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The following is an excerpt from a 10KSB SEC Filing, filed by MEDIZONE INTERNATIONAL INC on 4/15/2002.
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MEDIZONE INTERNATIONAL INC - 10KSB - 20020415 - PART_I

PART I

Item 1. Description of Business

General

Medizone International, Inc., a Nevada corporation ("Medizone") organized in 1986, is a development stage company. To date the principal business of Medizone has been limited to (i) seeking regulatory approval for its drug, a precise mixture of ozone and oxygen called MEDIZONE(R) (sometimes referred to in this report as the "Drug"), and its 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 its products, including its 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

Medizone owns three key patents. The first is a United States process patent (U.S. Patent No. 4,632,980) entitled, "Ozone Decontamination of Blood and Blood Products" ("Patent No. 1"). The second patent is a related United States equipment patent (U.S. Patent No. 5,052,382) entitled "Approaches for the Control Generation and Administration of Ozone" ("Patent No. 2"). The third patent (U.S. Serial Number 09/126,504) External Application of Ozone/Oxygen For External Applications is 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. 3").

Patent No. 1, which covers a procedure for ozone decontamination of blood and blood products through the treatment of blood and blood components, is Medizone's principal asset. It was purchased together with rights to other ozone-related inventions from Immunologics Limited Partnership, L.P. ("ILP") in 1987, for 6,000,000 shares of common stock (the "Patent Purchase Agreement"). John M. Kells, the general partner of ILP, was Chairman of Medizone's Board of Directors from November 1992 through September 1993.

The Patent Purchase Agreement requires Medizone to pay to ILP an annual royalty equal to 3% of the net receipts (defined as net receipts after all credits, returns and customary deductions, and exclusive of all taxes) received by Medizone from the sale of any product, device, or apparatus embodying Patent No. 1. The method covered by Patent No. 1 is the principal use of ozone under study by Medizone and is the method incorporated in its regulatory applications. In June 1990, pursuant to Medizone's request for re-examination of Patent No. 1, the U.S. Patent Office issued a re-examination certificate, confirming the patentability of the claims covered by Patent No. 1. This patent will expire in 2003, subject to extension based upon the length of time required to bring it to commercial fruition. Medizone has been granted foreign patents based on Patent No. 1 in Canada, the European Community, Australia, Malaysia, Hong Kong and Japan. Applications are pending in Singapore. The 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, which covers an apparatus for the controlled generation, monitoring and dosage of the Drug was developed by a consultant engineer to Medizone and issued and assigned to Medizone in 1991. Patent No. 2 was developed to provide the physical means to deploy Patent No. 1. The foreign patent coverage of Patent No. 2 parallels the coverage of Patent No. 1.

Patent No. 3, was issued to Medizone on March 14, 2000, as U.S. Patent No. 09/126,504 for External Application of Ozone/Oxygen for Pathogenic Conditions. Medizone believes that this patent will strengthen Medizone's

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existing 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 May 24, 2000, Medizone received recorded assignment of U.S. Provisional Patent Application no. 60/206,660 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.

Research and Development

Medizone does not own laboratories or other clinical research or testing facilities. Medizone's research and development activities to date have been conducted under contract by outside laboratories and clinicians.

Pre-clinical Studies

Pre-clinical Studies are non-human studies of the Drug and related equipment. Since 1988, Medizone sponsored and was the beneficiary of research to
(1) determine whether the use of ozone, either alone or with other modalities, is efficacious in the treatment of certain diseases and (2) 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.

Pre-clinical projects sponsored by Medizone include: (1) studies to test ozone's ability to inactivate HIV, conducted at the State University of New York Health Science Center at Syracuse; (2) 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 (3) 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 Medizone 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. Medizone's management 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, Medizone views 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.

Governmental Regulation

The Drug, the Medizone Technology and related products are regulated under the Food, Drug and Cosmetic Act and related regulations (the "FDC Act") by the Food and Drug Administration (the "FDA"). 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, Medizone is precluded from selling or distributing the Drug or the Medizone Technology until after FDA approval has been granted. To obtain FDA approval Medizone 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 ("NDA") unless it contains sufficient medical evidence and data to permit a body of qualified and experienced scientists to conclude that the new drug product is safe and effective for its

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recommended and proposed medical uses. Historically, the FDA has had a bias against treating humans with ozone, citing issues of safety.

To initiate Phase I of human clinical studies required as part of a 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 studies can be conducted without exposing the volunteer human subjects to an unreasonable risk of illness or injury. Medizone 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 Medizone to conduct additional animal studies prior to commencing a large animal study followed by human trials. In September 1994, the FDA inactivated Medizone's IND. Medizone 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 Medizone's IND application will ever be re-opened. Until an NDA has been granted to Medizone, 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 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. Management believes Medizone should pursue foreign Phase I human toxicity trials, as well as early stage phase II efficacy trials in these regions of the world. 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.

It is Medizone's intention to pursue future trials in Canada and other countries as soon as funding allows. Medizone believes trials successfully completed in Canada should be acceptable to both the United States FDA and the regulatory agencies of the European Union, due to recent harmonization of regulatory requirements between Health Canada and the FDA.

Clinical Studies

Human Pilot Trial - Hepatitis C

Beginning in 1998 and concluding in 2000, Medizone received patient data for 40 participants in a developmental human pilot trial investigating ozone treatment of hepatitis C. William Hitt, Ph.D., M.D., at his clinic, The William Hitt Center, in Tijuana, Mexico, conducted this trial during the normal course of practice. Dr. Hitt is a former member of the Medizone board of directors. This trial was not conducted as a blind study as required by the FDA and the results can serve only as anecdotal information.

Dr. Hitt provided the following data to Medizone. In his developmental ozone trial, Dr. Hitt treated patients using major autohemotherapy, a blood therapy treatment protocol, on an outpatient basis. The average treatment period was 30 days. Dr. Hitt conducted viral load testing (detecting 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. Dr. Hitt reported that no adverse side effects were observed or reported in any of the participants. According to Dr. Hitt, SGOT and SGPT scores returned to normal ranges and viral load reductions averaged 5 log or 99.9% reduction. Dr. Hitt's data indicates 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. Dr. Hitt's trials were not conducted as a blind study as required by the FDA and the Company regards these results only as anecdotal information. Further studies are needed to verify the effectiveness of the science.

Future Blind Trials - Hepatitis C

Medizone entered into a research agreement with the national research center of a foreign country outside of North America 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 Medizone's ozone therapy for the hepatitis C virus. The trial will be

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blind and the data produced will be shared by the country of origin and laboratories in Canada. This proposed trial is considered a major step toward the company's goal to conduct similar tests in Canada and eventually with the United States FDA. The proposal anticipates substantial collaborative efforts by the parties to share information with appropriate regulatory bodies in both countries. While the company has continued development work to proceed with this trail, additional funding will be required to start the trial and see it through to completion.

Instrument Development

Medizone has entered into an agreement with Biozone Corporation ("Biozone") under which Biozone was granted worldwide manufacturing rights for Medizone Ozone Generating Equipment. Medizone has exclusive worldwide marketing rights for Biozone manufactured equipment intended for scientific research and medical applications, to be marketed under the Medizone label. Biozone expects to relocate to Nevada in the future as an integrated part of our proposed future manufacturing facility to be located in Reno, Nevada. We have agreed with Biozone that it may retain the right to market its other industrial applications, such as water treatment plants. Once Medizone has obtained regulatory approvals for its technology and protocols and is in production mode, Biozone will phase out its other business to concentrate on its work with Medizone.

In the future the company intends to build a manufacturing and shipping center in Reno, Nevada. Nevada was chosen as a location for this facility due to the availability of human resources, land, general demographics, location and tax considerations. As an interim step in preparation for a transition from a research and development stage company to a company that anticipates future worldwide sales, Medizone plans to build a smaller development facility on the outskirts of the San Francisco Bay Area. This facility is intended to 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. The company will require additional funding to complete the development facility as well as the manufacturing plant.

International Activities

Medizone Canada Limited

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

In June 1998, Medizone sold its majority interest in Medizone Canada Limited, a Utah corporation ("MCL") for $125,000 cash, 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. Medizone retained ownership of 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 the 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. The company believes that if its research continues to prove successful, the future participation of the World Health Organization and the World Bank might be available to help bring the company's science to these developing regions of the world through matching funds and grant programs. The majority of the company's future customer base is located in the developing regions of the world.

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Medizone New Zealand Limited

On June 22, 1995, Medizone entered into a series of contracts that resulted in the formation of a joint venture subsidiary 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 ("Solomon"), a director of Medizone. MNZ is a research and development stage company formed to obtain regulatory approval for the distribution of Medizone's patented technology in New Zealand, Australia, South East Asia and the South Pacific Islands.

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

Under the Licensing Agreement, Medizone granted an exclusive license to MNZ for Patent No. 1 and Patent No. 2 and Medizone's 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. Medizone will receive a guaranteed minimum royalty, in an amount to be agreed to by Medizone and MNZ, commencing in the third year after all necessary regulatory approvals requisite to the license, use or distribution of Medizone's proprietary technology have been obtained in New Zealand. If Medizone and MNZ are unable to agree upon the amount of the guaranteed minimum royalty, Medizone may terminate the Licensing Agreement. Commencing on the first sale to a user by MNZ, Medizone will receive a sales royalty of MNZ's gross annual sales under the Licensing Agreement.

Under the Managing Agent Agreement, MNZ will act as Medizone's 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). Licensing fees will be divided between Medizone and 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%

MNZ and Medizone will also divide any net royalties paid to Medizone under any license entered into pursuant to the Managing Agent Agreement, with MNZ receiving 10% and Medizone receiving 90% 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 Medizone under certain circumstances. The company's management has had informal discussions with the management of Medizone New Zealand, Ltd. about Medizone acquiring the rights of Medizone New Zealand, Ltd. in the future. Negotiations have not yet progressed to a formal stage.

Competition

The market in which Medizone intends to do business is extremely competitive. Medizone is 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.

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Employees

As of December 31, 2001, Medizone had two full time employees and four part time employees acting in a consulting or outside services capacity, such as our outside CFO. A staff expansion is planned following the infusion of additional operating capital and key people have already been identified.

Status of Medizone's Research

Medizone has entered into a research agreement 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, Medizone will 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 and has since been halted while product development of the gas-serum interface system progresses to the next stage. The new interface development is nearly complete and we expect that the veterinarian research program will begin again in the second half of 2002 assuming the availability of additional funding. The next hepatitis C trial is also scheduled to start as soon as we complete our preparations. The lack of funding, however, has placed this project on hold and there is no assurance that we will be able to complete it as originally planned.

Risk Factors

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

Medizone's 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. Medizone has historically incurred significant losses, which have resulted in an accumulated deficit of $17,046,202 at December 31, 2001. These losses and this significant deficit raise substantial doubt about Medizone's 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 our losses to continue for the foreseeable future. Medizone has not generated any revenues from operations. No assurance can be given that its business activities will ever generate revenues. Medizone has experienced substantial losses throughout its history. Losses can be expected to continue 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. During 2001 and in the first quarter of 2002, the company sold a small amount of its common stock in private placements to accredited investors. The company pursued and continues to pursue funding opportunities, however to date no significant financing transactions have been completed.

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. Medizone has funded its development activities to date primarily from the sale of its common stock. Medizone does not have adequate financing at this time and will require substantial additional capital to meet its obligations, which will most likely be obtained through sales of its common stock or other securities. No assurances can be given that Medizone will be able to obtain sufficient additional capital for it to continue its research program, or that any additional financing will be sufficient to satisfy Medizone's 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

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technology, we could be required to scale back or to even cease operations. The identification, development and commercialization of Medizone's 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. Medizone's actual capital requirements will depend on many factors, including but not limited to, the costs and timing of Medizone's research and development activities, the number and type of clinical or other tests Medizone may be required to conduct in seeking approval of its products from governmental or other agencies, the success of Medizone's development efforts, the cost and timing of establishing or expanding Medizone's sales and marketing and/or manufacturing activities, the extent to which Medizone's products (if any) gain market acceptance, Medizone's ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of Medizone's commercialization efforts and the commercialization efforts of Medizone's 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. Medizone continues to 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 Medizone to relinquish its rights to certain of its technologies, products or marketing territories. Medizone's failure to raise capital when needed could also have a material adverse effect on Medizone's 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 Medizone, 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 Medizone's products which constitute medical devices or products will be extensively regulated by a number of governmental agencies, including the United States Food & Drug Administration. 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 virtually every foreign country. The regulatory processes established by these government agencies are lengthy, expensive, and uncertain and may require extensive and expensive clinical trials. There can be no assurance that any future products developed by Medizone and which 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 Medizone obtains from its testing activities could be susceptible to varied interpretations, which could delay, limit or prevent required regulatory approvals. In addition, Medizone 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. Medizone may 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 Medizone. Any such events, were they to occur, could have a material adverse effect on Medizone's business, financial condition and results of operations.

Medizone 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 Medizone's products or supplying materials or components for such products may also be subject to these manufacturing practices and mandatory procedures. If Medizone, its management or its third party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, it 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.

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Medizone's 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 Medizone engages in contract sterilization services, Medizone's products and operations may be subject to the infection control or other requirements of the Joint Commission on Accreditation of Health Care Organizations, the Center 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 Medizone's products may 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 ss.510(k) of the FDA Act. In order 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 by Medizone alone 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 Medizone is required to conduct clinical or other testing or trials of its 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. Medizone's sterilization technology has not been approved for use in connection with or as part of any device, and there can be no assurance that Medizone will not encounter problems in the conduct of any clinical trials or tests it is 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 Medizone's products. If any of Medizone's 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 Medizone's business, financial condition and results of operations.

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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. Medizone's success will depend, in large part, on its ability to obtain and enforce patents, maintain its 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. Medizone's 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 Medizone's business. Medizone intends to file additional patent applications (both United States and foreign), when appropriate, relating to its technologies, improvements to its technologies and for specific products it develops. There can be no assurance that any issued patents or pending patent applications of Medizone will not be challenged, invalidated or circumvented. There can also be no assurance that the rights granted thereunder will provide proprietary protection or competitive advantages to Medizone.

The commercial success of Medizone will also depend, in part, on Medizone not infringing patents issued to others and not breaching any technology licenses upon which Medizone's products and services are based. It is uncertain whether any third party patents will require Medizone to alter its 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, Medizone 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 Medizone will be able to obtain any such licenses on commercially favorable terms, if at all. Medizone's breach of an existing license or its failure to obtain a license to any technology that it may require in order to commercialize its products may have a material adverse impact on Medizone's business, results of operations and financial condition. Further, litigation, which could result in substantial costs to Medizone, may also be necessary to enforce patents licensed or issued to Medizone or to determine the scope or validity of third party proprietary rights. If competitors of Medizone prepare and file patent applications in the United States that claim technology also claimed by Medizone, Medizone 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 cost to Medizone, even if the eventual outcome is favorable to Medizone. An adverse outcome could subject Medizone to significant liabilities to third-parties, require disputed rights to be licensed from third-parties or require Medizone to cease using such technology.

Medizone also relies on secrecy to protect portions of its 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 Medizone, including but not limited to its know-how, trade secrets, methods of operation, names and information relating to Medizone's vendors or suppliers and customer names and addresses. This technology includes technology that Medizone acquired from two parties in connection with, but separate from, the patented technology from Biozone, a portion of which Medizone has acquired and a portion of which it has obtained a license to use. There can be no assurance that Medizone's undivided ownership and/or license rights in such technology are enforceable.

Medizone intends to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by confidentiality agreements with its employees, collaborative partners, consultants and certain contractors. There can be no assurance that these agreements will not be breached, that Medizone will have adequate remedies for any breach, whether Medizone's 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 Medizone's technology will have advantages over those of its competitors, which will be significant enough to cause users to adopt its use. The products in which Medizone's technology may be incorporated will compete with products currently marketed, and competition from such products is expected to increase.

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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 than Medizone. 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 Medizone's technology.

Medizone faces 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 Medizone's competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization than Medizone.

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 Medizone's technology involve unavoidable risks. The use of any of Medizone's potential products in clinical or other tests or as a result of the sale of its products, or the use of its technology in products, may expose Medizone to potential liability resulting from the use of such products. Such liability may result from claims made directly from consumers or by regulatory agencies, companies or others selling such products. Medizone currently has no clinical trial or product liability insurance coverage. The company anticipates obtaining and maintaining appropriate insurance coverage as its products become ready to be commercialized. There can be no assurance Medizone will be able to obtain this insurance or, if it obtains insurance, that the insurance can be acquired at a reasonable cost or in sufficient amounts to protect Medizone against potential liability. The obligation to pay any product liability claim in excess of insurance coverage or the recall of any products incorporating Medizone's technology could have a material adverse effect on Medizone's 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. Medizone's research and development activities, and the application of Medizone's technology, may involve the controlled use of materials, substances or electro-magnetic radiation that may, if used or employed improperly, prove hazardous. Medizone believes, however, that its technology employs such potentially hazardous or toxic materials and substances in a manner that minimizes their adverse effects. Further, where such hazards are employed, Medizone intends 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. Medizone is dependent on the principal members of its scientific and management staff. In addition, Medizone anticipates that it will rely upon consultants and advisors to assist it in formulating its research and development strategies and operations. Retaining and attracting qualified personnel, consultants and advisors will be critical to Medizone's success. In order to pursue its product development and marketing plans, Medizone will be required to hire 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. Medizone faces competition for qualified individuals from numerous medical and clinical companies, universities and other research institutions. There can be no assurance Medizone will be able to attract and retain such individuals on acceptable terms, when needed, and to the degree required.

Medizone anticipates that any clinical development or other approval tests in which it participates will be augmented by agreements with universities and/or medical institutions or other personnel. It is likely that Medizone's

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academic collaborators will not be employees of Medizone. As a result, Medizone will have limited control over their activities and can expect that only limited amounts of their time will be dedicated to Medizone's activities. Medizone's academic collaborators may have relationships with other commercial entities, some of which could compete with Medizone.

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 plan to 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. Medizone initially intends to develop relationships with other companies to manufacture those components and/or products, with Medizone being primarily in the role of specification developer and final assembly manufacturer for selected products only. The two products currently being developed by Medizone 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 Medizone's and business, financial condition, or results of operations. Medizone's 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 Medizone's 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 Medizone's manufacturing processes would be successful, or that manufacturing or quality problems will not arise as Medizone initiates production of any products it might develop.

In addition, some or all of Medizone's potential products, or products in which Medizone's 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 Medizone can successfully acquire manufacturing capacity on a profitable basis, or contract with another party on terms acceptable to Medizone, if at all.

You should consider this cautionary warning concerning forward-looking statements in this report. 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 which may cause the actual results, performance or achievements of Medizone, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among other things, Medizone's unprofitability and the continuing uncertainty of its profitability, Medizone's ability to develop and introduce new products, Medizone's lack of sales, marketing and distribution experience and anticipated dependence on third parties for such matters, the risks associated with obtaining governmental approval of Medizone's products, the highly competitive industry in which Medizone intends to operate and the rapid pace of technological change within those industries, the uncertainty of patent and proprietary technology protection and Medizone's reliance on such patent 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 Medizone's products, Medizone's dependence on key employees, general economic and business conditions and other factors referenced above.

Item 2. Properties

Medizone's offices are located at 144 Buena Vista Ave., Stinson Beach, California. The offices are located temporarily in the home of Medizone's CEO, Edwin Marshall. When financial resources permit, Medizone intends to remain in the San Francisco Bay Area and lease office space that will allow for additional staffing. Medizone pays $200 a month for a storage area for the company's archives and pays or reimburses all telephone and related expenses incurred by or for Medizone. The company has not been charged rent for this temporary office space.

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Item 3. Legal Proceedings

The company is 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 the company had failed to pay consulting fees under a consulting agreement. The company denies that it owes any fees to the consultant. There has been no action in this matter since June 2001, when the parties exchanged proposed settlement terms.

Killian vs. Medizone International, Inc., Civil No. C014525, in the United States District Court, Northern District of California. This action was brought by five individuals who alleged that they were patients of Dr. William Hitt in Mexico and that they were defrauded and injured by Hitt as a result of treatments received there. Four of the plaintiffs are unknown to the company. Other defendants named in the complaint are Dr. Hitt, Jane Hitt, The Hitt Clinic, and Jill Marshall. The company and Mrs. Marshall deny all of the allegations and also deny any liability for any injury or harm these persons may have suffered. The company and Mrs. Marshall filed an answer to the complaint on February 22, 2002. On March 26, 2002, plaintiff's counsel and counsel for the company met and conferred to discuss alternative dispute resolution alternatives, discovery and initial disclosure. A Case Management Conference is scheduled for April 22, 2002.

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 have mismanaged the company's finances. The company and the Marshalls deny any wrongdoing and will vigorously defend themselves against the claims of these plaintiffs. The company and the Marshalls filed an answer with the court on February 25, 2002. On April 12, 2002 the company also file a Schedule 14 A with the Securities and Exchange Commission, responding to the allegations of the Bottomlys and Pace in proxy solicitation materials they have circulated.

The company believes the allegations made by the plaintiffs are false and distort the company's previous disclosures in the company's SEC filings. The company filed its own lawsuit against the Bottomlys and Pace on April 5, 2002. The company's complaint alleges that the defendants have violated federal laws by using materially misleading and false statements to solicit the vote of shareholders to replace the company's current management. In addition to the Bottomlys and Pace, defendants to the company's lawsuit include Advocates of Medizone, an unincorporated entity founded by these individual defendants, and John Does 1 through 25. The complaint was filed in the United States District Court Northern District of California.

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