UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-KSB  (Mark One) X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006  OR  __ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to  Commission File Number: 2-93277-D  MEDIZONE INTERNATIONAL, INC. (Name of small business issuer in its charter)  Nevada87-0412648(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)  144 Buena Vista, P.O. Box 742, Stinson Beach, California94970(Address of principal executive offices)(Zip code)  Issuers telephone number (415) 868-0300  Securities registered under Section 12(b) of the Exchange Act:  None Securities registered under Section 12(g) of the Exchange Act:  None  Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ___  Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   X     No   __  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 registrant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  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]    No [X]  The issuer is in the development stage and had no revenues for the fiscal year ended December 31, 2006.  The aggregate market value of voting common stock held by non-affiliates of the issuer was $4,136,884 on March 31, 2008 based on the average bid and asked prices of such stock as reported in the "pink sheets" of the National Daily Quotation Bureau.  On March 31, 2008, the registrant had 161,170,387 shares of common stock, par value $.001 per share, issued and outstanding.  Documents Incorporated by Reference  The issuer does not incorporate any documents by reference in this report. Transitional Small Business Disclosure Format (Check one): Yes __   No X   1   TABLE OF CONTENTS   PART I  Item 1. Description of Business 3 Item 2. Description of Property 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 15  PART II  Item 5 Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities 15 Item 6. Management's Discussion and Analysis or Plan of Operation 17 Item 7. Financial Statements 17 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 17 Item 8A. Controls and Procedures 17 Item 8B. Other Information 17  PART III  Item 9. Directors, Executive Officers, Promoters, Control Persons, and Corporate Goverance; Compliance with Section 16(a) of the Exchange Act 18 Item 10. Executive Compensation 19 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 19 Item 12. Certain Relationships and Related Transactions, and Director Independence 20 Item 13. Exhibits 21 Item 14. Principal Accountant Fees and Services 22 Signatures 22  Unless the context otherwise requires, all references in this report to "we," "us," "our," "Medizone" or the "Company" include Medizone International, Inc., a Nevada corporation, and its subsidiaries.  CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The statements contained in this Report on Form 10-KSB that are not purely historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of the words or phrases such as believes, expects, anticipates, should, plans, estimates, and potential, among others. Forward-looking statements include, but are not limited to, statements contained in Managements Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in these forward-looking statements for the reasons detailed in this report under the headings Risk Factors at pages 10 through 14.  The fact that some of these risk factors may be the same or similar to our past reports filed with the Securities and Exchange Commission (SEC) means only that the risks are present in multiple periods. We believe that many of the risks detailed here and in our other SEC filings are part of doing business in the industry in which we operate and compete and will likely be present in all periods reported. The fact that certain risks are common in the industry does not lessen their significance. The forward-looking statements contained in this report are made as of the date of this report and we assume no obligation to update them or to update the reasons why our actual results could differ from those that we have projected in such forward-looking statements.   2   PART I  Item 1. Description of Business General Medizone International, Inc., a Nevada corporation (Medizone), organized in 1986, is a development stage company.  To date, our business activity has been limited to (i) seeking regulatory approval of a precise mixture of ozone and oxygen called MEDIZONE® (sometimes referred to in this report as the "Drug"), and our 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 our products, including our drug production and delivery system (the Medizone Technology"). The Drug is intended to be used as a therapeutic drug in humans to inactivate certain viruses, and thereby afford a treatment for certain viral diseases including Human Immunodeficiency Virus (the AIDS-related virus), Hepatitis B, Hepatitis C, Epstein-Barr, herpes and cytomegalovirus, and to decontaminate blood and blood products. Patents We have owned two patents: · United States equipment patent (U.S. Patent No. 5,052,382) entitled "Apparatus for the Controlled Generation and Administration of Ozone" ("Patent No. 1"); and · United States patent (U.S. Patent No. 6073627) entitled External Application of Ozone/Oxygen For Pathogenic Conditions, a process patent for the treatment of external afflictions."  This patent also describes equipment evolutions and treatment envelope design for external medical applications (Patent No. 2). Patent No. 1, which covers an apparatus for the controlled generation, monitoring and dosage of the Drug, was developed by a consultant engineer of the Company, and issued and assigned to the Company in 1991.  It was developed to provide the physical means to deploy our previously patented process for ozone decontamination of blood and blood products through the treatment of blood and blood components. We hold several foreign patents based on this patent in Canada, the European Community, Australia, Malaysia, Hong Kong and Japan.  While this patent has now expired due to the 17-year expiration of rights, the Company has been working on new advances which it believes are patentable that are developments to the original US Patent No. 4,632,980 and US Patent No. 5,052,382.  Should adequate funding become available in the future, the Company anticipates filing new applications with the United States Patent Office for this more highly developed technology. Patent No. 2 was issued on March 14, 2000. We believe that this patent will strengthen our existing technology patents as it addresses advanced developments with ozone generating equipment. The patent additionally describes the equipment and protocols necessary to treat external wounds, burns and ulcerations.  Due to past due fees being owed, the Company will need to bring this patent current should funding become available. On November 2, 2001, we filed U.S. Provisional Patent Application serial no. 10/002943, for Method and Apparatus for Ozone Decontamination of Biological Liquids.  This application deals with protocols for biological liquid decontamination as well as the devices for conducting decontamination. We also owned a process patent (U.S. Patent No. 4,632,980) entitled "Ozone Decontamination of Blood and Blood Products," covering a procedure for ozone decontamination of blood and blood products through the treatment of blood and blood components.  That patent expired in February 2003.  Many of the claims and primary aspects of the technology covered by this patent are assumed by or incorporated in Patents 1 and 2 described above. We do not believe the expiration of this patent will prevent us from proceeding with our business plan as outlined in this report if and when adequate financial backing has been received by the Company. The Companys lack of financial resources has prevented it from making all payments required to maintain patent filings in some jurisdictions and certain of the filings have lapsed.  While some of the lapsed annuities might be redeemed pursuant to local rules and regulations, there is no assurance that the Company will be successful in obtaining the financial resources required within the period that these payments may be made or that redemption payments will be permitted in all jurisdictions.  Should the Company acquire the funding necessary to move forward with its science program, a full review of the  3   patent situation shall be completed and new patents are anticipated which are expected to mitigate the loss of expired patents.  There is no assurance that such funding will be obtained. Research and Development We do not own laboratories or other clinical research or testing facilities. All research and development activities to date have been conducted under contract by outside laboratories and clinicians.  The Company is not currently engaged in any research and development activity due to the lack of financial resources. Government Regulation The manufacturing and marketing of the Drug and related drug delivery technology, as well as our related research and development activities, are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. We believe that complying with these regulations will involve a considerable amount of time, expense and uncertainty. In the United States, drugs are subject to rigorous federal regulation and, to a lesser extent, state regulation. The Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act"), and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our drug and medical devices. Drug development and approval within this regulatory framework is difficult to predict and will take a number of years and involve the expenditure of substantial resources. The steps required before a pharmaceutical agent may be marketed in the United States include: · Pre-clinical laboratory tests, in vivo pre-clinical studies and formulation studies; · The submission to the Food and Drug Administration (the "FDA") of an Investigational New Drug Application (IND) for human clinical testing which must become effective before human clinical trials can commence; · Adequate and well-controlled human clinical trials to establish the safety and efficacy of the product; · The submission of a New Drug Application to the FDA; and · FDA approval of the New Drug Application prior to any commercial sale or shipment of the product. In addition to obtaining FDA approval for each product, each domestic product-manufacturing establishment must be registered with, and approved by, the FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with the FDA's Good Manufacturing Practices for products, drugs and devices. Pre-clinical Trials Pre-clinical testing includes laboratory evaluation of chemistry and formulation, as well as tissue culture and animal studies to assess the potential safety and efficacy of the product. Pre-clinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. No assurance can be given as to the ultimate outcome of such pre-clinical testing. The results of pre-clinical testing are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to an IND, the IND becomes effective 30 days following its receipt by the FDA. We have conducted limited pre-clinical studies on the Drug; however, more studies are needed.  We intend to rely upon third-party research firms and other independent contractors to perform further pre-clinical trials to the extent we obtain sufficient funding.  There is no assurance that we will obtain funding to conduct such studies or that the studies, if conducted, will yield positive results. Clinical Trials Clinical trials involve the administration of the new product to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with the FDAs Good Clinical Practices  4   standard under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an independent institutional review board at the institution where the study will be conducted. The institutional review board will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Compounds must be formulated according to Good Manufacturing Practices. Clinical trials are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the product into healthy human subjects, the drug is tested for safety (adverse side effects), absorption, dosage tolerance, metabolism, bio-distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II is the proof of principal stage and involves studies in a limited patient population in order to: · Determine the efficacy of the product for specific, targeted indications; · Determine dosage tolerance and optimal dosage; and · Identify possible adverse side effects and safety risks. When there is evidence that the product may be effective and has an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and to test for safety within an expanded patient population at geographically dispersed multi-center clinical study sites. Phase III frequently involves randomized controlled trials and, whenever possible, double blind studies. We, or the FDA, may suspend clinical trials at any time if it is believed that the individuals participating in such trials are being exposed to unacceptable health risks. We have not conducted clinical trials and will not be in a position to do so until such time, if any, as we have obtained additional financing, of which there is no assurance.  If the Company does obtain financing in an amount sufficient to support such trials, we intend to rely upon third party contractors to advise and assist us in those clinical trials. New Drug Application and FDA Approval Process The results of the pharmaceutical development, pre-clinical studies and clinical studies are submitted to the FDA in the form of a New Drug Application for approval of the marketing and commercial shipment of the product. The testing and approval process is likely to require substantial time and effort. In addition to the results of pre-clinical and clinical testing, the applicant must submit detailed information about chemistry and manufacturing and controls that will determine how the product will be made. The approval process is affected by a number of factors, including the severity of the disease, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Consequently, there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny a New Drug Application if applicable regulatory criteria are not satisfied, require additional testing or information or require post-marketing testing (Phase IV) and surveillance to monitor the safety of a company's products if it does not believe the New Drug Application contains adequate evidence of the safety and efficacy of the drug. Notwithstanding the submission of such data, the FDA may ultimately decide that a New Drug Application does not satisfy its regulatory criteria for approval. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Post approval studies may be conducted to explore further intervention, new indications or new product uses. Among the conditions for New Drug Application approval is the requirement that any prospective manufacturer's quality control and manufacturing procedures conform to Good Manufacturing Practices and the requirement specifications of the approved New Drug Application. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of drug and quality control to ensure full technical compliance. Manufacturing establishments, both foreign and domestic, also are subject to inspections by or under the authority of the FDA and by other federal, state or local agencies. Additionally, in the event of non-compliance, the FDA may issue warning letters and seek criminal and civil penalties, enjoin manufacture, seize product or revoke approval.    5   International Approval Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of commercial sales of the drug in such countries. The requirements governing the conduct of clinical trials and drug approvals vary widely from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general, each country at this time has its own procedures and requirements. Other Regulation In addition to regulations enforced by the FDA, our business activities may also become subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. Our research and development may involve the controlled use of hazardous materials, chemicals, and various radioactive compounds. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of any accident, we could be held liable for any damages that result and any such liability could exceed our resources. Medizones Pre-clinical Studies Between 1988 and 2000, we sponsored and were the primary beneficiary of research to: · Determine whether the use of ozone, either alone or with other modalities, is efficacious in the treatment of certain diseases, and · 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. These pre-clinical projects included the following: · Studies to test ozone's ability to inactivate HIV, conducted at the State University of New York Health Science Center at Syracuse; · 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 · 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 we 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. We 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, we view this study of the Drug as a success, in that the treated simians never became ill through the entire course of the trial period, while the control group all died within a 14-day period. Effect of Governmental Regulation on Medizone The Drug, the Medizone Technology and related products are regulated by the FDA under the FDC Act and related regulations. 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, we are precluded from selling or distributing the Drug or the Medizone Technology until after FDA approval has been granted. To obtain FDA approval, we will be required to submit medical and scientific evidence sufficient to demonstrate that  6   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 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. We 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 us to conduct additional animal studies prior to commencing a large animal study followed by human trials. In September 1994, the FDA inactivated our IND. We have no present plans to commence a large animal study, which would require, as a precursor, additional small animal and laboratory work. Accordingly, we do not expect that our IND application will ever be re-opened. Until an NDA has been granted, we 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") and other regions of the world outside of North America are more accepting than the United States of human clinical trials of ozone therapies.  We believe we should pursue foreign Phase I human toxicity trials, as well as early stage phase II efficacy trials in these regions of the world when funding is obtained.  The results anticipated from the next planned blind Phase I/II human safety and efficacy trials investigating Hepatitis C are expected to contribute to satisfying regulatory requirements in the United States, Canada and other countries.  These trials cannot be undertaken until such time as the Company obtains sufficient financing, of which there can be no assurance. We previously entered into a research agreement with a foreign national research center to proceed with a Phase I/II human Hepatitis C trial.  The protocols for the proposed testing are designed with the intention of producing a peer-reviewed, journal-published article on our ozone therapy for the Hepatitis C virus.  The trial will be blind, and the country of origin and laboratories in Canada will share the data produced.  This proposed trial is considered a major step toward our goal to conduct similar tests in Canada and eventually with the FDA.  The proposal anticipates substantial collaborative efforts by the parties to share information with appropriate regulatory bodies in both countries.  While we continued development work to proceed with this trail through 2001, no substantive progress has been made since 2001, and additional funding will be required to start the trial and see it through to completion.  Due to the location of this country and current world events in the middle east, we currently believe it is unlikely we will proceed with trials in that region of the world at this time. We intend to pursue future trials in Canada and other countries as soon as funding allows. We believe trials successfully completed in Canada would be acceptable to both the FDA and the regulatory agencies of the European Union, due to recent harmonization of regulatory requirements between Health Canada and the FDA. Anecdotal Studies Beginning in 1998 and concluding in 2000, we obtained patient data for 40 participants in a developmental human pilot trial investigating ozone treatment of Hepatitis C.  This trial was conducted independently by a former board member of the Company at his private clinic in Tijuana, Mexico, during the course of his normal medical practice.  The trial was not conducted as a blind study as required by the FDA and the results have value only as anecdotal information.  The Company believes that the information reported from the studies corresponds with the success reported in similar anecdotal studies conducted in Europe (primarily in Germany). The clinic voluntarily provided the data from the study to us and we have not independently verified its accuracy.  Patients were treated with major autohemotherapy, a blood therapy treatment protocol, on an outpatient basis. The average treatment period was 30 days.  The clinic reported viral load testing (detection of the levels of the virus present), as well as standardized SGOT and SGPT tests of liver enzyme levels before the start of the treatment, immediately following treatment, and six months after treatment without any further medical intervention during the post-treatment period.  No adverse side effects were observed or reported in any of the participants. According to the study results, SGOT and SGPT scores returned to normal ranges and viral load reductions averaged 5 log or 99.9% reduction.  If accurate, these data indicate that in the six-month post-treatment follow up testing, 38 of the 40 patients tested at inactive viral levels for Hepatitis C virus.  Two of the patients reportedly had increased viral levels at the end of the treatment test period; however, even those patients enjoyed significantly reduced viral load levels when compared to pre-treatment test results.  As indicated above, because these trials were not conducted as a blind study as required by the FDA we regard the results only as anecdotal information.  Further studies are needed to verify the effectiveness of the science.   7   Instrument Development In 1998, we entered into an agreement with Biozone Corporation (Biozone) under which Biozone was granted worldwide manufacturing rights for Medizone Ozone Generating Equipment and we were granted exclusive worldwide marketing rights for Biozone manufactured equipment intended for scientific research and medical applications, to be marketed under the Medizone label.  We have agreed with Biozone that it may retain the right to market its other industrial applications, such as water treatment plants.  The Biozone agreement has now expired although the companies remain on good terms. If the Company obtains adequate funding, future plans may include construction of a manufacturing and shipping center in Reno, Nevada.  We selected Nevada as a location for this future facility due to the availability of human resources, land, general demographics, location and favorable tax laws.  As an interim step in preparation for a transition from a research and development stage company to a company that anticipates future worldwide sales, we anticipate that we would need to construct or acquire a smaller development facility on the outskirts of the San Francisco Bay Area.  This facility would provide a location in which to finalize product development and production line design prior to making the larger commitment to build a full scale manufacturing plant.  These plans are on hold pending the receipt of funding, of which there is no assurance given. International Activities Medizone Canada Limited To maximize research opportunities and the potential market for our products, we intend to establish subsidiary or affiliated corporations in other countries. The organization of these subsidiaries may initially result in significant expense; thereafter, it is intended that the subsidiaries would be responsible for organizing research programs and generating possible sources of financing, from which we would benefit directly or indirectly. It is anticipated that we would also enter into license agreements with all subsidiary companies for use of the Medizone Technology and patents. We presently own all of the issued and outstanding stock of MCL Medizone Canada, Ltd., a Canadian corporation ("MedCan").  MedCan was a participant in the Canadian Blood Forces Program's SIV Study.  The Canadian government requires that a Canadian entity must perform research accepted under the auspices of Health Canada.  Therefore, future research in Canada will be pursued through MedCan. Future staffing of MedCan will be with Canadian citizens, and MedCan will be operated from Canada. Medizone also intends to form a not-for-profit foundation. The future business of the non-profit entity will be to assist in research and aid economically underdeveloped third world countries in the acquisition of Medizone equipment, training of doctors, and funding of programs for the treatment of Hepatitis and AIDS, at discounted prices in those countries.  We believe that if our research continues to prove successful, the future participation of the World Health Organization and the World Bank might be available to help bring our science to developing regions of the world through matching funds and grant programs.  The majority of our expected future customer base is located in the developing regions of the world. The objectives of the non-profit entity primarily would be to provide access to a highly qualified scientific advisory board and to permit more cost-effective access of treatments and assistance to third world and developing nations.  The Company believes that the non-profit entity should have better access to medical researchers, infectious disease experts, virologists and scholars, including those associated with universities and research facilities.  In addition, the not-for-profit nature of the entity should allow the Company to use a tiered pricing structure for services and products in emerging economies and extend the reach of the Companys technology to as many in need as possible.  The Company would eventually direct a portion of its profits to the non-profit foundation to fund its operations and its research.  It is also anticipated that the Company will pay the establishment costs for the foundation start-up, and some of those initial costs have already been paid. Medizone New Zealand Limited On June 22, 1995, we entered into a series of contracts that resulted in the formation of a joint venture incorporated in New Zealand, Medizone New Zealand Limited ("MNZ"). MNZ is owned equally by Medizone and Solwin Investments Limited ("Solwin"), a New Zealand corporation, which is an affiliate of Richard G. Solomon, one of our directors.  MNZ is a research and development stage company formed to obtain regulatory approval for the distribution of our patented technology in New Zealand, Australia, South East Asia and the South Pacific Islands. Under these agreements, we purchased 100% of MNZ from Mr. Solomon and sold 50% of MNZ to Solwin for $150,000.  We also loaned $50,000 to MNZ on a demand basis, which was repaid on October 2, 1995. On October 26, 1995, we loaned MNZ $50,000 on a demand basis, which has not been repaid as of the date of this report.  We also entered into a  8   Licensing Agreement (the "Licensing Agreement") and a Managing Agent Agreement (the "Managing Agent Agreement") with MNZ. Under the Licensing Agreement, we granted an exclusive license to MNZ under certain patents and the right to use the Medizone 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. We will receive a guaranteed minimum royalty, in an amount to be agreed to by the parties, commencing in the third year after all necessary regulatory approvals requisite to the license, use or distribution of our proprietary technology have been obtained in New Zealand. If we are unable to agree with MNZ upon the amount of the guaranteed minimum royalty, we may terminate the Licensing Agreement. Commencing on the first sale to a user by MNZ, we are to receive a sales royalty on MNZ's gross annual sales under the Licensing Agreement. Under the Managing Agent Agreement, MNZ will act as our 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). We will divide Licensing fees with MNZ on a sliding scale as set forth below: MedizoneMNZInitial license50%50%Subsequent license fees up to $500,00050%50%Subsequent license fees between $500,000 and $750,00075%25%Subsequent license fees in excess of $750,00085%15%  We will also divide any net royalties paid to us under any license entered into pursuant to the Managing Agent Agreement, with MNZ receiving 10% 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 us under certain circumstances.  We have had informal discussions with the management of MNZ about acquiring the rights of MNZ in the future.  Negotiations have not yet progressed to a formal stage, due to the lack of funding to finalize such a purchase. Competition The market in which we intend to do business is extremely competitive. We are 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.  Our lack of financial resources has limited our business activity to date. Employees As of December 31, 2006, we had one full-time employee and one part-time employee, acting on an outside service capacity as our CFO.  The Company also has one part-time consultant for business operations and one part-time medical affairs consultant.  If we are successful in obtaining needed financing, we intend to bring on additional personnel and we have identified key members of that team. Status of Research Activity We entered into a research agreement in 2001 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, we would enter into a license agreement for the use of the technology in the viral deactivation of commercial vats of serum product.  That trial progressed satisfactorily through the first stages, but was interrupted while product development of the gas-serum interface system was finalized.  The new interface development has been completed to a prototype stage.  The Company believes this new interface device will provide a stable and measurable platform for drug delivery in future trials and also provide future  9   income as a disposable to be used with each treatment should approvals be obtained from regulatory agencies following further research.  The lack of funding, however, has placed these projects on hold, and there is no assurance that we will be able to complete them as originally planned even if funding becomes available. Risk Factors Our business is in the development stage and is subject to a number of risks, including, but not limited to the following: Our 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.  We have incurred significant losses since inception, which have resulted in an accumulated deficit of $19,310,249 at December 31, 2006.  These losses and this significant deficit raise substantial doubt about our ability to continue as a going concern.  The accompanying audited 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. We are a development stage company with significant accumulated deficits and we can expect losses to continue for the foreseeable future.  We have not generated any revenues from operations. No assurance can be given that our business activities will ever generate revenues. Even with funding to continue our research and development activity, we expect to continue to incur substantial losses for the foreseeable future. We currently do not have sufficient financing to meet our operating expenses.  If we are unable to obtain additional financing, we may be required to take out bankruptcy or liquidate the company.  We have financed operations at a minimal level during the past six or seven years by the sale of common stock in small private placements to accredited investors. Significant committed funding sources have thus far been unable to perform as promised.  We have pursued and continue to pursue funding opportunities; however no significant financing transactions have been completed as of the date of this Report.  During April 2008, however, the Company was able to raise $80,000 through the sale of 8,000,000 restricted shares of common stock at $0.01 per share, which funds are being used to bring the Companys filings with the Securities and Exchange Commission current and pay other corporate obligations.  There is no assurance that the Company will successfully accomplish its objectives or that additional financing will be obtained. Our net operating losses and our lack of revenues will require that we finance our operations through the sale of our securities for the foreseeable future.  The sale of equity securities or of securities that are convertible to our common stock will result in possibly significant dilution to our shareholders and may adversely affect the trading prices of our common stock.  We have funded development and operations activities to date primarily from the sale of common stock.  We do not have significant adequate financing at this time and will require substantial additional capital to meet our obligations, as previously described.  The lack of assets and borrowing capacity make it most likely that such funding, if obtained, will most likely be obtained through sales of common stock or other securities.  No assurances can be given that we will be able to obtain sufficient additional capital to continue our intended research program, or that any additional financing will be sufficient to satisfy our ongoing administrative and operating expenses for any significant period of time. Our future funding needs will require significant additional capital, which is not immediately available to us.  If we fail to obtain financing at levels required to pay for the testing and additional development of our technology, we could be required to scale back or to even cease operations.  We may also lose key elements of our technology as patents and license agreements lapse or expire.  The identification, development and commercialization of 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. Our actual capital requirements will depend on many factors, including but not limited to, the costs and timing of research and development activities, the number and type of clinical or other tests we may be required to conduct in seeking approval of products from governmental or other agencies, the success of our development efforts, the cost and timing of establishing or expanding sales and marketing and/or manufacturing activities, the extent to which our products (if any) gain market acceptance, our ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of our commercialization efforts and the commercialization efforts of our 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.  We continually seek opportunities to raise funds through public or private financings, collaborative relationships or other arrangements. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish its rights to certain of our technologies, products or marketing territories.  10   The failure to raise capital when needed will have a material adverse effect on our 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 us, if at all. Our business is subject to substantial government regulation which causes us to incur significant expense and which results in substantial delay in the approval of our products for marketing in the United States and in other jurisdictions.  If we do not receive the required approvals, we will be required to scale back or limit or even to cease operations.  The research, development, manufacture and marketing of our products, which constitute medical devices or products, are extensively regulated by a number of governmental agencies, including the 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 most other countries. The regulatory processes established by government agencies are lengthy, expensive, and uncertain and may require extensive and expensive clinical trials. There can be no assurance that any future products we develop that 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 of testing activities could be susceptible to varied interpretations, which could delay, limit or prevent required regulatory approvals. In addition, we may encounter delays or denials of approval based on a number of factors, including future legislation, administrative action or changes in FDA policy made during the period of product development and FDA regulatory review.  We might 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 us. Any such events, were they to occur, would likely have a material adverse effect on our business, financial condition and results of operations. We 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 our products or supplying materials or components for such products may also be subject to these manufacturing practices and mandatory procedures. If we or our third party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, we or they 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. Our products may also be subject to regulation, inspection and licensing by other governmental agencies, including the Environmental Protection Agency, state agencies similar to the FDA and EPA and the Occupational Health and Safety Administration. In addition, if we engage in contract sterilization services, our products and operations may be subject to the infection control or other requirements of the Joint Commission on Accreditation of Health Care Organizations, the Centers for Disease Control, the Association for Advancement of Medical Instrumentation and other federal and state agencies that have established or maintain testing methods or sterilization process monitoring. Although we expect to conduct clinical tests and trials of our technology, the outcome of such tests and trials is uncertain and cannot be guaranteed.  If our tests and trials are not acceptable to the governing authorities, we will not obtain the approvals required to market our products in the United States and other jurisdictions where such trials are required.  Certain of our planned products constitute medical devices within the meaning of the Food, Drug and Cosmetic Act and, therefore, may be subject to the FDA's regulations governing medical devices. Products regulated as medical devices may not be commercially distributed in the United States unless they have been cleared or approved by the FDA, or unless they are otherwise exempted from the FDA's regulations. Currently, there are two methods for obtaining FDA approval or clearance of medical devices. Devices deemed to pose less risk are placed in class I (general controls) or class II (general and special controls) and qualify for 510(k) notification, a procedure under §510(k) of the FDA Act. For a device to qualify under that procedure, the manufacturer must, among other things, establish that the product is substantially equivalent in intended use, safety and effectiveness to another legally marketed class I or class II device or to a "pre-amendment" class III device for which the FDA has not called for preliminary market approval or PMA. Medical class III is the class reserved for devices deemed by the FDA to pose the greatest risk. Manufacturers of class III devices must file a PMA. PMA applications generally require a much more complex submission than a 510(k) notification and typically require a showing that the device is safe and effective based on extensive and costly clinical and other testing. There can be no assurance that any product developed by Medizone, which is deemed to be a medical device for FDA Act purposes will qualify for approval under the 510(k) notification process, or that any such products will be deemed to be safe and effective if required to be qualified under a PMA.  11   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 solely by us or in conjunction with others will prove to be safe and efficacious in any required clinical trials, or that they will meet the applicable regulatory requirements necessary for their marketing, including the receipt of a marketing clearance, should such be required. Further, if regulatory approval is granted that approval would generally be limited to the uses for which the product has been demonstrated through clinical studies and other means to be safe and effective. Furthermore, approval may entail ongoing requirements for, among other things, post-marketing studies. Even if regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities and pertinent operations are subject to extensive regulation and periodic inspections. The regulatory requirements pertinent to medical device manufacturing and related activities are stringently applied and enforced by the FDA and similar governmental agencies in other countries. If we are required to conduct clinical or other testing or trials of our 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. Our sterilization technology has not been approved for use in connection with or as part of any device, and there can be no assurance that we will not encounter problems in the conduct of any clinical trials or tests we are 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 our products. If any of our 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 our business, financial condition and results of operations. Our reliance on patented technology may limit the scope of our protection and may increase the cost of doing business if we are required to enforce our rights under existing and future patents.  Our success will depend, in large part, on our ability to obtain and enforce patents, maintain our 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. Our 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 our business. We intend to file additional patent applications (both United States and foreign), when appropriate, relating to our technologies, improvements to the technologies and for specific products. There can be no assurance that any issued patents or pending patent applications will not be challenged, invalidated or circumvented. There can also be no assurance that the rights granted under patents will provide us with adequate proprietary protection or competitive advantages. Our commercial success will also depend in part, on our ability to avoid infringing patents issued to others or breaching any technology licenses upon which our products and services are based. It is uncertain whether any third party patents will require us to alter our 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, we 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 we will be able to obtain necessary licenses on commercially favorable terms, if at all. The breach of an existing license or the failure to obtain a license to any technology that we may require in order to commercialize our products may have a material adverse impact on our business, results of operations and financial condition. Litigation in those events or to enforce patents licensed or issued to us or to determine the scope or validity of third party proprietary rights would be costly and time consuming. If competitors prepare and file patent applications in the United States that claim technology also claimed by us, we 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 costs, even if the eventual outcome is favorable to us. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require that we stop using such technology. We also rely on secrecy to protect portions of our 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 us, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to existing or potential vendors or suppliers and customer names and addresses. This technology includes technology that we acquired from two parties in connection with, but separate from, the patented technology from Biozone, a portion of which we have acquired and a portion of which we have obtained a license to use. There can be no assurance that our undivided ownership and/or license rights in such technology are enforceable.  12   We intend to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by confidentiality agreements with employees, collaborative partners, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, whether our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors. We face competition in some of our markets from well-funded and significantly larger companies, some of which enjoy significant name recognition or market share in the pharmaceutical and related industries.  We may not be successful in our efforts to compete with these companies.  There can be no assurance that our technology will have advantages over those of competitors which will be significant enough to cause users to adopt its use. The products in which our technology may be incorporated will compete with products currently marketed, and competition from such products is expected to increase. Most of the companies currently producing products or using techniques have significantly greater financial resources and expertise in research and development, marketing, manufacturing, pre-clinical and clinical testing, obtaining regulatory approvals and marketing. 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 our technology. We face 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 our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization. Our business and our proposed business will subject us to the potential for product liability claims if people using our technology suffer bodily injury, including death.  Although we intend to insure for this liability, the claims might in some cases exceed the amount of coverage available to us.  The testing, marketing and sale of medical or clinical products and other products that may utilize our technology involve unavoidable risks. The use of any of our potential products in clinical or other tests or as a result of the sale of our products, or the use of our technology in products, may expose us to potential liability resulting from the use of such products.  That liability may result from claims made directly by consumers or by regulatory agencies, companies or others selling such products. We currently have no clinical trial or product liability insurance coverage.  We anticipate obtaining and maintaining appropriate insurance coverage as products become ready to be commercialized. There can be no assurance we will be able to obtain this insurance or, if we can obtain insurance, that the insurance can be acquired at a reasonable cost or in sufficient amounts to protect us against potential liability.  The obligation to pay any product liability claim in excess of insurance coverage or the recall of any products incorporating our technology could have a material adverse effect on our business, financial condition and future prospects. Our business activities may involve the use and storage of hazardous substances that are subject to government restrictions and regulation, increasing our potential liability to third parties and the cost of doing business in order to comply with applicable regulations.  Our research and development activities, and the application of our technology, may involve the controlled use of materials, substances or electro-magnetic radiation that may, if used or employed improperly, prove hazardous. We believe, however, that our technology employs such potentially hazardous or toxic materials and substances in a manner that minimizes their adverse effects. Further, where such hazards are employed, we intend to utilize appropriate detection equipment and take appropriate countermeasures in design or in the test lab environment. We have only a limited staff, and if we are to succeed in implementing our business plan, we will need to engage and retain trained and qualified staff.  There is no assurance that we will succeed in attracting the personnel needed to meet our needs.  As of the date of this Report, our financial limitations have restricted our staff to one administrative officer.  If funding can be obtained, we will require assistance of qualified expert scientific and sales staff.  We anticipate that at a minimum we will rely upon consultants and advisors to assist in formulating our research and development strategies and operations. Retaining and attracting qualified personnel, consultants and advisors will be critical to our success.  In order to pursue product development and marketing plans, we will need 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.  We face competition for qualified individuals from numerous medical and clinical  13   companies, universities and other research institutions.  Even if financing is obtained, there can be no assurance we will be able to attract and retain such individuals on acceptable terms, when needed, and to the degree required. We anticipate that any clinical development or other approval tests in which we participate will be augmented by agreements with universities and/or medical institutions or other personnel. It is likely that our academic collaborators will not become our employees. As a result, we will have limited control over their activities and can expect that only limited amounts of their time will be dedicated to our business activities.  Our academic collaborators may have relationships with other commercial entities, some of which could compete with us. We do not own our manufacturing capability and must rely on third parties to manufacture the devices required for our technology.  This arrangement results in a certain loss of control over the manufacturing process and may result in problems relating to quality control and warranty issues.  Although we might build or acquire our own manufacturing facility in the future, at this time we have no manufacturing capability or capacity to produce any products utilizing its sterilization technology, including any products to be used in any required clinical or other tests. We initially intend to develop relationships with other companies to manufacture those components and/or products, and we will act as specification developer and final assembly manufacturer for selected products only. The two products currently being developed by us 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 our business, financial condition, or results of operations.  Our 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 our 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 our manufacturing processes would be successful, or that manufacturing or quality problems will not arise as we initiate production of any products we might develop. In addition, some or all of our potential products, or products in which our 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 we can successfully acquire manufacturing capacity on a profitable basis, or contract with another party on terms acceptable to us, if at all. This Repot may contain forward-looking statements, and actual performance results may not match theses 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 that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, among other things, our lack of revenue and our substantial net losses and accumulated deficit, as well as the continuing uncertainty of profitability, our ability to develop and introduce new products, our lack of sales, marketing and distribution experience and anticipated dependence on third parties for such matters, the risks associated with obtaining governmental approval of our products, the highly competitive industry in which we intend to operate and the rapid pace of technological change within those industries, the uncertainty of patent and proprietary technology protection and our reliance on such patent protection 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 our products, general economic and business conditions and other factors referenced above. Item 2. Description of Property The offices of the Company are located temporarily in the home of our CEO, Edwin Marshall, at 144 Buena Vista Ave., Stinson Beach, California.  We pay or reimburse all telephone and related expenses.  To date we have not been charged or paid any rent for the temporary office space provided by our CEO. Item 3. Legal Proceedings Rakas vs. Medizone International, Inc. A former consultant brought this action in the Supreme Court of New York, Westchester County (Index No. 08798/00) claiming we had failed to pay consulting fees under a consulting agreement.  We deny that we owe any fees to the consultant. In September 2001, the parties agreed to settle the matter for $25,000.  Our lack of funds prevented us from consummating the settlement, and the plaintiff moved the court to enter a default judgment in the  14   amount of $143,000 in January 2002. On May 8, 2002, the court vacated the default judgment and requested that we post a bond of $25,000 to cover the settlement previously entered into by the parties.  We have not been in a position to post the bond as of the date of this report and there is no assurance that we will be able to do so in the near term unless additional financing is made available to us.  Therefore, at December 31, 2006, the entire amount of the judgment, plus fees of $21,308, has been accrued pending additional settlement discussions.  Item 4.   Submission of Matters to a Vote of Security Holders.  No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report. The Company will hold an annual meeting of shareholders at such time as it has obtained financing, of which there can be no assurance given.  Part II  Item 5. Market for Common Equity, Related Stockholder Matters, and Small Business Issuer Purchases of Equity Securities  Our common stock was traded on the NASD'S OTC Bulletin Board (the "OTCBB") under the symbol "MZEI" until May 2007, at which time, due to our failure to timely file our Annual Report on Form 10-KSB for the year ended December 31, 2006, we received a delisting notice from the NASD.  Our common stock is now traded on the Pink Sheets under the symbol MZEI.PK. The following table summarizes data from the National Quotation Bureau, indicating the high and low bid prices for a share of common stock during each of the four calendar quarters of 2005 and 2006. These prices reflect inter-dealer prices without retail markup, markdown or commission, are not necessarily representative of actual transactions, or of the value of our securities, and are, in all likelihood, not based upon any recognized criteria of securities valuation as used in the investment banking community. Bid PriceYearCalendar PeriodHighLow2005First Quarter$0.02$0.01Second Quarter$0.08$0.01Third Quarter$0.01$0.01Fourth Quarter$0.01$0.012006First Quarter$0.02$0.01Second Quarter$0.01$0.01Third Quarter$0.01$0.01Fourth Quarter$0.01$0.01 As of March 31, 2008, we estimate that there were approximately 3,500 holders of record of our common stock, and approximately 4,500 beneficial owners. We have never paid cash dividends on the common stock.  Payment of cash dividends is subject to the discretion of the Board of Directors and is dependent upon various factors, including the availability of earnings, capital needs and general financial condition.  We do not believe that we have any immediate prospect of earnings. However, we anticipate that in the foreseeable future, we will follow a policy of retaining earnings, if any, to finance research and development. Recent Sales of Unregistered Securities No shares of common stock were issued during the years ended December 31, 2005 or 2006, due to a credit freeze by the Companys stock transfer agent.  However, the Company has received a total of $110,100 from certain Company directors towards the purchase of 5,463,333 shares of common stock that have been approved by the Companys board of directors, which shares will be issued once the credit freeze is removed.  Accordingly, the $110,100 has been recorded as a stock deposit in the accompanying financial statements as of December 31, 2006.  The shares underlying this stock deposit were issued during 2008.  The Company has not repurchased any of its equity securities.  15   Item 6. Management's Discussion and Analysis or Plan of Operation Results of Operations From inception in January 1986, we have been a development stage company primarily engaged in research into the medical uses of ozone.  We have not generated, and cannot predict when or if we will generate, revenues or sufficient cash flow to fund continuing or planned operations. We had a net loss in 2006 of $356,430 compared to a net loss of $326,153 in 2005, primarily due to increased interest costs incurred during 2006 on past due debt. In 2006 and 2005, the Company expended no funds for research and development expenses.  Since inception we have spent a total of $2,685,788for research and development related to our ozone technology and related apparatus.  Research and development expenses include consultant fees, interface development costs and research stage ozone generator and instrument development. General and administrative expenses in 2006 totaled $312,598, compared to $301,773 in 2005. These expenses include professional fees, payroll, insurance costs and travel expenses.  Our lack of cash has prevented us from paying all accrued salary and other expenses during the last six years. Notes payable totaled $280,491 at December 31, 2006 and 2005 (no change in principal owed).  Interest expense on these obligations totaled $23,656 and $23,656 in 2006 and 2005, respectively.  The applicable interest rates on this debt ranged from 8% to 10% percent per annum. Liquidity and Capital Resources At December 31, 2006, we had a working capital deficiency of $3,118,740, compared to a working capital deficiency of $2,991,274 at December 31, 2005.  The stockholders deficit at December 31, 2006 was $3,343,592 compared to $2,991,274 at December 31, 2005. We continue to require additional investments to finance our operations and to fund research necessary to make the appropriate regulatory applications for our technology and products and to continue operations.  Our only source of financing to date has been the periodic sale of our common stock.  During 2006, we generated cash of $41,531 through financing activities, primarily through stock deposits of $41,100 and shareholder advances totaling $5,550. Given current negative cash flows, it will be difficult for us to continue as a going concern without an influx of significant capital. While we have continued to aggressively pursue potential financing opportunities, those efforts have to date produced only minimal results.  In addition, previously anticipated and announced financing commitments have failed to be fulfilled. During April 2008, the Company raised $80,000 through the sale of 8,000,000 restricted shares of common stock at $0.01 per share.  The proceeds from this transaction will be used to pay professional fees and other expenses related to the Companys reporting obligations with the Securities and Exchange Commission and for general operating expenses. Our audited financial statements included in this annual report on Form 10-KSB have been prepared on the assumption that we will continue as a going concern. Through the date of his Report, it has been necessary to rely upon financing from the sale of our equity securities to sustain operations. Additional financing, as described, will be required if we are to continue as a going concern. If additional financing is not obtained, we will be required to discontinue operations. Even if additional financing becomes available, there can be no assurance that it will be on terms favorable to us. In any event, this additional financing will result in immediate and possibly substantial dilution to existing shareholders. If we fail to obtain financing in the near future, we will cease operations. Critical Accounting Policies  We have identified the policies below as critical to our business operations and the understanding of our results of operations.  The impact and any risks related to these policies on our business operations are discussed in Managements Discussion and Analysis or Plan of Operations where such policies affect our reported and expected financial results.  For a detailed discussion of the application of these and other accounting policies, see Notes to the Financial Statements contained in this 10-KSB report. In all material respects, the accounting principles that are utilized conform to generally accepted accounting principles in the United States of America.   16   The preparation of this annual report on Form 10-KSB requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate these estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities.  The actual results may differ from these estimates under different assumptions or conditions. The Company accounts for equity securities issued for services rendered at the fair value of the securities on the date of issuance. Item 7. Financial Statements Our financial statements are included commencing at page 23 and form a part of this report.  Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  During the two most recent fiscal years and the subsequent interim period, there have been no disagreements on financial disclosures or accounting matters and no resignation by or dismissal of the independent public accountants engaged by the Company.  Item 8A.  Controls and Procedures  Evaluation of Disclosure Controls and Procedures.  Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.  Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Limitations on Effectiveness of Controls. A system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the system will meet its objectives. The design of a control system is based, in part, upon the benefits of the control system relative to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. In addition, the design of any control system is based in part upon assumptions about the likelihood of future events.  Item 8B.  Other Information  Not Applicable.  17   Part III Item 9. Directors and Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act The following table contains information concerning our directors and executive officers as of December 31, 2006. NameAgePositionEdwin G. Marshall64Chairman of the Board, CEORichard G. Solomon64DirectorDaniel Hoyt67DirectorSteve M. Hanni39Chief Financial Officer  Edwin G. Marshall became Chairman of the Board in June 1997 and Chief Executive Officer in April 1998 and has been with us full time since June 1997.  Mr. Marshall attended Santa Rosa Junior College and the College of Marin, studying fire science and business administration.  From 1964 to 1978, Mr. Marshall worked in the fire service in a city with a major chemical industrial complex, leaving with the rank of Captain. A private investor since 1973, he went to work in the real estate business in 1978.  From 1978 until 1995, Mr. Marshall pursued various business pursuits, including managing his personal investments. Richard Garrett Solomon is a Director of Medizone International and an Executive Officer of Medizone New Zealand Limited.  Mr. Solomon has been one of our shareholders since 1992.  In 1995, Mr. Solomon joined with us to form Medizone New Zealand as a 50/50-owned joint venture.  Between January 1996 and February 1997, Mr. Solomon was one of our directors.  He was reappointed to the Board of Directors in May 2000.  Mr. Solomon received a Bachelor of Commerce degree (University of Otago), and a Diploma of Business and Industrial Administration (University of Auckland).  He is an Associate Chartered Accountant.  Mr. Solomons career has been in business and investment.  For 20 years he developed and operated a private hospital operating company, Haven Care Hospitals Limited.  He was a long-standing board member and president of the New Zealand Hospitals Association and he was instrumental in the establishment of the New Zealand Council of Healthcare Standards, Inc., now known as Quality Health New Zealand. Daniel Hoyt became a director in January 2002. Mr. Hoyt is a graduate of the University of Indiana, where he received a Bachelor of Science degree in Business Administration. Over the past 25 years, he has become a recognized leader in the life insurance industry, working as a career agent for American United Life Insurance Company. Mr. Hoyt's clients have ranged from large public companies to small private businesses. In recent years he has spent most of his time in public speaking and relationship building in the insurance industry. His previous work experience includes seven years with Merrill Lynch as well as serving as the Chief Executive for the Chamber of Commerce in three Indiana communities. Mr. Hoyt currently serves as the Chairman of the Board of Biological Systems, Inc., a privately held corporation involved with bio-cleansing remediation systems for animal fats and oil-based materials. Steve Hanni became Chief Financial Officer in April 2002. Mr. Hanni is a certified public accountant engaged in public practice with the firm of Stayner, Bates & Jensen, PC, Certified Public Accountants, in Salt Lake City, Utah. Mr. Hanni was previously a partner with the firm of HJ & Associates, LLC, a public accounting firm that acts as our independent public accountant in connection with the audit of our annual reports and the review of our quarterly financial reports. Corporate Governance The Board of Directors is elected by and is accountable to the shareholders of the Company.  The Board establishes policy and provides strategic direction, oversight, and control of the Company.  The Board met three times during the year ended December 31, 2006.  All directors attended at least 75% of the meetings of the Board.  The Board has no separate committees. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and shareholders owning more than 10% of the shares are required by  18   regulation of the Securities and Exchange Commission to furnish the company with copies of all forms filed by them under Section 16(a).  We are not aware of any transactions in our common stock by or on behalf of any director, executive officer or 10% shareholder, which would require the filing of any report pursuant to Section 16(a) during the fiscal year ended December 31, 2006, that was not timely filed with the Commission. Item 10. Executive Compensation The following Summary Compensation Table shows compensation paid to our Chief Executive Officer for each of the past three years.  Summary Compensation Table  Annual CompensationLong-Term
Compensation AwardsName and Principal PositionYearSalaryBonusOptions (#)Edwin G. Marshall(1)2006$170,000(2)$    00Chairman and CEO2005$170,000(3)$    002004$170,000(4)$    00  (1) Does not include the following amounts accrued and payable to Mr. Marshalls wife (Dr. Jill Marshall), also an officer until  her resignation on July 1, 2004; $27,000 in 2006 (consulting), $22,500 in 2005 (consulting), and $47,500 in 2004.  Cash payments of salary and consulting fees made to Dr. Marshall in those years were $1,000 in 2006, $500 in 2005 and $0 in 2004. A total of $385,583 in salary and fees has been accrued for all periods of her employment by the Company and remains unpaid to Dr. Marshall. (2) Of the amount indicated, only $28,000 has been paid to Mr. Marshall.  The balance has been accrued due to the lack of funds. Aggregate accrued wages owed Mr. Marshall at December 31, 2006 totaled $903,929. (3) Of the amount indicated, $46,821 has been paid to Mr. Marshall.  The remaining amount has been accrued, but has not been paid to Mr. Marshall due to the lack of funds. See note (2). (4) Of the amount indicated, no amount has been paid to Mr. Marshall.  The amount has been accrued, but has not been paid to Mr. Marshall due to the lack of funds. See note (2). We do not have any employment agreements with any employee.  Our Board of Directors does not have a compensation committee or audit committee.  The Board determines matters concerning the compensation of executive officers.  When resources allow, we anticipate that directors will be paid an annual fee and a fee for attendance at meetings of the Board and meetings of committees of the Board. Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table contains information as of March 31, 2008, regarding beneficial stock ownership of (1) all persons known to us to be beneficial owners of more than 5% of our outstanding common stock, (2) each director and each person who served at any time during fiscal year 2006 as CEO of Medizone, and (3) officers and directors at March 31, 2008, as a group.       19   Each of the persons in the table below is believed to have sole voting and dispositive power as to all of the shares shown as beneficially owned by them except as otherwise indicated. Number of Shares Percent of Name and Address Beneficially Owned Outstanding Shares Edwin G. Marshall (1) 12,159,241 7.1%  Chairman of the Board, Chief Executive Officer P.O. Box 742 Stinson Beach, CA 94970   Richard G. Solomon (2) 7,460,001 4.4% Board Member, Medizone International Director, Medizone New Zealand, Ltd. 77 Seaview Road Remuera, Auckland 1005 New Zealand  Daniel D. Hoyt (3) 12,062,408 7.0% 1 American Square, Suite 1370 Indianapolis, IN 82040  Steve M. Hanni 150,000 * Chief Financial Officer 510 South 200 West Salt Lake City, UT 84101  All Officers and Directors  as a Group  (4 persons) (4): 31,831,650 18.6%  * Less than 1%. (1) Amount indicated includes (i) 1,020,000 shares owned of record by Jill Marshall, Mr. Marshalls wife, (ii) 4,936,507 shares owned of record by Sand Dollar, a limited partnership of which Mr. Marshall is the general partner, (iii) 6,129,366 shares owned directly by Mr. Marshall, (iv) 52,868 shares held by Mr. and Mrs. Marshall as joint tenants and (v) 20,500 shares held in street name. (2) Amount indicated includes combined holdings of Mr. Solomon individually, members of his immediate family, and Solwin Investments Ltd.  Also includes warrants to purchase 165,000 shares of common stock at $0.05 per share.  Does not include shares to be issued based upon stock subscriptions received totaling $2,500 as of December 31, 2006, for which a total of 125,000 shares are to be issued. (3) Includes warrants to purchase 8,392,408 shares of common stock at prices ranging from $0.02 to $0.20 per share, and 3,670,000 shares owned of record.  Does not include shares to be issued based upon stock subscriptions received totaling $107,600 as of December 31, 2006, for which a total of 5,338,333 shares are to be issued. (4) Based on a total of 171,405,016 shares outstanding.  This amount includes currently exercisable warrants for the purchase of 10,234,629 shares and eliminates all duplicate holdings. Item 12. Certain Relationships and Related Transactions, and Director Independence Recent Sales of Unregistered Securities During the years ended December 31, 2006 and 2005, no shares of common stock were issued without registration under the Securities Act of 1933, as amended.    20   Director Independence  The Companys common stock was previously traded on the OTC Bulletin Board and is now quoted on the Pink Sheets.  These markets do not impose standards relating to director independence or the makeup of committees with independent directors, or provide definitions of independence. Shareholder Communications with Directors If the Company receives correspondence from a shareholder that is addressed to the Board of Directors, we forward it to every director or to the individual director to whom it is addressed.  Shareholders who wish to communicate with the directors may do so by sending their correspondence to the director or directors at the Companys headquarters at 144 Buena Vista, P.O. Box 742, Stinson Beach, California, 94970. Item 13. Exhibits (a) Exhibits. NumberDescription2Agreement and Plan of Reorganization dated March 12, 1986 (2)3.1Articles of Incorporation of Company (2)3.2Bylaws (2)3.3Articles of Amendment to Company's Articles of Incorporation (3)10.1Loan agreement with Messrs. McGrath and Watrous dated as of November 16, 1992 (4)10.2Loan Agreements between Medizone and John Kells, George Handel and John Pealer, executed as of June 11, 1993 (and promissory notes) (4)10.3Agreement for Sale and Purchase of Shares in Medizone New Zealand Limited between Richard G. Solomon and Medizone International, Inc., dated June 22, 1995 (5)10.4Shareholders' 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 (5)10.5Licensing Agreement between Medizone International, Inc. and MNZ, dated June 22, 1995 (5)10.6Managing Agent Agreement between Medizone International, Inc. and Medizone New Zealand Limited, dated June 22, 1995 (5)10.7Funding commitment letter from Groundell Trust. (6)10.8Letter re: change in certifying accountants (6)31.1Certification of Chief Executive Officer31.2Certification of Chief Financial Officer32Certification under Section 906 of Sarbanes-Oxley Act of 2002  (1) Incorporated by reference to annual report on form 10-K for the year ended December 31, 1998. (2) Incorporated by reference to registration statement on Form S-18 (Registration No. 2-93277-D), effective May 14, 1985.  21   (3) Incorporated by reference to annual report on Form 10-K for the period ended December 31, 1986. (4) Incorporated by reference to annual report on Form 10-K for the period ended December 31, 1992. (5) Incorporated by reference to current report on Form 8-K, dated June 22, 1995. (6) Incorporated by reference to annual report on Form 10-KSB for the period ended December 31, 2001.  Item 14.    Principal Accountants Fees and Services  Audit Fees   The Companys independent public accountants for the past two fiscal years have been HJ Associates & Consultants, LLP.  The aggregate fees billed by the Companys independent public accountants for professional services rendered in fiscal years 2006 and 2005 in connection with (i) the audit of the Companys annual financial statements set forth in its Annual Report on Form 10-KSB for the fiscal years ended December 31, 2006 and December 31, 2005 and (ii) the review of the Companys quarterly financial statements set forth in its Quarterly Reports on Form 10-QSB for each of its fiscal quarters in such years, totaled approximately $12,650 and $5,750, respectively.  All Other Fees  The Company did not engage HJ Associates & Consultants, LLP on any other matters not otherwise included in the above categories in either fiscal year 2006 or 2005.   SIGNATURES  In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  MEDIZONE INTERNATIONAL, INC.   By:/s/ Edwin G. Marshall Edwin G. Marshall Chairman of the Board and Chief Executive Officer  By:/s/ Steve M. Hanni Chief Financial Officer  Date: May 29, 2008  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 and on the dates indicated.     /s/ Edwin G. MarshallCEO and Chairman of the BoardMay 29, 2008Edwin G. Marshall/s/ Steve M. HanniChief Financial OfficerMay 29, 2008Steve M. Hanni(Principal Financial and Accounting Officer)/s/ Richard G. SolomonDirectorMay 29, 2008Richard G. Solomon/s/ Daniel HoytDirectorMay 29, 2008Daniel Hoyt   22


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM       The Board of Directors Medizone International, Inc. and Subsidiaries (A Development Stage Company) Stinson Beach, California  We have audited the consolidated balance sheet of Medizone International, Inc. and Subsidiaries (a development stage company) as of December 31, 2006, and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for the years ended December 31, 2006 and 2005 and from inception on January 31, 1986 through December 31, 2006.  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 the standards of the Public Company Accounting Oversight Board (United States).  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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 Subsidiaries (a development stage company) as of December 31, 2006, and the consolidated results of their operations and their cash flows for the years ended December 31, 2006 and 2005 and from inception on January 31, 1986 through December 31, 2006, in conformity with U.S. 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 8 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 8.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.    /s/HJ Associates & Consultants, LLP HJ Associates & Consultants, LLP Salt Lake City, Utah May 29, 2008      24       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Balance SheetASSETSDecember 31, 2006CURRENT ASSETSCash$                                         2Total Current Assets2PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2)-OTHER ASSETSReceivable from affiliate, net (Note 1)-Total Other Assets-TOTAL ASSETS$                                         2LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT LIABILITIESAccounts payable$                             679,852Due to shareholders (Note 7)14,231Stock deposits (Note 7)110,100Accrued expenses (Note 3)2,034,068Notes payable (Note 6)280,491Total Current Liabilities3,118,742CONTINGENT LIABILITIES (Note 4)224,852Total Liabilities3,343,594STOCKHOLDERS' EQUITY (DEFICIT)Common stock, 250,000,000 shares authorized of $0.001 par value161,170,387 shares issued and outstanding161,170Additional paid-in capital15,805,487Deficit accumulated during the development stage(19,310,249)Total Stockholders' Equity (Deficit)(3,343,592)TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)$                                        2  The accompanying notes are an integral part of these consolidated financial statements.        MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of OperationsFrom Inceptionon January 31,For the Years Ended1986 ThroughDecember 31,December 31,200620052006REVENUES$                        -$                        -$              133,349EXPENSESCost of sales--103,790Research and development--2,685,788General and administrative312,598301,77314,807,903Expense on extension of warrants (Note 5)--1,866,857Bad debt expense--48,947Depreciation and amortization--47,996Total Expenses312,598301,77319,561,281Loss from Operations(312,598)(301,773)(19,427,932)OTHER INCOME (EXPENSES)Minority interest in loss--26,091Other income--19,780Gain on sale of subsidiary (Note 1)--208,417Interest expense(43,832)(24,380)(1,031,343)Total Other Income (Expenses)(43,832)(24,380)(777,055)LOSS BEFORE EXTRAORDINARY ITEMS(356,430)(326,153)(20,204,987)EXTRAORDINARY ITEMSLawsuit settlement (Note 4)--415,000Debt forgiveness (Note 4)--479,738Total Extraordinary Items--894,738NET LOSS$           (356,430)$           (326,153)$        (19,310,249)BASIC LOSS PER SHARE$                 (0.00)$                 (0.00)WEIGHTED AVERAGE NUMBER OFCOMMON SHARES OUTSTANDING161,170,387161,170,387  The accompanying notes are an integral part of these consolidated financial statements.        MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, January 31, 1986 (inception)-$            -$            -$                -$                -Initial capitalization of Medizone -Nevada at $0.03 per share5,500,0005,500-150,128-Common shares issued in acquisitionof Medizone - Delaware (Note 1)37,500,00037,500-(37,500)-Common stock issued for servicesrendered in July 1986 at $0.10per share50,00050-4,950-Common stock issued in conversionof warrants during 1986 at $0.10per share7,814,6007,815-773,645-Stock issuance costs---(105,312)-Net loss for the year endedDecember 31, 1986----(796,068)Balance, December 31, 198650,864,60050,865-785,911(796,068)Common stock issued upon exerciseof warrants in January 1987 at $0.10per share2,6002-257-Common stock issued for patent inMarch 1987 at $0.69 per share1,000,0001,000-692,750-Common stock issued for cash inJune 1987 at an average price of$0.16 per share950,000950-149,050-Common stock issued for servicesin June and July 1987 at anaverage price of $0.12 per share203,167203-24,314-Common stock issued throughexercise of options in August 1987at $1.75 per share250,000250-437,250-Net loss for the year endedDecember 31, 1987----(2,749,400)Balance, December 31, 198753,270,367$     53,270$            -$    2,089,532$   (3,545,468)  The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit) (Continued)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, December 31, 198753,270,367$     53,270$            -$    2,089,532$   (3,545,468)Common stock issued through exerciseof options in January 1988 at $0.50per share200,000200-99,800-Common stock issued for cash inSeptember 1988 at $0.08 per share1,000,0001,000-79,000-Common stock issued for servicesat an average price of $0.23per share35,00035-7,965-Additional capital contributed---174,126-Net loss for the year endedDecember 31, 1988----(714,347)Balance, December 31, 198854,505,36754,505-2,450,423(4,259,815)Common stock issued for servicesat an average price of $0.18 perShare261,889262-46,363-Common stock issued for cash atan average price of $0.05 per share5,790,0005,790-285,710-Common stock issued for servicesand in lieu of outstanding debt atan average price of $0.12 per share4,749,5324,750-578,978-Common stock issued upon exerciseof options at $0.16 per share375,000375-59,125-Net loss for the year endedDecember 31, 1989----(862,051)Balance, December 31, 198965,681,788$     65,682$            -$    3,420,599$   (5,121,866)  The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit) (Continued)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, December 31, 198965,681,788$     65,682$            -$    3,420,599$   (5,121,866)Common stock issued for servicesat $0.10 per share880,000880-87,120-Common stock issued for cash at anaverage price of $0.04 per share4,250,0004,250-175,250-Common stock issued for servicesand in lieu of outstanding debt atan average price of $0.06 per share2,422,7272,423-137,577-Additional capital contributed---100,000-Net loss for the year endedDecember 31, 1990----(606,309)Balance, December 31, 199073,234,51573,235-3,920,546(5,728,175)Common stock issued for cash at anaverage price of $0.07 per share4,366,6674,366-305,634-Common stock issued for servicesAt an average price of $0.17 perShare425,000425-72,075-Common stock issued throughexercise of options at an averageprice of $0.45 per share450,000450-204,050-Additional capital contributed---5,000-Net loss for the year endedDecember 31, 1991----(1,220,152)Balance, December 31, 199178,476,182$     78,476$            -$    4,507,305$   (6,948,327)  The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit) (Continued)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, December 31, 199178,476,182$     78,476$            -$    4,507,305$   (6,948,327)Common stock issued for servicesat $0.20 per share151,500152-30,148-Common stock issued in lieu ofdebt at $0.15 per share250,000250-37,250-Common stock issued for cash atan average price of $0.16 per share2,702,3352,702-427,648-Common stock issued throughexercise of options at $0.50per share250,000250-124,750-Additional capital contributed---81,100-Net loss for the year endedDecember 31, 1992----(649,941)Balance, December 31, 199281,830,01781,830-5,208,201(7,598,268)Common stock issued for servicesat an average price of $0.10per share5,347,2195,347-542,859-Common stock issued for cash atan average price of $0.18 per share1,471,6661,472-269,528-Common shares subscribed forat $0.10 per share--2,619259,296-Net loss for the year endedDecember 31, 1993----(1,598,342)Balance, December 31, 199388,648,902$     88,649$       2,619$    6,279,884$   (9,196,610)  The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit) (Continued)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, December 31, 199388,648,902$     88,649$  2,619$    6,279,884$   (9,196,610)Common stock issued for servicesat $0.10 per share1,431,5901,431-141,727-Common shares subscribed for at$0.10 per share--9,552945,682-Common shares subscribed for ascancellations of indebtedness at$0.10 per share--41741,234-Common shares subscribed for ascancellation of indebtedness at$0.18 per share--11,2502,022,379-Issuance of subscribed stock10,384,90010,385(10,385)--Issuance of shares in recognitionof disparity in purchase price inOffering1,125,8341,126-(1,126)-Prior period adjustment----219,422Net loss for the year endedDecember 31, 1994----(1,126,315)Balance, December 31, 1994101,591,226$   101,591$     13,453$    9,429,780$ (10,103,503)  The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit) (Continued)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, December 31, 1994101,591,226$   101,591$13,453$    9,429,780$ (10,103,503)Redeemable common sharesconverted to common stock200,000200-39,800-Common stock issued for servicesat $0.10 per share2,050,0002,050-202,950-Issuance of subscribed stock17,524,86017,524(17,524)--Cancellation of common shares(1,242,727)(1,242)-(70,563)-Common shares subscribed for at$0.10 per share--9,118902,707-Prior period adjustment----71,806Additional capital contributed---50,000-Net loss for the year endedDecember 31, 1995----(1,081,027)Balance, December 31, 1995120,123,359120,1235,04710,554,674(11,112,724)Common stock issued for cashat $0.10 per share100,000100-9,900-Common stock issued for servicesAt $0.10 per share1,415,8751,416-140,171-Issuance of subscribed stock8,412,3798,413(8,413)--Common shares subscribed forat $0.11 per share--6,456718,991-Net loss for the year endedDecember 31, 1996----(1,329,395)Balance, December 31, 1996130,051,613$   130,052$       3,090$   11,423,736$ (12,442,119)  The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit) (Continued)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, December 31, 1996130,051,613$   130,052$  3,090$   11,423,736$ (12,442,119)Issuance of subscribed stock3,089,6803,090(3,090)--Common shares subscribed forat $0.07 per share--5,714394,287-Common stock issued for servicesat $0.10 per share3,746,3363,746-370,886-Net loss for the year endedDecember 31, 1997----(775,559)Balance, December 31, 1997136,887,629136,8885,71412,188,909(13,217,678)Common stock issued throughexercise of warrants at $0.07per share857,142857-59,143-Common stock issued in lieu ofdebt at $0.05 per share864,747865-42,372-Issuance of subscribed stock5,714,2865,714(5,714)--Cancellation of common shares(630,000)(630)-630-Common stock issued for servicesat $0.05 per share3,465,0003,465-169,786-Common stock issued for servicesat $0.09 per share750,000750-63,785-Common stock issued in lieu ofdebt at $0.09 per share967,630967-82,214-Common stock issued for servicesat $0.08 per share50,00050-3,700-Net loss for the year endedDecember 31, 1998----(565,761)Balance, December 31, 1998148,926,434$   148,926$            -$   12,610,539$ (13,783,439)  The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit) (Continued)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, December 31, 1998148,926,434$   148,926$            -$   12,610,539$ (13,783,439)Common stock issued for servicesat $0.07 per share25,00025-1,725-Common stock issued through exerciseof warrants at $0.07 per share936,507937-64,618-Additional expense for extension ofwarrants below market value---123,389-Net loss for the year endedDecember 31, 1999----(359,571)Balance, December 31, 1999149,887,941149,888-12,800,271(14,143,010)Common stock issued throughexercise of warrants at $0.07 per share3,142,8573,143-216,857-Common stock issued for debt at$0.11 per share2,020,0002,020-220,180-Common stock issued for debt at$0.147 per share95,00095-13,905-Common stock issued for servicesat $0.175 per share350,000350-60,900-Common stock issued for debt at$0.20 per share20,00020-3,980-Common stock issued for debt at$0.55 per share100,000100-54,900-Cancellation of common stock(2,000,000)(2,000)-2,000-Common stock issued for servicesat $0.285 per share300,000300-85,200-Additional expense for extension ofwarrants below market value---1,743,468-Net loss for the year endedDecember 31, 2000----(2,187,138)Balance, December 31, 2000153,915,798$   153,916$            -$   15,201,661$ (16,330,148)  The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit) (Continued)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, December 31, 2000153,915,798$   153,916$            -$   15,201,661$ (16,330,148)Common stock and warrants issuedfor cash at $0.20 per share500,000500-99,500-Common stock and warrants issuedfor cash at $0.15 per share200,000200-29,800-Common stock and warrants issuedfor cash at $0.15 per share166,666167-24,818-Common stock and warrants issuedfor cash at $0.18 per share555,555555-99,441-Net loss for the year endedDecember 31, 2001----(716,054)Balance, December 31, 2001155,338,019155,338-15,455,220(17,046,202)Common stock and warrants issuedfor cash at $0.10 per share1,000,0001,000-99,000-Common stock issued for servicesat $0.10 per share230,000230-22,770-Common stock issued for debtat $0.10 per share447,368447-44,290-Common stock and warrants issuedfor cash at $0.10 per share250,000250-24,750-Common stock issued for servicesat $0.10 per share480,000480-47,520-Net loss for the year endedDecember 31, 2002----(687,273)Balance, December 31, 2002157,745,387$   157,745$            -$   15,693,550$ (17,733,475)  The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Stockholders' Equity (Deficit) (Continued)DeficitAccumulatedAdditionalDuring theCommon StockPaid-inDevelopmentSharesAmountSubscribedCapitalStageBalance, December 31, 2002157,745,387$   157,745$            -$   15,693,550$ (17,733,475)Common stock issued in lieu of notespayable at $0.05 per share460,000460-22,540-Common stock and warrants issuedfor cash at $0.05 per share400,000400-19,600-Common stock and warrants issuedfor cash at $0.05 per share100,000100-4,900-Common stock issued for servicesat $0.05 per share100,000100-4,900-Common stock and warrants issuedfor cash at $0.05 per share165,000165-8,085-Common stock and warrants issuedfor cash at $0.05 per share200,000200-9,800-Common stock and warrants issuedfor services at $0.02 per share2,000,0002,000-38,000-Net loss for the year endedDecember 31, 2003----(522,796)Balance, December 31, 2003161,170,387161,170-15,801,375(18,256,271)Net loss for the year endedDecember 31, 2004----(371,395)Balance, December 31, 2004161,170,387161,170-15,801,375(18,627,666)Net loss for the year endedDecember 31, 2005----(326,153)Balance, December 31, 2005161,170,387161,170-15,801,375(18,953,819)Common stock warrants granted (Note 5)---2,756-Additional capital contributed (Note 5)---1,356-Net loss for the year endedDecember 31, 2006----(356,430)Balance, December 31, 2006161,170,387$   161,170$            -$   15,805,487$ (19,310,249) The accompanying notes are an integral part of these consolidated financial statements.        MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Cash FlowsFrom Inceptionon January 31,For the Years Ended1986 ThroughDecember 31,December 31,200620052006CASH FLOWS FROM OPERATING ACTIVITIES:Net loss$           (356,430)$       (326,153)$      (19,310,249)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization--47,996Stock issued for services--3,131,916Expense for extension of warrants belowmarket value2,756-1,869,613Bad debt expense--48,947Minority interest in loss--(26,091)Loss on disposal of assets--693,752Gain on settlement of debt--(188,510)Gain on lawsuit settlement--(415,000)Changes in assets and liabilities:(Increase) in prepaid expenses and deposits--(48,947)Increase in accounts payable93,13780,9171,299,234Increase in accrued expenses219,008182,9582,457,091Net Cash Used by Operating Activities(41,529)(62,278)(10,440,248)CASH FLOWS FROM INVESTING ACTIVITIES:Organization costs--(8,904)Purchase of fixed assets--(39,090)Net Cash Used by Investing Activities--(47,994)CASH FLOWS FROM FINANCING ACTIVITIES:Bank overdraft(6,475)6,475-Proceeds from lawsuit settlement--415,000Principal payments on notes payable--(192,774)Cash received from notes payable--1,129,518Advances from shareholders5,5502,01136,032Payment on shareholder advances-(10,458)(16,515)Capital contributions1,356-423,203Stock issuance costs--(105,312)Increase in minority interest--14,470Increase in stock deposits41,10064,000110,100Issuance of common stock for cash--8,674,522Net Cash Provided by Financing Activities41,53162,02810,488,244NET INCREASE (DECREASE) IN CASH2(250)2CASH AT BEGINNING OF PERIOD-250-CASH AT END OF PERIOD$                          2$                    -$                          2 The accompanying notes are an integral part of these consolidated financial statements.       MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES(A Development Stage Company)Consolidated Statements of Cash Flows (Continued)From Inceptionon January 31,For the Years Ended1986 ThroughDecember 31,December 31,200620052006SUPPLEMENTAL CASH FLOW INFORMATIONCASH PAID FOR:Interest$                           -$                     -$                26,483Income taxes$                           -$                     -$                          -NON-CASH FINANCING ACTIVITIESStock issued for services$                           -$                     -$           3,131,916Stock issued for conversion of debt$                           -$                     -$           4,139,230Stock issued for license agreement and patent$                           -$                     -$              693,752   The accompanying notes are an integral part of these consolidated financial statements.


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  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, 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.  In June 1998, the Company sold its interest in MCL for $125,000 cash and 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.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  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. Solomon (Solomon), a New Zealand citizen, who became a director of the Company in January 1996 and who caused the formation of MNZ on June 22, 1995.  Contemporaneously with this transaction, the Company sold 50% of MNZ to Solwin, a corporation owned by Solomon, for $150,000, of which the Company thereupon loaned $50,000 to MNZ on a demand basis (see Note 1(h)).  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 will 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 will receive a sales royalty in an amount equal to 10% of MNZs gross annual sales under the License Agreement.  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: Australia (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 will be divided between the Company and MNZ on a sliding scale as set forth below:  Medizone International, Inc.Medizone New Zealand LimitedInitial license50%50%Subsequent license fees up to $500,00050%50%Subsequent license fees between $500,000 and $750,00075%25%Subsequent license fees in excess of $750,00085%15%





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  b.  Formation of Joint Venture (Continued)  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 principal of MNZ is Richard G. Solomon, who is also a board member of the Company.  Discussions have been ongoing regarding the possibility of the Company acquiring the rights currently held by MNZ, although final terms have not yet been agreed to.  Should this take place in the future, the Company would then own global rights to all of its future products.  The Managing Agent Agreement will 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 IssuesTask 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, 2006.  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.  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.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  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:  For the Years Ended December 31,20062005Numerator- Loss before extraordinary items$             (356,430=)$             (326,153)- Extraordinary items--Denominator (weighted average number of shares outstanding)161,170,387161,170,387Basic Income (loss) per share- Before extraordinary items$                  (0.00)$              (0.00)- Extraordinary items0.000.00Basic Income (Loss) Per Share$                  (0.00)$              (0.00)  Common stock equivalents, consisting of warrants and options, have not been included in the calculation as their effect is antidilutive for the periods presented.  g.  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.  h.  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, 2006.  i.  Provision for Taxes  Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  i.  Provision for Taxes (Continued)  At December 31, 2006, the Company had net operating loss carryforwards of approximately $12,823,000 that may be offset against future taxable income and expire in years 2006 through 2026.  If substantial changes in the Companys ownership should occur, there would also be an annual limitation of the amount of the NOL carryforwards which could be utilized.  No tax benefit had been reported in the consolidated financial statements as, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized and the carryforwards will expire unused.  The tax benefits of the loss carryforwards are offset by a valuation allowance of the same amount.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  The income tax benefit differs from the amount computed at the federal statutory rates as follows:  For the Years Ended December 31,20062005Income tax benefit at statutory rate$        137,404$         55,846Change in valuation allowance(137,404)(55,846)$                    -$                  -  Deferred tax assets at December 31, 2006 and 2005 are comprised of the following:  20062005Net operating loss carryforwards$   5,000,900$   5,002,300Accrued expenses846,700707,900Valuation allowance(5,847,600)(5,710,200)$                 -$                  - j.  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.  k.  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.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  l.  Advertising  The Company follows the policy of charging the costs of advertising to expense as incurred.  m.  Stock Options and Warrants  Prior to 2005, the Company applied Accounting Principles Board (APB) 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for all stock option plans. Under APB 25, compensation cost was recognized for stock options and warrants granted to employees when the option/warrant price is less than the market price of the underlying common stock on the date of grant.  FASB Statement 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation (SFAS No. 148) requires the Company to provide proforma information regarding net income and net income per share as if compensation costs for the Companys stock option plans and other stock awards had been determined in accordance with the fair value based method prescribed in SFAS No. 148.  The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model.  In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R).  SFAS 123R requires that the use of APB Opinion No. 25 be discontinued and that compensation cost related to share-based employee compensation transactions be recognized in the financial statements.  In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R).  The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company adopted the revised standard during fiscal year 2005, but had no share-based employee compensation during the year ended December 31, 2005.  During 2006, however, the Company extended the maturity date on various common stock warrants to certain directors and outside consultants (Note 5).  Stock based compensation expense for the year ended December 31, 2006 was $2,756.  n.  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 FDA has not approved the technologies covered by the patent.  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.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  o.  Revenue Recognition Policy  The Company currently has no source of revenues.  Revenue recognition policies will be determined when principal operations begin.  p. Recent Accounting Pronouncements  In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 155, Accounting for Certain Hybrid Financial Instruments, which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilitiesa replacement of FASB Statement No. 125. SFAS 155 will be effective for all financial instruments issued or acquired after the beginning of an entity's first fiscal year that begins after September 15, 2006. Management has no present expectation of issuing or acquiring any financial instruments likely to be affected by SFAS 155 in the foreseeable future.  In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an Interpretation of Statement of Financial Accounting Standard No. 109.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return.  The Company must determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  Management is currently evaluating the likely impact of adopting FIN 48 on its consolidated financial statements.  In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS 157 will be effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  Management does not believe that the application of SFAS 157 will have a material impact on the Companys consolidated financial statements.  In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R), which improves financial reporting by requiring an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.  Management does not believe that the application of SFAS 158 will have a material impact on the Companys consolidated financial statements.  In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts SFAS 157. The Company has not yet determined the impact this standard will have on its consolidated financial statements.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  p.  Recent Accounting Pronouncements (Continued)  In December 2007, the FASB issued SFAS No. 141(R), Business Combinations.  SFAS 141(R) replaces SFAS No. 141, Business Combinations, but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations. SFAS 141(R) expands on the disclosures previously required by SFAS 141, better defines the acquirer and the acquisition date in a business combination, and establishes principles for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the acquired business. SFAS 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS 141(R) is effective for all business combinations with an acquisition date in the first annual period following December 15, 2008; early adoption is not permitted. The impact SFAS 141(R) will have on the Companys consolidated financial statements will depend on the nature and size of acquisitions the Company completes after it adopts SFAS 141(R).  In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51.SFAS 160 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the companys balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling companys income statement. SFAS 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years; early adoption is not permitted. The adoption of SFAS 160 is not expected to have a material impact on the Companys financial position, results of operations or cash flows.  NOTE 2 - PROPERTY AND EQUIPMENT  Property and equipment consists of the following at December 31, 2006:  Office equipment$  19,249Furniture6,30725,556Accumulated depreciation(25,556)Net property and equipment$            -  Depreciation expense for the years ended December 31, 2006 and 2005 was $0 and $0, respectively.  NOTE 3 - ACCRUED EXPENSES  Accrued expenses consist of the following at December 31, 2006:  Accrued payroll and consulting$      1,593,846Accrued interest313,024Accrued payroll taxes110,515Other accruals16,683Total$      2,034,068





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 4 - COMMITMENTS AND CONTINGENCIES  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 complaint filed by the Company sought a declaration from the Court regarding the enforceability of the former officers employment contract, the right of the Company to terminate his employment and other relief.  A settlement was agreed upon, under the terms of which the Company agreed to withdraw its complaint with prejudice and the former officer waived any further claim for wages or other compensation under his employment agreement. In addition, the former officer consented to the cancellation of 2,000,000 shares of common stock issued to him in prior years.  On April 6, 2000, the Company settled this matter by paying its former Chief Financial Officer $35,000 and the Company received the 2,000,000 shares of common stock back for cancellation.  The Company recognized a $127,000 gain on settlement of debt due to the fact that at the time of settlement, the Company had accrued $162,000 of debt to the former Chief Financial Officer.  In January of 2000, the Company received $415,000 from its former President and Chief Executive Officer who was under an order of restitution from the State of New York.  In addition, the Board of Directors approved the following salaries for its key officers during 1999 to commence January 1, 2000: 1) $170,000 a year for the Companys C.E.O., 2) $170,000 a year for the Companys President and Director of Research, and 3) $95,000 a year for the Companys C.O.O. and Corporate Secretary.  The Companys President and Director of Research was terminated effective December 31, 2001, thus no additional accrual was recorded subsequent to this date.  The Companys C.O.O. and Corporate Secretary resigned effective July 1, 2004.  The Company is also party to litigation matters as follows:  Rakas vs. Medizone International, Inc.   A former consultant brought this action against the Company claiming the Company had failed to pay consulting fees under a consulting agreement.  In September 2001, the parties agreed to settle the matter for $25,000.  The Company, however, did not have the funds to pay the settlement and the plaintiff moved the court to enter a default judgment in the amount of $143,000 in January 2002.  On May 8, 2002, the court vacated the default judgment and requested that the Company post a bond of $25,000 to cover the settlement previously entered into by the parties.  The Company has been unable to post the required bond amount as of the date of this report.  Therefore, the Company has recorded the original default judgment in the amount of $143,000, plus fees totaling $21,308,  at December 31, 2006.  The Company intends to contest the judgment if and when they are able to obtain additional equity financing in the future.  Contingent Liabilities  As of December 31, 2006, the Company has recorded contingent liabilities totaling $224,852 related to certain past due payables in which the Company has not received invoices or demands on for over ten years.  Although management of the Company does not believe that the amounts will ever be paid, in order to be conservative, the amounts are being recorded as contingent liabilities until such time as the Company is certain that no liability exists and until the statute of limitations has expired.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  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 transaction for aggregate proceeds of $150,000.  During the period from June 1987 through July 1987, the Company issued 203,167 shares of common stock to various vendors and individuals for services rendered in 1986 and 1987.  On August 26, 1987, an officer of the Company exercised options to purchase 250,000 shares of common stock.  In January 1988, two holders exercised their options and acquired an aggregate of 200,000 shares of common stock.  On September 26, 1988, the Company sold, in a private placement, 1,000,000 shares of common stock at $0.08 per share to an individual.  During 1988, the Company issued a total of 35,000 shares of common stock for services.  During 1989, the Company issued 261,889 shares of common stock to various vendors and individuals for services rendered in 1988 and 1989.  The Company also 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.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 5 - ISSUANCE OF COMMON STOCK AND WARRANTS  During 1991, the following equity transactions occurred: The Company issued 4,366,667 shares to individuals in private transactions for aggregate proceeds of $310,000; the Company issued a total of 425,000 shares of common stock for services and accrued liabilities of which an aggregate of 100,000 shares were issued to two directors; and three holders exercised their options and acquired an aggregate of 450,000 shares of common stock.  During 1992, the following equity transactions occurred: The Company issued 2,702,335 shares to individuals in private transactions for aggregate proceeds of $430,350; the Company issued a total of 401,500 shares of common stock for services and accrued liabilities; holders exercised options and acquired an aggregate of 250,000 shares of common stock.  During 1993, the following equity transactions occurred: The Company issued 1,471,666 shares to individuals in private transactions for aggregate proceeds of $271,000; the Company issued a total of 5,347,219 shares of common stock for services.  Also, during 1993, a total of $261,915 was received in cash for 2,619,150 shares subscribed as a result of a private placement offering.  The offering commenced as of November 26, 1993, with a maximum of $700,000 to be raised in gross proceeds from the sale of up to 7,000,000 shares.  During 1994, the following equity transactions occurred: The Company issued a total of 1,431,590 shares of common stock for services; the Company issued a total of 1,125,834 shares of common stock to certain prior purchasers of common stock in recognition of disparity in purchase in contemporaneous offerings.  Also during 1994, a total of $680,040 was received in cash for 6,800,499 shares subscribed as a result of the offering.  Subsequent to the offering, an additional $316,860 was received in cash from foreign investors subscribing to 3,168,600 shares of common stock.  On December 28, 1994, the Company settled a dispute regarding the validity of notes payable to former management in the amount of $2,033,628 by agreeing to issue 11,250,000 common shares (recorded as shares subscribed) in satisfaction of the total amount of the debt.  Also in 1994, $40,000 of notes payable (a portion of loans totaling $60,000) together with interest was satisfied by issuing 416,500 shares of common stock.  During 1995, the following equity transactions occurred: The Company issued a total of 2,050,000 shares of common stock for services. $911,825 was received from investors subscribing to 9,118,260 shares of common stock.  Also, 7,524,860 common shares, previously recorded as shares subscribed, were issued, and 1,242,727 were retired in accordance with the settlement agreement with former management.  200,000 of redeemable shares were converted into common stock.  The Company sold shares of its New Zealand subsidiary for aggregate proceeds of $150,000.  During 1996, the Company received stock subscription agreements for the purchase of 7,254,470 shares of its common stock, together with proceeds totaling $725,447 from sales of its securities to non-United States investors, outside of the United States pursuant to Regulation S promulgated under the Securities Act of 1993.  Approximately $635,447 of these proceeds were from the sale of the Companys common stock at a per share price of $0.10 (including $37,500 for 375,000 shares from Richard G. Solomon, at the time a director of the Company).  The remaining $90,000 were from the sale of 900,000 units, each unit consisting of one share of the Companys common stock at a per share price of $0.10 to a director pursuant to the non-public offering exemption from registration under the Securities Act.  In May 1996, the Company issued 600,000 shares of its common stock to employees and 250,000 shares of its common stock to its public relations consultant as additional compensation.  The Company also issued 565,875 shares of its common stock to various consultants for services rendered.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  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.  During 2000, the Company issued 3,142,857 shares of common stock through the exercise of outstanding warrants at $0.07 per share for a total of $220,000.  The Company issued common stock for services in two different instances during the year.  One issuance was of 350,000 shares of common stock for a total of $61,250.  The other issuance was for 300,000 shares of common stock for a total of $85,500.  The Company issued common stock for debt in four separate instances.  The first one being 2,020,000 shares of common stock issued for a total of $222,200.  The second issuance was 95,000 shares of common stock for a total of $14,000.  The third issuance was 20,000 shares of common stock for a total of $4,000.  The fourth issuance was 100,000 shares of common stock for a total of $55,000.  The Company also canceled 2,000,000 shares of common stock pursuant to the settlement agreement with the Companys former C.F.O. (See Note 4).  The Company also recognized an additional expense of $1,743,468 for the extension of warrants below market value.  During 2001, the Company issued a total of 1,422,221 shares of common stock at prices ranging from $0.15 to $0.20 per share for total proceeds of $254,981.  Pursuant to these stock issuances, the Company granted warrants to purchase 2,122,221 shares of common stock at exercise prices of $0.15 to $0.20 per share.  25,000,000 warrants previously outstanding also expired during 2001, unexercised.  During 2002, the Company issued a total of 1,250,000 shares of common stock at $0.10 per share for total proceeds of $125,000.  The Company also granted the investors warrants to purchase 1,250,000 shares of common stock at $0.10 per share, exercisable over a two-year term.  The market price of the common stock was $0.10 per share on the date of the issuance of the shares and grant of the warrants.  Also during the year ended December 31, 2002, the Company issued a total of 677,368 shares of common stock for services rendered and repayment of outstanding debt at $0.10 per share for a total of $67,737.  The Company also issued a total of 480,000 shares of common stock, pursuant to an S-8 registration, for services rendered at $0.10 per share for a total of $48,000.  During 2003, the Company issued a total of 865,000 shares of common stock at $0.05 per share for total proceeds of $43,250.  The Company also granted the investors warrants to purchase 865,000 shares of common stock at $0.05 per share, exercisable over a two-year term.  The market price of the common stock was $0.05 per share on the date of the issuance of the shares and grant of the warrants.  Also during the year ended December 31, 2003, the Company issued 460,000 shares of common stock at $0.05 per share in lieu of a note payable totaling $23,000 and 100,000 shares of common stock to an officer of the Company for services rendered valued at $0.05 per share for a total value of $5,000.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 5 - ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)  The Company also issued 2,000,000 shares of restricted common stock to an individual pursuant to a Letter of Understanding / Employment whereby the individual was issued the shares as an incentive for him to enter into a future employment agreement with the Company once initial funding is obtained.  The shares have been valued at $0.02 per share, the market price of the common stock on the date of issuance.  The individual was also issued 2,000,000 warrants exercisable at $0.40 per share.  The warrants cannot be exercised, however, unless the individual remains employed by the Company for a minimum of three years. The warrants carry a five year term and include a cashless exercise option.  On various dates over the past several years up to and including November 3, 2006, the Board of Directors of the Company agreed to extend the expiration date on certain of the above outstanding warrants to purchase common stock to February 28, 2007, as indicated above (see also Note 9 regarding subsequent extensions through August 31, 2008).  The Company estimates the fair value of each stock award or expiration extension at the grant date or extension date by using the Black-Scholes option pricing model pursuant to FASB Statement 123, Accounting for Stock-Based Compensation, which model requires the use of exercise behavior data and the use of a number of assumptions including volatility of the Companys stock price, the weighted average risk-free interest rate, and the weighted average expected life of the warrants.  Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes model is zero.  Under the provisions of SFAS 123, additional expense of $2,756 was recorded for the year ended December 31, 2006 under the Black-Scholes option pricing model for these warrant extensions.  The Company estimated the fair value of the stock warrants at the date of the maturity extension, based on the following weighted average assumptions:  Risk-free interest rate4.56% - 5.11%Expected life2 to 3 monthsExpected volatility90.75% - 267.52%Dividend yield0.00%  A summary of the status of the Companys outstanding warrants as of December 31, 2006 and changes during the year then ended is presented below: SharesWeighted Average Exercise PriceOutstanding, beginning of period10,304,629$0.15Granted (extension of terms)29,135,367$0.14Expired/Canceled(27,205,367)$(0.14)Exercised-n/aOutstanding, end of period12,234,629$0.13Exercisable12,234,629$0.13





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 5 - ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)  As of December 31, 2006, the following warrants were outstanding:  WarrantsExercise PriceTermination Dates1,000,000$0.20February 28, 2007566,666$0.15February 28, 2007555,555$0.18February 28, 2007250,000$0.55February 28, 20071,250,000$0.10February 28, 2007865,000$0.05February 28, 2007409,075$0.02February 28, 200783,333$0.03February 28, 2007100,000$0.02April 28, 2007400,000$0.02September 8, 2007250,000$0.02September 16, 2007400,000$0.02July 22, 2007300,000$0.02August 9, 2007350,000$0.02August 24, 2007300,000$0.02Sept. 21, 2007150,000$0.02Sept. 28, 2007150,000$0.02October 21, 2007450,000$0.02November 11, 2007350,000$0.02December 14, 2007350,000$0.02January 4, 2008400,000$0.02January 20, 2008350,000$0.02February 21, 2008350,000$0.02March 16, 2008250,000$0.02April 3, 2008250,000$0.02May 3, 2008105,000$0.02December 11, 20082,000,000$0.40December 26, 2008





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 6 - NOTES PAYABLE  Notes payable consisted of the following at December 31, 2006:  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 lenders may purchase from the Company upon exercise of the lenders option to acquire shares from the Company.$    60,815Notes 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 at 8% 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.37,000Notes payable to former directors and a family member of a former 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 $0.10 per share if alternative financings do not occur.182,676Total Notes Payable280,491Less: Current Portion(280,491)Long-Term Notes Payable$              -  The aggregate principal maturities of notes payable are as follows:  Year Ended December 31,Amount2007$       280,4912008-2009-2010-2011-2011 and thereafter-Total$      280,491





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 7 - ADVANCES FROM SHAREHOLDERS AND STOCK DEPOSITS  During the years ended December 31, 2002, 2003 and 2004, certain directors advanced a total of $8,681 to the Company to cover operating expenses.  An additional $5,550 was advanced during the year ended December 31, 2006.  These amounts are non-interest bearing, unsecured and due on demand.  In addition, the Company has received a total of $110,100 from two separate directors during 2004, 2005, and 2006, the proceeds of which will be used to purchase shares of the Companys common stock.  The Board of Directors of the Company has approved the issuance of a total of 5,463,333 shares of common stock for the $110,100, which shares were eventually issued during May 2008.  Accordingly, the amount is being shown as a stock deposit at December 31, 2006.  NOTE 8 - GOING CONCERN  The Companys consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred significant losses from its inception through December 31, 2006, which have resulted in an accumulated deficit of $19,310,249 at December 31, 2006.  The Company does not have an established source of funds sufficient to cover its operating costs, has a working capital deficit of approximately $3,119,000, and has relied exclusively on debt and equity financing.  Accordingly, there is substantial doubt about its ability to continue as a going concern.  Continuation of the Company as a going concern is dependent upon obtaining additional capital, obtaining the requisite approvals from the Food and Drug Administration (FDA) and/or the European Union 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.  Until mid-March 2008, the Company held the belief that it was about to be funded by a significant investor, which investor was waiting for a significant transaction to close prior to being able to fund the Company.  The Company learned, however, that the significant transaction needed by the investor was being delayed and is not expected to close for a significant period of time.  During April 2008, however, the Company was able to raise $80,000 through the sale of 8,000,000 restricted shares of common stock at $0.01 per share, which funds are being used to get the Companys filings with the Securities and Exchange Commission current and other corporate obligations.  The Company also has a verbal commitment from a separate accredited investor that is interested in the Companys science, for an additional $5,000,000 in funding through the issuance of an additional 50,000,000 restricted shares of common stock at $0.10 per share.  This funding is conditional upon the Company being able to meet certain obligations such as getting its SEC filings current, and is anticipated to occur during July 2008.  No formal written agreements have been entered into, however, on this additional funding.  If the Company is unsuccessful in finalizing this transaction, however, it will most likely be forced to cease operations.  The Company also does not believe that this funding will have a negative impact on the originally anticipated funding source as described in the preceding paragraph, or other sources in the future, should additional funding become available.  The Company would, however, need to increase its authorized shares of common stock which would require the approval of shareholders.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 8 - 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 Companys proprietary technology (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 have 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 the application contains sufficient medical evidence and data to permit a body of qualified and experienced scientists to conclude that the new drug product is safe and effective for its recommended and proposed medical uses.  Historically, the FDA has held a strong bias against treating humans with ozone, due largely to issues of safety.  In order to initiate the first phase (i.e., Phase I) of human clinical trials required as part of an NDA, an applicant must submit to the FDA an application for an Investigational New Drug Exemption (IND), which contains adequate information to satisfy the FDA that human clinical trials can be conducted without exposing the volunteer human subjects to an unreasonable risk of illness or injury.  The Company submitted an IND application (assigned to the Company by its former president) to the FDA on October 6, 1985, and requested FDA approval to commence human clinical trials using ozone-oxygen to inactivate HIV.  The FDA deemed the IND application to be incomplete, and required the Company to conduct additional animal studies prior to commencing a large animal study and human trials.  In September 1994, after not receiving responses to requests for information from the Company, the FDA inactivated the Companys IND.  The Company has no present plans to commence a large animal study, which would require, as a precursor, additional small animal and laboratory work.  Accordingly, there can be no assurance that the Companys IND application will ever be reopened.  Until an NDA 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 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 trials in an effort to obtain EU approval, to market the product in Europe and to reopen the Companys FDA file.  The Company estimates that 90% of its potential market is outside the United States.  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.  The ability of the Company to continue as a going concern is dependent on its ability to successfully accomplish the plan described in the preceding paragraphs and eventually attain profitable operations.  The 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 these uncertainties.  NOTE 9 - SUBSEQUENT EVENTS  On various dates subsequent to December 31, 2006, up to and including March 26, 2008, the Board of Directors of the Company agreed to extend the expiration date on certain of the outstanding warrants totaling 10,254,629, as described in Note 5, to purchase common stock to August 31, 2008.





MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements December 31, 2006 and 2005  NOTE 9 - SUBSEQUENT EVENTS (Continued)  On August 27, 2007, the Companys board of directors approved various stock issuances to the Companys directors, officers and outside consultants for a total of 11,250,000 shares of common stock, valued at $0.02 per share, the market value of the shares on the date that the shares were approved to be issued.  These shares were eventually issued during May 2008.  During April 2008, the Company received a total of $80,000 to be used as start-up funds in order to get the Companys filings current.  The Company issued a total of 8,000,000 shares of common stock to the investor ($0.01 per share), as remuneration for the $80,000.