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

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

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

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

5

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

6

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

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

March 31,September 30, 2009 and December 31, 2008

NOTE 1 -

BASIS OF PRESENTATION

The financial information included herein is unaudited and has been prepared consistent with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements do not include all information and footnotes required by generally accepted accounting principles for complete financial statements.  These statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.  In the opinion of management, these financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period presented.

The results of operations for the three months and nine months ended March 31,September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

Recently Adopted Accounting Pronouncements

In June 2009, the Company adopted a new accounting standard for subsequent events, as codified in Accounting Standards Codification (“ASC”) 855-10 (formerly SFAS No. 165,Subsequent Events), which establishes general accounting standards and disclosure for events that occur after the balance sheet date but before the financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.  This new standard is effective for interim and annual financial periods ending after June 15, 2009 and requires prospective application.  The adoption of this new standard had no impact on the Company’s consolidated financial statements.  The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was November 9, 2009.

Effective July 1, 2009, the Company adopted the “FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles” (ASC 105), (formerly, SFAS No. 168,The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles.  This new standard establishes the “FASB Accounting Standards Codification™” (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP).  Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative GAAP for SEC registrants.  The Codification now supersedes all previous-existing Non-SEC accounting and reporting standards.  All other no n-grandfathered Non-SEC accounting literature not included in the Codification has now become non-authoritative.  Now that the Codification is in effect, all of its content carries the same level of authority.  The Company believes that the adoption of this standard will not have a material impact on its consolidated financial statements.  

NOTE 2 -

CANADIAN FOUNDATION FOR GLOBAL HEALTH

The Company assisted in the formation of the Canadian Foundation for Global Health (“CFGH”), a not-for-profit foundation based in Ottawa, Canada.  The Company helped establish CFGH for two primary purposes: (1) to establish an independent not-for-profit foundation intended to have a continuing working relationship with the Company for research purposes that is best positioned to attract the finest scientific, medical and academic professionals possible to work on projects deemed to be of social benefit; and (2) to provide a means for the Company to use a tiered pricing structure for services and products in emerging economies and extend the reach of the Company’s technology to as many in need as possible.

8

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

NOTE 2 -

CANADIAN FOUNDATION FOR GLOBAL HEALTH (Continued)

The CFGH is specifically not authorized to contract for research or other services on behalf of the Company without prior approval.  All intellectual property, including but not limited to, scientific results, patents and trademarks that are derived from work done on the Company’s behalf or at its request, by CFGH or parties contracted by CFGH with the Company’s prior approval, are the sole and exclusive property of the Company.

In January 2003, the Financial Accounting Standards Board issued a new standard which requires a variable interest entity (“VIE”) to be consolidated by a company if that company absorbs a majority of the VIE’s expected losses and/or receives a majority of the entity’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the entity.  In addition, a legal entity is considered to be a VIE, if it does not have sufficient equity at risk to finance its own activities without relying on financial support from other parties.  If the legal entity is a VIE, then the reporting entity determined to be the primary beneficiary of the VIE must consolidate it.  

The Company has determined that CFGH meets the requirements of a VIE, effective upon the first advance to CFGH on February 12, 2009.  Accordingly, the financial condition and operations of CFGH are being consolidated with the Company as of and for the nine months ended September 30, 2009.

NOTE 3 -

LOSS PER SHARE

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

9

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

NOTE 3 -

LOSS PER SHARE (Continued)

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

NOTE 34 -

GOING CONCERN

The Company’s consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred significant losses from its inception through March 31,September 30, 2009, which have resulted in an accumulated deficit of $20,793,972$21,556,629 at March 31,September 30, 2009.  The Company currently does not have an established source of funds sufficient to cover its operating costs beyond the next three months, has a working capital deficit of approximately $3,388,000,$3,266,000, and has relied exclusively on debt and equity financing.  Accordingly, there is substantial doubt about its ability to continue as a going concern.  Continuation of the Company as a going concern is dependent upon obtaining additional capital and ultimately, upon the Company’s attainingattaini ng profitable operations.  The Company wil lwill require a substantial amount of additional funds to complete the development of its products, to establish manufacturing facilities, to build a sales and marketing organization,hospital beta testing, commercialization, and to fund additional losses, whichuntil revenues are sufficient to cover the Company expects to incur over the next several years.  

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

March 31, 2009 and December 31, 2008

NOTE 3 -

GOING CONCERN (Continued)Company’s operating expenses.  

During 2008, the Company raised a total of $279,000 through the sale of 14,633,333 restricted shares of common stock at prices ranging from $0.01 to $0.03 per share, which funds were used to bring the Company current in its reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and to pay certain other corporate obligations including the initial costs of development for its hospital sterilization initiative.  An additional $200,000 was$1,000,100 has been raised during the quarter ended March 31, 2009 through the sale of 6,666,66631,468,332 restricted shares of common stock, at $0.03prices ranging from $0.02 to $0.06 per share.share ($232,100 of which was subsequent to September 30, 2009).  However, the Company will need to raise additional capital in the near future in order to sustain operations and to fund additional research.  The Company is currently working on possiblebelieves that it will be able to raise these additional funding sources and has received verbal commitmentsneeded funds from some of the same investors who haveha ve purchased shares during 2008 and 2009, although there areis no guaranteesguarantee that these verbal commitmentsinvestors will be fulfilled.purchase additional shares.  However, theythese investors have verbally committed to continue to fund the Company’s projects on a monthly basis, as needed.  If the Company is unsuccessful in finalizing thesethis or other additional funding, it will most likely be forced to substantially reduce or cease operations.  

Because ozone-generation for the purposes of interfacing with blood and blood products is regarded as a new drug delivery system, the Company is precluded from selling or distributing its drug or the Company’s proprietary technology (the “Medizone Technology”) in the United States until after FDA approval has been granted.  In order to obtain FDA approval, the Company will be required to submit a New Drug Application (“NDA”) for review by the FDA and provide medical and scientific evidence sufficient to demonstrate that the drug and the Medizone Technology have been successfully used in pre-clinical studies followed by three phases of well-controlled clinical studies using human volunteer subjects.  The FDA will not grant an NDA unless the application contains sufficient medical evidence and data to permit a body of qualified and experienced scientists to conclude that the new drug product is safe and effective for its recommended and proposed medical uses.  Historically, the FDA has held a strong bias against treating humans with ozone, due largely to issues of safety.  However, the Company’s hospital sterilization initiative falls outside of the regulatory requirements of the FDA since it is not a drug, therapy or medical device.  The initiative will be based on sound engineering and laboratory and hospital trials.  Assuming funds become available, the Company currently believes that this technology will be fully tested and ready for manufacture during late 2009.

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

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

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

March 31, 2009 and December 31, 2008

NOTE 3 -

GOING CONCERN (Continued)

Recently, the Company isbegan pursuing the development of a novel ozone-based technology (“AsepticSure™ technology”) which will offer a safe, inexpensive means of disinfecting medical facilities of all bacteria, fungi and viruses known to cause hospital derived infections.  Since this technology is not considered a medical treatment or a diagnostic, its developmental pathway will not be subject to regulatory review or the requirement forof a lengthy clinical trial process.  The Company hopeshas recently commenced a third series of laboratory trials of this hospital sterilization technology at Innovation Park, Queen’s University, Ontario, Canada, which is intended to commercializebuild upon the success of its research to date and to establish the precise protocols necessary in order to obtain maximum bactericidal action in combination with minimum turn-around times in keeping with normal hospital flow patterns.  Most recently, the Company re search has shown that the technology can now achieve a level of bacterial decontamination heretofore unseen in open space settings using conventional means.  The Company believes that this technologydevelopment will significantly expand the utility for the AsepticSure™ technology.  

In addition, a development prototype is being finalized in order to conduct a full room scale hospital mock up.  The mock up trial is intended to be followed by hospital beta testing of the AsepticSure™ hospital sterilization prototype system.  Assuming successful hospital beta testing, commercialization of the system with first product deliveries is expected during the fourth quarterfirst half of 2009,2010, which if successful, maythe Company believes will provide the necessary revenue to fund additional advanced efforts with this technology for bio-terrorism counter measures, as well as other projects that the Company is working on, as previously discussed. The development time table is contingent upon acquiring the required on-going funding for this project, which at the date of this report, has not been fully secured.projects.  

The management of

10

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Company intends to seek additional funding which will be utilized to fund additional researchConsolidated Financial Statements (Unaudited)

September 30, 2009 and continue operations.  The Company recognizes that if it is unable to raise additional capital, it may find it necessary to substantially reduce or cease operations.December 31, 2008

NOTE 4 -

GOING CONCERN (Continued)

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

NOTE 45 -

COMMITMENTS AND CONTINGENCIES

The Company is subject to certain claims and lawsuits arising in the normal course of business.  In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material effect on the Company’s financial position, results of operations, or cash flows.

Effective July 1, 2009, the Company entered into a lease agreement and established its own certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which will provide a primary research and development platform for the Company as it proceeds towards commercialization of its products.  The lease term goes through June 30, 2010 and includes a monthly lease payment of $1,300 Canadian Dollars plus the applicable Goods and Services Tax (GST).    

NOTE 56 -

OUTSTANDING WARRANTS AND OPTIONS

Warrants

On various dates over the past several years up to and including March 03,June 10, 2009, the Board of Directors of the Company agreed to extend the expiration date on certain outstanding warrants to purchase common stock to June 30,August 19, 2009.  The Company estimates the fair value of each stock award or expiration extension at the grant date or extension date by using the Black-Scholes option pricing model, pursuant to FASB Statement 123, “Accounting for Stock-Based Compensation”, which model requires the use of exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate, and the weighted average expected life of the warrants.  Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes model is zero.  Under the provisions of SFAS 123,this accounting standard, additional expense of $29,913$105,393 and $64,962 was recorded for the threenine months ended March 31,September 30, 2009 and 2008, respectively, under the Black-ScholesBlack-Sc holes option pricing model for these warrant extensions.  

The Company estimated the fair value of the stock warrants at the date of the maturity extension, based on the following weighted average assumptions:

On August 5, 2009, warrants held by two separate directors of the Company for a total of 6,487,408 shares were exercised, using the cashless exercise provision within the warrant agreements, resulting in the issuance of 5,126,265 shares of common stock with no cash proceeds received.  On August 19, 2009, all remaining warrants expired unexercised.

A summary of the status of the Company’s outstanding warrants as of September 30, 2009 and changes during the nine months then ended is presented below:

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

March 31,September 30, 2009 and December 31, 2008

NOTE 56 -

OUTSTANDING WARRANTS AND OPTIONS (Continued)

Options

On August 26, 2009, the Company granted a total of 1,000,000 options to a Company director with an exercise price of $0.10 per share, exercisable for up to five years.  On the same date, the Company granted an additional 1,500,000 options to an outside consultant for services rendered, with an exercise price of $0.10 per share, exercisable for up to five years, but including vesting provisions as follows: i) 500,000 of the options vested immediately on the date of grant, ii) 500,000 options will vest on the date certified by the Company as the date the Company’s hospital sterilization program completes its beta-testing, and iii) the remaining 500,000 options will vest on the date certified by the Company as the date that the Company’s process has been commercialized and a minimum of fifty units or devices have been sold to third parties by the Company.  As of September 30, 2009, 1,000,000 of the 1,500,000 options granted to this consu ltant had not yet vested.

As previously discussed, the Company estimates the fair value of each stock award by using the Black-Scholes option pricing model, which model requires the use of exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options.  Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes model is zero.  Under the provisions of this accounting standard, additional expense of $146,097 was recorded for the nine months ended September 30, 2009 under the Black-Scholes option pricing model for these options granted on August 26, 2009.  Additional expense of $97,398 will be recorded in the future as the additional vesting requirements are met.  

The Company estimated the fair value of the stock options at the date of the grant, based on the following weighted average assumptions:

A summary of the status of the Company’s outstanding warrantsoptions as of March 31,September 30, 2009 and changes during the threenine months then ended is presented below:

As of March 31, 2009, the following warrants were outstanding:

12

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

September 30, 2009 and December 31, 2008

NOTE 67 -

STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS

During the threenine months ended March 31,September 30, 2009, the Company issued 6,666,66627,599,999 shares of common stock for cash proceeds of $200,000, or$768,000, at prices ranging from $0.02 to $0.03 per share.

During 2008, the Company’s board of directors approved the issuance of a total of 1,000,000 restricted shares to be issued to a public relations firm, for public relations and corporate communications services to be rendered valued at $42,000, or $0.042 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  The consulting agreement is based on a one-year term, the shares will vest in equal increments, and the consulting expense willis to be recognized over the same period.  $14,000 and $10,500 of the $42,000 consulting expense was recognized for the year ended December 31, 2008, and for the three months ended March 31, 2009, respectively, with the remaining $17,500 recorded as deferred consulting fees, to be$28,000 recognized overduring the remaining five month period at $3,500 per month.nine months ended September 30, 2009.

Also during 2008, the Company’s board of directors approved the issuance of 1,000,000 free-trading shares to be issued to an individual for consulting services to be rendered valued at $30,000, or $0.03 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  The consulting agreement iswas based on a six-month term, the shares vestvested in equal increments, and the consulting expense iswas recognized over the same period.  $10,000 and  $10,000 of the $30,000 consulting expense was recognized during the year ended December 31, 2008, and during the three months ended March 31, 2009, respectively, with the remaining $5,000$20,000 recognized during the nine months ended September 30, 2009.

During April 2009, the Company’s board of directors approved the issuance of 700,000 (350,000 restricted and 350,000 free-trading) shares to be issued to a consultant valued at $25,200, or $0.036 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  The consulting agreement was based on a one-year term, the shares vest in equal increments, and the consulting expense is to be recognized over the same period.  $10,500 of the $25,200 was recognized during the nine months ended September 30, 2009, with the remaining $14,700 recorded as deferred consulting fees, to be recognized during Aprilover the remaining seven month period at $2,100 per month.

During May 2009, the Company’s board of directors approved the issuance of 500,000 restricted shares to be issued to a consultant valued at $19,500, or $0.039 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  The consulting agreement was based on a one-year term, the shares vest in equal increments, and the consulting expense is to be recognized over the same period.  $7,036 of the $19,500 was recognized for the nine months ended September 30, 2009, with the remaining $12,464 recorded as deferred consulting fees, to be recognized over the remaining period at $1,625 per month.

During June 2009, pursuant to a consulting agreement that included a cash payment of $7,200, the Company’s board of directors approved the issuance of 200,000 restricted shares to be issued to a consultant valued at $8,400, or $0.042 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  The consulting agreement was based on a three-and-one-half month term, the shares vest in equal increments, and the total consulting expense is to be recognized over the same period, which expired on September 15, 2009.

During September 2009, the Company’s board of directors approved the issuance of 250,000 restricted shares to be issued to a consultant valued at $25,000, or $0.10 per share, which represented the market value of the shares on the date that the shares were approved to be issued.  15,000 of the shares issued were issued in lieu of outstanding debt owed to the consultant, totaling $1,500.  The remaining 235,000 shares issued were based on a consulting agreement expiring on January 31, 2010, the shares vest in equal increments, and the $23,500 consulting expense is to be recognized over the same period.  $2,611 of the $23,500 was recognized for the nine months ended September 30, 2009, with the remaining $20,889 recorded as deferred consulting fees, to be recognized over the remaining period at $5,222 per month.

Total deferred consulting fees related to the above mentioned agreements as of March 31,September 30, 2009 was $22,500$48,053 which will be recognized over the subsequent periods as previously discussed.

MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to the Consolidated Financial Statements (Unaudited)

March 31,September 30, 2009 and December 31, 2008

NOTE 7 -

LOAN RECEIVABLE – RELATED PARTYSTOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS (Continued)

During 2008, the Company assisted in the formation

As previously discussed, on August 5, 2009, warrants held by two separate directors of the Canadian Foundation for Global Health (“CFGH”), a not-for-profit foundation based in Ottawa, Canada.  The Company helped establish CFGH for two primary purposes: (1) to establish an independent not-for-profit foundation intended to have a continuing working relationship with the Company for research purposes that is best positioned to attract the finest scientific, medical and academic professionals possible to work on projects deemed to be of social benefit; and (2) to provide a means for the Company to use a tiered pricing structure for services and products in emerging economies and extend the reach of the Company’s technology to as many in need as possible.

The CFGH is specifically not authorized to contract for research or other services on behalf of the Company without prior approval.  All intellectual property, including but not limited to, scientific results, patents and trademarks that are derived from work done on the Company’s behalf or at its request, by CFGH or parties contracted by CFGH with the Company’s prior approval, are the sole and exclusive property of the Company.

During the quarter ended March 31, 2009, the Company loaned CFGH a total of $65,000 to be used for its operating expenses, such as rent, executive and staff salaries, and overhead.  The amount is non-interest bearing, due on demand, and unsecured.  However,6,487,408 shares were exercised, using the cashless exercise provision within the warrant agreements, resulting in the issuance of 5,126,265 shares of common stock with no cash proceeds received.

NOTE 8 -

RECAPITALIZATION

Effective August 26, 2009, authorized by the shareholders pursuant to Proposal 4 at the loan agreement betweenCompany’s annual shareholder’s meeting, the CompanyCompany’s Articles of Incorporation were amended to include a class of Preferred Stock, par value $0.00001, with authorized shares of 50,000,000.  No shares of Preferred Stock have been issued, however.  The rights and CFGH,preferences of the newly authorized preferred shares will be determined by the Company’s Board of Directors will review, onat a periodic basis, all advances madelater time.

The Articles of Incorporation were also amended to CFGHincrease the authorized shares of common stock from 250,000,000 to determine the terms and conditions requiring repayment, and may, at its sole discretion, elect395,000,000 shares, par value $0.001.  

NOTE 9 -

SUBSEQUENT EVENTS

Subsequent to forgive part or all of such advances.  At March 31,September 30, 2009, the Company’s BoardCompany raised additional funds totaling $232,100, through the issuance of Directors has determined that it is more likely than not, that the $65,000 advance3,868,333 shares of restricted common stock, issued at $0.06 per share.

The Company evaluated events through November 9, 2009 for consideration as a subsequent event to CFGH will eventually be forgiven.  Therefore, the Company has recorded bad debt expense of $65,000 for the three months ended March 31,included in its September 30, 2009 related to these advances.financial statements.

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

General

Medizone International, Inc. ("Medizone" or the "Company"), isprior to 2008 had been dedicated to (i) seeking regulatory approval of a precise mixture of ozone and oxygen, 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; (ii) developing or acquiring the related technology and equipment for the medical application of its products, including a drug production and delivery system; and (iii) applying its novel technology to the problem of nosocomial infections world-wide.  Beginning in 2008, the Company’s management also has worked to positionre-positioned the Company to pursue an initiative in the field of hospital sterilization.

Corporate Redirection

Early in 2008, the Company'sour management and board of directors began to consider other applications of the Company'sour core technologies and new technologies with lower development costs with the objective of bringingmoving us to revenue production in the Company a revenue stream to offset the ongoing expenseshortest period of funding further development of the drug and treatment protocols for diseases such as Hepatitis C and HIV/AIDS.time.

ManagementSince that time, management has worked to position the Company in such a way asus to pursue an initiative in the field of hospital sterilization.  This change in focus is based, in part, on a review of published data on hospital-derived infections, an area of rapidly growing concern in the medical community. Management believes that there is an opportunity to build on the Company'sour experience with ozone technologies and its bio-oxidative qualities in pursuing this initiative. The Company will shift itsWe have shifted our near term efforts towards one of its founding tenets, namely that under the right conditions, ozone can be extremely effective at sterilizing virtually all biological fluids (blood, serum, and plasma and its fractionates) as well as all biologically contaminated equipment and spaces.

This decision has been effected by the growing realizationWe believe that Medizone'sour unique ozone generating technologies could play a vital role in addressing what public health officials and surgeons world-wide are beginning to recognize as "the silent epidemic" (American Academy of Orthopedic Surgeons, May 2008, copy on file with the Company (“AAOS Study”)), a reference to MRSA (methicillin-resistant staphylococcus aureus) infection.  This is a strain of Staphylococcus aureus bacteria (“staph”) that is resistant to the broad-spectrum antibiotics commonly used to treat it. MRSA can be fatal.  According to the AAOS Study, "the number of hospital admissions for MRSA has exploded in the past decade. By 2005, admissions were triple the number in 2000 and 10-fold higher than in 1995. In 2005, in the United States alone, 368,600 hospital admissions for MRSA — including 94,000 invasive infections — resulted in 18,650 deaths. The number of MRSA fatalitiesfatalitie s in 2005 surpassed the number of fatalities from hurricane Katrina and AIDS combined and is substantially higher than fatalities at the peak of the U. S. polio epidemic."  Indeed, biological contamination of medical treatment areas such as hospitals and chronic care facilities has recently been identified by several world renowned public health institutions, including the Centers for Disease Control or “CDC” (CDC Report, 17 Oct, 2007, copy on file with the Company), as one of the greatest threats to public health and safety in the industrial world. This concern was reflected in an article recently published in the journal Science (18 July 2008, Vol 321, pp 356-361, copy on file with the Company) which estimated that hospital-based infections in 2006 accounted for almost 100,000 deaths in the US alone.

In response to this situation, the Company iswe are currently developing a highly portable, low-cost, ozone-based technology (“AsepticSure™”) specifically for the purpose of decontaminating and sterilizing hospital surgical suites, emergency rooms, and intensive care units. Since this technology is not considered a medical treatment or a diagnostic, its development pathway is not subject to a stringent and expensive regulatory review process.  The development pathway will be based on independent peer-reviewed science and engineering excellence.

In 2008, we entered into a five-year agreement with BiOzone Corporation (“BiOzone”).  Under the agreement, BiOzone has been developing, along with us, equipment for specialized laboratory trials, a prototype AsepticSure™ system for hospital beta-testing and ozone destruct technology.  The Company expects independentagreement also covers initial product manufacturing by BiOzone exclusively for Medizone. Under this agreement, we retain the right to outsource additional manufacturing capacity.  

During May 2009, we commenced the first of a series of trials targeteddesigned to proveconfirm that our AsepticSure™ Hospital Sterilization System can rapidly eliminate hospital-based bacterial pathogens known to be responsible for the growing number of deaths and serious infections currently plaguing the healthcare system worldwide.  We have engaged an internationally recognized expert in medical microbiology and hospital infections to lead the trials.  A second series of laboratory trials were commenced in early June 2009, after the first series produced results that management believes to have demonstrated significant reductions inbactericidal effects against C-difficile, E-coli, Pseudomonas aeruginous, MRSA and VRE, the majormain causative agents of hospital derived infectionsnosocomial infections.  This second series

15

of laboratory trials resulted in what management believes to be levels of bactericidal action necessary to achieve our commercial objectives.  

A third series of laboratory trials were commenced during October 2009 in order to establish the precise protocols necessary in order to obtain maximum bactericidal action in combination with minimum turn-around times in keeping with normal hospital flow patterns.  Most recently, our research has shown that the technology can now achieve a level of bacterial decontamination heretofore unseen in open space settings using conventional means.  We now believe that this development will begin by spring 2009, followed bysignificantly expand the utility for the AsepticSure™ technology.   

Simultaneously with this recent testing, a development prototype is being finalized in order to conduct a full room scale hospital mock-up.  If the hospital mock-up is successful, we will proceed to hospital beta testing of the production prototype design.  Completionin preparation for marketing.  Commercialization of these projects will be dependent upon the Company obtainingsystem, with first product deliveries, is expected during the necessary funding, for which there is no assurance.first half of 2010.

In addition to the hospital sterilization initiative, the Company is developingwe have developed an ozone-destruct unit which is used following sterilization of the treated infrastructure to reverse the ozone gas (O3) in the space, and turn it back into O2 in a short period of time.  The Company hasWe have targeted initially the treatment of a typically sized surgical suite including sterilization followed by ozone destruct to habitable standards in two hours or less.  This short turn-around period is considered of great importance relative to commercialization of the technology.

At present,In parallel research recently conducted at BiOzone, our engineering development partner, it was confirmed that the Company is earlyAsepticSure™ hospital sterilization system can complete the entire decontamination process with minimal disturbance to normal hospital flow patterns.  We believe that from a commercial viewpoint, the higher the “kill rate” in the patent research stage of this development program.  Whileshortest turn-around time, the Company cannot guarantee that patentsmore favorably physicians and hospital administrators will be available for this technology,view the Company will make every effort to research any possibilities, and management believes some protections are likely.  system.  

An application for registration of a trademark has been filed for the system with the United States Patent and Trademark Office for the mark AsepticSure™. The mark is used to describe a portable decontamination and sterilization system for hospitals, government buildings, schools and other functionally critical environments that might currently require, or need to be prepared for countermeasures capability from contamination by infectious biological agents such as C difficile, E coli, Pseudomonas aeruginous, MRSA and VRE (Vanocomycin-resistant Enterococci – another d rug-resistantdrug-resistant bacteria).

In 2008,July 2009, we filed a patent application for the CompanyAsepticSure™ technology in order to establish protection of its commercial rights to this technology internationally.  The patent covers disinfection for rooms and their contents within all healthcare facilities, mobile or stationary, and other critical infrastructure such as schools and government buildings.  A second patent filing is expected in the near future to cover the recent testing results as explained above.  Also effective July 1, 2009, we entered into a five-yearlease agreement and established our own certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which will provide us with Biozone Corporation (“Biozone”).  Under the agreement, Biozone is developing, along with the Company, equipment for specialized laboratory trials, a prototype AsepticSure™ system for hospital beta-testingprimary research and ozone destruct technology.  The agreement also covers initial product manufacturing by Biozone exclusively for the Company. Under this agreement, the Company retains the right to outsource additional manufacturing capacity.  During 2009, the Company expects to commence a trial to be conducted at a major university for independent verificationdevelopment platform as we proceed towards commercialization of the Company’s technology in the de-activation of infectious biological agents. If the trial is successful and funding continues to be available to the Company, the next step in the development program is hospital beta testing of the prototype AsepticSure™ system.AsepticSure ™ product.  

The Company’s believes itsWe believe our research and development time frame as well as intellectual property development remain on track.  Once the trial program for the Company’s AsepticSure™ hospital sterilization system starts, it is expectedconcluded, we expect to progress rapidly.  A staff expansion duringout-source the summermanufacturing of 2009 will then be required in order to position the Companyproduct and ultimately, partner with a large corporation for a targeted marketing program, initialthe sales and product service follow-up.marketing of the final product.  

Canadian Foundation for Global Health (CFGH) – Consolidated Variable Interest Entity

In September 2008, the CompanyWe assisted in the formation of the Canadian Foundation for Global Health (“CFGH”), a not-for-profit foundation based in Ottawa, Canada.  The CompanyWe helped establish CFGH for two primary purposes: (1) to establish an independent not-for-profit foundation intended to have a continuing working relationship with the CompanyMedizone for research purposes that is best positioned to attract the finest scientific, medical and academic professionals possible to work on projects deemed to be of social benefit; and (2) to provide a means for the Companyus to use a tiered pricing structure for services and products in emerging economies and extend the reach of the Company’sour technology to as many in need as possible.

The CFGH is specifically not authorized to contract for research or other services on our behalf of the Company without prior approval.  All intellectual property, including but not limited to, scientific results, patents and trademarks that are derived from work done on the Company’sour behalf or at itsour request, by CFGH or parties contracted by CFGH with the Company’sour prior approval, are the sole and exclusive property of the Company.Medizone.

The Canadian Foundation for Global HealthCFGH is registered as a not-for-profit corporation under Canadian Federal Charter.  CFGH maintains offices at 170 Lauier Avenue West in Ottawa, Canada.  Dr. Michael E. Shannon M.A., M.Sc., M.D. is President of the CFGH and maintains offices at the CFGH in Ottawa.CFGH.  Dr. Shannon is also a member of the Company’sour board of directors and is the Company’sour Director of Medical Affairs.  Mr. Brad Goble, President of TDVGlobal, Inc., is also a board member of the CFGH and serves

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as the Secretary-Treasurer for the organization. According to its website, TDVGlobal, Inc. “is a strategic management consulting company” focusing on the public sector.  It is based in Ottawa, Ontario, Canada.  Other members of the CFGH board are Edwin G. Marshall (our CEO and Chairman), Daniel D. Hoyt, a director of the Company, and Jill C. Marshall, NMD, Mr. Marshall’s wife and a for merformer corporate officer of the Company.

In January 2003, the Financial Accounting Standards Board issued a new accounting standard  which requires a variable interest entity (“VIE”) to be consolidated by a company if that company absorbs a majority of the VIE’s expected losses and/or receives a majority of the entity’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the entity.  In addition, a legal entity is considered to be a VIE, if it does not have sufficient equity at risk to finance its own activities without relying on financial support from other parties.  If the legal entity is a VIE, then the reporting entity determined to be the primary beneficiary of the VIE must consolidate it.  We have determined that CFGH meets the requirements of a VIE, effective upon the first advance to CFGH on February 12, 2009.  Accordingly, the financial co ndition and operations of CFGH are being consolidated with Medizone as of and for the nine months ended September 30, 2009.

Results of Operations

The Company wasWe were incorporated in January 1986.  The Company isWe are a development stage company primarily engaged in research into the medical uses of ozone.  The Company hasWe have not generated, and cannot predict when or if itwe will generate, revenues or sufficient cash flow to fund continuing or planned operations.   If we fail to obtain additional funding, we will be forced to suspend or permanently cease operations, and may need to seek protection under United States bankruptcy laws.

Three Months Ended March 31,September 30, 2009 and 2008

There were no sales during the quarters ended March 31,September 30, 2009 or 2008. For the three months ended March 31,September 30, 2009, the Companywe had a net loss of $223,732,$472,994, compared with a net loss for the three months ended March 31,September 30, 2008 of $148,718.  The$192,913.  Our primary expense of the Company is payroll and other office costs, research, development, and consulting fees, together with interest expense and additional expense recorded as a result of options granted, and the extension of certain stock purchase warrants outstanding.  The Company also recorded bad debt expense of $65,000 for the three months ended March 31, 2009.

For the three months ended March 31,September 30, 2008, the Companywe had no research and development expenses. For the three months ended March 31,September 30, 2009, however, the Companywe incurred $20,885$165,237 in research and development costs, as a result of prototype development costs, consulting, and other research activities.  Since inception, the Company haswe have spent a total of $2,750,006for$3,035,004for research and development related to its ozone technology and related apparatus. Research and development expenses include consultant fees, interface development costs, prototypes, and research stage ozone generator and instrument development.

General and administrative expenses in the quarter ended March 31,September 30, 2009, were $163,190$301,149 compared to $74,350$186,870 during the same period in 2008. The increase in the current year as compared to the prior year was related to additional payroll and consulting fees incurred, along withvaluation of options granted for consulting services during 2009, costs incurred for the shareholder meeting held in August 2009, and increased professional fees.  The remaining general and administrative expenses include rent, office expenses and travel expenses.  Our lack of cash has prevented us from paying all accrued salary and other expenses during the last eight years.

Principal amounts owed on notes payable totaled $285,206 and $280,491 at MarchSeptember 30, 2009 and December 31, 2008, respectively.  Interest expense on these obligations during the three months ended September 30, 2009 and 2008 was $5,990 and $5,914, respectively.  

Nine Months Ended September 30, 2009 and 2008

There were no sales during the nine months ended September 30, 2009 or 2008. For the nine months ended September 30, 2009, we had a net loss of $986,389, compared with a net loss for the nine months ended September 30, 2008 of $432,424.  Our primary expense is payroll and other office costs, research, development, and consulting fees, together with interest expense and additional expense recorded as a result of options granted to consultants, and the extension of certain stock purchase warrants outstanding.  

For the nine months ended September 30, 2008, we had no research and development expenses.  For the nine months ended September 30, 2009, however, we incurred $305,883 in research and development costs, as a result of prototype development costs, consulting, and other research activities.  

General and administrative expenses in the nine months ended September 30, 2009, were $617,377 compared to $342,889 during the same period in 2008. The increase in the current year as compared to the prior year was related

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to additional payroll and consulting fees incurred, valuation of options granted for consulting services during 2009, costs incurred for the shareholder meeting held in August 2009, and increased professional fees.  The remaining general and administrative expenses include rent, office expenses and travel expenses.  

Principal amounts owed on notes payable totaled $285,206 and $280,491 at September 30, 2009 and December 31, 2008.  Interest expense on these obligations during the threenine months ended March 31,September 30, 2009 and 2008 was $5,914$17,818 and $5,914,$24,444, respectively.  Additional interest expense of $3,492$6,702 was recorded for the threenine months ended March 31,September 30, 2008 on other outstanding indebtedness.

The CompanyWe also recorded debt forgiveness of $61,514 from a professional service firm during the threenine months ended March 31,September 30, 2009.

Liquidity and Capital Resources

At March 31,September 30, 2009, the Company’sour working capital deficiency was $3,388,041,$3,265,784, compared to a working capital deficiency of $3,394,071 at December 31, 2008.  The stockholders’ deficit at March 31,September 30, 2009 was $3,609,145$3,479,870 compared to $3,615,326 at December 31, 2008.  

As a development stage company, the Company haswe have had no revenues. The Company continuesWe will continue to require additional financing to fund its operations. The Company will also require financingoperations and to continue to fund the research necessary to undertake itsour new business plans, which contemplatesto further the ongoing testing as previously described, and then marketingto market a system for hospital and medical sterilization.  The Company’sOur only source of financing to date has been the periodic sale of its common stock. During the threenine months ended March 31,September 30, 2009, the Companywe generated cash of $200,000$768,000 through common stock purchases.  Ansales at prices ranging from $0.02 to $0.03 per share.  During October and November 2009, we raised an additional $295,582 was raised by the Company$232,100 through the sale of its common stock during 2008.

Given current negative cash flows, itat $0.06 per share.  However, we will need to raise additional capital in the near future in order to continue its research and development activities and to sustain operations.  We believe that we will be difficult forable to raise these additional needed funds from some o f the Companysame investors who have purchased shares during 2008 and 2009, although there is no assurance that these investors will purchase additional shares.  However, these investors have verbally committed to continue to fund our projects on a monthly basis, as a going concern without an influx of significant capital. While the Company has continued to aggressively pursue potential financing opportunities, those efforts have to date produced only minimal results.  In addition, previously anticipated and announced financing commitments have failed to be fulfilled in a significant manner.needed.  

The Company’sOur unaudited financial statements included in this Reportreport have been prepared on the assumption that the Company will continue as a going concern. Through the date of this report, it has been necessary to rely upon financing from the sale of the Company’sour equity securities to sustain operations as indicated above. Additional financing will be required if the Company iswe are to continue as a going concern. If additional financing is not obtained in the near future, the Companywe will be required to curtail or discontinue operations, or seek protection under the bankruptcy laws. Even if additional financing becomes available, there can be no assurance that it will be on terms favorable to the Company. In any event, this additional financing will likely result in immediate and possibly substantial dilution to existing shareholders.

Forward-Looking Statements and Risks Affecting the Company

The statements contained in this Reportreport on Form 10-Q that are not purely historical are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act. These statements regard our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of the words or phrases "believes," "expects," "anticipates," "should," "plans," "estimates," and "potential," among others. Forward-looking statements include, but are not limited to, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding the Company’sour financial performance, revenue and expense levels in the future and the sufficiency of existing assets to fund future operations and capital spending needs.needs . Actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements for the reasons detailed in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2008 under the heading "Description of Business”.  The Company believes that many of the risks previously discussed and in its SEC filings are part of doing business in the industry in which the Company operateswe operate and competescompete and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance.

The forward-looking statements contained in this Reportreport are made as of the date of this Reportreport and the Company assumeswe assume no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may affect the Company’sour business, financial condition, performance, development, and results of operations include:

·

Rigorous government scrutiny and regulation of the Company’sour products and planned products;

·

Potential effects of adverse publicity regarding ozone and related technologies or industries;

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·

Failure to sustain or manage growth including the failure to continue to develop new products; and

·

The ability to obtain needed financing.

Critical Accounting Policies and Estimates

The Company’s discussionThis Discussion and analysisAnalysis of financial conditionFinancial Condition and resultsResults of operationsOperations are based upon itsour unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such statements requires the Companymanagement to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the financial statements. The Company’sThese estimates are based on historical experience and other assumptions that the Company considermanagement considers to be appropriate in the circumstances. However, actual future results may vary from these estimates, since by their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, the Company evaluateswe evaluate these estimates, including those related to bad debts, intangible assets, warranty obligations, product liability,liabili ty, revenue, and income taxes.

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

Recent Accounting Pronouncements

In December 2007, the FASB issuedJune 2009, we adopted a new accounting standard for subsequent events, as codified in Accounting Standards Codification (“ASC”) 855-10 (formerly SFAS No. 141(R)165,Subsequent Events),Business Combinations.  SFAS 141(R) replaces SFAS No. 141, Business Combinations, which establishes general accounting standards and disclosure for events that occur after the balance sheet date but retainsbefore the requirement thatfinancial statements are issued or are available to be issued.  It requires the purchase methoddisclosure of accounting for acquisitions be used for all business combinations. SFAS 141(R) expands on the disclosures previously required by SFAS 141, better defines the acquirerdate through which an entity has evaluated subsequent events and the acquisition date in a business combination, and establishes principlesbasis for recognizing and measuring the assets acquired (including goodwill), the liabilities assumed and any non-controlling interests in the acquired business. SFAS 141(R) also requires an acquirer to record an adjustment to income tax expense for changes in valuation allowances or uncertain tax positions related to acquired businesses. SFAS 141(R)that date.  This new standard is effective for all business combinations with an acquisition date in the firstinterim and annual period following Decemberfinancial periods ending after June 15, 2008; early adoption is not permitted. T he impact SFAS 141(R) will have on the Company’s consolidated financial statements will depend on the nature2009 and size of acquisitions the Company completes after it adopts SFAS 141(R).

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51.  SFAS 160 requires that non-controlling (or minority) interests in subsidiaries be reported in the equity section of the company’s balance sheet, rather than in a mezzanine section of the balance sheet between liabilities and equity. SFAS 160 also changes the manner in which the net income of the subsidiary is reported and disclosed in the controlling company’s income statement. SFAS 160 also establishes guidelines for accounting for changes in ownership percentages and for deconsolidation. SFAS 160 is effective for financial statements for fiscal years beginning on or after December 1, 2008 and interim periods within those years; early adoption is not permitted.prospective application.  The adoption of SFAS 160 is not expected to have a materialthis new standard had no impact on our consolidated financial statements.  We evaluated subsequent events through the Company’sdate the accompanying financial position, resultsstatements were issued, which was November 9, 2009.

Effective July 1, 2009, we adopted the “FASB Accounting Standards Codification™ and the Hierarchy of operations or cash flows.

In March 2008, the FASB issuedGenerally Accepted Accounting Principles” (ASC 105), (formerly, SFAS No. 161, Disclosures about Derivative Instruments168,The FASB Accounting Standards Codification™ and Hedging Activities-an amendment of FASB Statement No. 133 ("SFAS No. 161"). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how the instruments are accounted for under SFAS No. 133 and its related interpretations, and how the instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The guidance in SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 is note expected to have a material impact on the Company’s disclosures in its financial statements.

In May of 2008, the FASB issued Statement No. 162,The Hierarchy of Generally Accepted Accounting Principles.  This statement identifies literature establishednew standard establishes the “FASB Accounting Standards Codification™” (Codification) as the source of authoritative accounting principles recognized by the FASB as the source for accounting principles to be applied by nongovernmental entities which preparein the preparation of financial statements presented in conformity with generally accepted accounting