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Medizone International Inc · 10-K · For 12/31/96

Filed On 3/31/97 · SEC File 2-93277-D · Accession Number 1013708-97-22

  As Of               Filer                 Filing     On/For/As Docs:Pgs              Issuer               Agent

 3/31/97  Medizone International Inc        10-K       12/31/96    1:36                                     1013708

Annual Report · Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         36    166K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (RTF, XML, et al.) Certain Relationships and Related Transactions Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Directors and Executive Officers of Registrant Employees and Consultants Executive Compensation Exhibits, Financial Statement Schedules, Reports on Form 8-K Financial Statements and Supplementary Data Governmental Regulation Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Market for Registrant's Common Equity and Related Stockholder Matters Part II are the subject of a Form 12b-25 and have not been included in this report Patents Properties Research and Development Security Ownership of Certain Beneficial Owners and Management Selected Financial Data Signatures Submission of Matters to a Vote of Security Holders
1	1st Page
"	Items 6, 7 and 8,. Part II are the subject of a Form 12b-25 and have not been included in this report
3	Patents
4	Research and Development
9	Governmental Regulation
13	Employees and Consultants
14	Item 2. Properties
"	Item 3. Legal Proceedings
"	Item 4. Submission of Matters to a Vote of Security Holders
"	Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
17	Item 6. Selected Financial Data
"	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
20	Item 8. Financial Statements and Supplementary Data
"	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
"	Item 10. Directors and Executive Officers of Registrant
23	Item 11. Executive Compensation
27	Item 12. Security Ownership of Certain Beneficial Owners and Management
29	Item 13. Certain Relationships and Related Transactions
30	Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K
31	Signatures

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Items 6, 7 and 8, Part II are the subject of a
Form 12b-25 and have not been included in this
 report.

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
--------------------
 FORM 10-K

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

 For the fiscal year ended December 31, 1996

 Commission File Number: 2-93277-D

MEDIZONE INTERNATIONAL, INC. (originally Madison Funding, Inc.) 
--------------------------------------------------------------- 
 (Exact name of Registrant as stated in its corporate charter)

Nevada                                              87-0412648  
--------------------------------------------------------------------------------
(State of incorporation)                           (I.R.S. Employer I.D. Number)

123 East 54th Street, #7B, New York, NY                              10022    
--------------------------------------------------------------------------------
(Address of principal executive offices)                            (Zip code)  

Registrant's telephone number:                (212) 421-0303                    
                              --------------------------------------------------

Securities registered pursuant to Section 12(b) of the Act:  None               
                                               -----

Securities registered pursuant to Section 12(g) of the Act:  None               
                                               -----

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

Disclosure  of  delinquent  filers  pursuant  to Item 405 of  Regulation  S-K is
contained  herein,  and will be contained  in  definitive  proxy or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment hereto.   Yes          No   X                                         
-------     -------               

The aggregate market value of voting common stock held by  non-affiliates of the
Registrant was  $6,300,183 on March 7, 1997,  based on the average bid and asked
prices of such stock as  reported in the NASD OTC  Bulletin  Board and the "pink
sheets" of the National Daily Quotation Bureau.                                 

According to information received from Registrant's  transfer agent, as of March
13, 1997,  Registrant had 130,051,613  shares  outstanding (of which  51,299,323
were restricted).                                                               

DOCUMENTS INCORPORATED BY REFERENCE:  None                                      

SUPPLEMENTAL  INFORMATION:  The Registrant  intends to furnish its  shareholders
with an annual report for 1996 and a proxy statement subsequent to the filing of
the 10-K.                                                                       

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 TABLE OF CONTENTS

PART I
                                                          Page
                                                          ----

Item 1.           Business.........................................  3          

Item 2.           Properties....................................... 14          

Item 3.           Legal Proceedings................................ 14          

Item 4.           Submission of Matters to a Vote of Security                   
        Holders.......................................... 14

 PART II

Item 5.           Market for Registrant's Common Equity and Related             
        Stockholder Matters.............................. 14

Item 6.           Selected Financial Data.......................... 17          

Item 7.           Management's Discussion and Analysis of Financial             
        Condition and Results of Operations.............. 17

Item 8.           Financial Statements and Supplementary Data...... 20          

Item 9.           Changes in and Disagreements with Accountants on              
        Auditing and Financial Disclosure................ 20

PART III

Item 10.          Directors and Executive Officers................. 20          

Item 11.          Executive Compensation........................... 23          

Item 12.          Security Ownership of Certain Beneficial Owners               
        and Management................................... 27

Item 13.          Certain Relationships and Related Transactions... 29          

 PART IV

Item 14.          Exhibits, Financial Statement Schedules,                      
        and Reports on Form 8-K.......................... 30

        Signatures....................................... 31

         Exhibits Index................................... E-1

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PART I
Item 1.  Business                                                               
--------                                                      

General                                                                         

     Medizone  International,  Inc., a Nevada  corporation (the "Company" or the
"Registrant")  organized in 1986, is a development stage company whose objective
is to (i) gain regulatory  approval for its drug, a precise mixture of ozone and
oxygen  called  MEDIZ0NE(R),  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) develop the related
technology and equipment for the medical application of its products,  including
its drug production and delivery system (the "Medizone Technology"). The Company
also intends to develop a dedicated cost-effective, product-specific, disposable
hollow  fiber  cartridge  device  in order to  utilize  its  patented  thin film
technology.  MEDIZ0NE(R)  is one of two  registered  trademarks  of the Company.
Throughout this report,  whether or not the trademark symbol is used, the phrase
"Medizone  (the drug)" is  intended to have the same effect as if the  trademark
symbol had been used.                                                           

     Medizone (the drug) is intended to be used as a therapeutic  drug in humans
to  inactivate  certain  viruses,  and thereby  afford a  treatment  for certain
virally-based diseases (including Human Immunodeficiency Virus ["HIV"], the AIDS
related virus, Hepatitis B, Epstein-Barr,  herpes, and cytomegalovirus),  and to
decontaminate blood and blood products, applications which are covered under the
Company's patent (Patent No. 4,632,980).  The Medizone  Technology was developed
for the  production  of  Medizone  (the  drug),  and has  led to the  design  of
equipment  for which a patent has been issued in the United  States  (Patent No.
5,052,382).  The Company has obtained  patents based on each of these patents in
various foreign countries. See "Patents".                                       

Patents                                                                         

     The  proprietary  scope of the  Company  is covered  under a United  States
process patent (U.S. Patent No. 4,632,980) entitled,  "Ozone  Decontamination of
Blood and Blood  Products" (the "Patent") and a related United States  equipment
patent  (U.S.  Patent  No.  5,052,382)  entitled  "Approaches  for  the  Control
Generation and Administration of Ozone" (the "Equipment Patent").               

     The Patent, which covers a procedure for ozone decontamination of blood and
blood  products  through the  treatment  of blood and blood  components,  is the
Company's  principal  asset,  and was  purchased,  together with rights to other
ozone-related inventions, from Immunologics Limited Partnership, L.P. ("ILP") in
1987,  for an aggregate of 6,000,000  shares of the Company's  common stock (the
"Patent  Purchase  Agreement").  John M. Kells,  the general partner of ILP, was
Chairman of the Company's Board of Directors from                               

 -3-

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November 1992 through September 1993.                                           

     The Patent Purchase  Agreement requires the Company to pay to ILP an annual
royalty equal to 3% of the net receipts  (i.e.,  net receipts after all credits,
returns and customary  deductions,  and exclusive of all taxes)  received by the
Company  in  connection  with  the  sale of any  product,  device  or  apparatus
embodying the Patent.  The method  covered by the Patent is the principal use of
ozone  under  study  by  the  Company  and  is the  method  incorporated  in its
regulatory  applications.  (See "Governmental  Regulation" below.) In June 1990,
pursuant to the Company's  request for  re-examination  of the Patent,  the U.S.
Patent Office issued a re-examination certificate,  confirming the patentability
of the  claims  covered  by the  Patent.  The  Company's  United  States  patent
protection for the Patent will expire in 2003,  subject to extension  based upon
the length of time  required  to bring the Patent to  commercial  fruition.  The
Company  has been  granted  patents  (based on the  Patent)  in  Canada  and the
European  Patent  Community,  Australia,  Malaysia,  Hong Kong and  Japan,  with
applications  pending in Taiwan and Singapore.  The foreign  patents began to be
issued  in 1990 and  will  expire  17  years  after  their  respective  dates of
issuance.                                                                       

     The Equipment Patent, which covers apparatus for the controlled generation,
monitoring and dosage of a precise admixture of ozone and oxygen (Medizone,  the
drug),  was  developed  by a  consultant  engineer to the Company and issued and
assigned to the Company in 1991.  The Equipment  Patent was developed to provide
the  physical  means to deploy the Patent.  The foreign  patent  coverage of the
Equipment Patent parallels the coverage of the Patent.                          

     In late 1996, the Company became aware that a United States patent had been
issued to a Canadian  corporation which it believes infringes on the Patent. The
Company has  consulted  its patent  counsel and intends to take the  appropriate
steps to protect its rights with respect to the Patent.                         

Research and Development                                                        

     The Company does not maintain  laboratories  or other clinical  research or
testing facilities, but has sponsored a number of research projects to determine
the safety and  efficacy of using  ozone in various  medical  applications.  The
research  and  development  activities  have  been  directed  by  the  Company's
Scientific  Advisory Board (see  "Employees and  Consultants").  The Company has
both sponsored and been the  beneficiary  of research to determine,  among other
things, (i) whether the use of ozone, either alone or with other modalities,  is
efficacious  in  the  treatment  of  certain  diseases  and  (ii)  to  establish
additional scientific evidence that ozone, through the use of the patents and/or
applications of scientific  methodologies of a similar nature can  decontaminate
blood of lipid enveloped viruses and thereby  significantly  diminish the degree
of transfusion related disease.                                                 

 -4-

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     The data  generated  by this  research  has provided the seed or pilot data
which forms the basis for a number of grant applications  which, if successfully
awarded,  may provide additional data beneficial to the Company's progress.  The
ability of (i) the  Company to continue to itself  supply  funding for  research
initiatives  and (ii)  independent  investigators  interested  in the  Company's
science to obtain funding  through grant awards are and will be major factors in
the ability of the Company to obtain sufficient  scientific  evidence in support
of the Company's proprietary technology. The inability to obtain such grants, or
of the  Company to itself  fund  additional  research,  would have a  materially
adverse effect on the Company.                                                  

     Research projects sponsored by the Company to date include:  (1) continuing
studies  to test  ozone's  ability to  inactivate  HIV,  conducted  at the State
University of New York ("SUNY")  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;  (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; (4) preliminary  animal studies of the
potential  efficacy  of ozone in the healing of burns,  conducted  at New York's
Mount Sinai Hospital;  and (5) a pilot animal study of the relative  toxicity of
ozone versus its ability to inactivate the Feline Immunodeficiency Virus ("FIV")
at Cornell  University Feline Health Center at Ithaca,  New York (the "FIV Pilot
Study").  The last two of these research  initiatives  were  suspended  prior to
conclusion because of insufficient funds.                                       

     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
the Company add the  Medizone  Technology  to the other  proprietary  technology
being investigated as an experimental arm of an ozone-based blood  sterilization
investigative  program,  in an effort to develop  an  effective  technology  for
sterilizing whole blood and blood products. With funding from the Canadian Blood
Forces  Program,  the Company made available the equipment  necessary to conduct
the first three phases of this study  investigating  the ability of the Medizone
Technology to inactivate Simian Immunodeficiency Virus ("SIV"), including a live
primate  (monkey)  model.  This research  project (the "SIV Study") is under the
direction of a collaborative  team of scientists  representing  the Canadian Red
Cross,  Canadian  Departments  of Defense and  Agriculture,  Cornell  University
Veterinarian  Medical  College and MCL Medizone  Canada  Ltd.,  the wholly owned
subsidiary of the Company's majority owned subsidiary, Medizone Canada Limited. 

     In October 1991, a peer-reviewed  article  entitled  "Inactivation of Human
Immunodeficiency  Virus Type I by Ozone in Vitro",  was published in Blood:  The
                                                                     -----------
Journal of the  American  Society of  Hematology,  (Vol 78, No. 7 at  1882-1890,
------------------------------------------------                                

 -5-

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October 1, 1991).  The article  described the use of the Medizone  Technology to
inactivate HIV in Factor VIII, a blood product used to treat hemophiliacs.      

     In June 1993, the Company issued a press release  announcing the completion
of the  first  two  stages  of the SIV  Study,  which  demonstrated  preliminary
scientific  evidence  supporting  the use of the Medizone  Technology  in a live
primate model,  further  evidencing the scientific  rationale  toward  achieving
approval for human trials. (See "Governmental Regulation" below.)               

     In May 1994,  the Canadian Blood Forces  Program  finalized  funding of the
third stage of the SIV Study,  which was to be  conducted  at the New York State
College of Veterinary Medicine, Cornell University,  Ithaca, New York to further
investigate,  inter alia, the Company's patented technology as a decontamination
----- ----                                          
process in red blood cells  through  both in vitro  experimentation  and in vivo
animal modeling. The Canadian Department of Defense (the "DND"), the funding arm
of the Canadian Blood Forces  Program (the "CBFP"),  unbeknownst to the Company,
discontinued  its funding during the third stage of the SIV Study.  In May 1996,
the Company  learned that Cornell  University had entered into a contract with a
Canadian  corporation  to complete the third stage of the SIV Study in a generic
framework,  i.e., not utilizing any  proprietary  technology.  At that time, the
Company  initially  requested formal final reports for phases one and two of the
SIV Study and a progress  report for phase three of the SIV Study and,  together
with  Commodore  (Ret.)  Michael E.  Shannon,  former  Deputy  Surgeon  General,
Department  of Defense,  Canadian  Blood Forces  Program,  have  continued  such
requests  during 1996 and the first quarter of 1997. The Company has been orally
advised  by a  representative  of the CBFP  that it may  expect to  receive  the
information concerning the results of the SIV Study during the second quarter of
1997.                                                                           

     A tangential  veterinarian  aspect of the Canadian research resulted in the
article   entitled   "Bacteriocidal   Effects   of   Ozone   at   Nonspermicidal
Concentrations",  written by members of the SIV Study team,  being  accepted for
publication by the Canadian  Journal of Veterinarian  Research (1995;  Vol. 159,
pp. 183-186).  The results included in this publication  provide further insight
in the ability to simultaneously exploit ozone's bacteriocidal  properties while
maintaining cellular integrity and function.                                    

     Although  certain of the HIV and  non-toxicity  studies  undertaken  by the
Company have been concluded,  the Company  determined that further  research was
required to confirm the efficacy and safety of using ozone to inactivate the HIV
virus.  As noted above,  insufficient  funds  resulted in the  suspension of the
study concerning the use of ozone to heal burns and the FIV Pilot Study prior to
their conclusion.  To date,  results from the blood studies provide  preliminary
evidence  supporting the potential use of ozone, when  specifically  employed as
delineated  in  the  Company's  Patent,  as a safe  and  efficacious  method  to
inactivate viruses in human blood and blood products.                           

 -6-

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     In February  1994,  the Company  acted as a  pharmaceutical  cosponsor in a
National  Heart,  Lung and Blood Institute  grant  application  submitted by The
Brooklyn Hospital Center. The proposal was entitled  "Inactivation of Viruses in
Blood  Components  by  Ozone"  and was being  co-investigated  by both the State
University of New York at Syracuse and Cornell University  Medical  Veterinarian
College.  This  application was not awarded funding in January 1995, for reasons
not having to do with scientific matters.  The proposal has been resubmitted and
is pending review.                                                              

     In late 1992, the Italian  Ministry of Health suspended the clinical use of
ozone until such time as sufficient scientific evidence was available to support
its use as a human therapeutic  treatment.  In this regard, the Italian Ministry
of Health designated the Italian Scientific Society for Ozone-Oxygen  Therapy in
Bergano,  Italy  ("ISSOT")  as the agency to select  those  treatment  protocols
utilizing ozone as worthy of investigation and to provide those protocols to the
Italian  Ministry of Health for review and approval.  By letter  agreement dated
March 23, 1993, with ISSOT, the Company entered into a collaborative arrangement
to research and examine the efficacy of the Medizone Technology in the treatment
of various  blood-related  human diseases.  The research is being  supervised by
ISSOT in Italy, under the direction of a research group assembled by the Italian
Ministry  of  Health.  The  Company's  president  was  invited  to join  and has
participated  in this  research  initiative.  The research is to be conducted in
accordance  with the  protocols  approved  by the  United  States  Food and Drug
Administration  (the "FDA") for human  clinical  trials (to be  furnished by the
Company),  at  five  university-based  hospitals.  The  ISSOT  letter  agreement
required  the Company to furnish five  ozone-generating  machines for use in the
trials,  which the Company  delivered in late 1993,  after it had the  equipment
manufactured by Camped USA of Bryn Mahr, Pennsylvania. There can be no assurance
that any of the data  generated  from the ISSOT research will be permitted to be
utilized  in  connection  with  the  Company's  applications  to  the  FDA  (see
"Governmental Regulation").                                                     

     On May 16, 1994,  the Company  announced that human trials were to commence
at the  University of Naples  ("Naples") on May 30, 1994 to study the effects of
MEDIZONE(R)  on  patients  infected  with  either  HIV or  Hepatitis  B (chronic
active).  The two  protocols,  either  for HIV or  Hepatitis  B  patients,  were
designed  by the  Company  as  classical  Phase I trials of the  Patent  and the
Equipment Patent to determine, in a dose-ranging study, the relative toxicity of
this treatment against surrogate markers of efficacy. The Company was advised in
April 1986 that the HIV protocol had been completed and that patients were being
enrolled for the Hepatitis B protocol. The Company has announced that no interim
data will be available  until a particular  site has  completed  its  respective
trials, said trials being estimated to be approximately one year in duration. To
date, the  University of Naples  remains the only site that has commenced  these
trials, with other  university-based  hospitals still awaiting approval by their
Italian  university  authorities  on a site by site  basis.  During the sumer of

 -7-

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1996,  the Company was advised that Naples would not enroll new patients for the
Hepatitis B protocol until trials were  commenced at another site,  although the
trials  would  continue on those  patients  already  enrolled in the  protocols.
During the last  quarter  of 1995,  the  Company  was  advised  by San  Raffaele
Hospital of the University of Milan  ("Milan") and the Regional  Oncology Center
and AIDS Treatment Center at Avianno  ("Avianno")  that their respective  ethics
committee or investigational  review board, as the case may be, had approved the
commencement of HIV trials (in the case of Milan) and Hepatitis B trials (in the
case of Avianno),  subject to the receipt of specific affirmative  approvals for
these tests from the Italian Ministry of Health.                                

     On May 8, 1996, the Italina Ministry of Health issued its approvals,  which
were thereafter  communicated to the Company. ISSOT will supervise these Phase I
clinical  trials which were designed by the Company as classical  Phase I trials
of its patents (both of Medizone,  the drug,  and the Company's  technology)  to
determine,  in a  dose-ranging  study,  the relative  toxicity of this treatment
against surrogate markers of efficacy.  Each of these trials is designed to take
approximately one year to complete, although there can be no assurance that such
time-frame will be adhered to once the trials commence.                         

     By the terms of the Company's letter agreement with ISSOT,  dated March 23,
1993,  the Company is required to pay for  laboratory  tests  performed  by each
testing  institution  that are outside the scope of the normal realm of clinical
analyses  performed  by the  testing  institutions.  The Company has agreed with
Milan  and  Aviano,  respectively,  that  the  costs  of  these  assays  will be
approximately  U.S. $150,000 for Milan and U.S. $180,000 for Aviano. The Company
is  required  to  commit  to each of  these  respective  fundings  prior  to the
commencement of trials at the particular site. The Company is presently  without
the  financial  wherewithal  to enter into such  binding  commitments  with each
institution  to provide such funding.  Accordingly,  neither trial has commenced
and neither will  commence  until such  commitment  is made by the Company.  The
Company is also  required to provide  each  institution  with ozone  generating,
monitoring and delivery devices for use in the trials.                          

     On October 17, 1996, the Company  executed an agreement with  Multiossigen,
S.r.L., an Italian corporation located in Bergamo,  Italy (the  "Manufacturer"),
dated as of September  13, 1996 (the  "Equipment  Contract"),  providing for the
manufacture  of ozone  generating  devices to be used in the human  trials to be
commenced  pursuant to the Company's  letter agreement with the ISSOT, as trials
are approved by the Italian Ministry of Health.                                 

     Pursuant to the Equipment Contract, the Manufacturer has produced a working
prototype of ozone generating  devices  dedicated to the use of hollow fibers or
similar  gas  exchange   technology   covered  under  the   Company's   patents,
satisfactory to the Company (the "Equipment"),  and will make all data generated

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from the use of the Equipment  available to the Company.  The Equipment Contract
calls for the  Manufacturer  to manufacture  twenty pieces of the Equipment at a
purchase  price of $9,000 per unit,  for an aggregate  of  $180,000,  payable as
follows:                                                                        

(a)      $25,000, paid upon approval of the prototype;                
(b)      $55,000, payable in fifteen installments of $3,667 with      
five such installments ($18,335) being paid on each 
delivery of five units of the Equipment; and        
 (c)      one million  shares of the Company's  common stock,  bearing a
          restrictive legend, 500,000 shares of which were issued on the
          date the  Equipment  Agreement was executed with the remaining
500,000 shares issued on March 16, 1997.            

     Pursuant  to  the  Equipment   Agreement,   the  Company   granted  to  the
Manufacturer  a license to use the Company's  patents in Europe,  subject to the
regulations of all documents necessary to protect the Company's rights in and to
the  patents,   and  appointed  the  Manufacturer  as  the  Company's  exclusive
manufacturer  and  distributor of the Equipment in Europe.  Notwithstanding  the
forgoing,  the present  distribution of the Equipment shall be limited to Italy,
but such  distribution  will be  expanded  to the rest of Europe upon the mutual
agreement of the parties.                                                       

     The  Equipment   Agreement   (together  with  its  grants  of  license  and
distribution  described  above) will  terminate on September 13, 1998 and may be
renewed by mutual  agreement  of the  partners at least thirty days prior to the
end of its term.                                                                

     The initial five units of the  Equipment  were  delivered to Aviano,  on or
about November 15, 1996.  Thereafter,  units of Equipment  shall be delivered in
lots of five units and shall be  deliverable  to the  appropriate  hospital site
within 60 days of the written request by the Company, based upon such hospital's
ethics committee granting approval to committee trials at a particular site.    

     Since  its   organization,   the  Company  has  attributed   $_________  as
expenditures for research and development, including $________ in 1996.         

Governmental Regulation                                                         

     MEDIZONE(R),  the  Medizone  Technology  and any related  products  derived
therefrom  are regulated  under the Federal Food,  Drug and Cosmetic Act and the
regulations  promulgated thereunder (the "FDC Act"). The FDA exercises broad and
extensive  authority in regulating  the  development,  production,  importation,
distribution and promotion of "new drug" products and "investigational  devices"
pursuant to the FDC Act. Health and Welfare Canada ("HWC")  similarly  regulates
the  introduction  of new  drugs in  Canada,  as do  similar  agencies  in other
countries.                                                                      

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     Because  ozone-generation  for the purposes of  interfacing  with blood and
blood  products  is  regarded  as a new drug  delivery  system,  the  Company is
precluded  from  selling or  distributing  Medizone  (the drug) or the  Medizone
Technology  until after FDA  approval has been  granted.  In order to obtain FDA
approval,  the Company will be required to submit a New Drug Application ("NDA")
for review by the FDA and provide medical and scientific  evidence sufficient to
demonstrate that MEDIZONE(R) and the Medizone  Technology has been  successfully
used in well-controlled clinical studies using human volunteer subjects. The FDA
will not grant an NDA unless it contains sufficient medical evidence and data to
permit a body of qualified and  experienced  scientists to conclude that the new
drug product is safe and  effective  for its  recommended  and proposed  medical
uses.8                                                                          

     In order to initiate  the first  phase  (i.e.,  Phase I) of human  clinical
studies  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  studies  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
Registrant 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 has requested that
the Company  complete  additional  research  regarding animal toxicity and other
studies,  which will require the  expenditure  of  significant  funds before the
Company's IND  application  will be deemed  complete.  There can be no assurance
that  the  Company's  IND  application  will be  granted.  Until an NDA has been
granted to the Company, it may not distribute  ozone-generating  devices, except
to researchers who agree to follow FDA guidelines,  and provided the devices are
labeled as "Investigational Devices."                                           

     The  Company's  ability to  commercially  market  products is  dependent on
obtaining FDA approval. The Company believes (based upon a chart prepared by the
FDA which  appeared in FDA  Consumer in January  1988) that the average time for
approval of an IND is eighteen months from the beginning of animal testing; that
a new drug undergoes  clinical  testing (Phase 1-3 trials) for an average period
of five  years;  and that the  average  period of time  required  for the FDA to
approve an NDA after  submission is two years.  While,  there is wide  variation
among  particular cases and  applications,  it appears that even if FDA approval
was obtained, the process will encompass several years. In addition, the Company
believes  that  research  costs  incident  to  obtaining  FDA  approval  will be
significant  and will  require the  Company to obtain  additional  infusions  of
capital.                                                                        

International Activities                                                        

Medizone Canada Limited                                               
-----------------------                                               

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

     Registrant owns  approximately  two-thirds of the equity of Medizone Canada
Limited, a publicly-owned Utah corporation ("MCL"), which is engaged in the same
business as the Registrant in Canada through its  wholly-owned  subsidiary,  MCL
Medizone  Canada  Ltd.   ("MedCan")  As  described  above  under  "Research  and
Development", MedCan is a participant in the Canadian Blood Forces Program's SIV
Study.                                                                          

     Four million redeemable common stock purchase warrants, each exercisable to
purchase one share of the common stock of MCL for $.125, are publicly-held.  The
MCL warrants  originally  had a nine month exercise  period,  but the expiration
date has been  extended  numerous  times (and is currently  December 31,  1997).
While MCL has indicated to  Registrant  that it is prepared to provide a portion
of the funds  necessary to conduct the  additional  research  necessary  for the
Company  to  obtain  regulatory  approval,  there is no  assurance  that the MCL
warrants  will  ever be  exercised  (an  event  dependent  upon  achievement  of
effectiveness of a post-effective  amendment to MCL's registration statement) or
that MCL would otherwise be funded.                                             

Medizone New Zealand Limited                                          
----------------------------                                          

     On  June  22,  1995,  the  Company  entered  into  a  series  of  contracts
(collectively the "Transaction  Documents") which resulted in the formation of a
joint  venture  subsidiary  incorporated  in New  Zealand,  Medizone New Zealand
Limited ("MNZ").  MNZ, a privately held corporation equally owned by the Company
and Solwin Investments Limited ("Solwin"), a New Zealand corporation which is an
affiliate  of  Richard G.  Solomon  ("Solomon"),  who  became a director  of the
Company on January  16,  1996,  but later  resigned on February  27,  1997,  was
organized on June 22, 1995 and is a research and development stage company whose
objective is to obtain regulatory approval for the distribution of the Company's
patented  technology  in New Zealand,  Australia,  South East Asia and the South
Pacific Islands.                                                                

     Pursuant to the Transaction  Documents,  the Company  purchased one hundred
percent of MNZ from  Solomon,  who had caused the  formation  of MNZ on June 22,
1995. Contemporaneously with this transaction, the Company sold fifty percent of
MNZ to Solwin,  a  corporation  owned by Solomon,  for U.S.  $150,000,  of which
which                                                                           

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which was repaid on October 26, 1995.  On October 26, 1995,  the Company  loaned
MNZ $50,000 on a demand basis,  which has not been repaid as of the date of this
report. The Directors of MNZ are Solomon and Dr. Joseph L. Latino, the Company's
President and Chief Executive Officer.                                          

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

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

     Pursuant to the Managing  Agent  Agreement,  MNZ will act as the  Company's
agent in the finding of other  licensees of the Company's  patents and trademark
in the following countries: 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 shall be divided between the Company and MNZ on a sliding scale as set
forth below:                                                                    

                                      The Company                            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%

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

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

Competition                                                                     

     The  area  in  which  the  Company   seeks  to  do  business  is  extremely
competitive.  The Company is aware of a number of domestic  companies  that have
commenced  research  into the use of ozone as a virucide in the treatment of HIV
and other diseases,  or 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.  The Company is also aware that another company has
provided  ozonegenerating  equipment to departments  of the Canadian  government
conducting studies in Canada for the purposes of comparison of technologies.  In
addition,  as reported in  scientific  journals and  newspapers,  there are many
commercial,  not-for-profit  and governmental  agencies  investigating  possible
treatments  for  HIV  and  other  viral  diseases,  as  well  as  a  variety  of
methodologies aimed toward blood fractionate decontamination.                   

Employees and Consultants                                                       

     The Company has three employees,  its President,  its Vice  President/Chief
Financial Officer and an executive assistant.                                   

     The Company has established a Scientific  Advisory Board which suggests and
formulates avenues of research and reviews research in progress.  The Scientific
Advisory Board is currently comprised of two members,  Joseph S. Latino,  Ph.D.,
the Company's President and Chief Executive Officer and Bernard J. Poiesz, M.D.,
Head, Regional Oncology Center,  S.U.N.Y. at Syracuse,  Syracuse,  New York. The
Scientific Advisory Board met three times in 1996. Dr. Poiesz is not compensated
by the Company for his  services on the  Company's  Scientific  Advisory  Board,
although he does apply for  research  grants in  connection  with the  Company's
research and development efforts. Dr. Poiesz has been a member of the Scientific
Advisory  Board since  1987.  From 1989 to 1995,  Fred  Quimby,  D.V.M.,  Ph.D.,
Chairman,  Animal  Research  Institute,  New York State  School of  Veterinarian
Medicine, Cornell University, was a member of the Scientific Advisory Board, but
resigned when he became the sole principal  investigator for the SIV Study being
which                                                                           

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which  auspices  of  the  Canadian  Blood  Forces  Program.  See  "Research  and
Development".                                                                   

     The Company retains CTC, Inc. ("CTC"),  of Cincinnati,  Ohio, to act as the
Company's liaison with the brokerage community. The agreement is for a period of
one year,  but may be extended by the parties for  additional  one year periods.
CTC receives a monthly payment of $2000. As additional  compensation in 1996, it
received  250,000  shares of the Company's  common stock,  restricted  under the
federal securities laws.                                                        

Insurance                                                                       

     The Company presently has no product liability insurance, since none of its
products are in clinical use. The Italian Ministry of Health, through ISSOT, has
provided  product  liability  insurance to the Company for the Italian trials in
the aggregate amount of approximately $600,000. The Company pays annual premiums
of  approximately  $64,000 for a  $1,000,000  policy of officers  and  directors
liability insurance.                                                            

Item 2.  Properties.                                                            

     Registrant leases from an unaffiliated party  approximately 900 square feet
of office space at 123 East 54th Street,  Suite 7B, New York, NY 10022,  under a
two-year  lease  expiring on February 28, 1998,  at an annual rental of $20,940.
The office space is used for executive offices and administrative purposes.     

Item 3.  Legal Proceedings                                                      

     In November 1992, the Company consented to the entry of a final judgment of
permanent  injunction  (S.E.C.  v. Medizone  International,  Inc.,  Civil Action
93-2761,  D.D.C.),  pursuant to which the Company was permanently  enjoined from
failing  to  timely  file  the  reports  required  to be filed  pursuant  to the
Securities Exchange Act of 1934.                                                

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

     No matters were submitted to a vote of securities holders during the fourth
quarter of the fiscal year ending December 31, 1996.                            

 Part II

Item 5.  Market for Registrant's Common Equity and Related                      
Stockholder Matters.                                          
-------------------------------------------------             

Prices/Trading Market Information                                               

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

     On March 7, 1997,  according to the NQB Non-NASDQ Price Report furnished by
the National  Quotation Bureau,  there were approximately 18 marketmakers in the
Company's  shares,  with a high bid for the  shares of  $.0825  and a low bid of
$.082. Such prices reflect interdealer prices without retail markup, markdown or
commission; are not necessarily representative of actual transactions, or of the
value of the Company's  securities;  and are, in all likelihood,  not based upon
any  recognized  criteria  of  securities  valuation  as used in the  investment
banking community.                                                              

     Shown below is  information  obtained from the National  Quotation  Bureau,
indicating  the high bid and low bid prices for a share of the Company's  common
stock at the end of each of the four calendar  quarters of fiscal 1995 and 1996,
representing prices between dealers which do not include retail markup, markdown
or commission. They do not reflect actual transactions.                         

                                             Bid Price
                                             ---------
                     Calendar Period       High                  Low
                     ---------------       ----                  ---

    1995              First Quarter           .20                .0625
                      Second Quarter          .17                .0625
                    Third Quarter           .17                .05
                     Fourth Quarter          .18                .015

   1996              First Quarter           .10                .075
                    Second Quarter          .17                .11
                    Third Quarter           .15                .10
                     Fourth Quarter          .125               .075

Number of Holders                                                               

     On March 13, 1997,  according to the Company's  transfer agent,  there were
3,907 holders of record of the Company's par value $.001 common stock.          

Dividends                                                                       

     The Company has never paid cash  dividends on its common stock.  Payment of
cash  dividends is subject to the  discretion  of the Board of Directors  and is
dependent upon various factors,  including the Company's earnings, capital needs
and general  financial  condition.  The Company does not believe that it has any
immediate  prospect of earnings.  However,  the Company  anticipates that in the
foreseeable  future, it will follow a policy of retaining  earnings,  if any, in
order to finance research and development.                                      

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Private Sales of Shares                                                         

     During 1996,  the Company  received stock  subscription  agreements for the
purchase  of  5,311,850  shares of its  common  stock,  together  with  proceeds
totalling  $531,185 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 1933 (the "Securities Act").  Approximately  $441,185 of these
proceeds were from the sale of the  Company's  common stock at a per share price
of $.10  (including  $37,500 for 375,000  shares from  Richard G. Solomon at the
time, a director of the Company).  The  remaining  $90,000 were from the sale of
Units,  each Unit consisting of one share of the Company's  common stock,  $.001
par value,  and a Warrant to purchase two shares of the  Company's  common stock
for six months,  at an exercise price of $.10 share. The Warrants will expire at
various times in May and June 1997.  The Company also sold 100,000 shares of its
common  stock,  $.01 at a per share price of $.10 to a director  pursuant to the
non-public  offering  exemption from  registration  under the Securities Act. In
November  1996, the Company issued 800,000 shares of its common stock as payment
of a $40,000 promissory note held by an unaffiliated party in the United States.
The Company relied on the non-public offering exemption of the Securities Act in
issuing these  shares.  In March 1996,  the Company  issued 50,000 shares of its
common stock to an employee and 250,000 shares of its common stock to its public
relations  consultant  as  additional  compensation.  The  Company  also  issued
1,000,000 shares of its common stock to Multiossigen,  S.r.L.,  the manufacturer
of the equipment being utilized in the Italian trials.                          

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

     During 1994, the Company received stock subscription  agreements,  together
with aggregate proceeds totalling  $996,885,  pursuant to a private placement of
its common stock in the United States,  which concluded in August 1994, and from
sales of its common stock to foreign  investors,  outside of the United  States,
pursuant to Regulation S promulgated under the Act.                             

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Item 6.  Selected Financial Data.                                               

                      Year Ended
                      December 31,

                       1996         1995          1994          1993        1992
                       ----         ----          ----          ----        ----

                                                                      (restated)

Operations Data:                                                                

Revenues                          $ -0-        $ -0-        $ -0-        $ -0-  

  Net income                   (1,081,027)   (1,126,315)  (1,598,342)  (649,941)
(loss) before                                                             
minority interest                                                         

Net income (loss)              (1,081,027)   (1,126,315)  (1,598,342)  (649,941)

Net income (loss)                    (.01)         (.01)        (.02)      (.01)
per common share                                                          

Weighted average              111,306,000    98,292,000   93,384,000  88,361,00 
common shares                                                             
outstanding                                                               

Balance Data                   (1,554,076)                                      
Sheet:                                                                    

Working capital                  (538,102)    (576,101)  (2,844,085) (1,554,076)
(deficiency)                                                              

Total assets                      124,653       87,230       81,705     257,216 

Long-term                          -0-           -0-          -0-         -0-   
liabilities                                                               

Accumulated                   (11,112,724  (10,103,503)  (9,196,610) (7,598,268)
(deficit)                                                                 

Stockholders'                    (432,880)    (558,679)  (2,825,458) (1,494,870)
equity                                                                    
deficiency                                                                

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations.                                                  
        ------------------------------------------------------------------------

Results of Operations                                                           

General                                                                         

     From its  organization  in January 1986,  Registrant has been a development
stage company primarily engaged in retaining research consultants and sponsoring
research to investigate the medical uses of ozone. Registrant has not generated,
and cannot predict when or if it will generate, sufficient cash flow to fund its
continuing  operations.  Since  its  organization,   Registrant  has  attributed
$_________ as expenditures for research and development,  including  $_______ in
1996.                                                                           

Restatements                                                                    

     Registrant  has restated each of its quarterly  reports for 1992 to account
properly for the proceeds from the Company's sale of a portion of its holding of
Medizone Canada Limited ("MCL") as equity transactions.                         

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     During the first  quarter of 1992,  Registrant  sold 250,000  shares of MCL
common stock at  per-share  prices  ranging  from $.093 to $.10,  and during the
third quarter of 1992, an additional  150,000 shares were sold through a broker.
Aggregate  proceeds  from the  transactions  were  $24,555  (first  quarter) and
$24,470 (third quarter), respectively.                                          

     Because  the  Company's  investment  in MCL was only $2,  the  $24,555  and
$24,470 was reported as a gain in the Company's statement of operations for each
respective  period.  In  the  restated  reports,   the  transactions  have  been
characterized as equity transactions.                                           

     The  restatements  result in an increase in the first  quarter  loss in the
amount of $24,555,  and an increase in the third  quarter  loss in the amount of
$24,470.                                                                        

     Additionally,  the Company sold  100,000  shares of MCL common stock during
1991 through a broker for $5,000, at a per-share price of $.05. This transaction
was also  restated  in 1992,  as an  equity  transaction,  which  results  in an
increase in the 1991 loss of $5,000.                                            

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

Years Ended December 31, 1996, and December 31, 1995.                 

     There were no sales during  either year.  Sales  commenced in May 1986 and,
except for incidental items, ceased in October 1987.                            

     Expenditures  for research and  development,  including  work  performed by
independent  contractors  was  $___________  in 1996, as compared to $112,929 in
1995.                                                                           

     General and administrative  expenses  (increase)  decreased by $________ in
1996 to  $________________  as compared with $1,057,190 in 1995.  These expenses
include professional fees, payroll, insurance costs and travel expenses.        

     Notes payable in 1996 of $______________ and 1995 of $147,815 have interest
accruing at rates averaging from 8% to 10%.                                     

Years Ended December 31, 1995, and December 31, 1994                  

     There were no sales during  either year.  Sales  commenced in May 1986 and,
except for incidental items, ceased in October 1987.                            

     Expenditures  for research and  development,  including  work  performed by
independent contractors and laboratories, equalled $112,929 in 1995, compared to
$37,960 during 1994.                                                            

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     General  and  administrative  expenses  decreased  by  $23,096  in  1995 to
$1,057,190 from $1,070,286 in 1994.  These expenses include  professional  fees,
payroll, insurance costs and travel expenses.                                   

     Notes  payable  in 1995 of  $147,815  and  $97,815  in 1994  have  interest
accruing at rates ranging from 8% to 10%.                                       

Liquidity and Capital Resources                                                 

     At December 31, 1996, the Registrant  had a working  capital  deficiency of
$_____________ and a stockholders' deficiency of $_________________.            

     At December  31,  1995,  Registrant  had a working  capital  deficiency  of
$538,102 and a stockholders' deficiency of $432,880.                            

     During 1987,  excluding  options  exercised and shares issued for services,
Registrant  sold an aggregate  of 950,000  shares to  unrelated  individuals  at
prices ranging from $.10 to $.25 for aggregate proceeds of $150,000 and borrowed
$150,000 which, in 1989, was exchanged for 1,500,000 shares.                    

     During 1988,  excluding  options  exercised and shares issued for services,
Registrant sold 1,000,000  shares to an unrelated  individual at $.08 per share,
and  borrowed an  aggregate  of  $166,700  which,  in 1989,  was  exchanged  for
1,834,000 shares.                                                               

     During 1989,  excluding options exercised and other issuances not for cash,
Registrant  sold an aggregate of 5,790,000  shares to unrelated  individuals  at
prices  ranging  from  $.03-1/3  to $.10 per share,  for  aggregate  proceeds of
$291,500.                                                                       

     During 1990, excluding issuances to settle outstanding  obligations and for
services,  Registrant  sold  an  aggregate  of  4,250,000  shares  to  unrelated
individuals at prices ranging from $.03 to $.05 per share for aggregate proceeds
of $179,500.                                                                    

     During 1991,  excluding  options  exercised  and  issuances  for  services,
Registrant  sold an aggregate of 4,366,667  shares to unrelated  individuals  at
prices ranging from $.036 to $.20 per share, for aggregate proceeds of $310,000.

     During  1992,  excluding  options  exercised  and  issuance  of shares  for
services,  Registrant  sold  an  aggregate  of  2,702,335  shares  to  unrelated
individuals at prices ranging from $.15 to $.20 per share for aggregate proceeds
of $430,350.                                                                    

     During 1993, excluding issuance of shares for services,  Registrant sold an
aggregate of 1,471,766  shares to unrelated  individuals  at prices ranging from
$.15 to $.20 per share for aggregate proceeds of $271,000.                      

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     During 1994, excluding issuance of shares for services,  Registrant sold an
aggregate of 7,765,750  shares to  unrelated  individuals  at $.10 per share for
aggregate proceeds of $776,575.  (N.B. - numbers for 1994 - 1996 must tally with
Item 5. "Private Sale of Shares".)                                              

     During 1995, excluding issuance of shares for services,  Registrant sold an
aggregate of 4,071,250  shares to  unrelated  individuals  at $.10 per share for
aggregate proceeds of $407,125.                                                 

     During 1996, excluding issuance of shares for services,  Registrant sold an
aggregate of _____________ shares to unrelated  individuals at $________________
per share for aggregate proceeds of $________________.                          

     In connection with certain of the foregoing  transactions,  the Company has
paid or accrued finders' fees.                                                  

     Registrant will continue to require additional funding to enable it to fund
research necessary to make the appropriate  regulatory  application and continue
operations.                                                                     

Item 8.  Financial Statements and Supplementary Data.                           
-------------------------------------------                   

     The financial statements and supplementary data are listed under Item 14 in
this Annual Report and commence on page F-1.                                    

Item 9.  Changes in and Disagreements with Accountants                          
on Accounting and Financial Disclosure.                       
---------------------------------------------                 

None.                                                                 

PART III

Item 10.  Directors and Executive Officers of Registrant.                       
----------------------------------------------              

     Until  November  1992,  the Company's  affairs were  controlled by its then
Board of  Directors,  consisting  of McGrath,  Watrous,  Wayne Chou and Peter W.
Melera ("Former Management").  On November 17, 1992, Former Management resigned,
after having  elected John M. Kells,  John Pealer and George Handel as Directors
("New  Management").  McGrath and Watrous  also  resigned  their  positions  as,
respectively,  President and Chief Executive Officer, and Vice President,  Chief
Financial  Officer,  Secretary  and  Treasurer.  At that  time,  New  Management
appointed  Joseph S. Latino to be the Company's  President  and Chief  Operating
Officer.  In September 1993, upon the resignation from the Board of Directors of
John M. Kells, Dr. Latino was elected to the Board by the other  directors.  Dr.
Latino and Messrs.  Pealer and Handel were elected  directors  at the  Company's
1995 annual  meeting in May 1995.  Kenneth  Gropper and Richard G.  Solomon were
appointed to the Board of  Directors by the Board in September  1995 and January

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1996, respectively, pursuant to the amendment to the Company's By-laws, voted on
by the Company's  shareholders at its 1995 annual meeting, which provided for an
increase in the size of the Board of Directors  from three  members to a maximum
of seven members, and for such appointments to be made by the Company's Board of
Directors.                                                                      

     Messrs.  Latino,  Handel,  Pealer,  Gropper  and  Solomon  will hold  their
positions as Directors  until the next annual  meeting of the  shareholders  and
until their successors have been elected and have qualified.                    

     The  following  table  sets  forth  certain   information   concerning  the
Registrant's directors and officers.                                            

Director Officer      
Name                    Age   since    since    Positions with Registrant       
----                    ---  -------- -------   -------------------------       

Joseph S. Latino        39    1993     1992     President; Chief Executive      
                                    Officer and Director

Arthur P. Bergeron      46             1992     Vice President, Treasurer and   
                                       Chief Financial Officer

George Handel           69    1992     1993     Secretary and Director          

John D. Pealer          77    1992              Director                        

Kenneth Gropper         54    1995              Director                        

Richard G. Solomon      54    1996              Director                        

Howard L. Feinsand      48    1996              Director                        

     There  are  no  family   relationships  among  Registrant's   officers  and
directors.                                                            

     Joseph S.  Latino,  Ph.D.,  was  appointed  President  and Chief  Operating
Officer  of the  Company  in  November  1992  and was  elected  to the  Board of
Directors on September  21, 1993.  He was named Chief  Executive  Officer of the
Company in January 1995. He holds the same positions with the Company's majority
owned subsidiary, MCL. His affiliation with the Company dates from 1986, when he
was named its Director of Research.  Dr.  Latino  received a Bachelor of Science
degree in 1978  from  Brooklyn  College  of the City  University  of New York in
Biology and Chemistry.  He received his Doctor of Philosophy in  Biochemistry in
1984 from the City University of New York. Dr. Latino became Director of Special
Hematology/Oncology  Laboratory at The Brooklyn Hospital Center,  Brooklyn,  New
York in 1984,  where he was  employed  until he went on  sabbatical  in December
1994.  In  1994,  Dr.  Latino  was  designated  as the  Basic  Science  Research
Coordinator   for  The   Brooklyn   Hospital   Center   and  was  a  member   in
Investigational/Institutional  Review Board of that  institution.  In 1986,  Dr.
Latino became an Assistant Professor of Medicine,  Division of Hematology at the

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Health Science Center at Brooklyn,  State  University of New York, as well as Ad
Hoc  Research  Advisor for The  Brooklyn  Hospital  Center.  In 1987 he became a
Research Educator for the Hematology/Oncology Fellowship Program at the Brooklyn
Hospital Center. Dr. Latino currently devotes substantially his full time to the
operations of the Company.                                                      

     George  Handel  became a director of the  Company in November  1992 and has
served as the Company's  Secretary,  without  compensation,  since  November 24,
1993. He holds the same  positions  with MCL. Mr.  Handel,  who attended  Temple
University,  is President of Hantex Mills, a dry goods firm established in 1975,
and  vice-president  of Handel & Co., a wholesale dry goods firm  established in
1923.                                                                           

     John D. Pealer  became a director of the  Company in November  1992.  He is
also a director of MCL. Mr. Pealer has been the  President  and Chief  Executive
Officer of Pealer's Inc., a family-owned  corporation engaged in the business of
real estate development since 1949.                                             

     Kenneth  Gropper  became a director of the Company in September  1995.  Mr.
Gropper is the President and Chief  Executive  Officer of Management  Consulting
Group, Inc. of Woburn, Massachusetts,  which serves as a consultant to physician
group practices,  medical centers,  pharmaceutical  companies and medical device
manufacturers on regulatory, legislative,  administrative,  sales, marketing and
other management issues. Mr. Gropper joined Management Consulting Group, Inc. in
1977. Mr. Gropper was a member of the Board of Trustees of the Massachusetts Eye
and Ear Infirmary  from 1989 to 1994.  Mr.  Gropper  received a Bachelor of Arts
degree in Biology from Long Island  University in 1964 and a Masters'  Degree in
Business Administration from Columbia University in 1966.                       

     Richard G. Solomon  became a director of the Company in January 1996. He is
also a  director  of MNZ and the owner of Solwin  Investments  Limited,  the 50%
owners of MNZ. Mr. Solomon is a New Zealand  citizen and lives in Auckland,  New
Zealand. He co-founded Havencare Hospitals, a three-hospital elder care facility
in 1978 and occupied an  executive  position  with that entity  until 1996.  Mr.
Solomon was President of the New Zealand Private Hospitals Association from 1989
to 1993 and founded  the New Zealand  Council  Health Care  Standards,  on whose
council he sat until 1995.  Prior to  entering  the health  care  industry,  Mr.
Solomon  administered the New Zealand  subsidiary of a British merchant bank and
its investment,  finance and development  activities in New Zealand. Mr. Solomon
resigned from the Company's Board of Directors on February 27, 1997.            

     Howard L.  Feinsand  became a director  of the  Company  in July 1996.  Mr.
Feinsand is  Executive  Managing  Director and  Principal of Choir  Capital Ltd.
("Choir"), a New York investment banking firm which he co-founded in 1996. Choir
is primarily engaged in the securitization business as principal,  asset manager
and advisor.   Mr. Feinsand is also a director of Duke Realty Investments, Inc.,

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a New York Stock  Exchange-listed fully integrated real estate investment trust.
From 1995 to 1996,  Mr.  Feinsand  was a Managing  Director  of  Citicorp  North
America, Inc., in New York, with responsibility for its Global Aviation Products
activities.  From 1989 to 1995, Mr.  Feinsand was a senior manager  (culminating
with his  position  as Senior  Vice  President  and  Manager - Capital  Markets,
Pricing and Investor  Programs) of GE Capital Aviation  Services Limited and its
corporate predecessor,  Polaris Aircraft Leasing Corporation. From 1971 to 1989,
Mr.  Feinsand  practiced  law as a partner  in three  New York  City law  firms,
advising  institutional and  entrepreneurial  clients regarding a broad range of
corporate finance,  direct investment and other matters. Mr. Feinsand received a
Bachelors  of Arts  degree  from Temple  University  in 1968 and a Juris  Doctor
degree from St. John's University School of Law in 1971.                        

     Arthur P. Bergeron  became Vice  President,  Treasurer and Chief  Financial
Officer of the  Company in 1992.  He holds  these same  positions  with MCL.  He
received a Bachelor of Science in  Accounting  from Bentley  College in Waltham,
Massachusetts  in 1973 and a Master of Science in Taxation from Bentley  College
in 1980. Mr. Bergeron is a certified  public  accountant and is the principal of
Arthur P. Bergeron & Co., P.C., in Wellesley, Massachusetts, a public accounting
firm which he founded in 1978.  He does not devote his full time to the  affairs
of the Company.                                                                 

Item 11.  Executive Compensation.                                               
----------------------                                      

Directors Compensation                                                          
----------------------                                                          

     None of the directors  received any  compensation for serving as a director
in 1996.                                                                        

Executive Compensation                                                          

     The following table sets forth the compensation paid by the Company for the
past three fiscal years to Joseph S. Latino,  the Company's  President and Chief
Executive Officer, and Arthur Bergeron, the Company's Vice President,  Treasurer
and Chief Financial Officer.                                                    

(Remainder of Page Intentionally Left Blank)

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Summary Compensation Table
                                                                     Long Term
                                                                     Compensa-
                                             Annual             tion
                            Compensation
                                               Other
Name and                                                     Annual             
Principal                                                    Compensa-          
Position             Year      Salary(1)      Bonus          tion      Options #
--------             ----      -------        -----          --------  ---------
--------------------------------------------------------------------------------
      1996      $180,000         - 0 -         (2)
Joseph S.            1995      $180,000         - 0 -         (2)     3,000,000 
Latino, Ph.D,        1994      $ 72,000        $17,800        (2)               
President and                                                                   
Chief Executive                                                                 
Officer                                                                         
--------------------------------------------------------------------------------
Arthur P.            1996      $ 72,000         - 0 -        4                  
Bergeron, Vice       1995      $ 72,000         - 0 -        (4)      1,500,000 
President,           1994      $ 36,0003        - 0 -      (4)(4)               
Treasurer and                                                                   
Chief Financial                                                                 
Officer                                                                         

Employment Agreements                                                           

     The Company  and Joseph S. Latino  entered  into an  employment  agreement,
effective  January 1, 1995,  pursuant to which the Company  agreed to employ Dr.
Latino as its Chief Executive  Officer and Director of Research,  at a salary of

-------------------                                                             

1    From 1992 through  1994,  Dr.  Latino and Mr.  Bergeron  were not paid on a
salaried basis, but were paid as consultants.                         

2    In 1994,  1995 and 1996 Dr. Latino was  reimbursed  for certain  automobile
     expenses and other business  expenses,  in the amounts of $21,324,  $33,222
     and  $__________  respectively.  In 1995 and 1996 the Company  provided Dr.
     Latino with health insurance,  paying premiums in the amounts of $9,438 and
$_________,  respectively.                                            

3    From July 1, 1993  through  December 31,  1994,  Arthur P.  Bergeron & Co.,
     P.C., the accounting  firm of which Mr.  Bergeron is the sole  shareholder,
     received an aggregate of $64,825 as professional  fees for support services
     rendered in connection  with the Company's  1992 audit,  the  engagement of
     Coopers & Lybrand and for  investigative  services  rendered in  connection
     with certain litigation engaged in by the Company. He also received 500,000
     shares of the Company's  common stock for his services through December 31,
1994.                                                                 

4    In 1995, the Company  provided Mr. Bergeron with health  insurance,  paying
premiums in the respective amounts of $9,438 and $______________.     

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$180,000  per  annum,  for a one  year  period;  provided,  however,  that  this
agreement  shall remain in effect until  terminated  by either of the parties in
accordance  with its  terms.  The  Agreement  continued  in effect in 1996.  Dr.
Latino's  salary may be increased in the  discretion  of the Board of Directors.
Pursuant to this  agreement,  Dr. Latino is to devote  substantially  all of his
time and efforts to the  Company's  affairs and is to serve as  President of the
Company's subsidiary,  Medizone Canada Limited without additional  compensation.
Dr.  Latino is to  receive  certain  fringe  benefits,  including  the use of an
automobile  and  health  and life  insurance  and has been  granted an option to
purchase  3,000,000  shares of the Company's common stock, par value $.001, at a
per share price of $.20.  These  options vest in annual  increments of 1,000,000
shares, on and after January 1 of each of 1996, 1997 and 1998, provided that Dr.
Latino is still employed by the Company at the time. The agreement also provides
for certain  bonus  payments,  which are  dependent on the  Company's  achieving
certain financial results.                                                      

     The Company agreed to employ Arthur P. Bergeron, effective January 1, 1995,
as its Chief Financial Officer, at a salary of $72,000 per annum, for a one year
period;  provided,  however,  that this  agreement  shall remain in effect until
terminated by either party in accordance with its terms. The Agreement continued
in effect in 1996. Mr.  Bergeron's  salary may be increased in the discretion of
the Board of  Directors.  Mr.  Bergeron is also to serve as the Chief  Financial
Officer of Medizone Canada Limited without additional compensation.  Pursuant to
this  agreement,  Mr.  Bergeron is permitted to continue his private  accounting
practice.  Mr. Bergeron will also receive health  insurance from the Company and
has been granted an option to purchase  1,500,000 shares of the Company's common
stock,  par value  $.001,  at a per share price of $.20.  These  options vest in
annual increments of 500,000 shares on and after January 1 of each of 1996, 1997
and 1998,  provided that Mr.  Bergeron is still  employed by the Company at that
time. The agreement also provides for certain  bonuses to be paid if the Company
achieves certain financial results.                                             

Compensation Committee Interlocks and Insider Participation                     

     The Company does not have a compensation committee.  Matters concerning the
compensation  of executive  officers are  determined by the  Company's  Board of
Directors.  Dr. Latino,  who is an executive  officer of the Company,  is also a
member of the Company's Board of Directors and will participate in deliberations
concerning  executive  officer  compensation,  but  will  not  vote  on his  own
individual compensation.  However, his participation in such deliberations gives
rise to a conflict of interest which could affect his compensation.             

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 Open Grants in Last Year Pursuant to Employment Agreement
 ---------------------------------------------------------

     The  following  table  sets  forth  information  as of  December  31,  1996
regarding the outstanding options under the Company's employment agreements with
its executive officers.                                                         

                                                 Potential  realizable
                                                   value at Assumed Annual
                                                Rates of Stock Price
                                                    Appreciation for Option.

Percent of            
Total                 
Options               
Number of    granted                            
Securities   under        Exercise   Expir-     
Under        Employment   Price      ation      
Name            Option(1)    Agreements   ($/sh)     Date      5%($)   10%($)   
----            ------       ----------   ------     --------  -----   ------   
Joseph S.                                                                       
Latino           - 0 -         - 0 -        - 0 -       (1)       (1)     (1)   

Arthur P.                                                                       
Bergeron         - 0 -         - 0 -        - 0 -       (1)       (1)     (1)   

     (1)  Options  were  granted on January 1, 1995  pursuant  to the  Company's
     employment  agreements  with  each of Dr.  Latino  (options  for  3,000,000
     shares) and Mr. Bergeron (options for 1,500,000 shares). The exercise price
     of the  option  is $.20.  They  vest  fully on  January  1,  1998  over the
     following vesting schedule,  33% on January 1, 1996, 33% on January 1, 1997
     and 33% on January 1, 1998. They may be exercised for as long as Dr. Latino
     and Mr.  Bergeron remain employed by the Company and for one year after the
     termination of Dr. Latino's and/or Mr. Bergeron's termination of employment
     with the Company. As of January 1, 1995 (the date of grant), the a

Medizone International Inc · 10-K · For 12/31/96

Filed On 3/31/97 · SEC File 2-93277-D · Accession Number 1013708-97-22

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