<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   Form 10-KSB

(Mark One)
 X       Annual report under section 13 or 15(d) of the Securities Exchange Act
---      of 1934 for the fiscal year ended December 31, 1999,

         or

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

Commission File Number: 2-93277-D

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

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

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

Issuer's telephone number (415) 868-0300

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

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

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

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

The aggregate market value of voting common stock held by  non-affiliates of the
issuer was  $68,694,585  on March 23,  2000 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 March 23, 2000, the Company had 155,140,798 shares of common stock, par value
$.001 per share issued and outstanding.

Documents  incorporated by reference.  The registrant  incorporates  information
required  by Part III (Items 10, 11, 12 and 13) of this report by  reference  to
the  registrant's  definitive proxy statement to be filed pursuant to Regulation
14A in connection with the Annual Meeting of Shareholders to beheld in May 2000.

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




<PAGE>





                                TABLE OF CONTENTS


PART I                                                                      Page

Item 1.  Description of Business                                               1

Item 2.  Properties                                                           12

Item 3.  Legal Proceedings                                                    12

PART II

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

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

Item 7.  Financial Statements                                                 14

PART III

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

Item 10. Executive Compensation                                               15

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

Item 12. Certain Relationships and Related Transactions                       16

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

Signatures                                                                    20

Exhibits Index                                                                21

Financial Statements and Schedules                                           F-1



                                        ii

<PAGE>

                                     PART I


Item 1.  Description of Business

General

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

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

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"  ("Patent No. 1"). The second patent is a related United States
equipment  patent  (U.S.  Patent No.  5,052,382)  entitled  "Approaches  for the
Control Generation and Administration of Ozone" ("Patent No. 2").

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

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

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

         On July 30, 1998, the Company received  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

                                       1
<PAGE>


application,  if granted,  would strengthen the Company's existing 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 to date
have been  conducted  under  contract by outside  laboratories  and  clinicians.
Gerard V. Sunnen, MD directs the Company's research and development  activities.
Dr.  Sunnen is a member of the Board of Directors  and 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 to (i)  determine  whether  the use of ozone,  either  alone or with
other  modalities,  is efficacious in the treatment of certain diseases and (ii)
establish  additional  scientific  evidence  that ozone,  through the use of the
patents or  applications  of scientific  methodologies  of a similar  nature can
decontaminate  blood  or  lipid  enveloped  viruses  and  thereby  significantly
diminish the degree of transfusion related disease.

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

         In 1990,  the  Canadian  Blood Forces  Program  (under the aegis of the
Canadian  Department  of Defense and  Agriculture  and the  Canadian  Red Cross)
requested that 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 views this study of the Drug as
a success,  in that the  treated  simians  never  became ill  through the entire
course of the trial period.

Governmental Regulation

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

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


                                       2
<PAGE>

         To initiate  Phase I of human  clinical  studies  required as part of a
NDA, an applicant must submit to the FDA an application  for an  Investigational
New Drug Exemption ("IND"),  which contains adequate  information to satisfy the
FDA that human clinical studies can be conducted  without exposing the volunteer
human  subjects  to an  unreasonable  risk of  illness or  injury.  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 to  commencing  a large animal study
followed by 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 in the United States, except to researchers
who agree to follow FDA  guidelines,  and  provided  the  devices are labeled as
"Investigational Devices."

         Because  ozone has been used to treat  humans in Europe for at least 30
years, the European Union (the "EU") is more accepting than the United States of
human clinical trials of ozone therapies. Management believes 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
Italy. 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  responsible  for  selecting  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,  the  Company  and  ISSOT  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 obtain a waiver of these  requirements.  The  Company  has never  performed a
large animal study or published  Phase I clinical trial and does not possess the
necessary  data with  respect to its ozone  therapy to commence  Phase II study.
However,  there exists 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.

Instrument Development

         The Company has entered  into an  agreement  with  Biozone  Corporation
("Biozone") under which Biozone was granted worldwide  manufacturing  rights for
Medizone Ozone Generating Equipment.  Medizone has exclusive worldwide marketing
rights for Biozone  manufactured  equipment intended for scientific research and
medical  applications,  to be marketed under the Medizone label. Biozone expects
to relocate to California in the future,  so the  manufacturing  facility can be


                                       3
<PAGE>

located near Medizone's  corporate  headquarters.  Under the 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 consideration under
the licensing agreement the Company issued 100,000 shares of restricted stock to
Biozone in 1998.

International Activities

Medizone Canada Limited

         To maximize  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 majority 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 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.  The
Company  also  intends to  establish  a  non-profit  corporation  to be owned by
MedCan.  The future business of the non-profit  will be to aid the  economically
underdeveloped  third world countries in the acquisition of Medizone  equipment,
training of doctors,  and funding of programs for hepatitis and aids, at greatly
discounted prices in those countries.

Medizone New Zealand Limited

         On June 22, 1995,  the Company  entered into a series of contracts that
resulted in the  formation of a joint  venture  subsidiary  incorporated  in New
Zealand,  Medizone  New Zealand  Limited  ("MNZ").  MNZ is owned  equally by the
Company and Solwin Investments  Limited ("Solwin"),  a New Zealand  corporation,
which is an affiliate of Richard G. Soloman  ("Soloman"),  a former  director of
the Company.  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.


         Under these  agreements the Company  purchased 100% of MNZ from Soloman
and sold 50% of MNZ to Solwin 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.  The Company and MNZ also  entered into a
Licensing  Agreement (the "Licensing  Agreement") and a Managing Agent Agreement
(the "Managing Agent Agreement").

         Under the Licensing Agreement, the Company granted an exclusive license
to MNZ for  Patent No. 1 and Patent  No. 2 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.



                                       4
<PAGE>

         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 Southeast 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 receiving 10% and the Company  receiving 90% of the net royalties under
those licenses.

         The Managing Agent  Agreement  expires on the termination or expiration
of the last of the licenses  obtained  under the  agreement,  subject to earlier
termination by 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  companies  that have  commenced
research  into the use of ozone as a virucide in the  treatment of HIV and other
diseases,  or that have  announced  the  intention  to do so.  Other  companies,
foundations,  research  laboratories  or  institutions  may  also be  conducting
similar investigations into the use of ozone as a virucide or as a decontaminant
for blood or blood products.

Employees

         As of December 31, 1999, the Company had four full time employees.

Status of the Company's Research

         The Company has entered into a research  agreement with a multinational
research  partner  interested in the possibility of viral  deactivation of serum
products by using  ozone.  Serum  products are used to make a media base that is
then used in the manufacture of vaccines for humans and animals. Under the terms
of the agreement, if the research proves successful,  Medizone will enter into a
license  agreement for the use of the  technology in the viral  deactivation  of
commercial vats of serum product.

         A director,  Dr.  William Hitt,  commenced a human pilot trial into the
deactivation of hepatitis C in 1998. Using Medizone ozone  generating  equipment
constructed by Biozone, in the course of his regular medical practice.  Dr. Hitt
operates the William Hitt Center in Tijuana,  Mexico. The initial results of the
trial have shown  significant  reductions in viral load and the normalization of
previously  elevated liver enzyme levels as measured by SGOT and SGPT tests. The
therapy consists of an outpatient daily treatment  protocol averaging 30 days in
duration.  Although  the study was done in  Mexico,  the  laboratory  tests were
evaluated  at  FDA  reference  laboratories  in  the  United  States  to  assure
statistical  reliability.  The pilot trial was not  conducted  as a double blind
study, or under conditions that would allow for peer review,  journal  published
research as  required by the FDA.  However,  the Company is  satisfied  that the
trial  served as a  successful  proof of concept  human trial for the  Company's
proposed hepatitis protocols.

                                       5
<PAGE>

Risk Factors

         The Company's  business is in the development stage and 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  generated  any
revenues from operations. No assurance can be given that its business activities
will ever generate revenues. As indicated in the Company's financial statements,
the Company has experienced  substantial  losses throughout its history.  Losses
can be expected to continue for the foreseeable future.

Need for Additional Financing

         The Company has funded its  development  activities  to date  primarily
from  the  sale of its  common  stock.  The  Company  will  require  substantial
additional  capital,  which will most  likely be obtained  through  sales of its
common stock or other  securities,  to continue the  research  program  outlined
above,  pay its  administrative  and  operating  expenses,  meet its  filing and
disclosure  obligations  as a public  company,  and  repay  certain  outstanding
indebtedness.  Cash  operating  reserves  on hand as of March  23,  2000  should
support operations for eight months. 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 and Development

         The Company  believes that its proprietary  technology  offers benefits
that  are  not  currently  found  in  existing  purification,  disinfection  and
sterilization  systems.  To date,  the  Company  has not  brought  to market any
products   incorporating   the  technology.   The  Company  has  conducted  only
preliminary  clinical,  engineering and other tests to determine the feasibility
of products that could incorporate the technology, although it believes that the
technology may be incorporated into other products and devices.  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.  The Company has not
received any required  governmental  approvals for the use or application of the
Medizone  Technology in any medical or other clinical product or device,  and it
has not yet  realized  any  revenues  from the sale or license of any  products.
Product  revenues may not be realized from the sale or licensing of any products
(if they are identified and developed) for several years, if at all. Many of the
products  and  applications  the Company is  currently  evaluating  will require
significant  research and  development  efforts prior to any commercial use, and
those additional research and development  efforts may include  pre-clinical and
clinical testing, as well as a lengthy regulatory approval process. There can be
no assurance 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

                                       6
<PAGE>

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 that 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 pre-clinical and
clinical studies, to create and expand  distribution and marketing  capabilities
and to acquire and expand manufacturing  capacity.  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.  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,  and 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

                                       7
<PAGE>

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
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
section  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
section  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 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



                                       8
<PAGE>

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 be made in compliance with
regulations  promulgated by the FDA under the authority granted it under the FDA
Act. In other countries,  governmental agencies similar to the FDA also regulate
the sale of medical  devices and products,  generally in a manner similar to the
FDA's regulation of those products. Sales of any products to Europe also require
a "CE" mark,  which shows that the product has been  manufactured  in accordance
with required  standards.  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  pre-clinical  testing  and  clinical  trials,  as well as the  need for
financing to complete any such testing and trials, could have a material adverse
effect on 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
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.

         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.


                                       9
<PAGE>

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 depend in part
upon the  breadth  and  scope of  protection  provided  by the  patents  and the
validity  of the  patents.  Any  failure to maintain  the issued  patents  could
adversely affect the Company's business.  The Company intends to file additional
patent applications (both United States and foreign), when appropriate, relating
to its technologies,  improvements to its technologies and for specific products
it develops. There can be no assurance that any issued patents or pending patent
applications of 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 that 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 are 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.

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.


                                       10
<PAGE>

         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 that 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

         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
that 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 that the Company's


                                       11
<PAGE>

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 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.


Item 2.  Properties

         The  Company's  offices are  located at 144 Buena  Vista Ave.,  Stinson
Beach,  California.  The  offices  are  located  temporarily  in the home of the
Company's CEO, Edwin  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 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 (SEC 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 was 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.

         On  December  3,  1999,  the  Company  filed a  complaint  in the Third
Judicial District Court of Salt Lake County,  Utah (Civil No. 990912073) against
its former Chief Financial Officer, Arthur P. Bergeron.  Among other things, the

                                       12
<PAGE>

complaint filed by the Company sought a declaration from the court regarding the
enforceability of Mr. Bergeron's  employment contract,  the right of the Company
to terminate his employment and other relief.  The Company and Mr. Bergeron have
agreed  upon a  settlement,  under  the  terms of which  the  Company  agreed to
withdraw its complaint with prejudice and Mr.  Bergeron waived any further claim
for wages or other compensation under his employment agreement. In addition, Mr.
Bergeron  consented  to the  cancellation  of  2,000,000  shares of common stock
issued to him during  the  tenure of the  Company's  former  President  and CEO,
Joseph R. Latino. The settlement  agreement has not yet been finalized,  but the
Company anticipates that the final agreement will be executed by April 30, 2000.

         Following  the takeover  and  management  change of June 12, 1997,  new
management learned that there had been serious irregularities and possible fraud
perpetrated upon the Company by the former  President & CEO, Mr. Latino.  As the
seriousness of those past events became more evident,  management  presented the
information  it had gathered to the New York District  Attorney's  Office.  That
office commenced a criminal  investigation  that ultimately  resulted in charges
being brought against Mr. Latino.  On January 25, 2000, Mr. Latino was sentenced
to serve 1.5 to 4.5 years  and pay  restitution  in the  amount of  $415,869  to
Medizone  under a plea bargain that  dropped all felony  charges  except for one
count of Grand Larceny in the Second Degree.


                                     Part II

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

         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 1998 and 1999. 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>
     1999              First Quarter             .095              .065
                       Second Quarter            .17               .065
                       Third Quarter             .195              .125
                       Fourth Quarter            .13               .08

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

         As of March 21, 2000, there were  approximately  3839 holders of record
of the Company's common stock, and approximately 4511 beneficial owners.

         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 is
dependent upon various factors,  including the Company's earnings, capital needs
and  general  financial  condition.  To date the  Company has had no revenues or
earnings.  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.


                                       13
<PAGE>


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

Results of Operations

         From its inception in 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.

         The Company  has had no sales.  In 1998,  the  Company had  revenues of
$125,000 from the sale of a subsidiary.  The Company had no revenues in 1999. In
January  2000,  the  Company  received  payment  of  $415,869  under an order of
restitution entered against its former President and CEO.

         There were $75,000 in research and development expenditures,  including
work  performed  by  independent  contractors  in 1999,  compared to $13,218 for
research  and  development  in 1998.  Since  inception  the  Company  has  spent
$2,407,853 for research and development.

         General and administrative  expenses were $198,308 in 1999, compared to
$562,729 in 1998. These expenses include  professional fees, payroll,  insurance
costs and travel expenses.

         Notes payable in 1999 totaled $280,491 in 1999 and 1998.

Liquidity and Capital Resources

         At December 31, 1999, the Company had a working  capital  deficiency of
$1,058,028 and a  stockholders'  deficiency of $1,052,361  compared to a working
capital deficiency of $1,031,586 and a stockholders' deficiency of $1,023,974 in
1998.

         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 7.  Financial Statements and Supplementary Data

         The  financial  statements  of the Company are  attached to this report
commencing on page F-1.


                                    Part III

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

         The following table contains  information  concerning the directors and
executive officers of the Company as of March 23, 2000.

Name                       Age      Position

Edwin G. Marshall          57       Chairman of the Board, CEO
Gerard V. Sunnen           57       Director, President
William M. Hitt            73       Director
Jill C. Marshall           48       Chief Operating Officer, Corporate Secretary
Kevin R. Andersen          48       Chief Financial Officer

         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


                                       14
<PAGE>

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.  Dr. Sunnen has 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
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, MS, was appointed Chief  Financial  Officer in
November  1998. Mr.  Andersen is a partner in Andersen,  Andersen & Strong L.C.,
Certified Public  Accountants,  who previously served as 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 10.  Executive Compensation

         The  information  for this Item is  incorporated  by  reference  to the
Company's  definitive  proxy  statement to be filed  pursuant to Regulation  14A
under the Securities Exchange Act of 1934.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

         The  information  for this Item is  incorporated  by  reference  to the
Company's  definitive  proxy  statement to be filed  pursuant to Regulation  14A
under the Securities Exchange Act of 1934, as amended.

                                       15
<PAGE>

Item 12. Certain Relationships and Related Transactions

         The  information  for this Item is  incorporated  by  reference  to the
Company's  definitive  proxy  statement to be filed  pursuant to Regulation  14A
under the Securities Exchange Act of 1934, as amended.


Item 13.  Exhibits and Reports on Form 8-K

(a)       Exhibits

         Number            Description

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

         3.1               Articles of Incorporation of Company (2)



<PAGE>


         3.2               Bylaws (2)

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

         10.1              Patent Agreement, dated February 26, 1987.

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

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

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

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

         10.6              Consulting Agreement between Joseph Latino and the
                           Company (2)

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

         10.8              Stock Option of Joseph Latino (2)

         10.9              Stock Option of Jeffrey Freed (2)

         10.10             Stock Option of Susan Golden (2)

         10.11             Stock Option of Hubert Weinberg (2)

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

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

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

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

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

                                       16
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

         10.33             Contract between Company and Capmed USA (10)

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

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

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

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


                                       17
<PAGE>

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

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

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

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

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

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

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

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

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

         16                Letter re: change in certifying accountants (17)



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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       18
<PAGE>

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

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

(b)      Reports on Form 8-K.

         The Company  filed a Current  Report on Form 8-K on February 8, 2000 to
report the change of auditors.


                                       19
<PAGE>


                                   SIGNATURES


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

                                MEDIZONE INTERNATIONAL, INC.


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

Date: March 28, 2000

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


Date: March 28, 2000          /s/ Edwin G. Marshall
                         -------------------------------------------------------
                         Edwin G. Marshall, Chief Executive Officer and Director


Date: March 28, 2000          /s/ Gerard V. Sunnen
                         -------------------------------------------------------
                         Gerard V. Sunnen, President and Director


Date: March 28, 2000          /s/ William M. Hitt
                         -------------------------------------------------------
                         William M. Hitt, Director


Date: March 28, 2000          /s/ Kevin R. Andersen
                         -------------------------------------------------------
                         Kevin R. Andersen, Chief Financial Officer
                         (and Principal Accounting Officer)






                                       20
<PAGE>


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

                       CONSOLIDATED FINANCIAL STATEMENTS

                              December 31, 1999



<PAGE>






                                C O N T E N T S


Independent Auditors' Report.................................................F-3

Consolidated Balance Sheet...................................................F-4

Consolidated Statements of Operations........................................F-6

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

Consolidated Statements of Cash Flows.......................................F-14

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



                                      F-2
<PAGE>







                        INDEPENDENT AUDITORS' REPORT


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

We  have  audited  the  accompanying  consolidated  balance  sheet  of  Medizone
International,  Inc. and Subsidiary (a development stage company) as of December
31, 1999, and the related consolidated  statements of operations,  stockholders'
equity (deficit),  and cash flows for the years ended December 31, 1999 and 1998
and from  inception  on January  31,  1986  through  December  31,  1999.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Medizone International,  Inc. and Subsidiary (a development stage company) as of
December 31, 1999, and the  consolidated  results of their  operations and their
cash flows for the years ended  December 31, 1999 and 1998 and from inception on
January 31, 1986  through  December  31,  1999,  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
March 24, 2000



                                      F-3
<PAGE>

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


                                     ASSETS

<TABLE>
<CAPTION>
                                                               December 31,
                                                                1999

CURRENT ASSETS

<S>                                                       <C>
   Cash and cash equivalents                              $           4,388
                                                          -----------------

     Total Current Assets                                             4,388

PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2)                          5,667
                                                          -----------------

OTHER ASSETS

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

     Total Other Assets                                                  -

     TOTAL ASSETS                                         $          10,055
                                                          =================
</TABLE>


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


                                      F-4
<PAGE>


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


                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                                   1999

CURRENT LIABILITIES

<S>                                                                          <C>
   Accounts payable                                                          $         395,370
   Accrued expenses (Note 3)                                                           527,045
   Notes payable (Note 6)                                                              280,491
                                                                             -----------------

     Total Current Liabilities                                                       1,202,906
                                                                             -----------------
     Total Liabilities                                                               1,202,906
                                                                             -----------------
COMMITMENTS AND CONTINGENCIES (Note 4)

STOCKHOLDERS' EQUITY (DEFICIT)

   Common stock; 250,000,000 shares authorized of $0.001 par value,
    149,887,941 shares issued and outstanding                                          149,888
   Additional paid-in capital                                                       12,676,882
   Deficit accumulated during the development stage                                (14,019,621)
                                                                             -----------------

     Total Stockholders' Equity (Deficit)                                           (1,192,851)
                                                                             -----------------
     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                    $          10,055
                                                                             =================
</TABLE>

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


                                      F-5
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                                       From
                                                                                                   Inception on
                                                                 For the Years Ended                January 31,
                                                                        December 31,               1986 Through
                                                        --------------------------------------     December 31,
                                                               1999               1998                 1999
                                                        ------------------  ------------------  ------------------
<S>                                                     <C>                 <C>                 <C>
REVENUE                                                 $               -   $               -   $          133,349
                                                        ------------------  ------------------  ------------------

EXPENSES

   Cost of sales                                                        -                   -              103,790
   Research and development                                         75,000              13,218           2,407,853
   General and administrative                                      198,308             562,729          11,328,872
   Bad debt expense                                                     -               48,947              48,947
   Depreciation and amortization                                     1,945               2,673              27,398
                                                        ------------------  ------------------  ------------------

     Total Expenses                                                275,253             627,567          13,916,860
                                                        ------------------  ------------------  ------------------

     Loss from Operations                                         (275,253)           (627,567)        (13,783,511)
                                                        ------------------  ------------------  ------------------

OTHER INCOME (EXPENSE)

   Minority interest in loss                                            -                   -               26,091
   Other income                                                         -                  420              19,780
   Gain on sale of subsidiary (Note 1)                                  -              108,417             208,417
   Interest expense                                                (22,439)           ( 47,031)           (843,136)
                                                        ------------------  ------------------  ------------------

     Total Other Income (Expense)                                  (22,439)             61,806            (588,848)
                                                        ------------------  ------------------  ------------------

LOSS BEFORE EXTRAORDINARY
 ITEMS                                                            (297,692)           (565,761)        (14,372,359)
                                                        ------------------  ------------------  ------------------

EXTRAORDINARY ITEMS

   Debt forgiveness (Note 11)                                       61,510                  -              352,738
                                                        ------------------  ------------------  ------------------

     Total Extraordinary Items                                      61,510                  -              352,738
                                                        ------------------  ------------------  ------------------

NET LOSS                                                $         (236,182) $        ( 565,761) $      (14,019,621)
                                                        ==================  ==================  ==================

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

WEIGHTED AVERAGE NUMBER
 OF SHARES OUTSTANDING                                         149,255,666         142,645,000
                                                        ==================  ==================

</TABLE>

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

                                      F-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.


                                      F-7
<PAGE>



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

<TABLE>
<CAPTION>

                                                                                                                 Deficit
                                                                                                Additional      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.


                                      F-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.


                                      F-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.


                                      F-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.


                                      F-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.


                                      F-12
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                                    Deficit
                                                                                                                   Accumulated
                                                              Common Stock                          Additional     During the
                                              -------------------------------------------------      Paid-in      Development
                                                  Shares          Amount           Subscribed        Capital          Stage
                                              --------------  ----------------  ---------------  ---------------- -----------------
<S>                                           <C>             <C>               <C>              <C>              <C>
Balance, December 31, 1996                       130,051,613  $       130,052   $         3,090  $    11,423,736  $    (12,442,119)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Balance, December 31, 1998                       148,926,434          148,926                -        12,610,539       (13,783,439)

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

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

Net loss for the year ended
 December 31, 1999                                        -                -                 -                -           (236,182)
                                             ---------------  ---------------   ---------------  ---------------   ---------------

Balance, December 31, 1999                       149,887,941  $      149,888    $            -   $    12,676,882   $   (14,019,621)
                                             ===============  ==============    ===============  ===============   ===============
</TABLE>

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


                                      F-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,
                                                                     1999             1998              1999
                                                                  ---------------- ----------------- -----------------
        CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                                               <C>              <C>               <C>
          Net loss                                                $      (236,182) $       (565,761) $   (14,019,621)
          Adjustments to reconcile net loss to net cash
           used by operating activities:
             Depreciation and amortization                                  1,945             2,673           27,398
             Stock issued for services                                      1,750           241,536        2,869,166
             Bad debt expense                                                  -             48,947           48,947
             Minority interest in loss                                         -                 -           (26,091)
             Loss on disposal of assets                                        -                 -           693,752
             Gain on settlement of debt                                   (61,510)               -           (61,510)
          Changes in assets and liabilities:
             (Increase) decrease in prepaid expenses
              and deposits                                                     -             11,631          (48,947)
             Increase (decrease) in accounts payable                      (13,252)          (18,698)         691,250
             Increase (decrease) in accrued expenses                      238,439            69,783          587,067
                                                                  ---------------- ----------------- -----------------
               Net Cash Used by Operating Activities                      (68,810)        ( 209,889)      (9,238,589)
                                                                  ---------------- ----------------- -----------------
        CASH FLOWS FROM INVESTING ACTIVITIES

          Organization costs                                                   -                 -            (8,904)
          Purchase of fixed assets                                             -             (2,017)         (24,159)
                                                                  ---------------- ----------------- -----------------
               Net Cash Used by Investing Activities                           -             (2,017)         (33,063)
                                                                  ---------------- ----------------- -----------------
        CASH FLOWS FROM FINANCING ACTIVITIES

          Principle payments on notes payable                                  -            (3,624)         (192,774)
          Cash received from notes payable                                     -             25,000        1,106,518
          Capital contributions                                                -                 -           421,847
          Stock issuance costs                                                 -                 -          (105,312)
          Increase in minority interest                                        -                 -            14,470
          Issuance of common stock for cash                                65,555            60,000        8,031,291
                                                                  ---------------- ----------------- -----------------
               Net Cash Provided by Financing Activities                   65,555            81,376        9,276,040
                                                                  ---------------- ----------------- -----------------
        NET INCREASE (DECREASE) IN CASH                                    (3,255)         (130,530)           4,388

        CASH AT BEGINNING OF PERIOD                                         7,643           138,173               -
                                                                  ---------------- ----------------- -----------------
        CASH AT END OF PERIOD                                     $         4,388  $          7,643  $         4,388
                                                                  ================ ================= =================
</TABLE>

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


                                      F-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,
                                                                     1999             1998              1999
                                                                  ----------------  ---------------- -----------------
SUPPLEMENTAL CASH FLOW INFORMATION

CASH PAID FOR:

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

NON-CASH FINANCING ACTIVITIES:

   Stock issued for services                                      $         1,750   $       241,536  $     2,869,166
   Stock issued in conversion of debt to common stock             $            -    $       126,418  $     3,776,293
   Stock issued for license agreement and patent                  $            -    $            -   $       693,752
</TABLE>



                                      F-15
<PAGE>



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


NOTE 1 -      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

              a.  Organization

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

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

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

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



                                      F-16
<PAGE>




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


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

              a.  Organization (Continued)

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

              b.  Formation of Joint Venture

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

              Pursuant to the contracts,  the Company purchased 100% of MNZ from
              Richard G. Soloman,  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 Soloman,
              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.



                                      F-17
<PAGE>




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

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

              b.  Formation of Joint Venture (Continued)

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


<TABLE>
<CAPTION>
                                                   Medizone             Medizone
                                                   International,       New Zealand
                                                   Inc.                 Limited


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

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

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

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

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

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

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

              The  investment in the joint  venture has been recorded  under the
              equity  method of accounting as the Company does not have ultimate
              control of the joint  venture.  The investment is recorded at $-0-
              as of December 31, 1999.

              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.




                                      F-18
<PAGE>



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


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

              c.  Business Activities (Continued)

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

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



                                      F-19
<PAGE>


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


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

              c.  Business Activities (Continued)

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

              d.  Accounting Methods

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

              e.  Cash and Cash Equivalents

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

              f.  Basic Loss Per Share

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




                                      F-20
<PAGE>


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


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

              f.  Basic Loss Per Share (Continued)
<TABLE>
<CAPTION>
                                                                                    For the Years Ended
                                                                                        December 31,
                                                                                  1999               1998
                                                                            ------------------  ------------------

<S>                                                                         <C>                 <C>
              Numerator (net loss)                                          $         (236,182) $         (565,761)

              Denominator (weighted
               average number of
               shares outstanding)                                                 149,255,666         142,645,000

              Loss per share                                                $            (0.00) $            (0.00)
</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.  The Company has adopted these two  standards  although they
              did not  have a  material  impact  on the  Company's  consolidated
              financial statements.


                                      F-21
<PAGE>


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


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.



                                      F-22
<PAGE>

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


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, 1999.

              j.  Provision for Taxes

              At  December  31,  1999,   the  Company  has  net  operating  loss
              carryforwards  of  approximately  $12,000,000  that may be  offset
              against  future  taxable  income  through 2019. 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.


                                      F-23
<PAGE>



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

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.



                                      F-24
<PAGE>


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

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 at December 31,
1999:

              Office equipment                     $            4,318
              Furniture and fixtures                            6,307
                                                   ------------------
                                                               10,625
              Accumulated depreciation                         (4,958)
                                                   ------------------
              Net property and equipment           $            5,667
                                                   ==================

              Depreciation  expense  for the  years  ended  December  31,  1999
              and 1998 was  $1,945  and  $2,673, respectively.

NOTE 3 -      ACCRUED EXPENSES

              Accrued expenses consist of the following at December 31, 1999:

              Accrued payroll                      $          378,000
              Accrued interest                                149,045
                                                   ------------------

                           Total                   $          527,045
                                                   ==================

NOTE 4 -      COMMITMENTS AND CONTINGENCIES

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

              On December 3, 1999,  the Company  filed a complaint  in the Third
              District Court of Salt Lake County,  Utah against its former Chief
              Financial Officer.  Among other things, the compliant filed by the
              Company  sought  a  declaration   from  the  Court  regarding  the
              enforceability of the former officer's  employment  contract,  the
              right of the Company to terminate his employment and other relief.
              A verbal settlement has been agreed upon, under the terms of which
              the Company  agreed to withdraw its compliant  with  prejudice and
              the former  officer  waived any  further  claim for wages or other
              compensation  under his  employment  agreement.  In addition,  the
              former officer  consented to the  cancellation of 2,000,000 shares
              of common  stock  issued  to him in prior  years.  The  settlement
              agreement has not yet been finalized.



                                      F-25
<PAGE>

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


NOTE 4 -      COMMITMENTS AND CONTINGENCIES (Continued)

              Therefore,  the debt accrued as compensation to the former officer
              has been  recorded at December  31,  1999,  until a final  written
              agreement has been  reached.  Furthermore,  the  2,000,000  shares
              remain  outstanding  at  December  31,  1999  until the shares are
              received and canceled.

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

NOTE 5 -      ISSUANCE OF COMMON STOCK AND WARRANTS

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

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

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

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

              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.



                                      F-26
<PAGE>

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


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

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

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

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

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

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

              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.



                                      F-27
<PAGE>

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


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

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

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

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

              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. Soloman,  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.




                                      F-28
<PAGE>

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


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

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

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

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

              As of December 31, 1999, the following warrants were outstanding:

<TABLE>
<CAPTION>
                      Warrants                            Exercise Price                       Termination Dates

<S>                       <C>                       <C>                                     <C>
                           7,492,066                $                    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

<TABLE>
<CAPTION>
              Notes payable consisted of the following at December 31, 1999:

<S>                                                                                            <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

              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

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



                                      F-29
<PAGE>

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


NOTE 6 -      NOTES PAYABLE (Continued)

<TABLE>
<CAPTION>
<S>                                                                                            <C>
              Balance Forward                                                                  $          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

              Total Notes Payable                                                                        280,491
              Less: Current Portion                                                                     (280,491)
                                                                                               -----------------
              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>
             2000                                 $         280,491
             2001                                                -
             2002                                                -
             2003                                                -
             2004                                                -
             2005 and thereafter                                 -
                                                  -----------------

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



                                      F-30
<PAGE>


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

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

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

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

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

              Balance, December 31, 1999                                                -      $              -
                                                                         =================     =================
</TABLE>


                                      F-31
<PAGE>


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


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.

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 $14,019,621 at December 31,
               1999 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.



                                      F-32
<PAGE>

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


NOTE 10 -      GOING CONCERN (Continued)

               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'
               IND  application  will  ever be  reopened.  Until an NDA had been
               granted to the Company,  it may not  distribute  ozone-generating
               devices,   except  to   researchers   who  agree  to  follow  FDA
               guidelines,   and   provided   the   devices   are   labeled   as
               "Investigational Devices."

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

               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.



                                      F-33
<PAGE>

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


NOTE 11 -      SUBSEQUENT EVENTS

               Subsequent to December 31, 1999, the following events occurred:

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

               2.  On January  18,  2000,  the board of  directors  granted  the
                   following  shares of common stock in lieu of accrued salaries
                   at December  31,  1999:  a) 750,000  shares to the  Company's
                   C.E.O., valued at $75,000, b) 750,000 shares to the Company=s
                   President  and  Director of Research,  valued at $75,000,  c)
                   420,000  shares  to  the  Company's   C.O.O.   and  Corporate
                   Secretary,  valued  at  $42,000,  d)  70,000  shares  to  the
                   Company's C.F.O.,  valued at $7,000, and e) 100,000 shares to
                   a member of the board of directors of the Company,  valued at
                   $10,000.

               3.  On February 8, 2000,  the Company  consummated  an  agreement
                   which  provided  for the release of $39,577 in old debt to an
                   unrelated party for  consideration of $15,000 cash and 20,000
                   shares  of the  Company's  common  stock  valued  at  $3,500,
                   resulting in a gain on  settlement of debt of $21,077 for the
                   year ended December 31, 1999.

               4.  On February 18, 2000,  the Company  consummated  an agreement
                   which  provided  for the release of $67,933 in old debt to an
                   unrelated party for consideration of $27,500 cash,  resulting
                   in a gain on settlement of debt of $40,433 for the year ended
                   December 31, 1999.

               5.  On February 22, 2000,  the Company  consummated  an agreement
                   which  provided  for the release of $90,893 in old debt to an
                   unrelated party for consideration of $45,000 cash and 100,000
                   shares of the  Company=s  common  stock at a market  value of
                   $18,000.  However, pursuant to the agreement, if the value of
                   the  Company=s  common stock within the next 90 days is lower
                   that  $1.00  per  share,  the  Company  would  guarantee  the
                   difference. Therefore, no gain on settlement of debt has been
                   recorded  for the year  ended  December  31,  1999  since the
                   ultimate liability has not yet been determined.

               6.  On January  25,  2000,  a former  officer of the  Company was
                   charged  with  fraud  perpetrated  upon the  Company  in past
                   years.  The former  officer was forced to pay  restitution to
                   the  Company in the amount of $415,869  under a plea  bargain
                   that dropped all felony  charges  against the former  officer
                   except for one count of grand  larceny in the second  degree.
                   The amount will be recorded as  miscellaneous  income  during
                   the year ended December 31, 2000.



                                      F-34