UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2001

Commission file number 0-29907

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BLUE ZONE, INC.

(Exact name of registrant as specified in its charter)



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|                                                                      |  |                                                   
|--------------------------------------------------------------------- |  | --------------------------------------------------
|NEVADA
(State or other jurisdiction of
incorporation or organization) |  | 86-0863053
(I.R.S. employer identification number)



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329 RAILWAY STREET, 5TH FLOOR
VANCOUVER, BRITISH COLUMBIA
CANADA V6A 1A4
(604) 685-4310

(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices)

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

The number of outstanding shares of the registrants Common Stock, par value
$0.001 per share, was 24,539,350 on August 10, 2001.





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BLUE ZONE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2000

TABLE OF CONTENTS

|        |                                                                                               |                                                |    |    |   |  |  |  |  |  |  |  |  | 
|------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------- | -- | -- | - |  |  |  |  |  |  |  |  | 
|PART I  |                                                                                               |                                                | 2  |   
|       
|       
|       
|       
|        | ITEM 1. FINANCIAL STATEMENTS                                                                  |                                                |    | 2  |  
|       
|       
|       
|       
|        |                                                                                               | Consolidated Balance Sheet                     |    |    | 2 | 
|       
|       
|       
|       
|        |                                                                                               | Consolidated Statement of Operations           |    |    | 3 | 
|       
|       
|       
|       
|        |                                                                                               | Consolidated Statement of Stockholders Equity |    |    | 4 | 
|       
|       
|       
|       
|        |                                                                                               | Consolidated Statement of Cash flow            |    |    | 5 | 
|       
|       
|       
|       
|        |                                                                                               | Notes to Consolidated Financial Statements     |    |    | 7 | 
|       
|       
|       
|       
|        | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |                                                |    | 8  |  
|       
|       
|       
|       
|        | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK                            |                                                |    | 17 |  
|       
|       
|       
|       
|PART II |                                                                                               |                                                | 18 |   
|       
|       
|       
|       
|        | ITEM 1. LEGAL PROCEEDINGS                                                                     |                                                |    | 18 |  
|       
|       
|       
|       
|        | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |                                                |    | 18 |  
|       
|       
|       
|       
|        | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                       |                                                |    | 18 |  
|       
|       
|       
|       
|        | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |                                                |    | 18 |  
|       
|       
|       
|       
|        | ITEM 5. OTHER INFORMATION                                                                     |                                                |    | 18 |  
|       
|       
|       
|       
|        | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      |                                                |    | 18 |  





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PART I

ITEM 1. FINANCIAL STATEMENTS

BLUE ZONE, INC.

Consolidated Balance Sheet
(Expressed in U.S. dollars)

|                                                                                                       |  |               |            |                   |  |   |            |  
|------------------------------------------------------------------------------------------------------ |  | ------------- | ---------- | ----------------- |  | - | ---------- | -
|                                                                                                       |  | June 30, 2001 |            | December 31, 2000
|                                                                                                       |  | (Unaudited)   |            |                  
|                                                                                                       |  |               |            |                  
|Assets
Current assets:                                                                                 |  |               |            |                   |  |   |            |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Cash and cash equivalents                                                                              |  | $             | 304,284    |                   |  | $ | 1,844,981  |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Accounts receivable, net of allowance for doubtful
accounts of $5,546, (2000 - nil)                    |  |               | 245,089    |                   |  |   | 221,363    |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Prepaid expenses                                                                                       |  |               | 85,348     |                   |  |   | 144,767    |  
|                                                                                                       |  |               |            |                  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |  |               | 634,721    |                   |  |   | 2,211,111  |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Fixed assets                                                                                           |  |               | 720,889    |                   |  |   | 838,897    |  
|                                                                                                       |  |               |            |                  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |  | $             | 1,355,610  |                   |  | $ | 3,050,008  |  
|                                                                                                       |  |               |            |                  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Liabilities and Stockholders Equity
Current liabilities:                                              |  |               |            |                   |  |   |            |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Accounts payable                                                                                       |  | $             | 76,578     |                   |  | $ | 258,728    |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Accrued liabilities                                                                                    |  |               | 127,198    |                   |  |   | 198,077    |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Deferred revenue                                                                                       |  |               | 19,814     |                   |  |   | 60,020     |  
|                                                                                                       |  |               |            |                  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |  |               | 223,590    |                   |  |   | 516,825    |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Stockholders equity:                                                                                  |  |               |            |                   |  |   |            |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Preferred stock, authorized 5,000,000 shares,
$.01 par value, none issued in 2001 or 2000              |  |               |           |                   |  |   |           |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Common stock, $.001 par value, authorized 100,000,000
shares; issued and outstanding 24,539,350 shares |  |               | 24,539     |                   |  |   | 24,539     |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Additional paid in capital                                                                             |  |               | 8,496,526  |                   |  |   | 8,446,877  |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Deficit                                                                                                |  |               | (7,144,181 | )                 |  |   | (5,738,665 | )
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Accumulated other comprehensive loss:                                                                  |  |               |            |                   |  |   |            |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Foreign currency translation adjustment                                                                |  |               | (244,864   | )                 |  |   | (199,568   | )
|                                                                                                       |  |               |            |                  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |  |               | 1,132,020  |                   |  |   | 2,533,183  |  
|                                                                                                       |  |               |            |                  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |  | $             | 1,355,610  |                   |  | $ | 3,050,008  |  
|                                                                                                       |  |               |            |                  

Subsequent events (note 4)

See accompanying notes to consolidated financial statements.





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BLUE ZONE, INC.

Consolidated Statement of Operations
(Expressed in U.S. dollars)

(Unaudited)

|                                                              |                            |   |                             |         |                           |   |            |         |      |   |            |         |  |   |            |           | 
|------------------------------------------------------------- | -------------------------- | - | --------------------------- | ------- | ------------------------- | - | ---------- | ------- | ---- | - | ---------- | ------- |  | - | ---------- | --------- | 
|                                                              |                            |   | Three months ended June 30, |         | Six months ended June 30,
|                                                              |                            |   | 2001                        |         | 2000                      |   | 2001       |         | 2000
|                                                              |                            |   |                             |         |                          
|Product,
license and service revenue                          |                            | $ | 220,817                     |         |                           | $ | 310,863    |         |      | $ | 341,072    |         |  | $ | 385,416    |          
|                                                             
|                                                             
|                                                             
|                                                             
|Cost of revenues                                              |                            |   | 14,819                      |         |                           |   | 279,084    |         |      |   | 39,555     |         |  |   | 352,212    |          
|                                                              |                            |   |                             |         |                           |   |            |         |     
|                                                             
|                                                             
|                                                             
|                                                             
|Gross profit                                                  |                            |   | 205,998                     |         |                           |   | 31,779     |         |      |   | 301,517    |         |  |   | 33,204     |          
|                                                              |                            |   |                             |         |                           |   |            |         |     
|                                                             
|                                                             
|                                                             
|                                                             
|Operating expenses:                                           |                            |   |                             |         |                           |   |            |         |      |   |            |         |  |   |            |          
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | General and administrative |   |                             | 444,786 |                           |   |            | 929,582 |      |   |            | 954,232 |  |   |            | 1,620,460 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Research and development   |   |                             | 178,462 |                           |   |            | 184,376 |      |   |            | 373,806 |  |   |            | 277,837   | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Selling and marketing      |   |                             | 151,296 |                           |   |            | 25,836  |      |   |            | 297,279 |  |   |            | 106,381   | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Depreciation               |   |                             | 56,789  |                           |   |            | 48,735  |      |   |            | 117,884 |  |   |            | 91,375    | 
|                                                              |                            |   |                             |         |                           |   |            |         |     
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              |                            |   | 831,333                     |         |                           |   | 1,188,529  |         |      |   | 1,743,201  |         |  |   | 2,096,053  |          
|                                                              |                            |   |                             |         |                           |   |            |         |     
|                                                             
|                                                             
|                                                             
|                                                             
|Loss before undernoted                                        |                            |   | 625,335                     |         |                           |   | 1,156,750  |         |      |   | 1,441,684  |         |  |   | 2,062,849  |          
|                                                             
|                                                             
|                                                             
|                                                             
|Interest income                                               |                            |   | 5,668                       |         |                           |   | 82,891     |         |      |   | 36,168     |         |  |   | 130,931    |          
|                                                              |                            |   |                             |         |                           |   |            |         |     
|                                                             
|                                                             
|                                                             
|                                                             
|Net loss                                                      |                            | $ | 619,667                     |         |                           | $ | 1,073,859  |         |      | $ | 1,405,516  |         |  | $ | 1,931,918  |          
|                                                              |                            |   |                             |         |                           |   |            |         |     
|                                                             
|                                                             
|                                                             
|                                                             
|Net loss per common share,
basic and diluted                  |                            | $ | 0.03                        |         |                           | $ | 0.05       |         |      | $ | 0.06       |         |  | $ | 0.09       |          
|                                                              |                            |   |                             |         |                           |   |            |         |     
|                                                             
|                                                             
|                                                             
|                                                             
|Weighted average common shares
outstanding, basic and diluted |                            |   | 24,539,350                  |         |                           |   | 21,538,100 |         |      |   | 24,539,350 |         |  |   | 21,538,100 |          
|                                                              |                            |   |                             |         |                           |   |            |         |     

See accompanying notes to consolidated financial statements.





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BLUE ZONE, INC.

Consolidated Statement of Stockholders Equity
(Expressed in U.S. dollars)

Six months ended June 30, 2001
(Unaudited)

|                                            |  |              |            |         |  |         |        |         |  |             |           |               |  |   |            |          |  |               |          |   |  |   |            |  
|------------------------------------------- |  | ------------ | ---------- | ------- |  | ------- | ------ | ------- |  | ----------- | --------- | ------------- |  | - | ---------- | -------- |  | ------------- | -------- | - |  | - | ---------- | -
|                                            |  |              |            |         |  |         |        |         |  |             |           |               |  |   |            |          |  | Accumulated   |          |   |  |  
|                                            |  |              |            |         |  |         |        |         |  |             |           |               |  |   |            |          |  | other         |          |   |  |  
|                                            |  |              |            |         |  |         |        |         |  |             |           |               |  |   |            |          |  | comprehensive |          |   |  |  
|                                            |  |              |            |         |  |         |        |         |  |             |           |               |  |   |            |          |  | loss          |          |   |  |  
|                                            |  |              |            |         |  |         |        |         |  |             |           |               |  |   |            |          |  | Foreign       |          |   |  |  
|                                            |  |              |            |         |  |         |        |         |  | Additional  |           |               |  |   |            | currency |  | Total        
|                                            |  | Common stock |            | paid-in |  |         |        |         |  | translation |           | stockholders'
|                                            |  | Shares       |            | Amount  |  | capital |        | Deficit |  | adjustment  |           | equity       
|                                            |  |              |            |         |  |         |        |         |  |             |           |              
|Balance, December 31, 2000                  |  |              | 24,539,350 |         |  | $       | 24,539 |         |  | $           | 8,446,877 |               |  | $ | (5,738,665 | )        |  | $             | (199,568 | ) |  | $ | 2,533,183  |  
|                                           
|                                           
|                                           
|                                           
|Amortization of deferred stock compensation |  |              |           |         |  |         |       |         |  |             | 19,300    |               |  |   |           |          |  |               |         |   |  |   | 19,300     |  
|                                           
|                                           
|                                           
|                                           
|Adjustment of financing costs               |  |              |           |         |  |         |       |         |  |             | 30,349    |               |  |   |           |          |  |               |         |   |  |   | 30,349     |  
|                                           
|                                           
|                                           
|                                           
|Other comprehensive loss:                   |  |              |            |         |  |         |        |         |  |             |           |               |  |   |            |          |  |               |          |   |  |   |            |  
|                                           
|                                           
|                                           
|                                           
|Net loss                                    |  |              |           |         |  |         |       |         |  |             |          |               |  |   | (1,405,516 | )        |  |               |         |   |  |   | (1,405,516 | )
|                                           
|                                           
|                                           
|                                           
|Foreign currency translation adjustment     |  |              |           |         |  |         |       |         |  |             |          |               |  |   |           |          |  |               | (45,296  | ) |  |   | (45,296    | )
|                                            |  |              |            |         |  |         |        |         |  |             |           |              
|                                           
|                                           
|                                           
|                                           
|                                            |  |              |            |         |  |         |        |         |  |             |           |               |  |   |            |          |  |               |          |   |  |   | (1,450,812 | )
|                                            |  |              |            |         |  |         |        |         |  |             |           |              
|                                           
|                                           
|                                           
|                                           
|Balance, June 30, 2001                      |  |              | 24,539,350 |         |  | $       | 24,539 |         |  | $           | 8,496,526 |               |  | $ | (7,144,181 | )        |  | $             | (244,864 | ) |  | $ | 1,132,020  |  
|                                            |  |              |            |         |  |         |        |         |  |             |           |              

See accompanying notes to consolidated financial statements.





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BLUE ZONE, INC.

Consolidated Statement of Cash Flows
(Expressed in U.S. dollars)

Six months ended June 30, 2001 and 2000
(Unaudited)

|                                                             |                                                      |                          |            |            |          |      |            |            |          |  
|------------------------------------------------------------ | ---------------------------------------------------- | ------------------------ | ---------- | ---------- | -------- | ---- | ---------- | ---------- | -------- | -
|                                                             |                                                      |                          |            | 2001       |          | 2000
|                                                             |                                                      |                          |            |            |          |     
|Cash flows from operating activities:                        |                                                      |                          |            |            |          |      |            |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net loss                                             |                          | $          | (1,405,516 | )        |      | $          | (1,931,918 | )       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Items not involving cash:                            |                          |            |            |          |      |            |            |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                      | Stock based compensation |            |            | 19,300   |      |            |            | 22,950   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                      | Depreciation             |            |            | 117,884  |      |            |            | 91,375   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Changes in operating assets and liabilities:         |                          |            |            |          |      |            |            |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                      | Accounts receivable      |            |            | (23,726  | )    |            |            | (136,150 | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                      | Prepaid expenses         |            |            | 59,419   |      |            |            | 34,182   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                      | Work-in-progress         |            |            |         |      |            |            | (70,581  | )
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                      | Accounts payable         |            |            | (182,150 | )    |            |            | 86,764   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                      | Accrued liabilities      |            |            | (70,879  | )    |            |            | 14,274   |  
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |                                                      | Deferred revenue         |            |            | (40,206  | )    |            |            | (180,143 | )
|                                                             |                                                      |                          |            |            |          |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net cash used in operating activities                |                          |            | (1,525,874 | )        |      |            | (2,069,247 | )       
|                                                            
|                                                            
|                                                            
|                                                            
|Cash flows from financing activities:                        |                                                      |                          |            |            |          |      |            |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Repayment to stockholder                             |                          |            |           |          |      |            | (45,559    | )       
|                                                             |                                                      |                          |            |            |          |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net cash used in financing activities                |                          |            |           |          |      |            | (45,559    | )       
|                                                            
|                                                            
|                                                            
|                                                            
|Cash flows from investing activities:                        |                                                      |                          |            |            |          |      |            |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Purchase of fixed assets                             |                          |            | (9,507     | )        |      |            | (510,604   | )       
|                                                             |                                                      |                          |            |            |          |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Net cash used in investing activities                |                          |            | (9,507     | )        |      |            | (510,604   | )       
|                                                            
|                                                            
|                                                            
|                                                            
|Effect of exchange rate changes on cash and
cash equivalents |                                                      |                          | (5,316     | )          |          |      | 68,822     |           
|                                                             |                                                      |                          |            |            |          |     
|                                                            
|                                                            
|                                                            
|                                                            
|Net decrease in cash and cash equivalents                    |                                                      |                          | (1,540,697 | )          |          |      | (2,556,588 | )         
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents, beginning of period               |                                                      |                          | 1,844,981  |            |          |      | 4,097,869  |           
|                                                             |                                                      |                          |            |            |          |     
|                                                            
|                                                            
|                                                            
|                                                            
|Cash and cash equivalents, end of period                     |                                                      |                          | 304,284    |            |          |      | 1,541,281  |           
|                                                             |                                                      |                          |            |            |          |     
|                                                            
|                                                            
|                                                            
|                                                            
|Supplementary information:                                   |                                                      |                          |            |            |          |      |            |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Interest paid                                        |                          |            |           |          |      |            | 2,122      |         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Income taxes paid                                    |                          |            |           |          |      |            |           |         
|                                                             |                                                      |                          |            |            |          |     
|                                                            
|                                                            
|                                                            
|                                                            
|Non-cash transactions:                                       |                                                      |                          |            |            |          |      |            |           
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Revenue received in exchange for
advertising expense |                          |            |           |          |      |            | 8,651      |         
|                                                             |                                                      |                          |            |            |          |     

See accompanying notes to consolidated financial statements.





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BLUE ZONE, INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Six months ended June 30, 2001 and 2000
(Unaudited)



---

1. Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in
conformity with generally accepted accounting principles applicable to interim
financial information and with the rules and regulations of the United States
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed,
or omitted, pursuant to such rules and regulations. In the opinion of
management, the unaudited interim financial statements include all adjustments
necessary for the fair presentation of the results of the interim periods
presented. These financial statements should be read in conjunction with the
Companys audited consolidated financial statements and notes thereto for the
year ended December 31, 2000, included in Blue Zones annual report on Form
10-K, dated March 29, 2001, filed with the Securities and Exchange Commission.
The results of operations for the interim period are not necessarily indicative
of the results of operations for any other interim period or for a full fiscal
year.

Certain comparative figures have been reclassified to conform to the
presentation adopted in the current period.

2. Going Concern

These unaudited interim consolidated financial statements have been prepared
on the going concern basis, which presumes the realization of assets and the
settlement of liabilities and commitments in the normal course of
operations. The application of the going concern basis is dependent upon
the Company achieving profitable operations to generate sufficient cash
flows to fund continued operations, or, in the absence of adequate cash
flows from operations, obtaining additional financing.

The Company has reported losses in the last three fiscal years, and has an
accumulated deficit of $7,144,181 at June 30, 2001. Management continues to
review operations in order to identify additional strategies, including
obtaining future sales contracts, designed to generate cash flow, improve the
Companys financial position, and enable the timely discharge of the Companys
obligations. If management is unable to identify sources of additional cash
flow in the short term, it may be required to reduce or limit
operations (note 4).

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BLUE ZONE, INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Six months ended June 30, 2001 and 2000
(Unaudited)



---

3. Contingency

During the year ended December 31, 2000, the Company was audited by the
Consumer Taxation Branch of the British Columbia Ministry of Consumer and
Corporate Affairs for provincial sales tax for the period from November 1, 1997
to October 31, 2000. The Ministry proposed an assessment of approximately
$182,000 relating to various items from this period, including tax on revenue
and tax on capital assets purchased outside the province for use in B.C. The
Company believes the proposed assessment applies tax primarily to items that
are not taxable and has disputed the proposed assessment. $15,700 was paid to
the Ministry in the prior quarter, representing managements best estimate of
the Companys obligation in respect of the possible assessment.

4. Subsequent Events

Subsequent to June 30, 2001, the Company issued secured convertible
debentures in the amount of $300,000. The funds will used to fund working
capital requirements. The debentures are convertible into common stock of
the Company at a conversion rate of $0.135 per share, the market price at the
date of issuance, and bear interest at a rate of 8.25% per annum. The
debentures are part of the Companys $1,000,000 convertible debenture
facility signed in April 2001. The debentures are due in April 2003.

Blue Zones Board of Directors has approved a voluntary stock option exchange
program for its employees, directors and officers. Under the program, Blue
Zones employees, directors and officers will be given the opportunity to
elect to cancel outstanding stock options held by them in exchange for an
undertaking to issue an equal number of new options to be granted at a future
date, which will be more than six months after the date of cancellation. The
exercise price of the new options will be equal to the fair market value of
the Companys common stock on the date of grant.

During the quarter ended June 30, 2001, the Company received notice from the
Nasdaq Stock Market indicating that its common stock would be delisted from
the Nasdaq Smallcap Market as a result of Blue Zones failure to meet certain
of Nasdaqs continued listing requirements. The Company filed an appeal and
has had a hearing before the Nasdaq Listing Qualifications Panel to present
the Companys plan to regain compliance for continued listing. However, the
Panel notified the Company on August 7, 2001 that its stock would be delisted
effective August 8, 2001. Blue Zones common stock commenced quotation on the
OTC Bulletin Board system on August 8, 2001.

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following Managements Discussion and Analysis of Financial Condition and
Results of Operations contains forward- looking statements that involve risks
and uncertainties. Blue Zones actual results could differ materially from
those anticipated in these forward-looking statements. The following
discussion should be read in conjunction with the unaudited interim
consolidated financial statements and notes thereto included in Part I  Item
1 of this Quarterly Report, and the audited consolidated financial statements
and notes thereto and Managements Discussion and Analysis of Financial
Conditions and Results of Operations included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2000.

FORWARD LOOKING STATEMENTS

All statements contained herein, as well as statements made in press releases
and oral statements that may be made by us or by officers, directors or
employees acting on our behalf, that are not statements of historical fact
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause our actual results to be materially different from historical results or
from any future results expressed or implied by such forward-looking
statements. Readers should consider statements that include the terms
believe, belief, expect, plan, anticipate, intend or the like to be
uncertain and forward-looking. All cautionary statements made herein should be
read as being applicable to all forward-looking statements wherever they
appear. In this connection, readers should consider the risks described in the
Companys annual report on Form 10-K for the year ended December 31, 2000 and
should not place undue reliance on any forward-looking statements.

Overview

Blue Zone has used in-depth knowledge acquired from working closely with
broadcasting companies to develop proprietary technology for use in media
applications. Our experience with live news delivery, including the large
variety of filming, graphics and editing equipment for audio and video
production, combined with our understanding of the specific communication
standards that exist inside a newsroom between equipment and employees, has
provided us with the opportunity to develop software to service the unique
needs of the broadcast community. The business has historically been focused
on providing Website design and content services and interactive consulting to
a range of Canadian-based media and broadcasting companies. This focus has now
expanded to include convergence technology targeted at broadcast, media, and
wireless communication companies throughout North America and Asia.

Bruce Warren, the Companys President and Chief Executive Officer, and Jamie
Ollivier, the Executive Creative Director, have worked in the broadcast field
for over ten years. During this time they have acquired valuable insights into
the technology requirements for traditional television and radio broadcast
companies to access the World Wide Web

Page 8



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through set-top-boxes and other interactive devices. In 1997, the Company
began development of a proprietary product, now trademarked as the MediaBZ
suite of products, to facilitate convergence of television, radio, and
print media content to the interactive environment.

In the latter half of 1999, Blue Zone contracted with CTV, Canadas largest
private television network, to plan, design, and implement CTV News
interactive broadcasts on the Internet, focused around the MediaBZ product.
The interactive news service, CTVNEWS.com, was launched on September 21, 2000.
CTVNEWS.com utilizes Blue Zones NewsBZ software to publish its content to
Web-enabled computers, interactive television, WAP-enabled cellular
telephones, and personal digital assistants. Blue Zone has also been retained
as an ongoing consultant to CTV. Approximately 56% of the Companys revenue
for the six- month period ended June 30, 2001 is derived from delivering
product and services related to this CTV contract. At June 30, 2001, Blue
Zone continues to work closely with CTV in accordance with the contract.

Blue Zone has begun to work with Bell Mobility, the largest wireless
telecommunications service provider in Canada. We have completed development
of one wireless application prototype for Bell Mobility and expect to develop
further applications as a result of this relationship. Blue Zone has not yet
signed a definitive agreement with Bell Mobility.

Blue Zone has also commenced working with PacketVideo Corporation, a world
leader in wireless multimedia communications. PacketVideos technology enables
video and audio content delivery over wireless networks to handheld devices
such as cellular phones, personal digital assistants, and laptop computers.
This technology is compatible with Blue Zones content acquisition and
management solution. Blue Zone is now a chartered developer for PacketVideo.
Blue Zone expects the relationship with PacketVideo will provide potential
sales opportunities for our software.

The Company has incurred losses in each of the last three fiscal years and for
the period ended June 30, 2001, and as of June 30, 2001, had an accumulated
deficit of $7,144,000. The net loss was $1,406,000 for the six- month period
ended June 30, 2001. Blue Zone continues to incur losses as a result of the
focus on executing the Companys business plan, which is built around
marketing of the MediaBZ product line to a broad range of broadcast, media,
and wireless communication companies throughout North America.

During the
second quarter of 2001, the Company implemented an operational restructuring
with the objective of reinforcing Blue Zones core technology and increasing
the Companys sales focus. Blue Zone eliminated 14 positions in
administration and production, while maintaining the Companys core competency
as a software solutions company.

Concurrent with the operational restructuring, the Company has also refocused
its business plan. Blue Zone is broadening the scope of its sales efforts to
include other verticals such as telecommunication companies, Internet portals
and corporate intranets.

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The Company believes that companies in these sales verticals are more
convergence ready and provide the Company with opportunities to reduce the
duration of our sales cycle. The Company has hired a senior level sales
individual in Los Angeles to help execute on this refined plan.

The restructuring, combined with other cost savings measures in the areas of
travel and entertainment, professional fees, and administrative costs,
positions the Company to capitalize on future business opportunities while
reducing the cash utilization rate. The Companys President and Chief
Executive Officer and the Executive Creative Director both volunteered to
reduce their salaries by 50% in order to further Blue Zones costs reduction
goals. The focus of the next several fiscal quarters will be controlling
discretionary costs, while still supporting growth of the business.

Stock option exchange program

Blue Zones Board of Directors has approved a voluntary stock option exchange
program for our employees, directors and officers. Under the program, Blue
Zones employees, directors and officers will be given the opportunity to elect
to cancel outstanding stock options held by them in exchange for an undertaking
to issue an equal number of new options to be granted at a future date, which
will be at least six months after the cancellation date. The exercise price of
the new options will be equal to the fair market value of the Companys common
stock on the date of grant.

Nasdaq listing

During the quarter ended June 30, 2001, the Company received notice from the
Nasdaq Stock Market indicating that its common stock would be delisted from
the Nasdaq Smallcap Market as a result of Blue Zones failure to meet certain
of Nasdaqs continued listing requirements. The Company filed an appeal and
has had a hearing before the Nasdaq Listing Qualifications Panel to present
the Companys plan to regain compliance for continued listing. However, the
Panel notified the Company on August 7, 2001 that its stock would be delisted
effective August 8, 2001. Blue Zones common stock commenced quotation on the
OTC Bulletin Board system on August 8, 2001.

Sources of revenue and revenue recognition

Product, license and service:

The Company generates product, license and service revenue through the licensing of the
MediaBZ solution and associated professional services. More specifically, Blue
Zone generates revenue from: interactive broadcasting development and
maintenance, strategic and business process improvement consulting services for
broadcasting, media, and wireless communication companies, integration,
implementation and production services related to the MediaBZ solution, and
software licensing from Blue Zones family of MediaBZ software applications.

Consulting service revenues are recognized upon delivery of the service.
Interactive broadcasting maintenance revenue is recognized over the term of the
contracts, typically month to month. Software licensing revenue is recognized
over the term of the license. For long-term development projects such as the
CTV contract, revenue is recognized on a

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percentage completion basis, based upon achievement of specifically
identifiable milestones. Revenue that has been prepaid or invoiced but
does not yet qualify for recognition under the Companys policies is
reflected as deferred revenue.

Exchange product and service:

In fiscal 2000, the Company adopted EITF No. 99-17 Accounting for Advertising
Barter Transactions. EITF 99-17 provides that the Company recognize revenue
and advertising expenses from barter transactions at the fair value only when
it has a historical practice of receiving or paying cash for similar
transactions. The Company has not recorded barter transactions during the six-
month period ended June 30, 2001.

Results of operations

The following table sets forth consolidated statement of operations data
for the three-month periods and six- month periods ended June 30, 2001 and
2000, expressed as a percentage of total revenues:

|                                           |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|------------------------------------------ |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                           |  | Three Months Ended |       | Six Months Ended
|                                           |  | June 30,           |       | June 30,        
|                                           |  |                    |       |                 
|                                           |  | 2001               |       | 2000             |  | 2001 |       | 2000
|                                           |  |                    |       |                  |  |      |       |     
|Consolidated Statement of
Operations Data: |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|                                          
|                                          
|                                          
|                                          
|Revenue                                    |  |                    | 100.0 | %                |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|                                          
|                                          
|                                          
|                                          
|Cost of revenue                            |  |                    | 6.7   |                  |  |      | 89.8  |      |  |  | 11.6  |   |  |  | 91.4  |  
|                                           |  |                    |       |                  |  |      |       |     
|                                          
|                                          
|                                          
|                                          
|Gross profit                               |  |                    | 93.3  |                  |  |      | 10.2  |      |  |  | 88.4  |   |  |  | 8.6   |  
|                                          
|                                          
|                                          
|                                          
|Operating expenses:                        |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|                                          
|                                          
|                                          
|                                          
|General and administrative                 |  |                    | 201.4 |                  |  |      | 299.0 |      |  |  | 279.8 |   |  |  | 420.4 |  
|                                          
|                                          
|                                          
|                                          
|Research and Development                   |  |                    | 80.8  |                  |  |      | 59.3  |      |  |  | 109.6 |   |  |  | 72.1  |  
|                                          
|                                          
|                                          
|                                          
|Selling and marketing                      |  |                    | 68.5  |                  |  |      | 8.3   |      |  |  | 87.2  |   |  |  | 27.6  |  
|                                          
|                                          
|                                          
|                                          
|Depreciation                               |  |                    | 25.7  |                  |  |      | 15.7  |      |  |  | 34.6  |   |  |  | 23.7  |  
|                                           |  |                    |       |                  |  |      |       |     
|                                          
|                                          
|                                          
|                                          
|Total operating expenses                   |  |                    | 376.4 |                  |  |      | 382.3 |      |  |  | 511.2 |   |  |  | 543.8 |  
|                                           |  |                    |       |                  |  |      |       |     
|                                          
|                                          
|                                          
|                                          
|Loss before interest and
income taxes      |  |                    | 283.1 |                  |  |      | 372.1 |      |  |  | 422.8 |   |  |  | 535.2 |  
|                                          
|                                          
|                                          
|                                          
|Interest income                            |  |                    | 2.6   |                  |  |      | 26.7  |      |  |  | 10.6  |   |  |  | 34.0  |  
|                                           |  |                    |       |                  |  |      |       |     
|                                          
|                                          
|                                          
|                                          
|Net loss                                   |  |                    | 280.5 | %                |  |      | 345.4 | %    |  |  | 412.2 | % |  |  | 501.2 | %
|                                           |  |                    |       |                  |  |      |       |     

Revenue

Product and service revenue decreased to $221,000 for the quarter ended June
30, 2001, a decrease of 29% over revenue of $311,000 for the quarter ended June
30, 2000. Product and service revenue decreased 11% to $341,000 for the six
months ended June 30, 2001 from revenue of $385,000 for the six months ended
June 30, 2000. The decrease in revenue is mainly attributable to a reduction
in the volume of work performed for CTV in

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fiscal 2001. CTVNews.com went live in September 2000, meaning that Blue Zone
performed preliminary work in quarter two of 2000 in anticipation of the CTV
launch. The reduction in revenue from CTV in the second quarter of 2001 was
partially offset by revenue generated from developing a MediaBZ wireless
application prototype for trial by Bell Mobility. CTV accounted for
approximately 42% of the revenue for the second quarter of fiscal 2001 and 56%
of revenue for the 2001 year-to-date, compared to 90% and 84% respectively for
the same periods in 2000.

Cost of Revenue

The principal components of cost of revenue include labor and materials
incurred in the delivery of software and services. Cost of revenue decreased
by 95% to $15,000 in the quarter ended June 30, 2001 from $279,000 for the same
period in 2000, and decreased by 89% to $40,000 in the six months ended June
30, 2001 from $352,000 for the same period in 2000. This decrease is mainly as
a result of the different nature of the work performed during the periods. In
2001, most of the revenue was derived from support and maintenance and
demonstration projects, which are high margin activities, compared to
consulting and implementation work in 2000, which are lower margin tasks. The
gross profit percentage improved to 93% in the second quarter of 2001 from 10%
in the second quarter of 2000 and increased to 88% during fiscal 2001 from 9%
in the 2000 year-to-date because of this change.

We expect our gross profit to fluctuate based on our product mix, geographic
mix, product and patent licenses, and the uncertain costs associated with
hiring competent technical, creative and management personnel. There are no
assurances that Blue Zone will be able to maintain gross margins in future
periods.

General and Administrative Expenses

General and administrative expenses for the quarter ended June 30, 2001 were
$445,000, a decrease of $485,000 compared to the quarter ended June 30, 2000
expenses of $930,000. General and administrative expenses for the six months
ended June 30, 2001 were $954,000, a decrease of $666,000 compared to expenses
of $1,620,000 for the six months ended June 30, 2000. The lower level of
general and administrative expenses is directly attributable to efforts to
control operating costs, such as travel and entertainment, professional fees,
and general office expenses, as well as the elimination of administrative
positions in the second quarter of 2001. This focus resulted in
proportionately more costs being allocated to selling and marketing costs
rather than general and administrative expenses. In addition, the operational
restructuring effected in the second quarter of 2001 resulted in reduced
payroll and other costs. The significant components of general and
administrative costs are discussed below.

Labor costs comprised approximately
13% of general and administrative expenses during the quarter ended June 30,
2001, or $59,000. This is a decrease of $252,000 over the 2000 quarter two
labor component of $311,000. Labor costs comprised approximately 25% of
general and administrative expenses during the six- month period ended June 30,
2001, or $238,000. This is a decrease of $287,000 compared to the labor
component of

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$525,000 for the six months ended June 30, 2000. The decrease can be
explained by the lower average headcount in 2001; Blue Zone employed an
average of 36 employees during the six months ended June 30, 2001 compared to
an average of 41 employees during the six months ended June 30, 2000.

Blue Zone incurred termination costs of $77,000 in the second quarter of 2001
in connection with the operational restructuring that took place in April 2001.
These costs relate to severance and other costs associated with positions that
were eliminated in the restructuring. No such costs were incurred in 2000.

Accounting, legal, and investor relations fees were $62,000 for the quarter
ended June 30, 2001, and $196,000 for the six months ended June 30, 2001.
These amounts represent a decrease of 72% and 62% respectively over expenses of
$223,000 and $518,000 respectively for the same periods in 2000. The majority
of this decrease is attributable to lower legal fees, which decreased by 67% in
2001 as a result of several factors, including high legal costs incurred in the
first half of fiscal 2000 associated with filing the Companys Form 10 and
costs associated with preparing for the Companys Nasdaq listing in July 2000,
together with a greater effort to control legal costs in 2001. Investor
relations fees decreased 71% during 2001 because of much lower level of
external investor relations activities. Blue Zone conducted an investor road
show in 2000, but not in 2001. Blue Zone cancelled the external investor
relations contract in March 2001 in order to reduce costs.

Travel and entertainment costs charged to general and administrative expenses decreased
91% to $11,000 for the quarter ended June 30, 2001, compared to $124,000 for
the same period last year. These costs decreased 67% to $82,000 for the six
months ended June 30, 2001, compared to $246,000 for the same period last year.
During the six months ended June 30, 2000, travel costs were incurred in
connection with the CTV contract and for presentations to the investment
community and corporate financing activities. The travel costs incurred in
2001 were mainly for general corporate purposes, as well as some travel in
connection with CTV. Travel costs also decreased as a result of greater
efforts to control discretionary spending in 2001 and fewer people traveling.

Facilities costs, which include rent, utilities, and operating costs, were
$55,000 for the second quarter of fiscal 2001, an increase of $8,000 over the
prior year. Facilities costs were $106,000 for the first two quarters of
fiscal 2001, an increase of $19,000 over the same period in the prior year.
Blue Zone had additional space in Vancouver and an apartment in Toronto during
the six- month period ended June 30, 2001 compared to the same period in fiscal
2000.

Public company expenses increased to $52,000 in the second quarter of
2001 and to $62,000 for the six months ended June 30, 2001. These amounts
represent increases of 478% and 226% respectively over expenses of $9,000 and
$19,000 respectively for the same periods in 2000. Public company costs include primarily Nasdaq listing fees. The increase is attributable to the
fact that the Companys common stock began trading on the Nasdaq market in July
2000. Before that date, the public company costs were minimal because there
are no listing fees for being quoted on the over-the-counter system.

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General office expenses decreased to $35,000 during the quarter ended June 30,
2001 from $104,000 in the prior year. General office expenses decreased to
$63,000 during the six months ended June 30, 2001 from $170,000 in the same
period in the prior year. The decrease from fiscal 2000 can be attributed
mainly to lower printing costs and lower association dues in fiscal 2001.
Printing costs were incurred in 2000 for the printing of corporate brochures.
In addition, costs were incurred late in the second quarter of fiscal 2000 to
outfit new office space in Vancouver.

Network, internet and telecommunications costs for the second quarter
decreased to $37,000 in 2001 from $65,000 in 2000, and for the six months
ended June 30 decreased to $70,000 in 2001 from $133,000 in same period in
the prior year. The decrease can be explained by costs incurred in the first
half of 2000 to install the Companys communications line, together with
overall lower phone charges in 2001.

Research and Development

Based on the development and anticipated success of the MediaBZ suite of
software products and contingent upon our ability to raise additional funds,
Blue Zone expects to invest funds to improve the existing MediaBZ products by
providing features and options requested by existing and prospective clients.

Research and development costs decreased to $178,000 in the second quarter of
fiscal 2001 from $184,000 for the same period in the prior year. Research
and development costs increased to $374,000 in the first half of fiscal 2001
from $278,000 for the same period in the prior year. The changes from the
prior year can be explained by the different labor mix utilized for research
and development activities in 2001 compared to 2000. Labor is the main
component of research and development costs, and the headcount involved in
research and development activities decreased during the second quarter of
2001 compared to the same period in the prior year.

Blue Zone cannot provide any assurance that expenditures in research and
development will ensure our success or lead to innovations that are not
available to our competition.

Selling and Marketing

Selling and marketing costs increased to $151,000 for the quarter ended June
30, 2001 from $26,000 for the same period in the prior year, and increased to
$297,000 for the six months ended June 30, 2001 from $106,000 for the same
period in 2000. These changes represent increases of 481% and 180%
respectively. The increase in sales and marketing costs is directly tied to
the execution of Blue Zones business plan, as discussed above. As the
Company continues to evolve into a product and solutions focused operation,
more of Blue Zones President and Chief Executive Officers time and other
resources are focused on selling and marketing activities. In addition, Blue
Zone had employees working full time on selling and marketing activities in
2001, and not in 2000.

The Companys sales and marketing activities during the first two quarters of
fiscal 2001 were focused on securing new customers throughout North America.
The Company incurred higher costs in the areas of salaries and wages, travel,
advertising and promotions, and other related costs in 2001.

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Selling and marketing costs will likely increase in the future as the Company
attempts to expand business in North America and throughout the world. There
can be no assurances that these expenditures will result in secure, long-term
customers or reliable revenue sources.

Depreciation

Depreciation is provided on the declining balance basis using a 30% rate for
all capital asset categories, except for leasehold improvements, which are
amortized on a straight-line basis over five years, representing the term of
the leases to which the improvements relate. Depreciation expense for the
quarter ended and six months ended June 30, 2001 increased to $57,000 and
$118,000 respectively from $49,000 and $91,000 respectively for the same
periods in the prior year, reflecting higher fixed asset balances in fiscal
2001 compared to fiscal 2000.

Income Taxes

No income taxes were payable in the first or second quarter of fiscal 2001 or
2000, as a result of the operating loss recorded during those periods. Based
on a number of factors, including the lack of a history of profits, management
believes that there is sufficient uncertainty regarding the realization of
deferred tax assets, and, accordingly, has not booked an income tax benefit at
June 30, 2001 or 2000. The loss incurred in the current year can be carried
forward for seven years for Canadian income tax purposes.

Interest Income

The Company recorded interest income of $6,000 in the second quarter and
$36,000 in the first half of fiscal 2001, relating to interest earned on
short-term investments (see Liquidity and Capital Resources section below).
This is a decrease of $77,000 and $95,000 over the same periods in 2000,
reflecting lower average short-term investment balances in fiscal 2001.

Other Comprehensive Income

Blue Zone recorded other comprehensive loss of $45,000 during the half- year
ended June 30, 2001, compared to a loss of $72,000 during the same period in
2000, resulting in accumulated other comprehensive loss of $245,000 at June 30,
2001, compared to $200,000 at December 31, 2000. Other comprehensive loss
relates entirely to the effect of the foreign currency translation adjustment
arising from the translation of the Companys subsidiary financial statements
from Canadian dollars into US dollars upon consolidation. The loss increased
as a result of the devaluation of the Canadian dollar against the United States
dollar during the first half of 2001. The US dollar exchange rate changed from
$1.4995 at December 31, 2000 to $1.5140 at June 30, 2001.

Liquidity and Capital Resources

The Company does not currently have an adequate source of reliable, long-term
revenue to fund operations. As a result, Blue Zone is reliant on outside
sources of capital funding. There can be no assurances that the Company will
in the future achieve a consistent and reliable revenue stream adequate to
support continued operations. In addition, there are no assurances that the
Company will be able to secure adequate sources of new capital

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funding, whether it be in the form of share capital, debt, or other financing
sources. The Company currently has two customers that accounted for
approximately 89% of the revenue recorded during the six months ended June 30,
2001.

Blue Zone had cash and cash equivalents of $304,000 and working capital
of $411,000 at June 30, 2001. This compares to cash and cash equivalents of
$1,845,000 and working capital of $1,694,000 at December 31, 2000. The Company
continued to incur costs but did not secure adequate new revenue to cover the
costs, and this contributed to an erosion of working capital during the quarter ended June 30, 2001. Surplus cash is
invested in high grade corporate securities and guaranteed investment
certificates with terms to maturity at the date of purchase of less than
three months.

During the six months ended June 30, 2001, Blue Zone used
cash of $1,526,000 in operating activities compared to using $2,069,000 in
the same period in the prior year. The reduction in cash used for
operations in 2001 demonstrates the effect of the Companys efforts to
reduce operating costs in 2001.

Blue Zone invested $10,000 in fixed assets for the six months ended June 30,
2001, compared to $511,000 in the same period in 2000. The higher expenditures
in 2000 reflect the Companys focus on installing the infrastructure to support
growth of the business. Such expenditures were not required in 2001

Subsequent to quarter end, the Company issued secured convertible debentures of $300,000.
The funds will be used to fund working capital requirements. The debentures
are convertible into common stock of the Company at a conversion rate of $0.135
per share, the prevailing market price of the Companys common stock on the
date of issuance of the debentures. The debentures bear interest at a rate of
8.25% per year and are due in April 2003. The Company has an additional
$700,000 available under its $1 million debenture facility.

Our future capital requirements will depend on a number of factors, including costs associated
with product development efforts, the success of the commercial introduction of
our products and the possible acquisition of complementary businesses, products
and technologies. When additional capital is required, we may sell additional
equity, debt or convertible securities or establish credit facilities. There
can be no assurances that additional capital will be available when we need it
on terms that we consider acceptable.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 2001, Blue Zone had not entered into or acquired financial
instruments that have material market risk. The Company has no financial
instruments for trading purposes, or derivative or other financial instruments
with off balance sheet risk. All financial assets and liabilities are due
within the next twelve months and are classified as current assets or
liabilities in the consolidated balance sheet included in this report. The
fair value of all financial instruments at June 30, 2001 is not materially
different from their carrying value.

Blue Zone regularly invests funds in excess of immediate needs in guaranteed
investment certificates issued by major Canadian banks or high grade corporate
debt securities. The fair value of these instruments, which generally have a
term to maturity at the date of purchase of 90 days or less, does not differ
significantly from their face value.

To June 30, 2001, substantially all revenues and the majority of cash costs have been realized or incurred in
Canadian dollars. To date, Blue Zone has not entered into foreign currency
contracts to hedge against foreign currency risks between the Canadian dollar
or other foreign currencies and our reporting currency, the United States
dollar. Generally, however, The Company attempts to manage our risk of
exchange rate fluctuations by maintaining sufficient net assets in Canadian
dollars to retire our liabilities as they come due.

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PART II

ITEM 1. LEGAL PROCEEDINGS

The Company is not a party to any litigation.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

None.

(b)  REPORTS ON FORM 8-K

None.

Page 18



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SIGNATURES

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

|                         |  |                        
|------------------------ |  | -----------------------
|                         |  | BLUE ZONE, INC         
|                        
|By:                      |  | /s/ Bruce Warren       
|                         |  |                        
|                         |  | Bruce Warren           
|                         |  | Chief Executive Officer
|                        
|Date:    August
13, 2001

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Blue Zone
and in the capacities and on the dates indicated:

|          |  |                                               |  |                                                                                  |  |                
|--------- |  | --------------------------------------------- |  | -------------------------------------------------------------------------------- |  | ---------------
|Signature |  | Title                                         |  | Date                                                                            
|By:       |  | /s/ Bruce Warren
Bruce Warren                 |  | President and Chief
Executive Officer
and Director (Principal
Executive Officer) |  | August 13, 2001
|         
|         
|         
|         
|By:       |  | /s/ Jamie Ollivier
Jamie Ollivier             |  | Executive Creative
Director and Director                                         |  | August 13, 2001
|         
|         
|         
|         
|By:       |  | /s/ F. Michael P. Warren
F. Michael P. Warren |  | Chairman and Director                                                            |  | August 13, 2001
|         
|         
|         
|         
|By:       |  | /s/ Tryon Williams
Tryon Williams             |  | Director                                                                         |  | August 13, 2001
|         
|         
|         
|         
|By:       |  | /s/ Jay Shecter
Jay Shecter                   |  | Director                                                                         |  | August 13, 2001
|         
|         
|         
|         
|By:       |  | /s/ Dave Thomas
Dave Thomas                   |  | Director                                                                         |  | August 13, 2001
|         
|         
|         
|         
|By:       |  | /s/ Jeremy Black
Jeremy Black                 |  | Chief Financial Officer
(Principal Financial
and Principal
Accounting Officer)   |  | August 13, 2001

Page 19