U

10KSB 1 f05dk.htm MEDIZONE 05DEC 10KSB U

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-KSB

(Mark One)

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number: 2-93277-D

MEDIZONE INTERNATIONAL, INC.

(Name of small business issuer in its charter)


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


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

Issuer’s telephone number (415) 868-0300

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: None

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

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

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

The aggregate market value of voting common stock held by non-affiliates of the issuer was $964,118 on March 31, 2006 based on the average bid and asked prices of such stock as reported in the OTC Electronic Bulletin Board and the "pink sheets" of the National Daily Quotation Bureau.

On March 31, 2006, the registrant had 161,170,387 shares of common stock, par value $.001 per share, issued and outstanding.

Documents Incorporated by Reference

The issuer does not incorporate any documents by reference in this report.

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

TABLE OF CONTENTS

PART I

Item 1.

Description of Business

Item 2.

Description of Property

Item 3.

Legal Proceedings

Item 4.

Submission of Matters to a Vote of Security Holders

PART II

Item 5

Market for Common Equity, and Related Stockholder Matters

Item 6.

Management's Discussion and Analysis or Plan of Operation and Small Business Issuer

Purchases of Equity Securities

Item 7.

Financial Statements

Item 8.

Changes in and Disagreements With Accountants on Accounting

and Financial Disclosure

Item 8A.

Controls and Procedures

Item 8B.

Other Information

PART III

Item 9.

Directors, Executive Officers, Promoters and Control Persons; Compliance with

Section 16(a) of the Exchange Act

Item 10.

Executive Compensation

Item 11.

Security Ownership of Certain Beneficial Owners and Management and Related

Stockholder Matters

Item 12.

Certain Relationships and Related Transactions

Item 13.

Exhibits

Item 14.

Principal Accountant Fees and Services

Signatures

Unless the context otherwise requires, all references in this report to "we," "us," "our," "Medizone" or the "Company" include Medizone International, Inc., a Nevada corporation, and its subsidiaries.

PART I

Item 1.

Description of Business

FORWARD LOOKING STATEMENTS

When used in this Annual Report and the documents incorporated herein by reference, the terms "anticipates," "believes," "expects," and similar expressions are intended to identify in certain circumstances, forward-looking statements. Such statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected, including the risks described in this Annual Report. Given these uncertainties, readers are cautioned not to place undue reliance on such statements. The company also undertakes no obligation to update those forward-looking statements.

General

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

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

Patents

We own two patents:

United States equipment patent (U.S. Patent No. 5,052,382) entitled "Apparatus for the Controlled Generation and Administration of Ozone" ("Patent No. 1"); and

United States patent (U.S. Patent No. 6073627) entitled “External Application of Ozone/Oxygen For Pathogenic Conditions, a process patent for the treatment of external afflictions." This patent also describes equipment evolutions and treatment envelope design for external medical applications (“Patent No. 2”).

Patent No. 1, which covers an apparatus for the controlled generation, monitoring and dosage of the Drug, was developed by our consultant engineer and issued and assigned to the Company in 1991. It was developed to provide the physical means to deploy our previously patented process for ozone decontamination of blood and blood products through the treatment of blood and blood components. We hold several foreign patents based on this patent in Canada, the European Community, Australia, Malaysia, Hong Kong and Japan. These foreign patents began to be issued in 1990 and will expire in most cases 17 years after their respective dates of issuance.

Patent No. 2 was issued on March 14, 2000. We believe that this patent will strengthen our existing technology patents as it addresses advanced developments with ozone generating equipment. The patent additionally describes the equipment and protocols necessary to treat external wounds, burns and ulcerations.

On November 2, 2001, we filed U.S. Provisional Patent Application serial no. 10/002943, for “Method and Apparatus for Ozone Decontamination of Biological Liquids.” This application deals with protocols for biological liquid decontamination as well as the devices for conducting decontamination.

We also own a process patent (U.S. Patent No. 4,632,980) entitled "Ozone Decontamination of Blood and Blood Products," covering a procedure for ozone decontamination of blood and blood products through the treatment of blood and blood components. That patent expired in February 2003. Many of the claims and primary aspects of the technology covered by this patent are assumed by or incorporated in Patents 1 and 2 described above. We do not believe the expiration of this earlier patent will prevent us from proceeding with our business plan as outlined in this report if and when adequate financial backing has been received by the Company. We continue to hold several foreign rights based on this earlier patent in Canada, the United Kingdom, Austria, France, Italy, Belgium, Germany, Sweden, Switzerland, Luxembourg, Australia, Malaysia, Singapore, Hong Kong and Japan.

The Company’s lack of financial resources has prevented it from making all payments required to maintain patent filings in some jurisdictions and certain of the filings have lapsed. While some of the lapsed annuities might be redeemed pursuant to local rules and regulations, there is no assurance that the Company will be successful in obtaining the financial resources required within the period that these payments may be made or that redemption payments will be permitted in all jurisdictions. Should the Company acquire the funding necessary to move forward with its science program, a full review of the patent situation shall be completed and new patents are anticipated which are expected to mitigate the loss of expired patents. Without funding, the Company’s patents will all expire.

Research and Development

We do not own laboratories or other clinical research or testing facilities. All research and development activities to date have been conducted under contract by outside laboratories and clinicians. The Company is not currently engaged in any research and development activity due to the lack of financial resources.

Government Regulation

The manufacturing and marketing of the Drug and related drug delivery technology, as well as our related research and development activities, are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. We believe that complying with these regulations will involve a considerable amount of time, expense and uncertainty.

In the United States, drugs are subject to rigorous federal regulation and, to a lesser extent, state regulation. The Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act"), and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our drug and medical devices. Drug development and approval within this regulatory framework is difficult to predict and will take a number of years and involve the expenditure of substantial resources.

The steps required before a pharmaceutical agent may be marketed in the United States include:

Pre-clinical laboratory tests, in vivo pre-clinical studies and formulation studies;

The submission to the Food and Drug Administration (the "FDA") of an Investigational New Drug Application (IND) for human clinical testing which must become effective before human clinical trials can commence;

Adequate and well-controlled human clinical trials to establish the safety and efficacy of the product;

The submission of a New Drug Application to the FDA; and

FDA approval of the New Drug Application prior to any commercial sale or shipment of the product.

In addition to obtaining FDA approval for each product, each domestic product-manufacturing establishment must be registered with, and approved by, the FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with the FDA's Good Manufacturing Practices for products, drugs and devices.

Pre-clinical Trials

Pre-clinical testing includes laboratory evaluation of chemistry and formulation, as well as tissue culture and animal studies to assess the potential safety and efficacy of the product. Pre-clinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. No assurance can be given as to the ultimate outcome of such pre-clinical testing. The results of pre-clinical testing are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to an IND, the IND becomes effective 30 days following its receipt by the FDA.

We have conducted limited pre-clinical studies on the Drug; however, more studies are needed. We intend to rely upon third-party research firms and other independent contractors to perform further pre-clinical trials to the extent we obtain sufficient funding. There is no assurance that we will obtain funding to conduct such studies or that the studies, if conducted, will yield positive results.

Clinical Trials

Clinical trials involve the administration of the new product to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with the FDA’s Good Clinical Practices standard under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND.

Further, each clinical study must be conducted under the auspices of an independent institutional review board at the institution where the study will be conducted. The institutional review board will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Compounds must be formulated according to Good Manufacturing Practices.

Clinical trials are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the product into healthy human subjects, the drug is tested for safety (adverse side effects), absorption, dosage tolerance, metabolism, bio-distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II is the proof of principal stage and involves studies in a limited patient population in order to:

Determine the efficacy of the product for specific, targeted indications;

Determine dosage tolerance and optimal dosage; and

Identify possible adverse side effects and safety risks.

When there is evidence that the product may be effective and has an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and to test for safety within an expanded patient population at geographically dispersed multi-center clinical study sites. Phase III frequently involves randomized controlled trials and, whenever possible, double blind studies. We, or the FDA, may suspend clinical trials at any time if it is believed that the individuals participating in such trials are being exposed to unacceptable health risks.

We have not conducted clinical trials and will not be in a position to do so until such time, if any, as we have obtained additional financing, of which there is no assurance. If the Company does obtain financing in an amount sufficient to support such trials, we intend to rely upon third party contractors to advise and assist us in those clinical trials.

New Drug Application and FDA Approval Process

The results of the pharmaceutical development, pre-clinical studies and clinical studies are submitted to the FDA in the form of a New Drug Application for approval of the marketing and commercial shipment of the product. The testing and approval process is likely to require substantial time and effort. In addition to the results of pre-clinical and clinical testing, the applicant must submit detailed information about chemistry and manufacturing and controls that will determine how the product will be made. The approval process is affected by a number of factors, including the severity of the disease, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. Consequently, there can be no assurance that any approval will be granted on a timely basis, if at all. The FDA may deny a New Drug Application if applicable regulatory criteria are not satisfied, require additional testing or information or require post-marketing testing (Phase IV) and surveillance to monitor the safety of a company's products if it does not believe the New Drug Application contains adequate evidence of the safety and efficacy of the drug. Notwithstanding the submission of such data, the FDA may ultimately decide that a New Drug Application does not satisfy its regulatory criteria for approval. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Post approval studies may be conducted to explore further intervention, new indications or new product uses.

Among the conditions for New Drug Application approval is the requirement that any prospective manufacturer's quality control and manufacturing procedures conform to Good Manufacturing Practices and the requirement specifications of the approved New Drug Application. In complying with standards set forth in these regulations, manufacturers must continue to expend time, money and effort in the area of drug and quality control to ensure full technical compliance. Manufacturing establishments, both foreign and domestic, also are subject to inspections by or under the authority of the FDA and by other federal, state or local agencies.

Additionally, in the event of non-compliance, the FDA may issue warning letters and seek criminal and civil penalties, enjoin manufacture, seize product or revoke approval.

International Approval

Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of commercial sales of the drug in such countries. The requirements governing the conduct of clinical trials and drug approvals vary widely from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general, each country at this time has its own procedures and requirements.

Other Regulation

In addition to regulations enforced by the FDA, our business activities may also become subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. Our research and development may involve the controlled use of hazardous materials, chemicals, and various radioactive compounds. The risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of any accident, we could be held liable for any damages that result and any such liability could exceed our resources.

Medizone’s Pre-clinical Studies

Between 1988 and 2000, we sponsored and were the primary beneficiary of research to:

Determine whether the use of ozone, either alone or with other modalities, is efficacious in the treatment of certain diseases, and

Establish additional scientific evidence that ozone, through the use of the patents or applications of scientific methodologies of a similar nature, can decontaminate blood or lipid enveloped viruses and thereby significantly diminish the degree of transfusion related disease.

These pre-clinical projects included the following:

Studies to test ozone's ability to inactivate HIV, conducted at the State University of New York Health Science Center at Syracuse;

A pilot animal study of the potential toxicity of ozone, conducted by the Arnold & Marie Schwartz College of Pharmacy and Health Science at Long Island University; and

Studies investigating the effects of ozone/oxygen admixtures on human peripheral blood, including whole blood, serum and plasma, conducted by the Blood Bank of Mt. Sinai Medical Center, New York City.

In 1990, the Canadian Blood Forces Program (under the aegis of the Canadian Department of Defense and Agriculture and the Canadian Red Cross) requested that we add the Medizone Technology to the other proprietary technology being investigated as an experimental arm of an ozone-based blood sterilization investigative program. The program was an attempt to develop an effective technology for sterilizing whole blood and blood products. This program, which was to study the Medizone Technology as it relates to the inactivation of Simian Immunodeficiency Virus ("SIV"), included a live primate model. The program continued until 1994, completing two out of the three proposed stages, when the funding of the Canadian Blood Forces Program was discontinued. We learned in late 1997 that the program suffered difficulties with the ozone/bioserum interface that was used in the study, which resulted in an inconsistent, difficult to accurately measure, dosage of ozone. As a result, from a regulatory perspective the study yielded results that could not be used due to the inability to specifically identify dosage. From a practical standpoint, we view this study of the Drug as a success, in that the treated simians never became ill through the entire course of the trial period, while the control group all died within a 14-day period.

Effect of Governmental Regulation on Medizone

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

Because ozone generation for purposes of interfacing with blood and blood products is regarded as a new drug delivery, we are precluded from selling or distributing the Drug or the Medizone Technology until after FDA approval has been granted. To obtain FDA approval, we will be required to submit medical and scientific evidence sufficient to demonstrate that the Drug and the Medizone Technology have been successfully used in pre-clinical studies followed by well-controlled clinical studies using human volunteer subjects. The FDA will not grant a New Drug Application unless it contains sufficient medical evidence and data to permit a body of qualified and experienced scientists to conclude that the new drug product is safe and effective for its recommended and proposed medical uses. Historically, the FDA has had a bias against treating humans with ozone, citing issues of safety.

We submitted an IND application to the FDA on October 6, 1985, and requested FDA approval to commence human clinical trials using ozone-oxygen to inactivate HIV. The FDA deemed the IND application to be incomplete and required us to conduct additional animal studies prior to commencing a large animal study followed by human trials. In September 1994, the FDA inactivated our IND. We have no present plans to commence a large animal study, which would require, as a precursor, additional small animal and laboratory work. Accordingly, we do not expect that our IND application will ever be re-opened. Until an NDA has been granted, we may not distribute ozone-generating devices in the United States, except to researchers who agree to follow FDA guidelines, and provided the devices are labeled as "Investigational Devices."

Because ozone has been used to treat humans in Europe for at least 30 years, the European Union (the "EU") and other regions of the world outside of North America are more accepting than the United States of human clinical trials of ozone therapies. We believe we should pursue foreign Phase I human toxicity trials, as well as early stage phase II efficacy trials in these regions of the world when funding is obtained. The results anticipated from the next planned blind Phase I/II human safety and efficacy trials investigating Hepatitis C are expected to contribute to satisfying regulatory requirements in the United States, Canada and other countries. These trials cannot be undertaken until such time as the Company obtains sufficient financing, of which there can be no assurance.

We previously entered into a research agreement with a foreign national research center to proceed with a Phase I/II human Hepatitis C trial. The protocols for the proposed testing are designed with the intention of producing a peer-reviewed, journal-published article on our ozone therapy for the Hepatitis C virus. The trial will be blind, and the country of origin and laboratories in Canada will share the data produced. This proposed trial is considered a major step toward our goal to conduct similar tests in Canada and eventually with the FDA. The proposal anticipates substantial collaborative efforts by the parties to share information with appropriate regulatory bodies in both countries. While we continued development work to proceed with this trail through 2001, no substantive progress has been made since 2001, and additional funding will be required to start the trial and see it through to completion.

We intend to pursue future trials in Canada and other countries as soon as funding allows. We believe trials successfully completed in Canada would be acceptable to both the FDA and the regulatory agencies of the European Union, due to recent harmonization of regulatory requirements between Health Canada and the FDA.

Anecdotal Studies

Beginning in 1998 and concluding in 2000, we obtained patient data for 40 participants in a developmental human pilot trial investigating ozone treatment of Hepatitis C. This trial was conducted independently by a former board member of the Company at his private clinic in Tijuana, Mexico, during the course of his normal medical practice. The trial was not conducted as a blind study as required by the FDA and the results have value only as anecdotal information. The Company believes that the information reported from the studies corresponds with the success reported in similar anecdotal studies conducted in Europe (primarily in Germany).

The clinic voluntarily provided the data from the study to us and we have not independently verified its accuracy. Patients were treated with major autohemotherapy, a blood therapy treatment protocol, on an outpatient basis. The average treatment period was 30 days. The clinic reported viral load testing (detection of the levels of the virus present), as well as standardized SGOT and SGPT tests of liver enzyme levels before the start of the treatment, immediately following treatment, and six months after treatment without any further medical intervention during the post-treatment period. No adverse side effects were observed or reported in any of the participants. According to the study results, SGOT and SGPT scores returned to normal ranges and viral load reductions averaged 5 log or 99.9% reduction. If accurate, these data indicate that in the six-month post-treatment follow up testing, 38 of the 40 patients tested at inactive viral levels for Hepatitis C virus. Two of the patients reportedly had increased viral levels at the end of the treatment test period; however, even those patients enjoyed significantly reduced viral load levels when compared to pre-treatment test results. As indicated above, because these trials were not conducted as a blind study as required by the FDA we regard the results only as anecdotal information. Further studies are needed to verify the effectiveness of the science.

Instrument Development

In 1998, we entered into an agreement with Biozone Corporation (“Biozone”) under which Biozone was granted worldwide manufacturing rights for Medizone Ozone Generating Equipment and we were granted exclusive worldwide marketing rights for Biozone manufactured equipment intended for scientific research and medical applications, to be marketed under the Medizone label. We have agreed with Biozone that it may retain the right to market its other industrial applications, such as water treatment plants. The Biozone agreement had a seven year term and will lapse this year if not renewed.

If the Company obtains adequate funding, future plans may include construction of a manufacturing and shipping center in Reno, Nevada. We selected Nevada as a location for this future facility due to the availability of human resources, land, general demographics, location and favorable tax laws. As an interim step in preparation for a transition from a research and development stage company to a company that anticipates future worldwide sales, we anticipate that we would need to construct or acquire a smaller development facility on the outskirts of the San Francisco Bay Area. This facility would provide a location in which to finalize product development and production line design prior to making the larger commitment to build a full scale manufacturing plant. These plans are on hold pending the receipt of funding, of which there is no assurance given.

International Activities

Medizone Canada Limited

To maximize research opportunities and the potential market for our products, we intend to establish subsidiary or affiliated corporations in other countries. The organization of these subsidiaries may initially result in significant expense; thereafter, it is intended that the subsidiaries would be responsible for organizing research programs and generating possible sources of financing, from which we would benefit directly or indirectly. It is anticipated that we would also enter into license agreements with all subsidiary companies for use of the Medizone Technology and patents.

We presently own all of the issued and outstanding stock of MCL Medizone Canada, Ltd., a Canadian corporation ("MedCan"). MedCan was a participant in the Canadian Blood Forces Program's SIV Study. The Canadian government requires that a Canadian entity must perform research accepted under the auspices of Health Canada. Therefore, future research in Canada will be pursued through MedCan. Future staffing of MedCan will be with Canadian citizens, and MedCan will be operated from Canada.

Medizone also intends to form a not-for-profit foundation. The future business of the non-profit entity will be to assist in research and aid economically underdeveloped third world countries in the acquisition of Medizone equipment, training of doctors, and funding of programs for the treatment of Hepatitis and AIDS, at discounted prices in those countries. We believe that if our research continues to prove successful, the future participation of the World Health Organization and the World Bank might be available to help bring our science to developing regions of the world through matching funds and grant programs. The majority of our expected future customer base is located in the developing regions of the world.

The objectives of the non-profit entity primarily would be to provide access to a highly qualified scientific advisory board and to permit more cost-effective access of treatments and assistance to third world and developing nations. The Company believes that the non-profit entity should have better access to medical researchers, infectious disease experts, virologists and scholars, including those associated with universities and research facilities. In addition, the not-for-profit nature of the entity should allow the Company to use a tiered pricing structure for services and products in emerging economies and extend the reach of the Company’s technology to as many in need as possible. The Company would eventually direct a portion of its profits to the non-profit foundation to fund its operations and its research.

Medizone New Zealand Limited

On June 22, 1995, we entered into a series of contracts that resulted in the formation of a joint venture incorporated in New Zealand, Medizone New Zealand Limited ("MNZ"). MNZ is owned equally by Medizone and Solwin Investments Limited ("Solwin"), a New Zealand corporation, which is an affiliate of Richard G. Solomon, one of our directors. MNZ is a research and development stage company formed to obtain regulatory approval for the distribution of our patented technology in New Zealand, Australia, South East Asia and the South Pacific Islands.

Under these agreements, we purchased 100% of MNZ from Mr. Solomon and sold 50% of MNZ to Solwin for $150,000. We also loaned $50,000 to MNZ on a demand basis, which was repaid on October 2, 1995. On October 26, 1995, we loaned MNZ $50,000 on a demand basis, which has not been repaid as of the date of this report. We also entered into a Licensing Agreement (the "Licensing Agreement") and a Managing Agent Agreement (the "Managing Agent Agreement") with MNZ.

Under the Licensing Agreement, we granted an exclusive license to MNZ under certain patents and the right to use the Medizone trademark in New Zealand. MNZ has agreed to apply for corresponding patent protection for these patents in New Zealand and to use its best effort to exploit the rights granted in the Licensing Agreement. The Licensing Agreement will terminate on the expiration date of the last patent obtained in New Zealand, or, if no patents are obtained, on June 22, 2010. We will receive a guaranteed minimum royalty, in an amount to be agreed to by the parties, commencing in the third year after all necessary regulatory approvals requisite to the license, use or distribution of our proprietary technology have been obtained in New Zealand. If we are unable to agree with MNZ upon the amount of the guaranteed minimum royalty, we may terminate the Licensing Agreement. Commencing on the first sale to a user by MNZ, we are to receive a sales royalty on MNZ's gross annual sales under the Licensing Agreement.

Under the Managing Agent Agreement, MNZ will act as our agent to find licensees of the Medizone Technology in Australia, New Zealand, the South Pacific Islands and Southeast Asia (including the Philippines, Indonesia and Vietnam). We will divide Licensing fees with MNZ on a sliding scale as set forth below:


	Medizone	MNZ
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%

We will also divide any net royalties paid to us under any license entered into pursuant to the Managing Agent Agreement, with MNZ receiving 10% of the net royalties under those licenses.

The Managing Agent Agreement expires on the termination or expiration of the last of the licenses obtained under the agreement, subject to earlier termination by us under certain circumstances. We have had informal discussions with the management of MNZ about acquiring the rights of MNZ in the future. Negotiations have not yet progressed to a formal stage, due to the lack of funding to finalize such a purchase.

Competition

The market in which we intend to do business is extremely competitive. We are aware of several companies that have commenced research into the use of ozone as a virucide in the treatment of HIV and other diseases, or that have announced the intention to do so. Other companies, foundations, research laboratories or institutions may also be conducting similar investigations into the use of ozone as a virucide or as a decontaminant for blood or blood products. Our lack of financial resources has limited our business activity to date.

Employees

As of December 31, 2005, we had one full time employee and four part time employees acting in outside service capacities, including our CFO. If we are successful in obtaining needed financing, we intend to bring on additional personnel and we have identified key members of that team.

Status of Research Activity

We entered into a research agreement in 2001 with a multinational research partner interested in the possibility of viral deactivation of serum products by using ozone. Serum products are used to make a media base that is then used in the manufacture of vaccines for humans and animals. Under the terms of the agreement, if the research proves successful, we would enter into a license agreement for the use of the technology in the viral deactivation of commercial vats of serum product. That trial progressed satisfactorily through the first stages, but was interrupted while product development of the gas-serum interface system was finalized. The new interface development is complete and we expect that the veterinarian research program will begin again as soon as funding has been obtained, of which there is no assurance given. The next Hepatitis C trial is also scheduled to start as soon as we complete our preparations and obtain funding. The lack of funding, however, has placed these projects on hold, and there is no assurance that we will be able to complete them as originally planned even if funding becomes available.

Risk Factors

Our business is in the development stage and is subject to a number of risks, including, but not limited to the following:

Our consolidated financial statements are prepared using generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have incurred significant losses since inception, which have resulted in an accumulated deficit of $18,953,819 at December 31, 2005. These losses and this significant deficit raise substantial doubt about our ability to continue as a going concern. The accompanying audited consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

We are a development stage company with significant accumulated deficits and we can expect losses to continue for the foreseeable future. We have not generated any revenues from operations. No assurance can be given that our business activities will ever generate revenues. Even with funding to continue our research and development activity, we expect to continue to incur substantial losses for the foreseeable future.

We do not have sufficient financing to meet our operating expenses. If we are unable to obtain financing, we may be required to take out bankruptcy or liquidate the company. We have financed operations at a minimal level during the past six years by the sale of common stock in small private placements to accredited investors. Committed funding sources have thus far been unable to perform as promised. We have pursued and continue to pursue funding opportunities; however no significant financing transactions have been completed as of the date of this Report.

Our net operating losses and our lack of revenues will require that we finance our operations through the sale of our securities for the foreseeable future. The sale of equity securities or of securities that are convertible to our common stock will result in possibly significant dilution to our shareholders and may adversely affect the trading prices of our common stock. We have funded development and operations activities to date primarily from the sale of common stock. We do not have adequate financing at this time and will require substantial additional capital to meet our obligations. The lack of assets and borrowing capacity make it most likely that such funding, if obtained, will most likely be obtained through sales of common stock or other securities. No assurances can be given that we will be able to obtain sufficient additional capital to continue our intended research program, or that any additional financing will be sufficient to satisfy our ongoing administrative and operating expenses for any significant period of time.

Our future funding needs will require significant additional capital, which is not immediately available to us. If we fail to obtain financing at levels required to pay for the testing and additional development of our technology, we could be required to scale back or to even cease operations. We may also lose key elements of our technology as patents and license agreements lapse or expire. The identification, development and commercialization of products and technology will require a commitment of substantial funds to conduct research and development activities, including possible pre-clinical and clinical studies, to create and expand distribution and marketing capabilities and to acquire and expand manufacturing capacity. Our actual capital requirements will depend on many factors, including but not limited to, the costs and timing of research and development activities, the number and type of clinical or other tests we may be required to conduct in seeking approval of products from governmental or other agencies, the success of our development efforts, the cost and timing of establishing or expanding sales and marketing and/or manufacturing activities, the extent to which our products (if any) gain market acceptance, our ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of our commercialization efforts and the commercialization efforts of our marketing partners, the costs involved in preparing, filing, prosecuting, maintaining and enforcing and defending patent claims and other intellectual property rights, developments related to regulatory issues, and other factors. We continually seek opportunities to raise funds through public or private financings, collaborative relationships or other arrangements. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish its rights to certain of our technologies, products or marketing territories. The failure to raise capital when needed will have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that any such financing, if required, will be available on terms satisfactory to us, if at all.

Our business is subject to substantial government regulation which causes us to incur significant expense and which results in substantial delay in the approval of our products for marketing in the United States and in other jurisdictions. If we do not receive the required approvals, we will be required to scale back or limit or even to cease operations. The research, development, manufacture and marketing of our products, which constitute medical devices or products, are extensively regulated by a number of governmental agencies, including the FDA. The FDA requires governmental clearance of all medical devices and drugs before they can be marketed in the United States. Similar approvals are required from other regulatory bodies in most other countries. The regulatory processes established by government agencies are lengthy, expensive, and uncertain and may require extensive and expensive clinical trials. There can be no assurance that any future products we develop that are subject to the FDA's authority will prove to be safe and effective and meet all of the applicable regulatory requirements necessary to be marketed. The results of testing activities could be susceptible to varied interpretations, which could delay, limit or prevent required regulatory approvals. In addition, we may encounter delays or denials of approval based on a number of factors, including future legislation, administrative action or changes in FDA policy made during the period of product development and FDA regulatory review. We might encounter similar delays in foreign countries. Furthermore, approval may entail ongoing requirements for, among other things, post-marketing studies. Even if a product developer obtains regulatory approval, a marketed product, its manufacturer and its manufacturing facility are subject to on-going regulation and inspections. Discovery of previously unknown problems with a product, manufacturer or facility could result in FDA sanctions, restrictions on a product or manufacturer, or an order to withdraw and/or recall a specific product from the market. There can also be no assurance that changes in the legal or regulatory framework or other subsequent developments will not result in limitation, suspension or revocation of regulatory approvals granted to us. Any such events, were they to occur, would likely have a material adverse effect on our business, financial condition and results of operations.

We may also be required to comply with FDA regulations for manufacturing practices, which mandate procedures for extensive control and documentation of product design, control and validation of the manufacturing process and overall product quality. Foreign regulatory agencies have similar manufacturing standards. Any third parties manufacturing our products or supplying materials or components for such products may also be subject to these manufacturing practices and mandatory procedures. If we or our third party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, we or they could be subject to a number of sanctions, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of market approval, seizures or recalls of product, operating restrictions and, in some cases, criminal prosecutions.

Our products may also be subject to regulation, inspection and licensing by other governmental agencies, including the Environmental Protection Agency, state agencies similar to the FDA and EPA and the Occupational Health and Safety Administration. In addition, if we engage in contract sterilization services, our products and operations may be subject to the infection control or other requirements of the Joint Commission on Accreditation of Health Care Organizations, the Centers for Disease Control, the Association for Advancement of Medical Instrumentation and other federal and state agencies that have established or maintain testing methods or sterilization process monitoring.

Although we expect to conduct clinical tests and trials of our technology, the outcome of such tests and trials is uncertain and cannot be guaranteed. If our tests and trials are not acceptable to the governing authorities, we will not obtain the approvals required to market our products in the United States and other jurisdictions where such trials are required. Certain of our planned products constitute medical devices within the meaning of the Food, Drug and Cosmetic Act and, therefore, may be subject to the FDA's regulations governing medical devices. Products regulated as medical devices may not be commercially distributed in the United States unless they have been cleared or approved by the FDA, or unless they are otherwise exempted from the FDA's regulations. Currently, there are two methods for obtaining FDA approval or clearance of medical devices. Devices deemed to pose less risk are placed in class I (general controls) or class II (general and special controls) and qualify for 510(k) notification, a procedure under §510(k) of the FDA Act. For a device to qualify under that procedure, the manufacturer must, among other things, establish that the product is substantially equivalent in intended use, safety and effectiveness to another legally marketed class I or class II device or to a "pre-amendment" class III device for which the FDA has not called for preliminary market approval or PMA. Medical class III is the class reserved for devices deemed by the FDA to pose the greatest risk. Manufacturers of class III devices must file a PMA. PMA applications generally require a much more complex submission than a 510(k) notification and typically require a showing that the device is safe and effective based on extensive and costly clinical and other testing. There can be no assurance that any product developed by Medizone, which is deemed to be a medical device for FDA Act purposes will qualify for approval under the 510(k) notification process, or that any such products will be deemed to be safe and effective if required to be qualified under a PMA.

The time required to obtain FDA approval is uncertain, and frequently takes several years or more, if approval is ever granted. There can be no assurance that any future products developed or identified solely by us or in conjunction with others will prove to be safe and efficacious in any required clinical trials, or that they will meet the applicable regulatory requirements necessary for their marketing, including the receipt of a marketing clearance, should such be required. Further, if regulatory approval is granted that approval would generally be limited to the uses for which the product has been demonstrated through clinical studies and other means to be safe and effective. Furthermore, approval may entail ongoing requirements for, among other things, post-marketing studies. Even if regulatory approval is obtained, a marketed product, its manufacturer and its manufacturing facilities and pertinent operations are subject to extensive regulation and periodic inspections. The regulatory requirements pertinent to medical device manufacturing and related activities are stringently applied and enforced by the FDA and similar governmental agencies in other countries.

If we are required to conduct clinical or other testing or trials of our products, any such testing will need to be made in compliance with regulations promulgated by the FDA under the authority granted it under the FDA Act. In other countries, governmental agencies similar to the FDA also regulate the sale of medical devices and products, generally in a manner similar to the FDA's regulation of those products. Sales of any products to Europe also require a "CE" mark, which shows that the product has been manufactured in accordance with required standards. Our sterilization technology has not been approved for use in connection with or as part of any device, and there can be no assurance that we will not encounter problems in the conduct of any clinical trials or tests we are required to complete which will cause the FDA, or any other regulatory agencies to delay or suspend the tests or otherwise not approve the sale of our products. If any of our products under development are not shown to be safe and effective in any required clinical trials, the resulting delays in developing other products or conducting related pre-clinical testing and clinical trials, as well as the need for financing to complete any such testing and trials, could have a material adverse effect on our business, financial condition and results of operations.

Our reliance on patented technology may limit the scope of our protection and may increase the cost of doing business if we are required to enforce our rights under existing and future patents. Our success will depend, in large part, on our ability to obtain and enforce patents, maintain our trade secrets and operate without infringing on the proprietary rights of others, both in the United States and in other countries. The patent positions of companies can be uncertain to some extent and involve complex legal and factual questions, and, therefore, the scope and enforceability of claims allowed in patents are not systematically predictable with absolute accuracy. Our license rights depend in part upon the breadth and scope of protection provided by the patents and the validity of the patents. Any failure to maintain the issued patents could adversely affect our business. We intend to file additional patent applications (both United States and foreign), when appropriate, relating to our technologies, improvements to the technologies and for specific products. There can be no assurance that any issued patents or pending patent applications will not be challenged, invalidated or circumvented. There can also be no assurance that the rights granted under patents will provide us with adequate proprietary protection or competitive advantages.

Our commercial success will also depend in part, on our ability to avoid infringing patents issued to others or breaching any technology licenses upon which our products and services are based. It is uncertain whether any third party patents will require us to alter our products or processes, obtain licenses or cease certain activities. In addition, if patents have been issued to others, which contain competitive or conflicting claims and such claims are ultimately determined to be valid, we may be required to obtain licenses to those patents or to develop or obtain alternative technology. If any licenses are required, there can be no assurance we will be able to obtain necessary licenses on commercially favorable terms, if at all. The breach of an existing license or the failure to obtain a license to any technology that we may require in order to commercialize our products may have a material adverse impact on our business, results of operations and financial condition. Litigation in those events or to enforce patents licensed or issued to us or to determine the scope or validity of third party proprietary rights would be costly and time consuming. If competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial costs, even if the eventual outcome is favorable to us. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require that we stop using such technology.

We also rely on secrecy to protect portions of our technology for which patent protection has not yet been pursued or which is not believed to be appropriate or obtainable in addition to any information of a confidential and proprietary nature relating to us, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to existing or potential vendors or suppliers and customer names and addresses. This technology includes technology that we acquired from two parties in connection with, but separate from, the patented technology from Biozone, a portion of which we have acquired and a portion of which we have obtained a license to use. There can be no assurance that our undivided ownership and/or license rights in such technology are enforceable.

We intend to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by confidentiality agreements with employees, collaborative partners, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, whether our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors.

We face competition in some of our markets from well-funded and significantly larger companies, some of which enjoy significant name recognition or market share in the pharmaceutical and related industries. We may not be successful in our efforts to compete with these companies. There can be no assurance that our technology will have advantages over those of competitors which will be significant enough to cause users to adopt its use. The products in which our technology may be incorporated will compete with products currently marketed, and competition from such products is expected to increase.

Most of the companies currently producing products or using techniques have significantly greater financial resources and expertise in research and development, marketing, manufacturing, pre-clinical and clinical testing, obtaining regulatory approvals and marketing. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large third parties. Academic institutions, governmental agencies and public and private research organizations also conduct research, seek patent protection and establish collaborative arrangements for product and clinical development and marketing. Many of these competitors have products or techniques approved or in development and operate large, well-funded research and development programs. Moreover, these companies and institutions may be in the process of developing technology that could be developed more quickly or ultimately proved safer or more effective than our technology.

We face competition based on product efficacy, safety, the timing and scope of regulatory approvals, availability of supply, marketing and sales capability, reimbursement coverage, price and patent position. There can be no assurance our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization.

Our business and our proposed business will subject us to the potential for product liability claims if people using our technology suffer bodily injury, including death. Although we intend to insure for this liability, the claims might in some cases exceed the amount of coverage available to us. The testing, marketing and sale of medical or clinical products and other products that may utilize our technology involve unavoidable risks. The use of any of our potential products in clinical or other tests or as a result of the sale of our products, or the use of our technology in products, may expose us to potential liability resulting from the use of such products. That liability may result from claims made directly by consumers or by regulatory agencies, companies or others selling such products. We currently have no clinical trial or product liability insurance coverage. We anticipate obtaining and maintaining appropriate insurance coverage as products become ready to be commercialized. There can be no assurance we will be able to obtain this insurance or, if we can obtain insurance, that the insurance can be acquired at a reasonable cost or in sufficient amounts to protect us against potential liability. The obligation to pay any product liability claim in excess of insurance coverage or the recall of any products incorporating our technology could have a material adverse effect on our business, financial condition and future prospects.

Our business activities may involve the use and storage of hazardous substances that are subject to government restrictions and regulation, increasing our potential liability to third parties and the cost of doing business in order to comply with applicable regulations. Our research and development activities, and the application of our technology, may involve the controlled use of materials, substances or electro-magnetic radiation that may, if used or employed improperly, prove hazardous. We believe, however, that our technology employs such potentially hazardous or toxic materials and substances in a manner that minimizes their adverse effects. Further, where such hazards are employed, we intend to utilize appropriate detection equipment and take appropriate countermeasures in design or in the test lab environment.

We have only a limited staff, and if we are to succeed in implementing our business plan, we will need to engage and retain trained and qualified staff. There is no assurance that we will succeed in attracting the personnel needed to meet our needs. As of the date of this Report, our financial limitations have restricted our staff to one administrative officer. If funding can be obtained, we will require assistance of qualified expert scientific and sales staff. We anticipate that at a minimum we will rely upon consultants and advisors to assist in formulating our research and development strategies and operations. Retaining and attracting qualified personnel, consultants and advisors will be critical to our success. In order to pursue product development and marketing plans, we will need additional qualified scientific personnel, as well as personnel with expertise in clinical testing, governmental regulation, manufacturing and marketing. Expansion of product development and marketing are also expected to require the addition of management personnel and the development of additional expertise by existing management personnel. We face competition for qualified individuals from numerous medical and clinical companies, universities and other research institutions. Even if financing is obtained, there can be no assurance we will be able to attract and retain such individuals on acceptable terms, when needed, and to the degree required.

We anticipate that any clinical development or other approval tests in which we participate will be augmented by agreements with universities and/or medical institutions or other personnel. It is likely that our academic collaborators will not become our employees. As a result, we will have limited control over their activities and can expect that only limited amounts of their time will be dedicated to our business activities. Our academic collaborators may have relationships with other commercial entities, some of which could compete with us.

We do not own our manufacturing capability and must rely on third parties to manufacture the devices required for our technology. This arrangement results in a certain loss of control over the manufacturing process and may result in problems relating to quality control and warranty issues. Although we might build or acquire our own manufacturing facility in the future, at this time we have no manufacturing capability or capacity to produce any products utilizing its sterilization technology, including any products to be used in any required clinical or other tests. We initially intend to develop relationships with other companies to manufacture those components and/or products, and we will act as specification developer and final assembly manufacturer for selected products only. The two products currently being developed by us have never been manufactured on a commercial scale and there can be no assurance that such products can be manufactured at a cost or in quantities necessary to make them commercially viable. Any delay in availability of products may result in a delay in the submission of products for any required regulatory approval or market introduction, subsequent sales of such products, which could have a material adverse effect on our business, financial condition, or results of operations. Our manufacturing processes may be labor intensive and, if so, significant increases in production volume would likely require changes in both product and process design in order to facilitate increased automation of our then-current production processes. There can be no assurance that any such changes in products or processes or efforts to automate all or any portion of our manufacturing processes would be successful, or that manufacturing or quality problems will not arise as we initiate production of any products we might develop.

In addition, some or all of our potential products, or products in which our sterilization technology may be incorporated, may be required to be manufactured in accordance with current FDA or other governmental agency manufacturing regulations. If the manufacturing facilities cannot pass a plant inspection by the FDA, the manufacturer's ability to manufacture the products will be adversely affected. There can be no assurance we can successfully acquire manufacturing capacity on a profitable basis, or contract with another party on terms acceptable to us, if at all.

This Repot may contain forward-looking statements, and actual performance results may not match theses statements. Certain statements in this report constitute "forward-looking statements" within the meaning of the rules and regulations promulgated by the Securities and Exchange Commission. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include, among other things, our lack of revenue and our substantial net losses and accumulated deficit, as well as the continuing uncertainty of profitability, our ability to develop and introduce new products, our lack of sales, marketing and distribution experience and anticipated dependence on third parties for such matters, the risks associated with obtaining governmental approval of our products, the highly competitive industry in which we intend to operate and the rapid pace of technological change within those industries, the uncertainty of patent and proprietary technology protection and our reliance on such patent protection and proprietary technology (including reliance on technology licensed from third parties), changes in or failure to comply with governmental regulation, the uncertainty of third party reimbursement for our products, general economic and business conditions and other factors referenced above.

Item 2.

Description of Property

The offices of the Company are located temporarily in the home of our CEO, Edwin Marshall, at 144 Buena Vista Ave., Stinson Beach, California. We pay or reimburse all telephone and related expenses. To date we have not been charged or paid any rent for the temporary office space provided by our CEO.

Item 3.

Legal Proceedings

During the year ended December 31, 2005, we were a party to the following litigation matters:

Rakas vs. Medizone International, Inc. A former consultant brought this action in the Supreme Court of New York, Westchester County (Index No. 08798/00) claiming we had failed to pay consulting fees under a consulting agreement. We deny that we owe any fees to the consultant. In September 2001, the parties agreed to settle the matter for $25,000. Our lack of funds prevented us from consummating the settlement, and the plaintiff moved the court to enter a default judgment in the amount of $143,000 in January 2002. On May 8, 2002, the court vacated the default judgment and requested that we post a bond of $25,000 to cover the settlement previously entered into by the parties. We have not been in a position to post the bond as of the date of this report and there is no assurance that we will be able to do so in the near term unless additional financing is made available to us. Therefore, at December 31, 2005, the entire amount of the judgment has been accrued pending additional settlement discussions.

Bottomly vs. Medizone International, Inc., Civil No. 020900403 (Third Judicial District Court for Salt Lake County). Nathaniel and Ross Bottomly and Jeff Pace, who claim to be shareholders of Medizone, brought this action. Other defendants named in the complaint are Ed and Jill Marshall. The plaintiffs allege that the company and the Marshalls made untrue statements in connection with the purchase of securities regarding certain funding transactions that we anticipated. In addition, the plaintiffs allege that the Marshalls have breached their duties to our shareholders by making untrue statements regarding the funding transactions and that they otherwise mismanaged the company. The company and the Marshalls deny any wrongdoing and have vigorously defended themselves against the claims of the plaintiffs. The Marshalls and the Company filed an answer with the court on February 25, 2002. On April 12, 2002, we also filed a Proxy Statement on Schedule 14A with the Securities and Exchange Commission, responding to the allegations of the Bottomlys and Pace in proxy solicitation materials they circulated to certain of our shareholders. On November 9, 2005, the court dismissed the action for failure to prosecute.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report. The Company will hold an annual meeting of shareholders at such time as it has obtained financing, of which there can be no assurance given.

Part II

Item 5.

Market for Common Equity and Related Stockholder Matters

Our shares are traded in the over-the-counter market, with price quotes listed on the OTC Electronic Bulletin Board under the trading symbol "MZEI," and in the "pink sheets" published by the National Quotation Bureau.

The following table summarizes data from the National Quotation Bureau, indicating the high and low bid prices for a share of common stock during each of the four calendar quarters of 2004 and 2005. These prices reflect inter-dealer prices without retail markup, markdown or commission, are not necessarily representative of actual transactions, or of the value of our securities, and are, in all likelihood, not based upon any recognized criteria of securities valuation as used in the investment banking community.


		Bid Price
Year	Calendar Period	High	Low

2004	First Quarter	$0.04	$0.01
	Second Quarter	$0.03	$0.01
	Third Quarter	$0.03	$0.01
	Fourth Quarter	$0.04	$0.01

2005	First Quarter	$0.02	$0.01
	Second Quarter	$0.08	$0.01
	Third Quarter	$0.01	$0.01
	Fourth Quarter	$0.01	$0.01

As of March 31, 2006, we estimate that there were approximately 3,500 holders of record of our common stock, and approximately 4,500 beneficial owners.

We have never paid cash dividends on the common stock. Payment of cash dividends is subject to the discretion of the Board of Directors and is dependent upon various factors, including the availability of earnings, capital needs and general financial condition. We do not believe that we have any immediate prospect of earnings. However, we anticipate that in the foreseeable future, we will follow a policy of retaining earnings, if any, to finance research and development.

Recent Sales of Unregistered Securities

No shares of common stock were issued during the years ended December 31, 2004 or 2005.

Item 6.

Management's Discussion and Analysis or Plan of Operation

Results of Operations

From inception in January 1986, we have been a development stage company primarily engaged in research into the medical uses of ozone. We have not generated, and cannot predict when or if we will generate, revenues or sufficient cash flow to fund continuing or planned operations. We had a net loss in 2005 of $326,153 compared to a net loss of $371,395 in 2004, primarily due to the decrease in legal and consulting costs from 2004 to 2005.

In 2005 and 2004, the Company expended no funds for research and development expenses. Since inception we have spent a total of $2,685,788 for research and development related to our ozone technology and related apparatus. Research and development expenses include consultant fees, interface development costs and research stage ozone generator and instrument development.

General and administrative expenses in 2005 totaled $301,773, compared to $344,935 in 2004. These expenses include professional fees, payroll, insurance costs and travel expenses. Our lack of cash has prevented us from paying all accrued salary and other expenses during the last five years.

Notes payable totaled $280,491 at December 31, 2005 and 2004 (no change in principal owed). Interest expense on these obligations totaled $23,656 and $25,249 in 2005 and 2004, respectively. The applicable interest rates on this debt ranged from 0% to 10% percent per annum.

Liquidity and Capital Resources

At December 31, 2005, we had a working capital deficiency of $2,991,274, compared to a working capital deficiency of $2,665,121 at December 31, 2004. The stockholders’ deficit at December 31, 2005 was $2,991,274 compared to $2,665,121 at December 31, 2004.

We continue to require additional investments to fund research necessary to make the appropriate regulatory applications for our technology and products and to continue operations. Our only source of financing to date has been the sale of our common stock. During 2005, we generated cash of $62,028 through financing activities, primarily through stock deposits of $69,000, less net repayments on shareholder advances totaling $8,447.

Given current negative cash flows, it will be difficult for us to continue as a going concern without an influx of capital. While we continue to aggressively pursue potential financing opportunities, those efforts have to date produced only minimal results. Previously anticipated and announced financing commitments have failed to be fulfilled and we have no assurance that financing will be obtained.

Our audited financial statements included in this annual report on Form 10-KSB have been prepared on the assumption that we will continue as a going concern. Through the date of his Report, it has been necessary to rely upon financing from the sale of our equity securities to sustain operations. Additional financing will be required if we are to continue as a going concern. If additional financing is not obtained, we will be required to discontinue operations. Even if additional financing becomes available there can be no assurance that it will be on terms favorable to us. In any event, this additional financing will result in immediate and possibly substantial dilution to existing shareholders. If we fail to receive financing in the near future, we will cease operations.

Forward-Looking Statements and Risks

The statements contained in this Report on Form 10-KSB that are not purely historical are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. These statements relate to the company’s expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of the words or phrases “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others. Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis or Plan of Operation regarding financial performance, revenue and expense levels in the future and the sufficiency of existing assets to fund future operations and capital spending needs. Actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements for the reasons detailed in the this report under the headings “Description of Business” and “Risk Factors.” The fact that some of the risk factors may be the same or similar to past reports filed with the Securities and Exchange Commission means only that the risks are present in multiple periods. The company believes that many of the risks detailed here are part of doing business in the industry in which it intends to operate and compete and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance. The forward-looking statements contained in this report are made as of the date of this report and the company assumes no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements.

Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any risks related to these policies on our business operations are discussed in Management’s Discussion and Analysis or Plan of Operations where such policies affect our reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, see Notes to the Financial Statements contained in this 10-KSB report. In all material respects, the accounting principles that are utilized conform to generally accepted accounting principles in the United States of America.

The preparation of this annual report on Form 10-KSB requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate these estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.

The Company accounts for equity securities issued for services rendered at the fair value of the securities on the date of issuance.

Item 7.

Financial Statements

Our financial statements are included commencing at page 24 and form a part of this report.

Item 8.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

During the two most recent fiscal years and the subsequent interim period, there have been no disagreements on financial disclosures or accounting matters and no resignation by or dismissal of the independent public accountants engaged by the Company.

Item 8A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls. A system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the system will meet its objectives. The design of a control system is based, in part, upon the benefits of the control system relative to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. In addition, the design of any control system is based in part upon assumptions about the likelihood of future events.

Item 8B. Other Information

Not Applicable.

Part III

Item 9.

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

The following table contains information concerning our directors and executive officers as of December 31, 2005.


Name	Age	Position
Edwin G. Marshall	63	Chairman of the Board, CEO
Richard G. Solomon	63	Director
Daniel Hoyt	66	Director
Steve M. Hanni	38	Chief Financial Officer

Edwin G. Marshall became Chairman of the Board in June 1997 and Chief Executive Officer in April 1998 and has been with us full time since June 1997. Mr. Marshall attended Santa Rosa Junior College and the College of Marin, studying fire science and business administration. From 1964 to 1978, Mr. Marshall worked in the fire service in a city with a major chemical industrial complex, leaving with the rank of Captain. A private investor since 1973, he went to work in the real estate business in 1978. From 1978 until 1995, Mr. Marshall pursued various business pursuits, including managing his personal investments.

Richard Garrett Solomon is a Director of Medizone International and an Executive Officer of Medizone New Zealand Limited. Mr. Solomon has been one of our shareholders since 1992. In 1995, Mr. Solomon joined with us to form Medizone New Zealand as a 50/50-owned joint venture. Between January 1996 and February 1997, Mr. Solomon was one of our directors. He was reappointed to the Board of Directors in May 2000. Mr. Solomon received a Bachelor of Commerce degree (University of Otago), and a Diploma of Business and Industrial Administration (University of Auckland). He is an Associate Chartered Accountant. Mr. Solomon’s career has been in business and investment. For 20 years he developed and operated a private hospital operating company, Haven Care Hospitals Limited. He was a long-standing board member and president of the New Zealand Hospitals Association and he was instrumental in the establishment of the New Zealand Council of Healthcare Standards, Inc., now known as Quality Health New Zealand.

Daniel Hoyt became a director in January 2002. Mr. Hoyt is a graduate of the University of Indiana, where he received a Bachelor of Science degree in Business Administration. Over the past 25 years, he has become a recognized leader in the life insurance industry, working as a career agent for American United Life Insurance Company. Mr. Hoyt's clients have ranged from large public companies to small private businesses. In recent years he has spent most of his time in public speaking and relationship building in the insurance industry. His previous work experience includes seven years with Merrill Lynch as well as serving as the Chief Executive for the Chamber of Commerce in three Indiana communities. Mr. Hoyt currently serves as the Chairman of the Board of Biological Systems, Inc., a privately held corporation involved with bio-cleansing remediation systems for animal fats and oil-based materials.

Steve Hanni became Chief Financial Officer in April 2002. Mr. Hanni is a certified public accountant engaged in public practice with the firm of Stayner, Bates & Jensen, PC, Certified Public Accountants, in Salt Lake City, Utah. Mr. Hanni was previously a partner with the firm of HJ & Associates, LLC, a public accounting firm that acts as our independent public accountant in connection with the audit of our annual reports and the review of our quarterly financial reports.

Jill C. Marshall, NMD had been our Chief Operating Officer, Corporate Secretary, and Director of Investor Relations since April 1998. Dr. Marshall resigned effective July 1, 2004, although she continues to consult for the Company.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and shareholders owning more than 10% of the shares are required by regulation of the Securities and Exchange Commission to furnish the company with copies of all forms filed by them under Section 16(a). We are not aware of any transactions in our common stock by or on behalf of any director, executive officer or 10% shareholder, which would require the filing of any report pursuant to Section 16(a) during the fiscal year ended December 31, 2005, that was not timely filed with the Commission.

Item 10.

Executive Compensation

The following Summary Compensation Table shows compensation paid to our Chief Executive Officer for each of the past three years.

Summary Compensation Table


	Annual Compensation			Long-Term Compensation Awards
Name and Principal Position	Year	Salary	Bonus	Options (#)
Edwin G. Marshall⁽¹⁾	2005	$170,000⁽²⁾	$ 0	0
Chairman and CEO	2004	$170,000⁽³⁾	$ 0	0
	2003	$170,000⁽⁴⁾	$ 0	0

(1)

Does not include amounts paid or accrued to Mr. Marshall’s wife (Dr. Jill Marshall), also an officer up until July 1, 2004 at which time she resigned, at $22,500 for 2005 (consulting), $47,500 for 2004 and $95,000 for 2003. Cash payments of salary or for consulting were made to Dr. Marshall in the amounts of $500 in 2005, $0 in 2004 and 2003. The remaining balance of $359,583 has been accrued overall, but remains unpaid to Dr. Marshall due to the lack of funds.

(2)

Of the amount indicated, $46,821 has been paid to Mr. Marshall as of the date of this Report. The remaining amount has been accrued due to the lack of funds. Aggregate accrued wages owed Mr. Marshall at December 31, 2005 totaled $761,929.

(3)

Of the amount indicated, no amount has been paid to Mr. Marshall as of the date of this Report. The amount has been accrued, but has not been paid to Mr. Marshall due to the lack of funds. See note (2).

(4)

We do not have any employment agreements with any employee. Our Board of Directors does not have a compensation committee or audit committee. The Board determines matters concerning the compensation of executive officers. When resources allow, we anticipate that directors will be paid an annual fee and a fee for attendance at meetings of the Board and meetings of committees of the Board.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table contains information as of March 31, 2006, regarding beneficial stock ownership of (1) all persons known to us to be beneficial owners of more than 5% of our outstanding common stock, (2) each director and each person who served at any time during fiscal year 2005 as CEO of Medizone, and (3) officers and directors at March 31, 2006, as a group. Each of the persons in the table below is believed to have sole voting and dispositive power as to all of the shares shown as beneficially owned by them except as otherwise indicated.

Number of Shares

Percent of

Name and Address

Beneficially Owned

Outstanding Shares

Edwin G. Marshall (1)

12,159,241

7.1%

Chairman of the Board,

Chief Executive Officer

P.O. Box 742

Stinson Beach, CA 94970

Richard G. Solomon (2)

7,460,001

4.4%

Board Member, Medizone International

Director, Medizone New Zealand, Ltd.

77 Seaview Road

Remuera, Auckland 1005

New Zealand

Daniel D. Hoyt (3)

7,487,408

4.4%

1 American Square, Suite 1370

Indianapolis, IN 82040

Steve M. Hanni

150,000

Chief Financial Officer

510 South 200 West

Salt Lake City, UT 84101

All Officers and Directors

as a Group (4 persons) (4):

27,256,650

15.9%

* Less than 1%.

(1)

Amount indicated includes (i) 1,020,000 shares owned of record by Jill Marshall, Mr. Marshall’s wife and our former COO, (ii) 4,936,507 shares owned of record by Sand Dollar, a limited partnership of which Mr. Marshall is the general partner, (iii) 6,129,366 shares owned directly by Mr. Marshall, (iv) 52,868 shares held by Edwin and Jill Marshall as joint tenants and (v) 20,500 shares held in street name.

(2)

Amount indicated includes combined holdings of Mr. Solomon individually, members of his immediate family, and Solwin Investments Ltd. Also includes warrants to purchase 165,000 shares of common stock at $0.05 per share.

(3)

Includes warrants to purchase 3,817,408 shares of common stock at prices ranging from $0.02 to $0.20 per share, and 3,670,000 shares owned of record.

(4)

Based on a total of 171,475,016 shares outstanding. This amount includes currently exercisable warrants for the purchase of 10,304,629 shares and eliminates all duplicate holdings.

Item 12. Certain Relationships and Related Transactions

During the years ended December 31, 2005 and 2004, no shares of common stock were issued.

Item 13.

Exhibits

(a)

Exhibits.

Number

Description

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

3.1

Articles of Incorporation of Company (2)

3.2

Bylaws (2)

3.3

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

10.1

Loan agreement with Messrs. McGrath and Watrous dated as of November 16, 1992 (4)

10.2

Loan Agreements between Medizone and John Kells, George Handel and John Pealer, executed as of June 11, 1993 (and promissory notes) (4)

10.3

Agreement for Sale and Purchase of Shares in Medizone New Zealand Limited between Richard G. Solomon and Medizone International, Inc., dated June 22, 1995 (5)

10.4

Shareholders' Agreement relating to Medizone New Zealand Limited between and among Solwin Investments Limited, Medizone International, Inc. and Medizone New Zealand Limited, dated June 22, 1995 (5)

10.5

Licensing Agreement between Medizone International, Inc. and MNZ, dated June 22, 1995 (5)

10.6

Managing Agent Agreement between Medizone International, Inc. and Medizone New Zealand Limited, dated June 22, 1995 (5)

a.7

Funding commitment letter from Groundell Trust. (6)

a.8

Letter re: change in certifying accountants (6)

a.1

Certification of Chief Executive Officer

a.2

Certification of Chief Financial Officer

Certification under Section 906 of Sarbanes-Oxley Act of 2002

(1)

Incorporated by reference to annual report on form 10-K for the year ended December 31, 1998.

(2)

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

(3)

Incorporated by reference to annual report on Form 10-K for the period ended December 31, 1986.

(4)

Incorporated by reference to annual report on Form 10-K for the period ended December 31, 1992.

(5)

Incorporated by reference to current report on Form 8-K, dated June 22, 1995.

(6)

Incorporated by reference to annual report on Form 10-KSB for the period ended December 31, 2001.

Item 14. Principal Accountants Fees and Services

Audit Fees

The Company’s independent public accountants for the past two fiscal years have been HJ Associates & Consultants, LLP. The aggregate fees billed by the Company’s independent public accountants for professional services rendered in fiscal years 2005 and 2004 in connection with (i) the audit of the Company’s annual financial statements set forth in its Annual Report on Form 10-KSB for the fiscal years ended December 31, 2005 and December 31, 2004 and (ii) the review of the Company’s quarterly financial statements set forth in its Quarterly Reports on Form 10-QSB for each of its fiscal quarters in such years, totaled approximately $5,750 and $5,900, respectively.

All Other Fees

The Company did not engage HJ Associates & Consultants, LLP on any other matters not otherwise included in the above categories in either fiscal year 2005 or 2004.

SIGNATURES

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

MEDIZONE INTERNATIONAL, INC.

By: /s/ Edwin G. Marshall

Edwin G. Marshall

Chairman of the Board and Chief Executive Officer

By: /s/ Steve M. Hanni

Chief Financial Officer

Date: April 17, 2006

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


/s/ Edwin G. Marshall	CEO and Chairman of the Board	April 17, 2006
Edwin G. Marshall

/s/ Steve M. Hanni	Chief Financial Officer	April 17, 2006
Steve M. Hanni	(Principal Financial and Accounting Officer)

/s/ Richard G. Solomon	Director	April 17, 2006
Richard G. Solomon

/s/ Daniel Hoyt	Director	April 17, 2006
Daniel Hoyt

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Medizone International, Inc. and Subsidiaries

(A Development Stage Company)

Stinson Beach, California

We have audited the accompanying consolidated balance sheet of Medizone International, Inc. and Subsidiaries (a development stage company) as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the years ended December 31, 2005 and 2004 and from inception on January 31, 1986 through December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, audits of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medizone International, Inc. and Subsidiaries (a development stage company) as of December 31, 2005, and the consolidated results of their operations and their cash flows for the years ended December 31, 2005 and 2004 and from inception on January 31, 1986 through December 31, 2005, in conformity with United States generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 8 to the consolidated financial statements, the Company has incurred significant losses which have resulted in an accumulated deficit and a deficit in stockholders’ equity, raising substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 8. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

HJ Associates & Consultants, LLP

Salt Lake City, Utah

April 11, 2006


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

ASSETS
			December 31, 2005
CURRENT ASSETS
	Cash		$ -
		Total Current Assets	-

PROPERTY AND EQUIPMENT (Net) (Notes 1 and 2)			-

OTHER ASSETS
	Receivable from affiliate, net (Note 1)		-
		Total Other Assets	-

		TOTAL ASSETS	$ -

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
	Accounts payable		$ 811,567
	Bank overdraft		6,475
	Due to shareholders (Note 7)		8,681
	Stock deposits (Note 7)		69,000
	Accrued expenses (Note 3)		1,815,060
	Notes payable (Note 6)		280,491
		Total Current Liabilities	2,991,274

		Total Liabilities	2,991,274

STOCKHOLDERS' EQUITY (DEFICIT)
	Common stock, 250,000,000 shares authorized of $0.001 par value
	161,170,387 shares issued and outstanding		161,170
	Additional paid-in capital		15,801,375
	Deficit accumulated during the development stage		(18,953,819)
		Total Stockholders' Equity (Deficit)	(2,991,274)

		TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$ -

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


MEDIZONE INTERNATIONAL, INC., AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
					From Inception
					on January 31,
			For the Years Ended		1986 Through
			December 31,		December 31,
			2005	2004	2005

REVENUES			$ -	$ -	$ 133,349

EXPENSES
	Cost of sales		-	-	103,790
	Research and development		-	-	2,685,788
	General and administrative		301,773	344,935	14,495,305
	Expense on extension of warrants (Note 5)		-	-	1,866,857
	Bad debt expense		-	-	48,947
	Depreciation and amortization		-	1,211	47,996
		Total Expenses	301,773	346,146	19,248,683

		Loss from Operations	(301,773)	(346,146)	(19,115,334)

OTHER INCOME (EXPENSES)
	Minority interest in loss		-	-	26,091
	Other income		-	-	19,780
	Gain on sale of subsidiary (Note 1)		-	-	208,417
	Interest expense		(24,380)	(25,249)	(987,511)

		Total Other Income (Expenses)	(24,380)	(25,249)	(733,223)

LOSS BEFORE EXTRAORDINARY ITEMS			(326,153)	(371,395)	(19,848,557)

EXTRAORDINARY ITEMS
	Lawsuit settlement (Note 4)		-	-	415,000
	Debt forgiveness (Note 4)		-	-	479,738

		Total Extraordinary Items	-	-	894,738

NET LOSS			$ (326,153)	$ (371,395)	$ (18,953,819)

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

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING			161,170,387	161,170,387

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage
Balance, January 31, 1986 (inception)	-	$ -	$ -	$ -	$ -

Initial capitalization of Medizone -
Nevada at $0.03 per share	5,500,000	5,500	-	150,128	-

Common shares issued in acquisition
of Medizone - Delaware (Note 1)	37,500,000	37,500	-	(37,500)	-

Common stock issued for services
rendered in July 1986 at $0.10
per share	50,000	50	-	4,950	-

Common stock issued in conversion
of warrants during 1986 at $0.10
per share	7,814,600	7,815	-	773,645	-

Stock issuance costs	-	-	-	(105,312)	-

Net loss for the year ended
December 31, 1986	-	-	-	-	(796,068)
Balance, December 31, 1986	50,864,600	50,865	-	785,911	(796,068)

Common stock issued upon exercise
of warrants in January 1987 at $0.10
per share	2,600	2	-	257	-

Common stock issued for patent in
March 1987 at $0.69 per share	1,000,000	1,000	-	692,750	-

Common stock issued for cash in
June 1987 at an average price of
$0.16 per share	950,000	950	-	149,050	-

Common stock issued for services
in June and July 1987 at an
average price of $0.12 per share	203,167	203	-	24,314	-

Common stock issued through
exercise of options in August 1987
at $1.75 per share	250,000	250	-	437,250	-

Net loss for the year ended
December 31, 1987	-	-	-	-	(2,749,400)
Balance, December 31, 1987	53,270,367	$ 53,270	$ -	$ 2,089,532	$ (3,545,468)

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage

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

Common stock issued through exercise
of options in January 1988 at $0.50
per share	200,000	200	-	99,800	-

Common stock issued for cash in
September 1988 at $0.08 per share	1,000,000	1,000	-	79,000	-

Common stock issued for services
at an average price of $0.23
per share	35,000	35	-	7,965	-

Additional capital contributed	-	-	-	174,126	-

Net loss for the year ended
December 31, 1988	-	-	-	-	(714,347)

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

Common stock issued for services
at an average price of $0.18 per
Share	261,889	262	-	46,363	-

Common stock issued for cash at
an average price of $0.05 per share	5,790,000	5,790	-	285,710	-

Common stock issued for services
and in lieu of outstanding debt at
an average price of $0.12 per share	4,749,532	4,750	-	578,978	-

Common stock issued upon exercise
of options at $0.16 per share	375,000	375	-	59,125	-

Net loss for the year ended
December 31, 1989	-	-	-	-	(862,051)

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

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage

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

Common stock issued for services
at $0.10 per share	880,000	880	-	87,120	-

Common stock issued for cash at an
average price of $0.04 per share	4,250,000	4,250	-	175,250	-

Common stock issued for services
and in lieu of outstanding debt at
an average price of $0.06 per share	2,422,727	2,423	-	137,577	-

Additional capital contributed	-	-	-	100,000	-

Net loss for the year ended
December 31, 1990	-	-	-	-	(606,309)

Balance, December 31, 1990	73,234,515	73,235	-	3,920,546	(5,728,175)

Common stock issued for cash at an
average price of $0.07 per share	4,366,667	4,366	-	305,634	-

Common stock issued for services
At an average price of $0.17 per
Share	425,000	425	-	72,075	-

Common stock issued through
exercise of options at an average
price of $0.45 per share	450,000	450	-	204,050	-

Additional capital contributed	-	-	-	5,000	-

Net loss for the year ended
December 31, 1991	-	-	-	-	(1,220,152)

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

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage

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

Common stock issued for services
at $0.20 per share	151,500	152	-	30,148	-

Common stock issued in lieu of
debt at $0.15 per share	250,000	250	-	37,250	-

Common stock issued for cash at
an average price of $0.16 per share	2,702,335	2,702	-	427,648	-

Common stock issued through
exercise of options at $0.50
per share	250,000	250	-	124,750	-

Additional capital contributed	-	-	-	81,100	-

Net loss for the year ended
December 31, 1992	-	-	-	-	(649,941)

Balance, December 31, 1992	81,830,017	81,830	-	5,208,201	(7,598,268)

Common stock issued for services
at an average price of $0.10
per share	5,347,219	5,347	-	542,859	-

Common stock issued for cash at
an average price of $0.18 per share	1,471,666	1,472	-	269,528	-

Common shares subscribed for
at $0.10 per share	-	-	2,619	259,296	-

Net loss for the year ended
December 31, 1993	-	-	-	-	(1,598,342)

Balance, December 31, 1993	88,648,902	$ 88,649	$ 2,619	$ 6,279,884	$ (9,196,610)

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage

Balance, December 31, 1993	88,648,902	$ 88,649	$ 2,619.00	$ 6,279,884	$ (9,196,610)

Common stock issued for services
at $0.10 per share	1,431,590	1,431	-	141,727	-

Common shares subscribed for at
$0.10 per share	-	-	9,552	945,682	-

Common shares subscribed for as
cancellations of indebtedness at
$0.10 per share	-	-	417	41,234	-

Common shares subscribed for as
cancellation of indebtedness at
$0.18 per share	-	-	11,250	2,022,379	-

Issuance of subscribed stock	10,384,900	10,385	(10,385)	-	-

Issuance of shares in recognition
of disparity in purchase price in
Offering	1,125,834	1,126	-	(1,126)	-

Prior period adjustment	-	-	-	-	219,422

Net loss for the year ended
December 31, 1994	-	-	-	-	(1,126,315)

Balance, December 31, 1994	101,591,226	$ 101,591	$ 13,453	$ 9,429,780	$ (10,103,503)

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage

Balance, December 31, 1994	101,591,226	$ 101,591	$13,453.00	$ 9,429,780	$ (10,103,503)

Redeemable common shares
converted to common stock	200,000	200	-	39,800	-

Common stock issued for services
at $0.10 per share	2,050,000	2,050	-	202,950	-

Issuance of subscribed stock	17,524,860	17,524	(17,524)	-	-

Cancellation of common shares	(1,242,727)	(1,242)	-	(70,563)	-

Common shares subscribed for at
$0.10 per share	-	-	9,118	902,707	-

Prior period adjustment	-	-	-	-	71,806

Additional capital contributed	-	-	-	50,000	-

Net loss for the year ended
December 31, 1995	-	-	-	-	(1,081,027)

Balance, December 31, 1995	120,123,359	120,123	5,047	10,554,674	(11,112,724)

Common stock issued for cash
at $0.10 per share	100,000	100	-	9,900	-

Common stock issued for services
At $0.10 per share	1,415,875	1,416	-	140,171	-

Issuance of subscribed stock	8,412,379	8,413	(8,413)	-	-

Common shares subscribed for
at $0.11 per share	-	-	6,456	718,991	-

Net loss for the year ended
December 31, 1996	-	-	-	-	(1,329,395)

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

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage
Balance, December 31, 1996	130,051,613	$ 130,052	$ 3,090.00	$ 11,423,736	$ (12,442,119)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage
Balance, December 31, 1998	148,926,434	$ 148,926	$ -	$ 12,610,539	$ (13,783,439)

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

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

Additional expense for extension of
warrants below market value	-	-	-	123,389	-

Net loss for the year ended
December 31, 1999	-	-	-	-	(359,571)
Balance, December 31, 1999	149,887,941	149,888	-	12,800,271	(14,143,010)

Common stock issued through
exercise of warrants at $0.07 per share	3,142,857	3,143	-	216,857	-

Common stock issued for debt at
$0.11 per share	2,020,000	2,020	-	220,180	-

Common stock issued for debt at
$0.147 per share	95,000	95	-	13,905	-

Common stock issued for services
at $0.175 per share	350,000	350	-	60,900	-

Common stock issued for debt at
$0.20 per share	20,000	20	-	3,980	-

Common stock issued for debt at
$0.55 per share	100,000	100	-	54,900	-

Cancellation of common stock	(2,000,000)	(2,000)	-	2,000	-

Common stock issued for services
at $0.285 per share	300,000	300	-	85,200	-

Additional expense for extension of
warrants below market value	-	-	-	1,743,468	-

Net loss for the year ended
December 31, 2000	-	-	-	-	(2,187,138)
Balance, December 31, 2000	153,915,798	$ 153,916	$ -	$ 15,201,661	$ (16,330,148)

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage

Balance, December 31, 2000	153,915,798	$ 153,916	$ -	$ 15,201,661	$ (16,330,148)

Common stock and warrants issued
for cash at $0.20 per share	500,000	500	-	99,500	-

Common stock and warrants issued
for cash at $0.15 per share	200,000	200	-	29,800	-

Common stock and warrants issued
for cash at $0.15 per share	166,666	167	-	24,818	-

Common stock and warrants issued
for cash at $0.18 per share	555,555	555	-	99,441	-

Net loss for the year ended
December 31, 2001	-	-	-	-	(716,054)

Balance, December 31, 2001	155,338,019	155,338	-	15,455,220	(17,046,202)

Common stock and warrants issued
for cash at $0.10 per share	1,000,000	1,000	-	99,000	-

Common stock issued for services
at $0.10 per share	230,000	230	-	22,770	-

Common stock issued for debt
at $0.10 per share	447,368	447	-	44,290	-

Common stock and warrants issued
for cash at $0.10 per share	250,000	250	-	24,750	-

Common stock issued for services
at $0.10 per share	480,000	480	-	47,520	-

Net loss for the year ended
December 31, 2002	-	-	-	-	(687,273)

Balance, December 31, 2002	157,745,387	$ 157,745	$ -	$ 15,693,550	$ (17,733,475)

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
					Deficit
					Accumulated
				Additional	During the
	Common Stock			Paid-in	Development
	Shares	Amount	Subscribed	Capital	Stage

Balance, December 31, 2002	157,745,387	$ 157,745	$ -	$ 15,693,550	$ (17,733,475)

Common stock issued in lieu of notes
payable at $0.05 per share	460,000	460	-	22,540	-

Common stock and warrants issued
for cash at $0.05 per share	400,000	400	-	19,600	-

Common stock and warrants issued
for cash at $0.05 per share	100,000	100	-	4,900	-

Common stock issued for services
at $0.05 per share	100,000	100	-	4,900	-

Common stock and warrants issued
for cash at $0.05 per share	165,000	165	-	8,085	-

Common stock and warrants issued
for cash at $0.05 per share	200,000	200	-	9,800	-

Common stock and warrants issued
for services at $0.02 per share	2,000,000	2,000	-	38,000	-

Net loss for the year ended
December 31, 2003	-	-	-	-	(522,796)

Balance, December 31, 2003	161,170,387	161,170	-	15,801,375	(18,256,271)

Net loss for the year ended
December 31, 2004	-	-	-	-	(371,395)

Balance, December 31, 2004	161,170,387	161,170	-	15,801,375	(18,627,666)

Net loss for the year ended
December 31, 2005	-	-	-	-	(326,153)

Balance, December 31, 2005	161,170,387	$ 161,170	$ -	$ 15,801,375	$ (18,953,819)

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
					From Inception
					on January 31,
			For the Years Ended		1986 Through
			December 31,		December 31,
			2005	2004	2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss			$ (326,153)	$ (371,395)	$ (18,953,819)
Adjustments to reconcile net loss to net cash
used in operating activities:
	Depreciation and amortization		-	1,211	47,996
	Stock issued for services		-	-	3,131,916
	Expense for extension of warrants below
	market value		-	-	1,866,857
	Bad debt expense		-	-	48,947
	Minority interest in loss		-	-	(26,091)
	Loss on disposal of assets		-	-	693,752
	Gain on settlement of debt		-	-	(188,510)
	Gain on lawsuit settlement		-	-	(415,000)
Changes in assets and liabilities:
	(Increase) in prepaid expenses and deposits		-	-	(48,947)
	Increase in accounts payable		80,917	48,994	1,206,097
	Increase in accrued expenses		182,958	307,332	2,238,083
		Net Cash Used by Operating Activities	(62,278)	(13,858)	(10,398,719)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Organization costs		-	-	(8,904)
	Purchase of fixed assets		-	-	(39,090)
		Net Cash Used by Investing Activities	-	-	(47,994)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Bank overdraft		6,475	-	6,475
	Proceeds from lawsuit settlement		-	-	415,000
	Principal payments on notes payable		-	-	(192,774)
	Cash received from notes payable		-	-	1,129,518
	Advances from shareholders		2,011	8,151	30,482
	Payment on shareholder advances		(10,458)	-	(16,515)
	Capital contributions		-	-	421,847
	Stock issuance costs		-	-	(105,312)
	Increase in minority interest		-	-	14,470
	Increase in stock deposits		64,000	5,000	69,000
	Issuance of common stock for cash		-	-	8,674,522
		Net Cash Provided by Financing Activities	62,028	13,151	10,446,713
NET INCREASE (DECREASE) IN CASH			(250)	(707)	-
CASH AT BEGINNING OF PERIOD			250	957	-
CASH AT END OF PERIOD			$ -	$ 250	$ -

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


MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
				From Inception
				on January 31,
		For the Years Ended		1986 Through
		December 31,		December 31,
		2005	2004	2005

SUPPLEMENTAL CASH FLOW INFORMATION

CASH PAID FOR:

	Interest	$ -	$ -	$ 26,483
	Income taxes	$ -	$ -	$ -

NON-CASH FINANCING ACTIVITIES

	Stock issued for services	$ -	$ -	$ 3,131,916
	Stock issued for conversion of debt	$ -	$ -	$ 4,139,230
	Stock issued for license agreement and patent	$ -	$ -	$ 693,752

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

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Organization

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

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

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

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

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

a. Organization (Continued)

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

b. Formation of Joint Venture

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

Pursuant to the contracts, the Company purchased 100% of MNZ from Richard G. Solomon (Solomon), a New Zealand citizen, who became a director of the Company in January 1996 and who caused the formation of MNZ on June 22,1995. Contemporaneously with this transaction, the Company sold 50% of MNZ to Solwin, a corporation owned by Solomon, for $150,000, of which the Company thereupon loaned $50,000 to MNZ on a demand basis (see Note 1(h)).

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

Pursuant to the Licensing Agreement, the Company granted an exclusive license to MNZ for its process and equipment patents and trademark in New Zealand. MNZ has agreed to apply for corresponding patent protection for the patents in New Zealand and to use its best effort to exploit the rights granted in the agreement. The License Agreement will terminate on the date of the expiration of the last to expire of any patent obtained in New Zealand, or, if no such patents are obtained, on June 22, 2010. The Company is to receive a guaranteed minimum royalty (the Guaranteed Minimum Royalty) in an amount to be agreed to by the Company and MNZ, commencing in the third year after all necessary regulatory approvals requisite to the license, use or distribution of the Company’s proprietary technology have been obtained in New Zealand. If the Company and MNZ are unable to agree upon the amount of the Guaranteed Minimum Royalty, the Company may terminate the license on thirty days notice. Commencing on the first sale to a user by MNZ, the Company will receive a sales royalty in an amount equal to 10% of MNZ’s gross annual sales under the License Agreement.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

b. Formation of Joint Venture (Continued)

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


	Medizone International, Inc.	Medizone New Zealand Limited

Initial license	50%	50%

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

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

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

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

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

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

The investment in the joint venture has been recorded under the equity method of accounting as the Company does not have ultimate control of the joint venture. The investment is recorded at $-0- as of December 31, 2005.

c. Business Activities

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

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

d. Accounting Methods

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

e. Cash and Cash Equivalents

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

f. Basic Loss Per Share

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


	For the Years Ended December 31,
	2005	2004
Numerator
- Loss before extraordinary items	$ (326,153)	$ (371,395)
- Extraordinary items	-	-

Denominator (weighted average number of shares outstanding)	161,170,387	161,170,387

Basic Income (loss) per share
- Before extraordinary items	$ (0.00)	$ (0.00)
- Extraordinary items	0.00	0.00

Basic Income (Loss) Per Share	$ (0.00)	$ (0.00)

Common stock equivalents, consisting of warrants and options, have not been included in the calculation as their effect is antidilutive for the periods presented.

g. Property and Equipment

Property and equipment is recorded at cost. Major additions and improvement are capitalized. The cost and related accumulated depreciation of equipment retired or sold are removed from the accounts and any differences between the undepreciated amount and the proceeds from the sale are recorded as gain or loss on sale of equipment. Depreciation is computed using the straight-line method over a period of five years.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

h. Receivable from Affiliate

The Company loaned $50,000 in 1996 to MNZ, the joint venture company, on a demand basis. MNZ currently has minimal assets and operations. Management has recorded an allowance for the full amount of the loan as of December 31, 2005.

i. Provision for Taxes

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.

At December 31, 2005, the Company had net operating loss carryforwards of approximately $12,800,000 that may be offset against future taxable income and expire in years 2006 through 2025. If substantial changes in the Company’s ownership should occur, there would also be an annual limitation of the amount of the NOL carryforwards which could be utilized. No tax benefit had been reported in the consolidated financial statements as, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized and the carryforwards will expire unused. The tax benefits of the loss carryforwards are offset by a valuation allowance of the same amount. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The income tax benefit differs from the amount computed at the federal statutory rates as follows:


	For the Years Ended December 31,
	2005	2004

Income tax benefit at statutory rate	$ 55,846	$ 29,615
Change in valuation allowance	(55,846)	(29,615)

	$ -	$ -

Deferred tax assets at December 31, 2005 and 2004 are comprised of the following:


	2005	2004

Net operating loss carryforwards	$ 5,002,300	$ 4,818,400
Accrued expenses	707,900	-
Valuation allowance	(5,710,200)	(4,818,400)

	$ -	$ -

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

j. Principles of Consolidation

The consolidated financial statements include those of Medizone International, Inc. (Medizone-Nevada) and its wholly owned subsidiaries, Medizone International, Inc. (Medizone-Delaware) and Medizone Canada, Ltd (MedCan).

All material intercompany accounts and transactions have been eliminated.

k. Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

l. Advertising

The Company follows the policy of charging the costs of advertising to expense as incurred.

m. Stock Options and Warrants

Prior to 2005, the Company applies Accounting Principles Board (“APB”) 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for all stock option plans. Under APB 25, compensation cost was recognized for stock options and warrants granted to employees when the option/warrant price is less than the market price of the underlying common stock on the date of grant.

FASB Statement 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation (“SFAS No. 148”) required the Company to provide proforma information regarding net income and net income per share as if compensation costs for the Company’s stock option plans and other stock awards had been determined in accordance with the fair value based method prescribed in SFAS No. 148. The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model.

Under the provisions of SFAS No. 148, the Company’s net loss for the year ended December 31, 2004 would have been unchanged from the reported net loss.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires that the use of APB Opinion No. 25 be discontinued and that compensation cost related to share-based employee compensation transactions be recognized in the financial statements. The Company adopted the revised standard during fiscal year 2005, but had no share-based employee compensation during the year ended December 31, 2005.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

n. Patents

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

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

o. Revenue Recognition Policy

The Company currently has no source of revenues. Revenue recognition policies will be determined when principal operations begin.

Recent Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has evaluated the impact of the adoption of SFAS 151, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

p. Recent Accounting Pronouncements (Continued)

In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS 152) The amendments made by Statement 152 This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions."The amendments made by Statement 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Board believes that exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the Board believes this Statement produces financial reporting that more faithfully represents the economics of the transactions. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The Company has evaluated the impact of the adoption of SFAS 153, and does not believe the impact will be significant to the Company's overall results of operations or financial position.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

p. Recent Accounting Pronouncements (Continued)

In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based Payment". Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Company adopted Statement 123(R) in December of 2005.

In December 2004, the Financial Accounting Standards Board issued two FASB Staff Positions - FSP FAS 109-1, Application of FASB Statement 109 "Accounting for Income Taxes" to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, and FSP FAS 109-2 Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. Neither of these affected the Company as it does not participate in the related activities.

In March 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff’s views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on our consolidated financial statements.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 1 -

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(Continued)

p. Recent Accounting Pronouncements (Continued)

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt FIN 47 beginning the first quarter of fiscal year 2006 and does not believe the adoption will have a material impact on its consolidated financial position or results of operations or cash flows.

In May 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections.” This new standard replaces APB Opinion No. 20, “Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,” and represents another step in the FASB’s goal to converge its standards with those issued by the IASB. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005 . The Company has evaluated the impact of the adoption of Statement 154 and does not believe the impact will be significant to the Company's overall results of operations or financial position.

In February of 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which is intended to simplify the accounting and improve the financial reporting of certain hybrid financial instruments (i.e., derivatives embedded in other financial instruments). The statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125.” SFAS No. 155 is effective for all financial instruments issued or acquired after the beginning of an entity's first fiscal year that begins after September 15, 2006.. The Company is currently evaluating the impact SFAS No. 155 will have on its consolidated financial statements, if any.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 2 -

PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31, 2005:


Office equipment	$ 19,249
Furniture	6,307
	25,556
Accumulated depreciation	(25,556)

Net property and equipment	$ -

Depreciation expense for the years ended December 31, 2005 and 2004 was $0 and $1,211, respectively.

NOTE 3 -

ACCRUED EXPENSES

Accrued expenses consist of the following at December 31, 2005:


Accrued payroll and consulting	$ 1,415,845
Accrued interest	289,369
Accrued payroll taxes	99,716
Other accruals	10,130

Total	$ 1,815,060

NOTE 4 -

COMMITMENTS AND CONTINGENCIES

On December 3, 1999, the Company filed a complaint in the Third District Court of Salt Lake County, Utah against its former Chief Financial Officer. Among other things, the complaint filed by the Company sought a declaration from the Court regarding the enforceability of the former officer’s employment contract, the right of the Company to terminate his employment and other relief. A settlement was agreed upon, under the terms of which the Company agreed to withdraw its complaint with prejudice and the former officer waived any further claim for wages or other compensation under his employment agreement. In addition, the former officer consented to the cancellation of 2,000,000 shares of common stock issued to him in prior years. On April 6, 2000, the Company settled this matter by paying its former Chief Financial Officer $35,000 and the Company received the 2,000,000 shares of common stock back for cancellation. The Company recognized a $127,000 gain on settlement of debt due to the fact that at the time of settlement, the Company had accrued $162,000 of debt to the former Chief Financial Officer.

In January of 2000, the Company received $415,000 from its former President and Chief Executive Officer who was under an order of restitution from the State of New York.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 4 -

COMMITMENTS AND CONTINGENCIES (Continued)

In addition, the Board of Directors approved the following salaries for its key officers during 1999 to commence January 1, 2000: 1) $170,000 a year for the Company’s C.E.O., 2) $170,000 a year for the Company’s President and Director of Research, and 3) $95,000 a year for the Company’s C.O.O. and Corporate Secretary. The Company’s President and Director of Research was terminated effective December 31, 2001, thus no additional accrual was recorded subsequent to this date. The Company’s C.O.O. and Corporate Secretary resigned effective July 1, 2004.

The Company is also party to litigation matters as follows:

Rakas vs. Medizone International, Inc. A former consultant brought this action against the Company claiming the Company had failed to pay consulting fees under a consulting agreement. In September 2001, the parties agreed to settle the matter for $25,000. The Company, however, did not have the funds to pay the settlement and the plaintiff moved the court to enter a default judgment in the amount of $143,000 in January 2002. On May 8, 2002, the court vacated the default judgment and requested that the Company post a bond of $25,000 to cover the settlement previously entered into by the parties. The Company has been unable to post the required bond amount as of the date of this report. Therefore, the Company has recorded the original default judgment in the amount of $143,000 at December 31, 2005. The Company intends to contest the judgment if and when they are able to obtain additional equity financing in the future.

Bottomly et al. vs. Medizone International, Inc. et al. This action was brought by certain individuals who claim to be shareholders of the Company, who have alleged that the current officers and directors of the Company have mismanaged the Company’s finances. They also allege that the Company and certain officers had made untrue statements in connection with the purchase of securities regarding certain funding transactions that the Company anticipated. The Company denies any wrongdoing and intends on vigorously contesting the case. The Company and the accused officers filed an answer with the court on February 25, 2002. On April 12, 2002, the Company also filed a Schedule 14A Proxy Statement with the Securities and Exchange Commission, responding to the allegations. On November 9, 2005, the court dismissed the action for failure to prosecute.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 5 -

ISSUANCE OF COMMON STOCK AND WARRANTS

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

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

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

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

During the period from August 1986 through October 31, 1986, the final expiration date for exercise, warrants to purchase 7,814,600 shares together with cash totaling $781,460 were received by the Company which then issued 7,814,600 shares of new common stock. In January 1987, an additional 2,600 shares were issued in exchange for warrants and cash of $259.

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

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

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

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

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

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

During 1989, the Company issued 261,889 shares of common stock to various vendors and individuals for services rendered in 1988 and 1989. The Company also issued 5,790,000 shares to individuals in private transactions for aggregate proceeds of $291,500.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 5 -

ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)

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

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

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

During 1992, the following equity transactions occurred: The Company issued 2,702,335 shares to individuals in private transactions for aggregate proceeds of $430,350; the Company issued a total of 401,500 shares of common stock for services and accrued liabilities; holders exercised options and acquired an aggregate of 250,000 shares of common stock.

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

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 5 -

ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)

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

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

During 1995, the following equity transactions occurred: The Company issued a total of 2,050,000 shares of common stock for services. $911,825 was received from investors subscribing to 9,118,260 shares of common stock. Also, 7,524,860 common shares, previously recorded as shares subscribed, were issued, and 1,242,727 were retired in accordance with the settlement agreement with former management. 200,000 of redeemable shares were converted into common stock. The Company sold shares of its New Zealand subsidiary for aggregate proceeds of $150,000.

During 1996, the Company received stock subscription agreements for the purchase of 7,254,470 shares of its common stock, together with proceeds totaling $725,447 from sales of its securities to non-United States investors, outside of the United States pursuant to Regulation S promulgated under the Securities Act of 1993. Approximately $635,447 of these proceeds were from the sale of the Company’s common stock at a per share price of $0.10 (including $37,500 for 375,000 shares from Richard G. Solomon, at the time a director of the Company). The remaining $90,000 were from the sale of 900,000 units, each unit consisting of one share of the Company’s common stock at a per share price of $0.10 to a director pursuant to the non-public offering exemption from registration under the Securities Act. In May 1996, the Company issued 600,000 shares of its common stock to employees and 250,000 shares of its common stock to its public relations consultant as additional compensation. The Company also issued 565,875 shares of its common stock to various consultants for services rendered.

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

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 5 -

ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)

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

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

During 2000, the Company issued 3,142,857 shares of common stock through the exercise of outstanding warrants at $0.07 per share for a total of $220,000. The Company issued common stock for services in two different instances during the year. One issuance was of 350,000 shares of common stock for a total of $61,250. The other issuance was for 300,000 shares of common stock for a total of $85,500. The Company issued common stock for debt in four separate instances. The first one being 2,020,000 shares of common stock issued for a total of $222,200. The second issuance was 95,000 shares of common stock for a total of $14,000. The third issuance was 20,000 shares of common stock for a total of $4,000. The fourth issuance was 100,000 shares of common stock for a total of $55,000. The Company also canceled 2,000,000 shares of common stock pursuant to the settlement agreement with the Company’s former C.F.O. (See Note 4). The Company also recognized an additional expense of $1,743,468 for the extension of warrants below market value.

During 2001, the Company issued a total of 1,422,221 shares of common stock at prices ranging from $0.15 to $0.20 per share for total proceeds of $254,981. Pursuant to these stock issuances, the Company granted warrants to purchase 2,122,221 shares of common stock at exercise prices of $0.15 to $0.20 per share. 25,000,000 warrants previously outstanding also expired during 2001, unexercised.

During 2002, the Company issued a total of 1,250,000 shares of common stock at $0.10 per share for total proceeds of $125,000. The Company also granted the investors warrants to purchase 1,250,000 shares of common stock at $0.10 per share, exercisable over a two-year term. The market price of the common stock was $0.10 per share on the date of the issuance of the shares and grant of the warrants.

Also during the year ended December 31, 2002, the Company issued a total of 677,368 shares of common stock for services rendered and repayment of outstanding debt at $0.10 per share for a total of $67,737. The Company also issued a total of 480,000 shares of common stock, pursuant to an S-8 registration, for services rendered at $0.10 per share for a total of $48,000.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 5 -

ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)

During 2003, the Company issued a total of 865,000 shares of common stock at $0.05 per share for total proceeds of $43,250. The Company also granted the investors warrants to purchase 865,000 shares of common stock at $0.05 per share, exercisable over a two-year term. The market price of the common stock was $0.05 per share on the date of the issuance of the shares and grant of the warrants.

Also during the year ended December 31, 2003, the Company issued 460,000 shares of common stock at $0.05 per share in lieu of a note payable totaling $23,000 and 100,000 shares of common stock to an officer of the Company for services rendered valued at $0.05 per share for a total value of $5,000.

The Company also issued 2,000,000 shares of restricted common stock to an individual pursuant to a “Letter of Understanding / Employment” whereby the individual was issued the shares as an incentive for him to enter into a future employment agreement with the Company once initial funding is obtained. The shares have been valued at $0.02 per share, the market price of the common stock on the date of issuance. The individual was also issued 2,000,000 warrants exercisable at $0.40 per share. The warrants cannot be exercised, however, unless the individual remains employed by the Company for a minimum of three years. The warrants carry a five year term and include a cashless exercise option.

As of December 31, 2005, the following warrants were outstanding:


Warrants	Exercise Price	Termination Dates
750,000	$0.20	May 30, 2006
250,000	$0.20	May 30, 2006
400,000	$0.15	May 30, 2006
166,666	$0.15	May 30, 2006
555,555	$0.18	May 30, 2006
250,000	$0.55	May 30, 2006
1,000,000	$0.10	May 30, 2006
250,000	$0.10	May 30, 2006
400,000	$0.05	May 30, 2006
100,000	$0.05	May 30, 2006
165,000	$0.05	May 30, 2006
200,000	$0.05	May 30, 2006
2,000,000	$0.40	December 26, 2008
409,075	$0.02	June 21, 2006
125,000	$0.02	August 23, 2006
83,333	$0.03	November 12, 2006
100,000	$0.02	April 28, 2007
400,000	$0.02	June 8, 2007
250,000	$0.02	June 16, 2007
400,000	$0.02	July 22, 2007
300,000	$0.02	August 9, 2007
350,000	$0.02	August 24, 2007
300,000	$0.02	Sept. 21, 2007
150,000	$0.02	Sept. 28, 2007
150,000	$0.02	October 21, 2007
450,000	$0.02	November 11, 2007
350,000	$0.02	December 14, 2007

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 5 -

ISSUANCE OF COMMON STOCK AND WARRANTS (Continued)

On various dates over the past three years up to and including February 21, 2006, the Board of Directors of the Company agreed to extend the expiration date on certain of the above outstanding warrants to purchase common stock to May 30, 2006, as indicated above. The Company estimates the fair value of each stock award or expiration extension at the grant date or extension date by using the Black-Scholes option pricing model pursuant to FASB Statement 123, “Accounting for Stock-Based Compensation.” Under the provisions of SFAS 123, no additional expense was recorded at the various dates under the Black-Scholes option pricing model for these warrant extensions.

NOTE 6 -

NOTES PAYABLE

Notes payable consisted of the following at December 31, 2005:


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

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

Notes payable to directors and a family member of a director, due at various dates in 1995, 1996 and 1997 (principal and accrued interest in arrears as of report date), plus interest at 8% per annum. The Company has the right to repay the loans with restricted stock at $0.10 per share if alternative financings do not occur.	182,676

Total Notes Payable	280,491

Less: Current Portion	(280,491)

Long-Term Notes Payable	$ -

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 6 -

NOTES PAYABLE (Continued)

The aggregate principal maturities of notes payable are as follows:


Year Ended December 31,	Amount
2006	$ 280,491
2007	-
2008	-
2009	-
2010	-
2011 and thereafter	-

Total	$ 280,491

NOTE 7 -

ADVANCES FROM SHAREHOLDERS AND STOCK DEPOSITS

During the years ended December 31, 2002, 2003 and 2004, certain directors advanced a total of $8,681 to the Company to cover operating expenses. These amounts are non-interest bearing, unsecured and due on demand.

In addition, the Company received a total of $69,000 from two separate directors during 2004 and 2005, the proceeds of which will be used to purchase shares of the Company’s common stock. The Board of Directors of the Company has approved the issuance of a total of 3,408,333 shares of common stock for the $69,000, although the shares have not been issued as of the date of this audit report. Accordingly, the amount is being shown as a stock deposit at December 31, 2005 until the shares are issued to the directors.

NOTE 8 -

GOING CONCERN

The Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred significant losses from its inception through December 31, 2005, which have resulted in an accumulated deficit of $18,953,819 at December 31, 2005. The Company does not have an established source of funds sufficient to cover its operating costs, has a working capital deficit of approximately $2,991,000, and has relied exclusively on debt and equity financing. Accordingly, there is substantial doubt about its ability to continue as a going concern. Continuation of the Company as a going concern is dependent upon obtaining additional capital, obtaining the requisite approvals from the Food and Drug Administration (“FDA”) and/or the European Union for the marketing of ozone-related products and equipment, and ultimately, upon the Company’s attaining profitable operations. The Company will require a substantial amount of additional funds to complete the development of its products, to establish manufacturing facilities, to build a sales and marketing organization, and to fund additional losses, which the Company expects to incur over the next several years. However, if the Company is unsuccessful in raising necessary capital, it will most likely be forced to cease operations.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 8 -

GOING CONCERN (Continued)

Because ozone-generation for the purposes of interfacing with blood and blood products is regarded as a new drug delivery system, the Company is precluded from selling or distributing its drug or the Company’s proprietary technology (the “Medizone Technology”) in the United States until after FDA approval has been granted. In order to obtain FDA approval, the Company will be required to submit a New Drug Application (“NDA”) for review by the FDA and provide medical and scientific evidence sufficient to demonstrate that the drug and the Medizone Technology have been successfully used in pre-clinical studies followed by three phases of well-controlled clinical studies using human volunteer subjects. The FDA will not grant an NDA unless the application contains sufficient medical evidence and data to permit a body of qualified and experienced scientists to conclude that the new drug product is safe and effective for its recommended and proposed medical uses. Historically, the FDA has held a strong bias against treating humans with ozone, due largely to issues of safety.

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

Because ozone has been used to treat humans in Europe for at least 30 years, the EU is more accepting of human clinical trials of ozone therapies being conducted than is the United States. Accordingly, management believes that the Company should pursue the option of conducting human clinical trials in Europe, using stringent protocols that will meet EU standards, with a view to utilizing the results of such trials in an effort to obtain EU approval, to market the product in Europe and to reopen the Company’s FDA file. The Company estimates that 90% of its potential market is outside the United States.

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

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005 and 2004

NOTE 8 -

GOING CONCERN (Continued)

The ability of the Company to continue as a going concern is dependent on its ability to successfully accomplish the plan described in the preceding paragraphs and eventually attain profitable operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of these uncertainties.