.  The program was an attempt to develop an
effective  technology  for  sterilizing  whole  blood and blood  products.  This
program,  which  was to study  the  Medizone  Technology  as it  relates  to the
inactivation of Simian  Immunodeficiency Virus ("SIV"),  included a live primate
model.  The  program  continued  until  1994,  completing  two out of the  three
proposed  stages,  when the funding of the  Canadian  Blood  Forces  Program was
discontinued.  Medizone's  management  learned  in late  1997  that the  program
suffered  difficulties  with the  ozone/bioserum  interface that was used in the
study,  which  resulted in an  inconsistent,  difficult to  accurately  measure,
dosage of ozone.  As a result,  from a regulatory  perspective the study yielded
results  that could not be used due to the  inability to  specifically  identify
dosage. From a practical standpoint,  Medizone views this study of the Drug as a
success,  in that the treated simians never became ill through the entire course
of the trial period, while the control group all died within a 14-day period.


Governmental Regulation


         The Drug, the Medizone  Technology  and related  products are regulated
under the Food, Drug and Cosmetic Act and related regulations (the "FDC Act") by
the Food and Drug  Administration  (the  "FDA").  The FDA  exercises  broad  and
extensive  authority in regulating  the  development,  production,  importation,
distribution and promotion of "new drug" products and "investigational  devices"
under the FDC Act and regulations.


         Because ozone  generation  for purposes of  interfacing  with blood and
blood  products is regarded as a new drug  delivery,  Medizone is precluded from
selling or  distributing  the Drug or the  Medizone  Technology  until after FDA
approval has been granted.  To obtain FDA approval  Medizone will be required to
submit medical and scientific  evidence  sufficient to demonstrate that the Drug
and the Medizone Technology have been successfully used in pre-clinical  studies
followed by well-controlled clinical studies using human volunteer subjects. The
FDA will not grant a new drug application  ("NDA") unless it contains sufficient
medical  evidence  and  data to  permit  a body  of  qualified  and  experienced
scientists  to conclude  that the new drug product is safe and effective for its
recommended  and proposed  medical  uses.  Historically,  the FDA has had a bias
against treating humans with ozone, citing issues of safety.


         To initiate  Phase I of human  clinical  studies  required as part of a
NDA, an applicant must submit to the FDA an application  for an  Investigational
New Drug Exemption ("IND"),  which contains adequate  information to satisfy the
FDA that human clinical studies can be conducted  without exposing the volunteer
human subjects to an unreasonable risk of illness or injury.  Medizone submitted
an IND  application to the FDA on October 6, 1985, and requested FDA approval to


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<PAGE>

commence human clinical  trials using  ozone-oxygen  to inactivate  HIV. The FDA
deemed the IND  application  to be incomplete  and required  Medizone to conduct
additional  animal  studies prior to commencing a large animal study followed by
human trials.  In September 1994, the FDA inactivated  Medizone's IND.  Medizone
has no present plans to commence a large animal study, which would require, as a
precursor,  additional small animal and laboratory work. Accordingly,  there can
be no assurance that Medizone's IND application will ever be re-opened. Until an
NDA has been granted to Medizone, it may not distribute ozone-generating devices
in the United States,  except to researchers who agree to follow FDA guidelines,
and provided the devices are labeled as "Investigational Devices."


         Because  ozone has been used to treat  humans in Europe for at least 30
years, the European Union (the "EU") is more accepting than the United States of
human clinical trials of ozone therapies.  Management  believes  Medizone should
pursue  foreign Phase I human toxicity  trials,  as well as early stage efficacy
trials.  The  results  anticipated  from the next  planned  blind Phase II human
safety and efficacy trials investigating  hepatitis C are expected to contribute
to satisfying  regulatory  requirements  in the United States,  Canada and other
countries.


         It is Medizone's  intention to pursue future trials in Canada and other
countries  as soon as funding  allows.  Medizone  believes  trials  successfully
completed in Canada  should be  acceptable to both the United States FDA and the
regulatory  agencies  of the  European  Union,  due to recent  harmonization  of
regulatory requirements between Health Canada and the FDA.


Clinical Studies


Human Pilot Trial - Hepatitis C


         Beginning in 1998 and concluding in 2000, Medizone  accumulated patient
data for 40  participants  in a  developmental  human pilot trial  investigating
ozone  treatment  of  hepatitis  C. This trial was  conducted  during the normal
course of practice by William Hitt, Ph.D., M.D., at his clinic, The William Hitt
Center, in Tijuana, Mexico. Dr. Hitt is a former member of the Medizone board of
directors.  While this trial was not  conducted  as a blind study as required by
the FDA and the results  can serve only as  anecdotal  information,  Medizone is
very encouraged by the results.


         In this  developmental  ozone trial,  patients were treated using major
autohemotherapy, a blood therapy treatment protocol, on an outpatient basis. The
average  treatment period was 30 days. Viral load testing  (detecting the levels
of the virus  present),  as well as  standardized  SGOT and SGPT  tests of liver
enzyme  levels were  conducted  before the start of the  treatment,  immediately
following treatment,  and six months after treatment without any further medical
intervention  during the  post-treatment  period.  No adverse  side effects were
observed or reported in any of the  participants.  SGOT and SGPT scores returned
to normal ranges and viral load reductions averaged 5 log or 99.9% reduction. In
the six-month  post-treatment follow up testing, 38 of the 40 patients tested at
inactive viral levels for hepatitis C virus, indicating the possibility that the
disease had been cleared by the ozone therapy they received. Two of the patients
had  increased  viral levels at the end of the treatment  test period;  however,
even  those  patients  enjoyed  significantly  reduced  viral load  levels  when
compared to pre-treatment test results.


Future Blind Trials - Hepatitis C


         Medizone  has  entered  into a  research  agreement  with the  national
research  center  of a  foreign  country  to  proceed  with a Phase  I/II  human
hepatitis C trial.  The protocols for the proposed testing are designed with the
intention of producing a peer-reviewed,  journal-published article on Medizone's
ozone  therapy for the  hepatitis C virus.  The trial will be blind and the data
produced will be shared by the country of origin and laboratories in Canada.  We
intend to pursue future  research  initiatives  in Canada in the near future and
this proposed trial is considered a major step toward that objective. There will
be substantial  collaborative efforts made to share information with appropriate
regulatory  bodies  in both  countries.  We will  not be  able  to  pursue  this
additional testing without additional financing.


Instrument Development


         Medizone  has  entered  into  an  agreement  with  Biozone  Corporation
("Biozone") under which Biozone was granted worldwide  manufacturing  rights for
Medizone Ozone Generating Equipment.  Medizone has exclusive worldwide marketing
rights for Biozone  manufactured  equipment intended for scientific research and
medical  applications,  to be marketed under the Medizone label. Biozone expects
to  relocate  to Nevada  in the  future as an  integrated  part of our  proposed


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manufacturing  facility  to be  located in Reno,  Nevada.  We have  agreed  with
Biozone   that  it  may  retain  the  right  to  market  its  other   industrial
applications,  such as  water  treatment  plants.  Once  Medizone  has  obtained
regulatory approvals for its technology and protocols and is in production mode,
Biozone  will  phase  out its other  business  to  concentrate  on its work with
Medizone.


International Activities


Medizone Canada Limited


         To maximize  research  opportunities  and the potential  market for its
products, Medizone intends to establish subsidiary or affiliated corporations in
other countries.  The organization of these  subsidiaries may initially  require
Medizone to incur  significant  expenses;  thereafter,  it is intended  that the
subsidiaries   would  be  responsible  for  organizing   research  programs  and
generating  possible  sources of financing,  from which  Medizone  would benefit
directly or indirectly.  It is  anticipated  that Medizone would also enter into
license agreements with all subsidiary companies.


         In June 1998,  Medizone sold its majority  interest in Medizone  Canada
Limited, a Utah corporation ("MCL") for $125,000 cash in a private  transaction.
Medizone  retained  ownership of all of the issued and outstanding  stock of MCL
Medizone  Canada,  Ltd.,  a  Canadian  corporation  ("MedCan").   MedCan  was  a
participant in the Canadian Blood Forces Program's SIV Study.


         The Canadian  government  requires that a Canadian Company must perform
research accepted under the auspices of Health Canada. Future research in Canada
will be pursued through MedCan.  Future staffing of MedCan will be with Canadian
citizens  and MedCan will be operated  from  Canada.  Medizone  also  intends to
establish a non-profit corporation to be owned by MedCan. The future business of
the  non-profit  will  be to aid the  economically  underdeveloped  third  world
countries in the  acquisition of Medizone  equipment,  training of doctors,  and
funding of programs for  hepatitis  and aids,  at greatly  discounted  prices in
those countries.


Medizone New Zealand Limited


         On June 22, 1995,  Medizone  entered  into a series of  contracts  that
resulted in the  formation of a joint  venture  subsidiary  incorporated  in New
Zealand,  Medizone New Zealand Limited ("MNZ"). MNZ is owned equally by Medizone
and Solwin Investments Limited ("Solwin"),  a New Zealand corporation,  which is
an affiliate of Richard G. Solomon ("Solomon"), a director of Medizone. MNZ is a
research and development stage company formed to obtain regulatory  approval for
the distribution of Medizone's  patented  technology in New Zealand,  Australia,
South East Asia and the South Pacific Islands.


         Under these agreements  Medizone purchased 100% of MNZ from Solomon and
sold 50% of MNZ to Solwin for $150,000,  of which $50,000 was loaned by Medizone
to MNZ on a demand  basis and repaid on October 26,  1995.  On October 26, 1995,
Medizone  loaned MNZ $50,000 on a demand basis,  which has not been repaid as of
the  date  of this  report.  Medizone  and MNZ  also  entered  into a  Licensing
Agreement  (the  "Licensing  Agreement")  and a Managing  Agent  Agreement  (the
"Managing Agent Agreement").


         Under the Licensing Agreement, Medizone granted an exclusive license to
MNZ for Patent No. 1 and Patent No. 2 and  Medizone's  trademark in New Zealand.
MNZ has agreed to apply for corresponding patent protection for these patents in
New  Zealand  and to use its best  effort to exploit  the rights  granted in the
Licensing  Agreement.  The Licensing  Agreement will terminate on the expiration
date of the last patent obtained in New Zealand, or, if no patents are obtained,
on June 22, 2010.  Medizone  will receive a guaranteed  minimum  royalty,  in an
amount to be agreed to by Medizone and MNZ,  commencing  in the third year after
all necessary regulatory approvals requisite to the license, use or distribution
of  Medizone's  proprietary  technology  have been  obtained in New Zealand.  If
Medizone and MNZ are unable to agree upon the amount of the  guaranteed  minimum
royalty, Medizone may terminate the Licensing Agreement. Commencing on the first
sale to a user by MNZ,  Medizone  will  receive a sales  royalty of MNZ's  gross
annual sales under the Licensing Agreement.


         Under the Managing Agent Agreement, MNZ will act as Medizone's agent to
find licensees of the Medizone Technology in Australia,  New Zealand,  the South
Pacific  Islands and Southeast Asia  (including the  Philippines,  Indonesia and
Vietnam).  Licensing fees will be divided between  Medizone and MNZ on a sliding
scale as set forth below:


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                                                          Medizone      MNZ


Initial license                                             50%         50%
Subsequent license fees up to $500,000                      50%         50%
Subsequent license fees between $500,000 and $750,000       75%         25%
Subsequent license fees in excess of $750,000               85%         15%


         MNZ and Medizone  will also divide any net  royalties  paid to Medizone
under any license  entered into pursuant to the Managing Agent  Agreement,  with
MNZ  receiving 10% and Medizone  receiving 90% of the net royalties  under those
licenses.


         The Managing Agent  Agreement  expires on the termination or expiration
of the last of the licenses  obtained  under the  agreement,  subject to earlier
termination by Medizone under certain circumstances.


Competition


         The  market in which  Medizone  intends  to do  business  is  extremely
competitive. Medizone is aware of several companies that have commenced research
into the use of ozone as a virucide in the treatment of HIV and other  diseases,
or that have  announced  the intention to do so. Other  companies,  foundations,
research   laboratories   or  institutions   may  also  be  conducting   similar
investigations  into the use of ozone as a virucide  or as a  decontaminant  for
blood or blood products.


Employees


         As of December 31, 2000, Medizone had four full time employees.


Status of Medizone's Research


Medizone has entered into a research  agreement  with a  multinational  research
partner interested in the possibility of viral deactivation of serum products by
using ozone.  Serum  products are used to make a media base that is then used in
the  manufacture  of  vaccines  for humans and  animals.  Under the terms of the
agreement, if the research proves successful, Medizone will enter into a license
agreement for the use of the technology in the viral  deactivation of commercial
vats of serum product.  That trial progressed  satisfactorily  through the first
stages and has since been halted  while  product  development  of the  gas-serum
interface  system  progresses to the next stage.  The interface  development  is
nearly complete and we expect that the veterinarian  research program will begin
again in the second half of 2001.  The next  hepatitis C trial is also scheduled
to start as soon as we complete our preparations.


Risk Factors


         Medizone's  business  is in the  development  stage and is subject to a
number of risks, including, but not limited to the following:


         We  are  a  development  stage  company  with  significant  accumulated
deficits  and we can expect our losses to continue for the  foreseeable  future.
Medizone is in the  development  stage and has not  generated  any revenues from
operations.  No assurance  can be given that its business  activities  will ever
generate revenues. As indicated in Medizone's financial statements, Medizone has
experienced substantial losses throughout its history. Losses can be expected to
continue for the foreseeable future.


         Our net operating  losses and our lack of revenues will require that we
finance our operations  through the sale of our  securities for the  foreseeable
future.  The sale of equity  securities or of securities that are convertible to
our  common  stock  will  result  in  possibly   significant   dilution  to  our
shareholders  and may adversely  affect the trading  prices of our common stock.
Medizone has funded its  development  activities to date primarily from the sale
of its common stock. Medizone will require substantial additional capital, which
will  most  likely  be  obtained  through  sales  of its  common  stock or other
securities,   to  continue  the  research   program   outlined  above,  pay  its
administrative   and  operating   expenses,   meet  its  filing  and  disclosure
obligations as a public company, and repay certain outstanding indebtedness.  No
assurances  can be  given  that  Medizone  will  be able  to  obtain  sufficient
additional  capital  for it to  continue  its  research  program,  or  that  any
additional financing will be sufficient to satisfy Medizone's administrative and
operating expenses for any significant period of time.


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         There is no established market for our technology and our technology is
not  immediately  marketable  in the United  States until we have  complied with
significant  governmental  regulations and testing. The failure to obtain market
approval  in the United  States  would  adversely  affect  our  future  business
prospects.  Medizone  believes that its proprietary  technology  offers benefits
that  are  not  currently  found  in  existing  purification,  disinfection  and
sterilization  systems. To date, Medizone has not brought to market any products
incorporating the technology.  Medizone has conducted only preliminary clinical,
engineering  and other tests to determine the feasibility of products that could
incorporate  the  technology,  although it believes that the  technology  may be
incorporated   into  other   products  and  devices.   Medizone  has   conducted
proof-of-concept  tests of the  technology,  but there can be no assurance  that
Medizone  will be able to  develop or market any  products,  or that  Medizone's
technology  may  be  successfully  incorporated  into  any  existing  or  future
products.


         Medizone is at an early stage of development. Medizone has not received
any required  governmental  approvals for the use or application of the Medizone
Technology in any medical or other  clinical  product or device,  and it has not
yet  realized  any revenues  from the sale or license of any  products.  Product
revenues may not be realized from the sale or licensing of any products (if they
are identified and developed) for several years, if at all. Many of the products
and  applications  Medizone is currently  evaluating  will  require  significant
research  and  development  efforts  prior  to any  commercial  use,  and  those
additional  research  and  development  efforts  may  include  pre-clinical  and
clinical testing, as well as a lengthy regulatory approval process. There can be
no assurance  Medizone's  research and  development  efforts will be successful,
that  Medizone's  potential  products will prove to be safe and effective in any
required  clinical trial or other  governmental  tests, or that any commercially
successful products will ultimately be developed by Medizone.


         Our future funding needs will require  significant  additional capital,
which is not  immediately  available  to us. If we fail to obtain  financing  at
levels  required  to pay for  the  testing  and  additional  development  of our
technology, we could be required to scale back or to even cease operations.  The
identification,  development and  commercialization  of Medizone's  products and
technology  will require a commitment of substantial  funds to conduct  research
and  development  activities,   including  possible  pre-clinical  and  clinical
studies,  to create and expand  distribution  and marketing  capabilities and to
acquire  and  expand   manufacturing   capacity.   Medizone's   actual   capital
requirements  will  depend on many  factors,  including  but not limited to, the
costs and timing of Medizone's research and development  activities,  the number
and type of  clinical  or other  tests  Medizone  may be  required to conduct in
seeking  approval of its  products  from  governmental  or other  agencies,  the
success of Medizone's  development  efforts, the cost and timing of establishing
or expanding Medizone's sales and marketing and/or manufacturing activities, the
extent to which Medizone's products (if any) gain market acceptance,  Medizone's
ability  to  establish  and  maintain  collaborative  relationships,   competing
technological   and   market   developments,    the   progress   of   Medizone's
commercialization  efforts  and  the  commercialization  efforts  of  Medizone's
marketing  partners,  the costs  involved  in  preparing,  filing,  prosecuting,
maintaining  and enforcing and  defending  patent claims and other  intellectual
property rights, developments related to regulatory issues, and other factors.


         To satisfy its capital  requirements,  Medizone may seek to raise funds
through  public or  private  financings,  collaborative  relationships  or other
arrangements.  Additional equity financing may be dilutive to stockholders,  and
debt financing,  if available,  may involve significant  restrictive  covenants.
Collaborative arrangements,  if necessary to raise additional funds, may require
Medizone to relinquish  its rights to certain of its  technologies,  products or
marketing  territories.  Medizone's  failure to raise  capital when needed could
also have a material adverse effect on Medizone's business,  financial condition
and results of operations. There can be no assurance that any such financing, if
required, will be available on terms satisfactory to Medizone, if at all.


         Our business is subject to  substantial  government  regulation,  which
causes us to incur significant expense and which results in substantial delay in
the  approval of our products  for  marketing in the United  States and in other
jurisdictions.  If we do not receive the required approvals, we will be required
to scale back or limit or even to cease operations.  The research,  development,
manufacture  and  marketing of  Medizone's  products  which  constitute  medical
devices or products will be  extensively  regulated by a number of  governmental
agencies,  including  the  United  States  Food & Drug  Administration.  The FDA
requires governmental clearance of all medical devices and drugs before they can
be marketed in the United  States.  Similar  approvals  are required  from other
regulatory bodies in virtually every foreign country.  The regulatory  processes
established by these government agencies are lengthy,  expensive,  and uncertain
and may  require  extensive  and  expensive  clinical  trials.  There  can be no
assurance that any future  products  developed by Medizone and which are subject
to the FDA's  authority  will prove to be safe and effective and meet all of the
applicable  regulatory  requirements  necessary  to  be  marketed.  The  results
Medizone  obtains from its testing  activities  could be  susceptible  to varied
interpretations,  which  could  delay,  limit  or  prevent  required  regulatory


                                       8

<PAGE>

approvals.  In addition,  Medizone may  encounter  delays or denials of approval
based on a number  of  factors,  including  future  legislation,  administrative
action or changes in FDA policy  made  during the period of product  development
and FDA  regulatory  review.  Medizone may encounter  similar  delays in foreign
countries.  Furthermore,  approval may entail  ongoing  requirements  for, among
other  things,  post-marketing  studies.  Even if a  product  developer  obtains
regulatory  approval, a marketed product, its manufacturer and its manufacturing
facility  are subject to  on-going  regulation  and  inspections.  Discovery  of
previously  unknown  problems  with a product,  manufacturer  or facility  could
result in FDA sanctions,  restrictions on a product or manufacturer, or an order
to withdraw and/or recall a specific product from the market.  There can also be
no  assurance  that  changes  in the  legal  or  regulatory  framework  or other
subsequent developments will not result in limitation,  suspension or revocation
of  regulatory  approvals  granted to Medizone.  Any such  events,  were they to
occur,  could have a material adverse effect on Medizone's  business,  financial
condition and results of operations.


         Medizone  may also be  required  to  comply  with FDA  regulations  for
manufacturing  practices,  which mandate  procedures  for extensive  control and
documentation  of product  design,  control and validation of the  manufacturing
process and overall product quality.  Foreign  regulatory  agencies have similar
manufacturing  standards. Any third parties manufacturing Medizone's products or
supplying materials or components for such products may also be subject to these
manufacturing practices and mandatory procedures. If Medizone, its management or
its  third  party  manufacturers  fail to  comply  with  applicable  regulations
regarding  these  manufacturing  practices,  it could be  subject to a number of
sanctions, including fines, injunctions, civil penalties, delays, suspensions or
withdrawals  of market  approval,  seizures  or  recalls of  product,  operating
restrictions and, in some cases, criminal prosecutions.


         Medizone's  products may also be subject to regulation,  inspection and
licensing by other governmental agencies, including the Environmental Protection
Agency,  state agencies similar to the FDA and EPA and the  Occupational  Health
and  Safety  Administration.  In  addition,  if  Medizone  engages  in  contract
sterilization services, Medizone's products and operations may be subject to the
infection control or other requirements of the Joint Commission on Accreditation
of Health Care  Organizations,  the Center for Disease Control,  the Association
for Advancement of Medical  Instrumentation and other federal and state agencies
that have  established  or maintain  testing  methods or  sterilization  process
monitoring.


         Although we are currently  conducting  clinical tests and trials of our
technology,  the  outcome of such tests and  trials is  uncertain  and cannot be
guaranteed.  If our  tests  and  trials  are  not  acceptable  to the  governing
authorities, we will not obtain the approvals required to market our products in
the  United  States and other  jurisdictions  where  such  trials are  required.
Certain of Medizone's products may constitute medical devices within the meaning
of the Food, Drug and Cosmetic Act and,  therefore,  may be subject to the FDA's
regulations governing medical devices. Products regulated as medical devices may
not be  commercially  distributed  in the United  States  unless  they have been
cleared or approved by the FDA, or unless they are  otherwise  exempted from the
FDA's regulations.  Currently,  there are two methods for obtaining FDA approval
or clearance of medical devices.  Devices deemed to pose less risk are placed in
class I (general  controls)  or class II  (general  and  special  controls)  and
qualify for 510(k) notification,  a procedure under ss.510(k) of the FDA Act. In
order for a device to qualify under that procedure, the manufacturer must, among
other things, establish that the product is substantially equivalent in intended
use, safety and  effectiveness  to another legally  marketed class I or class II
device or to a "pre-amendment" class III device for which the FDA has not called
for preliminary  market approval or PMA. Medical class III is the class reserved
for devices deemed by the FDA to pose the greatest risk.  Manufacturers of class
III devices  must file a PMA.  PMA  applications  generally  require a much more
complex  submission than a 510(k)  notification and typically  require a showing
that the device is safe and effective based on extensive and costly clinical and
other testing. There can be no assurance that any product developed by Medizone,
which is deemed to be a medical  device for FDA Act  purposes  will  qualify for
approval under the 510(k)  notification  process, or that any such products will
be deemed to be safe and effective if required to be qualified under a PMA.


         The time required to obtain FDA approval is uncertain,  and  frequently
takes  several  years or more,  if  approval  is ever  granted.  There can be no
assurance that any future products  developed or identified by Medizone alone or
in conjunction with others will prove to be safe and efficacious in any required
clinical trials, or that they will meet the applicable  regulatory  requirements
necessary for their marketing,  including the receipt of a marketing  clearance,
should  such be  required.  Further,  if  regulatory  approval  is granted  that
approval  would  generally be limited to the uses for which the product has been
demonstrated  through clinical studies and other means to be safe and effective.
Furthermore,  approval may entail ongoing  requirements for, among other things,
post-marketing  studies.  Even if  regulatory  approval  is  obtained a marketed
product,  its  manufacturer  and  its  manufacturing  facilities  and  pertinent
operations  are subject to extensive  regulation and periodic  inspections.  The


                                       9

<PAGE>

regulatory  requirements  pertinent to medical device  manufacturing and related
activities  are  stringently  applied  and  enforced  by  the  FDA  and  similar
governmental agencies in other countries.


         If Medizone is required to conduct  clinical or other testing or trials
of its  products,  any such  testing  will  need to be made in  compliance  with
regulations  promulgated by the FDA under the authority granted it under the FDA
Act. In other countries,  governmental agencies similar to the FDA also regulate
the sale of medical  devices and products,  generally in a manner similar to the
FDA's regulation of those products. Sales of any products to Europe also require
a "CE" mark,  which shows that the product has been  manufactured  in accordance
with  required  standards.  Medizone's  sterilization  technology  has not  been
approved for use in connection  with or as part of any device,  and there can be
no assurance  that Medizone  will not  encounter  problems in the conduct of any
clinical trials or tests it is required to complete which will cause the FDA, or
any other  regulatory  agencies to delay or suspend the tests or  otherwise  not
approve the sale of Medizone's  products.  If any of Medizone's  products  under
development  are not shown to be safe and  effective  in any  required  clinical
trials,  the resulting delays in developing other products or conducting related
pre-clinical  testing and clinical trials,  as well as the need for financing to
complete any such testing and trials,  could have a material  adverse  effect on
Medizone's business, financial condition and results of operations.


         We do not own our  manufacturing  capability  and  must  rely on  third
parties to manufacture the devices required for our technology. This arrangement
results in a certain  loss of control  over the  manufacturing  process  and may
result in problems relating to quality control and warranty issues.  Although we
plan to build or acquire our own  manufacturing  facility in the future, at this
time we have no  manufacturing  capability  or capacity to produce any  products
utilizing its sterilization technology, including any products to be used in any
required  clinical  or  other  tests.  Medizone  initially  intends  to  develop
relationships  with other  companies  to  manufacture  those  components  and/or
products,  with Medizone being primarily in the role of specification  developer
and final  assembly  manufacturer  for selected  products only. The two products
currently  being  developed  by  Medizone  have  never  been  manufactured  on a
commercial  scale and  there  can be no  assurance  that  such  products  can be
manufactured  at a cost or in  quantities  necessary  to make them  commercially
viable.  Any delay in  availability  of  products  may  result in a delay in the
submission  of  products  for  any  required   regulatory   approval  or  market
introduction,  subsequent  sales of such  products,  which could have a material
adverse effect on Medizone's and business,  financial  condition,  or results of
operations.  Medizone's  manufacturing  processes may be labor intensive and, if
so,  significant  increases in production volume would likely require changes in
both product and process design in order to facilitate  increased  automation of
Medizone's then-current production processes. There can be no assurance that any
such  changes in products or processes or efforts to automate all or any portion
of Medizone's manufacturing processes would be successful, or that manufacturing
or quality  problems  will not arise as  Medizone  initiates  production  of any
products it might develop.


         In addition,  some or all of Medizone's potential products, or products
in  which  Medizone's  sterilization  technology  may  be  incorporated,  may be
required to be manufactured in accordance with current FDA or other governmental
agency manufacturing regulations.  If the manufacturing facilities cannot pass a
plant  inspection  by the FDA, the  manufacturer's  ability to  manufacture  the
products  will be adversely  affected.  There can be no  assurance  Medizone can
successfully acquire  manufacturing  capacity on a profitable basis, or contract
with another party on terms acceptable to Medizone, if at all.


         Our  reliance  on  patented  technology  may  limit  the  scope  of our
protection  and may  increase  the cost of doing  business if we are required to
enforce our rights under existing and future  patents.  Medizone's  success will
depend,  in large part, on its ability to obtain and enforce  patents,  maintain
its trade secrets and operate without  infringing on the  proprietary  rights of
others,  both in the United States and in other countries.  The patent positions
of  companies  can be  uncertain  to some extent and involve  complex  legal and
factual  questions,  and,  therefore,  the  scope and  enforceability  of claims
allowed in patents are not  systematically  predictable with absolute  accuracy.
Medizone's  license  rights  depend  in part  upon  the  breadth  and  scope  of
protection provided by the patents and the validity of the patents.  Any failure
to maintain the issued  patents  could  adversely  affect  Medizone's  business.
Medizone intends to file additional patent  applications (both United States and
foreign),  when appropriate,  relating to its technologies,  improvements to its
technologies  and for specific  products it develops.  There can be no assurance
that any issued patents or pending patent  applications  of Medizone will not be
challenged, invalidated or circumvented. There can also be no assurance that the
rights granted  thereunder  will provide  proprietary  protection or competitive
advantages to Medizone.


         The  commercial  success of  Medizone  will also  depend,  in part,  on
Medizone  not  infringing  patents  issued  to  others  and  not  breaching  any
technology licenses upon which Medizone's products and services are based. It is


                                       10

<PAGE>

uncertain  whether any third party  patents will  require  Medizone to alter its
products or processes, obtain licenses or cease certain activities. In addition,
if patents have been issued to others,  which contain competitive or conflicting
claims and such claims are  ultimately  determined to be valid,  Medizone may be
required to obtain licenses to those patents or to develop or obtain alternative
technology.  If any licenses are  required,  there can be no assurance  Medizone
will be able to obtain any such licenses on commercially  favorable terms, if at
all. Medizone's breach of an existing license or its failure to obtain a license
to any technology that it may require in order to commercialize its products may
have a material adverse impact on Medizone's business, results of operations and
financial  condition.  Further,  litigation,  which could result in  substantial
costs to Medizone,  may also be necessary to enforce patents  licensed or issued
to Medizone  or to  determine  the scope or validity of third party  proprietary
rights.  If competitors of Medizone prepare and file patent  applications in the
United States that claim technology also claimed by Medizone,  Medizone may have
to  participate  in  interference  proceedings  declared by the U.S.  Patent and
Trademark  Office to  determine  priority of  invention,  which could  result in
substantial  cost to  Medizone,  even if the  eventual  outcome is  favorable to
Medizone.  An adverse outcome could subject Medizone to significant  liabilities
to third-parties,  require disputed rights to be licensed from  third-parties or
require Medizone to cease using such technology.


         Medizone also relies on secrecy to protect  portions of its  technology
for which patent protection has not yet been pursued or which is not believed to
be  appropriate  or obtainable in addition to any  information of a confidential
and proprietary  nature  relating to Medizone,  including but not limited to its
know-how, trade secrets, methods of operation, names and information relating to
Medizone's  vendors  or  suppliers  and  customer  names  and  addresses.   This
technology  includes  technology  that  Medizone  acquired  from two  parties in
connection  with,  but separate from, the patented  technology  from Biozone,  a
portion of which  Medizone has acquired and a portion of which it has obtained a
license to use. There can be no assurance that  Medizone's  undivided  ownership
and/or license rights in such technology are enforceable.


         Medizone   intends  to  protect  this   unpatentable   and   unpatented
proprietary  technology and  processes,  in addition to other  confidential  and
proprietary  information  in  part,  by  confidentiality   agreements  with  its
employees,  collaborative partners,  consultants and certain contractors.  There
can be no assurance that these  agreements  will not be breached,  that Medizone
will have adequate remedies for any breach, whether Medizone's trade secrets and
other  confidential and proprietary  information will not otherwise become known
or be independently discovered or reverse-engineered by competitors.


         We face  competition  in  some  of our  markets  from  well-funded  and
significantly larger companies, some of which enjoy significant name recognition
or market  share in the  pharmaceutical  and related  industries.  We may not be
successful  in our  efforts to compete  with  these  companies.  There can be no
assurance  Medizone's   technology  will  have  advantages  over  those  of  its
competitors,  which will be significant  enough to cause users to adopt its use.
The products in which  Medizone's  technology may be  incorporated  will compete
with products currently marketed, and competition from such products is expected
to increase.


         Most of the companies  currently producing products or using techniques
have  significantly  greater  financial  resources and expertise in research and
development,  marketing,  manufacturing,   pre-clinical  and  clinical  testing,
obtaining  regulatory  approvals and marketing than Medizone.  Smaller companies
may also prove to be significant competitors, particularly through collaborative
arrangements  with large  third  parties.  Academic  institutions,  governmental
agencies and public and private research  organizations  also conduct  research,
seek patent protection and establish collaborative  arrangements for product and
clinical  development and marketing.  Many of these competitors have products or
techniques  approved or in development and operate large,  well-funded  research
and development programs.  Moreover,  these companies and institutions may be in
the process of  developing  technology  that could be developed  more quickly or
ultimately proved safer or more effective than Medizone's technology.


         Medizone  faces  competition  based on product  efficacy,  safety,  the
timing and scope of regulatory approvals,  availability of supply, marketing and
sales capability,  reimbursement coverage,  price and patent position. There can
be no assurance  Medizone's  competitors will not develop more effective or more
affordable   products,   or  achieve   earlier  patent   protection  or  product
commercialization than Medizone.


         Our business and our proposed business will subject us to the potential
for  product  liability  claims if people  using our  technology  suffer  bodily
injury,  including death.  Although we intend to insure for this liability,  the
claims  might in some cases  exceed the amount of coverage  available to us. The
testing,  marketing and sale of medical or clinical  products and other products
that may utilize Medizone's technology involve unavoidable risks. The use of any



                                       11
<PAGE>

of  Medizone's  potential  products in clinical or other tests or as a result of
the sale of its products,  or the use of its technology in products,  may expose
Medizone to potential  liability  resulting from the use of such products.  Such
liability may result from claims made  directly from  consumers or by regulatory
agencies,  companies or others selling such products.  Medizone currently has no
clinical trial or product liability insurance coverage,  although it anticipates
obtaining and maintaining  appropriate  insurance  coverage as clinical or other
development  of its product  candidates  progresses and if and when its products
are ready to be commercialized.  There can be no assurance Medizone will be able
to obtain such insurance or, if it obtains such  insurance,  that such insurance
can be  acquired  at a  reasonable  cost or in  sufficient  amounts  to  protect
Medizone  against such  liability.  The obligation to pay any product  liability
claim in excess of whatever insurance Medizone is able to acquire, or the recall
of any of its  products (or the products  incorporating  Medizone's  technology)
could have a material adverse effect on Medizone's business, financial condition
and future prospects.


         Our  business  activities  may involve the use and storage of hazardous
substances  that  are  subject  to  government   restrictions   and  regulation,
increasing  our  potential  liability  to  third  parties  and the cost of doing
business in order to comply with applicable regulations. Medizone's research and
development  activities,  and the  application  of  Medizone's  technology,  may
involve  the  controlled  use  of  materials,   substances  or  electro-magnetic
radiation that may, if used or employed  improperly,  prove hazardous.  Medizone
believes,  however,  that its technology  employs such potentially  hazardous or
toxic materials and substances in a manner that minimizes their adverse effects.
Further,   where  such  hazards  are  employed,   Medizone  intends  to  utilize
appropriate detection equipment and take appropriate  countermeasures in design,
or in the test lab environment.


         We have only a limited  staff and if we are to succeed in  implementing
our business plan we will need to engage and retain trained and qualified staff.
There is no assurance that we will succeed in attracting the personnel needed to
meet our needs. Medizone is dependent on the principal members of its scientific
and management staff. In addition,  Medizone  anticipates that it will rely upon
consultants   and  advisors  to  assist  it  in  formulating  its  research  and
development  strategies  and  operations.  Retaining  and  attracting  qualified
personnel,  consultants and advisors will be critical to Medizone's  success. In
order to pursue its product  development and marketing  plans,  Medizone will be
required to hire additional qualified scientific personnel, as well as personnel
with expertise in clinical testing,  governmental regulation,  manufacturing and
marketing.  Expansion of product  development and marketing are also expected to
require the addition of management  personnel and the  development of additional
expertise by existing  management  personnel.  Medizone  faces  competition  for
qualified individuals from numerous medical and clinical companies, universities
and other research institutions. There can be no assurance Medizone will be able
to attract and retain such individuals on acceptable terms, when needed,  and to
the degree required.


         Medizone  anticipates  that any clinical  development or other approval
tests in which it participates will be augmented by agreements with universities
and/or medical  institutions  or other  personnel.  It is likely that Medizone's
academic collaborators will not be employees of Medizone. As a result,  Medizone
will have limited control over their activities and can expect that only limited
amounts of their time will be dedicated  to  Medizone's  activities.  Medizone's
academic  collaborators may have relationships  with other commercial  entities,
some of which could compete with Medizone.


         It is not  possible  to  predict  the  impact  that  future  government
regulatory  activity might have on our business and the cost of compliance  with
future  regulatory  schemes  may  adversely  affect our  results of  operations.
Medizone  currently  anticipates that one or more of its potential  products may
constitute  medical products.  Recently,  a series of legislative and regulatory
proposals has been  initiated  with the aim of changing the United States health
care system.  While  Medizone  cannot  predict  whether any such  legislative or
regulatory  proposals will be adopted,  or the effect such proposals may have on
its business if they are adopted,  the pendency of such  proposals  could have a
material adverse effect on Medizone's ability to raise capital, and the adoption
of such proposals could have a material  adverse effect on Medizone's  business,
financial condition and results of operations.  Furthermore,  Medizone's ability
to develop,  identify or commercialize  its potential  product  portfolio (which
includes  medical and clinical  applications)  may be adversely  affected to the
extent  that such  proposals  have a material  adverse  effect on the  business,
financial  condition and  profitability  of other companies that are prospective
collaborators for certain of Medizone's proposed products.


         You should consider this cautionary warning concerning  forward-looking
statements  in  this  report.  Certain  statements  in  this  report  constitute
"forward-looking  statements"  within the  meaning of the rules and  regulations
promulgated  by the  Securities and Exchange  Commission.  Such  forward-looking
statements  involve  known and unknown  risks,  uncertainties  and other factors
which may cause the actual results,  performance or achievements of Medizone, or



                                       12
<PAGE>

industry  results,   to  be  materially   different  from  any  future  results,
performance  or  achievements  expressed  or  implied  by  such  forward-looking
statements.  These risks,  uncertainties and other factors include,  among other
things,  Medizone's  unprofitability  and  the  continuing  uncertainty  of  its
profitability,  Medizone's  ability  to  develop  and  introduce  new  products,
Medizone's lack of sales, marketing and distribution  experience and anticipated
dependence  on third  parties  for  such  matters,  the  risks  associated  with
obtaining  governmental approval of Medizone's products,  the highly competitive
industry  in  which   Medizone   intends  to  operate  and  the  rapid  pace  of
technological  change within those  industries,  the  uncertainty  of patent and
proprietary  technology  protection and  Medizone's  reliance on such patent and
proprietary  technology  (including  reliance on technology  licensed from third
parties),  changes in or failure to comply  with  governmental  regulation,  the
uncertainty of third party  reimbursement  for Medizone's  products,  Medizone's
dependence on key employees,  general economic and business conditions and other
factors referenced above.


Item 2.           Properties


         Medizone's  offices are located at 144 Buena Vista Ave., Stinson Beach,
California.  The offices are located  temporarily in the home of Medizone's CEO,
Edwin Marshall.  When financial resources permit,  Medizone intends to remain in
the San Francisco Bay Area and lease office space that will allow for additional
staffing.  Medizone pays $100 a month for a storage area for Medizone's archives
and pays or reimburses  all telephone  and related  expenses  incurred by or for
Medizone.


Item 3.           Legal Proceedings


         None.


                                     Part II


Item 5.           Market for Registrant's Common Equity and Related Stockholder
                  Matters


         Medizone's shares are traded in the over-the-counter market, with price
quotes  listed on the OTC  Electronic  Bulletin  Board under the trading  symbol
"MZEI," and in the "pink sheets" published by the National Quotation Bureau.


         The following table summarizes data from the National Quotation Bureau,
indicating  the high and low bid prices for a share of  Medizone's  common stock
during each of the four calendar  quarters of fiscal 2000 and 1999. These prices
reflect inter-dealer prices without retail markup,  markdown or commission,  are
not  necessarily  representative  of  actual  transactions,  or of the  value of
Medizone's securities, and are, in all likelihood, not based upon any recognized
criteria of securities valuation as used in the investment banking community.


                                                                Bid Price


                  Year              Calendar Period           High     Low

                  2000              First Quarter             $0.80    $0.16
                                    Second Quarter            $0.66    $0.27
                                    Third Quarter             $0.52    $0.30
                                    Fourth Quarter            $0.41    $0.14

                  1999              First Quarter             $0.10    $0.07
                                    Second Quarter            $0.17    $0.07
                                    Third Quarter             $0.20    $0.13
                                    Fourth Quarter            $0.13    $0.08


         As of April 4, 2001, there were  approximately  3,839 holders of record
of Medizone's common stock, and approximately 4,511 beneficial owners.


         Medizone has never paid cash dividends on its common stock.  Payment of
cash  dividends is subject to the  discretion  of the Board of Directors  and is
dependent upon various factors, including Medizone's earnings, capital needs and
general financial  condition.  To date Medizone has had no revenues or earnings.
Medizone  does not  believe  that it has any  immediate  prospect  of  earnings.
However,  Medizone  anticipates that in the foreseeable future, it will follow a
policy of retaining earnings, if any, to finance research and development.



                                       13
<PAGE>

Item 6.           Management's Discussion and Analysis or Plan of Operation


Results of Operations


         From its  inception in January  1986,  Medizone has been a  development
stage  company  primarily  engaged in research  into the medical  uses of ozone.
Medizone has not  generated,  and cannot  predict  when or if it will  generate,
revenues or sufficient cash flow to fund its continuing operations.


         Medizone  has had no  sales.  In 1999,  Medizone  had no  revenues.  In
January  2000,   Medizone  received  payment  of  $415,869  under  an  order  of
restitution entered against its former President and CEO, Joseph Latino.


         The company  spent  $170,000  for  research  and  development  in 2000,
compared  to  $75,000 in 1999.  Since  inception  Medizone  has spent a total of
$2,577,853 for research and development.


         General and administrative  expenses were $787,610 in 2000, compared to
$198,308 in 1999. These expenses include  professional fees, payroll,  insurance
costs and travel expenses.


         Notes payable totaled  $280,491 in 2000,  compared to $280,491  in1999.
Interest  expense on these  obligations  totaled  $22,439 in 2000,  compared  to
$22,439 in 1999.


Liquidity and Capital Resources


         At December 31,  2000,  Medizone had a working  capital  deficiency  of
$989,548  and a  stockholders'  deficiency  of  $974,571  compared  to a working
capital  deficiency of $1,198,518 and stockholders'  deficiency of $1,192,850 in
1999.


         Medizone  will continue to require  additional  funding to enable it to
fund  research  necessary to make the  appropriate  regulatory  application  and
continue  operations.  It is expected  that these funds will be generated by the
sale of Medizone's securities.


Recent Developments

         Subsequent to the year-end,  we funded  operations  through the sale of
securities as follows.

         On February  16,  2001,  we sold  500,000  shares of common stock to an
accredited  investor  at a price of  $0.20  per  share,  or  gross  proceeds  of
$100,000.  In connection with this sale, we also issued to the investor warrants
to  purchase an  additional  1,000,000  shares of stock at $0.20 per share.  The
warrants expire in two years.

On March 21,  2001,  we sold  200,000  shares of common  stock to an  accredited
investor at $0.15 per share,  or gross proceeds of $30,000.  We also granted the
investor  warrants  to  purchase  400,000  shares of stock at $0.15  per  share,
exercisable over a two-year term.







                                       14
<PAGE>




                                    Part III


Item 9.           Directors and Executive  Officers,  Promoters and Control
Persons;  Compliance with Section 16(a) of the Exchange Act


         The following table contains  information  concerning the directors and
executive officers of Medizone as of March 30, 2001.


Name                       Age      Position


Edwin G. Marshall          58        Chairman of the Board, CEO


Gerard V. Sunnen           58        Director, President


Richard G. Solomon         58       Director


Jill C. Marshall           49       Chief Operating Officer, Corporate Secretary


Kevin R. Andersen          49        Chief Financial Officer


         Edwin  G.  Marshall  became  Chairman  of the  Board & Chief  Executive
Officer in April 1998 and has been with Medizone since June 1997.  Mr.  Marshall
attended  Santa Rosa  Junior  College and the  College of Marin,  studying  fire
science and business  administration.  From 1964 to 1978, Mr. Marshall worked in
the fire service in a city with a major  chemical  industrial  complex,  leaving
with the rank of Captain.  A private investor since 1973, he went to work in the
real estate business in 1978. From 1978 until 1995, Mr. Marshall pursued various
business interests in the ownership of a real estate brokerage, a vacuum forming
business in the plastics industry,  an industrial computer controls company, and
an automobile and truck  dealership.  Since 1992 he has  concentrated on his own
investments,  and since 1997 devoted substantially all of his time to management
responsibilities with Medizone.


         Gerard V.  Sunnen,  M.D.  became a Director  of  Medizone in June 1997,
Director of Research in 1997 and  President in 1998.  He graduated  from Rutgers
University  in 1963 and from the medical  school of the State  University of New
York,  Downstate,  in 1967. Dr. Sunnen has practiced  psychiatric medicine since
his  graduation  from medical school and has taught  clinical  psychiatry at New
York University Medical Center since 1977, where he is now an Associate Clinical
Professor of Psychiatry.  He is currently a consultant to several  organizations
and  companies,  including the  Institute for Behavior  Therapy and the Training
Institute  for Mental  Health  Practitioners  in New York. He is a member of the
American Psychiatric Association, the American Society of Clinical Hypnosis, the
International  Association  of  Emergency  Psychiatry,  of which he is  Honorary
President,  and the World  Psychiatric  Association,  where he is currently Vice
President of the Section for Emergency Psychiatry.  He received the Chevalier de
l'Ordre du Merite from the French  government  in 1990 for his work in assisting
members of the French community in New York. Dr. Sunnen has written and lectured
extensively on psychiatric  medicine and medical  hypnosis.  Dr. Sunnen has also
written on the medical applications of ozone.


         Richard  Garrett  Solomon,  Director and Executive  Officer of Medizone
New Zealand Limited, a partially owned subsidiary of Medizone. Mr. Solomon first
invested  in  Medizone in 1992.  In 1995,  Medizone  New Zealand was formed as a
50/50-owned  joint venture owned by Mr.  Solomon and Medizone.  Between  January
1996  and  February  1997,  Mr.  Solomon  was a  director  of  Medizone.  He was
reappointed  to the board of directors to replace Dr.  William Hitt in May 2000.
Mr. Solomon  received a Bachelor of Commerce  (University of Otago),  Diploma of
Business and Industrial  Administration  (University of Auckland),  and he is an
Associate  Chartered  Accountant.  Mr. Solomon's career has been in business and
investment.  For 20 years he developed and operated a private hospital operating
company,  Haven Care Hospitals Limited.  He was a long-standing board member and
president of the New Zealand  Hospitals  Association and he was  instrumental in
the establishment of the New Zealand Council of Healthcare Standards, Inc.


         Jill C. Marshall,  NMD has been the Chief Operating Officer,  Corporate
Secretary,  and Director of Investor Relations of Medizone since April 1998. Dr.
Marshall is the recipient of a Doctor of  Naturopathic  Medicine degree from The
Southern  College of  Naturopathic  Medicine  and a Bachelor of Arts degree from
California  State  University  at Long Beach  majoring in  Sociology  and Health
Education. She brings a successful background in Naturopathic healing, teaching,
sales  training and  marketing to Medizone with 20 years  experience  working in



                                       15
<PAGE>

corporate  environments.  Dr.  Marshall's  previous sales and marketing  clients
include:  Foundation  Health,  Plus Financial,  Principal  Financial Group, Paul
Revere Companies, Discovery Toys, Lotus Development, Pacific Bell, PG&E and Blue
Shield of California. Dr. Marshall is the wife of Ed Marshall, Medizone's CEO.


         Kevin R. Andersen,  CPA, MS, was appointed Chief  Financial  Officer in
November  1998. Mr.  Andersen is a partner in Andersen,  Andersen & Strong L.C.,
Certified Public  Accountants,  who previously served as Medizone's auditors for
the past four years  ended  December  31,  1997.  Mr.  Andersen  has a Master of
Science in  Taxation  (graduating  Phi Kappa  Phi) from UNLV and a  Bachelor  of
Science in Accountancy from the University of Utah. His professional  experience
includes  work as a Senior Tax Manager  with the  national  accountancy  firm of
Laventhol  &  Horwath,  working  in their  Las Vegas  office  and  National  Tax
Department in Washington, D.C.


Item 10.          Executive Compensation

     The following  Summary  Compensation  Table shows  compensation paid by the
Company to the Chief  Executive  Officer of the  Company  for each of the past 2
years. No officer of the Company was paid more than $100,000 during 1999.

                           Summary Compensation Table

                                                                  Long-Term
                                                                  Compensation
                                      Annual Compensation             Awards
Name and Principal
Position                   Year     Salary           Bonus        Options (#)

Edwin G. Marshall         2000     $99,166 (1)       $    0          0
Chairman and CEO          1999     $     0 (2)       $    0          0
                          1998     $75,000 (3)       $    0          0


(1)      The board of directors  established the CEO's compensation  package for
         year 2000 to be $170,000. However, cash flow did not provide sufficient
         funds to pay all of the accrued salary. The company remains indebted to
         the CEO for the balance of the compensation payable in 2000.


(2)      No cash  compensation  was paid in 1999. In January 2000,  the board of
         directors  authorized  the issuance of 750,000  shares of common stock,
         valued at $.175 per share, as payment of compensation for calendar year
         1999.


(3)      In 1998,  the board of directors  authorized and caused the issuance of
         1,500,000 shares of common stock,  valued at $.05 per share, as payment
         of  compensation  for Mr.  Marshall's  services  as CEO.  The shares of
         common  stock  issued  in 2000 and in 1998 were  valued at the  closing
         price of Medizone's  common stock as reported by the OTC Bulletin Board
         on the dates of issue.


Employment Contracts and Termination of Employment Arrangements


         Medizone has no employment agreements with any employee at this time.


Compensation Committee Interlocks and Insider Participation


         Medizone's  board of directors does not have a compensation  committee.
The  board of  directors  determines  matters  concerning  the  compensation  of
executive officers.


Item 11.          Security Ownership of Certain Beneficial Owners and Management


         The following table contains information as of April 4, 2001, regarding
beneficial stock ownership of (i) all persons known to Medizone to be beneficial
owners of more than 5% of the outstanding  common stock;  (ii) each director and
each person who served at any time during  fiscal year 2000 as CEO of  Medizone,
and (iii)  officers  and  directors of Medizone at December 31, 2000 as a group.
Each of the persons in the table below has sole voting and dispositive  power as
to all of the shares  shown as  beneficially  owned by them except as  otherwise
indicated.



                                       16
<PAGE>



                                         Number of Shares        Percent of
Name and Address                        Beneficially Owned    Outstanding Shares

Edwin G. Marshall                            12,123,373 (1)           7.7%
Chairman of the Board,
Chief Executive Officer
P.O. Box 742
Stinson Beach, CA 94970

Gerard V. Sunnen, MD                          3,779,462                2.4%
Board Member
President and Director of Research
200 East 23rd Street
New York, NY 10016

Richard G. Solomon                            7,199,001 (2)             4.6%
Board Member, Medizone International
Director, Medizone New Zealand, Ltd.
77 Seaview Road
Remuera, Auckland 1005
New Zealand

Jill C. Marshall, ND                         12,123,373 (3)            7.7%
Chief Operating Officer,
Corporate Secretary
P.O. Box 742
Stinson Beach, CA 94970

Kevin Andersen                                  145,000 (4)             *
Chief Financial Officer
8760 Hidden Oak Drive
Salt Lake City, UT 84121

All Officers and Directors                   23,246,836               15.0%
as a Group  (5 persons):

* Less than 1%.

         (1) Amount  indicated  includes  (i) 920,000  shares owned of record by
Jill Marshall,  Mr.  Marshall's wife and the COO, (ii) 4,936,507 shares owned of
record by Sand  Dollar,  a limited  partnership  of which  Mr.  Marshall  is the
general partner, (iii) 6,079,366 shares owned directly by Mr. Marshall, and (iv)
187,500 shares held in street name.

         (2)      Amount indicated includes combined holdings of Mr. Solomon
individually and of Solwin Investments Ltd.

         (3) Amount indicated includes (i) 920,000 shares owned of record, (ii)
4,936,507  shares  owned by Sand  Dollar,  of which her  husband is the  general
partner,  (iii) 6,079,366 shares owned by Ed Marshall,  Mrs. Marshall's husband,
and (iv) 187,500 shares held in street name.

         (4)      All  shares  held  in the  name of Mr. Andersen's  wife, Debra
Andersen.

         (5)      Based on a total of 154,615,798 shares outstanding.


                                       17
<PAGE>

Compliance with Section 16(a) of The Exchange Act

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
company's officers and directors, and persons who beneficially own more than 10%
of a registered  class of the company's  equity  securities,  to file reports of
ownership and changes in ownership with the Securities and Exchange  Commission.
Officers,  directors  and  shareholders  owning  more than 10% of the shares are
required by regulation of the Securities and Exchange  Commission to furnish the
company with copies of all forms filed by them under Section 16(a).  The company
is not  aware of any  transactions  in its  common  stock by or on behalf of any
director, executive officer or 10%-holder, which would require the filing of any
report pursuant to Section 16(a) during the fiscal year ended December 31, 1999,
that was not timely filed with the Commission.


Item 12. Certain Relationships and Related Transactions


         In June 1997, the company issued  warrants to The Sand Dollar  Solution
to purchase an aggregate of 73,333,333 shares of common stock in connection with
funding  arranged or provided by Sand Dollar.  Sand Dollar  purchased  5,714,286
shares of common stock upon exercise of part of the warrants, at a price of $.07
per share, for a total purchase price of $400,000.


         In 1998, Sand Dollar exercised  warrants to purchase a total of 857,142
shares of common stock at $.07 per share, or a total of $60,000.


         In 1999, Sand Dollar exercised  warrants to purchase a total of 936,507
shares of common stock at $.07 per share, or a total of $65,555.


         In January 2000, Sand Dollar exercised  warrants to purchase  3,142,857
shares of common stock at $.07 per share, or a total of $220,000. In April 2000,
warrants for the purchase of 37,682,540 shares of common stock at prices ranging
from $0.07 per share to $0.15 per share  expired.  An  affiliate  of Sand Dollar
continues to hold  warrants for the purchase of  25,000,000  shares at $0.20 per
share, which expire on May 31, 2001.


         The shares  issued upon  exercise of the Sand Dollar  warrants were not
registered  under the  Securities Act of 1933 in reliance upon  exemptions  from
registration,   including  those  created  by  the  safe  harbor  provisions  of
Regulation D under the Act for offerings  made solely to  accredited  investors.
The shares are "restricted shares" as that term is defined under the Act and the
transfer  and sale of the shares is  therefore  subject to the  limitations  and
restrictions  imposed by the federal and state  securities  laws  applicable  to
shares issued in private or non-public sales of securities.


Item 13.          Exhibits and Reports on Form 8-K

(a)       Exhibits


         Number     Description


         2         Agreement and Plan of Reorganization dated March 12, 1986 (2)


         3.1       Articles of Incorporation of Company (2)


         3.2       Bylaws (2)


         3.3       Articles of Amendment to Company's Articles of Incorporation
                   (3)


         10.1      Patent Agreement, dated February 26, 1987. (3)


         10.2      Assignment of Distributor  Agreement by Terrence O. McGrath
                   to Medizone Delaware, dated February 4, 1986, and Distributor
                   Agreement  between  Terrence O.  McGrath and Dr. J.  Hansler
                   GmbH, dated September 25, 1985 (3)


         10.3      Letter  confirmation  and  Protocol, dated June 2, 1986, with
                   regard to research to be conducted by the State University of
                   New York at Syracuse (2)


                                       18

<PAGE>


         10.4      Consulting Agreement between P.J. Watrous & Co., Inc. and
                   Medizone (2)


         10.5      Consulting Agreement between Jeffrey Freed, MD, PC and
                   Medizone (2)


         10.6      Consulting Agreement between Joseph Latino and Medizone (2)


         10.7      Consulting Agreement between Susan Golden, RN and Medizone
                   (2)


         10.8      Stock Option of Joseph Latino (2)


         10.9      Stock Option of Jeffrey Freed (2)


         10.10     Stock Option of Susan Golden (2)


         10.11     Stock Option of Hubert Weinberg (2)


         10.12     Agreement dated June 16, 1987, between Company and Oliver
                   Grace (5)


         10.13     Agreement dated June 26, 1987, between Company and John Grace
                   (5)


         10.14     Agreement dated June 26, 1987, between Company and Oliver
                   Grace (5)


         10.15     Agreement  dated June 30, 1987,  by and among  Company and
                   John C. Black,  Dr. Gerard V. Sunnen and Dr. Priyakant S.
                   Doshi (5)


         10.16     License Agreement with MCL Medizone Canada Ltd. dated
                   November 18, 1987 (5)


         10.17     Agreement dated October 1988 by and among  Immunologics,
                   Limited  Partnership,  John M. Kells, Y. C. Zee, David C.
                   Bolton and Medizone International, Inc. (6)


         10.18     Form of Stock Purchase  Agreement  between Company and
                   individuals who purchased  shares  from Company (7)


         10.19     Letter agreement between Company and Rebus Oil Co., Ltd.
                   dated July 28, 1992 (8)


         10.20     Letter of  understanding  between  Company and the RMB Group
                   of Boston  dated August 10, 1992 (8)


         10.21     Agreement between Company and Rebus Oil Company, Ltd., dated
                   as of October 20, 1992 (9)


         10.22     Letter  agreement  among Messrs.  McGrath,  Watrous,  Melera,
                   Chou,  Kells,  Handel and  Pealer, dated as of November 10,
                   1992 (9)


         10.23     Loan agreement with Messrs. McGrath and Watrous dated as of
                   November 16, 1992 (9)


         10.24     Settlement agreement with former consultant dated February
                   12, 1993 (9)


         10.25     Consulting Agreement with Joseph S. Latino dated as of
                   January 1, 1993 (9)


         10.26     Consulting Agreement with Arthur P. Bergeron dated as of
                   January 1, 1993 (9)


         10.27     Employment Agreement with Katherine M. Kalinowski dated as of
                   January 1, 1993 (9)


         10.28     Consulting Agreement with Roger Shelley dated as of January
                   1, 1993 (9)


         10.29     Consulting Agreement with Jeannette Arsenault dated as of
                   January 1, 1993 (9)


                                       19
<PAGE>

         10.30     Loan  Agreements  between  Company  and John  Kells,  George
                   Handel  and  John  Pealer, executed as of June 11, 1993 (and
                   promissory notes) (9)


         10.31     Promissory  Note to Joseph S. Latino  dated as of October 26,
                   1993 and  Acceptance  Form  dated as of November 26, 1993 (9)


         10.32     Letter  Agreement  dated March 23,  1993  between  Company
                   and the  Italian  Scientific  Society (10)


         10.33     Contract between Company and Capmed USA (10)


         10.34     Agreement made as of May 18, 1994, among Medizone
                   International,  Inc., Medizone Canada  Ltd., John M. Kells,
                   George Handel, John Pealer,  Joseph S. Latino,  Terrence O.
                   McGrath and Philip J. Watrous (11)


         10.35     Agreement made as of January 1, 1995,  between Medizone
                   International,  Inc. and Joseph S. Latino (11)


         10.36     Agreement  made as of January 1, 1995 between  Medizone
                   International,  Inc. and Arthur P. Bergeron (11)


         10.37     Agreement made as of January 1, 1995 between  Medizone
                   International,  Inc. and Giacomo  C. DiGiorgio, MD (11)


         10.38     Lease  Agreement  between  Medizone  International,  Inc.
                   and  Benabi  Realty, made on September 27, 1991, as extended,
                   January 17, 1995 (11)


         10.39     Agreement  for Sale and  Purchase of Shares in  Medizone  New
                   Zealand  Limited  between    Richard G. Solomon and Medizone
                   International, Inc., dated June 22, 1995 (12)


         10.40     Shareholders'  Agreement  relating to Medizone  New  Zealand
                   Limited  between and among   Solwin  Investments  Limited,
                   Medizone  International,  Inc.  and  Medizone New Zealand
                   Limited, dated June 22, 1995 (12)


         10.41     Licensing  Agreement between Medizone  International,  Inc.
                   and MNZ, dated June 22, 1995   (12)


         10.42     Managing Agent Agreement between Medizone  International,
                   Inc. and Medizone New Zealand Limited, dated June 22, 1995
                   (12)


         10.43     Lease Agreement  between  Medizone  International,  Inc. and
                   Linmar L.P.,  dated January 17, 1996 (13)


         10.44     Agreement  between Medizone  International,  Inc. and
                   Multiossigen  S.r.l.,  dated as of  September 13, 1996 (14)


         10.45     Agreement between Medizone  International,  Inc. and JRH
                   Biosciences,  Inc., dated April 17, 1997 (15)


         10.46     Lease Agreement between Medizone  International  Inc. and
                   Eagle Overlook,  L.C., made on  September 23, 1997 (16)


         16        Letter re: change in certifying accountants (17)





(1)      Incorporated by reference to Medizone's annual report on form 10-K for
         the year ended December 31, 1998.



                                       20
<PAGE>

(2)      Incorporated  by  reference  to  Medizone's   registration   statement
         on  Form  S-18  (Registration  No. 2-93277-D), effective May 14, 1985.


(3)      Incorporated  by  reference to  Medizone's  annual  report on Form 10-K
         for the period ended  December 31, 1986.


(4)      Incorporated by reference to Medizone's current report on Form 8-K,
         filed March 13, 1987.


(5)      Incorporated  by  reference to  Medizone's  annual  report on Form 10-K
         for the period ended  December 31, 1987.


(6)      Incorporated  by  reference to  Medizone's  annual  report on Form 10-K
         for the period ended  December 31, 1988.


(7)      Incorporated  by  reference to  Medizone's  annual  report on Form 10-K
         for the period ended  December 31, 1989.


(8)      Incorporated  by  reference to  Medizone's  annual  report on Form 10-K
         for the period ended  December 31,  1990.


(9)      Incorporated  by  reference to  Medizone's  annual  report on Form 10-K
         for the period ended  December 31, 1992.


(10)     Incorporated by reference to Medizone's  current annual report on Form
          8-K dated September 8, 1993.


(11)     Incorporated  by  reference to  Medizone's  annual  report on Form 10-K
         for the period ended  December 31, 1994.


(12)     Incorporated by reference to Medizone's  current annual report on Form
         8-K, dated June 22, 1995.


(13)     Incorporated  by  reference to  Medizone's  annual  report on Form 10-K
         for the period ended  December 31, 1995.


(14)     Incorporated by reference to Medizone's current report on Form 8-K,
         dated October 17, 1996.


(15)     Incorporated by reference to Medizone's current report on Form 8-K,
         dated May 5, 1997.


(16)     Incorporated by reference to Medizone's current report on Form 8-K
         dated September 24, 1997.

(b)      Reports on Form 8-K.




         None.




                                       21
<PAGE>

                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                MEDIZONE INTERNATIONAL, INC.


                                By:   /s/ Edwin G. Marshall
                                   --------------------------------------------
                                Edwin G. Marshall
                Chairman of the Board and Chief Executive Officer

Date: April 12, 2001

         In accordance  with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities shown
and on the date indicated.


Date: April 12, 2001              /s/ Edwin G. Marshall
                                ------------------------------------------------
                                Edwin G. Marshall, Chief Executive Officer and
                                Director


Date: April 12, 2001              /s/ Gerard V. Sunnen
                                ------------------------------------------------
                                Gerard V. Sunnen, President and Director


Date: April 12, 2001            /s/ Kevin R. Andersen
                                ------------------------------------------------
                                Kevin R. Andersen, Chief Financial Officer and
                                Principal Accounting Officer

<PAGE>


                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)

                   RESTATED CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2000


                                       1


<PAGE>







                                 C O N T E N T S


Independent Auditors' Report.................................................. 3

Consolidated Balance Sheet.................................................... 4

Consolidated Statements of Operations......................................... 6

Consolidated Statements of Stockholders' Equity (Deficit) .................... 7

Consolidated Statements of Cash Flows.........................................15

Notes to the Consolidated Financial Statements................................17


                                       2

<PAGE>











                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
Medizone International, Inc. and Subsidiary
(A Development Stage Company)
Stinson Beach, California

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Medizone
International,  Inc. and Subsidiary (a development stage company) as of December
31, 2000, and the related consolidated  statements of operations,  stockholders'
equity (deficit),  and cash flows for the years ended December 31, 2000 and 1999
and from  inception  on January  31,  1986  through  December  31,  2000.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  financial  statement  presentation.  We  believe  that our  audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Medizone International,  Inc. and Subsidiary (a development stage company) as of
December 31, 2000, and the  consolidated  results of their  operations and their
cash flows for the years ended  December 31, 2000 and 1999 and from inception on
January 31, 1986  through  December  31,  2000,  in  conformity  with  generally
accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue as a going  concern.  As discussed in Note 10 to the
consolidated  financial statements,  the Company has incurred significant losses
which have  resulted in an  accumulated  deficit and a deficit in  stockholders'
equity,  raising  substantial  doubt  about its  ability to  continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 10. The  consolidated  financial  statements do not include any adjustments
that might result from the outcome of this uncertainty.

As discussed in Note 8 to the consolidated  financial  statements,  an error was
discovered by management  of the Company  during the current year  regarding the
valuation   of  several   options   granted  in  1999  which   resulted  in  the
understatement of previously  reported amounts in Additional Paid-in Capital and
Accumulated  Deficit as of December  31, 1999 and an  understatement  of the net
loss for the year ended  December 31, 1999. An  adjustment  has been made to the
above mentioned accounts to correct the error.



HJ & Associates, LLC
Salt Lake City, Utah
April 7, 2001


                                       3
<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                           Consolidated Balance Sheet


                                     ASSETS

                                                               December 31,
                                                                2000

CURRENT ASSETS

   Cash and cash equivalents                              $           2,368
                                                          -----------------

     Total Current Assets                                             2,368
                                                          -----------------

PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2)                         14,977
                                                          -----------------

OTHER ASSETS

   Receivable from affiliate, net (Note 1)                           -
                                                          -----------------

     Total Other Assets                                              -
                                                          -----------------

     TOTAL ASSETS                                         $          17,345
                                                          =================



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


                                        4

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                     Consolidated Balance Sheet (Continued)


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                 ----------------------------------------------
<TABLE>
<CAPTION>

                                                                              December 31,
                                                                               2000

CURRENT LIABILITIES

<S>                                                                      <C>
   Accounts payable                                                      $         339,774
   Accrued expenses (Note 3)                                                       371,651
   Notes payable (Note 6)                                                          280,491
                                                                         -----------------

     Total Current Liabilities                                                     991,916
                                                                         -----------------

     Total Liabilities                                                             991,916
                                                                         -----------------

COMMITMENTS AND CONTINGENCIES (Note 4)

STOCKHOLDERS' EQUITY (DEFICIT)

   Common stock; 250,000,000 shares authorized of $0.001 par value,
    153,915,798 shares issued and outstanding                                      153,916
   Additional paid-in capital                                                   15,201,661
   Deficit accumulated during the development stage                            (16,330,148)
                                                                         -----------------

     Total Stockholders' Equity (Deficit)                                         (974,571)
                                                                         -----------------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                $          17,345
                                                                         =================
</TABLE>




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


                                        5

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                      Consolidated Statements of Operations
<TABLE>
<CAPTION>

                                                                                                       From
                                                                                                   Inception on
                                                                                                    January 31,
                                                                   For the Years Ended             1986 Through
                                                                      December 31,                  December 31,
                                                        --------------------------------------
                                                               2000               1999                 2000
                                                        ------------------  ------------------  ------------------
                                                                                 (Restated)

<S>                                                     <C>                 <C>                 <C>
REVENUE                                                 $                -  $                -  $          133,349
                                                        ------------------  ------------------  ------------------

EXPENSES

   Cost of sales                                                         -                   -             103,790
   Research and development                                        170,000              75,000           2,577,853
   General and administrative                                      787,610             198,308          12,116,482
   Expense on extension of warrants (Notes 5 and 8)              1,743,468             123,389           1,866,857
   Bad debt expense                                                      -                   -              48,947
   Depreciation and amortization                                     5,621               1,945              33,019
                                                        ------------------  ------------------  ------------------

     Total Expenses                                              2,706,699             398,642          16,746,948
                                                        ------------------  ------------------  ------------------

     Loss from Operations                                       (2,706,699)           (398,642)        (16,613,599)
                                                        ------------------  ------------------  ------------------

OTHER INCOME (EXPENSE)

   Minority interest in loss                                             -                   -              26,091
   Other income                                                          -                   -              19,780
   Gain on sale of subsidiary (Note 1)                                   -                   -             208,417
   Interest expense                                                (22,439)            (22,439)           (865,575)
                                                        ------------------  ------------------  ------------------

     Total Other Income (Expense)                                  (22,439)            (22,439)           (611,287)
                                                        ------------------  ------------------  ------------------

LOSS BEFORE EXTRAORDINARY
 ITEMS                                                          (2,729,138)           (421,081)        (17,224,886)
                                                        ------------------  ------------------  ------------------

EXTRAORDINARY ITEMS

   Lawsuit settlement (Note 4)                                     415,000                   -             415,000
   Debt forgiveness  (Note 4)                                      127,000              61,510             479,738
                                                        ------------------  ------------------  ------------------

     Total Extraordinary Items                                     542,000              61,510             894,738
                                                        ------------------  ------------------  ------------------

NET LOSS                                                $       (2,187,138) $         (359,571) $      (16,330,148)
                                                        ==================  ==================  ==================

BASIC INCOME (LOSS) PER SHARE

   Loss from operations                                 $            (0.01) $            (0.00)
   Extraordinary items                                                0.00                0.00
                                                        ------------------  ------------------

     Basic Income (Loss) Per Share                      $            (0.01) $            (0.00)
                                                        ==================  ==================

WEIGHTED AVERAGE NUMBER
 OF SHARES OUTSTANDING                                         154,371,805         149,255,666
                                                        ==================  ==================
</TABLE>

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


                                        6

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
            Consolidated Statements of Stockholders' Equity (Deficit)


<TABLE>
<CAPTION>
                                                                                                                      Deficit
                                                                                                                    Accumulated
                                                                Common Stock                        Additional       During the
                                             --------------------------------------------------      Paid-in        Development
                                                  Shares           Amount          Subscribed        Capital           Stage
                                             ---------------  ---------------   ---------------  ---------------   ---------------

<S>                                               <C>         <C>               <C>              <C>
Balance, January 31, 1986 (inception)                      -  $             -   $            -   $            -    $            -

Initial capitalization of Medizone -
 Nevada at $0.03 per share                         5,500,000            5,500                -          150,128                 -

Common shares issued in acquisition
 of Medizone - Delaware (Note 1)                  37,500,000           37,500                -          (37,500)                -

Common stock issued for services
 rendered in July 1986 at $0.10
 per share                                            50,000               50                -            4,950                 -

Common stock issued in conversion
 of warrants during 1986 at $0.10
 per share                                         7,814,600            7,815                -          773,645                 -

Stock issuance costs                                       -                -                -         (105,312)                -

Net loss for the year ended
 December 31, 1986                                         -                -                -                -          (796,068)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1986                        50,864,600           50,865                -          785,911          (796,068)

Common stock issued upon exercise
 of warrants in January 1987 at $0.10
 per share                                             2,600                2                -              257                 -

Common stock issued for patent in
 March 1987 at $0.69 per share                     1,000,000            1,000                -          692,750                 -

Common stock issued for cash in
 June 1987 at an average price of
 $0.16 per share                                     950,000              950                -          149,050                 -

Common stock issued for services
 in June and July 1987 at an
 average price of $0.12 per share                    203,167              203                -           24,314                 -

Common stock issued through
 exercise of options in August 1987
 at $1.75 per share                                  250,000              250                -          437,250                 -

Net loss for the year ended
 December 31, 1987                                         -                -                -                -        (2,749,400)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1987                        53,270,367  $        53,270   $            -   $    2,089,532   $    (3,545,468)
                                             ---------------  ---------------   ---------------  ---------------   ---------------
</TABLE>




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


                                        7

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
      Consolidated Statements of Stockholders' Equity (Deficit) (Continued)

<TABLE>
<CAPTION>

                                                                                                                      Deficit
                                                                                                                    Accumulated
                                                              Common Stock                          Additional       During the
                                             -------------------------------------------------       Paid-in        Development
                                                  Shares          Amount           Subscribed        Capital           Stage
                                             ---------------  ---------------   ---------------  ---------------   ---------------

<S>                                               <C>         <C>               <C>              <C>               <C>
Balance, December 31, 1987                        53,270,367  $        53,270   $            -   $    2,089,532    $   (3,545,468)

Common stock issued through exercise
 of options in January 1988 at $0.50
 per share                                           200,000              200                -           99,800                 -

Common stock issued for cash in
 September 1988 at $0.08 per share                 1,000,000            1,000                -           79,000                 -

Common stock issued for services
 at an average price of $0.23
 per share                                            35,000               35                -            7,965                 -

Additional capital contributed                             -                -                -          174,126                 -

Net loss for the year ended
 December 31, 1988                                         -                -                -                -          (714,347)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1988                        54,505,367           54,505                -        2,450,423        (4,259,815)

Common stock issued for services
 at an average price of $0.18 per
 share                                               261,889              262                -           46,363                 -

Common stock issued for cash at
 an average price of $0.05 per share               5,790,000            5,790                -          285,710                 -

Common stock issued for services
 and in lieu of outstanding debt at
 an average price of $0.12 per share               4,749,532            4,750                -          578,978                 -

Common stock issued upon exercise
 of options at $0.16 per share                       375,000              375                -           59,125                 -

Net loss for the year ended
 December 31, 1989                                         -                -                -                -          (862,051)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1989                        65,681,788  $        65,682   $            -   $     3,420,599   $   (5,121,866)
                                             ---------------  ---------------   ---------------  ---------------   ---------------
</TABLE>



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


                                        8

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
      Consolidated Statements of Stockholders' Equity (Deficit) (Continued)

<TABLE>
<CAPTION>

                                                                                                                      Deficit
                                                                                                                    Accumulated
                                                               Common Stock                         Additional       During the
                                             -------------------------------------------------       Paid-in        Development
                                                  Shares          Amount           Subscribed        Capital           Stage
                                             ---------------  ---------------   ---------------  ---------------   ---------------

<S>                                               <C>         <C>               <C>              <C>               <C>
Balance, December 31, 1989                        65,681,788  $        65,682   $            -   $    3,420,599    $   (5,121,866)

Common stock issued for services
 at $0.10 per share                                  880,000              880                -           87,120                 -

Common stock issued for cash at an
 average price of $0.04 per share                  4,250,000            4,250                -          175,250                 -

Common stock issued for services
 and in lieu of outstanding debt at
 an average price of $0.06 per share               2,422,727            2,423                -          137,577                 -

Additional capital contributed                             -                -                -          100,000                 -

Net loss for the year ended
 December 31, 1990                                         -                -                -                -          (606,309)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1990                        73,234,515           73,235                -        3,920,546        (5,728,175)

Common stock issued for cash at an
 average price of $0.07 per share                  4,366,667            4,366                -          305,634                 -

Common stock issued for services
 at an average price of $0.17 per
 share                                               425,000              425                -           72,075                 -

Common stock issued through
 exercise of options at an average
 price of $0.45 per share                            450,000              450                -          204,050                 -

Additional capital contributed                             -                -                -            5,000                 -

Net loss for the year ended
 December 31, 1991                                         -                -                -                -        (1,220,152)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1991                        78,476,182  $        78,476   $            -   $    4,507,305    $   (6,948,327)
                                             ---------------  ---------------   ---------------  ---------------   ---------------
</TABLE>



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


                                        9

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
      Consolidated Statements of Stockholders' Equity (Deficit) (Continued)

<TABLE>
<CAPTION>

                                                                                                                      Deficit
                                                                                                                    Accumulated
                                                               Common Stock                        Additional       During the
                                             -------------------------------------------------      Paid-in         Development
                                                  Shares         Amount            Subscribed       Capital            Stage
                                             ---------------  ---------------   ---------------  ---------------   ---------------

<S>                                               <C>         <C>               <C>              <C>               <C>
Balance, December 31, 1991                        78,476,182  $        78,476   $            -   $    4,507,305    $   (6,948,327)

Common stock issued for services
 at $0.20 per share                                  151,500              152                -           30,148                 -

Common stock issued in lieu of
 debt at $0.15 per share                             250,000              250                -           37,250                 -

Common stock issued for cash at
 an average price of $0.16 per share               2,702,335            2,702                -          427,648                 -

Common stock issued through
 exercise of options at $0.50
 per share                                           250,000              250                -          124,750                 -

Additional capital contributed                             -                -                -           81,100                 -

Net loss for the year ended
 December 31, 1992                                         -                -                -                -          (649,941)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1992                        81,830,017           81,830                -        5,208,201        (7,598,268)

Common stock issued for services
 at an average price of $0.10
 per share                                         5,347,219            5,347                -          542,859                 -

Common stock issued for cash at
 an average price of $0.18 per share               1,471,666            1,472                -          269,528                 -

Common shares subscribed for
 at $0.10 per share                                        -                -            2,619          259,296                 -

Net loss for the year ended
 December 31, 1993                                         -                -                -                -        (1,598,342)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1993                        88,648,902  $        88,649   $        2,619   $     6,279,884   $   (9,196,610)
                                             ---------------  ---------------   ---------------  ---------------   ---------------
</TABLE>


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


                                       10

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
      Consolidated Statements of Stockholders' Equity (Deficit) (Continued)

<TABLE>
<CAPTION>

                                                                                                                      Deficit
                                                                                                                     Accumulated
                                                              Common Stock                          Additional       During the
                                             -------------------------------------------------       Paid-in        Development
                                                Shares           Amount            Subscribed        Capital           Stage
                                             ---------------  ---------------   --------------   ---------------   ---------------

<S>                                              <C>          <C>               <C>              <C>               <C>
Balance, December 31, 1993                        88,648,902  $        88,649   $        2,619   $    6,279,884   $    (9,196,610)

Common stock issued for services
 at $0.10 per share                                1,431,590            1,431                -          141,727                 -

Common shares subscribed for at
 $0.10 per share                                           -                -            9,552          945,682                 -

Common shares subscribed for as
 cancellations of indebtedness at
 $0.10 per share                                           -                -              417           41,234                 -

Common shares subscribed for as
 cancellation of indebtedness at
 $0.18 per share                                           -                -           11,250        2,022,379                 -

Issuance of subscribed stock                      10,384,900           10,385          (10,385)               -                 -

Issuance of shares in recognition
 of disparity in purchase price in
 offering                                          1,125,834            1,126                -           (1,126)                -

Prior period adjustment (Note 8)                           -                -                -                -           219,422

Net loss for the year ended
 December 31, 1994                                         -                -                -                -        (1,126,315)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1994                       101,591,226  $       101,591   $       13,453   $    9,429,780    $  (10,103,503)
                                             ---------------  ---------------   ---------------  ---------------   ---------------
</TABLE>


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


                                       11

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
      Consolidated Statements of Stockholders' Equity (Deficit) (Continued)

<TABLE>
<CAPTION>

                                                                                                                      Deficit
                                                                                                                    Accumulated
                                                               Common Stock                        Additional        During the
                                             --------------------------------------------------      Paid-in        Development
                                                  Shares          Amount           Subscribed        Capital           Stage
                                             ---------------  ---------------   ---------------  ---------------   ---------------

<S>                                              <C>          <C>               <C>              <C>               <C>
Balance, December 31, 1994                       101,591,226  $       101,591   $       13,453   $    9,429,780       (10,103,503)

Redeemable common shares
 converted to common stock (Note 9)                  200,000              200                -           39,800                 -

Common stock issued for services
 at $0.10 per share                                2,050,000            2,050                -          202,950                 -

Issuance of subscribed stock                      17,524,860           17,524          (17,524)               -                 -

Cancellation of common shares                     (1,242,727)          (1,242)               -          (70,563)                -

Common shares subscribed for at
 $0.10 per share                                           -                -            9,118          902,707                 -

Prior period adjustment (Note 8)                           -                -                -                -            71,806

Additional capital contributed                             -                -                -           50,000                 -

Net loss for the year ended
 December 31, 1995                                         -                -                -                -        (1,081,027)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1995                       120,123,359          120,123            5,047       10,554,674       (11,112,724)

Common stock issued for cash
 at $0.10 per share                                  100,000              100                -            9,900                 -

Common stock issued for services
 at $0.10 per share                                1,415,875            1,416                -          140,171                 -

Issuance of subscribed stock                       8,412,379            8,413           (8,413)               -                 -

Common shares subscribed for
 at $0.11 per share                                        -                -            6,456          718,991                 -

Net loss for the year ended
 December 31, 1996                                         -                -                -                -        (1,329,395)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1996                       130,051,613  $       130,052   $        3,090   $   11,423,736    $  (12,442,119)
                                             ---------------  ---------------   ---------------  ---------------   ---------------
</TABLE>


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


                                       12

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
      Consolidated Statements of Stockholders' Equity (Deficit) (Continued)

<TABLE>
<CAPTION>

                                                                                                                      Deficit
                                                                                                                    Accumulated
                                                               Common Stock                        Additional       During the
                                             --------------------------------------------------      Paid-in        Development
                                                  Shares           Amount          Subscribed        Capital           Stage
                                             ---------------  ---------------   ---------------  ---------------   ---------------

<S>                                              <C>          <C>               <C>              <C>               <C>
Balance, December 31, 1996                       130,051,613  $       130,052   $        3,090   $   11,423,736    $  (12,442,119)

Issuance of subscribed stock                       3,089,680            3,090           (3,090)               -                 -

Common shares subscribed for
 at $0.07 per share                                        -                -            5,714          394,287                 -

Common stock issued for services
 at $0.10 per share                                3,746,336            3,746                -          370,886                 -

Net loss for the year ended
 December 31, 1997                                         -                -                -                -          (775,559)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1997                       136,887,629          136,888            5,714       12,188,909       (13,217,678)

Common stock issued through
 exercise of warrants at $0.07
 per share                                           857,142              857                -           59,143                 -

Common stock issued in lieu of
 debt at $0.05 per share                             864,747              865                -           42,372                 -

Issuance of subscribed stock                       5,714,286            5,714           (5,714)               -                 -

Cancellation of common shares                       (630,000)            (630)               -              630                 -

Common stock issued for services
 at $0.05 per share                                3,465,000            3,465                -          169,786                 -

Common stock issued for services
 at $0.09 per share                                  750,000              750                -           63,785                 -

Common stock issued in lieu of
 debt at $0.09 per share                             967,630              967                -           82,214                 -

Common stock issued for services
 at $0.08 per share                                   50,000               50                -            3,700                 -

Net loss for the year ended
 December 31, 1998                                         -                -                -                -          (565,761)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1998                       148,926,434  $       148,926   $            -   $   12,610,539    $  (13,783,439)
                                             ---------------  ---------------   ---------------  ---------------   ---------------
</TABLE>



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


                                       13

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
      Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>

                                                                                                                      Deficit
                                                                                                                    Accumulated
                                                               Common Stock                        Additional        During the
                                             --------------------------------------------------     Paid-in          Development
                                                  Shares           Amount          Subscribed       Capital            Stage
                                             ---------------  ---------------   ---------------  ---------------   ---------------

<S>                                              <C>          <C>               <C>              <C>               <C>
Balance, December 31, 1998                       148,926,434  $       148,926   $            -   $   12,610,539    $  (13,783,439)

Common stock issued for services
 at $0.07 per share                                   25,000               25                -            1,725                 -

Common stock issued through exercise
 of warrants at $0.07 per share                      936,507              937                -           64,618                 -

Additional expense for extension of
 warrants below market value - restated                    -                -                -          123,389                 -

Net loss for the year ended
 December 31, 1999 - restated                              -                -                -                -          (359,571)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1999                       149,887,941         149,888                 -       12,800,271       (14,143,010)

Common stock issued through
 exercise of warrants at $0.07 per share           3,142,857            3,143                -          216,857                 -

Common stock issued for debt at
 $0.11 per share                                   2,020,000            2,020                -          220,180                 -

Common stock issued for debt at
 $0.147 per share                                     95,000               95                -           13,905                 -

Common stock issued for services
 at $0.175 per share                                 350,000              350                -           60,900                 -

Common stock issued for debt at
 $0.20 per share                                      20,000               20                -            3,980                 -

Common stock issued for debt at
 $0.55 per share                                     100,000              100                -           54,900                 -

Cancellation of common stock                      (2,000,000)          (2,000)               -            2,000                 -

Common stock issued for services
 at $0.285 per share                                 300,000              300                -           85,200                 -

Additional expense for extension of
 warrants below market value                               -                -                -        1,743,468                 -

Net loss for the year ended
 December 31, 2000                                         -                -                -                -        (2,187,138)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 2000                       153,915,798  $       153,916   $            -   $   15,201,661    $  (16,330,148)
                                             ===============  ===============   ===============  ===============   ===============
</TABLE>

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


                                       14

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                                      From
                                                                                                  Inception on
                                                                      For the Years Ended          January 31,
                                                                          December 31,            1986 Through
                                                              ---------------------------------   December 31,
                                                                  2000              1999              2000
                                                              ---------------   ---------------  ---------------
                                                                                  (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                                           <C>               <C>              <C>
   Net loss                                                   $    (2,187,138)  $      (359,571) $   (16,330,148)
   Adjustments to reconcile net loss to net cash
    used by operating activities:
     Depreciation and amortization                                      5,621             1,945           33,019
     Stock issued for services                                        146,750             1,750        3,015,916
     Expense for extension of warrants below market value           1,743,468           123,389        1,866,857
     Bad debt expense                                                       -                 -           48,947
     Minority interest in loss                                              -                 -          (26,091)
     Loss on disposal of assets                                             -                 -          693,752
     Gain on settlement of debt                                      (127,000)          (61,510)        (188,510)
     Gain on Court ordered restitution                               (415,000)                -         (415,000)
   Changes in assets and liabilities:
     (Increase) decrease in prepaid expenses
      and deposits                                                          -                 -          (48,947)
     Increase (decrease) in accounts payable                           23,604           (13,252)         714,854
     Increase (decrease) in accrued expenses                          187,606           238,439          774,673
                                                              ---------------   ---------------  ---------------

       Net Cash Used by Operating Activities                         (622,089)          (68,810)      (9,860,678)
                                                              ---------------   ---------------  ---------------

CASH FLOWS FROM INVESTING ACTIVITIES

   Organization costs                                                       -                 -           (8,904)
   Purchase of fixed assets                                           (14,931)                -          (39,090)
                                                              ---------------   ---------------- ---------------

       Net Cash Used by Investing Activities                          (14,931)                -          (47,994)
                                                              ---------------   ---------------  ---------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Proceeds from lawsuit settlement                                   415,000                 -          415,000
   Principle payments on notes payable                                      -                 -         (192,774)
   Cash received from notes payable                                         -                 -        1,106,518
   Capital contributions                                                    -                 -          421,847
   Stock issuance costs                                                     -                 -         (105,312)
   Increase in minority interest                                            -                 -           14,470
   Issuance of common stock for cash                                  220,000            65,555        8,251,291
                                                              ---------------   ---------------  ---------------

       Net Cash Provided by Financing Activities                      635,000            65,555        9,911,040
                                                              ---------------   ---------------  ---------------

NET INCREASE (DECREASE) IN CASH                                        (2,020)           (3,255)           2,368

CASH AT BEGINNING OF PERIOD                                             4,388             7,643                -
                                                              ---------------   ---------------  ---------------

CASH AT END OF PERIOD                                         $         2,368   $         4,388  $         2,368
                                                              ===============   ===============  ===============
</TABLE>

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


                                       15

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                Consolidated Statements of Cash Flows (Continued)



<TABLE>
<CAPTION>

                                                                                                      From
                                                                                                  Inception on
                                                                      For the Years Ended          January 31,
                                                                         December 31,             1986 Through
                                                              ---------------------------------   December 31,
                                                                 2000              1999              2000
                                                              ---------------   ---------------  ---------------
                                                                                 (Restated)

SUPPLEMENTAL CASH FLOW INFORMATION

CASH PAID FOR:

<S>                                                           <C>               <C>              <C>
   Interest                                                   $             -   $             -  $        26,483
   Income taxes                                               $             -   $             -  $             -

NON-CASH FINANCING ACTIVITIES:

   Stock issued for services                                  $       146,750   $         1,750  $     3,015,916
   Stock issued for conversion of debt                        $       295,200   $             -  $     4,071,493
   Stock issued for license agreement and patent              $             -   $             -  $       693,752
</TABLE>


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


                                       16

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

              a.  Organization

              The  consolidated  financial  statements  presented  are  those of
              Medizone   International,    Inc.    (Medizone-Nevada)   and   its
              wholly-owned    subsidiaries,    Medizone   International,    Inc.
              (Medizone-Delaware)    and   Medizone   Canada,   Ltd.   (MedCan).
              Collectively,  they  are  referred  to  herein  as the  "Company".
              Medizone-Nevada   was  incorporated  under  the  name  of  Madison
              Funding,  Inc.  on August 27,  1984 under the laws of the State of
              Nevada for the purpose of investing in,  acquiring,  operating and
              disposing of businesses or assets of any nature.  Effective  March
              26, 1986,  Medizone-Nevada  issued 37,500,000 shares of its common
              stock in exchange for the issued and  outstanding  common stock of
              Medizone-Delaware.

              Medizone-Delaware  was  incorporated on January 31, 1986 under the
              state laws of Delaware.  Medizone-Delaware  was  organized to seek
              regulatory  approval for a MEDIZONE (R) drug, a precise mixture of
              ozone and oxygen for the purpose of  inactivating  lipid enveloped
              viruses  for the  intended  purpose of  decontaminating  blood and
              blood products and assisting in the treatment of certain diseases.
              It is also trying to develop or acquire the related technology and
              equipment for the medical  application of the products,  including
              the drug production and delivery system.

              At   the   time   of   the   acquisition   of   Medizone-Delaware,
              Medizone-Nevada was essentially  inactive,  with no operations and
              minimal assets.  Additionally,  the exchange of  Medizone-Nevada's
              common stock for the common stock of Medizone-Delaware resulted in
              the former stockholders of Medizone-Delaware  obtaining control of
              Medizone-Nevada.   Accordingly,   Medizone-Delaware   became   the
              continuing entity for accounting purposes, and the transaction was
              accounted for as a recapitalization of  Medizone-Delaware  with no
              adjustment to the basis of Medizone-Delaware's  assets acquired or
              liabilities assumed.  For legal purposes,  Medizone-Nevada was the
              surviving entity.

              On  November  18,  1987,   Medizone   Canada  Ltd.   (MedCan)  was
              incorporated  under the laws of the Province of British  Columbia.
              Shortly  thereafter,  MedCan entered into a license agreement with
              the Company wherein the Company transferred to MedCan the licenses
              and rights  necessary to permit MedCan to hold  substantially  the
              same rights with respect to the medical  applications  of ozone in
              Canada as the Company does in the United States.  As consideration
              for the transfer,  the Company received 3,000,000 shares of MedCan
              and, in addition,  purchased 1 share for the sum of $1.00. Under a
              separate  agreement among the Company,  MedCan and Australian Gold
              Mines  Corporation  (AGMC),  (which  later  changed  its  name  to
              International  Blue  Sun  Resource  Corporation),  AGMC  purchased
              130,000  shares of MedCan for  $100,000.  On  December  23,  1988,
              MedCan was recapitalized in a transaction in which the majority of
              its shares were exchanged for shares of KPC  Investments,  (a Utah
              corporation) (KPC). Following this transaction,  the Company owned
              25,029,921  shares  of KPC,  representing  72% of the  outstanding
              shares. KPC then changed its name to Medizone Canada,  Ltd. (MCL).
              MedCan  acquired  all of the assets of MCL,  consisting  solely of
              cash in the amount of approximately $89,000.

                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY

                                       17

<PAGE>



                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)

              a.  Organization (Continued)

              In June 1998,  the Company  sold its  interest in MCL for $125,000
              cash debt  assumed  of $8,417  less fees of  $25,000  in a private
              transaction  which  resulted  in a gain of  $108,417  for the year
              ended December 31, 1998. The Company retained ownership,  however,
              of all of the issued and outstanding stock of MedCan, the Canadian
              subsidiary.

              b.  Formation of Joint Venture

              On June 22, 1995,  the Company  entered into a series of contracts
              which  resulted in the  formation  of a joint  venture  subsidiary
              incorporated  in New Zealand,  Medizone New Zealand Limited (MNZ).
              MNZ, a privately held corporation equally owned by the Company and
              Solwin Investments Limited (Solwin), a New Zealand corporation, is
              a research and  development  stage company  whose  objective is to
              obtain  regulatory  approval for the distribution of the Company's
              patented technology in New Zealand, Australia, South East Asia and
              the South Pacific Islands.

              Pursuant to the contracts,  the Company purchased 100% of MNZ from
              Richard G. Soloman (Solomon),  a New Zealand citizen, who became a
              director  of the  Company  in  January  1996  and who  caused  the
              formation  of MNZ on June 22,  1995.  Contemporaneously  with this
              transaction,  the Company sold 50% of MNZ to Solwin, a corporation
              owned by Solomon,  for  $150,000,  of which  $50,000 was thereupon
              loaned by the Company to MNZ on a demand basis (see Note 1(i)).

              Contemporaneous  with the  creation of the above share  structure,
              the  Company  and MNZ  entered  into a  Licensing  Agreement  (the
              Licensing  Agreement) and a Managing Agent Agreement (the Managing
              Agent Agreement).

              Pursuant  to the  Licensing  Agreement,  the  Company  granted  an
              exclusive license to MNZ for its process and equipment patents and
              trademark   in  New   Zealand.   MNZ  has   agreed  to  apply  for
              corresponding patent protection for the patents in New Zealand and
              to use its best  effort  to  exploit  the  rights  granted  in the
              agreement.  The License  Agreement  shall terminate on the date of
              the expiration of the last to expire of any patent obtained in New
              Zealand,  or, if no such patents are  obtained,  on June 22, 2010.
              The  Company  is to  receive a  guaranteed  minimum  royalty  (the
              Guaranteed  Minimum  Royalty)  in an amount to be agreed to by the
              Company and MNZ,  commencing in the third year after all necessary
              regulatory approvals requisite to the license, use or distribution
              of the Company's proprietary  technology have been obtained in New
              Zealand.  If the  Company  and MNZ are  unable  to agree  upon the
              amount  of  the  Guaranteed  Minimum  Royalty,   the  Company  may
              terminate  the license on thirty days  notice.  Commencing  on the
              first sale to a user by MNZ,  the  Company  shall  receive a sales
              royalty  in an amount  equal to 10% of MNZ's  gross  annual  sales
              under the License Agreement.


                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY

                                       18

<PAGE>



                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)

              b.  Formation of Joint Venture (Continued)

              Pursuant  to the  Managing  Agent  Agreement,  MNZ will act as the
              Company's agent in the finding of other licensees of the Company's
              patents  and  trademark  in the  following  countries:  Autralasia
              (including  Australia and New Zealand),  the South Pacific Islands
              and South East Asia  (including  the  Philippines,  Indonesia  and
              Vietnam).  Licensing  fees  obtained  as a result of the  Managing
              Agent  Agreement shall be divided between the Company and MNZ on a
              sliding scale as set forth below:
<TABLE>
<CAPTION>

                                                                                    Medizone            Medizone
                                                                                    International,      New Zealand
                                                                                    Inc.                Limited
                                                                             ------------------- --------------------

<S>                                                                                 <C>                 <C>
              Initial license                                                       50%                 50%

              Subsequent license fees up to $500,000                                50%                 50%

              Subsequent license fees between $500,000
               and $750,000                                                         75%                 25%

              Subsequent license fees in excess of $750,000                         85%                 15%
</TABLE>

              MNZ and the Company will also divide any net royalties paid to the
              Company pursuant to any license obtained  pursuant to the Managing
              Agent Agreement,  with MNZ being paid 10% of the net royalties and
              the Company receiving 90% of the net royalties.

              The Managing Agent  Agreement  shall expire on the  termination or
              expiration of the last of the licenses  obtained pursuant thereto,
              subject to earlier  termination  by the Company upon an occurrence
              of certain events.

              Pursuant to Emerging Issued Task Force Statement No. 89-7, the
              Company recognized   a $100,000 gain on the sale of MNZ to Solwin.

              The  investment in the joint  venture has been recorded  under the
              equity  method of accounting as the Company does not have ultimate
              control of the joint  venture.  The investment is recorded at $-0-
              as of December 31, 2000.

              c.  Business Activities

              The  Company's  objective is to gain  regulatory  approval for the
              medical uses of ozone to inactivate  certain viruses and to assist
              in the treatment of certain  diseases and to develop,  promote and
              distribute  ozone-generating  equipment  and related  products for
              medical applications.



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)

                                       19

<PAGE>



                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)

              c.  Business Activities (Continued)

              By  letter  agreement  with the  Italian  Scientific  Society  for
              Oxygen-Ozone  Therapy (ISSOT) in Bergamo,  Italy,  dated March 23,
              1993,  the Company  entered into a  collaborative  arrangement  to
              research  and  examine  the  efficacy  of  ozone  therapy  and the
              Company's  technology  in the  treatment of various  blood-related
              human diseases. The research is to be conducted by ISSOT in Italy,
              under the direction of a research  group  assembled by the Italian
              Ministry of Health.

              On May 16, 1994,  the Company  announced that human trials were to
              commence at the University of Naples  ("Naples").  However,  after
              the termination of the Company's former  President,  the Company's
              inquiry  into the  conduct  of its  operations  during  the former
              President's  tenure,  that disclosed that human clinical trials of
              the  Company's  ozone  therapy on  patients  infected  with either
              Acquired  Immunodeficiency Syndrome (AIDS) or Hepatitis B (chronic
              active) has not been  authorized  by Naples or  commenced  at that
              institution. The Company also learned that the Italian Ministry of
              Health  had not  issued  approvals  for human  clinical  trials to
              commence  at  certain  sites as  previously  disclosed.  While the
              ethics  committees  at certain  university  hospitals  have stated
              their  approval for the Company to conduct  Phase II trials,  they
              would require the Company to have either  completed a large animal
              study  and  Phase  I  human  clinical  trials  or  to  have  these
              requirements  waived.  The  Company  has never  performed  a large
              animal study or Phase I human clinical trials and does not possess
              the  necessary  data with respect to its ozone therapy to commence
              Phase  II  study.  However,  there  does  exist  a  broad  use and
              understanding  of ozone therapy  throughout  Europe and there have
              been numerous  scientific  articles  published in European medical
              journals describing the use of ozone on humans.



                                       20

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)

              c.  Business Activities (Continued)

              The Company has held discussions with an Italian Contract Research
              Organization  (the  ICRO) with a view to having the ICRO act as an
              intermediary on behalf of the Company with the Italian Ministry of
              Health and prepare a written submission to the Italian Ministry of
              Health  regarding  the data in the public  domain on ozone therapy
              with a view to having the Italian  Ministry of Health  accept this
              material as proof of safety,  toxicity and tolerance of the use of
              the  Company's  ozone  technology  on humans in lieu of having the
              Company  perform a large animal  study and  possibly  even Phase I
              human  clinical  trials.  The ICRO  would  also  design a research
              program and protocols for human  clinical  trials which would meet
              the  standards  of the  European  Union  (EU)  and  Food  and Drug
              Administration  (FDA),  monitor the clinical terms and collect and
              prepare  analyses of the data produced by the trials.  The Company
              will not be able to enter  into a  formal  contract  with the ICRO
              unless it obtains additional  funding.  If the Italian Ministry of
              Health does not accept the published  evidence on the use of ozone
              therapy on humans, the Company will be required to perform its own
              Phase I human  clinical  trials and possibly a large animal study.
              In late 1997, the Company  entered into  discussions  with Italian
              and  Belgium  clinicians  with regard to them  performing  Phase I
              human clinical trials.  However,  assuming the Italian Ministry of
              Health did not grant the Company's  request for waiver,  no formal
              agreements with these  clinicians  would be signed and the studies
              would not begin until the company obtains additional funding.  The
              Company   estimates   that  it  would   require  an   infusion  of
              approximately $1.5 million to advance the above-described research
              initiatives  through the  completion of a Phase III human clinical
              trials and  submission  of the data for  approval  to the  Italian
              Ministry of Health.

              d.  Accounting Methods

              The Company's consolidated financial statements are prepared using
              the  accrual  method of  accounting.  The  Company  has  elected a
              December 31 year end.

              e.  Cash and Cash Equivalents

              Cash equivalents  include  short-term,  highly liquid  investments
              with   maturities   of  three  months  or  less  at  the  time  of
              acquisition.

              f.  Basic Loss Per Share

              The computations of basic loss per share of common stock are based
              on the weighted average number of common shares outstanding during
              the period of the consolidated financial statements as follows:



                                       21

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)

              f.  Basic Loss Per Share (Continued)

                                                   For the Years Ended
                                                     December 31,
                                          --------------------------------------
                                                2000               1999
                                          ------------------  ------------------
                                                                  (Restated)

              Numerator (net loss)       $       (2,187,138) $         (359,571)

              Denominator (weighted
               average number of
               shares outstanding)              154,371,805         149,255,666

              Loss per share             $            (0.01) $            (0.00)

 .             Common stock equivalents, consisting of warrants and options, have
              not  been  included  in  the   calculation   as  their  effect  is
              antidilutive for the periods presented.

              g.  Change in Accounting Principle

              The Company has adopted the  provisions of FASB  Statement No. 138
              "Accounting  for  Certain   Derivative   Instruments  and  Hedging
              Activities, (an amendment of FASB Statement No. 133.)" Because the
              Company had  adopted the  provisions  of FASB  Statement  No. 133,
              prior to June 15, 2000, this statement is effective for all fiscal
              quarters  beginning  after June 15,  2000.  The  adoption  of this
              principle  had no material  effect on the  Company's  consolidated
              financial statements.

              The Company has adopted the  provisions of FASB  Statement No. 140
              "Accounting  for Transfers  and Servicing of Financial  Assets and
              Extinguishments  of  Liabilities  (a replacement of FASB Statement
              No.  125.)"  This  statement  provides  accounting  and  reporting
              standard for  transfers  and  servicing  of  financial  assets and
              extinguishments  of  liabilities.  Those  standards  are  based on
              consistent  application of a financial-  components  approach that
              focuses on control. Under that approach, the transfer of financial
              assets,  the Company recognized the financial and servicing assets
              it controls  and the  liabilities  it has  incurred,  derecognizes
              financial   assets  when   control  has  been   surrendered,   and
              derecognizes   liabilities  when   extinguished.   This  statement
              provides  consistent  standards  for  distinguishing  transfers of
              financial  assets that are sales from  transfers  that are secured
              borrowings.   This   statement  is  effective  for  transfers  and
              servicing of financial assets and  extinguishments  of liabilities
              occurring  after March 31, 2001.  This  statement is effective for
              recognition and reclassification of collateral and for disclosures
              relating to securitization  transactions and collateral for fiscal
              years  ending  after  December  15,  2000.  The  adoption  of this
              principle  had no material  effect on the  Company's  consolidated
              financial statements.



                                       22

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)

              g.  Change in Accounting Principle (Continued)

              The Company has adopted the provisions of FIN 44  "Accounting  for
              Certain    Transactions    Involving   Stock    Compensation   (an
              interpretation  of APB Opinion No.  25.)" This  interpretation  is
              effective  July 1,  2000.  FIN 44  clarifies  the  application  of
              Opinion No. 25 for only  certain  issues.  It does not address any
              issues  related to the  application  of the fair  value  method in
              Statement  No.  123.  Among other  issues,  FIN 44  clarifies  the
              definition  of employee for  purposes of applying  Opinion 25, the
              criteria   for   determining   whether  a  plan   qualifies  as  a
              noncompensatory  plan,  the  accounting   consequence  of  various
              modifications  to the terms of a previously  fixed stock option or
              award, and accounting for an exchange of stock compensation awards
              in a business  combination.  The adoption of this principle had no
              material effect on the Company's consolidated financial statements

              h.  Property and Equipment

              Property and  equipment is recorded at cost.  Major  additions and
              improvement  are  capitalized.  The cost and  related  accumulated
              depreciation  of  equipment  retired or sold are removed  from the
              accounts and any differences between the undepreciated  amount and
              the proceeds from the sale are recorded as gain or loss on sale of
              equipment. Depreciation is computed using the straight-line method
              over a period of five years.

              i.  Receivable from Affiliate

              The  Company  loaned  $50,000  in 1996 to MNZ,  the joint  venture
              company,  on a demand basis.  MNZ currently has minimal assets and
              operations.  Management  has  recorded an  allowance  for the full
              amount of the loan as of December 31, 2000.

              j.  Provision for Taxes

              At  December  31,  2000,   the  Company  had  net  operating  loss
              carryforwards  of  $14,300,000  that may be offset  against future
              taxable  income  through  2020.  If  substantial  change  sin  the
              Company's  ownership  should  occur,  thee would also be an annual
              limitation of the amount of the NOL  carryforwards  which could be
              utilized.  No tax  benefit  had  been  reported  in the  financial
              statements, because the Company believes there is a 50% or greater
              chance the carryforwards  will expire unused.  The tax benefits of
              the loss carryforwards are offset by a valuation  allowance of the
              same amount.



                                       23

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)

              j.  Provision for Taxes (Continued)

              The income tax  benefit  differs  from the amount  computed at the
              federal statutory rates as follows:
<TABLE>
<CAPTION>

                                                                                      For the Years Ended
                                                                                          December 31,
                                                                            --------------------------------------
                                                                                   2000               1999
                                                                            ------------------  ------------------

<S>                                                                         <C>                 <C>
              Income tax benefit at statutory rate                          $          831,112  $          136,637
              change in valuation allowance                                           (831,112)           (136,637)
                                                                            ------------------  ------------------

                                                                            $                -  $                -
                                                                            ==================  ==================

              Deferred tax assets at December 31, 2000 and 1999 are comprised of
              the following:

                                                                                   2000               1999
                                                                            ------------------  ------------------

              Net operating loss carryforwards                              $        5,434,000  $        4,602,888
              Valuation allowance                                                   (5,434,000)         (4,602,888)
                                                                            ------------------  ------------------

                                                                            $                -  $                -
                                                                            ==================  ==================
</TABLE>

              k.  Principles of Consolidation

              The consolidated  financial  statements  include those of Medizone
              International,   Inc.   (Medizone-Nevada)   and  its  wholly-owned
              subsidiaries, Medizone International, Inc. (Medizone-Delaware) and
              Medizone Canada, Ltd (MedCan).

              All  material  intercompany  accounts and  transactions  have been
eliminated.

              l.  Estimates

              The  preparation  of  financial   statements  in  conformity  with
              generally accepted  accounting  principles  requires management to
              make estimates and assumptions that affect 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. Actual results could differ from those estimates.

              m.  Advertising

              The  Company   follows  the  policy  of  charging   the  costs  of
              advertising to expense as incurred.



                                       24

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)

              n.  Stock Options and Warrants

              The  Company  applies  Accounting  Principles  Board  ("APB")  25,
              "Accounting   for  Stock   Issued  to   Employees,"   and  related
              interpretations  in accounting  for all stock option plans.  Under
              APB 25,  compensation  cost is  recognized  for stock  options and
              warrants  granted to employees  when the  option/warrant  price is
              less than the market price of the  underlying  common stock on the
              date of grant.

              FASB  Statement 123,  "Accounting  for  Stock-Based  Compensation"
              ("SFAS  No.  123")  requires  the  Company  to  provide   proforma
              information  regarding  net  income and net income per share as if
              compensation  costs for the Company's stock option plans and other
              stock awards had been determined in accordance with the fair value
              based method prescribed in SFAS No. 123. The Company estimates the
              fair  value of each  stock  award at the  grant  date by using the
              Black-Scholes option pricing model.

              Under the  provisions  of SFAS No. 123, the Company's net loss for
              the  years  ended  December  31,  2000 and 1999  would  have  been
              unchanged from the reported net loss.

              However,  under  the  provisions  of SFAS  No.  123,  the  Company
              recorded  additional  expense of  $1,743,468  and $123,389 for the
              years  ended  December  31,  2000 and 1999 as a result of warrants
              granted  to  non-employees  based upon the  Black-Scholes  pricing
              model. Under the Black-Scholes  method, the U.S. Treasury rate was
              used as the  risk-free  interest  rate,  the expected  life of the
              warrants was 3 months to one year, the  volatility  used was based
              upon the historical price per share of shares sold, and there were
              no expected dividends.

              o.  Patents

              In March  1987,  the Company  acquired a patent from  Immunologics
              Limited  Partnership  (Immunologics)  in  exchange  for  1,000,000
              shares  of the  Company's  common  stock.  In  1988,  Immunologics
              purchased for $25,000,  5,000,000  shares of the Company's  common
              stock from the former Chairman and Chief Executive  Officer of the
              Company.



                                       25

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
              (Continued)

              o.  Patents (Continued)

              The patent covers a procedure for "ozone  decontamination of blood
              and blood  products"  through the  treatment  of stored  blood and
              blood  components.  The  Board of  Directors  assigned  a value of
              approximately  $700,000  to the patent  based upon the fair market
              value  of the  stock  on the  date of  acquisition  together  with
              related legal costs. The Company charged the cost of the patent to
              research  and  development  expense  at  acquisition  because  the
              technologies  covered by the patent have not been  approved by the
              FDA. Additionally,  the Company agreed to pay the seller a royalty
              fee equal to 3% of the net  receipts  received  by the  Company in
              connection with the sale of any product, device or apparatus which
              embodies  the  patent.  The  Company's  management  considers  the
              acquisition  and  retention  of the patent to be  material  in its
              development  and  prospects.  In  1992,  the  General  Partner  of
              Immunologics  became  chairman of the Company's Board of Directors
              and subsequently resigned from the Company's Board of Directors in
              September 1993.

              p.  Revenue Recognition Policy

              The  Company   currently  has  no  source  of  revenues.   Revenue
              recognition  policies will be determined when principal operations
              begin.

NOTE 2 -      PROPERTY AND EQUIPMENT

              Property and  equipment  consists of the following at December 31,
2000:

              Office equipment                       $           19,249
              Furniture and fixtures                              6,307
                                                     ------------------

                                                                 25,556
              Accumulated depreciation                          (10,579)
                                                     ------------------

              Net property and equipment            $            14,977
                                                    ===================

              Depreciation  expense  for the years ended  December  31, 2000 and
              1999 was $5,621 and $1,945, respectively.

NOTE 3 -      ACCRUED EXPENSES

              Accrued expenses consist of the following at December 31, 2000:

              Accrued payroll                       $           196,250
              Accrued interest                                  171,484
              Accrued payroll taxes                               3,917
                                                    -------------------

                           Total                    $           371,651
                                                    ===================



                                       26

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 4 -      COMMITMENTS AND CONTINGENCIES

              The  Company  retains  an  investor  relations  firm to act as the
              Company's liaison with the brokerage community.  The agreement was
              originally  for a period of one year, but has been extended by the
              parties for  additional  one year  periods.  It receives a monthly
              payment of $2,000,  plus expenses.  As additional  compensation in
              1996, it received  250,000  shares of the Company's  common stock,
              restricted under the federal securities laws.

              On December 3, 1999,  the Company  filed a complaint  in the Third
              District Court of Salt Lake County,  Utah against its former Chief
              Financial Officer.  Among other things, the compliant filed by the
              Company  sought  a  declaration   from  the  Court  regarding  the
              enforceability of the former officer's  employment  contract,  the
              right of the Company to terminate his employment and other relief.
              A settlement was agreed upon, under the terms of which the Company
              agreed to withdraw its  compliant  with  prejudice  and the former
              officer  waived any further claim for wages or other  compensation
              under his employment  agreement.  In addition,  the former officer
              consented to the  cancellation of 2,000,000 shares of common stock
              issued  to him in  prior  years.  On April 6,  2000,  the  Company
              settled this matter by paying its former Chief  Financial  Officer
              $35,000 and the Company  received the  2,000,000  shares of common
              stock back for  cancellation.  The Company  recognized  a $137,000
              gain on  settlement  of debt due to the  fact  that at the time of
              settlement, the Company had accrued $162,000 of debt to the former
              Chief Financial Officer.

              In January of 2000, the Company received  $415,000 from its former
              President  and Chief  Executive  Officer who was under an order of
              restitution from the State of New York.

              In  addition,  the  Board of  Directors  approved  the  following
              salaries for its key officers during 1999 to commence  January 1,
              2000: 1) $170,000 a year for the Company's  C.E.O., 2) $170,000 a
              year for the  Company's  President  and Director of Research,  3)
              $36,000 a year for the Company's C.F.O. and 4) $95,000 a year for
              the Company's C.O.O. and Corporate Secretary.

NOTE 5 -      ISSUANCE OF COMMON STOCK AND WARRANTS

              Unless otherwise  stated,  all transactions  shown below were with
              unrelated parties and the securities issued were restricted.

              Medizone-Nevada  initially  issued  5,500,000  shares in a private
transaction.

              On March 26, 1986,  Medizone-Nevada  issued  37,500,000  shares of
              common stock,  representing 87.2% of the then outstanding  shares,
              to the stockholders of Medizone- Delaware,  including two officers
              and   directors,   in   exchange   for  all  of  the   shares   of
              Medizone-Delaware.  The  costs  of the  transactions  were  offset
              against paid-in capital.

              In July 1986,  the Company issued 50,000 shares of common stock to
              individuals for services rendered.





                                       27

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 5 -      ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)

              During the period from August 1986 through  October 31, 1986,  the
              final expiration date for exercise, warrants to purchase 7,814,600
              shares  together with cash totaling  $781,460 were received by the
              Company which then issued 7,814,600 shares of new common stock. In
              January 1987,  an additional  2,600 shares were issued in exchange
              for warrants and cash of $259.

              In March 1987, the Company issued 1,000,000 shares of common stock
              in exchange for a patent (see Note 1).

              In June 1987,  the Company issued 950,000 shares to individuals in
              private transactions for aggregate proceeds of $150,000.

              During the period from June 1987  through  July 1987,  the Company
              issued  203,167  shares of common  stock to  various  vendors  and
              individuals for services rendered in 1986 and 1987.

              On August 26, 1987, an officer of the Company exercised options to
              purchase  250,000  shares of common stock.  In January  1988,  two
              holders  exercised  their  options and  acquired an  aggregate  of
              200,000 shares of common stock.

              On September 26, 1988,  the Company sold, in a private  placement,
              1,000,000  shares  of  common  stock  at  $0.08  per  share  to an
              individual.

              During 1988, the Company issued a total of 35,000 shares of common
              stock for services.

              During 1989,  the Company issued 261,889 shares of common stock to
              various vendors and individuals for services  rendered in 1988 and
              1989.

              During 1989, the Company issued 5,790,000 shares to individuals in
              private transactions for aggregate proceeds of $291,500.

              Also during  1989,  the Company  satisfied  obligations  for notes
              payable  to and  accrued  interest  due to  unrelated  individuals
              totaling  $377,539 by the issuance of  3,899,532  shares of common
              stock.  The Company  issued  250,000  shares of common stock to an
              officer and 600,000  shares of common  stock to three  advisors to
              the  Company  as  additional  compensation  for work  done for the
              Company.  These  issuances  were  ascribed  values of $60,650  and
              $145,539,  respectively,  by the Company.  Also during  1989,  two
              holders  exercised  their  options and  acquired an  aggregate  of
              375,000 shares of common stock.



                                       28

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 5 -      ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)

              During 1990,  the  following  equity  transactions  occurred:  The
              Company  issued   4,250,000   shares  to  individuals  in  private
              transactions  for  aggregate  proceeds  of  $179,500;  the Company
              satisfied   obligations  totaling  $125,000  to  the  former  vice
              president,  secretary and treasurer as well as director by issuing
              2,272,727  shares of common stock at $0.55 per share;  the Company
              satisfied  an   outstanding   account   payable  to  an  unrelated
              individual  totaling  $15,000 by the issuance of 150,000 shares of
              common  stock at $0.10 per  share;  and the  Company  issued to an
              employee  and four  other  unrelated  persons as  compensation  or
              payment a total of  880,000  shares  of  common  stock to which it
              ascribed a value of $88,000.

              During 1991,  the  following  equity  transactions  occurred:  The
              Company  issued   4,366,667   shares  to  individuals  in  private
              transactions  for  aggregate  proceeds  of  $310,000;  the Company
              issued a total of 425,000  shares of common stock for services and
              accrued  liabilities  of which an aggregate of 100,000 shares were
              issued to two directors; and three holders exercised their options
              and acquired an aggregate of 450,000 shares of common stock.

              During 1992,  the  following  equity  transactions  occurred:  The
              Company  issued   2,702,335   shares  to  individuals  in  private
              transactions  for  aggregate  proceeds  of  $430,350;  the Company
              issued a total of 401,500  shares of common stock for services and
              accrued  liabilities;  holders  exercised  options and acquired an
              aggregate of 250,000 shares of common stock.

              During 1993,  the  following  equity  transactions  occurred:  The
              Company  issued   1,471,666   shares  to  individuals  in  private
              transactions  for  aggregate  proceeds  of  $271,000;  the Company
              issued a total of 5,347,219  shares of common stock for  services.
              Also,  during  1993,  a total of $261,915 was received in cash for
              2,619,150  shares  subscribed  as a result of a private  placement
              offering.  The offering  commenced as of November 26, 1993, with a
              maximum of $700,000 to be raised in gross  proceeds  from the sale
              of up to 7,000,000 shares.

              During 1994,  the  following  equity  transactions  occurred:  The
              Company  issued a total of  1,431,590  shares of common  stock for
              services; the Company issued a total of 1,125,834 shares of common
              stock to certain prior  purchasers of common stock in  recognition
              of disparity in purchase in contemporaneous offerings. Also during
              1994,  a total of  $680,040  was  received  in cash for  6,800,499
              shares  subscribed as a result of the offering.  Subsequent to the
              offering, an additional $316,860 was received in cash from foreign
              investors  subscribing  to 3,168,600  shares of common  stock.  On
              December 28, 1994,  the Company  settled a dispute  regarding  the
              validity of notes  payable to former  management  in the amount of
              $2,033,628 by agreeing to issue 11,250,000 common shares (recorded
              as shares  subscribed) in  satisfaction of the total amount of the
              debt.

              Also in  1994,  $40,000  of  notes  payable  (a  portion  of loans
              totaling $60,000) together with interest, was satisfied by issuing
              416,500 shares of common stock.



                                       29

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 5 -      ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)

              During 1995,  the  following  equity  transactions  occurred:  The
              Company  issued a total of  2,050,000  shares of common  stock for
              services.  $911,825 was received  from  investors  subscribing  to
              9,118,260 shares of common stock.  Also,  7,524,860 common shares,
              previously  recorded  as  shares  subscribed,   were  issued,  and
              1,242,727 were retired in accordance with the settlement agreement
              with  former   management.   200,000  of  redeemable  shares  were
              converted  into common  stock.  The Company sold shares of its New
              Zealand subsidiary for aggregate proceeds of $150,000.

              During 1996, the Company  received stock  subscription  agreements
              for the purchase of 7,254,470 shares of its common stock, together
              with proceeds  totaling  $725,447 from sales of its  securities to
              non-United States investors, outside of the United States pursuant
              to  Regulation S  promulgated  under the  Securities  Act of 1993.
              Approximately $635,447 of these proceeds were from the sale of the
              Company's  common  stock at a per share price of $0.10  (including
              $37,500 for 375,000 shares from Richard G. Solomon,  at the time a
              director of the Company). The remaining $90,000 were from the sale
              of  900,000  units,  each  unit  consisting  of one  share  of the
              Company's common stock at a per share price of $0.10 to a director
              pursuant to the non-public  offering  exemption from  registration
              under the Securities  Act. In May 1996, the Company issued 600,000
              shares of its common stock to employees and 250,000  shares of its
              common  stock to its public  relations  consultant  as  additional
              compensation. The Company also issued 565,875 shares of its common
              stock to various consultants for services rendered.

              During 1997, the Company issued  3,089,680  previously  subscribed
              shares of its common stock and also issued 3,746,336 shares of its
              common stock to various consultants for services rendered. Also in
              1997, the Company received  $400,000 for  subscriptions to acquire
              5,714,285  shares of its common  stock and  warrants  to  purchase
              9,285,715  shares of common  stock at $0.07 per share,  25,000,000
              shares  at $0.20 per  share,  and  33,333,333  shares at $0.15 per
              share.

              During 1998, the Company issued  5,714,286  previously  subscribed
              shares of its common  stock and also  issued a total of  4,265,000
              shares of its common  stock to various  individuals  for  services
              rendered.  Also in 1998,  the  Company  issued  857,142  shares of
              common stock through exercise of outstanding warrants at $0.07 per
              share for a total of $60,000,  and issued 1,832,377 shares in lieu
              of outstanding debt of $126,418. The Company also canceled 630,000
              shares for services that were never performed.

              During 1999,  the Company issued 25,000 shares of its common stock
              to an  individual  for  services  rendered  valued at  $1,750.  In
              addition,  the Company  issued  936,507 shares of its common stock
              through the  exercise of  outstanding  warrants at $0.07 per share
              for a total of $65,555.






                                       30

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 5 -      ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)

              During 2000, the Company issued  3,142,857  shares of common stock
              through the  exercise of  outstanding  warrants at $0.07 per share
              for a total of  $220,000.  The  Company  issued  common  stock for
              services in two different  instances during the year. One issuance
              of  350,000  shares of common  stock for a total of  $61,250.  The
              other  issuance was for 300,000 shares of common stock for a total
              of  $85,500.  The  Company  issued  common  stock for debt in four
              separate instances. The first one being 2,020,000 shares of common
              stock  issued for a total of  $222,200.  The second  issuance  was
              95,000  shares of common  stock  was for a total of  $14,000.  The
              third  issuance  was 20,000  shares of common stock for a total of
              $4,000. The fourth issuance was 100,000 shares of common stock for
              a total of $55,000.  The Company also canceled 2,000,000 shares of
              common  stock  pursuant  to  the  settlement  agreement  with  the
              Company's former C.F.O.  (see Note 4). The Company also recognized
              an additional  expense of $1,743,468 for the extension of warrants
              below market value.

              As of December 31, 2000, the following warrants were outstanding:
<TABLE>
<CAPTION>

                      Warrants                            Exercise Price                       Termination Dates
              -----------------------               -------------------------          ----------------------------

<S>                       <C>                       <C>                                         <C>
                          25,000,000                $                    0.20                    May 31, 2001
</TABLE>

NOTE 6 -      NOTES PAYABLE

              Notes payable consisted of the following at December 31, 2000:

              Notes payable to ten stockholders, due on demand, plus interest at
               10% per annum (in  arrears).  The Company is  obligated to accept
               the rate at face value plus accrued  interest as partial  payment
               for shares the lender may purchase from the Company upon exercise
<TABLE>
<CAPTION>
<S>                                                                               <C>
               of the lender's option to acquire shares from the Company.         $          60,815


              Notes payable to directors  totaling $28,000 and a note payable to
               a third  party in the  amount of  $9,000,  due on April 22,  1995
               (principal  and accrued  interest in arrears as of report  date),
               plus  interest  ranging from 8% to 9% per annum.  Each lender has
               the right to convert any portion of the  principal  and  interest
               into  common  stock at a price per  share  equal to the price per
               share under the most recent private

               placement transaction.                                                        37,000


              Notes payable to directors and a family member of a director,  due
               at various dates in 1995,  1996 and 1997  (principal  and accrued
               interest in arrears as of report  date),  plus interest at 8% per
               annum.  The  Company  has the  right  to  repay  the  loans  with
               restricted stock at $0.10 per share if alternative financings
               do not occur.                                                                182,676
                                                                                  -----------------

              Total Notes Payable                                                           280,491

              Less: Current Portion                                                        (280,491)
                                                                                  -----------------

              Long-Term Notes Payable                                             $               -
                                                                                  =================
</TABLE>



                                       31

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 6 -      NOTES PAYABLE (Continued)

              The  aggregate  principal  maturities  of  notes  payable  are  as
follows:

                           Year Ended
                          December 31,                             Amount
                       -----------------                      -----------------

                              2001                            $         280,491
                              2002                                            -
                              2003                                            -
                              2004                                            -
                              2005                                            -
                              2006 and thereafter                             -
                                                              -----------------

                              Total                           $         280,491
                                                              =================

NOTE 7 -      STOCK OPTIONS

              All options are  exercisable  for a period of five years beginning
              one year from the date of grant. Compensation expense, measured as
              to the excess of the estimated fair value over the exercise price,
              was accrued over the service period.  If, on the date of exercise,
              the estimated fair value of a share of the Company's  common stock
              exceeded the exercise price, the exercise price was decreased by a
              like amount (but not below the par value of $0.001). At the end of
              each fiscal period, total accrued compensation was recorded as the
              difference between the adjusted exercise price and the fair market
              value at the end of the period  for all  exercisable  shares.  The
              total accrued  compensation  was adjusted each year for changes in
              the  fair  market  value of the  Company's  stock  and for  option
              exercises and cancellations.  The shares issued in connection with
              the exercise of the options were restricted  shares to be held for
              investment purposes only.

              In 1995,  as part of their  employment  agreements,  the Company's
              president and chief  executive  officer,  and  vice-president  and
              chief  financial  officer and  treasurer  were granted  options to
              purchase an aggregate of 4,500,000  shares of the Company's common
              stock at an exercise price of $0.20 per share,  which vested fully
              on  January  1,  1998.  The  fair  value of each  option  grant is
              estimated on the grant date using an option-pricing model with the
              following  weighted-average  assumptions  used for grants in 1995:
              risk-free  interest  rate of 6%, and expected  lives of 3 years of
              the options.

              In 2000,  the Company  granted to the Company's  attorney  250,000
              options to purchase common stock at an exercise price of $0.55 per
              share,  which vest fully on March 21, 2003. The fair value of each
              option   grant  is   estimated   on  the  grant   date  using  the
              Black-Scholes  option-pricing model with a risk-free interest rate
              of 6.5% and an expected life of 3 years. No additional expense was
              recorded   for  the  year  ended   December  31,  2000  under  the
              Black-Scholes option pricing model for these options.



                                       32

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 7 -      STOCK OPTIONS (Continued)

              The following is a summary of option transactions:

<TABLE>
<CAPTION>
                                                                                              Weighted
                                                                                               Average
                                                                                              Exercise
              Fixed Options                                                  Shares             Price
              -------------                                              ------------     -----------------

<S>                                                                         <C>           <C>
              Balance - January 1, 1996                                     4,500,000     $            0.20
              Granted                                                               -                     -
              Exercised                                                             -                     -
              Forfeited                                                             -                     -
                                                                         ------------     -----------------

              Balance - December 31, 1996                                   4,500,000                  0.20
              Granted                                                               -                     -
              Exercised                                                             -                     -
              Forfeited                                                    (3,000,000)                    -
                                                                         ------------     -----------------

              Balance, December 31, 1997                                    1,500,000                  0.20
              Granted                                                               -                     -
              Exercised                                                             -                     -
              Forfeited                                                             -                     -
                                                                         ------------     -----------------

              Balance, December 31, 1998                                    1,500,000                  0.20
              Granted                                                               -                     -
              Exercised                                                             -                     -
              Forfeited                                                    (1,500,000)                    -
                                                                         ------------     -----------------

              Balance, December 31, 1999                                            -                     -
              Granted                                                         250,000                  0.55
              Exercised                                                             -                     -
              Forfeited                                                             -                     -
                                                                         ------------     -----------------

              Balance, December 31, 2000                                      250,000     $            0.55
                                                                         ============     =================
</TABLE>

NOTE 8 -      PRIOR PERIOD ADJUSTMENTS

              The Company  has  restated  its  financial  statements  to reflect
              adjustments  to write  off  liabilities  which  were  accrued  and
              expensed  in  years  prior  to  fiscal  1992.  These   adjustments
              increased  previously  reported  accumulated  deficit  and reduced
              previously  reported results of operations (for the period January
              31,  1986,  date of  inception,  through  December  31,  1994)  by
              $219,422. During the first quarter of 1995, the Company recorded a
              further reduction to accumulated  deficit in the amount of $71,806
              relating to the cancellation of shares previously issued to former
              management.



                                       33

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 8 -      PRIOR PERIOD ADJUSTMENTS (Continued)

              Subsequent  to the  original  issuance  of the  December  31, 1999
              consolidated financial statements, the Company determined that the
              extension  of certain  stock  warrants  resulted in an  additional
              expense  to the  Company  for 1999 of  $123,389,  pursuant  to the
              Black-Scholes  pricing model.  The Company extended the expiration
              date on warrants to purchase shares of common stock. Correction of
              this error had the following effect on the previously reported net
              loss  for the  year  ended  December  31,  1999  and has an  equal
              understatement of retained deficit as of December 31, 1999.


<TABLE>
<CAPTION>
                                                     Originally               As
                                                       Reported            Restated            Difference
                                                  ----------------     ----------------     -----------------

<S>                                               <C>                  <C>                  <C>                  <C>
               Net loss                           $       (236,182)    $       (359,571)    $        (123,389)   (1)
               Additional paid-in capital               12,676,882           12,800,241               123,389    (1)
               Loss per share                     $          (0.00)    $          (0.00)    $               -    (2)
</TABLE>

               (1) Relates to additional expense for the extension of warrants.
               (2) The loss per share was not effected by the corrections of
                   errors.

NOTE 9 -       REDEEMABLE COMMON STOCK

               On February 12, 1993,  per a  settlement  agreement,  the Company
               issued 200,000 shares of restricted  common stock to an unrelated
               third party.  According to the agreement,  if the Company files a
               registration statement for an offering of its securities, it must
               use its best efforts to include  such shares in the  registration
               statement.  If all,  or any  portion of the shares  have not been
               purchased  by the Company or all the shares have not been covered
               by an effective registration,  then the Company shall be required
               to pay,  no later than  April 13,  1995,  an amount  equal to the
               lesser of  $50,000  minus the  aggregate  purchase  price  amount
               payable under the formula set forth in the agreement, or $25,000.
               In September  1995,  the Company  paid $5,000 and issued  200,000
               shares of restricted common stock in full and final settlement of
               the agreement.

NOTE 10 -      GOING CONCERN

               The  Company's  consolidated  financial  statements  are prepared
               using generally accepted  accounting  principles  applicable to a
               going concern which  contemplates  the  realization of assets and
               liquidation of liabilities in the normal course of business.  The
               Company has historically  incurred  significant losses which have
               resulted in an accumulated deficit of $16,330,148 at December 31,
               2000 which raises  substantial  doubt about the Company's ability
               to continue as a going  concern.  The  accompanying  consolidated
               financial  statements do not include any adjustments  relating to
               the  recoverability  and classification of asset carrying amounts
               or the amount and classification of liabilities that might result
               from the outcome of this uncertainty.



                                       34

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999

NOTE 10 -      GOING CONCERN (Continued)

               Continuation  of the Company as a going concern is dependent upon
               obtaining  additional capital,  obtaining the requisite approvals
               from the FDA and/or  the EU for the  marketing  of  ozone-related
               products  and  equipment,  and  ultimately,  upon  the  Company's
               attaining  profitable  operations.  The  Company  will  require a
               substantial   amount  of   additional   funds  to  complete   the
               development   of  its   products,   to  establish   manufacturing
               facilities,  to build a sales and marketing  organization  and to
               fund  additional  losses which the Company  expects to incur over
               the next several years.

               Because  ozone-generation  for the purposes of  interfacing  with
               blood and  blood  products  is  regarded  as a new drug  delivery
               system, the Company is precluded from selling or distributing its
               drug or the Medizone  Technology in the United States until after
               FDA approval has been  granted.  In order to obtain FDA approval,
               the Company  will be  required  to submit a New Drug  Application
               ("NDA") for review by the FDA and provide  medical and scientific
               evidence sufficient to demonstrate that the drug and the Medizone
               Technology has been  successfully  used in  pre-clinical  studies
               followed  by three  phases of  well-controlled  clinical  studies
               using  human  volunteer  subjects.  The FDA will not grant an NDA
               unless it contains sufficient medical evidence and data to permit
               a body of qualified and  experienced  scientists to conclude that
               the new drug product is safe and  effective  for its  recommended
               and  proposed  medical  uses.  Historically,  the FDA has  held a
               strong bias against  treating  humans with ozone,  due largely to
               issues of safety.

               In order to  initiate  the first phase  (i.e.,  Phase I) of human
               clinical  trials  required as part of an NDA, an  applicant  must
               submit to the FDA an application for an Investigational  New Drug
               Exemption ("IND"), which contains adequate information to satisfy
               the FDA that  human  clinical  trials  can be  conducted  without
               exposing the volunteer human subjects to an unreasonable  risk of
               illness or  injury.  The  Company  submitted  an IND  application
               (assigned to the Company by its former  president)  to the FDA on
               October 6, 1985,  and  requested  FDA approval to commence  human
               clinical  trials using ozone- oxygen to  inactivate  HIV. The FDA
               deemed the IND  application  to be  incomplete,  and required the
               Company to conduct  additional animal studies prior to commencing
               a large animal study and human trials.  In September 1994,  after
               not  receiving  responses  to requests for  information  from the
               Company,  the FDA  inactivated the Company's IND. The Company has
               no present  plans to commence a large animal  study,  which would
               require,  as a precursor,  additional small animal and laboratory
               work.  Accordingly,  there can be no assurance that the Company's
               IND  application  will  ever be  reopened.  Until an NDA had been
               granted to the Company,  it may not  distribute  ozone-generating
               devices,   except  to   researchers   who  agree  to  follow  FDA
               guidelines,   and   provided   the   devices   are   labeled   as
               "Investigational Devices."

               Because  ozone  has been used to treat  humans  in Europe  for at
               least 30 years, the EU is more accepting of human clinical trials
               of ozone  therapies  being  conducted  than is the United States.
               Accordingly,  management  believes that the Company should pursue
               the option of conducting  human clinical trials in Europe,  using
               stringent  protocols that will meet EU standards,  with a view to
               utilizing  the  results of such a trial in an effort to obtain EU
               approval,  to market  the  product  in Europe  and to reopen  the
               Company's FDA file.


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<PAGE>


                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 2000 and 1999


NOTE 10 -      GOING CONCERN (Continued)

               The management of the Company intends to seek additional  funding
               which will be utilized to fund  additional  research and continue
               operations. The Company recognizes that, if it is unable to raise
               additional  capital,  it may find it necessary  to  substantially
               reduce or cease operations.

NOTE 11 -      SUBSEQUENT EVENTS

               Subsequent to December 31, 2000, the following events occurred:

               On February 16, 2001,  the board of directors  accepted a private
               stock  placement from an accredited  investor.  The placement was
               for 500,000  shares of the Company's  restricted  stock placed at
               $0.20 per share  ($100,000.00).  The board of  directors  granted
               warrants to purchase an additional  1,000,000  shares of stock at
               $0.20 per share in the same action.  The warrants have a two year
               expiration.

               On March 21,  2001,  the board of  directors  accepted  a private
               stock  placement from an accredited  investor.  The placement was
               for 200,000  shares of the  Company's  restricted  stock place at
               $0.15 per share  ($30,000.00).  The  board of  directors  granted
               warrants  to purchase an  additional  400,000  shares of stock at
               $0.15 per share in the same action.  The warrants have a two year
               expiration.

               On April 9, 2001, the board of directors accepted a private stock
               placement  from an  accredited  investor.  The  placement was for
               166,666 shares of the Company's  restricted stock placed at $0.15
               per share  ($25,000.00).  The board of directors granted warrants
               to purchase an  additional  166,666  shares of stock at $0.15 per
               share  in  the  same  action.   The  warrants  have  a  two  year
               expiration.


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