<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                           Washington, D.C. 20549
                           ----------------------
                                 FORM 10-K

(Mark One)

 X       Annual  report  pursuant  to  section  13 or  15(d)  of the  Securities
         Exchange Act of 1934 for the fiscal year ended December 31, 1998, or

___      Transition report pursuant to 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.
       ----------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

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

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

Registrant's telephone number (including area code):  (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

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment hereto. Yes __ No X

     The aggregate market value of voting common stock held by non-affiliates of
the Registrant was $5,388,427 on December 31, 1998, 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 January 8, 1999,  the Company had  148,926,434  shares of common  stock,  par
value $.001 per share issued and outstanding.





<PAGE>



                                TABLE OF CONTENTS

                                     PART I
                                                                         Page

Item 1.  Business..........................................................1

Item 2.  Properties.......................................................18

Item 3.  Legal Proceedings................................................19

Item 4.  Submission of Matters to a Vote of Security Holders..............19

                                     PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder
         Matters..........................................................20

Item 6.  Selected Financial Data..........................................21

Item 7.  Management's Discussion and Analysis
         of Financial Condition and Results of Operations.................21

Item 8.  Financial Statements and Supplementary Data......................22

Item 9.  Changes in and Disagreements with
         Accountants on Auditing and Financial Disclosure.................23

                                    PART III

Item 10. Directors and Executive Officers of the Registrant...............24

Item 11. Executive Compensation...........................................25

Item 12. Security Ownership of Certain
            Beneficial Owners and Management..............................26

Item 13. Certain Relationships and Related Transactions...................27

                                     PART IV

Item 14. Exhibits, Financial Statement
         Schedules, and Reports on Form 8-K...............................29

Signatures................................................................34

Exhibits Index...........................................................E-1

Financial Statements and Schedules.......................................F-1








                                        i

<PAGE>



                                     PART I

Item 1.  Business
         --------

General

         Medizone  International,  Inc., a Nevada  corporation  (the  "Company")
organized  in 1986,  is a  development  stage  company.  To date  its  principal
business  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
virally-based diseases (including Human Immunodeficiency Virus ["HIV"], the AIDS
related   virus,   Hepatitis   B,   Hepatitis   C,   Epstein-Barr,   herpes  and
cytomegalovirus), and to decontaminate blood and blood products. Applications of
these uses are covered under the Company's patent (U.S.  Patent No.  4,632,980).
The Medizone  Technology was developed for the production of the Drug and is the
basis for the  design of  equipment  for which a patent  has been  issued in the
United States  (Patent No.  5,052,382).  The Company has also  obtained  several
foreign patents based on these patents.


Patents

         The Company 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" (the "Patent"). 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" (the "Equipment Patent").

         The Patent, which covers a procedure for ozone decontamination of blood
and blood products through the treatment of blood and blood  components,  is the
Company'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 the Company's  common stock (the "Patent Purchase
Agreement").  John M. Kells,  the general  partner of ILP,  was  Chairman of the
Company's Board of Directors from November 1992 through September 1993.

         The Patent  Purchase  Agreement  requires  the Company to pay to ILP an
annual  royalty equal to 3% of the net receipts  (i.e.,  net receipts  after all
credits,  returns and customary  deductions,  and exclusive of all taxes) of the
Company  received  in  connection  with  the  sale of any  product,  device,  or
apparatus  embodying  the  Patent.  The  method  covered  by the  Patent  is the
principal use of ozone under study by the Company and is the method incorporated
in its regulatory applications.  In June 1990, pursuant to the Company's request
for re-examination of the Patent, the U.S. Patent Office issued a re-examination
certificate,  confirming the  patentability of the claims covered by the Patent.
The Patent will expire in 2003, subject to

                                        1

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extension  based  upon the  length  of time  required  to bring  the  Patent  to
commercial  fruition.  The  Company  has  been  granted  patents  (based  on the
Patent)in Canada and the European Patent Community,  Australia,  Malaysia,  Hong
Kong and Japan,  with  applications  pending in Singapore.  The foreign  patents
began to be issued in 1990 and will expire 17 years after their respective dates
of issuance.

         The  Equipment  Patent,  which  covers  apparatus  for  the  controlled
generation,  monitoring  and dosage of a precise  admixture  of ozone and oxygen
i.e., the Drug, was developed by a consultant engineer to the Company and issued
and  assigned to the Company in 1991.  The  Equipment  Patent was  developed  to
provide the physical means to deploy the Patent.  The foreign patent coverage of
the Equipment Patent parallels the coverage of the Patent.

         In late 1996,  the Company became aware that a United States patent had
been  issued to a  Canadian  corporation,  which it  believes  infringes  on the
Medizone patent. The Company contacted its patent attorneys who took appropriate
steps to protect the Company's patent rights. While the Company never received a
response to its  protests,  it has been  reported the Canadian  company did stop
working with ozone.

         On July 30, 1998, the Company was given recorded  assignment US. Serial
No.  09/126,504  for  a  new  patent   application,   External   Application  of
Ozone/Oxygen  For  Pathogenic   Conditions.   The  Company  believes  that  this
application,  if granted,  would  strengthen  the Company's  existing  equipment
patents as it addresses advanced developments with ozone generating equipment.


Research and Development

         The Company does not own  laboratories  or other  clinical  research or
testing facilities.  The Company's research and development activities have been
conducted by contract  laboratories  and  clinicians.  Research and  Development
activities  are directed by Gerard V. Sunnen,  MD. Dr. Sunnen is a member of the
Board of Directors  and also serves as President and Director of Research of the
Company.


Pre-clinical Studies

         Pre-clinical  Studies  are  non-human  studies of the Drug and  related
equipment.  Since 1988, the Company has both sponsored and been the  beneficiary
of research,  among other  things,  (i) to  determine  whether the use of ozone,
either  alone or with other  modalities,  is  efficacious  in the  treatment  of
certain  diseases  and (ii) to 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 the Company include: (1) studies to
test ozone's ability to inactivate HIV, conducted at the State University of New
York ("SUNY") 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

                                        2

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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 the Company 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.  The  Company'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,  the Company vies this study of the Drug as
a success,  in that the  treated  simians  never  became ill  through the entire
course of the trial period.


Governmental Regulation

         The  Drug,  the  Medizone   Technology  and  related  products  derived
therefrom  are regulated  under the Federal Food,  Drug and Cosmetic Act and the
regulations  promulgated  thereunder  (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" pursuant to the FDC.

         Because ozone  generation  for purposes of  interfacing  with blood and
blood products is regarded as a new drug delivery, the Company is precluded from
selling or  distributing  the Drug or the  Medizone  Technology  until after FDA
approval has been granted. In order to obtain FDA approval,  the Company 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"  or 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.

         In order to  initiate  the  first  phase  (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.  The Company  submitted an IND  application  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

                                        3

<PAGE>



to commencing a large animal study and human trials.  In September 1994, 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  re-opened.  Until an NDA has 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 European Union (the "EU") is more accepting than the United States of
human clinical trials of ozone therapies.  Accordingly,  management believes the
Company should pursue foreign Phase I human  toxicity  trials,  as well as early
stage efficacy trials.

         It is the Company's intention to pursue future trials in Canada as soon
as funding allows. The Company believes trials successfully  completed in Canada
should be acceptable to both the United States FDA and the  Regulatory  Agencies
of the EU.

Clinical Studies

         The Italian Initiative

         To date the Company has not performed any human  clinical  studies.  In
late 1992,  the Italian  Ministry of Health  suspended the clinical use of ozone
until such time as sufficient  scientific  evidence was available to support its
use as a human therapeutic treatment.  The Italian Ministry of Health designated
the Italian  Scientific  Society  for  Ozone-Oxygen  Therapy in  Bergamo,  Italy
("ISSOT") as the agency to select those treatment  protocols  utilizing ozone as
worthy of  investigation  and to provide those protocols to the Italian Ministry
of Health for review and  approval.  By letter  agreement  dated March 23, 1993,
with ISSOT, the Company entered into a collaborative arrangement to research and
examine the  efficacy of the  Medizone  Technology  in the  treatment of various
blood-related  human  diseases.  The  research is to be  supervised  by ISSOT in
Italy, under the direction of a research group assembled by the Italian Ministry
of Health.  The research is to be conducted in accordance  with  protocols  that
will meet EU  Standards  for  human  clinical  trials  (to be  furnished  by the
Company) at  university-based  hospitals,  which will enter into agreements with
the Company on a site-by-site  basis.  The ISSOT letter  agreement  requires the
Company to furnish ozone-generating instruments for use in the trials and to pay
for laboratory tests performed by each testing  institution that are outside the
scope  of the  normal  realm  of  clinical  analyses  performed  by the  testing
institutions.  There can be no assurance that any of the data generated from the
ISSOT  research will be permitted to be utilized in connection  with the Company
efforts to re-open the FDA IND (see "Governmental Regulation").

         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 trials or
to have these  requirements  waived.  The  Company  has never  performed a large
animal study or Phase I 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

                                        4

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medical  journals  describing  the use of ozone on humans.  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 a Phase I clinical study. The ICRO would also design a research program and
protocols for clinical  trials which would meet the standards of the EU and 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 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 clinical trials and possibly a large
animal study. In late 1997, the Company entered into discussion with Italian and
Belgium  clinicians  to perform  Phase I clinical  studies.  However,  no formal
agreements  with these  clinicians  can be signed and the studies will not begin
until the Company  obtains  additional  funding.  The Company  estimates that it
would require  approximately $1.5 million to advance these research  initiatives
through  the  completion  of a Phase III study  and  submission  of the data for
approval to the Italian Ministry of Health.


Instrument Development

         On  October  17,  1996,   the  Company   executed  an  agreement   with
Multiossigen,  S.r.L.,  an Italian  corporation  located in Bergamo,  Italy (the
"Manufacturer"),  dated as of  September  13, 1996 (the  "Equipment  Contract"),
providing for the  manufacture of ozone  generating  devices to be used in human
trials.

         In November 1997, the Company's  President & CEO,  Director of Research
and Italian Liaison,  met in Italy with the Company's  proposed Italian research
partners and the Company's ozone generating equipment manufacture, Multiossigen,
S.r.L.  At that time they  determined  that the  equipment  did not  produce  an
acceptable level of ozone  concentration,  nor did it allow a consistent  dosage
required to satisfy the Company's  goals relative to  therapeutic  treatment and
regulatory approval.

         An agreement was made to manufacture equipment to the new standard. The
new equipment was originally to be delivered in late January of 1998,  that date
was then  extended  to late  March of 1998.  When it  appeared  that it might be
difficult for  Multiossigen  to meet the  Company's  requirements,  Dr.  Guenter
Moldzio, President of Biozone Corporation of Englewood,  Colorado was contracted
to build a  prototype  of the  required  equipment.  The Biozone  prototype  was
delivered to Medizone in 60 days. Following extensive testing by Dr. Sunnen, the
Company's  Director  of  Research,  the  prototype  was  accepted.  Used  in the
veterinary  research program  investigating the deactivation of viruses in serum
products, the Biozone equipment appears to meet all of the Company's development
goals.

         By September of 1998, Multiossigen had not delivered the new equipment
to Medizone and the agreement with Multiossigen was terminated. The Company

                                        5

<PAGE>



entered into an  agreement  with Biozone  Corporation,  under which  Biozone was
granted world wide manufacturing rights for Medizone Ozone Generating Equipment.
Medizone has  exclusive  world wide  marketing  rights for Biozone  manufactured
equipment  intended  for  scientific  research and medical  applications,  to be
marketed under the Medizone label.  Biozone  Corporation  expects to relocate to
California  in the future,  so the  manufacturing  facility  can be located near
Medizone's  corporate  headquarters.  Under this agreement,  Biozone retains 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.  As part of this licensing  agreement
the Company issued 100,000 shares of restricted stock Biozone Corporation.


International Activities

         Medizone Canada Limited
         -----------------------

         To maximize both research  opportunities  and the potential  market for
its  products,  the  Company  intends  to  establish  subsidiary  or  affiliated
corporations in other  countries.  The  organization of these  subsidiaries  may
initially require the Company 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 the Company
would benefit  directly or indirectly.  It is anticipated that the Company would
also enter into license agreements with all subsidiary companies.

         In June 1998, the Company sold its interest in Medizone Canada Limited,
a Utah  corporation  ("MCL")for  $125,000  cash in a  private  transaction.  The
Company  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  research  accepted  under the
auspices of the Health  Canada must be performed by a Canadian  Company.  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.
Furthermore, unlike US Law, under Canadian law, a for profit corporation can own
a  non-profit.  The Company  also intends to  establish  under the  structure of
Medizone  Canada,  Ltd.,  a  non-profit  corporation  in the future.  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,  the  Company  entered  into a series  of  contracts
(collectively the "Transaction  Documents") which resulted in the formation of a
joint  venture  subsidiary  incorporated  in New  Zealand,  Medizone New Zealand
Limited  ("MNZ").  MNZ,is owned equally under the name by the Company and Solwin
Investments Limited ("Solwin"),  a New Zealand corporation which is an affiliate
of Richard G. Solomon ("Solomon"),a former director of the Company.

                                        6

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MNZ is a research and  development  stage  company  formed 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 Transaction  Documents,  the Company  purchased 100% of
MNZ from Solomon,  who had caused the formation of MNZ.  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 loaned by the Company to MNZ on a
demand  basis and repaid on October 26, 1995.  On October 26, 1995,  the Company
loaned MNZ $50,000 on a demand  basis,  which has not been repaid as of the date
of this report.

         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") with MNZ.

         Under the Licensing Agreement, the Company granted an exclusive license
to MNZ for the Patent and the Equipment  Patent and the  Company'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.  The Company will receive a 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
Licensing Agreement.  Commencing on the first sale to a user by MNZ, the Company
will receive a sales  royalty of MNZ's gross  annual  sales under the  Licensing
Agreement.

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

<TABLE>
<CAPTION>
                                        The Company                        MNZ
                                        -----------                        ---
<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 under any license entered into pursuant to the Managing Agent Agreement,
with MNZ being paid 10% of the net royalties and the Company

                                        7

<PAGE>



receiving 90% of the net royalties.

         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 the Company under certain circumstances.


Competition

         The market in which the Company  intends to do  business  is  extremely
competitive.  The  Company  is aware of  several  domestic  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.  The  Company  is also  aware  that
another  company has provided  ozone-generating  equipment to departments of the
Canadian government  conducting studies in Canada for the purposes of comparison
of technologies.

Employees

         As of December  31,  1998,  the Company had four  employees.  Gerard V.
Sunnen,  MD. the  Director of  Research  since June 12,  1997 and  President  of
Medizone since April 15, 1998;  Edwin G.  Marshall,  Chairman of the Board since
June 12,  1997 and  Chief  Executive  Officer  since  April  15,  1998;  Jill C.
Marshall,  ND,  Chief  Operating  Officer  since  April 15,  1998 and  Corporate
Secretary  since  August  6,  1998;  and Kevin R.  Andersen,  CPA,  M.S.,  Chief
Financial Officer since November 2, 1998.

         Status of the Company's Research
         --------------------------------

         The Company has entered into a research agreement with a multi national
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 then enter
into  a  licensing  agreement  for  the  use  of its  technology  in  the  viral
deactivation of commercial vats of serum product.

         At the Company's 1998 Annual meeting of Shareholders,  it was announced
that a human pilot trial into the  deactivation  of  hepatitis C had begun.  The
pilot trial,  using Medizone ozone generating  equipment  constructed by Biozone
Corporation,  was  conducted by a Company  associate,  Dr.  William Hitt, in the
course of his  regular  medical  practice.  Dr. Hitt is a member of the Board of
Directors and operates the William Hitt Center in Tijuana,  Mexico.  The initial
results,  with the first four patients,  showed significant  reductions in viral
load and the  normalization  of  previously  elevated  liver  enzyme  levels  as
measured by SGOT and SGPT tests. While the therapy, consisting of an out-patient
daily treatment protocol, averaging 21 days in duration, was done in Mexico, the
laboratory  tests were  evaluated at FDA  reference  laboratories  in the United
States. The pilot trial was not conducted as a double blind, or under conditions
that would allow for peer review,  journal published research as required by the
FDA.  However,  as a proof of concept  human  trial for the  Company's  proposed
hepatitis protocols, we view the study as a very positive

                                        8

<PAGE>



development.

RISK FACTORS

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

         Development Stage Company/Net Losses
         ------------------------------------

         The Company is in the development  stage and has not yet commenced full
operations,  nor has it earned any revenues.  No assurance can be given that its
business  activities will ever generate revenues.  As indicated in the Company's
financial  statements,  it has  experienced  substantial  losses  throughout its
history. Losses can be expected to continue for the foreseeable future.

         Need for Additional Financing
         -----------------------------

         The Company  has had no source of funds other than  through the sale of
its common stock and will require  substantial  additional  capital,  which will
most likely be  obtained  through  sales of its common  stock,  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 the Company
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
the Company's  administrative  and operating expenses for any significant period
of time.

         Production Identification & Development
         ---------------------------------------

         The Company  believes that its proprietary  technology  offers benefits
which  are not  currently  found  in  existing  purification,  disinfection  and
sterilization  systems.  To date,  the  Company  has not  brought  to market any
products  which  incorporate  the  technology  and has not conducted  other than
preliminary clinical, engineering or other tests to determine the feasibility of
products which could  incorporate the technology,  although it believes that the
technology may be incorporated into other products and devices.  The Company has
conducted  proof-of-concept  tests  of  the  technology,  but  there  can  be no
assurance  that the Company will be able to develop or market any  products,  or
that the Company's technology may be successfully incorporated into any existing
or future products.

         Early Stage of Development; Technological Uncertainty
         -----------------------------------------------------

         The Company is at an early stage of development it has not received any
required  governmental  approvals  for the use or  application  of its  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 the Company is currently  evaluating will require  significant
research and development efforts prior to any commercial use, and

                                        9

<PAGE>



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 the Company's research and development  efforts will be successful,
that the Company'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 the Company.

         Potential Dependence On Strategic Alliances
         -------------------------------------------

         The Company's strategy for the  identification,  development,  testing,
manufacture, marketing and commercialization of its technology includes entering
into various  collaborations with corporate partners,  licensors,  licensees and
others.  There can be no  assurance  that the Company  will be able to negotiate
strategic  alliances on acceptable terms, if at all, or that these collaborative
arrangements  will be successful.  To the extent the Company  chooses not, or is
not able, to establish such arrangements,  it could experience increased capital
requirements as a result of its undertaking  such activities at its own risk and
expense.  In  addition,   the  Company  may  encounter   significant  delays  in
introducing  products or product  applications  currently under development into
the  marketplace  or  find  that  the  development,  manufacture  or sale of its
proposed  products are adversely  affected by the absence of such  collaborative
agreements.

 Under typical collaborative relationships,  the collaborative partners have the
right to pursue  parallel  development  of other products which may compete with
the products of the other collaborative partner, and to terminate the agreements
without significant penalty under certain conditions.  Any parallel  development
by a collaborative  partner of the Company of competing products, or the failure
by a collaborative partner to devote sufficient resources to the development and
commercialization  of the  Company's  products,  could have a  material  adverse
effect on the Company's business, financial condition or results of operations.

         The Company's success may depend upon, among other things,  the skills,
experience and efforts of the Company's  collaborative  partners,  employees who
are responsible for the collaborative  project, such partners' commitment to the
collaborative arrangement,  and the financial condition of such partners, all of
which are beyond the  control of the  Company.  If one or more of the  Company's
collaborative  partners defaulted on their obligations under their collaborative
arrangements,  the Company  could be forced to engage in  litigation  to enforce
those  obligations  (which could be time  consuming and costly) or seek to enter
into agreements with other parties upon similar terms.

         Future Capital Needs; Uncertainty of Additional Funding
         -------------------------------------------------------

         The identification,  development and commercialization of the Company's
products  and  technology  will  require a commitment  of  substantial  funds to
conduct research and development activities,  including possible preclinical and
clinical studies, to create and expand  distribution and marketing  capabilities
and to acquire and expand manufacturing capacity.  Although the Company believes
that the net proceeds of the Offering,  together  with  existing cash  balances,
will be sufficient to fund the operations of the Company for

                                        10

<PAGE>



approximately  the next two years, the Company may be required or elect to raise
additional  capital before that time. The Company's actual capital  requirements
will depend on many factors,  including but not limited to, the costs and timing
of the Company's  research and  development  activities,  the number and type of
clinical  or other  tests the  Company  may be  required  to  conduct in seeking
approval of its products from governmental or other agencies, the success of the
Company's  development efforts, the cost and timing of establishing or expanding
the Company's sales and marketing and/or manufacturing activities, the extent to
which the  Company's  products (if any) gain market  acceptance,  the  Company's
ability  to  establish  and  maintain  collaborative  relationships,   competing
technological   and  market   developments,   the  progress  of  the   Company's
commercialization  efforts and the  commercialization  efforts of the  Company'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,  the  Company may seek to raise
funds through public or private financings, collaborative relationships or other
arrangements.  Any 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
the Company to relinquish its rights to certain of its technologies, products or
marketing territories.  The Company's failure to raise capital when needed could
also  have a  material  adverse  effect  on the  Company'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 the Company,
if at all.

         Governmental Regulation
         -----------------------

         The research,  development,  manufacture and marketing of the Company'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  ("FDA"). 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,  uncertain  and may  require  extensive  and
expensive  clinical  trials.  There can be no assurance that any future products
developed by the Company 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 the  Company  obtains  from its testing
activities  could be  susceptible to varied  interpretations  which could delay,
limit or prevent required  regulatory  approvals.  In addition,  the Company 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.  The Company 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

                                        11

<PAGE>



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 the
Company.  Any such  events,  were they to occur,  could have a material  adverse
effect on the Company's business, financial condition and results of operations.

         The Company 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 the Company's products
or supplying  materials or  components  for such products may also be subject to
these  manufacturing  practices and mandatory  procedures.  If the Company,  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.

         The Company's  products may also be subject to  regulation,  inspection
and  licensing  by other  governmental  agencies,  including  the  Environmental
Protection  Agency  ("EPA"),  state agencies  similar to the FDA and EPA and the
Occupational  Health and Safety  Administration  ("OSHA").  In addition,  if the
Company engages in contract  sterilization  services, the Company'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.

         Uncertainty Associated with Clinical Trials and Other Tests
         -----------------------------------------------------------

         Certain of the Company's products may constitute medical devices within
the meaning of the Food,  Drug and Cosmetic Act (the "FDA 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 ("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 under ss.
515 of the FDA Act.  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

                                        12

<PAGE>



be no assurance that any product  developed by the Company 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 the Company 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   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 the  Company is required  to conduct  clinical  or other  testing or
trials of its products,  any such testing will need to 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.  The Company'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 the Company 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 the Company's  products.  If any of the  Company'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  preclinical  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 the Company's business, financial condition and results of operations.

         No Manufacturing Capability
         ---------------------------

         The Company has 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. The Company  initially intends to
develop  relationships  with other  companies to  manufacture  those  components
and/or  products,  with the Company being primarily in the role of specification
developer and final assembly  manufacturer  for selected  products only. The two
products  currently being developed by the Company 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

                                        13

<PAGE>



introduction,  subsequent  sales of such  products,  which could have a material
adverse effect on the Company's and business, financial condition, or results of
operations. The Company'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
the Company'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 the Company's  manufacturing  processes would be successful,  or that
manufacturing  or  quality  problems  will not  arise as the  Company  initiates
production of any products it might develop.

         In  addition,  some  or all of the  Company's  potential  products,  or
products in which the Company'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
the Company can  successfully  acquire  manufacturing  capacity on a  profitable
basis, or contract with another party on terms acceptable to the Company,  if at
all.

         No Sales or Marketing Capability
         --------------------------------

         The Company has no experience in sales,  marketing or distribution.  To
market any of its products directly,  the Company would be required to develop a
marketing  and  sales  force  with  technical   expertise  and  with  supporting
distribution capability. Alternatively, the Company may obtain the assistance of
other companies with an established  distribution  and sales force. To this end,
the  Company  would be  required  to enter  into  agreements  with such  parties
regarding the use and maintenance of such distribution systems and sales forces.
There  can be no  assurance  the  Company  will be able to  establish  sales and
distribution  capabilities,  or that it will be  successful  in  gaining  market
acceptance for its products through the use of the efforts of third parties.

         The  Company  intends to develop  and  maintain a  marketing  and sales
organization  for its products  with a portion of the proceeds of the  Offering.
There  can be no  assurance  the  Company  will be able to  recruit,  train  and
maintain  successfully  any such  sales  and  marketing  personnel,  or that the
efforts of such personnel will be successful.


         Uncertainty of Protection of Patents or Proprietary Rights
         -----------------------------------------------------------

         The  Company'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.  The Company's license rights in the patents
depends,  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 the Company's  business.  The Company intends to
file additional patent applications (both United States and

                                        14

<PAGE>



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 the Company 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 the Company.

         The commercial success of the Company will also depend, in part, on the
Company not infringing patents issued to others and not breaching any technology
licenses  upon which the  Company's  products  and  services  are  based.  It is
uncertain  whether any third party patents will require the Company 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, the Company 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 the Company
will be able to obtain any such licenses on commercially  favorable terms, if at
all.  The  Company'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 the Company's  business,  results
of operations and financial condition.  Further,  litigation, which could result
in substantial  costs to the Company,  may also be necessary to enforce  patents
licensed or issued to the Company or to determine the scope or validity of third
party proprietary  rights. If competitors of the Company prepare and file patent
applications  in the United  States that claim  technology  also  claimed by the
Company,  the  Company  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 the Company,  even if the
eventual  outcome is favorable to the Company.  An adverse outcome could subject
the Company to significant liabilities to third-parties, require disputed rights
to be  licensed  from  third-parties  or require the Company to cease using such
technology.

         The  Company  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 the Company,  including but not
limited  to its  know-how,  trade  secrets,  methods  of  operation,  names  and
information  relating to the Company's  vendors or suppliers and customer  names
and addresses.  This technology  includes  technology which the Company acquired
from two parties in connection with, but separate from, the patented  technology
from Biozone, a portion of which the Company has acquired and a portion of which
it has obtained a license to use.  There can be no assurance  that the Company's
undivided ownership and/or license rights in such technology is enforceable.

         The  Company  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 the Company
will have adequate remedies for any breach,  whether the Company's trade secrets
and other  confidential  and proprietary  information  will not otherwise become
known or be independently discovered or reverse-engineered by competitors.

                                        15

<PAGE>



         Intense Competition; Rapid Technological Change
         -----------------------------------------------

         There can be no assurance the Company'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  the  Company'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 the Company. 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 the Company's technology.

         The Company 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 the  Company's  competitors  will not develop more  effective or
more  affordable  products,  or achieve  earlier  patent  protection  or product
commercialization than the Company.

         Product Liability
         -----------------

         The  testing,  marketing  and sale of medical or clinical  products and
other products which may utilize the Company's  technology involves  unavoidable
risks. The use of any of the Company'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 the Company 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.
The Company  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 the Company 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 the Company  against such  liability.  The
obligation to pay any product  liability  claim in excess of whatever  insurance
the Company is able to  acquire,  or the recall of any of its  products  (or the
products incorporating the Company's technology),  could have a material adverse
effect on the Company's business, financial condition and future prospects.

         Hazardous or Toxic Materials
         ----------------------------

                                        16

<PAGE>



         The Company's research and development activities,  and the application
of the  Company's  technology,  may involve  the  controlled  use of  materials,
substances  or  electro-magnetic  radiation  which  may,  if  used  or  employed
improperly,  prove hazardous. The Company believes, however, that its technology
employs such potentially hazardous or toxic materials and substances in a manner
which minimizes their adverse effects. Further, where such hazards are employed,
the  Company  intends  to  utilize  appropriate  detection  equipment  and  take
appropriate countermeasures in design, or in the test lab environment.

         Need to Attract and Retain Key Employees and Consultants
         --------------------------------------------------------

         The Company is dependent on the principal members of its scientific and
management  staff. In addition,  the Company  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 the Company's  success.
In order to pursue its product development and marketing plans, the Company 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.  The
Company faces  competition for qualified  individuals  from numerous medical and
clinical companies,  universities and other research institutions.  There can be
no assurance the Company will be able to attract and retain such  individuals on
acceptable terms, when needed, and to the degree required.

         The Company 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 the  Company's
academic  collaborators  will not be employees of the Company.  As a result, the
Company will have limited control over their activities and can expect that only
limited amounts of their time will be dedicated to the Company's activities. The
Company's  academic  collaborators may have  relationships with other commercial
entities, some of which could compete with the Company.


        Uncertainty of Health Care Reform Measures and Third Party Reimbursement
        ------------------------------------------------------------------------

         The Company  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 the Company  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 the Company's ability to raise
capital, and the adoption of such proposals could have a material adverse effect
on the  Company's  business,  financial  condition  and  results of  operations.
Furthermore,  the Company'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

                                        17

<PAGE>



and  profitability  of other  companies that are prospective  collaborators  for
certain of the Company's proposed products.

         Forward-looking Statements
         --------------------------

         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 the Company, or 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,  the Company's
unprofitability  and  the  continuing  uncertainty  of  its  profitability,  the
Company's  ability to develop and introduce new products,  the Company'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 the Company's products, the highly competitive industry in which the
Company  intends to operate and the rapid pace of  technological  change  within
those  industries,   the  uncertainty  of  patent  and  proprietary   technology
protection and the Company'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 the  Company's  products,  the  Company's  dependence  on key
employees, general economic and business conditions and other factors referenced
above.

         Forward-Looking Information May Prove Inaccurate
         ------------------------------------------------

         This report contains  forward-looking  statements and information  that
are based on management's beliefs as well as assumptions made by and information
currently  available  to  management.  When  used  in  this  report,  the  words
"anticipate,"  "believe,"  "estimate," and "expect," and similar expressions are
intended to identify  forward-looking  statements.  Such statements  reflect the
Company's current views with respect to future events and are subject to certain
risks,  uncertainties  and  assumptions,  including  the  specific  risk factors
described above. Should one or more of these risks or uncertainties materialize,
or should  underlying  assumptions  prove  incorrect,  actual  results  may vary
materially from those anticipated,  believed, estimated or expected. The Company
does not intend to update these forward-looking statements and information.

Item 2.  Properties
         ----------

         On September 23, 1997, the Company entered into a three-year lease with
an unaffiliated third party for its offices at 4505 South Wasatch Boulevard,  in
Salt Lake City, Utah,  comprising  approximately  1400 square feet, at an annual
rental of  $22,984.56.  The  office  space was used for  executive  offices  and
administrative  purposes.  Following the  re-organization of April 15, 1998, the
Company's  offices  were moved to Stinson  Beach,  California.  The  offices are
located  temporarily  in the  home  of the  Company's  CEO,  Ed  Marshall.  When
financial  resources permit,  the Company intends to remain in the San Francisco
Bay Area and lease office space that will allow for additional staffing. The

                                        18

<PAGE>



current,  temporary offices are located at 144 Buena Vista Ave. in Stinson Beach
and are  provided to the Company  without  any charge.  The Company  pays $100 a
month  for an  adjacent  storage  area for the  Company's  archives  and pays or
reimburses all telephone and related expenses incurred by or for the Company.

Item 3.  Legal Proceedings
         -----------------

         In  November  1992,  the  Company  consented  to the  entry  of a final
judgment of permanent injunction (S.E.C. v. Medizone International,  Inc., Civil
Action 93-2761,  D.D.C.), pursuant to which the Company was permanently enjoined
from  failing to timely  file the reports  required to be filed  pursuant to the
Securities  Exchange  Act of 1934.  The  Company's  report  for the  year  ended
December 31, 1998 is being filed late. There is no assurance that the failure of
the Company to file this,  or any future report in a timely manner will not lead
to additional sanctions or actions against the Company by the SEC or others.

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

         At its Annual  Meeting of  Shareholders  held  September 17, 1998,  the
following  actions  were  submitted  and approved by vote of the majority of the
shares present in person and by proxy:

         1.       Election of three directors;
         2.       Approval of the adoption of amended and restated bylaws of the
                  Company; and
         3.       Approval of the selection of Andersen,  Andersen & Strong,  LC
                  as the Company's independent public accountants.

         A  total  of  144,323,804  shares  of  common  stock  were  issued  and
outstanding  as of August 3, 1998, the date set by the Board of Directors of the
Company  for notice of and  eligibility  to vote at the Annual  Meeting.  At the
meeting, there were present or represented by proxy a total of 63,722,706 shares
(approximately  44%) of the issued and outstanding shares of the Company.  Under
the  Company's  bylaws  as then in  effect,  a quorum of 33% of the  issued  and
outstanding  shares was  required for the purpose of  establishing  a quorum and
proceeding with the business of the meeting. A majority of the votes present and
cast at the  meeting  voted in favor of the  actions  proposed  by the  Board of
Directors. The details of the voting results were as follows:

For the Directors:

<TABLE>
<CAPTION>
Name of Nominee                     Number of Shares          Number of Shares          Number of Shares
for Director                        for Nominee               Against Nominee           Abstaining/Withheld
---------------                     -----------------         -----------------         --------------------

<S>                                 <C>                       <C>                       <C>
Edwin G. Marshall                   63,470,842                251,864                   0
Gerard V. Sunnen, M.D               63,486,342                236,364                   0
William Hitt, Ph.D., MD             63,418,342                241,364                   0
</TABLE>

         For the adoption of Amended and Restated  Bylaws, a total of 44,317,651
shares were voted for the  ratification,  299,865 shares were voted against this
proposal,  and 132,928 shares abstained or were withheld.  Broker non-votes were
not counted in the voting on this proposal.

                                        19

<PAGE>




         For  the  ratification  of  Andersen,  Andersen  &  Strong,  LC as  the
independent public accountants of the Company, a total of 65,519,773 shares were
voted in favor of ratification, 128,250 shares were voted against this proposal,
and 74,683 shares  abstained or were  withheld.  This vote is not binding on the
Board  of  Directors  and  the  Board  may,  in its  discretion,  appoint  other
independent public accountants.


                                     Part II

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

Prices/Trading Market Information

         The Company'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 the Company's common stock
during each of the four calendar  quarters of fiscal 1997 and 1998. These prices
reflect  interdealer prices without retail markup,  markdown or commission;  are
not necessarily  representative of actual  transactions,  or of the value of the
Company's securities;  and are, in all likelihood, not based upon any recognized
criteria of securities valuation as used in the investment banking community.

<TABLE>
<CAPTION>
                                                                                 Bid Price
                                                                                 ---------
                                    Calendar Period                    High                      Low
                                    ---------------                    ----                      ---

<S>               <C>               <C>                                <C>                       <C>
                  1998              First Quarter                      .09                       .045
                                    Second Quarter                     .06                       .037
                                    Third Quarter                      .095                      .035
                                    Fourth Quarter                     .102                      .047

                  1997              First Quarter                      .085                      .01
                                    Second Quarter                     .0825                     .05
                                    Third Quarter                      .105                      .085
                                    Fourth Quarter                     .10                       .065
</TABLE>

Number of Holders

         On January 8, 1999,  according to the Company's  transfer agent,  there
were  approximately  3839 holders of record of the Company's  common stock,  and
approximately 4511 beneficial owners.

Dividends

         The Company has never paid cash dividends on its common stock. Payment
of cash dividends is subject to the discretion of the Board of Directors and

                                        20

<PAGE>



is dependent upon various  factors,  including the Company's  earnings,  capital
needs and general financial condition.  The Company does not believe that it has
any immediate prospect of earnings. However, the Company anticipates that in the
foreseeable  future, it will follow a policy of retaining  earnings,  if any, to
finance research and development.

Item 6.  Selected Financial Data.
            -----------------------

<TABLE>
<CAPTION>
                                                              Year Ended

                                    1998             1997              1996             1995              1994
                                    ----             ----              ----             ----              ----

Operations Data:

<S>                        <C>                 <C>               <C>                <C>              <C>
Revenues                   $     125,000       $          -0-    $          -0-     $        -0-     $         -0-

  Net income                    (507,761)            (775,559)       (1,329,395)      (1,081,027)       (1,126,315)
   (loss) before
   minority interest

Net income (loss)               (507,761)            (775,559)       (1,329,395)      (1,081,027)       (1,126,315)
Net income (loss)                   (.00)                (.01)             (.01)            (.01)             (.01)
   per common share

Weighted average             142,645,000          133,568,000       118,022,000      111,306,000        98,292,000
   common shares
   outstanding

Balance Data
   Sheet:

Working capital               (1,031,586)            (945,859)         (949,254)        (538,102)         (576,101)
   (deficiency)

Total assets                      15,255              307,019            74,368          124,653            87,230

Long-term                            -0-                  -0-               -0-              -0-               -0-
   liabilities

Accumulated                  (13,720,439)         (13,217,678)      (12,442,119)     (11,112,724)      (10,103,503)
   (deficit)

Stockholders'                 (1,023,974)            (886,167)         (885,241)        (432,880)         (558,679)
   equity
   deficiency
</TABLE>


Item 7.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations.
         ----------------------------------------------

Results of Operations

General
-------

         From its inception  (January 1986),  the Company has been a development
stage company  primarily engaged in research into the medical uses of ozone. The
Company  has not  generated,  and cannot  predict  when or if it will  generate,
revenues or sufficient  cash flow to fund its continuing  operations.  Since its
inception,  the  Company  expended  $2,332,853  for  research  and  development,
including $13,218 in 1998, compared to $116,950 in 1997.

                                        21

<PAGE>



Years Ended December 31, 1997 and 1996.
--------------------------------------

         There were no sales  during  either  year.  In 1998,  the  Company  had
revenues of $125,000 from the sale of a subsidiary.

         Expenditures for research and development,  including work performed by
independent contractors was $13,218 in 1998, compared to $116,950 in 1997.
The decrease was due to lack of capital.

         General and administrative  expenses were $524,929 in 1998, compared to
$633,187 in 1997. These expenses include  professional fees, payroll,  insurance
costs and travel expenses.

         Notes  payable in 1998 of  $280,491  and in 1997 of  $354,115  at rates
averaging from 6% to 8%.

Years Ended December 31, 1997 and 1996
--------------------------------------

         There were no sales during either year.

         Expenditures  for research and development  including work performed by
independent contractors were $116,950 in 1997, compared to $25,000 in 1996.

         General and administrative  expenses were $633,187 in 1997, compared to
$1,291,082 in 1996. These expenses include professional fees, payroll, insurance
costs and travel  expenses.  The reduction in 1997 is due to the  termination of
its former CEO, Mr. Latino.

         Notes payable in 1997 totaled  $354,115 and in 1996 $332,315.  Interest
accrues at rates ranging from 8% to 10%.


Liquidity and Capital Resources
-------------------------------

         At December 31, 1998, the Registrant had a working  capital  deficiency
of $1,031,586 and a stockholders' deficiency of $1,023,974 compared to a working
capital deficiency of $945,859 and a stockholders' deficiency of $886,167.

         During 1998,  the Company sold its interest in a  subsidiary,  Medizone
Canada Ltd., a Utah Corporation for $125,000.

         The Company 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 the Company's securities.

Item 8.  Financial Statements and Supplementary Data.
         -------------------------------------------

         The financial  statements and supplementary  data are listed under Item
14 in this Annual Report and commence on page F-1.



                                        22

<PAGE>



Item 9.  Changes in and Disagreements with Accountants
         on Accounting and Financial Disclosure.
         ---------------------------------------------

         Subsequent to the end of the period covered by this report, the Company
appointed Jones Jensen & Co. ("Jones Jensen") to replace Andersen & Andersen LLP
("Andersen") as independent public accountants of the Company.

         This change was  required  because  Kevin R.  Andersen,  a principal in
Andersen,  accepted  the position of Chief  Financial  Officer of the Company in
June 1998.

         The  report  of  Andersen  on  the  Company's   consolidated  financial
statements  for the years ended  December 31, 1996 and 1997 contained no adverse
opinion or  disclaimer  of  opinion  and was not  qualified  or  modified  as to
uncertainty, audit scope or accounting principle, except that such report on the
consolidated financial statements included an explanatory paragraph with respect
to the Company being in the development stage and its having suffered  recurring
losses  which raise  substantial  doubt about its ability to continue as a going
concern.

         The  decision  to  engage  Jones  Jensen as the  Company's  independent
auditors was approved by the Company's board of directors.

         In connection with the audits for the years ended December 31, 1997 and
1996,  and through  June 30,  1998,  the Company has had no  disagreements  with
Andersen  on  any  matter  of  accounting  principles  or  practices,  financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the  satisfaction of Andersen would have caused it to make reference
thereto  in its report on the  consolidated  financial  statements  for 1997 and
1996.

         During the years ended December 31, 1997 and 1996, and through June 30,
1998, there have been no reportable  events (as defined in Item  304(a)(1)(v) of
Regulation S-K).

         Andersen  has  provided  to  the  Company  a  letter  addressed  to the
Securities and Exchange  Commission  stating that it has reviewed the disclosure
provided  in this  section of this  report on Form 10-K and has no  disagreement
with the relevant  portions of this disclosure,  pursuant to the requirements of
Item  304(a)(3) of Regulation  S-K. A copy of such letter,  dated as of June 11,
1998, is filed as an Exhibit to this report.




                                        23

<PAGE>



                                    PART III

Item 10.  Directors and Executive Officers of Registrant.
          ----------------------------------------------

         The  following  table sets forth  certain  information  concerning  the
directors and executive officers of the Company , as of December 31, 1998.

<TABLE>
<CAPTION>
                                Director                      Officer           Positions with
Name                       Age  Since                Since             Registrant
-----                      ---  --------                      -------           --------------

<S>                        <C>  <C>                  <C>               <C>
Edwin G. Marshall          56   1997                 1998              Chairman of the Board, CEO
Gerard V. Sunnen           56   1997                 1997              Director, President
William M. Hitt            72   1997                                   Director
Jill C. Marshall           48   N/A                  1998              Chief Operating Officer,
                                                                       Corporate Secretary
Kevin R. Andersen          48   N/A                  1998              Chief Financial Officer
</TABLE>

         Edwin G.  Marshall,  became  Chairman  of the  Board & Chief  Executive
Officer  in April  1998 and has been  with the  Company  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 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 the Company 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.  He have also written
on the medical applications of ozone.

         William M. Hitt became a Director of the Company in June 1997. He
received a Bachelor's of Science degree from the University of Denver in 1946
and a Ph.D. from Colorado A&M University in 1948. He received a medical degree
from the University of Colorado in 1952 and did post-medical school studies at
Duke University and Washington University School of Medicine. Dr. Hitt has
taught and conducted research at several institutions in the United States and

                                        24

<PAGE>



Mexico,  culminating  with his work at the World Health  Organization  in Mexico
City from 1989 to 1994.  He was the  recipient  of the Eli Lily  Award  from the
National  Institute  of  Health  in 1953,  the  Leovenhoek  Award  in 1960,  the
Cientifico Destacado in 1990 and 1992, and the Bioethics  International Award of
Merit in 1993.  Dr. Hitt was a member of the Board of  Directors  of  Physicians
Against  Nuclear War,  which  organization  was awarded the Nobel Peace Prize in
1985.  Dr. Hitt is currently  the  Director of the William  Hitt  Center,  which
conducts clinical immunology and addiction recovery programs, has operated since
1986 and now has seven locations in Central and South America, with headquarters
in Tijuana, Mexico.

         Jill C.  Marshall,  N.D.,  has been the  Chief  Operating  Officer  and
Corporate  Secretary of Medizone since April 1998. Dr. Marshall is the recipient
of a Doctor of Naturopathy degree from The Southern College of Naturopathy and a
Bachelor of Arts degree from Long Beach State  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
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,  the Company's
CEO.

         Kevin R. Andersen,  CPA, M.S., 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 the Company'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 11.  Executive Compensation.
          ----------------------

Directors Compensation

         During 1998, each Director received a grant of restricted stock as
follows: Mr. Marshall, 1,500,000 shares, Dr. Sunnen, 1,500,000 shares, Dr.
Hitt, 250,000 shares.  In addition, a former director, Kenneth Gropper, was
issued 50,000 shares.


Executive Compensation

         The  following  table sets forth the  compensation  of all  individuals
serving as the CEO of the Company  during the year ended  December  31, 1998 and
the  Company's  executive  officers  (other  than the CEO) who were  serving  as
executive  officers  at  December  31,  1998 (the  "Named  Officers")  and whose
compensation exceeded $100,000 during the year:






                                        25

<PAGE>



<TABLE>
<CAPTION>
                                           Summary Compensation Table
                                            -------------------------
                                                                               Long Term
                                    Annual Compensation                       Compensation
                                    -------------------                       ------------
                                                              Other
Name and                                                      Annual            Restricted
Principal                                                     Compensa-         Stock
Position                        Year        Salary   Bonus    tion              Awards
---------                       ----        ------   -----    --------          ---------

<S>                             <C>         <C>      <C>                        <C>
Edwin G. Marshall               1998        75,000   (1)                        1,500,000
</TABLE>


(1)Mr. Marshall's $75,000 salary was paid in the form of 1,500,000 shares of the
Company's common stock.  Each shares was valued at $.05.


Compensation Committee Interlocks and Insider Participation

         The Company does not have a compensation committee.  Matters concerning
the compensation of executive  officers are determined by the Company's Board of
Directors.


Item 12.  Security Ownership of Certain Beneficial Owners and Management.
          ---------------------------------------------------------------

         The  following  table sets forth certain  information  as of January 8,
1999,  pertaining to the  beneficial  ownership of Common Stock,  by (i) persons
known to the Company to beneficially  own 5% or more of the  outstanding  Common
Stock,  (ii) each  director  and  executive  officer of the Company in office at
December 31, 1998,  and (iii) all such  directors and executive  officers of the
Company as a group.

<TABLE>
<CAPTION>
                                    Number of Shares                            Percentage of
Name and Address                    Beneficially Owned                          Total Outstanding
-----------------                   ------------------                          -----------------

<S>                                      <C>                                            <C>
Edwin G. Marshall                        76,098,333(1)                                  51.09%
P.O. Box 342
Stinson Beach, CA 94970

Jill C. Marshall                         76,098,333(2)                                  51.09%
P.O. Box 342
Stinson Beach, CA 94970

Dr. Gerard V. Sunnen                      3,000,005                                      2.01%
200 East 23rd Street
New York, NY 10016

Dr. William M. Hitt                         250,000                                       *
4248 Palm Avenue
San Diego, CA 92154

Kevin R. Andersen                            50,000                                       *
8760 Hidden Oak Drive
Salt Lake City, UT 84121
</TABLE>

                                        26

<PAGE>




<TABLE>
<CAPTION>
<S>                                     <C>                                             <C>
All directors and                       79,398,338                                      53.31%
executive officers
as a group (5 persons)

-------------------
</TABLE>

(1)      Includes:  (i) an aggregate of 351,000  shares owned by Mr.  Marshall's
         wife and son; (ii) 6,571,428 shares owned by Sand Dollar,  of which Mr.
         Marshall  is  the  general  partner;  and  (iii)  options  to  purchase
         66,761,905 shares owned by Sand Dollar.

(2)      Includes shares beneficially owned by Ed Marshall, the husband of Mrs.
         Marshall.



Item 13. Certain Relationships and Related Transactions.
         -----------------------------------------------

Private Sales of Shares

         During  the past three  years the  Company  has  issued  the  following
securities without registration under the Securities Act:

1996
------

         The  Company  entered  into an  employment  agreement  with its  former
president,  Joseph S. Latino,  effective January 1, 1995,  pursuant to which the
Company agreed to employ Mr. Latino as its Chief Executive  Officer and Director
of Research, at a salary of $180,000 per annum, for a one year period; provided,
however,  that the agreement was to remain in effect until  terminated by either
of the  parties  in  accordance  with its  terms.  Mr.  Latino  received  fringe
benefits,  including the use of an automobile  and health and life insurance and
was  granted an option to  purchase  3,000,000  shares of the  Company's  common
stock, par value $.001, at a per share price of $.20. These options were to vest
in annual  increments  of 1,000,000  shares,  on and after  January 1 of each of
1996,  1997 and 1998,  provided that Mr. Latino  continued to be employed by the
Company  at the time.  The  Company  has  since  taken  the  position  that this
Agreement was not validly authorized and is nonenforceable. The agreement, if it
was enforceable, terminated for cause in May 1997.

         The Company agreed to employ Arthur P. Bergeron,  effective  January 1,
1995, as its Chief  Financial  Officer,  at a salary of $72,000 per annum,  plus
monthly expenses, for a one year period;  provided,  however, that the agreement
was to remain in effect until  terminated by either party in accordance with its
terms. Mr. Bergeron was permitted to continue his private  accounting  practice.
Mr. Bergeron also received health  insurance from the Company and was granted an
option to purchase  1,500,000  shares of the Company's  common stock,  par value
$.001, at a per share price of $.20,  provided that Mr. Bergeron continued to be
employed by the Company at that time.  The  agreement  also provided for certain
bonuses  to be paid if the  Company  achieves  certain  financial  results.  Mr.
Bergeron was terminated for cause in November 1998.


                                        27

<PAGE>



1997
----
         In May 1997, the Company issued 500,000 shares of the Company's  common
stock to each of Arthur P.  Bergeron  and Kenneth  Gropper in  consideration  of
their  services as  officers  of the  Company  and  750,000 to George  Handel in
consideration of his services as the Company's Secretary.  In December 1997, the
Company   awarded  Dr.  Gerard  Sunnen   100,000   shares  of  common  stock  in
consideration of his services as the Company's Director of Science.  In December
1997,  the Board of  Directors  voted to establish  the Option  Plan,  which was
approved by the shareholders at the Annual Meeting. Pursuant to the Option Plan,
options to purchase shares of the Company's  common stock were granted to Milton
G. Adair  (3,000,000  shares),  Gerard V.  Sunnen  (300,000  shares) and Kenneth
Gropper (100,000). On September 23, 1997, Sand Dollar purchased 5,714,285 shares
of the  Company's  common stock  pursuant to the Sand Dollar  Warrant,  at a per
share price of $.07, an aggregate of $400,000.

         In June 1997, the Company issued warrants to purchase 73,333,333 shares
of its common stock to The Sand Dollar  Solution ("Sand  Dollar"),  a California
limited partnership, whose general partner is Edwin G. Marshall, the Chairman of
the Company's Board of Directors (the "Sand Dollar Warrants").

         The  Sand  Dollar  Warrants  have the  following  exercise  prices  and
expiration dates:

<TABLE>
<CAPTION>
Shares                          Exercise Price                Termination Dates
-------                         --------------                -----------------

<S>                             <C>                           <C>
15,000,000                      $.07 per share                Originally
                                                              September 7, 1997, then
                                                              extended until ten
                                                              days after the Company
                                                              becomes current in its
                                                              filings with
                                                              Securities and
                                                              Exchange Commission.

33,333,333                      $.15 per share                Originally June 9, 1998,
                                                              extended to March 30, 1999.

25,000,000                      $.20 per share                Originally June 9, 1999
</TABLE>


         On September 23, 1997, Sand Dollar  purchased  5,714,285  shares of the
Company's  common  stock by exercise of the Sand Dollar  Warrant,  paying $.07 a
share, or aggregate consideration of $400,000.

         In March and May 1997,  the Company  issued an  aggregate  of 2,716,600
shares of common stock to Kenneth Gropper (500,000  shares),  Arthur P. Bergeron
(500,000  shares),  George Handel (750,000  shares),  counsel to the Company (an
aggregate  of 666,666  shares),  an  employee  (50,000  shares),  and its public
relations firm (250,000 shares) in consideration of services  rendered,  relying
on the private  offering  exemption  under the Securities Act. In December 1997,
the Company  authorized  the  issuance of 100,000  shares of common stock to Dr.
Gerard  Sunnen in  consideration  of his services as the  Company's  Director of
Science. The Company issued 103,200 shares of its common stock to an employee

                                        28

<PAGE>



of its New Zealand  subsidiary,  pursuant to Regulation S promulgated  under the
Securities Act, as consideration for services rendered.

1998
----
         In March 1998,  Sand Dollar  purchased  857,143 shares of the Company's
common  stock  pursuant to the Sand  Dollar  Warrant,  paying  $.07 a share,  or
$60,000.  The Company relied on the private offering exemption from registration
under the  Securities  Act of 1933 (the  "Securities  Act") in issuing  the Sand
Dollar  Warrants and for the sale of shares pursuant to the exercise of the Sand
Dollar Warrants.

         On March 4, 1998 the Company  issued  864,747 shares of common stock to
Mark Peterson, a principal with Alpine Securities Corporation.  The issued stock
was for  repayment of the  principal  and interest of a $40,000 loan made to the
Company on Oct. 2, 1996. Alpine Securities is a market maker in our stock.

         On May 27, 1998 the Sand Dollar  Warrants due to expire on May 31, 1998
were extended to Oct. 30, 1998 with the Company retaining the previously adopted
right of cancellation with 10 days notice should other funding be obtained.

         August  6,  1998  Grants  of stock  for  uncompensated  work and  other
contributions  by members of the Board of  Directors  were made as follows:  Dr.
Gerard Sunnen,  1.5 million shares;  Edwin G. Marshall,  1.5 million shares; Dr.
William Hitt, 250,000 shares;  and Kenneth Gropper,  50,000 shares. In addition,
grants of 150,000  shares of common stock to  Medizone's  former  President  and
Chief Executive Officer, Milton Adair, and 15,000 shares to former employee, Joy
Erickson, were made as final settlement of their employment.


                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules,
          Reports on Form 8-K
          ----------------------------------------

                  (a)      See Index to Consolidated Financial Statements and
                           Schedule on Page F-1.

                  (b)      See Index to Exhibits on page E-1.

                  (c)      None.

                  (d)      Exhibits  and  Financial  Statement  Schedules.   The
                           following  Exhibits form a part of this Annual Report
                           on Form 10-K:

Exhibit
Number     Description of Exhibit
-------    ----------------------

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

3(a)      Articles of Incorporation of Registrant.(2)


                                        29

<PAGE>



3(b)      By-laws of Registrant.(2)

3(c)      Articles of Amendment to Registrant's Articles of Incorporation.(3)

10(a)     Patent Agreement, dated February 26, 1987.(5)

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

10(d)     Consulting Agreement between P.J. Watrous & Co., Inc. and the
          Registrant.(2)

10(f)     Consulting Agreement between Jeffrey Freed, MD, PC and the
          Registrant.(2)

10(g)     Consulting Agreement between Joseph Latino and the Registrant.(2)

10(h)     Consulting Agreement between Susan Golden, RN and the Registrant.(2)

10(i)     Stock Option of Joseph Latino.(2)

10(j)     Stock Option of Jeffrey Freed.(2)

10(k)     Stock Option of Susan Golden.(2)

10(l)     Stock Option of Hubert Weinberg.(2)

10(m)     Agreement dated June 16, 1987, between Registrant and Oliver
             Grace.(5)

10(n)     Agreement dated June 26, 1987, between Registrant and John Grace.(5)

10(o)     Agreement dated June 26, 1987, between Registrant and Oliver
          Grace.(5)

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

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

10(r)     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(s)     Form of Stock Purchase Agreement between Registrant and individuals
          who purchased Shares from Registrant.(7)

10(t)     Letter agreement between Registrant and Rebus Oil Co., Ltd. dated
          July 28, 1992.(8)

                                        30

<PAGE>



10(u)     Letter of understanding between Registrant and the RMB Group of
          Boston dated August 10, 1992.(8)

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

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

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

10(y)     Settlement agreement with former consultant dated February 12,
          1993.(9)

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

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

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

10(cc)    Consulting  Agreement  with  Roger  Shelley  dated  as of  January  1,
          1993.(9)

10(dd)    Consulting  Agreement with Jeannette  Arsenault dated as of January 1,
          1993.(9)

10(ee)    Loan Agreements between  Registrant and John Kells,  George Handel and
          John Pealer, executed as of June 11, 1993 (and promissory notes).(9)

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

10(gg)    Letter  Agreement  dated March 23,  1993  between  Registrant  and the
          Italian Scientific Society.(10)

10(hh)    Contract between Registrant and Capmed USA.(10)

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

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

10(ll)    Agreement made as of January 1, 1995 between Medizone International,
          Inc. and Giacomo C. DiGiorgio, M.D.(11)

10(mm)    Lease Agreement between Medizone International, Inc. and Benabi

                                        31

<PAGE>



          Realty, made on September 27, 1991, as extended, January 17,
          1995.(11)

10(nn)    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(oo)    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(pp)    Licensing Agreement between Medizone International, Inc. and
          MNZ, dated June 22, 1995.(12)

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

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

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

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

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

16        Letter re: change in certifying accountants.(1)


--------------------

(1)       Filed herewith.

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

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

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

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

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

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

(8)       Incorporated by reference to the Registrant's annual report on Form

                                        32

<PAGE>



          10-K for the period ended December 31, 1990.

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

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

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

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

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

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

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

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



                                        33

<PAGE>


                                   SIGNATURES
                                -----------------

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange  Act of 1934,  the Company  has duly  caused  this Annual  Report to be
signed on its behalf by the undersigned, thereunto duly authorized.

                                MEDIZONE INTERNATIONAL, INC.


                                By: /s/ Edwin G. Marshall
                                -------------------------------------
                                Edwin G. Marshall
                                President and Chief Executive Officer

Date: February 7, 2000


         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934,  this Annual Report has been signed below by the following
persons  on  behalf  of the  Company,  in the  capacities  shown and on the date
indicated:


Date: February 7, 2000            /s/ Edwin G. Marshall
                                ------------------------------------
                                Edwin G. Marshall, President
                                Chief Executive Officer and Director



Date: February 7, 2000            /s/Gerard V. Sunnen
                                ------------------------------------
                                Gerard V. Sunnen, Director



Date: February 7, 2000            /s/ William M. Hitt
                                ------------------------------------
                                William M. Hitt, Director



Date: February 7, 2000            /s/ Kevin R. Andersen
                                 ------------------------------------
                                 Kevin R. Andersen, Chief Financial
                                 Officer (and Principal Accounting Officer)





                                        34

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

                          CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1998 and 1997





<PAGE>







                             C O N T E N T S


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

Consolidated Balance Sheets....................................................4

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

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

Consolidated Statements of Cash Flows.........................................14

Notes to the Consolidated Financial Statements................................16


<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, 1998, and the related consolidated  statements of operations,  stockholders'
equity  (deficit),  and cash flows for the year ended  December 31, 1998.  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 audit.

We conducted our audit 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  audit  provides  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, 1998, and the  consolidated  results of their  operations and their
cash flows for the year ended  December 31, 1998, 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.




Jones, Jensen & Company
Salt Lake City, Utah
January 24, 2000




<PAGE>



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


                                    ASSETS

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                               1998                  1997

CURRENT ASSETS

<S>                                                                      <C>                   <C>
   Cash and cash equivalents                                             $           7,643     $         138,173
   Prepaid expenses and advances                                                    -                      9,154
                                                                         -----------------     -----------------

     Total Current Assets                                                            7,643               147,327
                                                                         -----------------     -----------------

PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2)                                         7,612                 8,268
                                                                         -----------------     -----------------

OTHER ASSETS

   Receivable from affiliate, net (Note 1)                                             -                  48,947
   Deposits                                                                            -                   2,477
                                                                         -----------------     -----------------

     Total Other Assets                                                                -                  51,424
                                                                         -----------------     -----------------

     TOTAL ASSETS                                                        $          15,255     $         207,019
                                                                         =================     =================
</TABLE>



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 Sheets (Continued)


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                               1998                  1997
                                                                         -----------------     -----------------
CURRENT LIABILITIES

<S>                                                                      <C>                   <C>
   Accounts payable                                                      $         470,132     $         517,011
   Accrued expenses (Note 3)                                                       288,606               222,060
   Notes payable (Note 6)                                                          280,491               354,115
                                                                         -----------------     -----------------

     Total Current Liabilities                                                   1,039,229             1,093,186
                                                                         -----------------     -----------------

     Total Liabilities                                                           1,039,229             1,093,186
                                                                         -----------------     -----------------

COMMITMENTS AND CONTINGENCIES (Note 4)

STOCKHOLDERS' EQUITY (DEFICIT)

   Common stock; 250,000,000 shares authorized
    of $0.001 par value, 148,926,434 and 136,887,629
    shares issued and outstanding, respectively                                    148,926               136,888
   Common stock subscribed (Note 5)                                                     -                  5,714
   Additional paid-in capital                                                   12,610,539            12,188,909
   Deficit accumulated during the development stage                            (13,783,439)          (13,217,678)
                                                                         -----------------     -----------------

     Total Stockholders' Equity (Deficit)                                       (1,023,974)             (886,167)
                                                                         -----------------     -----------------

     TOTAL LIABILITIES AND STOCKHOLDERS'
      EQUITY (DEFICIT)                                                   $          15,255     $         207,019
                                                                         =================     =================
</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,
                                                        1998               1997                1996                 1998
                                                   ----------------   -----------------  ------------------  ------------------

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

EXPENSES

   Cost of sales                                                 -                   -                   -              103,790
   Research and development                                  13,218             116,950              25,000           2,332,853
   General and administrative                               562,729             631,491           1,288,175          11,130,564
   Bad debt expense                                          48,947                  -                   -               48,947
   Depreciation and amortization                              2,673               1,696               2,907              25,453
                                                   ----------------   -----------------  ------------------  ------------------

     Total Expenses                                         627,567             750,137           1,316,082          13,641,607
                                                   ----------------   -----------------  ------------------  ------------------

     Loss from Operations                                  (627,567)           (750,137)         (1,316,082)        (13,508,258)
                                                   ----------------   -----------------  ------------------  ------------------

OTHER INCOME (EXPENSE)

   Minority interest in loss                                     -                   -                   -               26,091
   Other income                                                 420               3,342                  -               19,780
   Gain on sale of subsidiary (Note 1)                      108,417                  -                   -              208,417
   Interest expense                                         (47,031)            (28,764)            (13,313)           (820,697)
                                                   ----------------   -----------------  ------------------  ------------------

     Total Other Income (Expense)                            61,806             (25,422)            (13,313)          (566,409)
                                                   ----------------   -----------------  ------------------  ------------------

LOSS BEFORE EXTRAORDINARY
 ITEMS                                                     (565,761)           (775,559)         (1,329,395)        (14,074,667)
                                                   ----------------   -----------------  ------------------  ------------------

EXTRAORDINARY ITEMS

   Debt forgiveness                                              -                   -                   -              291,228
                                                   ----------------   -----------------  ------------------  ------------------

     Total Extraordinary Items                               -                   -                       -              291,228
                                                   ----------------   -----------------  ------------------  ------------------

NET LOSS                                           $       (565,761)  $        (775,559) $       (1,329,395) $      (13,783,439)
                                                   ================   =================  ==================  ==================

BASIC LOSS PER SHARE                               $          (0.00)  $           (0.01) $            (0.01)
                                                   ================   =================  ==================

WEIGHTED AVERAGE NUMBER
 OF SHARES OUTSTANDING                                  142,645,000         133,568,000         118,022,000
                                                   ================   =================  ==================
</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>               <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 $0.10 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 Cash Flows


<TABLE>
<CAPTION>
                                                                                                                       From
                                                                                                                    Inception on
                                                                            For the Years Ended                      January 31,
                                                                                December 31,                       1986 Through
                                                              --------------------------------------------------   December 31,
                                                                  1998             1997             1996               1998
                                                              ---------------   ---------------  ---------------   ---------------
CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                                           <C>               <C>              <C>               <C>
   Net loss                                                   $      (565,761)  $      (775,559) $    (1,329,395)  $   (13,783,439)
   Adjustments to reconcile net loss to net cash
    used by operating activities:
     Depreciation and amortization                                      2,673             1,696            2,907            25,453
     Stock issued for services                                        241,536           374,632          141,587         2,867,416
     Bad debt expense                                                  48,947                -                -             48,947
     Minority interest in loss                                             -                 -                -            (26,091)
     Loss on disposal of assets                                            -                 -                -            693,752
   Changes in assets and liabilities:
     (Increase) decrease in prepaid expenses
      and deposits                                                     11,631             1,143           60,959           (48,947)
     Increase (decrease) in accounts payable                          (18,698)           61,126          139,913           704,502
     Increase (decrease) in accrued expenses                           69,783            50,651           79,423           348,628
                                                              ---------------   ---------------  ---------------   ---------------

       Net Cash Used by Operating Activities                         (209,889)         (286,311)        (904,606)       (9,169,779)
                                                              ---------------   ---------------  ---------------   ---------------

CASH FLOWS FROM INVESTING ACTIVITIES

   Organization costs                                                      -                 -                -             (8,904)
   Purchase of fixed assets                                            (2,017)             (895)         (10,002)          (24,159)
                                                              ---------------   ---------------  ---------------   ---------------

       Net Cash Used by Investing Activities                           (2,017)             (895)         (10,002)          (33,063)
                                                              ---------------   ---------------  ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Principle payments on notes payable                                 (3,624)               -                -           (192,774)
   Cash received from notes payable                                    25,000            21,800          184,500         1,106,518
   Capital contributions                                                   -                 -                -            421,847
   Stock issuance costs                                                    -                 -                -           (105,312)
   Increase in minority interest                                           -                 -                -             14,470
   Issuance of common stock for cash                                   60,000           400,000          735,447         7,965,736
                                                              ---------------   ---------------  ---------------   ---------------

       Net Cash Provided by Financing Activities                       81,376           421,800          919,947         9,210,485
                                                              ---------------   ---------------  ---------------   ---------------

NET INCREASE (DECREASE) IN CASH                                      (130,530)          134,594            5,339             7,643

CASH AT BEGINNING OF PERIOD                                           138,173             3,579           (1,760)               -
                                                              ---------------   ---------------  ---------------   ---------------

CASH AT END OF PERIOD                                         $         7,643   $       138,173  $         3,579   $         7,643
                                                              ===============   ===============  ===============   ===============
</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 (Continued)


<TABLE>
<CAPTION>
                                                                                                                       From
                                                                                                                    Inception on
                                                                            For the Years Ended                      January 31,
                                                                                December 31,                       1986 Through
                                                              --------------------------------------------------   December 31,
                                                                  1998             1997             1996               1998
                                                              ---------------   ---------------  ---------------   ---------------
SUPPLEMENTAL CASH FLOW INFORMATION

CASH PAID FOR:

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

NON-CASH FINANCING ACTIVITIES:

   Stock issued for services                                  $       241,536   $       374,632  $       141,587   $     2,867,416
   Stock issued in conversion of debt to common stock         $       126,418   $            -   $            -    $     3,776,293
   Stock issued for license agreement and patent              $            -    $            -   $            -    $       693,752
</TABLE>

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


                                        15

<PAGE>



               MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                      (A Development Stage Company)
             Notes to the Consolidated Financial Statements
                         December 31, 1998 and 1997


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  Match
              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.

                                        16

<PAGE>


                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                            December 31, 1998 and 1997


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.




                                        17

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                           (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 1998 and 1997

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, 1998.

              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.



                                       18

<PAGE>



                    MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                            (A Development Stage Company)
                  Notes to the Consolidated Financial Statements
                           December 31, 1998 and 1997


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.



                                       19

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                           (A Development Stage Company)
                Notes to the Consolidated Financial Statements
                          December 31, 1998 and 1997


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:



                                       20

<PAGE>



                MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                        (A Development Stage Company)
              Notes to the Consolidated Financial Statements
                          December 31, 1998 and 1997


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

              f.  Basic Loss Per Share (Continued)





<TABLE>
<CAPTION>
                                                                         For the Years Ended
                                                                              December 31,
                                                        ----------------------------------------------------------
                                                              1998               1997                1996
                                                        ------------------  ------------------  ------------------

<S>                                                     <C>                 <C>                 <C>
              Numerator (net loss)                      $         (565,761) $         (775,559) $       (1,329,395)

              Denominator (weighted
               average number of
               shares outstanding)                             142,645,000         133,568,000         118,022,000

              Loss per share                            $            (0.00) $            (0.01) $            (0.01)
                                                        ==================  ==================  ==================
</TABLE>

              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 Financial  Accounting  Standards Board has issued Statement of
              Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings Per
              Share" and  Statement of Financial  Accounting  Standards  No. 129
              "Disclosures of Information About an Entity's Capital  Structure."
              SFAS No. 128 provides a different  method of calculating  earnings
              per share than was previously  used in accordance with APB Opinion
              No.  15  "Earnings  Per  Share."  SFAS No.  128  provides  for the
              calculation  of "Basic" and "Dilutive"  earnings per share.  Basic
              earnings  per  share  includes  no  dilution  and is  computed  by
              dividing  income (loss)  available to common  shareholders  by the
              weighted  average  number of  common  shares  outstanding  for the
              period. Diluted earnings per share reflects the potential dilution
              of  securities  that  could  share in the  earnings  of an entity,
              similar  to  fully  diluted  earnings  per  share.  SFAS  No.  129
              establishes standards for disclosing information about an entity's
              capital structure. SFAS No. 128 and SFAS No. 129 are effective for
              financial  statements issued for periods ending after December 15,
              1997. In fiscal 1998, the Company  adopted SFAS No. 128, which did
              not have a material impact on the Company's financial  statements.
              In  addition,  the  implementation  of SFAS No. 129 did not have a
              material effect on the Company's financial statements.



                                        21

<PAGE>



                 MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                       (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 1998 and 1997


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

              g.  Change in Accounting Principle (Continued)

              The Financial  Accounting Standards Board has also issued SFAS No.
              130,   "Reporting   Comprehensive   Income"   and  SFAS  No.  131,
              "Disclosures   about   Segments  of  an  Enterprise   and  Related
              Information." SFAS No. 130 establishes standards for reporting and
              display of  comprehensive  income,  its components and accumulated
              balances.  Comprehensive  income is defined to include all changes
              in equity except those  resulting  from  investments by owners and
              distributions  to owners.  Among other  disclosures,  SFAS No. 130
              requires that all items that are required to be  recognized  under
              current accounting standards as components of comprehensive income
              be reported in a financial  statement  that displays with the same
              prominence as other financial statements.  SFAS No. 131 supersedes
              SFAS No.  14  "Financial  Reporting  for  Segments  of a  Business
              Enterprise."  SFAS No. 131  establishes  standards on the way that
              public  companies  report  financial  information  about operating
              segments in annual financial  statements and requires reporting of
              selected information about operating segments in interim financial
              statements issued to the public. It also establishes standards for
              disclosure  regarding products and services,  geographic areas and
              major  customers.  SFAS No.  131  defines  operating  segments  as
              components of a company about which separate financial information
              is available  that is evaluated  regularly by the chief  operating
              decision  maker  in  deciding  how to  allocate  resources  and in
              assessing  performance.  The adoption of these  statements did not
              have a material impact on the Company's financial statements.

              In  February  1998,  the  Financial   Accounting  Standards  Board
              ("FASB") has issued  Statement of  Financial  Accounting  Standard
              ("SFAS") No 132. "Employers'  Disclosures about Pensions and other
              Postretirement   Benefits"  which   standardizes   the  disclosure
              requirements  for pensions and other  Postretirement  benefits and
              requires   additional   information  on  changes  in  the  benefit
              obligations  and fair values of plan  assets that will  facilitate
              financial analysis.  SFAS No. 132 is effective for years beginning
              after December 15, 1997 and requires  comparative  information for
              earlier  years to be  restated,  unless  such  information  is not
              readily available.  The adoption of this statement had no material
              impact on the Company's financial statements.



                                        22

<PAGE>



                  MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                           (A Development Stage Company)
                   Notes to the Consolidated Financial Statements
                            December 31, 1998 and 1997


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

              g.  Change in Accounting Principle (Continued)

              In June  1998,  the FASB  issued  SFAS No.  133,  "Accounting  for
              Derivative  Instruments  and Hedging  Activities"  which  requires
              companies to record derivatives as assets or liabilities, measured
              at fair market value.  Gains or losses  resulting  from changes in
              the values of those  derivatives  would be accounted for depending
              on the use of the  derivative  and whether it qualifies  for hedge
              accounting.  The key  criterion  for hedge  accounting is that the
              hedging   relationship  must  be  highly  effective  in  achieving
              offsetting  changes in fair value or cash  flows.  SFAS No. 133 is
              effective for all fiscal  quarters of fiscal years beginning after
              June 15, 1999.  Management believes the adoption of this statement
              will  have  no  material   impact  on  the   Company's   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, 1998.

              j.  Provision for Taxes

              At  December  31,  1998,   the  Company  has  net  operating  loss
              carryforwards  of  approximately  $11,750,000  that may be  offset
              against  future  taxable  income  through 2018. No tax benefit has
              been reported in the consolidated financial statements because the
              Company  believes  there  is a  50%  or  greater  chance  the  net
              operating loss  carryforwards will not be used.  Accordingly,  the
              potential tax benefits of the net operating loss carryforwards are
              offset by a valuation allowance of the same amount.

              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.




                                        23

<PAGE>



                 MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                         (A Development Stage Company)
              Notes to the Consolidated Financial Statements
                         December 31, 1998 and 1997

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

              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.

              n.  Stock Based Compensation

              In October 1995, the Financial  Accounting  Standards Board issued
              Statement of Financial Accounting Standard No. 123, Accounting for
              Stock-Based  Compensation.  The Company currently accounts for its
              stock-based  compensation plans using the accounting prescribed by
              Accounting  Principles Board Opinion No. 25,  Accounting for Stock
              Issued to  Employees.  Since the Company is not  required to adopt
              the fair value based recognition  provisions prescribed under SFAS
              No. 123, it has elected to comply with the disclosure requirements
              set forth in the Statement, which includes disclosing proforma net
              income (loss) as if the fair value based method of accounting  had
              been applied. (See Note 7.)

              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.

              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.


                                        24

<PAGE>



               MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                         (A Development Stage Company)
               Notes to the Consolidated Financial Statements
                            December 31, 1998 and 1997


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

              p.  Revenue Recognition Policy

              The  Company   currently  ha  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:
<TABLE>
<CAPTION>

                                                                                         December 31,
                                                                            --------------------------------------
                                                                                  1998                1997
                                                                            ------------------  ------------------
<S>                                                                         <C>                 <C>
              Office equipment                                              $            4,318  $            2,301
              Furniture and fixtures                                                     6,307               6,307
                                                                            ------------------  ------------------

                                                                                        10,625               8,608
              Accumulated depreciation                                                  (3,013)               (340)
                                                                            ------------------  ------------------

              Net property and equipment                                    $            7,612  $            8,268
                                                                            ==================  ==================
</TABLE>

              Depreciation  expense for the years ended December 31, 1998,  1997
              and 1996 was $2,673, $1,696 and $2,907, respectively.

NOTE 3 -      ACCRUED EXPENSES

              Accrued expenses consist of the following:
<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                            --------------------------------------
                                                                                  1998                1997
                                                                            ------------------  ------------------
<S>                                                                         <C>                 <C>
              Accrued payroll                                               $          162,000  $          130,350
              Accrued interest                                                         126,606              90,310
              Other                                                                     -                    1,400
                                                                            ------------------  ------------------

                           Total                                            $          288,606  $          222,060
                                                                            ==================  ==================
</TABLE>

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 September 23, 1997, the Company entered into a three-year lease
              with an unaffiliated  third party for offices in Salt Lake City at
              an annual rent of approximately  $23,000.  The office was used for
              executive  offices  and  administrative  purposes.  Following  the
              Company's  reorganization on April 15, 1998, the Company's offices
              were moved to Stinson  Beach,  California,  and the Salt Lake City
              lease was terminated.

                                        25

<PAGE>


                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                        (A Development Stage Company)
                   Notes to the Consolidated Financial Statements
                         December 31, 1998 and 1997


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.

              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.





                                        26

<PAGE>


                  MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
                Notes to the Consolidated Financial Statements
                           December 31, 1998 and 1997


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

              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.

              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.



                                        27

<PAGE>



                 MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                           (A Development Stage Company)
                Notes to the Consolidated Financial Statements
                           December 31, 1998 and 1997


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

              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.

              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.




                                        28

<PAGE>


               MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                        (A Development Stage Company)
             Notes to the Consolidated Financial Statements
                         December 31, 1998 and 1997


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

              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.

              As of December 31, 1998, the following warrants were outstanding:

<TABLE>
<CAPTION>
                      Warrants                            Exercise Price                   Termination Dates
                    ----------------                -------------------------             ----------------------
<S>                       <C>                       <C>                                     <C>
                           8,428,573                $                    0.07               April 30, 2000
                          33,333,333                $                    0.15               April 30, 2000
                          25,000,000                $                    0.20               April 30, 2000
</TABLE>

NOTE 6 -      NOTES PAYABLE

              Notes payable  consisted of the following at December 31, 1998 and
1997:

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                 ---------------------------------------
                                                                                       1998                  1997
                                                                                 -------------------  ------------------
<S>                                                                              <C>                  <C>
              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
               of the lender's option to acquire shares from
               the Company.                                                      $          60,815    $           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                37,000
                                                                                 -----------------    ------------------

              Balance Forward                                                    $          97,815    $           97,815
                                                                                 -----------------    ------------------
</TABLE>

                                        29

<PAGE>



                MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                          (A Development Stage Company)
              Notes to the Consolidated Financial Statements
                        December 31, 1998 and 1997


NOTE 6 -      NOTES PAYABLE (Continued)
<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                 ---------------------------------------
                                                                                       1998                  1997
                                                                                 -------------------  ------------------
<S>                                                                              <C>                  <C>
              Balance Forward                                                    $          97,815    $           97,815

              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               216,300

              Note payable to individual, due on December 2, 1996 (principal and
               accrued interest in arrears as of report date),  plus interest at
               6.07% per  annum.  The  Company  has the  right,  on or after the
               payment due date, to repay the loan with
               restricted shares valued at $0.05 per share.                                     -                 40,000
                                                                                 -----------------     -----------------

              Total Notes Payable                                                          280,491               354,115

              Less: Current Portion                                                       (280,491)             (354,115)
                                                                                 -----------------     -----------------

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

              The  aggregate  principal  maturities  of  notes  payable  are  as
follows:

<TABLE>
<CAPTION>
                                        Year Ended
                                         December 31,                       Amount

<S>                                        <C>                        <C>
                                           1999                       $         280,491
                                           2000                                      -
                                           2001                                      -
                                           2002                                      -
                                           2003                                      -
                                           2004 and thereafter                       -
                                                                      -----------------

                                           Total                      $         280,491
                                                                      =================
</TABLE>


                                        30

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                         (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                          December 31, 1998 and 1997


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.

              The following is a summary of option transactions:

<TABLE>
<CAPTION>
                                                                                                   Weighted
                                                                                                    Average
                                                                                                   Exercise
              Fixed Options                                                    Shares               Price
              --------------------------                                 -----------------     -----------------
<S>                             <C>                                              <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
                                                                         =================     =================
</TABLE>




                                        31

<PAGE>



                   MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                         (A Development Stage Company)
                 Notes to the Consolidated Financial Statements
                           December 31, 1998 and 1997

NOTE 7 -      STOCK OPTIONS (Continued)

              The  following  table  summarizes  information  about  fixed stock
              options outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                                      Outstanding Options                              Exercisable Options
              -----------------------------------------------------------------  ----------------------------------
                                                    Weighted
                                                     Average          Weighted                          Weighted
                   Range of           Number         Remaining        Average          Number           Average
                 Exercisable       Outstanding     Contractual       Exercise        Exercisable        Exercise
                  Prices            12/31/98         Life            Price           at 12/31/98         Price
              ---------------   ---------------   ------------  ----------------  --------------  -----------------
<S>           <C>                     <C>           <C>         <C>                    <C>        <C>
              $          0.20         1,500,000     3 years     $           0.20       1,500,000  $            0.20
</TABLE>

              If the Company had used the fair value based method of  accounting
              for its employee  stock option plan, as prescribed by Statement of
              Financial  Accounting  Standard No. 123,  compensation cost in net
              loss for the year ended  December  31,  1998,  1997 and 1996 would
              have increased by $-0-,  $72,338 and $242,387,  respectively,  and
              the  Company's net loss and loss per share would have been reduced
              to the proforma amounts indicated below:
<TABLE>
<CAPTION>
                                                                1998                1997               1996
                                                           -----------------  ------------------  ----------------

<S>                                                        <C>                <C>                 <C>
              Net loss                 As reported         $        (502,761) $         (775,559) $     (1,329,395)
                                       Proforma            $        (502,761) $         (703,221) $     (1,571,782)
              Net loss per share       As reported         $           (0.00) $            (0.01) $          (0.01)
                                       Proforma            $           (0.00) $            (0.01) $          (0.01)
</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.

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.

                                        32

<PAGE>



                MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                     (A Development Stage Company)
             Notes to the Consolidated Financial Statements
                        December 31, 1998 and 1997


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 $13,783,439 at December 31,
               1998 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.

               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."


                                        33

<PAGE>


                  MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARY
                        (A Development Stage Company)
                Notes to the Consolidated Financial Statements
                          December 31, 1998 and 1997


NOTE 10 -      GOING CONCERN (Continued)

               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.

               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, 1998, the following events occurred:

              1.    On February 18, 1999, warrants to purchase 222,222 shares of
                    common stock were exercised at $0.07 per share for $15,556.

              2.    On November 4, 1999,  warrants to purchase 714,285 shares of
                    common stock were exercised at $0.07 per share for $50,000.

              3.    The Board of Directors approved the following  salaries:  a)
                    $170,000 a year for the Company's C.E.O., b) $170,000 a year
                    for the Company's President and Director of Research, and c)
                    $95,000  a year  for  the  Company's  C.O.O.  and  Corporate
                    Secretary.

              4.    On January 27, 2000,  warrants to purchase  3,142,857 shares
                    of  common  stock  were  exercised  at $0.07  per  share for
                    $220,000.

                                        34