FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

                  For the quarterly period ended March 31, 1998

                                       OR

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

                        Commission File Number 2-93277-D

                          MEDIZONE INTERNATIONAL, INC.
             (Exact name of registrant as.specified in its charter)

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


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

                                 (415) 868-0300
              (Registrant's telephone number, including area code)

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

At May 11, 1998, there were outstanding  144,323,804  shares of the registrant's
common stock.

                               Page 1 of 38 Pages

<PAGE>

                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES

                                    FORM 10-Q

                                      INDEX

                                 March 31, 1998

                                                                     Page
                                                                    Number

                           PART I - FINANCIAL INFORMATION

Item 1. -   Financial Statements                                     

            Unaudited Interim Consolidated Balance Sheets             3-4

            Unaudited Interim Consolidated Statements of Operations    5

            Unaudited Interim Consolidated Statements of Changes in
              Stockholders' Equity                                    6-13

            Unaudited Interim Consolidated Statements of Cash Flow   14-15

            Notes to Unaudited Interim Consolidated Financial
              Statements                                             16-33

Item 2. -   Management's Discussion and Analysis of Financial
              Condition and Results of Operations                    34-36


                        PART II - OTHER INFORMATION

Item 6. -   Exhibits and Reports on Form 8-K                           37

Signatures                                                             37




                               Page 2 of 38 Pages

<PAGE>

                PART I - FINANCIAL INFORMATION


Item 1. - Financial Statements

        MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                 (A Development Stage Company)
             Interim Consolidated Balance Sheets
                          (unaudited)

                            ASSETS

                                                      March 31,     December 31,
                                                       1998              1997
                                                      ---------     ------------
CURRENT ASSETS
  Cash and cash equivalents                           $30,339       $138,173
  Prepaid expenses and advances                         1,960          9,154
                                                       ------       --------

               Total Current Assets                    32,299        147,327
                                                      -------       --------

                  FIXED ASSETS
  Office equipment                                      2,301          2,301
  Furniture and fixtures                                6,307          6,307
                                                      -------       --------
                                                        8,608          8,608
  Less accumulated depreciation                          (993)          (340)
                                                      -------       --------

                                                        7,615          8,268
                                                      -------       --------

OTHER ASSETS
  Investment in affiliate (Note 1)                       -                -
  Receivable from affiliate (Note 1)                   48,947         48,947
  License agreement (Note 5)                             -                -
  Organization costs (net of accumulated
               amortization of $5,520 and $5,520,
               respectively)                             -                -
  Deposits (Note 6)                                     2,477          2,477
                                                      -------       --------

                                                      $91,338       $207,019
                                                      =======       ========


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


                               Page 3 of 38 Pages

<PAGE>
                PART I - FINANCIAL INFORMATION

Item 1. - Financial Statements

        MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                 (A Development Stage Company)
             Interim Consolidated Balance Sheets
                          (unaudited)

           LIABILITIES AND STOCKHOLDERS' DEFICIENCY

                                                   March 31,        December 31,
                                                     1998               1997
                                                  -----------       ------------

                  CURRENT LIABILITIES
  Accounts payable                                 $  510,418        $  517,011
  Accrued liabilities                                 219,904           222,060
  Notes payable (Note 10)                             314,115           354,115
                                                   ----------        ----------

    Total Current Liabilities                       1,044,437         1,093,186
                                                   ----------        ----------

COMMITMENTS AND CONTINGENCIES                               -                 -
  (Notes 2, 3, 6 and 13)

REDEEMABLE COMMON STOCK (Note 13)                           -                 -

MINORITY INTEREST (Note 9)                                  -                 -

STOCKHOLDERS' DEFICIENCY
    (Notes 1, 2, 3, 7, 8, 9 and 11)
  Common stock, authorized 250,000,000 shares;
    par value $.001 per share; issued
    and outstanding 144,323,804 and 136,887,629
    shares for 1998 and 1997, respectively            144,324           136,888
  Common stock subscribed                                   -             5,714
  Additional paid-in capital                       12,290,425        12,188,909
  Accrued stock option compensation                         -                 -
  Deficit accumulated during development stage    (13,387,848)       (13,27,678)
                                                   ----------         ---------

    Total Stockholders' Deficiency                   (953,099)         (886,167)
                                                      -------           -------

                                                      $91,338          $207,019
                                                      =======          ========




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


                               Page 4 of 38 Pages

<PAGE>

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

<TABLE>
<CAPTION>

                                                                              From the Date
                                                                               of Inception
                                                                             (Jan. 31, 1986)
                                              For the Three Months               through
                                                Ended March 31,               March 31, 1998
                                            1998               1997  

SALES                                       $   -0-           $  -0-            $   133,349
                                            -------           ------             ----------
<S>                                           <C>                <C>                  <C>    

                 COSTS AND EXPENSES:
  Costs of sales                                -0-              -0-                103,790
  Research and development
    expenses                                  8,050              -0-              2,327,685
  General and administrative
    expenses                                155,693           194,579             9,873,414
  Compensation under
    stock options (Note 8)                      -0-              -0-                872,894
  Interest expense                            6,831             7,080              7 80,497
  Other (income) and expense, net              (404)          201,659               (19,764)
                                            -------           -------             ----------

    Total Costs and Expenses                170,170           201,659             3,938,516
                                            -------           -------             ----------

Net loss before extraordinary
  gain or minority interest                 (170,170)        (201,659)          (13,805,167)
Extraordinary gain on sale of
  investment in subsidiary (Note 1)                -                 -              100,000
                                                                                 -----------
Net loss before minority interest                  -                 -          (13,705,167)
Minority interest in loss                          -                 -               26,091
Prior period adjustment (Note 11)                  -                 -              291,228
                                            ---------         ---------          -----------

Net loss                                    $(170,170)        $(201,659)       $(13,387,848)
                                            ==========        ==========       ============

  Weighted average number of
  shares outstanding                       138,126,991       130,051,613         85,832,594
                                           ===========       ===========        ===========

Loss per share                                   $0.00             $0.00            $(0.16)
                                                 =====             =====            =======
 

</TABLE>



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


                               Page 5 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
       Interim Consolidated Statements of Changes in Stockholders' Equity
                  From the Date of Inception (January 31, 1986)
                       through March 31, 1998 (unaudited)
                                                                               
<TABLE>
<CAPTION>
                                                                                                                     Deficit
                                                                                                                   Accumulated
                                                                  Additional                 Accrued                  During
                                             Common Stock           Paid-in                Stock Option            Development      
                                     Shares          Amount         Capital                Compensation               Stage
                                    --------       ---------      ------------            ---------------        ---------------    
<S>                                     <C>           <C>             <C>                      <C>                      <C>    
MEDIZONE - DELAWARE
--------------------
Initial capitalization
   of Medizone Delaware
   (no par value) Feb.
   1986 ($10.21 per
   share)                            882               $9,001     
  Shares of Medizone
    (Delaware [no par
    value] issued for
    cash, March 1986
    ($22.58 per share)               50                 1,129
                                     --                 -----

                                     932              $10,130
                                     ===              =======
MEDIZONE - NEVADA 
 (formerly Madison Funding, Inc.)
  Existing shares of
  Medizone Nevada
  (formerly Madison
  Funding, Inc.) (par
  value $.001 per
  share)                        5,500,000             $5,500      $139,998                                           $(310)
  Exchange of 932 shares
  of Medizone Delaware
  for shares of
  Medizone Nevada
  resulting in a
  reverse merger,
  March 1986                   37,500,000             10,130

  Reallocation of paid-
  in capital to par
  value due to
  recapitalization as
  a result of reverse
  merger                                              27,370       (27,370)
                                     --               ------       -------
  Balance after reverse
  merger, March 1986
  (par value $.001 per
  share)                        43,000,000            43,000       112,628                                            (310)
  Shares issued for
  services, July 1986
  ($.10 per share)                  50,000                50         4,950
  Shares issued for
  warrants, Aug.
  through Oct. 1986
  ($.10 per share)               7,814,600             7,815       773,645
  Stock issuance cost in
  connection with
  shares issued for
  warrants                                                        (105,312)
  Adjustment to accrued
  stock option
  compensation                                                                             $223,521
  Net/(loss) for the
  year ended December
  31, 1986                                                                                                           (795,758)
                                     ----------       -------     ---------                --------                  --------
Balance, December 31
  1986                               50,864,600       $50,865     $785,911                 $223,521                 $(796,068)

                   The accompanying notes are an integral part
                   of these consolidated financial statements.
</TABLE>
                               Page 6 of 38 Pages 
<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
       Interim Consolidated Statements of Changes in Stockholders' Equity
                  From the Date of Inception (January 31, 1986)
                       through March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
                                                                                                                  Deficit
                                                                                                                Accumulated
                                                                 Additional                 Accrued                During
                                       Common Stock               Paid-in                Stock Option            Development        
                                  Shares           Amount         Capital                Compensation               Stage
                                 --------        ---------      ------------            ---------------        ---------------      
<S>                                  <C>           <C>             <C>                      <C>                      <C>    
  Balance, December 31,
  1986                            50,864,600       $50,865        $785,911                $  223,521             $  (796,068)

Shares issued for
  warrants, Jan. 1987
  ($.10 per share)                2,600             2              257
Shares issued for
  patent, March 1987
  ($.69275 per share)             1,000,000        1,000           692,750
Shares issued for
  cash, June 1987
  (from $.10 to $.25
  per share)                      950,000          950             149,050
Shares issued for
  services, June and
  July 1987 (from $.10
  to $.25 per share)              203,167          203             24,314
Stock option
  compensation expense
  relating to option
  exercised in August
  1987                                                                                      388,551
Option exercised,
  August 1987 ($.001
  per share)                      250,000          250             437,250                 (437,250)
Adjustment to accrued
  stock option
  compensation                                                                              510,527
Net/(loss) for the
  year ended December
  31, 1987                                                                                                            (2,749,400)
                                  --               --              --                       --                        ----------

Balance, December 31,
  1987                            53,270,367       53,270          2,089,532                685,349                   (3,545,468)

Options exercised,
  Jan. 1988 ($.001 per
  share)                          200,000          200             99,800                   (99,800)
Shares issued for
  cash, Sept. 1988
  ($.0833 per share)              1,000,000        1,000           79,000
Shares issued for
  services (from $.10
  to $.25 per share)              35,000           35              7,965
Adjustment to accrued
  stock option
  compensation                                                                              (584,599)
Issuance of shares by
  subsidiaries                                                     174,126
Net/(loss) for the
  year ended December
  31, 1988                                                                                                               (714,347)
                                  ----------       -------         ---------               ----------                  ----------
  Balance, December 31,
  1988                            54,505,367       $54,505         $2,450,423               $     950                 $(4,259,815)
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                               Page 7 of 38 Pages
<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
       Interim Consolidated Statements of Changes in Stockholders' Equity
                  From the Date of Inception (January 31, 1986)
                       through March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                                                             Accumulated
                                                                 Additional            Accrued                  During
                                       Common Stock               Paid-in            Stock Option            Development            
                                  Shares           Amount         Capital            Compensation               Stage
                                 --------        ---------      ------------        ---------------        ---------------          
<S>                              <C>                <C>             <C>                <C>                         <C>   

Balance, December 31,
  1988                           54,505,367      $54,505        $2,450,423               $950              $ (4,259,815)

Shares issued for
  services (from $.10
  to $.19 per share)             261,889         262            46,363
Shares issued for cash
  (from $.03 to $.10
  per share)                     5,790,000       5,790          285,710
Shares issued for
  notes and accrued
  liabilities (from
  $.06 to $.24 per
  share)                         4,749,532       4,750          578,978
Options exercised
  ($.001 per share)              375,000         375            59,125                   (59,125)
Adjustment to accrued
  stock option
  compensation                                                                           58,175
Net/(loss) for the
  year ended December
  31, 1989                                                                                                   (862,051)
                                 ----------      ------         ---------            ----------             ----------

Balance, December 31,
  1989                           65,681,788      65,682         3,420,599                   -0-             (5,121,866)

Shares issued for
  services ($.10 per
  share)                         880,000         880            87,120
Shares issued for cash
  (from $.03 to $.05
  per share)                     4,250,000       4,250          175,250
Shares issued for
  notes and accrued
  liabilities (from
  $.055 to $.10 per
  share)                         2,422,727       2,423          137,577
Adjustment to accrued
  stock option
  compensation                                                                           6,000
Issuance of shares by
  subsidiaries                                                  100,000
Net/(loss) for the
  year ended December
  31, 1990                                                                                                         (606,309)
                                 --              --             --                       --                        ---------
Balance, December 31,
  1990                           73,234,515      $73,235        $3,920,546               $6,000                 $(5,728,175)
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                               Page 8 of 38 Pages
<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
       Interim Consolidated Statements of Changes in Stockholders' Equity
                  From the Date of Inception (January 31, 1986)
                       through March 31, 1998 (unaudited)       
<TABLE>
<CAPTION>
                                                                                                               Deficit
                                                                                                             Accumulated
                                                                 Additional            Accrued                  During
                                       Common Stock               Paid-in            Stock Option            Development            
                              Shares             Amount           Capital            Compensation               Stage
                             --------          ---------       ------------        ---------------        ---------------           
<S>                              <C>                <C>             <C>                <C>                         <C>   
Balance, December 31,
  1990                      73,234,515           $73,235        $3,920,546           $6,000                $(5,728,175)

Shares issued for
  services (from $.15
  to $.20 per share)         425,000              425            72,075
Shares issued for cash
  (from $.036 to $.20
  per share)                 4,366,667            4,366          305,634
Adjustment to accrued
  stock option
  compensation                                                                        324,800
Options exercised
  (from $.22 to $.93
  per share)                 450,000              450            204,050              (204,050)
Sale of subsidiary's
  stock                                                          5,000
Net/(loss) for the
  year ended December
  31, 1991                                                                                                  (1,220,152)
                             --                   --             --                   --                    ----------

Balance,
December 31, 1991            78,476,182           78,476         4,507,305            126,750               (6,948,327)

Shares issued for
  services ($.20 per
  share)                     151,500              152            30,148
Shares issued for
  accrued liabilities
  ($.15 per share)           250,000              250            37,250
Shares issued for cash
  ($.15 to $.20 per
  share)                     2,702,335            2,702          427,648
Shares issued in
  settlement of
  advances from and
  amounts due to
  stockholder ($.10
  per share)                 13,118,619           13,119         800,248
Options exercised
  ($.50 per share)           250,000              250            124,750              (124,750)
Adjustment to accrued
  stock option
  compensation                                                                        (2,000)
Sale of subsidiary's
  stock                                                          81,100
Net/(loss) for the
  year ended
  December 31, 1992                                                                                         (649,941)
                             --                   --             --                   --                    --------

Balance,
December 31, 1992            94,948,636           $94,949        $6,008,449                      -          $(7,598,268)
</TABLE>
                  The accompanying notes are an integral part
                   of these consolidated financial statements.

                               Page 9 of 38 Pages
<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
       Interim Consolidated Statements of Changes in Stockholders' Equity
                  From the Date of Inception (January 31, 1986)
                       through March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
                                                                                                                        Deficit
                                                                                                                      Accumulated
                                                                                  Additional       Accrued               During
                                        Common Stock                               Paid-in       Stock Option         Development   
                                 Shares             Amount       Subscribed        Capital       Compensation            Stage
                                --------          ---------     ------------   ---------------   ---------------    --------------- 
<S>                              <C>                <C>             <C>                <C>             <C>   
Balance,
December 31, 1992               94,948,636         $94,949                        $6,008,449               -        $ (7,598,268)

Cancelled shares
  previously issued in settle-
  ment of advances from and
  amounts due to stockholder
  ($.062  per share)          (13,118,619)       (13,119)                         (800,248)
Shares issued for
  services from $.10
  to $.46 per share)            5,347,219          5,347                             542,859
Shares issued for
  cash (from $.15 to
  $.20 per share)               1,471,666          1,472                             269,528
Shares subscribed                                                     $2,619         259,296
Net/(loss) for the
  year ended
December 31, 1993                                                                                                      (1,598,342)
                                ----------         ------              -----       ---------              --           ----------
Balance,
December 31, 1993               88,648,902         88,649              2,619       6,279,884                           (9,196,610)

Shares issued for
  services ($.10 per
  share)                        1,431,590          1,431                             141,727
Shares subscribed
  ($.10 per share)                                                      9,552        945,682
Shares subscribed
  for cancellation of
  indebtedness ($.10
  per share)                                                            417          41,234
Shares subscribed
  for cancellation of
  indebtedness to
  former management
  ($.18 per share)                                                      11,250     2,022,379
Issuance of
  subscribed stock              10,384,900         $10,385             $(10,385)
Issuance of shares 
  to certain prior purchasers 
  of common stock in recognition
  of disparity in purchase 
  price in contemporaneous
  offering                      1,125,834          1,126                            $(1,126)
Prior period
  adjustment                                                                                                           $  219,422
Net loss for the
  year ended
December 31, 1994                                                                                                      (1,126,315)
                                    --                 --                   --           --              --            ----------
Balance,
December 31, 1994               101,591,226         101,591              13,453     9,429,780                -        (10,103,503)
Redeemable shares
  converted to common
  stock                             200,000             200                            39,800
Shares issued for
  services ($.10 per
  share)                          2,050,000           2,050                           202,950
Issuance of
  subscribed stock               17,524,860          17,524             (17,524)
Cancelled shares
  previously issued
  to former
  management                    (1,242,727)          (1,242)                          (70,563)
 
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.
                              Page 10 of 38 Pages
<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
       Interim Consolidated Statements of Changes in Stockholders' Equity
                  From the Date of Inception (January 31, 1986)
                       through March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
                                                                                                                        Deficit
                                                                                                                      Accumulated
                                                                                  Additional       Accrued               During
                                      Common Stock                                 Paid-in       Stock Option         Development   
                              Shares              Amount       Subscribed        Capital       Compensation            Stage
                             --------           ---------     ------------   ---------------   ---------------    ---------------   
<S>                              <C>                <C>             <C>                <C>             <C>   
Shares subscribed
  ($.10 per share)                                                   9,118          902,707
Prior period
  adjustment                                                                                                           71,806
Sales of
  subsidiary's stock                                                                 50,000
Net/(loss) for the
  year ended
  December 31, 1995                                                                                                 (1,081,027)
                            -----------           ----------      ---------     ------------        ----------     ------------
Balance,
  December 31, 1995         120,123,359             $120,123       $  5,047      $10,554,674           --          (11,112,724)
</TABLE>


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


                               Page 11 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
       Interim Consolidated Statements of Changes in Stockholders' Equity
                  From the Date of Inception (January 31, 1986)
                       through March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
                                                                                                                        Deficit
                                                                                                                      Accumulated
                                                                               Additional         Accrued               During
                                      Common Stock                              Paid-in         Stock Option         Development    
                              Shares              Amount       Subscribed        Capital        Compensation            Stage
                             --------           ---------     ------------   ---------------   ---------------    ---------------   
<S>                              <C>                <C>             <C>                <C>             <C>   

Shares issued for
cash ($.10 per
share)                          100,000              100              -             9,900               -                      -

Shares issued for
  services ($.10 per
  share)                        1,415,875            1,416            -           140,171                -                     -
Issuance of
  subscribed stock              8,412,379            8,413       (8,413)              -                  -                     -
Shares subscribed
  ($.10 per share)              -                    -            6,456           718,991                -                     -
Net (loss) for the
  year ended December           -                    -                -               -                  -                     -
  31, 1996                                                                                                             (1,329,395)
                                --                   --                   --          --                 --            ----------

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

Issuance of
  subscribed stock              3,089,680            3,090         (3,090)             -                  -                     -
Shares subscribed
  ($.07 per share)                       -               -          5,714         394,287                 -                     -
Shares issued for
  services ($.10 per
  share)                        3,746,336            3,746             -          370,886                 -                     -
Net (loss) for the
  year ended                           -                 -             -               -                  -              (775,559)
  December 31, 1997
Balance,
  December 31, 1997             136,887,629          $136,888      $5,714     $12,188,909             $ -0-          $(13,217,678)
                                ===========          ========      ======      ===========             =====        =============

</TABLE>
                  The accompanying notes are an integral part
                   of these consolidated financial statements.

                               Page 12 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
       Interim Consolidated Statements of Changes in Stockholders' Equity
                  From the Date of Inception (January 31, 1986)
                       through March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
                                                                                                                       Deficit
                                                                                                                     Accumulated
                                                                               Additional         Accrued               During
                                      Common Stock                              Paid-in         Stock Option         Development
                              Shares              Amount       Subscribed        Capital        Compensation            Stage
                             --------           ---------     ------------   ---------------   ---------------    ---------------   
<S>                            <C>                 <C>            <C>             <C>               <C>                  <C>
Issuance of
  subscribed stock          5,714,286             $5,714         $(5,714)
Shares issued for
  cash ($.07 per
  share)                    857,143                 857                            $59,143
Shares issued for
  notes and accrued
  interest ($.05 per
  share)                    864,746                 865                             42,373
Net (loss) for the
  quarter ended
  March 31, 1998                                                                                                   ($170,170)
                            ----------          --------         ---------       -----------    --------------  -------------
Balance
  March 31, 1998            144,323,804         $144,324           $-0-          $12,290,425          $-0-      $(13,387,848)
                            ===========         ========           ====          ===========          ====      ============
</TABLE>


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


                               Page 13 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                  From the Date
                                                                  of Inception
                                   For the Three Months Ended   (Jan. 31, 1986)
                                           March 31,               through
                                   1998                1997     March 31, 1998
                                   ----                ----     --------------
OPERATING ACTIVITIES

  Net loss                        $(170,170)       $(201,659)     $(13,387,848)
                                           -                -                 -
 Prior period adjustment
  Adjustments to reconcile
  net loss to cash used in
  operating activities:
  Issuance of stock for
  accrued interest
  Issuance of stock for                3,238                -             3,238
  services
  Stock subscription for                   -                -         1,687,525
  services
  Compensation- stock options              -                -            13,380
  Write-off of license                     -                -           924,975
  agreement                                -                -
  Write-off of patent                                                         2
  Depreciation and                         -                -           693,750
  amortization
  Minority interest in loss              653              778            23,433
Changes in assets and                      -                -          (26,091)
liabilities:
  Current and other assets
  Accounts payable                     7,194            5,506          (50,907)
  Accrued liabilities                (6,593)          106,667           716,607
                                     (2,156)           72,728           276,689
                                     -------          -------           -------

Net Cash Used in Operating
Activities                         (167,834)         (15,980)       (9,125,247)
                                   ---------         --------       -----------
INVESTMENT ACTIVITIES
  Additions to organization
  costs                                    -                -           (8,904)
  Additions to fixed assets                -                -          (22,142)
  Additions to deposits                    -                -           (2,477)
Net Cash Used in Investment                -                -
  Activities                               -                -          (22,142)
                                                                        (2,477)
FINANCING ACTIVITIES
  Issuance of stock for cash          60,000                -         1,937,977
  Stock issuance cost                      -                -         (105,312)
  Exercise of warrants                     -                -           781,719
  Exercise of stock options                -                -             1,525
  Sale of stock of subsidiary              -                -           421,847
  Proceeds of long-term debt               -                -           191,657
  Proceeds of notes payable                -                -           283,665
  Payment of notes payable                 -                -         (189,150)
  Redeemable common stock                  -                -            40,000
  Increase in minority
  interest                                 -                -            14,470
  Common stock subscribed                  -                -         5,204,515
  Increase in notes and loans
  payable                              -               11,800           606,196
                                     -------           ------           -------

Cash Provided by Financing
  Activities                          60,000           11,800         9,189,109
                                      ------           ------         ---------


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

                               Page 14 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                              From the Date
                                                                              of Inception
                                          For the Three Months Ended          (Jan. 31, 1986)
                                                  March 31,                       through
                                            1998            1997              March 31, 1998
                                            ----            ----              --------------
<S>                                         <C>             <C>                    <C>    

INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                        $(107,834)      $(4,180)                  $30,339
  Cash and cash equivalents,
    beginning of period                      138,173         3,579                      -
                                          ----------      --------                  -------
  Cash and cash equivalents,
    end of period                          $  30,339       $ (601)                  $30,339
                                           =========       =======                  =======
SUPPLEMENTAL DISCLOSURE OF
  CASH FLOW INFORMATION
  Cash paid for interest                           -             -                $  26,483
SUPPLEMENTAL SCHEDULE OF
  NONCASH ACTIVITIES
  Conversion of accrued interest
    to stock                                   3,238             -                    3,238
  Conversion of notes payable to
    stock                                     40,000             -                2,131,980
  Conversion of long-term debt to
    stock                                          -             -                  191,658
  Conversion of accrued liabilities
    to stock                                       -             -                  258,689
  Conversion of accounts payable
    to stock                                       -             -                    4,285
  Conversion of due to stockholders
    to stock                                       -             -                1,103,263
  Issuance of stock for license
    agreement                                      -             -                        2
  Issuance of stock for patent                     -             -                  693,750
  Cancellation of stock for reinstate-
    ment of due to stockholders                    -             -                  813,367
  Conversion of redeemable common stock
    to common stock                                -             -                   40,000



</TABLE>


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


                               Page 15 of 38 Pages

<PAGE>

                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.         NATURE OF THE BUSINESS

Medizone International,  Inc., a Delaware corporation  ("Medizone-Delaware") was
formed on January 31, 1986.  Medizone  International,  Inc. (the  "Company") was
organized  under the laws of the State of Nevada on August  27,  1984 as Madison
Funding, Inc. ("Madison") for the purposes of investing in, acquiring, operating
and disposing of businesses or assets of any nature. On March 26, 1986,  control
of Madison was acquired by the stockholders of Medizone-  Delaware,  and Madison
changed  its  name  to  Medizone  International,  Inc.  The  substance  of  this
transaction  was the  acquisition  of the net  monetary  assets  of  Madison  in
exchange for the equity of  Medizone-Delaware.  As a result of this transaction,
the stockholders of Medizone-Delaware acquired 87.2% of Madison.  Therefore, the
transaction was accounted for as a pooling of interests.

On November 18, 1987,  Medizone Canada Ltd. (MedCan) was incorporated  under the
laws of the Province of British  Columbia with authorized  capital of 25,000,000
common  shares  without par value.  Shortly  thereafter,  MedCan  entered into a
license agreement with the Company wherein the Company transferred to MedCan the
licenses and rights  necessary to permit MedCan to hold  Substantially  the same
rights  with  respect  to the  medical  applications  of ozone in  Canada as the
Company  does in the United  States.  As  consideration  for the  transfer,  the
Company received 3,000,000 shares of MedCan and, in addition,  purchased 1 share
for the sum of $1.00. Under a separate  agreement among the Company,  MedCan and
Australian  Gold Mines  Corporation  ("AGMC"),  (which later changed its name to
International Blue Sun Resource  Corporation),  a company incorporated under the
laws of the  Province of British  Columbia,  AGMC  purchased  130,000  shares of
MedCan for (U.S.) $100,000.  On December 23, 1988, MedCan was recapitalized in a
transaction in which the majority of its shares were exchanged for shares of KPC
Investments, a Utah corporation ("KPC"). Following this transaction, the Company
owned 25,029,921 shares of KPC,  representing 72% of the outstanding shares. KPC
then changed its named to Medizone Canada, Ltd. ("MCL").  MedCan acquired all of
the  assets of KPC,  consisting  solely of cash in the  amount of  approximately
$89,000. KPC and its subsidiary MedCan are hereinafter referred to as MCL.

Formation of Joint Venture Subsidiary

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

Pursuant to the Transaction Documents, the Company purchased one hundred percent
of MNZ from Richard G. Soloman ("Solomon"),  a New Zealand citizen, who became a
director of the Company in January,  1996 and who caused the formation of MNZ on
June 22, 1995.  Contemporaneously with this transaction,  the Company sold fifty
percent of MNZ to Solwin, a corporation owned by Solomon, for U.S. $150,000,  of
which $50,000 was thereupon  loaned by the Company to MNZ on a demand basis. The
Directors of MNZ are Solomon and Milton Adair, the Company's President and Chief
Executive Officer.

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


                               Page 16 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.         NATURE OF THE BUSINESS (continued)-

Formation of Joint Venture Subsidiary (continued)

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

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

                                                                Medizone
                                                                   New
                                         Medizone                Zealand
                                   International, Inc.           Limited
Initial license                            50%                     50%

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

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

Subsequent license fees in
excess of $750,000                         85%                     15%


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

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

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


                               Page 17 of 38 Pages

<PAGE>

                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.         NATURE OF THE BUSINESS (continued)-

Business Activities

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

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

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

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



                               Page 18 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.        CHANGES IN MANAGEMENT CONTROL AND LITIGATION AGAINST FORMER
          MANAGEMENT

Changes in Control

In November 1992,  four directors  resigned from the Board of Directors.  Two of
the outgoing directors,  who were the founding shareholders of the Company, were
also the Company's  sole  officers  (former  management  or former  officers and
directors), and they resigned from these management positions as well. Three new
directors  were elected by the outgoing  directors  and three new officers  (new
management)  were then appointed on an interim basis,  to serve until the formal
election of directors and  appointment of officers at the next annual meeting of
shareholders.

On July 7, 1996,  at the  Company's  annual  meeting,  Joseph S. Latino,  George
Handel,  Kenneth Gropper,  John D. Pealer and Richard G. Solomon were elected to
the  Company's  Board of  Directors.  On July 31,  1996,  Lawrence I. Sosnow and
Howard L. Feinsand  were  appointed to the  Company's  Board of  Directors.  Mr.
Sosnow and Mr.  Feinsand  resigned as directors on October 1, 1996 and March 26,
1997,  respectively.  Richard G. Solomon  resigned as a director on February 27,
1997.

On May 14, 1997, the Company's  Board of Directors  terminated the employment of
Joseph L. Latino  ("Latino") as the Company's  President and Chairman  after the
discovery of a pattern of unaccounted for  expenditures of the Company's  funds.
The  Company  is  investigating   the  purposes,   nature  and  extent  of  such
expenditures. Dr. Latino remained a director of the Company until he resigned in
August 1997.  George  Handel  ("Handel")  was named  President  and Chairman and
served as such until May 19, 1997 when Kenneth Gropper ("Gropper") assumed these
positions.

Contemporaneously  with the above events, the Company was notified that The Sand
Dollar Solution, a California limited partnership ("Sand Dollar"), whose general
partner is Edwin G. Marshall ("Marshall"), was soliciting shareholder proxies to
vote for Marshall, Milton G. Adair ("Adair"),  Gerard V. Sunnen, M.D. ("Sunnen")
and William M. Hitt, Ph.D., M.D. ("Hitt") as directors.

On June 12, 1997, the Company's Board of Directors  appointed  Marshall,  Adair,
Sunnen and Hilt to the Company's  Board of Directors,  with Marshall being named
Chairman.  Contemporaneously  thereto,  John  Pealer  ("Pealer")  resigned  as a
director,  and Cropper  resigned as President.  George Handel  resigned from the
Board   effective  June  13,  1997.  The  Board  thereupon  made  the  following
appointments to the following positions:


           President and Chief
             Executive Officer                Milton Adair
           Chief Operating Officer            Kenneth Gropper
           Secretary                          Gerard V. Sunnen, M.D.


On November  5, 1997,  the Board  eliminated  the  position  of Chief  Operating
Officer. Gropper remains as a Director of the Company.


                               Page 19 of 38 Pages

<PAGE>


                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.         CHANGES IN MANAGEMENT CONTROL AND LITIGATION AGAINST FORMER
           MANAGEMENT (Continued)-

Litigation Against Former Management

In November 1992, a derivative  action was filed in the U.S.  District Court for
the District of New Jersey by two shareholders of the Company against two of its
former officers and directors.  The Company was named as a nominal  defendant in
the action but in January 1993, the Company  substituted  itself as a real party
plaintiff.  The Company filed an amended complaint seeking damages and equitable
remedies  and  alleging,  among  other  things,  that the  former  officers  and
directors  defrauded  the  Company,   breached  fiduciary  duties  owed  to  the
shareholders, and committed violations of federal securities laws.

In November 1993, the defendants  replied to the  counterclaims  asserted by the
Company.  The reply  contained  additional  counterclaims  seeking  monetary and
injunctive  relief under various  provisions of the federal  securities laws and
the common law. The defendants also asserted a derivative counterclaim on behalf
of the Company against  certain current and former  directors based upon alleged
breaches of a written  agreement  between the defendants and the Company's board
of directors.  Although the claims originally  asserted by the defendants in the
New York action sought only declaratory relief, the newly asserted claims sought
damages in excess of $2.0 million.

On May 18, 1994, the parties reached  agreement in principle to settle all their
litigation.  On September 27, 1994, the parties  stipulated to  discontinue  the
action pending the  finalization  of the  settlement.  On December 28, 1994, the
written settlement  agreement was signed. The settlement  agreement provides (i)
that  Messrs.  McGrath  and  Watrous  will not  challenge  the  validity  of the
Company's  Board of Directors  resolution  to rescind  approximately  13,000,000
shares of the Company's stock previously issued to Mr. McGrath and approximately
1,200,000 shares previously issued to Mr. Watrous and to reinstate the Company's
debt to Messrs.  McGrath and Watrous  that had been  retired by the  issuance of
those shares; and (ii) for the Company to acknowledge the validity of $2,033,628
of debt to Messrs.  McGrath and Watrous. In connection with the settlement,  Mr.
McGrath  assigned his portion of the above mentioned debt to Mr. Watrous,  which
was thereupon  satisfied by the Company's  issuance to Mr. Watrous of 11,250,000
shares of the Company's  common stock  restricted  under the  Securities  Act of
1933.

3.         GOING CONCERN

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

Because  ozone-generation  for the purposes of interfacing  with blood and blood
products is regarded as a new drug  delivery  system,  the Company is  precluded
from selling or distributing  Medizone (the drug) or the Medizone  Technology in
the United States until after FDA approval has been granted.  In order to obtain
FDA approval, the Company will be


                               Page 20 of 38 Pages

<PAGE>

                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.         GOING CONCERN (continued)-

required  to submit a New Drug  Application  ("NDA")  for  review by the FDA and
provide medical and scientific  evidence sufficient to demonstrate that Medizone
(the  drug)  and  the  Medizone   Technology  has  been   successfully  used  in
pre-clinical  studies  followed  by three  phases  of  well-controlled  clinical
studies using human volunteer subjects.  The FDA will not grant an NDA unless it
contains  sufficient medical evidence and data to permit a body of qualified and
experienced  scientists  to  conclude  that  the new  drug  product  is safe and
effective for its recommended and proposed medical uses.  Historically,  the FDA
has held a strong bias against treating humans with ozone, due largely to issues
of safety.

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

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

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

4.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company MCL, a
66.6%  owned   subsidiary,   and   Medizone-Delaware   (an  inactive   company).
Intercompany transactions have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with a maturity at
the time of purchase of less than three months to be cash equivalents.



                               Page 21 of 38 Pages

<PAGE>


                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)-

Fixed Assets

Fixed  assets  are  stated  at  cost.   Depreciation   is  computed   using  the
straight-line  method  over five  years for office  equipment  and ten years for
furniture  and  fixtures.  Maintenance  and  repairs  are  charged to expense as
incurred.  Upon  retirement  or sale,  the cost of the assets  disposed  and the
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is credited or charged to income.

Other Assets - Organization Costs

Organization  costs were  deferred  and  amortized  over a 60-month  period on a
straight-line basis.

Loss per Share

The  computation  of  primary  loss per  share of  common  stock is based on the
weighted average number of shares outstanding during the period.

Stock-Based Compensation

In October 1995, the Financial  Accounting  Standards Board issued  Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based  Compensation.
The Company currently accounts for its stock-based  compensation plans using the
accounting  prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock  Issued to  Employees.  Since the Company is not required to adopt the
fair value based  recognition  provisions  prescribed under SFAS No. 123, it has
elected to comply with the disclosure  requirements  set forth in the Statement,
which includes disclosing pro forma net income as if the fair value based method
of accounting had been applied. (See Note 8.)

Estimates and Assumption

Management uses estimates and assumptions in preparing  financial  statements in
accordance with generally accepted  accounting  principles.  Those estimates and
assumptions  affect  the  reported  amounts  of  assets  and  liabilities,   the
disclosure of contingent  assets and liabilities,  and the reported revenues and
expenses.  Actual  results  could vary from the  estimates  that were assumed in
preparing the financial statements.

5.         OTHER ASSETS

Patent

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





                               Page 22 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


           5.       OTHER ASSETS (continued)-

Patent (continued)

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

License Agreement

On  February 4, 1986,  Medizone,  in  exchange  for shares of its common  stock,
acquired  from a  principal  stockholder  his  interest  in a license  agreement
covering the distribution of ozone-generating  equipment.  The license agreement
was carried at $1.00 through  December 31, 1991;  as that was the  stockholder's
basis, and was written off as of December 31, 1992.

6.         COMMITMENTS AND CONTINGENCIES (See also Notes 7 and 10)

On May 14, 1997, the employment  contract of the Company's  former President and
Chief Operating  Executive Officer was terminated for cause. The Company hired a
new President and Vice President of Operations (who is not a corporate  officer)
at annual  salaries  of $200,000  and $65,000  respectively,  who  operated  the
Company's  headquarters in Salt Lake City until their resignations were accepted
effective  April 10,  1998,  in  conjunction  with the  decision to relocate the
headquarters  to  California.  The  Company  did not have a  written  employment
agreement  with its President or Vice  President of  Operations.  The employment
contract of the Company's Vice President,  Treasurer and Chief Financial Officer
for an annual salary of $72,000 plus expenses has remained unchanged.

In 1997 and 1996,  the Company had employment  contracts with two officers.  The
former President and Chief Operating  Officer was paid $180,000 annually and was
reimbursed  monthly  for  expenses  related  to a  leased  automobile.  The Vice
President,  Treasurer and Chief Financial Officer is paid $72,000 annually, plus
expenses.

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

In 1994, the Company had consulting  relations with two officers.  The President
and Chief Operating Officer was paid $72,000 annually and was reimbursed monthly
for expenses related to a leased automobile.  The Vice President,  Treasurer and
Chief Financial Officer was paid $36,000 annually.


                               Page 23 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



6.         COMMITMENTS AND CONTINGENCIES (See also Notes 7 and 10) (continued)-

From  November  17, 1992  through  December  31, 1994 the Company  maintained  a
consulting relationship with the Company's Vice President, who is also Treasurer
and Chief Financial  Officer,  whereby the Company was billed in connection with
accounting  services  provided by a private  company owned by the Company's Vice
President.

For the year ended December 31, 1996,  the Company  leased from an  unaffiliated
party, office space in New York City under a two-year lease expiring on February
28, 1998, at an annual rental of approximately  $21,000.  The Company terminated
this lease in June 1997 and paid  $4,599 to the  landlord in  settlement  of any
claim for unpaid  rent under the lease.  On  September  23,  1997,  the  Company
entered into a three-year lease with an unaffiliated  third party for its office
in Salt Lake City at an annual  rent of  approximately  $23,000.  The office was
used for  executive  offices  and  administrative  purposes  until  the  Company
re-located  its  headquarters  to  California  in April  1998.  The  Company  is
negotiating with the landlord to reduce or eliminate its future obligation under
the lease.  Future  minimum  rental  commitments  pursuant  to this lease are as
follows:

                  Year Ended
                 December 31,                       Amount
                     1998                            $17,410
                     1999                             24,144
                     2000                             18,649

                    Total                            $60,203


During 1992, a financial  consulting entity agreed to raise equity financing for
Medizone. An agreement was executed requiring the Company to tender $50,000 to a
third party whose obligation was to hold the funds in escrow pending  completion
of the  financing;  however,  these sums were not tendered at that time.  In the
event of completion of the financing,  the $50,000 would be released from escrow
to the  consultant  to defray  legal  fees of the  consultant.  In the event the
financing failed to be completed,  the funds were to be returned to the Company.
In a separate transaction during 1992, the Company sold 250,000 shares of common
stock to five investors for $50,000, and caused the proceeds to be paid directly
to the third party in the pending financing  transaction.  Medizone acknowledged
constructive receipt of the funds by executing stock purchase agreements and the
250,000  shares were  subsequently  issued in 1993.  Since the financing was not
completed  and the funds were not returned to the Company,  the $50,000 has been
expensed in the Company's financial statements.

On or about June 6, 1994,  Maureen Abato,  the Company's former outside counsel,
filed  suit in the  Supreme  Court of the State of New York,  County of New York
entitled Abato V. Medizone International, Inc., Medizone Canada, Ltd. and Joseph
S. Latino. The complaint contains thirteen causes of action. Three of the causes
of action are for breach of  contract,  account  stated and quantum  recruit for
recovery of unpaid  legal fees  allegedly  due  plaintiff  by the Company in the
amount of $67,864.  The remaining  claims are for fraud,  wrongful  termination,
sexual  discrimination,  defamation,  tortious  interference  with  contract and
intentional  infliction  of  emotional  distress.  With respect to each of these
causes of action,  plaintiff seeks unspecified compensatory damages and punitive
damages of not less than $1 million.

On October 24,  1994,  the Company  and the other  defendants  moved for partial
summary judgment dismissing all of plaintiff's claims except her legal fee claim
based on quantum  recruit.  By decision and order dated  February 14, 1995,  the
Court dismissed all of the plaintiff's  claims except for breach of contract and
for an account stated;


                               Page 24 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.         COMMITMENTS AND CONTINGENCIES (See also Notes 7 and 10) (continued)-

however, the court limited plaintiff's claim to her actual damages and dismissed
her claim for punitive damages on these counts. In addition, the court dismissed
these claims in their entirety as against Medizone Canada, Ltd. and Dr. Latino.

A Stipulation of Settlement was executed by the parties, dated October 30, 1995,
whereby the Company  agreed to pay $61,000 in full  settlement  of all remaining
claims, to be paid as follows:

         November 15,  1995$20,000  December 15, 19955,000 January 15, 19965,000
         February 15, 19965,000 March 15, 19965,000
         April 15, 1996                         5,000
         May 15, 1996                           5,000
         June 15, 1996                          5,000
         July 15, 1996                          6,000
                                                -----

         Total                               $ 61,000
                                               ======

As of the date of this report, all payments have been made in full.

On  November  10,  1995,  the  plaintiff  executed  a release  against  Medizone
International, Inc., Medizone Canada, Ltd. and Joseph S. Latino.

7.       ISSUANCE OF COMMON STOCK AND WARRANTS

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

Madison initially issued 1,500,000 shares in a private  transaction for proceeds
of $3,000.

In May 1985, Madison sold in a public offering, 4,000,000 shares of common stock
and  8,000,000  warrants  to  purchase a common  stock at $0.10 per  share.  The
proceeds from the offering to Madison were  $200,000.  The costs of the offering
were offset against paid-in capital.

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

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

During  the  period  from  August  1986  through  October  31,  1986,  the final
expiration  date for exercise,  warrants to purchase  7,814,600  shares together
with cash totaling $781,460 were received by the Company which then issued



                               Page 25 of 38 Pages

<PAGE>

                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.       ISSUANCE OF COMMON STOCK AND WARRANTS (continued)-

7,814,600  shares of new common stock.  In January  1987,  an  additional  2,600
shares were issued in exchange for warrants and cash of $259.

In March 1987, the Company issued  1,000,000  shares of common stock in exchange
for a patent (see Note 5).

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

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

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

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

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

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

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

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

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

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


                               Page 26 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.       ISSUANCE OF COMMON STOCK AND WARRANTS (continued)-

During 1992,  the following  equity  transactions  occurred:  The Company issued
2,702,335 shares to individuals in private  transactions for aggregate  proceeds
of $430,350;  the Company  issued a total of 401,500  shares of common stock for
services  and accrued  liabilities;  holders  exercised  options and acquired an
aggregate of 250,000  shares of common  stock.  Also,  during  1992,  13,118,619
restricted  shares of the Company's stock were issued pursuant to an approval by
the Company's board of directors in December 1989 to the former president, chief
executive  officer and board chairman for the settlement of $813,367 of advances
made to the Company.

During 1993,  the following  equity  transactions  occurred:  The Company issued
1,471,666 shares to individuals in private  transactions for aggregate  proceeds
of $271,000;  the Company issued a total of 5,347,219 shares of common stock for
services;  the Company canceled the 13,118,619  shares of common stock issued in
1992 to the former president,  chief executive officer and board chairman.  As a
result  of this  cancellation  of  shares,  the debt that was  removed  from the
Company books when the shares were issued,  was restored.  The restored debt was
$813,367.  Also,  during  1993,  a total of  $261,915  was  received in cash for
2,619,150  shares  subscribed  as a  result  of  a  private  placement  offering
("Offering").  The Offering commenced as of November 26, 1993, with a maximum of
$700,000 to be raised in gross proceeds from the sale of up to 7,000,000 shares.

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

Also in 1994,  $40,000 of notes  payable (a portion of loans  totaling  $60,000)
together with interest, was satisfied by issuing 416,500 shares of common stock.
(See Note 10.)

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

During 1996, the Company received stock subscription agreements for the purchase
of  7,254,470  shares of its  common  stock,  together  with  proceeds  totaling
$725,447 from sales of its securities to non-United States investors, outside of
the United States pursuant to Regulation S promulgated  under the Securities Act
of 1993 (the "Securities  Act").  Approximately  $635,447 of these proceeds were
from  the  sale of the  Company's  common  stock  at a per  share  price of $.10
(including  $37,500 for 375,000  shares from Richard G.  Solomon,  at the time a
director of the Company).  The  remaining  $90,000 were from the sale of 900,000
Units, each Unit consisting of one share of the Company's common


                               Page 27 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.       ISSUANCE OF COMMON STOCK AND WARRANTS (continued)-

stock,  $.001 par value, at a per share price of $.10 to a director  pursuant to
the non-public offering exemption from registration under the Securities Act. In
May 1996, the Company issued 600,000 shares of its common stock to employees and
250,000  shares  of its  common  stock to its  public  relations  consultant  as
additional  compensation.  The Company also issued  565,875 shares of its common
stock to various consultants for services rendered.

During 1997, the Company issued 3,089,680  previously  subscribed  shares of its
common  stock and also issued  3,746,336  shares of its common  stock to various
consultants for services rendered.  Also, in 1997, the Company received $400,000
for  subscriptions to acquire  5,714,285 shares of its common stock and warrants
to  purchase  8,428,571  shares of common  stock at $.07 per  share,  25,000,000
shares at $.20 per share, and 33,333,333 shares at $. 15 per share.

During the first  quarter  of 1998,  the  Company  issued  5,714,285  previously
subscribed shares of its common stock and also issued 857,143  additional shares
for aggregate proceeds of $60,000. The Company also issued 864,746 shares of its
common  stock in  exchange  for a note  payable in the  amount of  $40,000  plus
accrued interest of $3,238.

8.       STOCK OPTIONS

During 1986, the Company  granted  nonqualified  options to a number of persons,
consisting of an officer,  employee and consultants to the Company,  to purchase
an aggregate  of  1,150,000  shares of common stock of the Company at an initial
exercise price of $.25 per share, the estimated fair value at the date of grant.

During 1988,  the Company  granted a  nonqualified  option to a newly  appointed
member of the Board of  Directors  of the Company to purchase  an  aggregate  of
150,000  shares of common stock of the Company at an exercise price of $.001 per
share. The options were exercisable  50,000 shares on each of November 29, 1989,
1990 and 1991 and were to expire on November 29, 1994.  This director  exercised
the option which became exercisable on November 29, 1989 and resigned on January
22, 1990.

During 1989, in consideration  for services rendered over the prior three years,
the Company granted to a member of its Scientific  Advisory Board a nonqualified
option to purchase  325,000 shares of common stock of the Company at an exercise
price of $.001 per share. This option was exercised in 1989.

During 1990, in consideration  for services  rendered over the prior four years,
the Company granted to a member of its Scientific  Advisory Board a nonqualified
option to purchase  150,000  shares of common stock of the Company at an initial
exercise price of $.10 per share. This option was exercised in 1991.

All options were  exercisable for a period of five years beginning one year from
the date of  grant.  Compensation  expense,  measured  as to the  excess  of the
estimated  fair value over the  exercise  price,  was  accrued  over the service
period. If, on the date of exercise,  the estimated fair value of a share of the
Company's  common  stock  exceeded the exercise  price,  the exercise  price was
decreased by a like amount (but not below the par value of $.001). At the end of
each fiscal period,  total accrued  compensation  was recorded as the difference
between the adjusted  exercise price and the fair market value at the end of the
period for all exercisable  shares. The total accrued  compensation was adjusted
each year for changes in the fair market  value of the  Company's  stock and for
option  exercises and  cancellations.  The shares issued in connection  with the
exercise  of the  options  were  restricted  shares  to be held  for  investment
purposes only.

In 1995, as part of their  employment  agreements,  the Company's  president and
chief executive  officer,  and  vice-president  and chief financial  officer and
treasurer, were granted options to purchase an aggregate of 4,500,000

                               Page 28 of 38 Pages

<PAGE>

                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.       STOCK OPTIONS (continued)-

shares of the  Company's  common  stock at an exercise  price of $.20 per share,
which vest fully on January 1, 1998 over the following vesting schedule;  33% on
January 1, 1996,  33% on January 1, 1997,  and 33% on January 1, 1998.  The fair
value  of  each  option   grant  is   estimated  on  the  grant  date  using  an
option-pricing  model with the following  weighted-average  assumptions used for
grants in 1995: risk-free interest rate of 6%, and expected lives of 3 years for
the options.

The following is a summary of option transactions:


                                                              Weighted Average
Fixed Options                                     Shares       Exercise Price

Balance - January 1, 1996                          4,500,000             $   .20
Granted - Employees                                        -                   -
Exercised                                                  -                   -
Forfeited                                              -                       -
                                                ------------
Balance - December 31, 1996                        4,500,000                   -
Granted - Employees                                        -                   -
Exercised                                                  -                   -
Forfeited                                        (3,000,000)                   -
                                                 -----------
Balance - December 31, 1997                        1,500,000                 .20
                                                  ==========
Exercisable at December 31, 1997                   1,500,000
                                                  ==========
Weighted-average fair value of options
   granted during the year                     $      -
                                                  =======


The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>

                   Outstanding Options                                       Exercisable Options

                                         Weighted                                 
                                         Average                                  
                       Number           Remaining         Weighted-           Number         Weighted
Range of               Outstanding     Contractual          Average          Exercisable      Average
Exercisable Prices     12/31/97           Life           Exercise Price     at 12/31/97     Exercise Price
  
<S>        <C>           <C>             <C>                 <C>                <C>               <C> 
       $.20           1,500,000        3 years               $.20             1,500,000         $.20

</TABLE>

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

                                                     1997              1996
                                                  ----------        --------
Net loss                          As reported       $775,559       $1,329,395
                                  Pro forma         $703,221       $1,571,782
Net loss per share                As reported         $(.01)           $(.01)
                                  Pro forma           $(.01)           $(.01)


                               Page 29 of 38 Pages

<PAGE>


                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



9.       MINORITY INTEREST

In June 1988, MCL issued 2,000,000 units consisting of one share of common stock
and two  warrants  which allow the holder to purchase  one share of common stock
per warrant.  The warrants are exercisable at $. 125 per share. The net proceeds
of this offering were $84,024.  The warrants were originally scheduled to expire
on December 31, 1992 but were extended to December 31, 1995. In 1988, MCL issued
1,938,000 shares of common stock at $.005 per share to a consultant for services
rendered.  Following  these  transactions,  the  Company's  ownership of MCL was
72.2%.

In 1990,  MCL issued  983,333 shares of common stock at prices ranging from $.05
to $.075 in private  offerings to two individuals  unrelated to MCL for proceeds
of $57,400.  MCL also issued 850,000 shares to five individuals,  550,000 shares
to the three directors of MCL, 50,000 shares to an employee,  and 250,000 shares
to a consultant  for  services  rendered to which MCL assigned the value of $.05
per share  for an  aggregate  of  $42,500.  Following  these  transactions,  the
Company's  ownership of MCL was 68,6%.  These  transactions  had previously been
incorrectly  reported as minority  interest.  Minority  interest should not have
been recorded on the balance sheet because of the magnitude of the stockholders'
deficiency of these  stockholders.  Accordingly,  amounts  previously  stated as
minority interest have been restated to additional paid-in capital.

10.      NOTES PAYABLE

Short-term  debt at  December  31,  1997 and March 31,  1998,  consisted  of the
following:


                                                        December        March
                                                          31,            31,
                                                         1997           1998
                                                        --------        -------
Notes payable to ten  stockholders,  
  due on demand,  plus interest at 10% per
  annum (in arrears).  The Company is obligated 
  to accept the rate at face value plus  accrued
  interest as partial  payment for shares the
  lender may purchase from the Company upon 
  exercise of the lender's  option to acquire  
  shares from   the  Company.                            $60,815         $60,815

Notes payable to directors totaling $28,000 and 
  a note payable to a third  party in the amount 
  of $9,000,  due on April 22,  1995  (principal  
  and accrued interest in arrears as of report 
  date),  plus interest ranging from 8% to 9% per  
  annum.  Each  lender has the right to  convert  
  any  portion of the  principal  and  interest 
  into common  stock at a price per share equal
  to the price per share  under the most recent
  private placement transaction.                           37,000         37,000

Notes payable to directors and a family member of
  a director, due at various dates in 1995,  1996
  and 1997  (principal  and accrued  interest in
  arrears as of report date), plus interest at 8%
  per annum. The Company has the right  to  repay 
  the  loans  with  restricted  stock  at $.10  per
  share  if   alternative financings do not
  occur.                                                   216,300       216,300




                               Page 30 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



10.      NOTES PAYABLE (continued)-


   Note payable to  individual,  due on December 2, 1996  (principal and accrued
  interest in arrears as of report date),  plus interest at 6.07% per annum. The
  Company has the right,  on or after the  payment  due date,  to repay the loan
  with restricted shares valued at $.05 per share.
                                                          40,000         -0-
   Total short-term debt                                $354,115     $314,115
                                                         =======      =======



11.      RESTATEMENTS OF PRIOR PERIODS (Unaudited)

Beginning in 1991,  the Company  began  selling off its holdings of MCL to raise
cash for operations. The Company sold 100,000 and 610,000 shares of MCL's common
stock  during  1991 and 1992,  respectively,  through a broker  for  $5,000  and
$81,100  at $.05 per share in 1991 and per share  prices  ranging  from $.093 to
$.179 in 1992.  Because the Company's  investment in MCL was only $2, the entire
$5,000  and  $81,100  were  recorded  as gains  in the  Company's  statement  of
operations  during the fourth  quarter of 1991 and the first  three  quarters of
1992, respectively. During the fourth quarter of 1992, an adjustment was made to
classify these sales as equity transactions.

The effect of these restatements is as follows:
<TABLE>
<CAPTION>

                                                               Three Months Ended
                   -----------------------------------------------------------------------------------------------------------
                     December 31, 1991     March 31, 1992       June 30, 1992     September 30, 1992     December 31, 1992
                     -----------------     --------------       -------------     ------------------     -----------------
<S>                        <C>                   <C>                  <C>                 <C>                   <C>    

Net loss:
  Previously
  reported                 $1,215,200           $151,930            $173,496               $147,905             $  89,510
  Adjustment                    5,000             24,555               -                     24,470                32,075
                                -----            -------           ---------               --------              --------
As adjusted                $1,220,200          $ 176,485           $ 173,496              $ 172,375             $ 121,585
                            =========           ========            ========               ========              ========

</TABLE>


These  restatements do not affect previously  reported loss per share because of
rounding.

See Note 9 for restatement of minority interest in prior years.

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


                               Page 31 of 38 Pages

<PAGE>
                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.      INCOME TAXES

The components of the provision for income taxes are as follows:

                                                  From the Date of Inception
                                                   (January 31, 1986) through
                                                      December 31, 1997
                           1997    1996     1995          (Cumulative)
                           ----    ----     ----         -------------
Current tax expense         $ -     $ -      $ -              $ -
Deferred tax expense         -       -        -                 -
                            ---     ---      ---                --

Income tax expense         $ -     $ -      $ -               $ -
                            ===     ===      ===               ==

A reconciliation  of the consolidated  income tax expense on income per the U.S.
Federal Statutory rate to reported income tax follows:

                                      1997       1996      1995    Cumulative
                                      ----       ----      ----    ----------
Taxes at U.S. Federal Statutory        $ -        $ -       $ -       $ -
  rate                                  -          -         -         -
                                       ---        ---       ---       --
State Income taxes
                                      $ -        $ -       $ -        $ -
                                       ===        ===       ===        ==

At December 31, 1997 and 1996,  deferred tax assets  (liabilities)  consisted of
the following:
                                                  1997          1996
                                                 ------        -----
                                                $         -   $         -
Current deferred tax liabilities                          -             -
Noncurrent deferred tax liabilities               1,748,419     1,651,738
Current deferred tax assets                               -             -
Noncurrent deferred tax assets                  (1,748,419)   (1,651,738)
                                                -----------   -----------
Valuation allowance
                                             $         -    $         -
                                              ============== ==========



At December 31, 1997,  the Company has a net operating  loss (NOL)  carryforward
totaling  approximately  $11,275,000  that may be offset  against future taxable
income in varying amounts through 2006. No benefit has been reported in the 1997
or 1996 financial statements,  however, because the Company believes there is at
least a 50%; chance that the carryforward will expire unused.  Accordingly,  the
tax benefit of the loss carryforward has been offset by a valuation allowance of
the same  amount.  The  expected  tax benefit  that would  result from  applying
federal  statutory tax rates to the pretax loss differs from amounts reported in
the financial statements because of the increase in valuation allowance.

Under certain  circumstances,  Section 382 of the Internal  Revenue Code of 1986
restricts a  corporation's  use of its NOL  carryforward.  Due to the  Company's
issuance of additional stock, the Company's use of its existing NOL carryforward
could be limited.  Therefore,  the Company may have to pay federal  income taxes
sooner than if the use of its NOL carryforward were not restricted.

13.      REDEEMABLE COMMON STOCK

On February 12,  1993,  per a settlement  agreement  ("Agreement"),  the Company
issued  200,000  shares of restricted  common stock to an unrelated  third party
("Party").  According to the Agreement,  if net funds available specified in the
Agreement.  If the Company files a registration statement for an offering of its
securities, it must use its best efforts to

                               Page 32 of 38 Pages

<PAGE>

                 MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
                          (A Development Stage Company)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13.      REDEEMABLE COMMON STOCK (continued)-

include such shares in the registration statement. If all, or any portion of the
shares have not been  purchased  by the Company  pursuant to the exercise of the
put  option  described  above,  or all the  shares  have not been  covered by an
effective registration, then the Company shall be required to pay, no later than
April 13,  1995,  an amount equal to the lesser of $50,000  minus the  aggregate
purchase price amount  payable under the formula set forth in the Agreement,  or
$25,000. In September 1995, the Company paid $5,000 and issued 200,000 shares of
restricted common stock in full and final settlement of the Agreement.

14.      FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying  mounts  reflected  in the  consolidated  balance  sheets for cash,
receivable from affiliate,  accounts  payable and notes payable  approximate the
respective values. The estimated fair values have been determined by the Company
using  appropriate  valuation  methodologies  and available market  information.
Considerable  judgment is necessarily  required in  interpreting  market data to
develop the  estimates of fair value,  and,  accordingly,  the estimates are not
necessarily  indicative  of the  amounts  that the  Company  could  realize in a
current market  exchange.  A comparison of the carrying value of those financial
instruments, none of which are held for trading purposes, is as follows:

                                        Carrying       Fair
                                         Amount       Value
Assets:
Cash                                    $  30,339   $  30,339
Receivable from affiliate                  48,947      48,947

Liabilities:
Accounts payable and liabilities          730,322     730,322
Short-term debt                           314,115     314,115




Cash, receivable from affiliate and accounts payable. The carrying value of such
items approximates their fair value at March 31, 1998.

Short-term  debt. Fair value of such debt is based on rates currently  available
to the Company for debt of similar terms and remaining maturities.  There are no
quoted prices for the debt or similar debt.



                               Page 33 of 38 Pages

<PAGE>

Item 2.

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

General

From its organization in January 1986, the Company has been a development  stage
company  primarily  engaged in retaining  research  consultants  and  sponsoring
research  to  investigate  the  medical  uses  of  ozone.  The  Company  has.not
generated, and cannot predict when or if it will generate,  sufficient cash flow
to fund its  continuing  operations.  Since its  organization,  the  Company has
attributed $2,327,685 as expenditures for research and development.

By letter agreement dated March 23, 1993, with ISSOT, the Company entered into a
collaborative  arrangement  to research and examine the efficacy of the Medizone
Technology  in the  treatment  of  various  blood-related  human  diseases.  The
research  is to be  supervised  by ISSOT in  Italy,  under  the  direction  of a
research group assembled by the Italian  Ministry of Health.  The research is to
be conducted in accordance  with protocols that will meet EU Standards for human
clinical trials (to be furnished by the Company) at University-based  hospitals,
which will enter into agreements with the Company on a site-by-site  basis.  The
ISSOT  letter  agreement  requires  the  Company  to  furnish   ozone-generating
instruments  for use in the trials and to pay for laboratory  tests performed by
each  testing  institution  that are  outside  the scope of the normal  realm of
clinical  analyses  performed  by  the  testing  institutions.  There  can be no
assurance  that  any of the  data  generated  from the  ISSOT  research  will be
permitted to be utilized in connection with the Company's efforts to re-open the
FDA IND.

Litigation Against Former Management

In November 1992, a derivative  action was filed in the U.S.  District Court for
the District of New Jersey by two shareholders of the Company against two of its
former officers and directors.  The Company was named as a nominal  defendant in
the action,  but in January 1993 the Company  substituted itself as a real party
plaintiff.  The Company filed an amended complaint seeking damages and equitable
remedies  and  alleging,  among  other  things,  that the  former  officers  and
directors  defrauded  the  Company,   breached  fiduciary  duties  owed  to  the
shareholders and committed violations of federal securities laws.

In November 1993, the defendants  replied to the  counterclaims  asserted by the
Company.  The reply  contained  additional  counterclaims  seeking  monetary and
injunctive  relief under various  provisions of the federal  securities laws and
the common law. The defendants also asserted a derivative counterclaim on behalf
of the Company against  certain current and former  directors based upon alleged
breaches of a written  agreement  between the defendants and the Company's board
of directors.  Although the claims originally  asserted by the defendants in the
New York action sought only declaratory relief, the newly asserted claims sought
damages in excess of $2.0 million.



                               Page 34 of 38 Pages

<PAGE>

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (Continued)


On May 18, 1994, the parties reached  agreement in principle to settle all their
litigation.  On September 27, 1994, the parties  stipulated to  discontinue  the
action pending the  finalization  of the  settlement.  On December 28, 1994, the
written settlement  agreement was signed. The settlement  agreement provides (i)
that  Messrs.  McGrath  and  Watrous  will not  challenge  the  validity  of the
Company's  board of directors  resolution  to rescind  approximately  13,000,000
shares of the Company's stock previously issued to Mr. McGrath and approximately
1,200,000 shares previously issued to Mr. Watrous and to reinstate the Company's
debt to Messrs.  McGrath and Watrous  that had been  retired by the  issuance of
those shares; and (ii) for the Company to acknowledge the validity of $2,033,628
of debt to Messrs.  McGrath and Watrous. In connection with the settlement,  Mr.
McGrath assigned his portion of the above-mentioned  debt to Mr. Watrous,  which
was thereupon  satisfied by the Company's  issuance to Mr. Watrous of 11,250,000
shares of the Company's  common stock  restricted  under the  Securities  Act of
1933.

Three-month periods ended March 31, 1998, and March 31, 1997

The Company has had no sales since  January  1989.  Sales  commenced in May 1986
and, except for incidental  items,  ceased in October 1987. In cooperation  with
the FDA,  the Company has  assisted in  deactivating  ozone-generating  machines
owned by several  practitioners/researchers who formerly purchased supplies from
the Company,  and the Company does not intend to sell  equipment or supplies for
ozone-generating purposes until it receives FDA approval to do so.

Expenditures for research and development during the 1998 period were $8,050 and
were $-0- in the 1997 period.

General and administrative expenses were $155,693 in the 1998 period as compared
to $194,579 in the 1997 period.

Interest  expense was $6,831 in the 1998  period  compared to $7,080 in the 1997
period and was accrued regarding notes payable to Company directors.

Net cash  used in  operating  activities  was  $167,834  in the 1998  period  as
compared  to $15,980 in the 1997  period.  The  increase  was due  primarily  to
payments of accounts payable and accrued expenses.

Cash provided by financing  activities  increased in the 1998 period by $48,200.
The increase was due primarily to the sale of common stock during the period.

Three-month periods ended,March 31, 1997, and March 31, 1996

The Company has had no sales since  January  1989.  Sales  commenced in May 1986
and, except for incidental  items,  ceased in October 1987. In cooperation  with
the FDA,  the Company has  assisted in  deactivating  ozone-generating  machines
owned by several  practitioners/researchers who formerly purchased supplies from
the Company,  and the Company does not intend to sell  equipment or supplies for
ozone-generating purposes until it receives FDA approval to do so.

There were no expenditures for research and development  during the 1997 or 1996
period.




                               Page 35 of 38 Pages

<PAGE>
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (Continued)


General and administrative expenses were $194,579 in the 1997 period as compared
to $238,509 in the 1996 period.

Interest expense  increased from 1996 to 1997 by approximately  $4,000 to $7,000
due to the increase in notes payable to Company directors.

Net cash used in operating activities was $15,980 in the 1997 period as compared
to $268,511 in the 1996  period.  The  decrease  was due  primarily to decreased
revenues  from  the sale of stock  and  stock  subscriptions  and  increases  in
accounts payable and accrued expenses.

Cash provided by financing  activities decreased in the 1997 period by $255,482.
The decrease was due primarily to common stock subscriptions received during the
period.

Liquidity and Capital Resources

At March 31, 1998,  the Company had a working  capital  deficiency of $1,012,138
and stockholders'  deficiency of $953,099. At December 31, 1997, the Company had
a working  capital  deficiency  of  $945,859  and  stockholders'  deficiency  of
$886,167.

The  management of the Company has  developed a strategy  which it believes will
enable it to fund requisite  research  necessary to gain regulatory  approval(s)
and continue  operations.  The Company has structured a cohesive scientific plan
encompassing a number of research initiatives which it believes may enable it to
successfully  achieve  its  primary  goals,  which  include  the  submission  of
appropriate  research  data to the FDA  Center for Drugs and  Biologics  for the
approval  of its  blood  decontamination  process  and to the  FDA  Division  of
Antiviral  Drug Products for approval of Phase I human clinical trial status for
the treatment of AIDS.

The Company recognizes that, if it is unable to raise additional capital, it may
find it necessary to substantially reduce, or cease, operations.


                               Page 36 of 38 Pages

<PAGE>


           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS (Continued)



                           PART II - OTHER INFORMATION



Item 6. - Exhibits and Reports on Form 8-K

                  (b) No reports on Form 8-K were filed  during the  quarter for
                      which this report is filed.



                                SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,  Registrant
has duly  caused  this  report  to be signed  on its  behalf by the  undersigned
thereunto duly authorized.


                           MEDIZONE INTERNATIONAL, INC.
                                    (Registrant)



                           /s/Arthur P. Bergeron
                           Arthur P. Bergeron
                           Vice President and
                           Chief Financial Officer



May 11, 1998



                               Page 37 of 38 Pages