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, 1997

                                                        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)


                           4505 South Wasatch Boulevard
                                    Suite 210
                            Salt Lake City, Utah  84124
                 (Address of principal executive offices, zip code)

                                   (801) 274-8400
                (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                       NO  X  

At February 4, 1998, there were 142,601,914 shares of the
Registrant's common stock issued and outstanding.

                                                  Page 1 of 31


<PAGE>

            MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES

                               FORM 10-Q

                                 INDEX

                             March 31, 1997

                    PART I - FINANCIAL INFORMATION
Page
Number

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                                         6-12

         Unaudited Interim Consolidated Statements of
           Cash Flow                                                      13-14

         Notes to Unaudited Interim Consolidated Financial
         Statements                                                       15-29

Item 2. - Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                      30


                          PART II - OTHER INFORMATION
                          ---------------------------

Item 3. - Exhibits and Reports on Form, 8-K                                  31

Signatures                                                                   31





                                  Page 2 of 31


<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,
                                             1997                  1996   
                                           ---------            -----------
 
CURRENT ASSETS
         Cash and cash equivalents        $        -          $       3,579
         Prepaid expenses and advances         1,270                  6,776
                                           ---------           ------------

         Total Current Assets                  1,270                 10,355
                                           ---------           ------------
                                           
FIXED ASSETS
         Leasehold improvements                3,004                  3,004
         Office equipment                     11,661                 11,661
         Furniture and fixtures                2,711                  2,711
                                           ---------           ------------  
                                              17,376                 17,376
         Less accumulated depreciation         9,086                  8,308
                                           ---------           ------------
                                               8,290                  9,068

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)                     5,998                  5,998

                                             $64,505                $74,368




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



                                  Page 3 of 31


<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,
                                                          1997         1996    
                                                        --------   -----------

CURRENT LIABILITIES
         Checks issued in excess of deposits           $     601   $         -
         Accounts payable                                562,552       455,885
         Accrued liabilities                             244,137       171,409
         Notes payable (Note 10)                         344,155       332,315

               Total Current Liabilities               1,151,322       959,609

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
               130,051,613 and 130,051,613 shares for
               1997 and 1996, respectively              130,052        130,052
         Common stock subscribed                          3,090          3,090
         Additional paid-in capital                  11,423,736     11,423,736
         Accrued stock option compensation                    -              -
         Deficit accumulated during development
               stage                                (12,643,778)  (12,442,119)

         Total Stockholders' Deficiency              (1,086,900)     (885,241)
                                                     -----------   -----------  
                                                    $     64,505  $    74,368
                                                     ===========   ===========


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



                                  Page 4 of 31


<PAGE>

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

                                                               From the Date
                                                               of Inception
                                    For the Three Months       (Jan. 31, 1986)
                                       Ended March 31,         through
                                    1997          1996         March 31, 1997
                                    ----          ----         --------------
SALES                               $     -0-  $     -0-      $    133,349
COSTS AND EXPENSES:
      Costs of sales                      -0-        -0-           103,790
      Research and development    
      expenses                            -0-        -0-         2,202,685
      General and administrative
      expenses                        194,579    238,509         9,279,113
      Compensation under stock   
      options (Note 8)                    -0-        -0-           872,894
      Interest expense                  7,080      3,302           751,982
      Other (income) and expense, net     -0-        -0-           (16,018)

         Total Costs and Expenses     201,659    241,811        13,194,446

Net loss before extraordinary
  gain or minority interest         $(201,659)  (241,811)      (13,061,094)
Extraordinary gain on sale of
  investment in subsidiary (Note 1)         -          -           100,000
Net loss before minority interest           -          -       (12,961,097)
Minority interest in loss                   -          -            26,091
Prior period adjustment (Note 11)           -          -           291,228

Net loss                           $(201,,659)  $(241,811)    $(12,643,778)

Weighted average number of
  shares outstanding              130,051,613  120,123,359      81,135,000
Loss per share                          $0.00        $0.00          $(0.15)



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



                                  Page 5 of 31


<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, 1997
                                 (unaudited)
                                                                             
<TABLE>
<CAPTION>                                                                                                                       


                                                                                                             Deficit
                                                                                                           Accumulated    
                                                                        Additional          Accrued          During
                                             Common Stock                 Paid-in         Stock Option     Development
MEDIZONE - DELAWARE                             Shares       Amount       Capital         Compensation        Stage   
                                             ------------    ------     ---------         -------------    ----------- 

<S>                                        <C>             <C>        <C>             <C>   
Initial capitalization of Medi-
     zone 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 Medi-
zone 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 recapitali-
zation 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/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)

(Continued on next page)

</TABLE>


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

 

                                  Page 6 of 31


<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, 1997
                                  (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/share)          950,000          950       149,050
Shares issued for services, June
and July 1987 (from $.10 to
 S.25 per share)                         203,167          203        24,314
Stock option compensation expense
relating to option exercised
 in August 1987                                                                       388,551
Option exercised, August 1987
 ($.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/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)

(Continued on next page)

</TABLE>

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


                                  Page 7 of 31


<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, 1997
                                  (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/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
7~et/(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)

(Continued on next page)


</TABLE>

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


                                  Page 8 of 31


<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, 1997
                                  (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/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
 ($.20 per share)                      51,500               152           30,148
Shares issued for accrued
 liabilities ($.15/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)

(Continued on next page)

</TABLE>

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



                                  Page 9 of 31


<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, 1997
                                  (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                -   $(7,598,268)
Cancelled shares
previously issued
in settlement of
advances from and
amounts due to
stockholder
($.062/share)                           (13,118,619)          (13,119)                      (800,248)
Shares issued for
services (from
 $.10 to $.46/sh.)                        5,347,219             5,347                        542,859
Shares issued for
cash (from $.15
to $.20/share)                            1,471,666             1,472                        269,528
Shares subscribed                                                           $2,619           259,296
Net/(loss) for the
year ended Decem-
ber 31, 1993                             ----------           -------       ------        ---------                    ----------

Balance, Decem-
ber 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

(Continued on next page)

</TABLE>

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

                                  Page 10 of 31


<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, 1997
                               (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>   
Issuance of sub-
scribed stock                            10,384,900           $10,385            $(10,385)
Issuance of shares
to certain prior
purchasers of com-
mon stock in recog-
nition 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 Decem-
ber 31, 1994                                                                                                             (1,126,315)

Balance, Decem-
ber 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 ($.10/sh)                        2,050,000             2,050                          202,950
issuance of sub-
scribed stock                            17,524,860            17,524             (17,524)
Cancelled shares pre-
viously issued to
former management                        (1,242,727)           (1,242)                         (70,563)
Shares subscribed
 ($.10 per share)                                                                   9,118      902,707
Prior period
adjustment                                                                                                                  71,806
Sales of subsidi-
ary's stock                                                                                     50,000
Net/(loss) for the
year ended Decem-
ber 31, 1995                                                                                                            (1,081,027)
Balance, Decem-
ber 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 31


<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, 1997
                                   (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/share)                              1,415,875             1,416                           140,171

Issuance of sub-
 scribed stock                            8,412,379             8,413              (8,413)

     Shares subscribed
     ($.10 per share)                                                               6,456       718,991

     Net (loss) for the
     year ended Decem-
     ber 31, 1996                                                                                                       $(1,329,395)

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

Net (loss) for
the quarter
ended
March 31, 1997                                                                                                             (201,659)

Balance March 31,
     1997                               130,051,613          $130,052              $3,090  $11,423,736        -        $(12,643,778)
                                        ===========          ========              ======   ===========       ======    ============
</TABLE>


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




                                  Page 12 of 31


<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                     (Jan. 31, 1986)
                                                             Ended March 31,                           through
                                                        1997               1996                    March 31, 1997

<S>                                                      <C>                     <C>               <C> 
     OPERATING ACTIVITIES
 
     Net loss                                             (201,659)              (241,811)         ($12,643,778)
     Prior period adjustment                                     _
     Adjustments to reconcile net
     loss to net cash used in
     operating activities:
     Issuance of stock for services                              -                      -             1,312,893
     Stock subscription for services                             -                      -                13,380
     Compensation - stock options                                -                      -               924,975
     Write-off of license agreement                              -                                            2
     Write-off of patent                                         -                      -               693,750
     Depreciation and amortization                             778                    282                21,862   
     Minority interest in loss                                   -                      -               (26,091)
     Changes in assets and liabilities:
     Current and other assets                                5,506                  2,444               (50,217)
     Accounts payable                                      106,667                (16,496)              768,741
     Accrued liabilities                                    72,728                (12,930)              300,922

     Net Cash Used in Operating
     Activities                                            (15,980)              (268,511)           (8,683,561)

     INVESTMENT ACTIVITIES
     Additions to organization costs                             -                      -                (8,904)
     Additions to fixed assets                                   -                 (3,004)              (21,247)
     Additions to deposits                                       -                 (6,745)               (5,998)

Net Cash Used in Investment
Activities                                                       -                 (9,749)              (36,149)
FINANCING ACTIVITIES
     Issuance of stock for cash                                  -                      -             1,877,977
     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                                   -                 47,000               283,665
     Payment of notes payable                                    -                      -              (189,150)
     Redeemable common stock                                     -                      -                40,000
     Increase in minority interest                               -                      -                14,470
     Common stock subscribed                                     -                220,282             4,804,515
     Increase in notes and loans payable                    11,800                      -               596,196
Cash Provided by Financing Activities                       11,800                267,282             8,719,109
</TABLE>

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

                               Page 13 of 33 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                     (Jan. 31, 1986)
                                                             Ended March 31,                           through
                                                        1997               1996                    March 31, 1997

<S>                                                     <C>                  <C> 
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS                                      $ (4,180)              $(10,978)               $ (601)
Cash and cash equivalents,
beginning of period                                          3,579                 (1,760)                    _

     Cash and cash equivalents,
     end of period                                          $ (601)              $(12,378)               $ (601)
                                                            ======               ========                ======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION

     Cash paid for interest                                      -                      -          $     26,483

SUPPLEMENTAL SCHEDULE OF
NONCASH ACTIVITIES

Conversion of notes payable to stock                             -                      -           $ 2,091,980
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 14 of 31


<PAGE>

             MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
                       (A Development Stage Company)
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
                                                                               
1.   NATURE OF THE BUSINESS


Background
----------

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.

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

                                  Page 15 of 31


<PAGE>


               MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
                      (A Development Stage Company)
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
                                                                               
1.   NATURE OF THE BUSINESS (continued)-

Formation of Joint Venture Subsidiary (continued)

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

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

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

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

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

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


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

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

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

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.

                                  Page 16 of 31


<PAGE>

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

1.   NATURE OF THE BUSINESS (continued)-

Business Activities (continued)
-------------------

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

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

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

  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. Page 17 of 31


<PAGE>

                 MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
                           (A Development Stage Company)
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
                                                                               
2.   CHANGES IN MANAGEMENT CONTROL AND LITIGATION AGAINST FORMER
     MANAGEMENT

Changes in Control (continued)
------------------

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 Hitt to the Company's  Board of Directors,  with Marshall being named
Chairman.  Contemporaneously  thereto,  John  Pealer  ("Pealer")  resigned  as a
director,  and Gropper  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 G. 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.

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 18 of 31


<PAGE>

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

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

Litigation Against Former Management
------------------------------------

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  amount of  additional  funds to  complete  the  development  of its
products, to establish manufacturing  facilities, to build a sales and marketing
organization  and to fund  additional  losses which the Company expects to incur
over the next several years

Because  ozone-generation  for the purposes of  interfacing  with blood and
blood  products  is  regarded  as a new drug  delivery  system,  the  Company is
precluded  from  selling or  distributing  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 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.

                                  Page 19 of 31


<PAGE>

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

3. GOING CONCERN (continued)-

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.

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 Assumptions
-------------------------

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.

                             Page 20 of 31  

<PAGE>

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

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.

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,  The Company does 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 1996 and 1995,  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.

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 present
offices in Salt Lake City at an annual rent of approximately $23,000. The office
is used for executive offices and administrative purposes. Future minimum rental
commitments pursuant to this lease are as follows:

                             Page 21 of 31

<PAGE>

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

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

Year Ended
December 31,                   Amount
-----------                    ------
   1997                        $ 5,746
   1998                         23,214
   1999                         24,144
   2000                         18,649

  Total                        $71,753
                                ======

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  meruit 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  meruit.  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;  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, 1995        5,000
     January 15, 1996         5,000
     February 15, 1996        5,000
     March 15, 1996           5,000
     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.

                                 Page 22 of 31


<PAGE>

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

7. ISSUANCE OF COMMON STOCK AND WARRANTS

At December 31, 1996,  there were  41,639,323  shares and  88,412,290  shares of
restricted and unrestricted common stock outstanding respectively.

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
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.

                                   Page 23 of 31


<PAGE>

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

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

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

During 1992,  the following  equity  transactions  occurred:  The Company issued
2,702,335 shares to individuals in private  transactions for aggregate  proceeds
of $430,350;  the Company  issued a total of 401,500  shares of common stock for
services  and accrued  liabilities;  holders  exercised  options and acquired an
aggregate of 250,000  shares of common  stock.  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 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.  No equity  transactions  occurred
during the first quarter of 1997.

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.


                                  Page 24 of 31

<PAGE>

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

8.   STOCK OPTIONS

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 it 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 the their employment  agreements,  the Company's  president and
chief executive  officer,  and  vice-president  and chief financial  officer and
treasurer,  were granted options to purchase an aggregate of 4,500,000 shares of
the Company's  common stock at an exercise  price of $.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, 1995                              --         $--
Granted - Employees                                    --          --
Exercised                                              --          --
Forfeited                                              --          --
Balance - December 31, 1995                                        --
                                                                ----------
Granted - Employees                               4,500,000           .20
Exercised                                              --          --
Forfeited                                                          --
                                                                ----------
Balance - December 31, 1996                       4,500,000
                                                  =========
Exercisable at December 31, 1996                  1,500,000
                                                  =========
Weighted-average fair value of options
   granted during the year                        $   .16
                                                  =========


                                  Page 25 of 31


<PAGE>

                  MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)           
================================================================================
8. STOCK OPTIONS (continued)

          The following table summarizes  information  about fixed stock options
          outstanding at December 31, 1996:

<TABLE>
<CAPTION>
                                    Outstanding Options                           Exercisable Options   
 
                                         Weighted                                                  Weighted
                                         Average            Weighted                               Average
Range of             Number              Remaining          Average          Number                Exercise
Exercisable          Outstanding         Contractual        Exercise         Exercisable at        Price
Prices               12/31/96            Life               Price            12/31/96

<S>                  <C>                 <C>                <C>              <C>                   <C> 
$.20                 4,500,00            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,
1996 would have  increased by $242,387,  and the Company's net loss and loss per
share would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                  1996   
                                                                  ----   
<S>                        <C>                              <C>
Net loss                      As reported                     $1,329,395
                                Pro forma                     $1,571,782
Net loss per share            As reported                          $(.01)
                                Pro forma                          $(.01)
</TABLE>

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,  1996 and March  31,  1997  consisted  of the
following:

<TABLE>
<CAPTION>
                                                                                      Dec. 31   March 31
                                                                                       1996        1997 
                                                                                       ----        ---- 
<S>                                                                              <C>          <C> 

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

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


                                  Page 26 of 31

<PAGE>

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

10.   NOTES PAYABLE (continued)

<TABLE>

<CAPTION>

<S>                                                                                <C>          <C>
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.                                                                         194,500      206,300

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


         Total short-term debt                                                      $ 332,315    $ 344,115
                                                                                     ========     ========
</TABLE>

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, 1992   March 31, 1992  June 30, 1992  September 30, 1992  December 31, 1992
                    -----------------   --------------  -------------  ------------------  -----------------
<S>                   <C>                 <C>             <C>              <C>              <C>  
 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 27 of 31
<PAGE>

                  MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
                                                                               
12.   INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                  From the Date of Inception
                                                                                  (January 31, 1986) through
                                                                                       December 31, 1996
                                             1996           1995           1994           (Cumulative)            
                                             ----           ----           ----    ---------------------------      
                              
<S>                                  <C>            <C>            <C>             <C>    
Current tax expense                  $       -      $      -       $       -          $     -
Deferred tax expense                         -             -               -                -     
                                      ------------   ------------   ------------   ----------------
Income tax expense                   $       -      $      -       $       -          $     -     
                                      ============   ============   ============   ================
</TABLE>
  
A reconciliation  of the consolidated  income tax expense on income per the U.S.
Federal Statutory rate to reported income tax follows:

<TABLE>
<CAPTION>
                                             1996           1995           1994           (Cumulative)            
                                             ----           ----           ----    ---------------------------      
                              
<S>                                  <C>            <C>            <C>                <C>    
Taxes at U.S. Federal Statutory Rate $       -      $      -       $       -          $     -
State income taxes                           -             -               -                -     
                                      ------------   ------------   ------------   ----------------
                                     $       -      $      -       $       -          $     -     
                                      ============   ============   ============   ================
</TABLE>
  

At December 31, 1996 and 1995,  deferred tax assets  (liabilities)  consisted of
the following:

                                         1996           1995 
                                         ----           ---- 
Current deferred tax liabilities    $      -        $     -
Noncurrent deferred tax liabilities        -              -
Current deferred tax assets            1,651,738       1,470,725
Noncurrent deferred tax assets             -              -
Valuation allowance                   (1,651,738)     (1,470,725)
                                      -----------     -----------
                                    $     -         $     -      
                                     ============    ============
 
At December 31, 1996,  the Company has a net operating  loss (NOL)  carryforward
totaling  approximately  $10,500,000  that may be offset  against future taxable
income in varying  amounts through 2005 No benefit has been reported in the 1996
or 1995 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  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.


                                  Page 28 of 31
<PAGE>


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

14.   FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying  amounts  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                              $     3,579          $     3,579
Receivable from affiliate              48,947               48,947

Liabilities:
Accounts payable and liabilities      807,290              807,290
Short-term debt                       344,115              344,115

Cash receivable from affiliate and accounts payable.  The carrying value of such
items approximates their fair value at March 31, 1997.

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.

During 1995, the Company received stock subscription  agreements,  together with
proceeds  totalling $898,445 from sales of its common stock to non-United States
investors,  outside of the United States,  pursuant to Regulation S, promulgated
under the Securities Act.

During 1994, the Company received stock subscription  agreements,  together with
aggregate  proceeds totalling  $955,234,  pursuant to a private placement of its
common stock in the United  States,  which  concluded  in August 1994,  and from
sales of its common stock to foreign  investors,  outside of the United  States,
pursuant to Regulation S promulgated under the Act.


                                  Page 29 of 31
<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,  Registrant has been a development  stage
company  primarily  engaged in retaining  research  consultants  and  sponsoring
research to investigate the medical uses of ozone. Registrant has not generated,
and cannot predict when or if it will generate, sufficient cash flow to fund its
continuing  operations.  Since  its  organization,   Registrant  has  attributed
$2,202,685 as expenditures for research and development.

Three-Month Periods Ended March 31, 1997, and March 31, 1996.
-------------------------------------------------------------

There were no sales during  either the 1997 or 1996 period.  Sales  commenced in
May 1986 and, except for incidental items, ceased in October 1987.

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

General and administrative expenses were $194,579 in the 1997 period as compared
with $238,509 in the 1996 period.  These  expenses  include  professional  fees,
payroll, insurance costs and travel expenses.

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 the decline in common  stock  subscriptions
received during the period.

Three-Month Periods Ended March 31, 1996 and March 31, 1995.
------------------------------------------------------------

There were no sales during  either the 1996 or 1995 period.  Sales  commenced in
May 1986 and, except for incidental items, ceased in October 1987.

There were no research and development expenditures in the 1996 or 1995 periods.

General and administrative expenses were $238,509 in the 1996 period as compared
to  $268,389 in the 1995  period.  These  expenses  include  professional  fees,
payroll, insurance costs and travel expenses.

Interest expense  increased from 1995 to 1996 by approximately  $1,000 to $3,302
due to the increase in notes payable to Company directors.

Net cash  used in  operating  activities  was  $268,511  in the 1996  period  as
compared to $337,119 in the 1995  period.  The  decrease  was due  primarily  to
decreased general and administrative expenses.

Cash provided by financing  activities decreased in the 1996 period by $126,784.
The  decrease was due  primarily  to the decline in common  stock  subscriptions
received during the period.

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

At March 31, 1997,  the Company had a working  capital  deficiency of $1,150,135
and a stockholder's deficiency of $1,086,900.  At December 31, 1996, the Company
had a working capital  deficiency of $849,254 and a stockholder's  deficiency of
$885,241.

The Company has no capital resources except for the sale of its securities.  The
Company  recognizes that if it is unable to raise additional capital it will not
be able to undertake  further research  initiatives and may find it necessary to
substantially reduce, or suspend, operations.


                                  Page 30 of 31

<PAGE>

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

                           PART II - OTHER INFORMATION
                           ---------------------------

Item 3. - Exhibits and Reports on Form 8-K
------------------------------------------

     (b) On March 6, 1997,  the  Company  filed a current  report on Form 8-K in
which is disclosed  that Richard  Solomon  resigned from the Company's  Board of
Directors on February 27, 1997.


                                   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



February 11, 1998

                                  Page 31 of 31