United States Securities and Exchange Commission
                             Washington, D.C. 20549

                                   FORM 10-KSB
--------------------------------------------------------------------------------

(Mark One)

|X|   Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
      Act of 1934 for the Fiscal Year Ended December 31, 2004

|_|   Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

                        Commission File Number: 000-32343

                                MR3 Systems, Inc.
                                -----------------
                 (Name of small business issuer in its charter)

                Delaware                                68-0259003
                --------                                ----------
        (State or other jurisdiction of              (I.R.S. Employer
        incorporation or organization)               Identification No.)

         435 Brannan Street, Suite #200, San Francisco, California 94107
         ---------------------------------------------------------------
              (Address of principal executive officers) (Zip Code)

Issuer's telephone number: (415) 947-1090

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

Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, $0.01 par value per share
                                (Title of Class)

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

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

State issuer's revenues for its most recent fiscal year: $ 380,000

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $4,496,787 (based on price of $0.085 per share on May 18, 2005).

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.

         Class                                    Outstanding as of May 18, 2005
         -----                                    ------------------------------
Common Stock, Par Value $0.01                                70,046,766

DOCUMENTS INCORPORATED BY REFERENCE

Transitional Small Business Disclosure Format. Yes |_| No |X|

<PAGE>

                                MR3 Systems, Inc.

                                TABLE OF CONTENTS

                                     PART I
                                                                           Page

Item 1.   Description of Business.......................................... 01

Item 2.   Description of Property.......................................... 16

Item 3.   Legal Proceedings................................................ 16

Item 4.   Submission of Matters to a Vote of Security Holders.............. 16

                                               PART II

Item 5.   Market for Common Equity and Related Stockholder Matters......... 17

Item 6.   Management's Discussion and Analysis and Plan of Operation....... 20

Item 7.   Financial Statements and Supplementary Data...................... 26

Item 8.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................... 26

Item 8A.  Controls and Procedures.......................................... 26

Item 8B.  Other Information................................................ 26

                                              PART III

Item 9.   Directors, Executive Officers, Promoters and Control
            Persons; Compliance With Section 16(a) of the Exchange......... 27

Item 10.  Executive Compensation........................................... 31

Item 11.  Security Ownership of Certain Beneficial Officers and Management. 34

Item 12.  Certain Relationships and Related Transactions................... 36

                                               PART IV

Item 13.  Exhibits and Reports on Form 8-K................................. 37

Item 14.  Principal Accountant Fees and Services........................... 38

          Signatures....................................................... 39

          Index to Financial Statements.................................... 40

          Financial Statements............................................. F-1

<PAGE>

                                     PART I

THE  INFORMATION IN THIS ANNUAL REPORT ON FORM 10-KSB  CONTAINS  FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF FEDERAL SECURITIES LAWS. ANY STATEMENTS IN THIS
REPORT REGARDING MR3'S OUTLOOK FOR ITS BUSINESS AND RESPECTIVE MARKETS,  SUCH AS
PROJECTIONS  OF  FUTURE  PERFORMANCE,   STATEMENTS  OF  MANAGEMENT'S  PLANS  AND
OBJECTIVES,  METAL  PRODUCTION,  PROBABLE ORE RESERVES,  FUTURE FINANCING PLANS,
COMPETITION   AND  OTHER   MATTERS   ARE   FORWARD-LOOKING   STATEMENTS.   THESE
FORWARD-LOOKING  STATEMENTS  RELATE TO FUTURE EVENTS AND MR3'S FUTURE  FINANCIAL
AND OPERATING PERFORMANCE AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE
OR  ACHIEVEMENTS  TO BE MATERIALLY  DIFFERENT  FROM THAT EXPRESSED OR IMPLIED BY
THESE   FORWARD-LOOKING   STATEMENTS.   IN  SOME   CASES,   YOU   CAN   IDENTIFY
FORWARD-LOOKING  STATEMENTS  BY  TERMINOLOGY  SUCH AS "MAY",  "WILL",  "SHOULD",
"EXPECTS",   "PLANS",   "INTENDS",   "ANTICIPATES",   "BELIEVES",   "ESTIMATES",
"PREDICTS",  "POTENTIAL"  OR  "CONTINUE",  THE  NEGATIVE  OF SUCH TERMS OR OTHER
COMPARABLE  TERMINOLOGY.  THESE STATEMENTS ARE ONLY  PREDICTIONS.  IN EVALUATING
THESE STATEMENTS,  YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS,  INCLUDING,
WITHOUT  LIMITATION,  THE  RISKS  OUTLINED  UNDER  "RISK  FACTORS"  AND  MATTERS
DESCRIBED IN THIS REPORT  GENERALLY.  THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS
TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT.

ALTHOUGH MR3 BELIEVES  THAT THE  EXPECTATIONS  REFLECTED IN THE  FORWARD-LOOKING
STATMENTS  ARE  REASONABLE,  MR3  CANNOT  GUARANTEE  FUTURE  RESULTS,  LEVELS OF
ACTIVITY,  PERFORMANCE OR ACHIEVEMENTS.  GIVEN THESE UNCERTAINTIES,  READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH  FORWARD-LOOKING  STATEMENTS.  MR3
DISCLAIMS ANY OBLIGATION TO PUBLICLY  UPDATE THESE  STATEMENTS,  OR DISCLOSE ANY
DIFFERENCE BETWEEN ITS ACTUAL RESULTS AND THOSE REFLECTED IN THESE STATEMENTS

ITEM 1. DESCRIPTION OF BUSINESS

Business Development

      MR3 Systems,  Inc. ("MR3" or the "Company") was incorporated in California
on July 3, 1991 as Airponic International  Corporation to engage in the business
of developing and marketing a technology that  accelerates the growth of plants,
known as the Airponic  Growing  System  ("AGS").  On March 9, 1992,  the Company
amended  its  Articles  of   Incorporation   to  change  its  name  to  Bioponic
International.  On February 26, 1997 the Company  filed  Amended and Restated of
Articles of Incorporation to increase its authorized  common stock and to create
a new class of preferred stock.

      On October 7, 1997,  pursuant to a Plan and  Agreement of  Reorganization,
the Company  obtained all of the issued and  outstanding  shares of MR3, Inc., a
Delaware corporation, in exchange for 2,665,000 shares of its common stock. MR3,
Inc.,  was then engaged in the  business of  manufacturing  modules  (integrated
hardware  and media  systems)  for the removal and  purification  of metals from
industrial  waster  water,  similar  to  that of the  business  the  Company  is
currently engaged in. With the acquisition of MR3, Inc., which was accounted for
as a pooling of interests, MR3 became an operating division of the Company.

      On June 8, 1999 the  Company  formed  Emarethree  Corporation,  a Delaware
corporation,  as a wholly owned inactive  subsidiary of the Company. On March 6,
2000,  the Company  formed  Bioponic  AGS,  Inc.  ("Bioponic  AGS"),  a Delaware
corporation, as a wholly owned inactive subsidiary of Emarethree Corporation. On
March 31, 2000, the Certificate of Incorporation  of Emarethree  Corporation was
amended  and  restated to change its name to MR3  Systems,  Inc.,  increase  its
authorized  capital  stock and create a class of preferred  stock.  On April 28,
2000, the Company completed a change of domicile of incorporation from the State
of  California  to the State of  Delaware in  connection  with the merger of its
parent  company,  Bioponic  International,  a California  corporation,  with its
wholly owned subsidiary, MR3 Systems, Inc., a Delaware corporation. MR3 Systems,
Inc. became the surviving public entity resulting from the merger.


                                     - 1 -
<PAGE>

      Effective  April 29, 2000, the Company  transferred  its Airponic  Growing
System  technology  assets and related  liabilities to its subsidiary,  Bioponic
AGS. Further,  on April 29, 2000, the Company spun off its ownership in Bioponic
AGS to its shareholders of record as of January 31, 2000. Bioponic International
shareholders  of record as of January 31,  2000,  received one share of Bioponic
AGS Inc. for every two shares of Bioponic  International as a stock dividend. An
aggregate of 13,734,369  common shares of Bioponic AGS were  distributed  to 422
shareholders on or about May 8, 2000.  Effective with the distribution of shares
to the  Company's  shareholders,  Bioponic  AGS  was no  longer  deemed  to be a
subsidiary  of the Company and the Company had no rights or  ownership to any of
the technology transferred or otherwise owned by Bioponic AGS.

      In May 2003, the Company formed TechMining,  LLC, a Colorado company, as a
wholly  owned  subsidiary  of the Company to own and  operate a precious  metals
processing facility in Lakewood, Colorado.  TechMining is currently inactive and
the Company may elect to close the  subsidiary if it does not initiate  precious
metals processing operations in Colorado.

Business of the Company

Principal Product and Services

      MR3  Systems,  Inc.  is a provider  of turnkey  commercial  solutions  for
metals-related   remediation   applications   and  precious  metal   extraction,
separation,  and  purification  opportunities.  MR3's  business  objective is to
provide the most cost effective metal recovery systems, both in terms of capital
expenditures  and operating  costs,  while providing the most robust  continuous
separation and recovery of individual difficult/valuable metals. MR3's chelation
driven resin  technology is targeted to chemically  process and separate soluble
metals and elements found primarily in mining ores and concentrates,  industrial
effluents, hazardous wastes, complex metals sources and other aqueous solutions.

      Certain metal ores and  concentrates may require MR3 to pretreat and leach
the specific  metals in the ore,  and create a pregnant  liquor base for further
extraction and purification.  MR3 may provide its custom solutions utilizing its
own unique media and resin applications or in concert with third party strategic
partners to provide a complete  turnkey  solution from  mechanical  pretreatment
(such as grinding),  chemical  treatment (such as leaching) through final metals
concentration and collection.  MR3 approaches each problem or opportunity with a
custom  driven  solution  based on MR3's  technical  evaluation  of each  unique
situation and the characteristics of the particular metal laden application.

      MR3  Systems  plans to either  license its  technology  for use in mining,
industry and  environmental  remediation,  directly  implement the technology in
project  specific  applications,  or joint  venture with  strategic  partners to
exploit the  opportunity.  MR3's  technology has many  applications  in numerous
vertical  markets  including,  but not limited to: (i) the  recovery of precious
metals from ore and concentrates;  (ii) the processing of industrial wastes into
purified metals and specialty  chemical  products;  and (iii) the  environmental
remediation  of  hazardous  metals from  contaminated  sites  including  nuclear
related sites. The metals and specialty chemical  products,  if any, produced by
the Company will likely be offered for sale to metals and  chemical  commodities
brokers, refiners, and other end-users, where applicable. The Company intends to
charge  contract  fees,  where  appropriate,   for  various  waste  removal  and
remediation services related to its proprietary technology.


                                     - 2 -
<PAGE>

      In May of 2004,  the Company  entered into an agreement with Fluor Hanford
(see Exhibit 10.1) and the United States Department of Energy to provide a metal
recovery  system for the removal of toxic  chromium VI from the  groundwater  at
Hanford Nuclear  Reservation in south-central  Washington State. In coordination
with Fluor  Hanford,  MR3  initiated the  treatability  testing for the targeted
hexavalent chromium metal in July 2004. In September 2004, MR3 and Fluor Hanford
completed its first media  generation  cycle as specified in the  agreement,  in
which extracted chromium VI was stripped from the MR3 processing system, reduced
to chromium III, and removed for permanent  disposal.  During the fourth quarter
2004, the Company  completed all of its primary  obligations under the agreement
and  successfully  transferred  operations  of the MR3  system to Fluor  Hanford
personnel.

      The Company also fulfilled certain documentary  (manuals,  specifications,
drawings,  etc.) and  training  obligations  for Fluor  Hanford,  and  initiated
technical  support  activities.  The Company  recognized  $380,000 in revenue in
fourth  quarter  2004 as a  consequence  of meeting  its  obligations  under the
agreement.  With the successful  implementation of the Fluor Hanford remediation
project,  management is  developing a strategy to implement  similar MR3 turnkey
systems  for  various  public and  private  remediation  projects  in the United
States. At present, the Company has no other such remediation project underway.

      For the  foreseeable  future,  the Company's  strategy will be to focus on
precious metals  extraction,  specialty  chemical  production and  environmental
remediation  applications for the MR3 technology.  Management expects to license
other   possible   applications   to  qualified   licensees  on  a  territorial,
field-of-use basis with the goal of accelerating the global  introduction of the
technology. Management further intends to enter into joint venture opportunities
with  domestic  and  international  entities  whereby the Company  will  process
hazardous wastes and mining materials,  collect the resultant products,  arrange
for product sales to third party  commodity  brokers and share the proceeds or a
portion of the  manufactured  products  (e.g.  gold,  silver  platinum)  under a
negotiated  sharing  agreement.  Management  is currently in  negotiations  with
several  parties  for  licensing  or  other  contractual  adoption  of  its  MR3
technology.  The Company is in the  process of taking  source  samples  from the
prospect  sites to  determine  the  validity  and  potential  of the  designated
applications.

      In August 2004,  the Company  entered into an agreement (see Exhibit 10.3)
with Caddell & Associates of Denver,  Colorado  ("Caddell"),  to jointly provide
combined  turnkey  processing  systems to certain MR3 clients for the extraction
and  separation of precious and base metals from their mineral  deposits.  Under
the agreement,  MR3 secured exclusive rights to commercialize  Caddell's Halogen
Vapor Leaching System (HVLS) technology.  This technology is designed to recover
precious metals from alluvial ore bodies,  tailings,  clay deposits, and various
refractory  minerals found in the  Unconventional  Mining and Ore (UMO) vertical
market.  Source materials can be fed continuously  into the HVLS tubular reactor
geometry at rates from 20 to 200 tons per day.

      During the fourth quarter 2004,  Caddell & Associates  undertook,  for the
partnership,  the construction of a 1-5 kg batch HVLS for benchmarking,  testing
of ores,  and process  development.  The  combination of the HVLS and MR3's core
ion-exchange  technology is expected to be a cost effective,  robust,  automated
processing  system for  implementation  with  prospective MR3 clients in several
markets,   specifically  in  the   aforementioned   UMO,  the  Private  Contract
Environmental  Remediation  (PCER),  and Oil Brines and Geothermal Fluids (OBGF)
vertical  markets.   Both  MR3  and  Caddell  intend  to  continue  the  process
development and scale-up of the HVLS, with the  anticipation of constructing and
testing a 1-2 tons per day pilot unit at MR3's Englewood, Colorado laboratory in
the third  quarter  2005.  Management  anticipates  that it will be obligated to
provide funds on a shared investment basis for such construction.


                                     - 3 -
<PAGE>

      During  the third and fourth  quarters  2004,  the  Company  entered  into
various  discussions with  independent  mining  contractors in Nevada,  Arizona,
Idaho,  and Montana for the  processing  of their mineral  deposits.  Management
projects that its first turnkey processing system will be implemented during the
third and fourth  quarters  2005 in Nevada with Franklin  Lake  Resources,  Inc.
("FLR"), a public Nevada  corporation,  for the recovery of precious metals from
clay deposits.

      In September  2004, the Company  entered into an exclusive  agreement (see
Exhibit 10.4) with FLR for the processing of their mineral deposits  locating in
a volcanic lakebed in Death Valley Junction,  California. The parties are moving
forward to  establish  project  financing  for the  construction  of a 100 - 250
tons-per-day  processing facility to be located at Franklin Lake Resources' site
at Amargosa,  Nevada.  The processing  facility is projected to consist of three
unit operations: i) concentration of the head ore to a higher grade; ii) HVLS to
extract  precious  metals into  saturated  liquor;  and iii)  separation  of the
precious metals with MR3's Ion-Exchange system.  During the fourth quarter 2004,
MR3 initiated the evaluation of pre-treatment  technologies for the grinding and
leaching of FLR ores. Management  anticipates the design and construction of the
Amargosa facility to start in the fourth quarter 2005,  provided that sufficient
investment  capital can be raised in a timely manner.  Management can provide no
guarantees as to the success of such investment capital efforts.

      In November  2004,  the Company  entered  into a  Strategic  Alliance  and
Project  Venture   Agreement  (see  Exhibit  10.6)  with  The  Purolite  Company
("Purolite").  The agreement  provides for the formation of an exclusive venture
and a general  collaborative  framework for mutual  research and  development of
novel  resins and  separation  processes,  as well as  marketing  of any turnkey
solutions based on such  developments.  The first two  specialized  resins to be
developed  under this  agreement  include  resins for selenium  and  perchlorate
removal.  Management  views  the  partnership  with  Purolite  as a  significant
strategic step for MR3 in developing and  manufacturing  the next  generation of
resin  and  media  for the  extraction  of  metals  from  both  the  mining  and
remediation  market  sectors.  To  date,  no  resins  have  been  developed  for
commercial use under the strategic alliance.

      The research, development, bench-scale testing, pilot scale validation and
commercialization  of the  unique  products  and  processing  solutions  will be
performed  jointly  by the  Company  and  Purolite,  with the  ownership  of the
resulting  intellectual  property  to be  shared  equally  by the  parties.  The
agreement  positions  Purolite to manufacture and market the developed  products
worldwide,  with MR3 supporting the turnkey  applications  in the various market
sectors. The partnership,  which provides MR3 with sharing of royalties from the
sale  of  the  developed  products,  is  designed  to  rapidly  develop,   test,
manufacture, and implement turnkey solutions for the identified markets

      The  Company  has  established  strategic  relationships  with  mining and
engineering   consultancy  firms,  such  as  Arrakis,   Inc.,  a  mining-related
consulting,  system design,  and fabrication  company,  and SRK Engineering,  to
provide  engineering,  cost  modeling,  project due diligence and mining related
consulting  support to the Company's service  capabilities.  In association with
these firms,  and other firms with  related  expertise,  the Company  intends to
offer fee based services to its clients including:  (i) materials assessment and
pre-engineering  services;  (ii) plant  engineering and  construction  services;
(iii)  fabrication,  delivery  and  installation  of  fully  configured  process
components  including the necessary  proprietary  automation systems and medias;
(iv) plant  monitoring,  operational and maintenance  services;  and (v) special
selective media preparation and production.

      From time to time management has retained SRK engineering, an independent,
international  consultancy  group offering  services mainly from earth and water
resource  industries,  in support of the Company's technical  requirements.  For
mining  related   projects,   SRK  offers  services  from  exploration   through
feasibility,  mine planning, and production to mine closure. SRK, which began as
Steffen,  Robertson  & Kirsten  in 1974,  employs  more  than 500  professionals
internationally  and employs  leading  specialists  in each field of science and
engineering.  SRK was  retained to review  MR3's basic  design  criteria for its
metals extraction process and provide guidance on improving overall  engineering
efficiency  for  commercial  level  operations.  SRK will also provide  detailed
design and engineering support to create definitive operating and cost estimates
for project related plant  construction and anticipated  performance  estimates.
SRK may also provide project  management  support in instances where MR3 assumes
the leading role in management of a project.


                                     - 4 -
<PAGE>

      On November 1, 2003, the Company opened a testing  laboratory and customer
support facility in Beverly, Massachusetts to simulate actual field applications
on a pilot scale basis, test samples from prospective  client projects,  provide
the basis for  determining  practicable  solutions for designated  applications,
perform quality control,  and enable further research and development of the MR3
technology.  As a cost  cutting  measure  related to  complimentary  testing and
development  expenses,  the Company closed the Beverly  technical support center
and relocated its laboratory to Englewood, Colorado in fourth quarter 2004 under
a sublease agreement with Arrakis, Inc.

      In October 2003,  management  arranged a $1,250,000  credit  facility (see
Exhibit  10.5) which will allow the Company to further its ability to deploy the
first in a series of plants to utilize its metals  separation  and  purification
technology.  The Company  received  the first  distribution  of $250,000 in loan
proceeds on October 14, 2003,  the second  distribution  of $250,000 on December
17, 2003 and the third distribution of $250,000 on February 2, 2004. The Company
is  obligated  to submit  requests  for funds  against  the credit  facility  in
connection   with  its  financing   needs  related  to  plant   development  and
construction. The credit facility also has an equity conversion feature allowing
the lender,  High  Stakes  Capital--a  private  equity and  financing  group--to
convert the loan into percentage ownership in the plant.

MR3 Technology

      MR3's primary  technology  combines  high-affinity  metal  capture,  metal
refining, waste decontamination, and water purification into a single integrated
system.  This  technology is used to separate and recover  valuable  metals from
industrial  wastes  and  other  complex  metals  sources.  The MR3  System  is a
selective metals removal and reclamation process that extracts individual metals
and  separates  them  into  high  purity  fractions  using  a   low-temperature,
cost-effective, passive process. At present, the MR3 technology is not protected
by any Company owned patents.  The Company  attempts to protect its  proprietary
technology  through  a  combination  of  trade  secrets,  proprietary  know-how,
non-disclosure  agreements,  employment  and  consulting  agreements,  and other
common law remedies.

      MR3's  manufactured end products  include,  but are not limited to 42 pure
industrial metals such as zinc, copper,  chromium,  cobalt,  nickel and precious
metals  such as gold,  silver and  platinum,  which can be produced in either an
electro-winned  solid bar or strip form, or as value added metal products,  e.g.
sulfates,  chlorides  and oxides.  Specialty  chemical  products,  such as metal
sulfates,  can be  produced  in solid or liquid  form.  Targeted  metals  can be
extracted and  selectively  recovered  from  electric arc furnace  ("EAF") dust,
nuclear  wastes,   semiconductor  manufacturing  and  electroplating  effluents,
mercury and metal  hydroxide  sludge,  precious  metals mining  tailings,  ores,
contaminated soils and sediments,  and other industrial waste streams containing
high  concentrations of valuable metals. The Company  anticipates  acquiring the
source  materials at low cost to the Company or at minimal expense in connection
with an end product  revenue  sharing  agreement  with the source  provider.  In
certain cases the Company may be paid service fees to process  hazardous  source
materials at MR3 related facilities.


                                     - 5 -
<PAGE>

      The MR3 System is designed to generate  little or no waste of its own, and
thus  is  environmentally   beneficial  and  management   believes  it  is  also
economically  sound.  Low  capital,   operational,  and  maintenance  costs,  in
conjunction  with  innovative  engineering,  should  generate net revenues  from
applications previously considered cost-prohibitive.

      General Overview

      Metal contamination in harbors,  lakes and oceans;  sewage sludge;  mining
tailings, polluted soils, acid mine water, industrial waste waters; photographic
rinse waters, and other sources represent  significant  environmental  problems.
However,   these  types  of  pollutants  can  contain  commercially   attractive
quantities of concentrated valuable metals.

      At the other end of the  concentration  spectrum,  very minute  amounts of
radionuclide  metals,  e.g.,  cesium-137 (Cs-137) and strontium-90  (Sr-90), the
by-products of nuclear electrical power and military weapon production,  present
an even greater health hazard to the world's human and animal populations due to
their extreme toxicity even in minute amounts.  These highly  radioactive wastes
are stored in very dilute  solution in large  volumes of water at various  sites
throughout the world.

      The  MR3  technology  can  remove  radionuclides  over a  broad  range  of
concentration  levels,  even  those  that are  dispersed  as much as  parts  per
billion.  The MR3 technology consists of a continuous operation in which several
process steps,  i.e.,  selective  capture,  purification,  and  concentration of
individual  metals removed from industrial,  radioactive or mining wastes,  have
been integrated into one automated modular treatment plant.

      A processing  facility that employs MR3's  innovative  technology uses MR3
ion-exchange media of unique affinity and selectivity to economically remove and
simultaneously  purify  almost any metal from  aqueous  solutions.  It  operates
efficiently with metal  concentrations of over 20,000 parts per million (ppm) to
less than one part per billion (ppb).  Under  laboratory  conditions,  water has
been  successfully   cleaned  of  radionuclides  (e.g.,  Sr-90  and  Cs-137)  to
undetectable  levels,  even  with  starting  concentrations  as low as parts per
trillion.

      In the MR3 process, hazardous metals in soils, tailings, sediments, sludge
or ashes are  brought  into  solution  and moved from their  solid state into an
aqueous state in the form of slurry. Solid materials are then separated from the
metal-laden  liquid as the solution passes through metal recovery  modules where
each module selectively removes a target metal from the mixed metal stream.

      Each  separated  metal is then  processed  individually  into a non-waste,
metal product (e.g., ferric sulfate [Fe2(SO4)3] for drinking water purification,
zinc sulfate  [ZnSO4.H20]  corrosion  inhibitor and for fertilizers,  and copper
sulfate  [CuSO4.H20]  for  algaecide or animal  feeds.  In  instances  where the
quantity  of metal may be of no  commercial  interest  (e.g.,  metals  from most
contaminated  soils),  all toxic metals may be  simultaneously  removed from the
water as a group by a single MR3 module.

      Where a metal-contaminated water is the starting material and thus already
in an aqueous state,  the water with its metal load enters the MR3 process,  and
the cleaned  effluent water can be introduced  directly into the  environment or
used for other purposes. The water used internally as a metal carrier in the MR3
process is reused repeatedly.  The repeated re-use of process water and the fact
that the  process  generates  little or no waste of its own  contributes  to the
MR3's technology being environmentally beneficial and economically sound.


                                     - 6 -
<PAGE>

            Development of MR3 Media

      To date,  approximately  twenty-four (24) MR3 ion-exchange media have been
developed,  synthesized  and tested.  They have all proven to display  excellent
capacities  for metal  capture,  each being  specific to an individual  metal or
group of metals.  These MR3 media have high degrees of specificity  and affinity
specifically for: aluminum,  arsenic, cadmium, cesium, chromium, cobalt, copper,
gold, iron, lead, magnesium,  manganese, mercury, molybdenum, nickel, plutonium,
selenium, silver, strontium, thorium, titanium, uranium, vanadium, and zinc.

      In  management's  informed  opinion,  such media are non-toxic and are far
more  efficient  in  capturing  metals  from  aqueous  solutions  than  are  the
conventional and commonly used ion-exchange materials.  Moreover,  metal capture
from MR3 media is highly selective,  which represents a distinct  advantage over
conventional ion-exchange resins.

      During the development of the MR3 media, the following  required  features
and characteristics have been established for optimal performance:

--------------------------------------------------------------------------------
                    MR3 Media - Features and Characteristics
--------------------------------------------------------------------------------
Affinity:           Very high capture  efficiency  in solutions  containing  low
                    metal concentration.
--------------------------------------------------------------------------------
Specificity and     The ability to capture specific metals while ignoring others
Selectivity:        present in the same medium.
--------------------------------------------------------------------------------
Performance:        High flow rates with freedom from swelling,  shrinking,  and
                    compaction due to hydrostatic or osmotic pressure.
--------------------------------------------------------------------------------
Stability:          Strong resistance to harsh chemical and physical treatment.
--------------------------------------------------------------------------------
Regenerability:     Easy displacement of the captured metals from charged media,
                    resulting  in  metal  concentration,  high-volume  reduction
                    factors, and re-use of free media.
--------------------------------------------------------------------------------
Capacity:           The capability to capture  substantial  amounts of metal per
                    unit  of  media  while  still   maintaining   high   capture
                    efficiency.
--------------------------------------------------------------------------------
Toxicity:           Freedom from toxicity as there is no addition of trace toxic
                    components to the treated solution.
--------------------------------------------------------------------------------
Cost                Efficiency:    Production    costs    minimized   by   media
                    regenerability.
--------------------------------------------------------------------------------


      In instances  where it is  desirable  to remove more than one metal,  more
than one metal-specific  column may be used in a series.  With some media, it is
possible to broaden  their  specificities  by chemical  modification  or special
conditioning.  As a result,  a number of  different  metals can be removed  from
solutions  simultaneously.  The MR3 System can also be used in conjunction  with
conventional  ion-exchange  materials when the simultaneous use of both high and
low capture efficiencies can produce the intended results.

      The  design  features  and  characteristics  originally  sought  have been
attained  with respect to a relatively  large  selection of media useful for the
separation  of a broad  spectrum  of  metals  from  solution.  The  requirements
originally  set  forth  for  affinity,  specificity,  selectivity,  performance,
stability,  regenerability,  capacity,  toxicity and cost-efficiency have in all
cases been met successfully and in many instances have been surpassed.


                                     - 7 -
<PAGE>

            Potential Applications

      The MR3  technology  can be used to extract and recover metals from a vast
range of  sources,  originating  as both  solid  and  aqueous  states.  Specific
examples of applications include:

o     Water  purification,  metal  reclamation,  and refining  from  metal-laden
      industrial water or sludge waste.
o     Water purification and metal reclamation from metal-laden acid mine water.
o     Metal  reclamation  (including  precious  metals) from mining tailings and
      ore.
o     Cleaning sewage sludge and sewage sludge ash.
o     Cleaning fly ash and bottom ash.
o     Cleaning contaminated soils, including silt and clay fractions.
o     Cleaning  ground water of heavy metal  contamination,  including  chromate
      (Cr-6).
o     Cleaning harbor and lake sediments.
o     Recovery of metals and water from plating rinse waters.
o     Recovery  of  metals  from  hydroxide  sludge  from  the  metal  finishing
      industry.
o     High-affinity  capture  of  low  concentrations  of  radionuclides  (e.g.,
      Cs-137,
o     Co-60, Sr-90, Pu) from water.
o     Recovery and purification of precious metals from ore and placer.
o     Recovery of individual metals from process residuals (e.g., flue dusts).
o     Recovery of individual metals from bag-house contents (e.g.,  electric arc
      furnace dust).
o     Recovery of individual metals from slags and cinder.
o     Selective recovery of the oxidized iron ion, leaving the non-oxidized ion,
      from pickling baths used in the auto industry.
o     Selective  removal  of iron  from  electro-galvanizing  baths  to  greatly
      prolong bath life.
o     Removal of extremely low  concentrations  of industrial metals from sewage
      plant outflows.
o     Removal and recovery of metals from spent catalysts.
o     Removal of metals from wastewater of electronics industry (circuit boards,
      thick films, thin films, wafers).
o     Recovery of precious metals from computer junk.
o     Metal  decontamination  of blasting sand used in paint removal from ships,
      etc., and recycling of the sand.
o     Recovery of selenium from agricultural  irrigation waters, from water used
      to wash crude oil, and from waste water from the Xerox production process;
      and
o     Selective removal of contaminating  iron from any aqueous solution for the
      prevention of microbial growth.

            Technical Specifications

      The  MR3  technology  functions  over  a pH  range  from  1 to  14  and  a
temperature range from 5(degree) C to 95(degree) C. It yields a purity exceeding
99% of the target  ion,  such that the  output is  immediately  salable  with no
further processing.  Metal products collected directly from the module typically
achieve up to 99.9% purity. The purity level depends on the quality of the agent
that is used to  recover  the  collected  metal.  If the  separation  process is
followed  by an  electrowinning  treatment,  purities  of 99.99% or greater  are
possible

      It works over a  concentration  range from 1 molar to  parts-per-trillion,
yielding  removal  ratios of 40,000 to 10 million,  even in the presence of high
concentrations of competing ions. The media capacity is on the order of 14 moles
(the  mass in grams of this  amount  of a  substance,  numerically  equal to the
molecular weight of the substance) per cubic foot.


                                     - 8 -
<PAGE>

Related Markets

      The Company  currently  utilizes its technology to operate  primarily as a
high technology metals  extraction and recovery  company,  producer of specialty
chemical  products  and  provider of  environmental  remediation  services.  The
Company intends to commercially  manufacture  certain precious  metals,  such as
gold,  silver and platinum,  and various  chemical  products,  such as potassium
dichromate,  copper  sulfate and zinc sulfate,  for sale to third  parties.  The
Company  considers  the primary  markets for its  products to be  specialty  and
precious metal commodities brokers located domestically and internationally

      According to the Mine Safety and Health  Association  ("MSHA"),  currently
there are over one hundred active gold and other precious  metals mine locations
in the United  States.  The USGS reports that in 2002 gold was produced at about
52 major lode  mines,  a dozen or more  larger  placer (a  glacial  or  alluvial
deposit of sand or gravel  containing  eroded  particles of valuable  materials)
mines and numerous  smaller placer mines (mostly in Alaska and Western  States).
In addition,  there are thousands of "inactive"  or "shutdown"  precious  metals
mine sites and other locations where conventional mining would be impractical or
cost  inefficient.  Management  believes  that there will be more than  adequate
source  materials well into the future for its projected  precious metals mining
and processing activities.

      Management  further believes that there are numerous  hazardous  chemical,
waste  dump and other  environmentally  challenged  sites  around the world that
would  provide  sufficient  source  materials  for the  production  of specialty
chemicals,  as well as  numerous  sources  for the  purchase  of said  resultant
specialty chemicals.

Current Operations

MR3 Processing Facilities

      With the exception of the recently  completed Fluor Hanford  project,  the
Company has not deployed any new fully  operational  metals  related  processing
systems in calendar year 2005.

      The MR3  process  consists  of a  continuous  operation  in which  various
steps--selective  capture,  purification and concentration--have been integrated
into  one  automated  modular  treatment  facility.  Plants  utilizing  the  MR3
processing technology can be constructed proportional to the requirements of the
designated  application.  MR3 plants can range from  bench-scale  pilot systems,
room size system  implementations  for small to midsize  applications,  and full
building size facilities for large scale  extraction,  production or reclamation
operations.  The  MR3  technology  is  modular  in  design  and  can  be  scaled
accordingly to meet the size and scope of the particular application. The nature
of MR3's modular plant construction is such that it facilitates  disassembly and
transportation  to other  locations once the  requirements of an application has
been satisfied. The Company intends to initially focus on applications where the
targeted  metals  source  material  is  already  in a liquid or  slurry  form or
circumstances  where  the  client  assumes  that  responsibility.  Consequently,
projected expenses related to handling, pretreatment,  separation of solids, and
converting  the  raw  materials  into  a  saturated   solution  form  should  be
dramatically reduced or eliminated.

      MR3 processing plants can be fabricated for practical  applications for as
low as several  hundred  thousand or several  million  dollars  dependent on the
scope and nature (e.g.  extraction of precious  metals,  chemical  production or
environmental remediation) of the project under consideration.  A MR3 processing
plant  consists  of a  combination  of certain  standard  laboratory  equipment,
manufacturing hardware, and "unique" MR3 technology related modules and chemical
media including, but not limited to effluent treaters,  filter and vacuum units,
crystallizers,  extraction  tanks,  storage and product tanks,  pH  controllers,
computer  equipment,  pumps and motors,  chemical  reagents,  and  counter  flow
fluidized-bed  reactors.  It is the  "unique"  media  utilized in the  disparate
applications  that  creates  the  designation  of a unique  module.  The Company
intends to formulate its application-based media in-house and then outsource the
manufacture  of the media in large  volume on a  subcontract  basis.  Management
estimates  that it would take three to six  months to  fabricate  and equip such
processing  plants  dependent  on the size,  scope and nature of the  designated
application.


                                     - 9 -
<PAGE>

            Linsa Joint Venture

      Effective  April 10, 2002,  the Company  entered into a Joint  Venture and
Technology  Transfer  Agreement  with Linsa  Associates  Ltd., a British  Virgin
Islands  Company  ("Linsa"),  to  commercialize  the MR3  Technology  in Canada,
Australia, Asia and the Middle Eastern Territories. Both parties agreed to share
all the  distributable  profits  resulting from the use of the MR3 Technology to
which they are  collectively  entitled on a 50%-50%  basis.  In  February  2004,
management  negotiated an amendment with Linsa to reduce the number of exclusive
jurisdictions  to  Taiwan  and  Egypt,   including  affiliates  or  subsidiaries
operating outside of the restricted jurisdictions subject to certain conditions.
In October  2004,  the  Company  filed for  declaratory  relief (see MR3 Current
Report on Form 8-K filed with the  Commission  on October 18, 2004) with respect
to the  agreement.  Linsa  concurrently  filed suit  against  the Company in the
jurisdiction of Delaware. The parties have agreed to stay further prosecution on
this legal matter pending voluntary non-binding mediation

Competition

      There are a substantial  number of  competitors in both the precious metal
mining and chemical production  industries,  a vast majority of which are larger
and better  capitalized than MR3. The Company does not compete with conventional
mining  operations for the  exploration  and  acquisition  of mining  properties
producing  or  capable  of  producing  gold and other  precious  metals.  Due to
intensified  research  in the  field of  industrial  chromatography  in the last
several years, a number of companies are trying  commercialize  metals  recovery
technologies  similar  to that of MR3.  There  can be no  assurance  that  other
persons or entities  will not succeed in developing  technologies  that are more
effective  than those which the Company is  developing or which would render the
Company's technology noncompetitive.

      MR3's  principal  technology  approach  is  based on  applications  of its
chromatographic  media to industrial  scale  treatments of concentrated  aqueous
solutions for metals  separation and recovery.  The Company expects that it will
achieve a competitive advantage with the aforementioned  competitors through the
cost effective utilization of its uniquely formulated metals-extraction media at
commercial production levels, as well as its exclusive partnerships with notable
third party providers of complimentary technologies.

      Management  believes that there are currently more than sufficient sources
of the raw waste  materials that comprise the base  components  that make up the
core  of  the  Company's  targeted  manufactured  products.  Management  further
believes that such raw waste  materials can be reasonably  obtained at little to
minimal cost and without  substantive mining operations or extensive  mechanical
collection  activities.  The sale of  precious  metals  and  specialty  chemical
products in the commercial marketplace are affected by numerous factors, many of
which are beyond the control of the Company.  Such factors include,  but are not
limited  to the  price  of the  commodity  in the  marketplace,  imports  of the
commodity from  international  sources and the availability of adequate refining
and  processing  facilities  to  produce  the  product.  Sales  prices  for such
commodities  are  determined  by  world  market  forces  and may be  subject  to
significant  fluctuations.  The Company has not been materially affected by such
circumstances in the past, but believes that price  fluctuations,  especially in
the precious  metals  market,  could impact  revenues in the future.  Management
believes that there will be sufficient  demand for its manufactured  products in
the future.


                                     - 10 -
<PAGE>

Intellectual Property

      The  Company  attempts  to protect its  proprietary  technology  through a
combination of trade secrets,  proprietary know-how,  non-disclosure agreements,
employment and consulting agreements,  and common law remedies.  Such agreements
generally provide that all confidential  information  developed or made known to
the individual (or entity) by the Company during the course of the  individual's
relationship with the Company is not to be disclosed to third parties, except in
specific circumstances,  and that all inventions conceived by the individual (or
entity)  in the  course  of  rendering  services  to the  Company  shall  be the
Company's exclusive property.  There can be no assurance that confidentiality or
proprietary  information agreements will not be breached,  that remedies for any
breach would be adequate, or that the Company's trade secrets will not otherwise
become known to, or independently developed, by competitors.

Research and Development

      Research and development expenditures represent internal costs incurred in
connection with the Company's testing, documenting, enhancement and optimization
of its  hazardous  waste and precious  metals  recovery  processes.  The primary
emphasis of the  Company's  research  and  development  efforts is to tailor the
existing MR3 technology to meet the commercial level processing  requirements of
the unique project source materials. Research and development costs are expensed
as incurred  and the  majority  of  expenditures  in 2004 and 2003 are  directly
related to  personnel  and  consulting  costs.  The Company  does not  presently
license any third party  technology  in its  operations.  Aggregate  development
expenses,  inclusive  of  research  and  development,  for 2004  and  2003  were
approximately $474,000 and $545,000, respectively.

      In consideration of its planned  activities,  the Company expects that its
research  and  development  expenditures  will  materially  increase in 2005 and
beyond.  The majority of research and development work will be undertaken at its
technical  support  facility  located in Englewood,  Colorado and at prospective
operating locations.

Government Regulation

      The  Company's  proposed  business  activities  and plant  operations  are
subject to various federal,  state, and local laws and regulations in the United
States and other prospective jurisdictions in which the Company may operate. The
regulating  agencies  may include,  but are not limited to such  agencies as the
Environmental   Protection   Agency   ("EPA"),   the  Mine   Safety  and  Health
Administration  ("MHSA"), the Bureau of Land Management ("BLM") the Occupational
Health  and  Safety  Administration   ("OSHA")  which  normally  govern  mining,
production,   exports,  taxes,  labor  standards,   occupational  health,  waste
disposal,  protection of the environment,  mine safety, hazardous substances and
other  matters.   Given  its  proposed   environmentally   favorable   operating
methodology,  the Company  believes  that it will be  compliant  in all material
respects with applicable mining,  health, safety and environmental  statutes and
regulations  in effect  within the  jurisdictions  it intends  to  operate.  The
Company  further  intends to make adequate  provision for disposal of mine waste
and mill  tailings at all of its  prospective  operating  facilities in a manner
that complies with current federal and state environmental requirements.

      The Company has obtained  various permits and  authorizations  in the past
and  will  be  required  to do so in the  future  with  respect  to its  planned
activities  and  locations  where the Company  intends to  operate.  All on-site
mining permits will be obtained from the various state(s) controlled  Department
of Mines. In May 2003, the Company received an Exploration Permit for the Empire
Gold mine site and subsequently conducted preliminary mining activities, but has
no current plans to conduct  further  mining  related  operations  there at this
time. The permits for operating the Company's chemical-based processing facility
at its  targeted  locations  are  expected  to be  standard  industrial-building
equipment  installation and operating permits. The Company believes that it will
be able to reasonably obtain applicable permits, when necessary,  to conduct its
business  in a  routine  manner.  Management  has  further  determined  that the
acquisition and maintenance of such permits or authorizations will also not have
a  material  adverse  on the  Company's  results  of  operations  and  financial
condition.


                                     - 11 -
<PAGE>

Compliance with Environmental Laws

      The  Company's  metals  extraction  and  recovery  projects are subject to
various  federal  agencies  (i.e.,   Environmental  Protection  Agency,  Nuclear
Regulatory   Commission),   state  and  local  laws  and  regulations  governing
protection of the  environment.  These laws are  continually  changing and, as a
general  matter,  are becoming  more  restrictive.  The  Company's  policy is to
conduct its business in a way that safeguards public health and the environment.
Management  believes  that its future  operations  will  readily be conducted in
material  compliance with environmental  laws and regulations  applicable to its
mechanical and chemical processing technology.

      Changes to current  local,  state or federal laws and  regulations  in the
jurisdictions  where the Company operates,  or may operate in the future,  could
require   additional  capital   expenditures  and  increased   operating  and/or
reclamation  costs.  Although the Company is unable to predict  what  additional
legislation,  if any,  might  be  proposed  or  enacted,  additional  regulatory
requirements could impact the economics of its projects.  The Company reasonably
estimates,   however,   that  it  will  not  incur  material   expenditures  for
environmental regulation compliance and education during fiscal year 2005 or for
the foreseeable future.

      The  mining  and  chemical  waste  processing   industry,   including  the
prospective  business of  Company,  must follow  local,  provincial  and federal
regulations  imposed  in each  international  jurisdiction  where it  intends to
operate to maintain  environmental quality. As a result, the Company will likely
be subject to  certain  environmental  regulations  in such  jurisdictions  with
regard to  prospective  joint venture  projects with Linsa  Associates and other
potential international partners.

      Prior to 2003,  the Company  recorded  accruals for the  estimated  future
costs associated with certain  environmental  remediation  activities related to
the overdue  disposal of  hazardous  materials at the Butte,  Montana  facility.
Substantially all such costs relate to divested  operations and to facilities or
locations  that are no  longer in  operation.  These  costs  were  estimated  at
approximately  $38,250 and were recorded in the Company's  financial  statements
for the period ended  December 31, 2004. In January 2004,  the Company  received
notification of settlement with the Montana Department of Environmental  Quality
("MDEQ")for the sum of $38,502 payable in six monthly installments commencing on
January 30, 2004. MR3 received  notification  on June 7, 2004 from the MDEQ that
the matter was considered closed.

Patents, Trademarks and Other Licenses

      The  Company  claims no patents or  trademarks.  The  Company  has license
agreements  with Caddell  Associates  and Purolite,  the terms of which are more
fully  disclosed in the Principal  Products and Services  section of this annual
report.

Employees

      As of the date hereof, MR3 employs five full-time employees,  two of which
are  executive  officers,  two in  administrative  matters  and  one  in  senior
technical  management.  The Company hires  independent  contractors  and outside
service  providers  on  an  as-needed  basis.  The  Company  has  no  collective
bargaining  agreements  or other such labor  contracts  with its  employees  and
believes that its employee  relationships  are  satisfactory.  In the long-term,
management will likely hire additional staff to meet its anticipated growth rate
requirements.  Management  does  not  anticipate  encountering  problems  in its
ability to hire individuals with the requisite employee skill set.


                                     - 12 -
<PAGE>

Financial and Public Relations

      In  September  2003,  the  Company  retained  The  Wells  Group,  Inc.,  a
Scottsdale,  Arizona  based  investor  relations  consulting  firm and unrelated
party, to implement a proactive national investor relations campaign.  The Wells
Group  participated  in developing  the  Company's  perception  and  positioning
activities,  arrange  and  coordinate  presentations  and  serve as the  primary
information  resource  on behalf of the Company to the  professional  investment
community.   The  Wells  Group  also  provided  media  relation  activities  and
comprehensive information fulfillment services for all inquiries by shareholders
or  prospective  investors.  The term of the agreement was for twelve months and
either party could  terminate  the  agreement  with thirty days notice after the
sixth month. In compensation for its services,  The Wells Group received 250,000
restricted shares of the Company's common stock for each three-month  period The
Wells Group  provided  its  services  under the  agreement.  In April 2004,  the
parties extended the agreement through December 31, 2004 in consideration of the
issuance of 500,000  common  shares by MR3 to The Wells  Group.  The Company may
elect to retain such services in 2005, but has not done so as of this date.

Risk Factors Relating to the Company's Business

      Management cannot be certain that the Company's acquisition and processing
activities will be commercially successful.

      As of this date,  the Company has no facilities in operation  that produce
precious metals or other saleable  chemical  products in commercial  quantities.
Substantial  expenditures  are  required  to build and  develop  MR3  processing
facilities  capable of generating  such levels of precious  metals and specialty
chemical  products.  There can be no assurance that any probable  precious metal
reserves predicted in the Company's  prospective projects will meet expectations
or be present in sufficient  quantities  to justify  commercial  operations.  In
addition, there can be no assurance that precious metals recovery in small-scale
laboratory  tests or pilot plant  conditions  will be  duplicated  in commercial
production  levels under actual on-site  conditions.  In addition,  there are no
assurances  that any  additional  funds  required by the  Company  for  multiple
facility  developments  can be obtained in a timely manner.  Should these events
materialize,  they  could  have a  materially  adverse  impact on the  Company's
business  operations  and negatively  affect future  potential  revenues  and/or
profitability.

      The Company's  technology has only been employed at a high-rate commercial
processing level for limited periods of time in several  applications.  As such,
the  Company  does  not  have a  history  of  cost  effective  commercial  level
processing with respect to its current  business  strategy over a long period or
other extended basis.  Consequently,  the Company could experience unanticipated
expenses   resulting  from  unknown  factors   occurring  during   comprehensive
operations over a full year basis.  These  unanticipated  expenses could have an
adverse affect on the Company's profitability from planned operations.

      The price of  precious  metals is subject  to  fluctuations,  which  could
adversely affect the Company's quarterly results of operations and cash flow.

      The Corporation's  potential future revenues are expected to be materially
derived  from the  generation  and sale of precious  metals,  such as gold,  and
specialty  chemical  products  from  its  processing  facilities.  The  price of
precious  metals has  fluctuated  widely over time,  and is affected by numerous
factors  beyond the  control of the  Company,  including,  but not  limited  to,
international,   economic  and  political  trends,  expectations  of  inflation,
currency exchange fluctuations,  central bank activities, interest rates, global
or regional consumption patterns and speculative activities. The effect of these
factors on the price of precious metals, and therefore the economic  performance
of the Company in any fiscal quarter, cannot accurately be predicted. A material
decline in the price of  certain  precious  metals  could  adversely  affect the
Corporation's potential revenues and profits.


                                     - 13 -
<PAGE>

      The  Company's  growth  potential  could be  impacted  by its  failure  to
adequately protect its intellectual property.

      The Company's  proprietary  MR3 technology  and related  processes are not
currently  protected by patents.  Management has,  however,  recently  initiated
action to explore the  feasibility  of doing so in the future.  In the  interim,
there  can be no  assurance  that  the  Company  will  be able  to  protect  its
technology  from  unauthorized  use by competitors  or other third parties.  The
Company relies  primarily on a combination of copyright law,  industrial  design
legislation,  trade secret security measures and  nondisclosure  agreements with
employees and third parties to protect its intellectual property and proprietary
technology.  There can be no assurance of effective  protection of the Company's
intellectual  property  and  there  can be no  assurance  that  others  will not
independently  develop a similar  technology  or obtain  access to the Company's
technology.  Such failure to protect its proprietary technology and intellectual
property could  negatively  impact the Company  somewhat by making it easier for
its competitors to duplicate the Company's  service  offerings and more actively
compete with the Company for future business opportunities.

      Loss of key personnel may negatively affect the Company

      The  business  of  the  Company   will  be   dependent   upon  the  active
participation of its officers,  directors and other key personnel. To the extent
any of them becomes  unavailable for any reason, it could have a serious adverse
impact on the Company.  Any officer or employee of the Company can terminate his
or her  relationship  with the Company at any time with sufficient  notice.  The
Company's  future  success  will also depend on its  ability to attract,  train,
retain  and  motivate  highly  qualified  engineering,   marketing,   sales  and
management personnel. There can be no assurance that the Company will be able to
attract and retain such key personnel.

      Environmental  issues and concerns  may  negatively  affect the  Company's
ability to perform

      The Company will be subject to stringent standards designed to reduce air,
water and soil emissions  through state and local laws and regulations  relating
to the protection of human health and the environment.  Management believes that
the Company's  proposed  processing  facilities  will  reasonably meet standards
imposed by various jurisdictions, but cannot assure that such standards will not
become more exacting or draconian over time.

      Short Operating  History Could Lead to a Lack of Profitability and Lack of
Business Growth

      The Company has a short  operating  history with respect to the processing
of precious metals and specialty  chemical  products.  The Company has generated
only  limited  revenues  to date and has  incurred  operating  losses  since its
inception.  Its  likelihood  of success must be  considered in light of the many
costs,  expenses,  problems,  difficulties and delays frequently associated with
new  enterprises.  Also,  there  is no  assurance  that the  Company's  business
ventures  will be  successful  or that it  will be able to  attract  and  retain
sufficient  customers and clients to attain its goals.  The Company  anticipates
that its operating expenses will increase  substantially as its business expands
and there will be a greater  need to  generate  significantly  more  revenues to
achieve profitability.


                                     - 14 -
<PAGE>

      Difficulties  in Future Funding Could Hinder Growth and Development of the
Company's Business

      In the  past,  the  Company  has  financed  much  of its  operations  from
borrowing  and the  sale  of its  securities  pursuant  to  private  placements,
convertible debt instruments,  and other warrant  agreements.  It is likely that
the Company  will be required to seek  additional  external  funding  sources to
satisfy the Company's  future working  capital  demands if its operations do not
produce the anticipated level of  profitability.  There can be no assurance that
outside  funding  will be available to the Company at the time and in the amount
to satisfy the Company's needs, or, that if such funds are available,  they will
be available on terms favorable to the Company. If the Company issues additional
shares of common  stock,  current  shareholders  may  experience  immediate  and
substantial  dilution in their  ownership  of Company  shares.  In the event the
Company  issues  securities or  instruments  other than common stock,  it may be
required to issue such  instruments  with  greater  rights  than that  currently
possessed by holders of the Company's common stock.

      Concentration  of Share  Ownership Gives Control of the Company to a Small
Group

      The  Company's   directors,   executive   officers  and  other   principal
shareholders own approximately 41.40% of the Company's  outstanding common stock
as of March 31, 2005. As a result,  these persons possess significant  influence
over  the  Company  on  matters  including  the  election  of  directors.   This
concentration  of share  ownership may: (i) delay or prevent a change in control
of the Company; (ii) impede a merger, consolidation, takeover, or other business
involving the Company;  or (iii)  discourage a potential  acquirer from making a
tender offer or otherwise attempting to obtain control of the Company.

      Limited Public Market for the Common Stock

      The Company's  common stock is presently  quoted on the OTC Bulletin Board
and its securities are traded by broker-dealers. Because shares of the Company's
common  stock are not  currently  quoted  on a  recognized  national  securities
exchange in the United  States,  the shares are subject to rules  adopted by the
Securities  and  Exchange  Commission  regulating   broker-dealer  practices  in
connection  with  transactions  in  "penny-stocks."  Broker-dealers  dealing  in
penny-stocks  are  required  to  provide  potential  investors  with a  document
disclosing the risks of penny stocks.  Moreover,  broker-dealers are required to
determine whether an investment in a penny stock is a suitable  investment for a
prospective investor. These requirements may reduce the potential market for the
Company's common stock by reducing the number of potential  investors.  This may
make it more  difficult  for  investors  in the  Company's  common stock to sell
shares to third parties or to otherwise dispose of them. Accordingly,  there can
be no assurance that an active  trading  market in the Company's  shares will be
sustained.  Additional  disclosure on penny-stocks  and related  restrictions is
provided  in  Item  5.  Market  For  Registrant's   Common  equity  and  Related
Stockholder Matters.

      The  Company's  limited  financial  condition  could hinder its efforts to
raise new capital.

      The Company has generated  only limited  revenues to date and has incurred
operating  losses since its  inception.  The Company has not yet  established  a
source of revenues  sufficient to cover its operating costs. For the years ended
December  31,  2004 and 2003,  the  Company  had net  losses of  $2,359,527  and
$1,648,721,  respectively.  At fiscal year end 2004,  the Company's  liabilities
exceeded its assets.  There can be no assurance  that the Company will  generate
revenues  in a timely  manner in the future,  that it will not  continue to have
losses,  or  that  it will be able  to  maintain  funding  such  losses  if they
continue.  In the past, the Company has  successfully  raised funds to cover its
expenses  through  the  sale  of  its  securities  utilizing  various  financial
instruments  such  as  private  placements,   convertible  notes,  and  warrants
agreements despite its lack of profitability and weak financial  condition.  The
Company  reasonably  believes  that it will be able to raise  necessary  working
capital  in a  timely  manner  to  carry  out  its  plan of  operations  for the
foreseeable  future.  Should the Company not be able to raise  sufficient  funds
through these means or through  licensing  sales, it could adversely  impact its
ability to fund all critical operations and new business development  activities
in accordance with its existing business strategy.


                                     - 15 -
<PAGE>

ITEM 2. PROPERTIES

      The  Company's  leases  1,873  square feet of office  space at 435 Brannan
Street,  Suite #200, San Francisco,  California for its executive  offices.  The
Company is  committed  under a recent  extension  to its  operating  lease for a
period of two years beginning  October 1, 2004 and expiring  September 30, 2006.
This lease requires monthly rental payments of approximately $2,950.

      The Company leased 3,700 square feet of commercial office space within the
Cummings Center located in Beverly,  Massachusetts  for its testing  laboratory,
research and development,  and customer support  requirements.  In January 2005,
the  Company  elected to vacate the  premises  and  relocated  its  testing  and
development activities to 3040 South Vallejo Street, Englewood,  Colorado, under
a sublease arrangement with an associate  consultancy firm, Arrakis, Inc. MR3 is
committed under its sublease for a period of five years beginning March 15, 2005
and expiring on March 14, 2010. The sublease requires monthly rental payments of
approximately  $2,570.  The Company has accrued certain amounts in its financial
statements  to account  for any  potential  liability  (difference  in  sublease
arrangements)  that may  arise  out of the  Company's  action  in  vacating  its
remaining lease obligations at the Beverly, Massachusetts facility.

      Each property is leased from an unaffiliated  party. The Company maintains
tenant  fire and  casualty  insurance  on its  properties  in an  amount  deemed
appropriate by the Company.

ITEM 3. LEGAL PROCEEDINGS

      With the exception  noted below,  there are presently no material  pending
legal  proceedings to which the Company or any of its subsidiaries is a party or
to which any of its  property is subject and, to the best of its  knowledge,  no
such actions against the Company are contemplated or threatened.

      On October 18, 2004,  MR3 Systems,  Inc.  ("MR3 or the  Company")  filed a
legal action MR3 Systems, Inc. v. Linsa Associates,  Ltd., et. al. CGC-04-435558
in California  Superior  Court, in and for the City and County of San Francisco,
against Linsa,  Ltd., et al.  ("Linsa"),  for breach of contract and declaratory
relief in  connection  with the  Company's  MR3  Technology  Transfer  Agreement
("Agreement")  with Linsa.  These claims arise out of Linsa's failure to use its
best  efforts  to  commercialize  the MR3  Technology,  as  required  under  the
Agreement, and to correct a default on monies owed to MR3 for services performed
under the Agreement.  Concurrent  with the Company's  legal action,  Linsa filed
suit on this dispute against MR3 in the  jurisdiction  of Delaware.  The parties
have agreed to stay further  prosecution on this legal matter pending  voluntary
non-binding mediation

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matters were  submitted  to a vote of the  Company's  security  holders
during the fourth quarter of the fiscal year ended December 31, 2004.

      Pursuant to written notice to  shareholders of record as of July 22, 2004,
the Company held its Annual Meeting of shareholders on September 20, 2004 at the
Hyatt Regency, San Francisco,  California.  Four voting proposals were put forth
to  shareholders  at the annual  meeting.  Description and voting results of the
four  proposals are more fully  disclosed in the Company's  quarterly  report on
Form 10-QSB for the period ended  September 30, 2004,  filed with the Commission
on November 15, 2004.


                                     - 16 -
<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

      Effective March 23, 2004, the Company's common stock was quoted on the OTC
Bulletin  Board under the symbol "MRMR." For a portion of first quarter 2004 and
for calendar year 2003, the Company's stock traded  over-the-counter on the Pink
Sheets  and was  quoted  through  the  National  Quotation  Bureau's  Electronic
Quotation  System,  also  under the  symbol  MRMR.  Due to a delay in the timely
filing of its 2004 annual report on Form 10-KSB,  the Company's common stock has
been quoted under the symbol "MRMRE" as of April 22, 2005.

      The following table sets forth,  for the periods  indicated,  the range of
quarterly  high ask and low bid prices of the  Company's  common  stock based on
intraday trading as derived through Prophet Financial Systems, Inc. for the past
two years and through the date set forth for the current  year.  The  quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.

Year             Quarter Ending                  High Bid         Low Bid
----             --------------                  --------         -------
2005             March 31, 2005                  $  0.19          $  0.13
                 Through May 18, 2005            $  0.16          $  0.07
2004             March 31, 2004                  $  0.60          $  0.24
                 June 30, 2004                   $  0.60          $  0.26
                 September 30, 2004              $  0.30          $  0.15
                 December 31, 2004               $  0.29          $  0.16
2003             March 31, 2003                  $  0.26          $  0.09
                 June 30, 2003                   $  0.28          $  0.11
                 September 30, 2003              $  0.33          $  0.17
                 December 31, 2003               $  0.50          $  0.22

      The  ability  of an  individual  shareholder  to trade  their  shares in a
particular  state may be subject to various rules and regulations of that state.
A number of states  require that an issuer's  securities  be registered in their
state or  appropriately  exempted from  registration  before the  securities are
permitted  to  trade  in that  state.  Presently,  the  Company  has no plans to
register  its  securities  in any  particular  state.  Further,  most likely the
Company's  shares will be subject to the  provisions  of Section  15(g) and Rule
15g-9 of the Securities  Exchange Act of 1934, as amended (the "Exchange  Act"),
commonly referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1)  incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.


                                     - 17 -
<PAGE>

      The  Commission  generally  defines penny stock to be any equity  security
that  has a  market  price  less  than  $5.00  per  share,  subject  to  certain
exceptions.  Rule 3a51-1 provides that any equity security is considered to be a
penny  stock  unless  that  security  is:  registered  and  traded on a national
securities exchange meeting specified criteria set by the Commission; authorized
for  quotation on The NASDAQ  Stock  Market;  issued by a registered  investment
company;  excluded from the definition on the basis of price (at least $5.00 per
share) or the issuer's net tangible  assets;  or exempted from the definition by
the Commission.  If the Company's shares are deemed to be a penny stock, trading
in the shares  will be subject to  additional  sales  practice  requirements  on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors,  generally persons with assets in excess of $1,000,000
or annual income exceeding $200,000, or $300,000 together with their spouse.

      For  transactions  covered  by these  rules,  broker-dealers  must  make a
special  suitability  determination for the purchase of such securities and must
have received the purchaser's  written  consent to the transaction  prior to the
purchase.  Additionally,  for any  transaction  involving a penny stock,  unless
exempt,  the rules require the delivery,  prior to the first  transaction,  of a
risk  disclosure  document  relating to the penny stock market.  A broker-dealer
also must disclose the  commissions  payable to both the  broker-dealer  and the
registered representative,  and current quotations for the securities.  Finally,
monthly  statements  must be sent  disclosing  recent price  information for the
penny stocks held in the account and  information on the limited market in penny
stocks. Consequently,  these rules may restrict the ability of broker-dealers to
trade and/or maintain a market in the Company's  common stock and may affect the
ability of shareholders to sell their shares.

Record Holders

      As of  December  31, 2004 there were  approximately  414  shareholders  of
record of MR3 Systems,  Inc. common stock.  The Company believes that the number
of beneficial owners is substantially  greater than the number of record holders
because a portion  of its  outstanding  common  stock is held in broker  "street
names" for the benefit of individual investors or other nominees.

      As of December 31, 2004 there were approximately 81 shareholders of record
of MR3 Systems,  Inc. Series A preferred  stock. As of December 31, 2004,  there
are 232,714 shares of preferred stock issued and outstanding. Preferred stock is
convertible into common shares on a one-to-one ratio. There is no market for the
trading of the Company's preferred stock.

Dividends

      The Company has never paid any cash dividends on its common stock and does
not  anticipate  paying cash  dividends  within the next two years.  The Company
anticipates  that all earnings,  if any, will be retained for development of its
business. Any future dividends will be subject to the discretion of the board of
directors  and will  depend on,  among  other  things,  future  earnings,  MR3's
operating  and  financial  condition,  MR3's  capital  requirements  and general
business conditions.

Equity Compensation Table

      The following table provides  information about the Company's common stock
that may be issued upon the  exercise of options and  warrants  under all of the
Company's  equity  compensation  arrangements  as of December 31, 2004. In third
quarter 2004, the Company adopted a formal equity based  incentive  compensation
plan,  approved by shareholders  during the Company's  annual  meeting,  for the
benefit of employees  and/or  non-employees.  With the  exception of  employment
agreements  entered into with Messrs.  Tao, Reis,  Rotter, and DeVoe (which were
not approved by a vote of shareholders),  all securities  disclosed in the table
below  resulted  from  individual  grants of options and  warrants  for services
provided  to the  Company or  expected  to be  provided  to the Company and were
unrelated to any written compensation plan or agreement.


                                     - 18 -
<PAGE>

                      EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
             Plan category                Number of securities to be      Weighted average exercise       Number of securities
                                             issued upon exercise                 price of               remaining available for
                                            of outstanding options,         outstanding options,             future issuance
                                              warrants and rights            warrants and rights
                                                      (a)                            (b)                           (c)
<S>                                               <C>                              <C>                          <C>
Equity compensation plans                             -0-                            -0-                        7,000,000
approved by security holders
Equity compensation plans not approved            33,362,603                       $0.172                          -0-
by security holders
Total                                             33,362,603                       $0.172                       7,000,000
</TABLE>

Recent Sales of Unregistered Securities

      Fourth Quarter Funding and Dilutive Instruments

      None

      Fourth Quarter 2004 Stock Issuances

      1.    A total of 27,343 shares were issued to two  individuals in exchange
            for services rendered to the Company.

      2.    An aggregate of seven  individuals or entities were issued 3,349,087
            shares pursuant to the cashless exercise of warrants issued in prior
            periods.  1,028,940  of these  shares  related to cashless  warrants
            issued to Dr.  Irving  DeVoe,  former  Director  and  Chief  Science
            Officer.

      3.    A total of 350,000 shares were issued to three individuals  pursuant
            to the conversion of warrants at an exercise price of $0.10.

      4.    A total of 203,343  shares  were  issued to Zevtec  pursuant  to the
            conversion  of  warrants  at an  exercise  price  of  $0.07.  At the
            direction  of  Zevtec,  the  Company  allocated  $14,234  of accrued
            interest  owing  to  Zectec  as of  9/30/04  to  the  conversion  of
            outstanding warrants.

      5.    One individual was issued 50,000 shares  pursuant to the exercise of
            warrants at an exercise price of $0.03.

      The above  issuances were not  registered  under the Act. Each issuance of
convertible debt  instruments,  common stock, or warrants was made in a private,
isolated  transaction  with  either  an  affiliate  of the  Company  or a person
familiar with the operations of the Company.  There was no general  solicitation
of potential purchasers,  rather,  securities were offered only to persons known
by  directors,  employees  or  agents  of the  Company.  The  Company  also made
available to  prospective  purchasers  general  information  about the business,
including  financial  statements and other  information that might be requested.
With the  exception of the common  shares  issued to Dr.  DeVoe  pursuant to the
"cashless"  exercise of warrants held greater than two years, the aforementioned
issued  securities  were  deemed  "restricted"  as  defined  by the  Act and all
certificates  representing the issued  securities bore  appropriate  restrictive
legends.  Accordingly,  the issuances were made in transactions  not involving a
public offering and were exempt from registration under Section 4(2) of the Act.


                                     - 19 -
<PAGE>

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      The following  discussion  should be read in conjunction with the attached
financial  statements and notes thereto.  Except for the historical  information
contained  herein,  any statements  that refer to  expectations,  projections or
other  characterization of future events or circumstances,  and especially those
which  include  variations  of the  words  "believes,"  "intends,"  "estimates,"
"anticipates,"  "expects," "plans," or similar words or variations thereof,  are
likely to be  forward-looking  statements,  and as such,  are  likely to concern
matters  involving risk,  uncertainty,  unpredictability  and other factors that
could  materially  and adversely  affect the outcome or results  indicated by or
inferred from the statements themselves.  Therefore,  the reader is advised that
the following  discussion  should be  considered  in light of the  discussion of
risks and other  factors  contained in this annual  report on Form 10-KSB and in
the Company's  other filings with the  Securities and Exchange  Commission,  and
that no statements  contained in the following discussion or in this Form 10-KSB
should be construed as a guarantee or assurance of future  performance or future
results.

Overview

      Since 1997,  the Company has been engaged in  developing  and applying its
technology for the efficient  recovery,  separation and  purification  of metals
from various aqueous streams of source material.  The technology originated from
research in  microbiology  on how  microbial  cells  efficiently  acquire  their
essential nutrient metals such as calcium, copper, zinc, etc. The MR3 technology
is an automated,  modular metals reclamation system that integrates  specialized
media with a unique hydrometallurgical chemical process to selectively separate,
extract,  and purify individual targeted metals. MR3 has developed a process for
the recovery,  separation and purifying of a broad range of metals.  The Company
has also entered  into  strategic  alliances  with third party  manufactures  of
related technology processes to utilize their technology, or jointly develop new
technology  processes,  in the  implementation  of MR3 custom  solutions for its
prospective  clients. The Company has incurred losses from its inception through
December 31, 2004.

      The Company intends to produce these metals and metal-compound products in
facilities (or mobile  modular  plants) wholly owned and operated by the Company
or in facilities  jointly owned and operated with other third party  principals.
Such  facilities  may be  limited to the  placement  of  integrated  engineering
hardware and MR3 technology components in a leased building or a specially built
plant corresponding to a unique project requirement.  The resultant manufactured
products   are  then  offered  for  sale  to  metals  and   specialty   chemical
commodities-brokers and other client end-users. Where feasible, the Company also
plans to license its technology to third parties in consideration  for licensing
fees and possible  revenue sharing  arrangements.  In addition,  the Company may
elect to charge contract fees for various waste removal and remediation services
related to its proprietary technology.

      MR3's  technology  has many  applications  including:  (i) the recovery of
precious  metals from ore and  concentrates;(ii)  the  processing  of industrial
wastes into  purified  metals and  specialty  chemical  products;  and (iii) the
environmental  remediation  of hazardous  metals from  contaminated  sites.  The
Company's  strategy is to either  license its  proprietary  technology  to third
parties for use in individual  applications or directly implement the technology
under operations  controlled by the Company or through joint ventures with other
entities.


                                     - 20 -
<PAGE>

Results of Operations

Fiscal year Ended  December 31, 2004 Compared to Fiscal Year Ended  December 31,
2003

      The Company recognizes  revenue when manufactured  product is shipped to a
customer or at the time other services,  such as metals related  remediation are
rendered.  The Company  recorded  $380,000 in revenues in the fourth  quarter of
2004 related to the successful  implementation of its Fluor Hanford project. The
Company did not realize any  revenues  from its metals  separation  and recovery
technology during fiscal year 2003 as management  elected to revamp its business
strategy during that period away from specific specialty chemical  production to
focus on prospective  lucrative  prospects for its metals  recovery  technology,
especially in the area of precious metals.

      Cost of  goods  sold  amounted  to  $293,346  and $0 for  2004  and  2003,
respectively.  The components  that make up cost of goods sold include,  but are
not limited to chemicals and materials used in the processing of wastes, rent at
the site  processing  facility,  removal and disposal of post  processing  waste
materials and residues,  and salaries of personnel and  contractors  utilized in
the Company's  processing  activities.  Given that the gross margin of 22.8% was
solely  related  to  the   implementation  of  the  Fluor  Hanford  chromium  VI
remediation  project,  there is no reasonable  basis to determine if such result
will be typical of future service projects.

      General   operating   expenses--less   depreciation,    amortization   and
consideration for impairment loss--increased $613,188 (38.7%) from $1,586,705 in
2003 to $2,199,893 in 2004.  The increase is  attributable  to increases in most
operating  categories  related to the  Company's  larger  staffing  requirements
(including  outside  services and  consultants)  in 2004 related to  prospective
project(s) due diligence.  Development  expenses decreased by $71,028 (13.0%) in
2004 to  $474,307  compared to $545,335  in 2003.  The  decrease in  development
expenses primarily related to expenses incurred by a singular study performed by
SRK and  recorded  as expense  in 2003  ($103,000).  In  addition,  the  Company
eliminated  Empire Gold  related  development  expenses in fiscal year 2004 that
were a material portion of 2003 development expense.

      In  connection  with its  expanded  business  activities  to  acquire  new
contractual  commitments  and  perform  on  existing  obligations,  the  Company
incurred  increases  in both  personnel  expenses and  external  consulting  and
professional  fees.  Personnel expenses increased $83,764 (17.13%) to a level of
$572,741 in 2004 compared  with  $488,977 in 2003, as the Company  increased its
workforce  in 2004 in  consideration  of its  pending  project  obligations  and
marketing efforts to identify new prospective  opportunities.  External services
and professional fees increased  $399,644 (92.4%) to a level of $832,055 in 2004
compared to $432,391  in 2003.  Notable  components  of  external  services  and
professional  fees in 2004 were  $165,000  in expense  related to the  Company's
public relations  efforts,  as well as compensation  expense recorded to reflect
the grant of options or warrants to independent consultants. In addition, office
expenses  increased $197,964 (232.4%) to a level of $283,164 in 2004 compared to
$85,200 in 2003. The increase is primarily attributable to significant increases
in travel and  living  expenses,  as well as  ordinary  expenses  related to the
greater size of the Company's workforce.

      Depreciation  expense  amounted  to $35,413 in 2004  compared to $9,113 in
2003, an increase of $26,300. The increase is related to additional property and
equipment  acquired by the company in late 2003 and during  calendar  year 2004.
The Company also recorded  certain  losses on  write-downs  of equipment in 2003
amounting  to $105,813.  There were no  comparable  write-downs  of property and
equipment in 2004.

      The Company recorded net interest expense of $216,859 in 2004 and $168,533
for 2003.  This  increase of $48,326  (28.7%) for 2004 is attributed to interest
accrued on new and continuing notes payable to shareholders, related parties and
other third party holders of debt instruments. In addition, the Company incurred
interest  expenses for the full year of 2004 related to contracts  for equipment
and  instrumentation  in  connection  with  its  technical  support  laboratory.
Management anticipates that interest expense will likely increase in fiscal year
2004 in consideration of the  aforementioned  debt obligations and the potential
addition of new debt instruments, provided that certain existing note holders do
not convert their notes into shares of the Company's  common stock through their
conversion privileges. In 2003, the Company recorded gains under other income of
$223,843  related to debt forgiveness and reduction in accrued  liabilities,  in
connection  with the settlement of various  longstanding  obligations and claims
against the Company. There were no such material gains in fiscal year 2004.


                                     - 21 -
<PAGE>

            The  Company's  net loss for  fiscal  year 2004  increased  $710,806
(43.1%) to  $2,359,527  as compared  to  $1,648,721  for fiscal  year 2003.  The
increase is attributed to the material  increase in operating  expenses incurred
by the Company in implementing its revamped  operating strategy and the staffing
up of  additional  management  and  technical  personnel to oversee its business
activities and technical development.

Net Operating Losses

      At December  31, 2004 and 2003,  the Company has  available  approximately
$10,981,000  and  $8,969,000 in net operating  loss  carryforwards  available to
offset future federal and state income taxes, respectively, which expire through
2021.  Realization is dependent on generating sufficient taxable income prior to
expiration  of the loss  carryforwards.  A  change  of  greater  than 50% of the
Company  ownership  could  significantly  reduce  the  availability  of the  tax
credits.  At December  31, 2004 and 2003,  the Company has  provided a valuation
allowance to reduce its net  deferred tax asset to zero.  The amount of deferred
tax asset considered realizable,  however, can be revised in the near term based
upon future operating conditions during the carryforwards period.

Liquidity and Capital Resource

      Historically,  the Company's  working  capital  needs have been  satisfied
primarily  through the Company's  private  placement of securities,  convertible
debentures and other debt  instruments,  such as short and long-term  notes with
certain shareholders and third party financiers.  The Company reasonably expects
to continue to do so in the future,  but cannot  guarantee  that such  financing
activities  will be sufficient  to fund its current and future  projects and its
abilities to meet its cash and working capital needs

      At  December  31,  2004,  the  Company  had a working  capital  deficit of
$1,524,505  compared to a working  capital  deficit of $982,347 at December  31,
2003.  The $542,158  (55.2%)  increase in working  capital  deficit is primarily
attributed to deceases in cash, increases in accrued expenses,  and increases in
short term note  obligations,  all related to the Company's  increased  business
activities  for the full year in 2004  compared with 2003. At December 31, 2004,
the Company had $63,712 in cash compared to $288,674 at December 31, 2003.

      As of December  31,  2004,  the Company had total assets of $593,761 and a
total shareholder's holder's deficit of $1,808,927 compared with total assets of
$701,260 and total  stockholder's  deficit of  $1,182,390  at December 31, 2003.
Total assets  decreased in 2004 due to a decrease in cash  resulting  from basic
operations,  offset by increases in property and equipment.  Total shareholders'
deficit increased by $626,537 (53.0%) due to increased operating losses incurred
by the Company in carrying out its business activities.

      For the fiscal  year  ended  December  31,  2004,  cash used by  operating
activities  increased to $1,705,596  from  $1,272,447 for the comparable  period
ended  December 31, 2003.  This $433,149  (34.0%)  increase is attributed to the
material expansion of the Company's business activities in 2004.


                                     - 22 -
<PAGE>

      For the fiscal  year  ended  December  31,  2004,  cash used by  investing
activities  decreased to $168,041 from $220,746 for the comparable  period ended
December 31, 2003. This $52,435  (23.8%)  decrease is attributed to the purchase
of lesser amounts of property and equipment in 2004.

      In fiscal year ended 2004,  the Company  realized cash flow from financing
activities of $1,350,490  compared with $1,769,101 for the comparable  period in
2003. In 2004, the Company realized $350,000 in proceeds from notes payables and
$1,055,315  from the sale of common  stock and  warrants.  In 2003,  the Company
realized net proceeds  (receipts  less partial  principal  payments)  from notes
payable to certain shareholders of $980,661 and proceeds from the sale of common
stock and the exercise of warrants of $793,500.

      During fiscal year 2005, the Company  expects to meet its cash and working
capital needs primarily from cash generated from operations, prospective license
sales, the private sale of its securities,  convertible debt  instruments,  note
payables and credit  facilities with private lenders.  Management can provide no
guarantees   regarding  its   expectations  in  achieving  its  working  capital
objectives on a timely basis.

      The Company  presently  leases its facilities on a contractual  basis with
certain  timeframe  commitments and  obligations.  The Company believes that its
existing  facilities  will be sufficient to meet the  Company's  current  needs.
Should the Company need additional  space to accommodate  increased  activities,
management  believes it can secure such  additional  space on reasonable  terms.
From time to time, the Company has committed to leases on a month-to-month basis
without a minimum commitment and may elect to do so in the future.

Off-Balance sheet Arrangements

      The Company does not have any off balance sheet  arrangements that have or
are  likely  to have a  material  current  or  future  effect  on the  Company's
financial  condition,  or changes in financial  condition,  liquidity or capital
resources or expenditures.

Plan of Operation

      Since April 2004, the Company  initiated a  restructuring  of its business
strategy  with  multiple  objectives  positioning  the Company  toward  positive
revenue  generation.  This revised strategy  provides for the penetration of six
vertical markets in mining and environmental remediation with the application of
MR3's core  technology  of selective  metals  extraction,  either as the primary
operation,   or  in  partnership   with   synergistic   third  party  commercial
technologies.  Management's  short-term  (6  months-12  months)  objective is to
implement the MR3 technology with strategic partners owning ores,  concentrates,
and  tailings  in the United  States.  The general  terms of these  partnerships
involve  the joint  design,  construction,  and  operation  of  metals  recovery
centers, from which the recovered metals will be sold to third party brokers and
clients.  MR3's  long-term  (12 months-24  months)  objective is to align with a
financial strategic partner(s), from which metal recovery opportunities globally
may be adequately financed.

      In May of 2004,  the Company  entered into an agreement with Fluor Hanford
and the United States  Department of Energy to provide a metal  recovery  system
for the removal of toxic  chromium VI from the  groundwater  at Hanford  Nuclear
Reservation   in   south-central   Washington   State.   With   the   successful
implementation of the remediation  project,  management intends to leverage this
success so as to implement  similar  nuclear related turnkey systems for various
public and  private  remediation  projects  in the United  States.  The  Company
recognized $380,000 in revenue related to this project in 2004.


                                     - 23 -
<PAGE>

      In August  2004,  the Company  entered  into an  agreement  with Caddell &
Associates of Denver, Colorado ("Caddell"),  to jointly provide combined turnkey
processing  systems to certain MR3 clients for the  extraction and separation of
precious and base metals from their mineral deposits.  Under the agreement,  MR3
secured  exclusive  rights to  commercialize  Caddell's  Halogen Vapor  Leaching
System (HVLS) technology. In November 2004, the Company entered into a Strategic
Alliance and Project Venture  Agreement with The Purolite Company  ("Purolite"),
which signifies a formation of an exclusive venture and a general  collaborative
framework for mutual  research and  development  of novel resins and  separation
processes,  as  well  as  marketing  of any  turn-key  solutions  based  on such
developments.  Management  believes that such alliances with  established  third
party  partners   described  above  will  provide  more  opportunities  for  the
implementation of the Company's  technology than would otherwise be available to
MR3.

      In September  2004, the Company  entered into an exclusive  agreement with
Franklin Lakes Resources for the processing of their mineral  deposits  locating
in a volcanic  lakebed  in Death  Valley  Junction,  California.  Contingent  on
receiving adequate  investment funds,  management expects to aggressively pursue
this venture in the second half of 2005.

      MR3 continues to work with SRK  Consulting to develop three  opportunities
for base metal removal from various  large-scale mining operations.  The revenue
model for applications in this Conventional Mining and Ore (CMO) market involves
processing  system equipment sale,  service  contract for technical  support and
media supply, and recurring revenue from the sale of base metals recovered.

      t 6 0 MR3 is also collaborating with SRK Consulting and Arrakis Mining for
rapid  penetration  of the Private  Contract  Environmental  Remediation  (PCER)
market.  Opportunities  in this  market are  anticipated  to involve the sale of
turnkey  processing  equipment,   vendor  contract  for  support  services,  and
contracts for the supply of special media for use in the metals extraction.  The
Company is  negotiating  with  several  commercial  entities  for the removal of
contaminated metals from their large-scale mining operations.  Implementation of
MR3 processing  systems for these  large-scale  operations is estimated to be in
the range of 300-500  gallons-per-  minute.  The Company's  goal is to penetrate
this PCER market rapidly through several small-scale,  first-phase demonstration
efforts, followed by the design and implementation of the large scale processing
systems in coordination with established firms, such as SRK and Arrakis.

      MR3  continues  to  develop  and  evaluate  its   technology  for  revenue
generation  opportunities  including, but not limited to the adoption of two new
processing  techniques  for the  extraction  of base,  precious,  and rare earth
metals from oil brines and  geothermal  fluids  (OBGF).  This  venture  requires
relatively small  capitalization for continuous  extraction of metals, but could
provide  significant  return to MR3 in helping to build shareholder  value. This
objective is in the early stage of development and  participation in this market
would likely require modification of the MR3 core technology.

      Plant  costs,   associated  with  MR3  Technology   engineering,   design,
construction  and equipment,  are expected to vary as a factor of the particular
metals  extraction  application  and required plant size.  Future MR3 production
facilities  are expected to vary in initial cost from $500,000 to $2 million and
above.  Implementation  schedules  are  expected  to be in  terms  of less  than
eighteen months.  Development expenses for the MR3 technology will be limited to
adapting the  technology  to specific  field  applications  and are likely to be
proportional  to the number of projects  contracted by the Company.  The Company
does not  expect  these  technology  development  costs to exceed  the  revenues
contemplated by each specific project.

      The design of the MR3 System lends itself to be scalable  without material
difficulty.  The Company anticipates  supplying the initial processing materials
and then provide recurring  materials  (equipment,  reagents,  and media) to the
licensee or contract client at its cost plus a reasonable  markup.  In addition,
the Company will also likely provide  technical  consulting  services,  over and
above normal  services in line with a prospective  license,  at a  predetermined
price to the  licensee.  The  Company  further  expects  to charge a  negotiated
percentage of the precious metals extracted from the concentrates,  as well as a
monthly fee related to savings in capital and  operating  costs  realized by the
licensee or contract client from their normal operations.


                                     - 24 -
<PAGE>

      In  anticipation  of the need for  working  capital to provide  marketing,
preliminary sample testing,  development,  project validation and implementation
services  related  to  the  aforementioned  prospective  projects,  the  Company
initiated  private  placements  in 2004  with a  limited  number  of  accredited
investors.  Total proceeds related to the private sale of its securities in 2004
amounted to approximately $1,055,000. In addition, the Company received $350,000
in proceeds from funds advanced  pursuant to certain note payables.  The Company
has received an additional  $210,000 in funds  advanced in 2005 pursuant to such
notes..

      During October 2004, MR3 entered into a Memorandum of  Understanding  with
Swift Capital,  an investment arm of Sino Capital  Foundation.  The MOU provides
the  framework for Swift Capital to perform due diligence on MR3 for the purpose
of providing  long-term  financial  investment  into the  Company.  Sino Capital
Foundation  is a global  conglomerate  owning  petroleum,  energy,  mining,  and
banking assets in Asia, Southeast Asia, and Europe. The Company and Sino Capital
intend to structure a long-term  partnership  in which Sino Capital will provide
funding for MR3 operations in the US, contracts for MR3 technology  applications
in Asia and Europe,  and long-term  financing for joint projects.  Swift Capital
started  their due  diligence at the end of 2004 and has  continued  the process
into second quarter 2005.  $100,000 of the aforementioned  funds advanced to the
Company  pursuant  to note  agreements  in 2004  originated  with third  parties
related to Sino Capital.  An additional  $210,000 in advanced funds was received
in 2005 from these same parties.

      Management believes that cash expected to be generated from operations and
current cash reserves will not be sufficient for the Company to meet its capital
expenditures  and  working  capital  needs,  over the  next  twelve  months,  as
presently outlined in its business strategy.  The Company's future liquidity and
cash requirements will depend on a wide range of factors, including the level of
business in designated  market  segments,  expansion of facilities  and possible
acquisitions, and the formation of long-term financial strategic partnerships.

      The Company  anticipates  meeting its working capital  requirement for the
next twelve months through a combination of revenue  generated from  operations,
project  specific  financing from third parties,  certain debt  instruments  and
additional  sales of its securities on an as needed basis.  If anticipated  cash
flows from operations are not  sufficient,  it will be necessary for the Company
to raise capital or seek additional  financing.  While there can be no assurance
that such  raising  of  capital or  seeking  of  additional  financing  would be
available in amounts and on terms acceptable to the Company, management believes
that such financing  would likely be available and management will be reasonably
successful in doing so. The primary and most  significant  expenditures for 2005
are expected in the area of salaries,  consulting,  professional fees,  research
and development,  rent,  travel,  fabrication of processing  systems and certain
engineering costs related to anticipated operating agreements.

Effects of Inflation

      In the opinion of management,  inflation has not had a material  effect on
the operations of the Company.

Recent Accounting Pronouncements

      In 2004 and 2003, the Company adopted certain  accounting  pronouncements,
the results of which are reflected,  as applicable,  in the Company's  financial
statements and accompanying notes for fiscal years 2004 and 2003.  Disclosure on
the various  accounting  pronouncements  adopted by the Company  during 2004 and
2003 are more fully  detailed  in Section 1 (Summary of  Significant  Accounting
Policies;   Recent  Accounting   Pronouncements)  of  the  Company's   financial
statements   included  with  this  annual  report  and  incorporated  herein  by
reference.


                                     - 25 -
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The attached financial statements commencing on page F-1 have been audited
by  Pohl,  McNabola,  Berg &  Company  (formerly  Berg &  Company),  independent
certified  public  accountants,  to the extent and for the  periods set forth in
their reports appearing herein.

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

      There  have  been  no  changes  in or  disagreements  with  the  Company's
accountants, Pohl, McNabola, Berg & Company, for the reporting period.

ITEM 8A. CONTROLS AND PROCEDURES

      The  Company's  Chief  Executive   Officer  and  Chief  Financial  Officer
("Certifying   Officers")  are  responsible  for  establishing  and  maintaining
disclosure controls and procedures for the Company. The Certifying Officers have
concluded  (based on their  evaluation of these  controls and procedures as of a
date within 90 days of the filing of this report) that the design and  operation
of the  Company's  disclosure  controls  and  procedures  (as  defined  in  Rule
13a-15(e) and 15d-15(e)  under the Securities  Exchange Act of 1934)  adequately
meet intended  objectives  and are effective.  As of this date,  given the small
size of the  Company  and its  limited  operations  and over the last year,  the
Company  utilized a  preliminary  and basic  standard of internal  controls  and
procedures  related to its financial  reporting  for the period  covered by this
report.  Management  is in the process of  developing  and adopting new and more
stringent  controls and procedures and anticipates  such controls and procedures
to be in place prior to the end of fiscal year 2005.

      Disclosure  controls and procedures are controls and other procedures that
are  designed to ensure that  information  required to be  disclosed  in Company
reports  filed or  submitted  under the  Exchange  Act is  recorded,  processed,
summarized and reported, within the time periods specified in the Securities and
Exchange  Commission's  rules and  forms.  Disclosure  controls  and  procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information required to be disclosed in Company reports filed under the Exchange
Act  are  accumulated  and  communicated  to  management,  including  our  Chief
Executive  Officer  and  Chief  Financial  Officer,  to allow  timely  decisions
regarding required disclosure.

      No significant  changes were made in the Company's internal controls or in
other factors that could  significantly  affect those controls subsequent to the
date  of the  evaluation,  including  any  corrective  actions  with  regard  to
significant deficiencies and material weaknesses.

      The Company filed a Form 12b-25  (Notification of Late Filing) on April 1,
2004  related  to the late  filing of its annual  report on Form  10-KSB for the
period ended  December 31, 2004.  The late filing was  unrelated to any material
weakness or deficiency in the Company's internal controls and procedures.

ITEM 8B. OTHER INFORMATION

      None.


                                     - 26 -
<PAGE>

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The  current  Executive  Officers  and  Directors  of the  Company  are as
follows: (1)

     Name                     Age                    Position

Randall S. Reis               63            Chairman of the Board and CFO
William C. Tao                49            Chief Executive Officer and Director

            (1.) In first  quarter  2004,  Mr. Gary Abreim  provided the Company
      with his notice of resignation as the Chief Financial Officer effective on
      or about the filing date of the Company's Annual Report on Form 10-KSB for
      the period ended  December  31,  2003.  Mr.  Abreim's  resignation  is not
      related to any  disagreement  or discord with the Company on its financial
      matters.  Mr.  Randall  S.  Reis  has  assumed  the  acting  role of Chief
      Financial  Officer until such time as a qualified  individual can be hired
      consistent with the needs of the Company and its available resources.  Mr.
      Abreim  continues to supply interim  accounting  services as the Company's
      principal  accounting  authority  for the purposes of preparing  this 2004
      annual report on Form 10-KSB.

            In second  quarter  2004,  Mr. John K.  Burns,  then  President  and
      Director  resigned his positions with Company effective April 9, 2004. The
      resignation was not related to any  disagreement or other discord with the
      Company  or its  management.  Mr.  Burns  has  agreed  to  provide  senior
      consultant services to the Company, as required, on a mutually agreed upon
      basis. During his executive  management tenure with the Company, Mr. Burns
      was not compensated with a salary,  but was issued  1,000,000  warrants to
      purchase common shares of the Company.

            In second quarter 2004, Mr. Bradley N. Rotter,  then Chief Executive
      Officer  and  Director,  resigned  his  executive  position  as CEO of the
      Company,  effective  in April  2004,  but  remained  as a Director  of the
      Company until his successor  was elected at the Company's  annual  meeting
      held on September 20, 2004. Mr. Rotter's resignation is not related to any
      discord or  disagreement  with the  policies of the  Company.  Mr.  Rotter
      continues to be a substantial shareholder of the Company and has agreed to
      continue to provide  advisory  services  to the  Company in  business  and
      corporate financing matters.

            In third  quarter 2004,  the Company  accepted Dr. Irving W. DeVoe's
      resignation  from MR3 Systems as its Chief Science  Officer related to his
      retirement from the Company. The Company has no immediate plans to replace
      Dr. DeVoe in his capacity as Chief Science Officer.

      There is no family relationship  between any director or executive officer
of the Company.  There are no known  arrangements or understandings  between any
director or executive  officer and any other person pursuant to which any of the
above-named  executive  officers  or  directors  was  selected  as an officer or
director of the Company. All directors hold office until the next annual meeting
of stockholders and until their successors have been duly elected and qualified.
Aside from expenses to attend the Board of Directors  meetings,  the Company has
not  compensated  its  directors  for service on the Board of  Directors  or any
committee  thereof.  As of the date hereof, no director has accrued any expenses
or other  compensation.  The Board of Directors  appoints  officers annually and
each executive  officer serves at the discretion of the Board of Directors.  The
Company does not have any standing committees at this time.

      None of the  officers  and /or  directors  of the  Company  are  currently
officers or  directors of any other  publicly  traded  corporation.  None of the
directors,  officers,  affiliates  or  promoters  of the Company  have filed any
bankruptcy  petition,  been  convicted  in or been the  subject  of any  pending
criminal proceedings, or the subject of any order, judgment, or decree involving
the  violation  of any state or  federal  securities  laws  within the past five
years.


                                     - 27 -
<PAGE>

      The business experience of each of the persons listed above, as well other
significant persons and contributors to the Company, are as follows:

      Randall S. Reis.  Mr.  Reis  co-founded  MR3 and has been  Chairman of the
Board  since its  inception  in July 1991.  He served as MR3's  Chief  Executive
Officer from 1991-2003. Mr. Reis has over 35 years of executive level management
and legal  experience  in  entrepreneurial,  private and public  companies.  Mr.
Reis's  areas  of  responsibility   typically  focused  on  business   start-up,
acquisition, IPO strategies,  capital raising activities,  overall business plan
development and implementation,  SEC compliance matters,  and the negotiation of
all major  contracts.  From 1986 to 1991,  Mr. Reis was  co-founder,  CEO, and a
director  of  Vitafort  International  Corporation  ("VIT"),  a publicly  traded
company,  located in Mill Valley,  CA. VIT was primarily engaged in the business
of  developing  nutritionally  enhanced  food and beverage  products,  including
vitamin fortified products for the Crystal Geyser Water Company and Power Burst,
a  nutritionally  fortified  sports  drink.  From  1981 to  1985,  Mr.  Reis was
co-founder,  CEO and a director  of  Edwards  Ridge,  Lt., a private  California
corporation,  which was engaged in the business of developing  multi-unit luxury
single-family home real estate projects in Sausalito, CA. From 1970 to 1980, Mr.
Reis was a co-founder  and senior  partner of Burden and Reis,  a San  Francisco
based law firm specializing in corporate,  securities,  and real estate matters.
Mr.  Reis is a member of the  California,  New York and  Connecticut  State Bars
Association, and a graduate of Amherst College (B.A.) and the Stanford School of
Law (J.D.).

      William C. Tao,  Ph.D.  Dr. Tao joined the  Company in April 2004 as Chief
Executive Officer and was subsequently  appointed a Director of the Company. Dr.
Tao is an entrepreneur and technologist  with twenty-four  years of business and
technical experience including,  but not limited to the chemical,  environmental
and nuclear-related  industries. Dr. Tao has extensive experience in structuring
strategic  partnerships  and commercial  ventures within the energy,  petroleum,
transportation and materials application markets for both the public and private
sector.  From 2002 to April 2003, Dr. Tao was Chief Technologist and a Principal
of Global  Environment and Technology  Foundation,  a non-profit  Virginia based
foundation  involved in technology  consulting for U.S.  government agencies and
international commercial  institutions.  During this period, Dr. Tao also served
as a co-founder and Managing  Director of Global Technology  Ventures;  a Nevada
based  corporation  focused on equity financing and project  capitalization  for
entrepreneurial  ventures.  From 1998 to 2002,  Dr. Tao served as a Senior  Vice
president and Chief Strategy and Technology  Officer for Clean Fuels Technology,
Inc., a Nevada based company.  Dr. Tao was  responsible  for  international  and
domestic technology  commercialization,  large-scale product demonstration,  and
corporate finance  strategies.  From 1997 to 1998, Dr. Tao was president and CEO
of Landmark Credit,  Inc.  providing global finance and technology  services for
public and private  developers in the US,  Philippines  and Southeast Asia. From
1990 to 1997,  Dr. Tao served in  multiple  positions  and  capacities  with the
Lawrence Livermore National laboratory in Livermore, California. These positions
included,  but were not limited to Program  Manager for Nuclear  Weapons Surety,
Program  Development  for Director's  Program office and  Director-International
Program Development.

      Dr.  Tao  holds two B.S.  degrees  in  Chemical  Engineering  and  Nuclear
Engineering  from  University of California at Berkeley,  and an M.S.  degree in
Chemical  Engineering  and  Ph.D.  degrees  in  Chemical  Physics  and  Chemical
Engineering from Stanford  University.  He has authored over 45 journal articles
and served as editor for two  Symposium  Series on Shock  Physics and  Specialty
Materials.

      Other Senior Management, Significant Persons and Contributors

      Jody J.  Sitkoski.  Mr.  Sitkoski  joined the  Company in January  2003 as
Senior  Vice  President.  Prior to that,  he provided  advisory  services to the
Company from time to time over a five-year  period as a consequence of his being
an original shareholder of MR3, Inc., the predecessor to MR3 Systems, Inc. Along
with  providing  technical and  mechanical  guidance on mining  operations,  Mr.
Sitkoski was instrumental in identifying  potential  candidate  projects for the
Company's   technology   and  was   principally   involved  in  any   subsequent
negotiations.  Mr.  Sitkoski  brings  to the  Company  over 20 years of hands on
business  experience in mining  facilities  construction  and  maintenance;  and
environmental  technology  processes including electro coagulation  systems, UV,
ozone,  EC Fuel for  municipal  waste water/  drinking  water  system  cleaning,
landfill  leaching,  industrial  waste water and precious  metal/rare earth mine
processes for metals extraction and the purification of mining concentrates. For
the past five years Mr. Sitkoski has been self-employed as a private real estate
developer and personal  investor.  Mr. Sitkoski  received an Associate degree in
Computer  Science from Control Data Institute in Milwaukee,  Wisconsin and holds
numerous  real  estate  certifications  in  real  estate  law,  development  and
brokerage.


                                     - 28 -
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

      Section  16(a) of the  Exchange  Act  requires  our  directors,  executive
officers,  and the  persons  who  beneficially  own more than ten percent of our
common  stock,  to file reports of ownership  and changes in ownership  with the
Securities and Exchange Commission.  Copies of all filed reports are required to
be furnished to the Company.  Based solely on the reports  received by us and on
the  representations  of the  reporting  persons,  we  believe  that  no  Form 5
documents  were required to be filed at year-end  2004. The Company is not aware
of any  transactions  in our  common  stock  by or on  behalf  of any  director,
executive  officer or 10%  shareholder,  which  would  require the filing of any
report pursuant to Section 16(a) during the fiscal year ended December 31, 2004,
that was not timely filed with the Commission.

Committees

      It is the  intention  of the  Company's  management  to have its  board of
directors ultimately  structured to comply with the directives of Sarbanes-Oxley
Act of 2002. Presently, the Company's common stock is quoted on the OTC Bulletin
Board.  As  such,  the  Company  is not  currently  obligated  to  meet  certain
compliance  requirements  of  Sarbanes-Oxley   associated  with  national  stock
exchanges.  The  Company  intends,   however,  to  seek  and  attract  potential
independent  directors to its board and to ask its  shareholders  to elect these
potential  directors at future annual  meeting(s).  At this time,  the Company's
board of directors  consists of two  directors,  all of which are insiders  (the
Chairman and founder of the Company and the Chief Executive Office.

      The Company  anticipates using NASDAQ's Rule 4200(a)(15) as a guideline to
determine independent status. It should be noted that the Company may experience
difficulties  attracting  independent  directors  given  its  current  stage  of
corporate  development  and  level of  resources.  Once  sufficient  independent
directors  are in  place,  the  Company  expects  to  form a  minimum  of  three
committees--an Audit Committee, a Nominating and Corporate Governance Committee,
and a Compensation and Benefits Committee.  In the interim,  the Company expects
to carry out the  responsibilities  of those  committees,  as practicable,  with
inside  directors  and support of  individuals  from its Board of Advisors.  The
Company is in the process of developing  charters for each of the aforementioned
committees.

Audit Committee

      As of the date of this  annual  report,  the  Company  has no  independent
directors  and thus it is not  feasible  to  appoint  such  members  to an audit
committee.  Therefore, in the interim, the Company's existing Board of Directors
has and will conduct the respective role of an audit committee with support from
a  financially  knowledgeable  representative  of the  Board of  Advisors.  When
established,  the audit  committee's  primary function will be to provide advice
with  respect to our  financial  matters and to assist the Board of Directors in
fulfilling oversight  responsibilities  regarding finance,  accounting,  tax and
legal compliance. The audit committee's primary duties and responsibilities will
be to: (i) serve as an independent  and objective party to monitor our financial
reporting  process and  internal  control  system;  (ii) review and appraise the
audit  efforts of our  independent  accountants;  (iii)  evaluate our  quarterly
financial  performance  as well as compliance  with laws and  regulations;  (iv)
oversee  management's  establishment  and enforcement of financial  policies and
business  practices;  and (v) provide and open avenue of communication among the
independent accountants, management and the board of directors.


                                     - 29 -
<PAGE>

Nominating and Corporate Governance Committee

      The  purpose  of  the  Committee  shall  be  to:  (i)  identify  qualified
individuals  for  membership  on the  board;  (ii)  recommend  to the  board the
director nominees for the next annual meeting of shareholders; (iii) develop and
recommend to the board a set of corporate  governance  guidelines for the board;
and (iv) provide oversight of the corporate  governance affairs of the board and
the Company. In the absence of independent directors,  the Company has requested
three  members  of its  board of  advisors  to serve  in an  advisory  role as a
nominating committee for the election of future board members.

      The  Company  is  in  the  process  of  developing   corporate  governance
guidelines  that  meets  both  its  current  and  anticipated  future  operating
conditions and corporate structure.  Such guidelines,  when adopted by the board
of  directors,  will be posted on the  Company's  web site under the  caption of
Corporate Governance.

Compensation and Benefits Committee

      When  formed  and  adopted  by the  Company's  Board  of  Directors,  this
committee's  responsibilities  will  relate  to  compensation  of the  Company's
directors and executive  officers and oversight of the management of the various
plans, if any, that are implemented for the benefit of the Company's employees.

Code of Ethics

      MR3  adopted  a Code of  Ethics  ("Code")  in 2004  applicable  to all its
employees   regardless  of  position  or  stock   ownership.   The  Company  has
historically  operated  under  informal  ethical  guidelines,  under  which  the
Company's  principal  executive,  financial  and  accounting  officer,  are held
accountable.  In  accordance  with these  informal  guidelines,  the Company has
always promoted honest,  ethical and lawful conduct throughout the organization.
Certain of the Company's  senior  executive  and  financial  officers--Chairman,
Chief Executive Officer,  President and Chief Operating Officer, Chief Financial
Officer and Chief Science  Office--provide  services and perform  functions that
merit a more detailed  expression of their duties,  because they are  singularly
responsible for the integrity, accuracy and timeliness of our periodic financial
reports to  regulators  and the  investing  public.  Certain  officers  left the
Company  since its  adoption  and  William C. Tao  joined  the  Company as Chief
Executive Officer  subsequent to its adoption.  Thus the Company has provided as
an exhibit to this Annual  Report,  a signed  acknowledgement  of the applicable
officers understanding and acceptance of the Code.

Board of Advisors

      MR3 has assembled an  experienced  and  accomplished  group of advisors to
provide  guidance to  management on various  corporate,  technical and financial
matters.  These  executive level  individuals,  whose profiles are listed on the
Company's web site, have agreed to serve on the Company's  recently formed Board
of Advisors.  Their experience in both entrepreneurial  ventures and large-scale
public  companies  will provide  added  insight and  experience to MR3's current
management  team.  These  executives will provide guidance to management on such
matters as business  development,  investment  banking and  financial  services,
equity markets, general technology and chemical-related industries. From time to
time the Company anticipates drawing upon the experience of these individuals to
fulfill  certain  roles on corporate  committees  in the absence of  independent
directors.


                                     - 30 -
<PAGE>

Shareholder Communication With the Board of Directors

      The Company  maintains a process for  shareholders to communicate with the
Board of Directors.  Shareholders  wishing to communicate  with the Board should
send any communication to Corporate  Secretary,  MR3 Systems,  Inc., 435 Brannan
Street,  Suite 200, San Francisco,  CA 94107. Any such  communication must state
the  number  of  shares   beneficially  owned  by  the  stockholder  making  the
communication.  The Corporate  Secretary will forward such  communication to the
full Board of Directors or to any  individual  director or directors to whom the
communication  is  directed.   Alternatively,   the  Company  maintains  contact
information, both telephone and email, on its website under the heading "Contact
MR3". By following  the Contact MR3 link, a shareholder  will be given access to
the  Company's   telephone  number  as  well  as  a  link  for  providing  email
correspondence to Investor Relations.  Communications sent to Investor Relations
and  specifically  marked as a communication  for the Board will be forwarded to
the Board or  specific  members  of the  Board as  directed  in the  shareholder
communication.

ITEM 10. EXECUTIVE COMPENSATION

      The following Summary  Compensation  Table indicates certain  compensation
information for the Chairman and Chief Executive Officer (collectively  referred
to as the "Named  Executive  Officers").  Compensation  data for other executive
officers is not presented in the table because  aggregate  compensation for such
executive  officers  does not  exceed  $100,000  for  services  rendered  in all
capacities during the fiscal year. This information  provided below includes the
dollar value of base salaries, bonus awards, the number of SARs/options granted,
and certain other compensation, if any.


                                     - 31 -
<PAGE>

<TABLE>
<CAPTION>
                                                    Summary Compensation Table
                                                                                  Long Term Compensation Awards
                                                                                    Awards              Payout
                              Annual Compensation                                   ------              ------
                                                                              Restricted     LTIP      Securities      All Other
         Name and                                                            Stock Awards  Pay-out     Underlying       Compen-
    Principal Position         Year       Salary       Bonus       Other                                Options/         sation
    ------------------         ----       ------       -----       -----
                                           ($)          ($)         ($)                                   SARs            ($)
                                                                                                           (#)
<S>                            <C>       <C>           <C>         <C>       <C>           <C>          <C>             <C>
Randall S. Reis                2004      106,000                   10,546                                   -
Chairman (1)                   2003      101,122                                                        1,000,000
                               2002       79,730                                                            -

William C. Tao                 2004       75,530                   8,000                                5,000,016
Chief Executive (2)            2003         -                        -                                      -
Officer & Director             2002         -                        -                                      -
</TABLE>

      1.    Includes  advances  made  during the period  and  excludes  deferred
            compensation.  Balance  of  deferred  compensation  accrued  on  the
            Company's  financial  statements  at fiscal year ended  December 31,
            2004,  and  2003  and  2002  was  $27,578,   $18,878,   and  $6,176,
            respectively.  Mr.  Reis'  employment  agreement  with  the  Company
            specifies a gross annual  salary of $120,000.  At December 31, 2002,
            Mr. Reis has waived $192,000 of  compensation,  which represents the
            unpaid  balance  owed to him in excess of  amounts  paid  during the
            noted  periods and any  accrued  deferred  compensation.  Securities
            underlying  options include warrants granted during the noted period
            at $0.10 per share with a five-year exercise period.

      2.    Includes  advances  made  during the period  and  excludes  deferred
            compensation.  Balance  of  deferred  compensation  accrued  on  the
            Company's  financial  statements  at fiscal year ended  December 31,
            2004  was $0.  Dr.  Tao's  employment  agreement  with  the  Company
            specifies a gross annual salary of $108,000.  Securities  underlying
            options  include  warrants  granted during the noted period at $0.32
            per  share  with  a  five-year  exercise  period.  3,000,016  of the
            warrants vest equally over a two-year period from date of grant.

                      Option/SAR Grants in Fiscal Year 2004

                                Individual Grants
                                -----------------

<TABLE>
<CAPTION>
                                   Number of           % of Total
                                  Securities          Options/SARs
                                  Underlying           Granted to
                                 Options/SARs         Employees in          Exercise or Base        Expiration
            Name                  Granted (#)          Fiscal year          Price ($/Share)            Date

<S>                                <C>                   <C>                     <C>                  <C>
William C. Tao                     1,500,000             21.99%                  $0.32                4-12-09
William C. Tao                     3,000,016             43.98%                  $0.32                4-12-09
</TABLE>

The Company granted 6,820,016  warrants to employees in 2004, of which 5,320,016
are on vesting schedules.

                   Option Exercises and Fiscal Year-End Values

The following table sets forth  information  with respect to the number t 6 0 of
unexercised  stock options held by the named executive  officers on December 31,
2004, and the value of the unexercised in-the-money stock options on that date.


                                     - 32 -
<PAGE>

               Aggregated Option/SAR Exercises in Fiscal Year 2004
                     and December 31, 2004 Option/SAR Values

<TABLE>
<CAPTION>
                                                             Number of Securities                Value of Unexercised
                                                        Underlying Unexercised Options           In-The-Money Options
                                                           At December 31, 2004 (#)          At December 31, 2004 ($) (1)
                            Shares          ($)
                         Acquired on       Value
         Name            Exercise (#)    Realized       Exercisable      Unexercisable       Exercisable       Unexercisable
         ----            ------------    ---------

<S>                      <C>              <C>            <C>              <C>                  <C>                <C>
Randall S. Reis               -              -           1,000,000             -               $90,000               -

William C. Tao                -              -           2,739,589         2,260,427
</TABLE>

      (1.)  Represents  the  difference  between  the option  exercise  price of
            in-the-money  options  and the fair  market  value  per share of the
            Company's  Common  Stock at  December  31, 2004 ($0.19 per share) as
            quoted  on  the  National   Quotation  Bureau's  ("NQB")  Electronic
            Quotation System at the close of trading on that date, multiplied by
            the number of shares underlying the option.

Employment Agreements

      In  January  2003,  the  Company  entered  into  a  three-year  employment
agreement  with Jody J.  Sitkoski  for the  position of senior  vice  president.
Details of the  employment  agreement are more fully  disclosed in the Company's
2003 annual report (and any subsequent amendments) on Form 10-KSB filed with the
Commission on March 29, 2004.

      In second quarter 2003,  the Company  entered into  three-year  employment
agreements  with Mr. Bradley N. Rotter,  then the Company's  President and Chief
Operating Officer,  and Dr. Irving W. DeVoe,  Chief Science Officer.  Details of
the employment  agreements are more fully disclosed in the Company's 2003 annual
report (and any subsequent amendments) on Form 10-KSB filed with the Commission.
The  employment  agreements  subsequently  terminated  as a  consequence  of the
resignations in 2004 of Mr. Rotter and Dr. DeVoe.

      In second quarter 2003, the Company  entered into a three-year  employment
agreement with Randall S. Reis, then the Company's  Chairman and CEO. Details of
the employment  agreement are more fully  disclosed in the Company's 2003 annual
report (and any subsequent amendments) on Form 10-KSB filed with the Commission.

      In second quarter 2004, the Company  entered into a three-year  employment
agreement with Dr. William C. Tao, the Company's Chief Executive  Officer.  Upon
completion of the three-year term, the employment agreement automatically renews
on a month-to-month  basis until terminated or until the parties negotiate a new
term.  Neither party may terminate the agreement without cause. Upon termination
of the agreement by Dr. Tao for "good  reason"--as  specified in the  employment
agreement--the  Company  is  obligated  to pay Dr.  Tao the  following  material
amounts: (a) all accrued benefits;  (b) a lump sum cash payment equal to one and
one-half times his base salary in effect;  and (c) a lump sum cash payment equal
to one and one-half  times his highest annual bonus paid or payable prior to his
termination of the agreement for good reason.


                                     - 33 -
<PAGE>

      The agreement specifies an annual salary of $108,000, automobile allowance
of $500 per month and a flight  allowance  of $250 per  month  through  December
2004. In addition,  the Company is obligated to pay limited premiums  associated
with a $2,000,000 term life insurance  policy on Dr. Tao with the  beneficiaries
to be designated by him. The Company has further agreed to provide family health
insurance to Dr. Tao until such time as a company group plan is adopted. Mr. Tao
will be reimbursed for ordinary and necessary  expenses  incurred in performance
of his duties on behalf of the Company.  As further  consideration  for entering
into the employment agreement,  Dr. Tao was granted 1,500,000 warrants,  vesting
immediately,  to purchase  shares of the  Company's  common stock at an exercise
price of  thirty-two  cents  ($0.32)  for a five-year  period.  Dr. Tao was also
granted an  additional  3,500,016  warrants  at a price of $0.32 for a five-year
period,  which vest at a rate of 145,834  warrants  per month for a  twenty-four
month period.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth  information,  to the best knowledge of the
Company,  as of December 31, 2003,  certain  information  with respect to shares
beneficially  owned by: (a) each person who is known by us to be the  beneficial
owner of more than 5% of our outstanding shares of common stock; (b) each of our
directors;  (c) the executive  officers named in the Summary  Compensation Table
above and (d) all current directors and executive officers as a group.

      Information as to beneficial  ownership is based upon statements furnished
to the Company by such  persons.  To our  knowledge,  except as indicated in the
footnotes to this table and pursuant to applicable  community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. Unless otherwise
indicated,  the  business  address  of the  individuals  named  below is c/o MR3
Systems, Inc., 435 Brannan Street, Suite 200, San Francisco, California 94107.


                                     - 34 -
<PAGE>

            Name and Address               Amount and Nature
          of Beneficial Owner             of Beneficial Owner       Percent of
          as of March 31, 2005            as of March 31, 2005       Class (1)
          --------------------            --------------------       ---------

Randall S. Reis *                            6,521,687 (2)             7.30%

Irving W. DeVoe                              5,275,291 (3)             5.91%

Bradley N. Rotter                           10,366,664 (4)            11.61%

William C. Tao*                              3,468,759 (5)             3.88%

Mel Kelm                                     5,863,357 (6)             6.56%
Pfeiffer Ridge, #7
Big Sur, CA 93920

Theodore H. Swindells &                      4,499,999 (7)             5.59%
High Stakes Capital, LLC
11400 S.E. 8th St.; Unit 420
Belleuve, WA 98004

All directors and executive officers         9,990,446 (8)             11.18%
as a group (2)

* Director and/or executive officer

1.    Based upon 70,046,766  shares of common stock  outstanding on December 31,
      2004, and includes  consideration of stock options,  warrants,  conversion
      privileges or similar  obligations  owned by certain  Officers,  Directors
      and/or  principal  shareholders  entitling  the  holders  to  purchase  an
      aggregate  of  19,282,374  shares of common  stock  which are  exercisable
      within sixty days. Therefore,  for the purposes of calculating  percentage
      ownership  as  indicated  in the table above  89,329,140  shares of common
      stock are  deemed to be issued and  outstanding  in  accordance  with Rule
      13d-3  adopted  by  the  Securities  and  Exchange  Commission  under  the
      Securities Exchange Act of 1934, as amended.

2.    Includes 1,000,000 shares that may be acquired by Mr. Reis pursuant to the
      exercise of warrants priced at $0.10 per share and expiring 5/1/08.

3.    Includes  2,772,951  shares that may be acquired by Dr. DeVoe  pursuant to
      the exercise of warrants priced at $0.10 per share and expiring during the
      period 02/15/06 through 12/31/07.

4.    Includes  7,033,331  shares that may be acquired by Mr. Rotter pursuant to
      the  exercise  of  warrants  priced  between  $0.10 to $0.36 per share and
      expiring during the period 2/11/06 through 8/31/09

5.    Includes  5,000,016 shares that may be acquired by Dr. Tao pursuant to the
      exercise of warrants priced at $0.32 and expiring 4/12/09.

6.    Includes  830,667  shares that may be acquired by Mr. Kelm pursuant to the
      exercise of warrants  priced  between $0.02 and $0.05 and expiring  during
      the period 7/15/06 and 5/9/07.  7. Includes  4,166,666  shares that may be
      acquired by Mr.  Swindells  and High Stakes  Capital,  LLC pursuant to the
      exercise of warrants  priced  between $0.20 and $0.37 and expiring  during
      the period 7/21/07 and 10/06/08.

8.    Includes 4,468,759 shares that may be acquired by the Company's  Directors
      or Executive Officers pursuant to the exercise of warrants  exercisable at
      various prices and expiring during the period 5/01/08 and 4/12/09.


                                     - 35 -
<PAGE>

      As of the date  thereof,  there are no known  arrangement,  agreements  or
understandings  that may at a later date  result in a change in control or delay
in change in control of the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      There have been no  transactions  between  the  Company  and any  officer,
director,  nominee for election as director,  or any  shareholder  owning grater
than five percent (5%) of the Company's  outstanding  shares,  nor any member of
the above referenced individual's immediate family, except as set forth below:

      During 2004, the Company granted warrants to purchase common shares of the
Company's  stock to its CEO, as noted in Item 10 - Executive  Compensation.  The
warrants were issued in  consideration  for beneficial  services  expected to be
rendered to the Company pursuant to his employment agreement.

      In April 2004, Dr. William C. Tao was granted 1,500,000 warrants,  vesting
immediately,  to purchase  shares of the  Company's  common stock at an exercise
price of  thirty-two  cents  ($0.32)  for a five-year  period.  Dr. Tao was also
granted an  additional  3,500,016  warrants  at a price of $0.32 for a five-year
period,  which vest at a rate of 145,834  warrants  per month for a  twenty-four
month period.

      In 2004,  the Company  entered into an agreement  with Nevada  Hospitality
Incorporated  ("NHI")  to provide  consulting  services  to MR3 in  forming  and
implementing political,  legislative, and business strategies with the intent of
establishing  partnerships  with  public  and  private  sectors  of the state of
Nevada.  In  addition,  NHI was  retained to provide  assistance  in forming and
implementing a  comprehensive  strategy for  establishing  MR3's metals recovery
technology  in the  state  of  Nevada  in the form of a  toll-based,  processing
service for various mining consortia.  Dr. William C. Tao, the Company's CEO and
Director, serves as a Director of NHI. The aggregate sum of payments made to NHI
during 2004 totaled $31,000.

      Mr. Bradley N. Rotter resigned his position as Chief Executive  Officer as
of April 30, 2004.  Mr. Rotter  remained a  non-officer  employee of the Company
through  August 31,  2004 in a finance and  investment  guidance  position.  Mr.
Rotter  maintained  his  position as a Director of MR3 until his  successor  was
elected  at the  Company's  annual  meeting  held  on  September  20,  2004.  In
consideration of his performance and  contributions  during the noted four month
period,  the Company granted Mr. Rotter 333,336  warrants,  vesting  immediately
after August 31, 2004, and  exercisable at $0.23 for a five-year  period,  which
represents  the total amount of warrants Mr. Rotter would have  received  during
the period  pursuant to his  employment  agreement had it been in effect through
August 31, 2004.


                                     - 36 -
<PAGE>

                                     PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

2.0   Plan and Agreement of Reorganization, dated October 3, 1997 (1)

3.1   Articles of Incorporation of Company, filed July 3, 1991 (1)

3.2   Certificate of Amendment of Articles of  Incorporation  of Company,  filed
      March 9, 1992 (1)

3.3   Amended and Restated Articles of Incorporation of Company,  filed February
      26, 1997 (1)

3.4   Certificate of  Incorporation  of Emarethree  Corporation,  a wholly owned
      subsidiary of the Company, filed June 8, 2000 (1)

3.5   Amended  and  Restated   Certificate   of   Incorporation   of  Emarethree
      Corporation changing name to MR3 Systems, Inc., filed March 31, 2000 (2)

3.6   Delaware   Certificate   of   Ownership   and  Merger   Merging   Bioponic
      International into MR3 Systems, Inc. filed, April 28, 2000 (1)

3.7   By-Laws  of MR3  Systems,  Inc.,  filed as  Exhibit  to Form  10-SB  dated
      February 12, 2001 (1)

10.1  Purchase agreement with Fluror Hanford dated May 4, 2004 (3)

10.2  William C. Tao Employment Agreement dated April 12, 2004 (4)

10.3  Alliance and Project Venture  Agreement  between the Company and Caddell &
      Associates, LLC dated August 23, 2004 (5)

10.4  MR3 Systems Metals  Extraction  Agreement between the Company and Franklin
      Lakes Resources, Inc., dated September 14, 2004 (5)

10.5  Loan Agreement  (Credit  Facility) between High Stakes Capital LLC and the
      Company dated October 7, 2003 (6)

10.6  Strategic Alliance and Projected Venture Agreement between the Company and
      Purolite Company dated November 15, 2004.

14.1  Code of ethics

21.1  Subsidiary of the Company (7)

31.1  Certification of CEO pursuant to Section 302 of the  Sarbanes-Oxley Act of
      2002

31.2  Certification  of CFO pursuant to Section 302 of the Sarbanes Oxley Act of
      2002

32.1  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

      (1)  Incorporated by reference from  Registration  Statement on Form 10-SB
filed with the Securities and Exchange Commission on February 12, 2001.

      (2) Filed to reflect the current  version on file with the Delaware Office
of Secretary of State.

      (3) Incorporated by reference from the quarterly report on Form 10-QSB for
the  period  ended  March  31,  2004  filed  with the  Securities  and  Exchange
Commission on 5/17/2004.

      (4) Incorporated by reference from the quarterly report on Form 10-QSB for
the period ended June 30, 2004 filed with the Securities and Exchange Commission
on 8/13/2004.


                                     - 37 -
<PAGE>

      (5) Incorporated by reference from the quarterly report on Form 10-QSB for
the period  ended  September  30, 2004 filed with the  Securities  and  Exchange
Commission on 11/15/2004.

      (6)  Incorporated  by  reference  from the  annual  report on Form  10-KSB
(Amendment  #2) for the period ended December 31, 2002 filed with the Securities
and Exchange Commission on December 22, 2003.

      (7)  Incorporated  by reference  from the annual report on Form 10-KSB for
the period  ended  December  31,  2002 filed with the  Securities  and  Exchange
Commission on August 19, 2003.

Reports on Form 8-K

      The  Company  filed a Current  Report  on Form 8-K on  October  18,  2004,
related  to the  disclosure  of MR3's  filing of a legal  motion  for  breach of
contract and  declaratory  relief in connection  with a MR3 Technology  Transfer
Agreement with Linsa Associates Ltd.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit fees

      The  aggregate  fees  billed for  professional  services  rendered  by our
principal accountant for the audit of our annual financial statements, review of
our financial  statements  included in our quarterly reports and other fees that
are normally  provided by our  accountant in connection  with our audits for the
fiscal  years  ended  December  31,  2004 and 2003  were  $68,400  and  $58,985,
respectively.

Audit Related Fees

      There were no aggregate fees billed for assurance and related  services by
our principal  accountant that are reasonably  related to the performance of the
audit or review of our  financial  statements,  other  than  amounts  previously
reported in this Item 14 for the fiscal years ended December 31, 2004 and 2003.

Tax Fees

      The  aggregate  fees  billed for  professional  services  rendered  by our
principal  accountant  for tax  compliance,  tax advice and tax planning for the
fiscal  years  ended  December  31,  2004 and 2003  were  $3,412,  and  $11,825,
respectively.

All Other Fees

      There were no other fees billed by our principal accountant for the fiscal
years ended December 31, 2004 and 2003.

Audit Committee

      The Company's directors,  acting as its audit committee,  pre-approved all
of the above  amounts  billed to the Company  prior to  incurring  the  expenses
associated therewith.


                                     - 38 -
<PAGE>

                                   SIGNATURES

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

                                       MR3 Systems, Inc.

Date:  May 19, 2005
                                       By: /s/ RANDALL S. REIS
                                           -------------------------------------
                                           Randall S. Reis
                                           Chairman of the Board

      In accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

       Signature                  Title                              Date

/s/ RANDALL S. REIS       Chairman of the Board and               May 19, 2005
-------------------
     Randall S. Reis      Chief Financial Officer

/s/ WILLIAM C. TAO        Chief Executive Officer and Director    May 19, 2005
------------------
     William C. Tao


                                     - 39 -
<PAGE>

                                MR3 SYSTEMS, INC

                              FINANCIAL STATEMENTS

                           DECEMBER 31, 2004 AND 2003

                                 C O N T E N T S
                                 ---------------

    Report of Independent Certified Public Accountants               F-1

    Balance Sheets                                                   F-2

    Statements of Operations                                         F-3

    Statements of Shareholders' Equity                               F-4

    Statements of Cash Flows                                         F-5 - F-6

    Notes to Consolidated Financial Statements                       F-7 - F-32


                                     - 40 -
<PAGE>

                  REPORT OF REGISTERED INDEPENDENT ACCOUNTANTS

Board of Directors and Shareholders
MR3 Systems, Inc

We have audited the balance sheets of MR3 Systems, Inc., as of December 31, 2004
and 2003,  and the related  statements of operations,  shareholders'  equity and
cash  flows  for the  years  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted  our audits in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of MR3 Systems,  Inc.,  as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years then ended in  conformity  with  accounting  principles  generally
accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial  statements,  the  Company  has  incurred  substantial  net losses and
utilized  substantial amounts of cash in its operating  activities over the past
several  years and as of  December  31,  2004,  has an  accumulated  deficit  of
$13,091,064  and a  stockholders'  deficit of $1,808,927.  These matters,  among
others,  raise  substantial  doubt  about its  ability  to  continue  as a going
concern.  Management's  plans  concerning these matters are described in Note 2.
These  financial  statements  do not  include  any  adjustments  relating to the
recoverability  and  classification  of  recorded  assets,  or the  amounts  and
classification  of liabilities  that might be necessary in the event the Company
cannot continue in existence.

Pohl, McNabola, Berg & Company LLP
San Francisco, CA
April 22, 2005


                                      F-1
<PAGE>

                                MR3 SYSTEMS, INC.
                                 BALANCE SHEETS
                        AS OF DECEMBER 31, 2004 AND 2003
<TABLE>
<CAPTION>

                                                                       2004            2003
                                                                   ------------    ------------
<S>                                                                <C>             <C>
ASSETS
       Cash                                                        $     63,712    $    288,674
       Accounts receivable                                               17,650              --
                                                                   ------------    ------------

               Total current assets                                      81,362         288,674
                                                                   ------------    ------------

       Property, equipment and leaseholds,
            net of accumulated depreciation and
            amortization                                                509,902         391,089
       Deposits                                                           2,497          21,497
                                                                   ------------    ------------

               Total non-current assets                                 512,399         412,586
                                                                   ------------    ------------

 TOTAL ASSETS                                                      $    593,761    $    701,260
                                                                   ============    ============

 LIABILITIES
       Accounts payable                                            $    464,522    $    417,371
       Payroll taxes payable                                            152,895         179,739
       Accrued expenses                                                 491,590         294,470
       Note payable                                                      84,254          84,254
       Capital lease obligation                                          55,773          50,418
       Short term notes payable                                         356,833         244,769
                                                                   ------------    ------------

               Total current liabilities                              1,605,867       1,271,021
                                                                   ------------    ------------

       Long term notes payable                                          745,970         501,597
       Capital lease obligation - long term                              50,851         111,032
                                                                   ------------    ------------

               Total long term liabilities                              796,821         612,629
                                                                   ------------    ------------

 TOTAL LIABILITIES                                                    2,402,688       1,883,650
                                                                   ------------    ------------

 SHAREHOLDERS' DEFICIT
       Common stock:  250,000,000 shares  authorized;
           par value $ 0.01 70,046,766 and 60,334,897
           shares issued and outstanding
           in 2004 and 2003, respectively                               700,468         603,350
       Preferred stock:  5,000,000 shares authorized;
           par value $ 0.01 Series A, 1,250,000 shares
           authorized; 232,714 and 237,464 shares issued
           and outstanding in 2004 and 2003, respectively                 2,327           2,375
       Additional paid-in capital                                    10,579,342       8,943,422
       Accumulated deficit                                          (13,091,064)    (10,731,537)
                                                                   ------------    ------------

                  Total shareholders' deficit                        (1,808,927)     (1,182,390)
                                                                   ------------    ------------

 TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                       $    593,761    $    701,260
                                                                   ============    ============
</TABLE>

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


                                      F-2
<PAGE>

                                MR3 SYSTEMS, INC.
                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

                                                        2004            2003
                                                   ------------    ------------
Income

     Sales                                         $    380,000    $         --
     Cost of goods sold                                (293,346)             --
                                                   ------------    ------------

            Gross margin                                 86,654              --
                                                   ------------    ------------

Operating Expenses
     Development expenses                               474,307         545,335
     Office expenses                                    283,164          85,200
     Personnel expenses                                 572,741         488,977
     Outside services and professional fees             832,055         432,391
     Office rent                                         37,626          34,802
     Loss on write-down of equipment                         --         105,813
     Depreciation                                        35,413           9,113
                                                   ------------    ------------

            Total operating expenses                  2,235,306       1,701,631
                                                   ------------    ------------

Other (Income) and Expenses
     Interest expense                                   216,859         168,533
     Other income                                        (5,984)       (223,843)
                                                   ------------    ------------

            Total other (income) and expense            210,875         (55,310)
                                                   ------------    ------------

               Net loss before taxes                 (2,359,527)     (1,646,321)
                                                   ------------    ------------

               Provision for income taxes                    --           2,400
                                                   ------------    ------------

Net loss                                           $ (2,359,527)   $ (1,648,721)
                                                   ============    ============

     Loss per share:

              Basic - continuing operations        $      (0.04)   $      (0.03)
                                                   ============    ============

              Diluted - continuing operations      $      (0.04)   $      (0.03)
                                                   ============    ============

     Weighted average number of shares:
              Basic                                  64,262,583      53,060,616
                                                   ============    ============
              Diluted                                64,262,583      53,060,616
                                                   ============    ============

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


                                      F-3
<PAGE>

                                MR3 SYSTEMS, INC.
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                           Common Stock          Preferred Stock       Additional
                                                                                         paid-in       Accumulated
                                      Shares         Amount      Shares      Amount      Capital         Deficit          Total
                                    -----------    ---------    --------    -------    ------------    ------------    -----------
<S>                                  <C>           <C>           <C>        <C>        <C>             <C>             <C>
Balance December 31, 2002            48,382,171    $ 483,822     245,464    $ 2,455    $  7,403,600    $ (9,082,816)   $(1,192,939)
                                    -----------    ---------    --------    -------    ------------    ------------    -----------

Sale of common stock                  6,511,178       65,112          --         --         544,638              --        609,750

Warrants issued with stock
offering                                     --           --          --         --         183,750              --        183,750

Conversion of preferred stock
into common stock                         8,000           80      (8,000)       (80)             --              --             --

Conversion of notes payable and
accrued interest
into common stock                     4,297,276       42,973          --         --         460,455              --        503,428

Shares issued for cancellation of
warrants                                105,000        1,050          --         --          11,550              --         12,600

Shares issued in settlement of
anti-dilution agreement                 200,000        2,000          --         --          18,000          20,000

Compensation recognized on
options granted                              --           --          --         --          25,800              --         25,800

Compensation recognized on
repriced options                             --           --          --         --          85,475              --         85,475

Warrant issuance                             --           --          --         --         129,729              --        129,729

Common stock issued for services        831,272        8,313          --         --          80,425              --         88,738

Net loss                                     --           --          --         --              --      (1,648,721)    (1,648,721)
                                    -----------    ---------    --------    -------    ------------    ------------    -----------

Balance December 31, 2003            60,334,897    $ 603,350     237,464    $ 2,375    $  8,943,422    $(10,731,537)   $(1,182,390)
                                    -----------    ---------    --------    -------    ------------    ------------    -----------

Sale of common stock                  5,134,071       51,341          --         --         967,475              --      1,018,816

Conversion of preferred stock                                                                                                    )
into common stock                         4,750           48      (4,750        (48)             --              --             --

Conversion of accrued interest
into common stock                       203,343        2,033          --         --          12,201              --         14,234

Conversion of accounts payable
into common stock                        43,375          434          --         --           8,241              --          8,675

Exercise of warrants and options
into common stock                     5,445,148       54,451          --         --         446,563              --        501,014

Shares repurchased of warrants
exercised                            (1,696,061)     (16,961)         --         --        (447,554)             --       (464,515)

Compensation recognized on
options granted                              --           --          --         --         124,580              --        124,580

Compensation recognized on
repriced options                             --           --          --         --         298,186              --        298,186

Warrants issuance                            --           --          --         --          48,000              --         48,000

Warrants issued for services                 --           --          --         --          19,000              --         19,000

Common stock issued for services        577,243        5,772          --         --         159,228              --        165,000

Net loss                                     --           --          --         --              --      (2,359,527)    (2,359,527)
                                    -----------    ---------    --------    -------    ------------    ------------    -----------

Balance December 31, 2004            70,046,766    $ 700,468     232,714    $ 2,327    $ 10,579,342    $(13,091,064)   $(1,808,927)
                                    ===========    =========    ========    =======    ============    ============    ===========
</TABLE>

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


                                      F-4
<PAGE>

                                MR3 SYSTEMS, INC.
                            STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                            2004           2003
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES

     Net loss                                                           $(2,359,527)   $(1,648,721)
     Adjustments to reconcile net loss to net cash used
     by operating activities:
        Depreciation and amortization                                        35,413          9,113
        Net loss on write-down and disposal of property and equipment        13,815        105,813
        Compensation expense on stock options granted                       422,766        111,275
        Amortization of warrant issuance                                     42,373         62,021
        Shares issued for Services                                          184,000         88,738
        Shares issued on settlement of anti-dilution agreement                   --         20,000

     Changes in assets and liabilities
        Accounts receivable                                                 (17,650)            --
        Prepaid expenses and deposits                                        19,000         86,000
        Accounts payable                                                     55,826        (80,360)
        Payroll taxes payable                                               (26,844)       (16,957)
        Accrued expenses                                                    223,418         24,579
        Liabilities related to discontinued division                             --        (33,948)
                                                                        -----------    -----------
            Net cash used by operating activities                       $(1,407,410)   $(1,272,447)
                                                                        -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES

        Purchase of property and equipment                              $  (168,041)   $  (220,476)
                                                                        -----------    -----------

            Net cash used by investing activities                       $  (168,041)   $  (220,476)
                                                                        -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES

     Proceeds from notes payable-shareholders                           $   350,000    $ 1,007,661
     Principal payments on notes payable-shareholders                            --        (27,000)
     Payments on capital lease obligations                                  (54,826)        (5,060)
     Proceeds from sale of common stock and warrants                      1,055,315        793,500
                                                                        -----------    -----------

            Net cash provided by financing activities                   $ 1,350,489    $ 1,769,101
                                                                        -----------    -----------
</TABLE>

                                   (continued)

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


                                      F-5
<PAGE>

                                MR3 SYSTEMS, INC.
                      STATEMENTS OF CASH FLOWS (CONTINUED)
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

<TABLE>
<CAPTION>
                                                                              2004        2003
                                                                           ---------   ---------
<S>                                                                        <C>         <C>
            Increase (decrease) in cash and                                $(224,962)  $ 276,178
                                                                           ---------   ---------

            Balance at beginning of year                                     288,674      12,496
                                                                           ---------   ---------

            Balance at end of year                                         $  63,712   $ 288,674
                                                                           =========   =========

Supplemental disclosures:

      Cash paid for interest                                               $  28,466   $      --
                                                                           =========   =========
      Cash paid for taxes                                                  $      --   $   2,400
                                                                           =========   =========

Supplemental Schedule of Non-Cash Investing and Financing Activities:
                                                                             2004        2003
                                                                           ---------   ---------

      Conversion of notes payable and accrued interest into common stock   $  14,234   $ 503,428
                                                                           =========   =========

      Conversion of accounts payable into common stock                     $   8,675   $      --
                                                                           =========   =========

      Common stock issued for services                                     $ 165,000   $  88,738
                                                                           =========   =========

      Compensation expense on stock options and warrants granted           $ 441,766   $ 111,275
                                                                           =========   =========

      Amortization of warrant issuance                                     $  42,373   $  62,021
                                                                           =========   =========

      Shares issued on settlement of anti-dilution agreement               $      --   $  20,000
                                                                           =========   =========

      Shares issued for cancellation of warrants                           $      --   $  12,600
                                                                           =========   =========

                                                                                          2003
                                                                                       ---------

         Acquisition of equipment under capitalized leases                             $ 200,425
         Less: Equipment loans and capitalized leases                                   (166,510)
                                                                                       ---------
         Cash used for acquisition of equipment under capitalized leases               $  33,915
                                                                                       =========
</TABLE>

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


                                      F-6
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

1.    Summary of Significant Accounting Policies

Organization and line of business

MR3 Systems, Inc., (formerly known as Bioponic International,  Inc.), a Delaware
corporation  ("the  Company" or "MR3") was formed in July 1991 initially for the
purpose of developing,  manufacturing  and installing its  proprietary  Airponic
Growing  Systems  ("AGS").  On  October 7, 1997,  Bioponic  International,  Inc.
acquired all of the  outstanding  shares of MR3, Inc., a Delaware  environmental
technology  Company,  for 2,665,000  shares of the Company's  stock.  The merger
qualified  as a  tax-free  exchange  and  was  accounted  for  as a  pooling  of
interests.  MR3,  Inc.  had  nominal  assets  and  liabilities  on the  date  of
acquisition.  On June 8, 1999,  the Company  formed  Emarethree  Corporation,  a
Delaware  Corporation,  as a wholly owned inactive subsidiary of the Company. On
March 6, 2000, the Company formed Bioponic AGS, Inc., a Delaware Corporation, as
a wholly owned inactive subsidiary of Emarethree Corporation. On March 31, 2000,
the  Certificate  of  Incorporation  of Emarethree  Corporation  was amended and
restated to change its name to MR3  Systems,  Inc.  In April  2000,  the Company
completed a change of domicile from California to Delaware.

MR3 has developed  processes that can selectively capture and remove metals from
aqueous  streams.  The  Company  has  focused  its  efforts  on  completing  the
development  of its  products  and  initial  marketing  and sales  efforts.  The
Company's long-term  objectives are to focus on the sales and development of its
environmental  technology  and to  expand  the  worldwide  operations  of MR3 by
identifying  and  processing  metal-laden  source  materials  appropriate to its
technology.

On April 29,  2000,  the Company  spun off its Airponic  Growing  Systems  (AGS)
division to its  shareholders  (shareholders  of record as of January 31, 2000).
The AGS division was comprised of  agricultural  and  horticultural  production,
plant  biotechnology  and consumer  products.  Further,  Bioponic  International
shareholders  received one share of Bioponic  AGS,  Inc. for every two shares of
Bioponic International as a stock dividend.

Basis of accounting

The  financial  statements  have been  prepared  in  accordance  with  Generally
Accepted Accounting Principles in the United States of America ("U.S. GAAP").

Use of estimates

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


                                      F-7
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

1.    Summary of Significant Accounting Policies (continued)

Contingencies

Certain conditions may exist as of the date the financial statements are issued,
which may result in a loss to the Company  but which will only be resolved  when
one or more future events occur or fail to occur.  The Company's  management and
its legal  counsel  assess  such  contingent  liabilities,  and such  assessment
inherently  involves an exercise of judgment.  In assessing  loss  contingencies
related to legal  proceedings that are pending against the Company or unasserted
claims  that  may  result  in such  proceedings,  the  Company's  legal  counsel
evaluates the perceived merits of any legal  proceedings or unasserted claims as
well as the  perceived  merits of the amount of relief  sought or expected to be
sought therein.

If the assessment of a contingency indicates that it is probable that a material
loss has been incurred and the amount of the  liability  can be estimated,  then
the estimated liability would be accrued in the Company's financial  statements.
If the assessment  indicates that a potentially material loss contingency is not
probable but is  reasonably  possible,  or is probable but cannot be  estimated,
then the nature of the  contingent  liability,  together with an estimate of the
range of possible loss if determinable and material, would be disclosed.

Loss  contingencies  considered  remote are generally not disclosed  unless they
involve  guarantees,  in  which  case  the  nature  of the  guarantee  would  be
disclosed.

Cash and cash equivalents

For purpose of the statements of cash flows,  cash  equivalents  include amounts
invested in a money  market  account with a financial  institution.  The Company
considers  all highly  liquid  investments  with an  original  maturity of three
months or less to be cash  equivalents.  Cash  equivalents  are carried at cost,
which approximates market.

Concentration of cash

The Company at time maintains  cash balances in excess of the federally  insured
limit of $100,000 per  financial  institution.  Uninsured  balances  amounted to
$202,531 at December 31, 2003. There were no uninsured  balances at December 31,
2004.

Revenue recognition

The Company  recognizes  revenue when merchandise is shipped to a customer or at
the time services are rendered, subject to certain acceptance criteria agreed to
between  the  Company  and the  customer.  Shipping  costs for  delivery  of the
Company's products are recorded as sales revenue.


                                      F-8
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

1.    Summary of Significant Accounting Policies (continued)

Property and equipment

Property and equipment are recorded at cost less  accumulated  depreciation  and
amortization. Expenditures for major additions and improvements are capitalized,
and minor  maintenance,  repairs  and  replacements  are  charged  to expense as
incurred.  When property and equipment are retired or otherwise disposed of, the
cost  and  accumulated  depreciation  are  removed  from  the  accounts  and any
resulting  gain  or  loss is  included  in the  results  of  operations  for the
respective  period.   Depreciation  and  amortization  are  provided  using  the
straight-line  method over the estimated  useful lives of the respective  assets
using the straight-line  method for financial  statement  purposes.  The Company
uses other  depreciation  methods  (generally  accepted) for tax purposes  where
appropriate.  The estimated useful lives for significant  property and equipment
are as follows:

Computer and manufacturing equipment                   5 - 10 years
Office furniture and fixtures                          3 -  7 years
Building and improvements                              2 - 25 years

Amortization  of  leasehold  improvements  is computed  using the  straight-line
method over the shorter of the remaining  lease term or the  estimated  lives of
the improvements.

Assets held under capital leases

Assets held under  capital  leases are  recorded at the lower of the net present
value of the minimum lease payments or the fair value of the leased asset at the
inception  of the lease.  Amortization  of assets held under  capital  leases is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets or the period of the related lease.

Advertising costs

The Company expenses  advertising  costs as incurred.  There were no advertising
costs for the years ended December 31, 2004 and 2003, respectively.

Basic and diluted net earnings per share

Basic net earnings  (loss) per common share is computed by dividing net earnings
(loss)  applicable  to common  shareholders  by the  weighted-average  number of
common shares  outstanding  during the period.  Diluted net earnings  (loss) per
common share is determined  using the  weighted-average  number of common shares
outstanding during the period,  adjusted for the dilutive effect of common stock
equivalents,  consisting  of shares that might be issued upon exercise of common
stock options. In periods where losses are reported, the weighted-average number
of common shares outstanding  excludes common stock  equivalents,  because their
inclusion would be anti-dilutive.


                                      F-9
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

1.    Summary of Significant Accounting Policies (continued)

Income taxes

The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the  recognition of deferred tax assets and  liabilities for the expected future
tax  consequences of events that have been included in the financial  statements
or tax returns. Under this method,  deferred income taxes are recognized for the
tax consequences in future years of differences  between the tax bases of assets
and liabilities and their financial  reporting  amounts at each period end based
on enacted tax laws and statutory  tax rates  applicable to the periods in which
the differences are expected to affect taxable income.  Valuation allowances are
established,  when  necessary,  to reduce  deferred  tax  assets  to the  amount
expected to be  realized.  The  provision  for income taxes  represents  the tax
payable for the period and the change  during the period in deferred  tax assets
and liabilities.

Fair value of financial instruments

The Company  measures its financial  assets and  liabilities in accordance  with
generally accepted accounting principles. For certain of the Company's financial
instruments,  including cash and cash equivalents,  accounts payable and accrued
liabilities,  the  carrying  amounts  approximate  fair value due to their short
maturities.  The amounts  shown for notes  payable also  approximate  fair value
because  current  interest  rates  offered  to the  Company  for debt of similar
maturities are substantially the same.

SFAS-133: Accounting for Derivative Instruments and Hedging Activities

The Company is currently not engaged in hedging  activities nor does it have any
derivative instruments,  thus there is no impact on the current period financial
statements.

Intangible assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards  No. 142 ("SFAS  142"),  "Goodwill  and Other  Intangible  Assets." In
accordance with SFAS 142, the Company ceased  amortizing the intangible value of
its  proprietary  rights  to metal  extraction  and  separation  technology  and
performed a transitional  test of this  intangible  asset as of January 1, 2002.
SFAS 142 requires that  intangibles  be tested for impairment on an annual basis
and  between  annual  tests in  certain  circumstances.  The  Company  generally
determines  the fair value of its intangible  assets using the expected  present
value of future  cash  flows,  giving  consideration  to the  market  comparable
approach.  If the carrying  amount of the Company's  reporting units exceeds the
reporting  unit's  fair  value,  the  Company  performs  the second  step of the
goodwill  impairment test to determine the amount of impairment loss. The second
step of the goodwill  impairment test involves  comparing the implied fair value
of the Company's  reporting  unit's  goodwill  with the carrying  amount of that
goodwill.


                                      F-10
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

1.    Summary of Significant Accounting Policies (continued)

Intangible assets (continued)

The  carrying  value  and  useful  lives  of  intangible  assets  are  based  on
management's  current  assessment  of  recoverability.  Management  periodically
evaluates whether certain circumstances may affect the estimated useful lives or
the  recoverability  of the unamortized  balance of intangible assets using both
objective and subjective  factors.  Objective factors include  management's best
estimates  of  projected  future  earnings and cash flows and analysis of recent
sales and earnings trends.  Subjective factors include competitive  analysis and
the Company's strategic focus.

Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under generally accepted accounting  principles,  are
excluded from net income in accordance  with  Statement on Financial  Accounting
Standards No. 130, "Reporting Comprehensive Income." The Company,  however, does
not have any  components of  comprehensive  income (loss) as defined by SFAS No.
130 and therefore,  for the years ended December 31, 2004 and 2003 comprehensive
income (loss) is equivalent to the Company's reported net income (loss).

Stock option plan

Financial   Accounting   Standards  Board  Statement  No.  123  (Accounting  for
Stock-Based Compensation) encourages,  but does not require, companies to record
compensation cost for stock-based employee  compensation plans based on the fair
value of options  granted.  The  Company  has elected to continue to account for
stock-based   compensation  using  the  intrinsic  value  method  prescribed  in
Accounting  Principles  Board  Opinion No. 25  (Accounting  for Stock  Issued to
Employees) and related  interpretations  and to provide  additional  disclosures
with  respect to the pro forma  effects of  adoption  had the  Company  recorded
compensation expense as provided in SFAS-123.

In accordance with APB-25,  compensation cost for stock options is recognized in
income based on the excess,  if any, of the quoted  market price of the stock at
the  grant  date of the  award or other  measurement  date  over the  amount  an
employee must pay to acquire the stock. Generally,  the exercise price for stock
options  granted to  employees  equals or exceeds the fair  market  value of the
Company's common stock at the date of grant, thereby resulting in no recognition
of compensation expense by the Company.

The Company's policies comply with the guidance provided by FASB  Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation." This
Interpretation  addresses  certain practice issues related to APB Opinion No. 25
in regards to options or warrants granted to employees and other third-parties.

Research and development cost

Research and  development  represent  internal costs incurred in connection with
the Company's  testing,  documenting  and improving  its metals  extraction  and
recovery  processes.  All  research  and  development  costs are  expensed  when
incurred.


                                      F-11
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

1.    Summary of Significant Accounting Policies (continued)

Impairment of long-lived assets

The Company accounts for the impairment and disposition of long-lived  assets in
accordance  with SFAS No. 121,  "Accounting  for the  Impairment  of  Long-Lived
Assets and Long-Lived Assets to be Disposed Of".  Long-lived assets are reviewed
whenever indicators of impairment are present and whenever the undiscounted cash
flows are not sufficient to recover the related asset-carrying amount.

Segment reporting

The FASB issued SFAS 131 on  "Disclosures  about  Segments of an Enterprise  and
Related  Information"  effective  in 1998.  The Company  evaluated  SFAS 131 and
determined that it operates in only one segment.

Business risks and uncertainties

The Company  operates in the evolving field of materials waste  processing.  New
developments could affect both significantly and adversely existing and emerging
technologies in the field.

The Company's success in developing additional marketable products and processes
and  achieving  a  competitive  position  will  depend on its  ability to retain
qualified  management  personnel  and to raise  sufficient  capital  to meet its
operating and development needs.

While the Company is seeking financing through equity and loans, there can be no
assurance that the Company will be successful in accomplishing its objectives.

Environmental costs

Costs  related  to  environmental  remediation  are  charged to  expense.  Other
environmental  costs are also charged to expense  unless they increase the value
of the property and/or provide future economic benefits, in which event they are
capitalized.  Liabilities  are recognized when the  expenditures  are considered
probable and can be reasonably estimated.

Recent accounting pronouncements

In January 2003, the FASB issued Interpretation No. 46 ("FIN 46") "Consolidation
of Variable Interest Entities." Until this  interpretation,  a company generally
included  another entity in its  consolidated  financial  statements  only if it
controlled  the entity  through  voting  interests.  FIN 46  requires a variable
interest entity, as defined,  to be consolidated by a company if that company is
subject to a majority of the risk of loss from the  variable  interest  entity's
activities or entitled to receive a majority of the entity's  residual  returns.
The Company does not believe the adoption of FIN 46 will have a material  impact
on its results of operations or financial position.


                                      F-12
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

1.    Summary of Significant Accounting Policies (continued)

Recent accounting pronouncements (continued)

In April  2003,  the FASB  issued  SFAS  149,  "Amendment  of  Statement  133 on
Derivative  Instruments  and  Hedging  Activities",  which  amends  SFAS 133 for
certain  decisions  made  by  the  FASB  Derivatives  Implementation  Group.  In
particular,  SFAS 149: (1) clarifies under what circumstances a contract with an
initial net investment meets the  characteristic of a derivative,  (2) clarifies
when a derivative contains a financing  component,  (3) amends the definition of
an underlying  instrument to conform it to language used in FASB  Interpretation
No. 45,  "Guarantor's  Accounting and Disclosure  Requirements  for  Guarantees,
Including Indirect Guarantees of Indebtedness of Others," and (4) amends certain
other existing pronouncements. This Statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging  relationships  designated
after June 30, 2003. In addition,  most provisions of SFAS 149 are to be applied
prospectively.  The Company does not expect the adoption of SFAS 149 will have a
material impact on its financial position, cash flows or results of operations.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics  of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting  for certain  financial  instruments  that under
previous  guidance  issuers could account for as equity.  It requires that those
instruments be classified as liabilities in balance sheets. The guidance in SFAS
150 is  generally  effective  for  all  financial  instruments  entered  into or
modified  after May 31, 2003,  and  otherwise is effective on July 1, 2003.  The
Company does not expect the adoption of SFAS 150 will have a material  impact on
its financial position, cash flows or results of operations.

In July 2004,  the EITF issued a draft  abstract for EITF Issue No. 04-08,  "The
Effect of Contingently  Convertible  Debt on Diluted  Earnings per Share" ("EITF
04-08").  EITF  04-08  reflects  the  Task  Force's  tentative  conclusion  that
contingently  convertible  debt should be included in diluted earnings per share
computations  regardless  of whether the market  price  trigger has been met. If
adopted, the consensus reached by the Task Force in this Issue will be effective
for reporting  periods ending after December 15, 2004. Prior period earnings per
share  amounts  presented  for  comparative  purposes  would be  required  to be
restated  to conform to this  consensus  and the  Company  would be  required to
include  the shares  issuable  upon the  conversion  of the Notes in the diluted
earnings  per  share  computation  for all  periods  during  which the Notes are
outstanding  Management does not expect the  implementation of this new standard
to have a material impact on its computation of diluted earnings per share.

In September  2004, the EITF delayed the effective date for the  recognition and
measurement  guidance  previously  discussed  under EITF Issue No.  03-01,  "The
Meaning  of  Other-Than-Temporary  Impairment  and Its  Application  to  Certain
Investments"  ("EITF  03-01") as included in  paragraphs  10-20 of the  proposed
statement.    The   proposed    statement    will   clarify   the   meaning   of
other-than-temporary  impairment and its  application to investments in debt and
equity securities,  in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments  accounted  for under the cost  method.  The  Company  is  currently
evaluating the effect of this proposed  statement on its financial  position and
results of operations.


                                      F-13
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

1.    Summary of Significant Accounting Policies (continued)

Recent accounting pronouncements (continued)

In December 2004, the Financial  Accounting  Standards Board ("FASB") released a
revision  to  Statement  of  Financial  Accounting  Standard  ("SFAS")  No. 123,
Accounting for  Stock-Based  Compensation  ("FAS 123R").  FAS 123R addresses the
accounting for share-based payment  transactions in which an enterprise receives
employee  services in exchange for (a) equity  instruments  of the enterprise or
(b)  liabilities  that are based on the fair  value of the  enterprise's  equity
instruments  or that may be settled by the issuance of such equity  instruments.
The  statement   would   eliminate  the  ability  to  account  for   share-based
compensation  transactions using APB Opinion No. 25, Accounting for Stock Issued
to Employees,  and generally  would require  instead that such  transactions  be
accounted  for  using  a  fair-value-based  method.  The  revised  statement  is
effective for the annual reporting period beginning after December 15, 2005. MR3
will adopt the  statement  beginning in 2006 as  required.  With the adoption of
this new  statement,  the  Company  will have to  recognize  substantially  more
compensation  expense in the future.  This may have a material adverse impact on
the Company's financial position and results of operations in the future.

In December 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 151,  "Inventory  Costs,  an  amendment  of ARB No. 43,  Chapter  4",  which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and charges regardless of whether they meet the criterion of "so
abnormal" that was  originally  stated in Accounting  Research  Bulletin No. 43,
chapter 4. In  addition,  SFAS No. 151  requires  that the  allocation  of fixed
production  overheads to conversion costs be based on the normal capacity of the
production  facilities.  SFAS No. 151 is effective for inventory  costs incurred
during fiscal year beginning after June 15, 2005. Management does not expect the
implementation  of this new standard to have a material  impact on its financial
position, results of operations and cash flows.

In December 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29",
which amends Opinion 29 by eliminating the exception for  nonmonetary  exchanges
of  similar  productive  assets and  replaces  it with a general  exception  for
exchanges  of  nonmonetary  assets  that do not  have  commercial  substance.  A
nonmonetary  exchange has  commercial  substance if the future cash flows of the
entity are expected to change  significantly  as a result of the exchange.  SFAS
No. 151 is  effective  for a fiscal  year  beginning  after June 15,  2005,  and
implementation   is  done   prospectively.   Management   does  not  expect  the
implementation  of this new standard to have a material  impact on its financial
position, results of operations and cash flows.


                                      F-14
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

2.    Going Concern

The  accompanying  financial  statements  have been prepared in conformity  with
generally accepted accounting principles,  which contemplate continuation of the
Company as a going concern.  However,  the Company has experienced net losses of
$2,359,527  and  $1,648,721  for the years  ended  December  31,  2004 and 2003,
respectively.  The Company  also had a net  working  deficit of  $1,524,505  and
$982,347  for  the  years  ended  December  31,  2004  and  2003,  respectively.
Additionally,  the  Company  must raise  additional  capital to meet its working
capital needs. If the Company is unable to raise sufficient  capital to fund its
operations,  it might be required to discontinue its  operations.  These factors
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.  In view of the  matters  described  above,  recoverability  of a major
portion of the recorded asset amounts shown in the accompanying balance sheet is
dependent  upon the  Company's  ability to generate  sufficient  sales volume to
cover its operating expenses and to raise sufficient capital to meet its payment
obligations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts,  or amounts and
classification  of  liabilities  that might be  necessary  should the Company be
unable to continue in existence.

Management has previously  relied on equity financing sources and debt offerings
to fund  operations.  The Company's  reliance on equity and debt  financing will
continue.  The Company has obtained  additional  debt  financing  subsequent  to
December 31, 2004.

3.    Property and Equipment

Property and equipment at December 31, 2004 and 2003 consist of the following:

                                                          2004          2003
                                                        ---------     ---------

Office furniture and fixtures                           $  26,057     $  10,069
Computer and manufacturing equipment                      531,814       379,762
Leasehold improvements                                         --        22,605
                                                        ---------     ---------

Total property and equipment                              557,871       412,436
Less accumulated depreciation and amortization            (47,969)      (21,347)
                                                        ---------     ---------

Total                                                   $ 509,902     $ 391,089
                                                        =========     =========

Depreciation  expense for the years ended December 31, 2004 and 2003 was $35,413
and $9,113, respectively.


                                      F-15
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

4.    Impairment of Long-Lived Assets

In June 2002, the Company announced that it would close its Butte, Montana, Zinc
processing  plant  permanently  and move its  equipment  to Denver,  Colorado to
process gold under the agreement  with  Consolidated  Empire Gold,  Inc.  During
2003,  management  decided to terminate its agreement with  Consolidated  Empire
Gold, Inc and performed a review of the remaining carrying value of MR3 property
and  equipment.  The review  indicated  that the MR3 property and equipment were
impaired.  As a result, the Company recorded an impairment loss in the amount of
$105,813,  which was  included  in  operating  expenses  during  the year  ended
December 31, 2003.

5.    Accrued Expenses

Certain  officers and key employees of the Company  agreed to defer a portion of
their compensation (salaries and bonuses) earned during the years ended December
31, 2004 and 2003.

Accrued interest represents the interest earned on the outstanding notes payable
balances at December 31, 2004 and 2003 due to shareholders and related parties.

Accrued expenses at December 31, 2004 and 2003 consist of the following:

                                                        2004              2003
                                                      --------          --------
Deferred compensation                                 $223,581          $181,443
Accrued interest                                       164,813            50,341
Accrued vacation                                        21,515            27,886
Accrued audit fees                                      35,000            34,000
Accrued expenses - other                                45,881                --
State income tax payable                                   800               800
                                                      --------          --------

Total                                                 $491,590          $294,470
                                                      ========          ========

6.    Notes Payable

The Company has entered into multiple loan agreements with its  shareholders and
other related parties.

In 2002,  the  Company  had a 10% note  payable  with an  outstanding  principal
balance of $131,608.  In 2003,  the Company  reached an agreement with this note
holder  to  modify  the terms of the note.  The note  holder  agreed to  receive
additional  warrants  convertible  into 300,000  shares of the Company's  common
stock at an exercise  price of $0.05 per share and the  principal  amount of the
note was  modified  to include  the accrued  interest  balance of $13,161.  As a
result,  the amount of the note was  modified to $144,769 to reflect the revised
terms, and additional  interest expense was recognized for the fair value of the
warrants  granted to obtain the note payable  term  modification.  In 2004,  the
Company agreed to extend the  expiration  date from January 2005 to January 2007
of existing warrants  convertible into 300,000 shares that has an exercise price
of $0.10 per share. The principal amount of the note was modified to include the
accrued interest of $12,064 and the note amount was modified to $156,833.


                                      F-16
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

6.    Notes Payable (continued)

In 2002, the Company issued $50,000 of 12% convertible subordinated notes to one
of its  shareholders,  due on October 1, 2007.  Interest  is due and  payable at
maturity.  The notes are  convertible by the holder into shares of the Company's
common  stock at any time at a  conversion  price of $0.07 per share,  which was
greater  than  the  fair  value  of the  Company's  common  stock on the date of
issuance.  The  notes  are  subordinated  to  all  existing  and  future  senior
indebtedness,  as defined in the indenture. The notes are redeemable at any time
at the option of the Company at the principal amount plus accrued interest.  The
proceeds were primarily used for general corporate  purposes.  In February 2003,
the Company issued another 12% convertible  note in the amount of $15,000 to the
same shareholder with a five-year maturity date.

During 2002, the Company  entered into promissory note agreements with different
investors to finance the  operations  of the new plant in Colorado.  These notes
mature in five (5) five  years from the date of  issuance  and bear a 12 percent
interest rate per year.  The total amount  received from these notes during 2003
amounted to $349,500.  In light of the  subsequent  termination of its agreement
with Empire Gold in October  2003,  the Company  offered  alternative  financing
arrangement to the Empire note holders.  The majority of note holders  converted
their principal and interest into 3,657,752  restricted  shares of the Company's
common  stock at twelve  cents  ($0.12) per share and  retained  their  attached
warrants.  The converted  notes in 2003  amounted to $412,000.  Two note holders
opted to retain the amount of their  Empire  note as a loan to the Company for a
five-year  period with an annual  interest rate of 12%. In addition,  these note
holders were granted  105,000 shares of the Company's  common stock equal to the
amount of warrants originally  granted. As a consequence,  the original warrants
of these two note holders were subsequently  cancelled.  The outstanding balance
on these notes at December 31, 2004 and 2003 amounted to $52,500.

In April 2003, the Company  authorized two 12% convertible  notes for $30,000 to
two unrelated parties with a five- year maturity date.

In October 2003,  management  arranged a $1,250,000  credit  facility which will
allow the  Company  to  further  its  ability to deploy the first in a series of
plants to utilize its metals separation and purification technology.  The credit
facility  consists  of  a  14%  Promissory  Note  in  the  principal  amount  of
$1,250,000,  due March 1, 2006,  or an earlier  date 24 months from the date the
first plant is  completed  and  operational.  The Company is obligated to submit
requests for funds against the credit  facility in connection with its financing
needs related to plant development and construction.  Attached to the Promissory
Note are five-year warrants to purchase 2,000,000 shares of the Company's common
stock at a price of $0.23 per  share.  The  credit  facility  also has an equity
conversion feature allowing the lender, a private equity and financing group, to
convert the loan into percentage  ownership in the plant.  The Company  received
its first $250,000 of loan proceeds on October 14, 2003 and its second  $250,000
of loan proceeds on December 17, 2003.  The Company  received its third $250,000
of loan proceeds on February 5, 2004. The total outstanding balance on this note
amounted to $750,000 and  $500,000 at December 31, 2004 and 2003,  respectively.
This obligation is secured by equipment costing $224,466.


                                      F-17
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

6.       Notes Payable (continued)

In December 2003, the Company entered into a $100,000 promissory note with The
Aberdeen Trust, Grosvenor Trust Company Limited, as Trustee, for the purpose of
a bridge loan to the Company. Mr. Bradley Rotter, former Chief Executive
Officer, is the beneficial owner of the Aberdeen Trust. The Company is obligated
to pay back on demand the full amount of the note plus any interest accrued at
12% per annum. In consideration for entering into the promissory note, Aberdeen
Trust was granted warrants to purchase 200,000 shares of the Company's common
stock at $0.35 per share for a five-year period. The outstanding balance on this
note amounted to $100,000 at December 31, 2004 and 2003.

In December 2004, the company entered into a $100,000 promissory note with a
private investment group for the purpose of a bridge loan to the Company. The
Company is obligated to pay back on demand the full amount of the note plus
interest accrued at 20% per annum.

Long-term notes payable at consisted of the following at December 31,

<TABLE>
<CAPTION>
                                                                                      2004         2003
                                                                                   ---------    ---------
<S>                                                                               <C>          <C>
12% convertible  subordinated  debenture dated October 2002, due October 2007      $  50,000    $  50,000
with interest due and payable on the maturity date,  convertible into 714,286
shares of common stock at $0.07 per share at any time prior to maturity

12% convertible subordinated debenture dated February 2003, due February 2008
with interest due and payable on the maturity date, convertible into 214,286
shares of common stock at $0.07 per share at any time prior to
maturity                                                                              15,000       15,000

12% convertible subordinated debentures dated April 2003, due April 2008 with
interest due and payable on the maturity date, convertible into 300,000
shares of common stock at $0.10 per share at any time prior to maturity               30,000       30,000

12% note to a shareholder dated November 2002, due November 2007 with interest
due and payable on first anniversary date and thereafter on a
quarterly basis                                                                       50,000       50,000

12% note to a shareholder dated December 2002, due December 2007 with interest
due and payable on first anniversary date and thereafter on a
quarterly basis                                                                        2,500        2,500

14% secured promissory note to a private financing group in the principal amount
of $1,250,000 with equity conversion features dated October 2003 and
due March 1, 2006                                                                    750,000      500,000
                                                                                   ---------    ---------
                                                                                     897,500      647,500
Less: Unamortized discount                                                          (151,530)    (145,903)
                                                                                   ---------    ---------
Total long-term notes payable                                                      $ 745,970    $ 501,597
                                                                                   =========    =========
</TABLE>


                                      F-18
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

6.    Notes Payable (continued)

In conjunction with the issuance of the convertible  notes in 2002 and 2003, the
Company  issued  Common  Stock  Purchase  Warrants  to  purchase  shares  of the
Company's  common stock at an exercise price that ranges from $0.03 to $0.10 per
share.  The total value  allocated  to the note  warrants is being  amortized to
interest  expense over the term of the notes. At December 31, 2004 and 2003, the
unamortized   discount  on  the  notes   amounted  to  $151,530  and   $145,903,
respectively. All conversion features on the notes payable were priced at market
value or greater at the time of issuance.

Accrued  interest on all notes  amounted to $164,813 and $50,341 at December 31,
2004 and 2003, respectively.

7.    Capital Lease Obligation

The  Company  leases  laboratory  equipment  under  a  lease  agreement  that is
classified as a capital  lease.  The cost of this leased  equipment  amounted to
$200,425  and is included in  property  and  equipment  at  December  31,  2004.
Accumulated  amortization of the leased  equipment at December 31, 2004 amounted
to  $23,307.  Amortization  of  assets  under  capital  leases  is  included  in
depreciation expense.

The future  minimum  lease  payments  required  under the capital  lease and the
present  values of the net minimum lease payments as of December 31, 2004 are as
follows:

Year ending December 31,                                                 Amount
                                                                      ---------

2005                                                                  $  63,791
2006                                                                     53,134
                                                                      ---------

Total minimum lease payments                                            116,925

Less: Amount representing interest                                      (10,301)
                                                                      ---------

Present value of net minimum lease payments                             106,624

Less: Current maturities of capital lease obligation                    (55,773)
                                                                      ---------

Long-term capital lease obligation                                    $  50,851
                                                                      =========


                                      F-19
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

8.    Shareholders' Equity

Preferred Stock

The Company has one Series of preferred stock,  Series A. The preferred stock is
convertible to common stock on a one-for-one basis.

Dividend rights: Subject to the rights, preferences, privileges and restrictions
of any other class or series of stock, the holders of outstanding  shares of the
Series A Preferred Stock shall be entitled to receive dividends, when, as and if
declared  by the Board of  Directors  out of any assets of the  Company  legally
available,  at the rate of $0.40 per share during the Company's  fiscal year (as
adjusted for any stock  divisions,  stock  combinations,  stock  consolidations,
stock distributions or stock dividends with respect to such shares),  payable in
preference  and  priority to any payment of any  dividend on the Common Stock of
the Company and payable as the Board of Directors  may  determine.  The right to
such dividends on the Series A Preferred Stock shall not be cumulative

Liquidation: Subject to the rights, preferences,  privileges and restrictions of
any other class or series of stock, in the event of any liquidation, dissolution
or winding up of the Company,  either  voluntary or  involuntary,  the holder of
each  outstanding  share of the Series A  Preferred  Stock  shall be entitled to
receive,  out of the assets of the Company legally available for distribution to
its shareholders upon such liquidation,  dissolution or winding up, whether such
assets are capital or surplus of any nature, the amount of $4.00 per share.

If the assets to be distributed to the holders of Series A Preferred Stock shall
be insufficient  to permit the receipt by such holders of the full  preferential
amounts, then all of such assets shall be distributed among such holders ratably
in accordance with the number of such shares then held by each such holder.

Common stock

Dividend  Rights:  dividends may be paid on Common Stock during any fiscal year,
if and when declared by the Board of Directors,  after  dividends have been paid
to holders  of shares of  Preferred  Stock in  accordance  with  their  dividend
preferences.  In the event that any  dividend is declared on Common  Stock,  the
holders of the Series A Preferred Stock are entitled to receive dividends in the
amount per share of Series A  Preferred  Stock as would be payable on the shares
of Common Stock into which each share of Series A Preferred Stock is convertible
on the  record  date  for the  dividend  on  Common  Stock.  All  dividends  are
non-cumulative.


                                      F-20
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

9.    Income Taxes

Significant  components  of the provision for taxes based on income for the year
ended December 31 are as follows:

                                                        2004            2003
                                                    ------------    ------------
Current
      Federal                                       $         --    $         --
      State                                                   --           2,400
                                                    ------------    ------------

                                                              --           2,400
Deferred
      Federal                                                 --              --
      State                                                   --              --
                                                    ------------    ------------

Provision for income taxes                          $         --    $      2,400
                                                    ============    ============

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's  deferred tax assets and  liabilities  for income taxes consist of
the following:

                                                         2004           2003
                                                     -----------    -----------
Deferred tax asset
     Net operating loss carryforward                 $ 4,307,501    $ 3,445,338
     Amortization of intangible assets                    21,720         23,892
     Deferred benefits and other accruals                104,999         89,677
                                                     -----------    -----------

Total deferred tax asset                               4,434,220      3,558,907
                                                     -----------    -----------

Deferred tax liability
     Differences between book and tax depreciation       (30,633)        38,026
     State income tax benefit                           (201,846)      (145,271)
                                                     -----------    -----------

Total deferred tax liability                            (232,479)      (107,245)
                                                     -----------    -----------

Net deferred tax asset before valuation allowance      4,201,741      3,451,662
Less valuation allowance                              (4,201,741)    (3,451,662)
                                                     -----------    -----------
Net deferred tax asset                               $        --    $        --
                                                     ===========    ===========


                                      F-21
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

9.    Income Taxes (continued)

A  reconciliation  of the  provision  for income tax expense  with the  expected
income tax computed by applying the federal  statutory income tax rate to income
before  provision for (benefit  from) income taxes for the years ended  December
31, 2004 and 2003 is as follows:

                                                            2004         2003
                                                          -------      -------

Income tax provision  (benefit) computed
at federal statutory rate                                  (34.00%)     (34.00%)

State income tax rate                                       (8.84%)      (8.84%)

Valuation allowance                                         42.84%       42.65%
                                                          -------      -------

Effective income tax rate                                    0.00%        0.19%
                                                          =======      =======

The Company's  effective income tax rate is lower than what would be expected if
the federal  statutory rate were applied to income before income taxes primarily
because of certain expenses deductible for financial reporting purposes that are
not deductible for tax purposes, and operating loss carryforwards.

At  December  31,  2004  and  2003,  the  Company  has  available  approximately
$10,981,000  and  $8,969,000 in net operating  loss  carryforwards  available to
offset future federal and state income taxes, respectively, which expire through
2024.  Realization is dependent on generating sufficient taxable income prior to
expiration  of the loss  carryforwards.  A  change  of  greater  than 50% of the
Company  ownership  could  significantly  reduce  the  availability  of the  tax
credits.  This and other components of deferred tax asset accounts are described
above.  At  December  31, 2004 and 2003,  the  Company has  provided a valuation
allowance to reduce its net  deferred tax asset to zero.  The amount of deferred
tax asset considered realizable,  however, can be revised in the near term based
upon future operating conditions during the carryforward period.

10.   Commitments and Contingencies

Office leases

The Company is  committed  under an  operating  lease  agreement  for its office
facility at 435 Brannan Street, San Francisco, California. The lease was renewed
in 2004 for a period of two years and expiring  September  30, 2006.  This lease
requires monthly rental payments of approximately $2,950.

The Company is committed under an operating lease agreement for its 3,699 square
feet  office  and  laboratory   facility  at  100  Cummings   Center,   Beverly,
Massachusetts.  The lease is for a period of three years  beginning  November 1,
2003 and expiring  October 30, 2006. This lease requires monthly rental payments
of approximately  $6,432. The Company vacated this facility during December 2004
and is negotiating a termination of the lease or the sublease of the space.


                                      F-22
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

10.      Commitments and Contingencies (continued)

In October 2004, the Company entered into a triple net sublease with the
Company's primary mining and technology vendor, Arrakis, Inc., for 5,346 square
feet of lab space in Arrakis' commercial facility located in Englewood,
Colorado. The Company's pro-rata portion of rent is $2,568 per month under a
5-year sublease that expires in March 2010.

Future minimum lease payments required under these non- cancelable leases are as
follows:

          Years ending December 31,                   Amount
                                                 ----------------
          2005                                   $        139,548
          2006                                            121,686
          2007                                             30,816
          2008                                             30,816
          2009                                             30,816
          2010                                              3,852
                                                 ----------------

          Total                                  $        357,534
                                                      ================

During  2003 the  Company  rented on a  month-to-month  basis a lab  facility in
Salem, Massachusetts.

Total rent expense under all these operating leases for the years ended December
31, 2004 and 2003 amounted to $110,467 and $52,989, respectively.

Environmental remediation

In 2002, the Company recorded additional accruals for the estimated future costs
associated  with certain  environmental  remediation  activities  related to the
overdue  disposal  of  hazardous  materials  at  the  Butte,  Montana  facility.
Substantially all such costs relate to divested  operations and to facilities or
locations that are no longer in operation. These accrued costs were estimated at
approximately $38,250 and were recorded in the Company's financial statements at
December  31, 2002.  In January  2004,  the Company  settled the matter with the
Montana  Department  of  Environmental  Quality  ("DEQ")  for the sum of $38,502
payable in six monthly installments  commencing on January 30, 2004. The Company
received  a release  letter  from the DEQ dated  June 7, 2004  stating  that the
matter was closed.

11.   Stock Options and Warrants

The  Board  of  Directors  has  granted   management   the  authority  to  issue
non-statutory   stock  options  and/or  warrants  to  employees,   officers  and
consultants  of the  Company.  As of  December  31,  2004 and 2003,  the Company
granted to its employees and other  eligible  participants  options and warrants
exercisable  for the  Company's  common stock and preferred  stock.  Options and
warrants  to  purchase  shares of its common  stock are  usually  granted at the
prices equal to the current fair value of the Company's common stock at the date
of grant.


                                      F-23
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

11.   Stock Options and Warrants (continued)

Under this  authority  from the Board of  Directors,  no option may be exercised
after the  expiration  date of ten years  from the date of grant.  There are two
types of convertible securities: Non-Qualified Stock Options (NSO) and Warrants.
NSO's and warrants may be granted to any eligible  participant  as determined by
the management of the Company.  The non-statutory stock options and warrants are
for periods of four or five years.

On March 1, 2004, the Board of Directors  adopted a 2004 Stock  Incentive  Plan,
which was subject to approval by the Company's  shareholders.  Such approval was
ratified by a majority vote of shareholders at the Company's annual meeting held
on September 30, 2004 in San Francisco, California. The maximum number of shares
of common stock that may be issued pursuant to the plan is 7,000,000  shares. No
options were granted under the plan in 2004.  Stock options and warrants  issued
as of December 31, 2004 and 2003 are summarized as follows:

<TABLE>
<CAPTION>
                                                2004                            2003
                                    ------------------------------  --------------------------
                                                  Average Exercise                  Average Exercise
                                       Shares          Price          Shares            Price
                                    -----------     -----------     -----------       -----------
<S>                                  <C>            <C>              <C>              <C>
Outstanding at beginning of year     54,092,895     $      0.16      22,826,898       $      0.11
Granted                              13,746,994            0.39      31,920,997              0.19
Exercised                            (6,106,358)           0.09              --                --
Forfeited/Cancelled                  (4,200,268)           0.12        (655,000)            (0.55)
                                    -----------     -----------     -----------       -----------

Outstanding at end of year           57,533,263     $      0.23      54,092,895       $      0.16
                                    ===========     ===========     ===========       ===========

Exercisable at end of year           51,446,674     $      0.22      49,073,309       $      0.16
                                    ===========     ===========     ===========       ===========
</TABLE>


                                      F-24
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

11.      Stock Options and Warrants (continued)

The  following  table  presents  information  about stock  options and  warrants
granted  during the years ended  December  31, 2004 and 2003 where the  exercise
price  of some  options  and  warrants  differed  from the  market  price of the
Company's stock on the grant date:

<TABLE>
<CAPTION>
                                                        Weighted
                                                         Number              Average
                                                       of Shares            Exercise
                                                        Granted              Price
                                                    -----------------    ---------------
<S>                                                      <C>             <C>
Year ended December 31, 2003:

Exercise price equals market value                        3,849,997      $         0.10
Exercise price greater than market value                 28,071,000                0.20
Exercise price less than market value                             -                0.00
                                                    -----------------    ---------------

Total granted during year                                31,920,997      $         0.19
                                                    =================    ===============

Year ended December 31, 2004:

Exercise price equals market value                        8,003,352      $         0.33
Exercise price greater than market value                  3,256,142                0.50
Exercise price less than market value                     2,487,500                0.44
                                                    -----------------    ---------------

Total granted during year                                13,746,994      $         0.39
                                                    =================    ===============
</TABLE>


FASB  Interpretation  No. 44 of APB-25 Relating to Transactions  Involving Stock
Compensation

Pursuant to FASB  Interpretation  No. 44, the Company applies provisions of SFAS
No. 123 for options and warrants granted to third parties.  Accordingly, in 2004
and  2003,  compensation  cost has been  recognized  for its stock  options  and
warrants granted to outside third parties.

During the years  ended  December  31,  2004 and 2003,  the  Company's  board of
directors approved the grant of stock options or warrants to various independent
consultants  to purchase an  aggregate  of 571,000 and  1,310,800  shares of its
common stock,  respectively.  These  options have an exercise  price of $0.20 to
$0.50 in 2004 and  $0.10 to $0.25  in 2003.  All of these  options  or  warrants
shares were vested  immediately.  As a result,  the Company recorded $19,000 and
$25,800 in  compensation  expense,  which is  included in outside  services  and
professional  fees in the  statements  of  operations,  at December 31, 2004 and
2003, respectively.  These options or warrants were not issued as part of any of
the Company's Stock Option Plan.

                                      F-25
<PAGE>

                               MR3 SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003


11.      Stock Options and Warrants (continued)

The  following  table   summarizes   information   about  options  and  warrants
outstanding at December 31, 2004:

<TABLE>
<CAPTION>
                        Warrants and Options Outstanding          Warrants and Options Exercisable
                   -----------------------------------------    --------------------------------------
                       Number       Weighted                        Number
                    Outstanding     Average       Weighted        Exercisable       Weighted
   Range of           as of         Remaining      Average           as of           Average
   Exercise        December 31,    Contractual     Exercise      December 31,       Exercise
    Prices            2004             Life         Price             2004           Price
--------------     ------------    -----------    ---------      -------------     ----------
<S>                 <C>             <C>            <C>            <C>                 <C>
$   0.01-0.03       4,515,667       2.58           $  0.02        4,515,667           $   0.02

$   0.05-0.07       4,439,515       2.72           $  0.06        4,439,515           $   0.06

$      0.10         12,490,509      2.78           $  0.10        12,490,509          $   0.10

$   0.12-0.25       14,421,057      2.81           $  0.21        12,421,057          $   0.22

$   0.30-0.41       16,101,015      3.53           $  0.35        12,272,759          $   0.35

$      0.50         5,565,500       3.15           $  0.50        5,565,500           $   0.50
                   ------------                                  -------------

                    57,533,263      3.01           $  0.23        51,705,007          $   0.22
                   ============                                  =============
</TABLE>


                                      F-26
<PAGE>

                               MR3 SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

11.      Stock Options and Warrants (continued)

The  following  table   summarizes   information   about  options  and  warrants
outstanding at December 31, 2003:

<TABLE>
<CAPTION>
                        Warrants and Options Outstanding          Warrants and Options Exercisable
                   -----------------------------------------    --------------------------------------
                       Number       Weighted                        Number
                    Outstanding     Average       Weighted        Exercisable       Weighted
   Range of           as of         Remaining      Average           as of           Average
   Exercise        December 31,    Contractual     Exercise      December 31,       Exercise
    Prices            2004             Life         Price             2004           Price
--------------     ------------    -----------    ---------      -------------     ----------
<S>                 <C>             <C>            <C>            <C>               <C>
$   0.01-0.03       5,065,667       3.55           $   0.02       5,065,667         $   0.02

$   0.05-0.07       5,085,715       3.74           $   0.06       5,085,715         $   0.06

$     0.10          21,088,828      2.93           $   0.10       18,768,825        $   0.10

$   0.12-0.25       14,038,521      3.69           $   0.21       12,038,521        $   0.22

$   0.35-0.41       8,384,999       3.75           $   0.36       7,685,416         $   0.36

$   0.50-0.53       379,165         1.97           $   0.50       379,165           $   0.50

$   1.00-4.00       50,000          0.07           $   1.00       50,000            $   1.00
                   ------------                                  -------------
                    54,092,895                     $   0.16       49,073,309        $   0.16
                   ============                                  =============
</TABLE>

The exercise periods for the options range from immediate to five years from the
date of the grant.

The Company  has  adopted  only the  disclosure  provisions  of SFAS No. 123. It
applies APB Opinion No. 25 and related  interpretations  in  accounting  for its
stock  options and warrants  granted to employees or to members of the Company's
Board of  Directors.  This  information  is required to be  determined as if the
Company had accounted for its employee stock options/warrants  granted under the
fair value method of that statement.

                                      F-27
<PAGE>

                               MR3 SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

11.      Stock Options and Warrants (continued)

If the Company had elected to recognize compensation expense based upon the fair
value  at the  grant  date  for  awards  under  this  plan  consistent  with the
methodology  prescribed  by SFAS No. 123,  the  Company's  net loss and loss per
share would be reduced to the pro forma  amounts  indicated  below for the years
ended December 31:

<TABLE>
<CAPTION>
                                                           2004                 2003
                                                    -----------------    ----------------
<S>                                                 <C>                  <C>
Net Loss:
      As reported                                   $    (2,359,527)     $    (1,648,721)
      Pro forma                                     $    (2,526,919)     $    (1,846,772)

Basic and diluted loss per common share
      As reported
         Basic                                      $        (0.04)      $         (0.03)
         Diluted                                    $        (0.04)      $         (0.03)
      Pro forma
         Basic                                      $        (0.04)      $         (0.04)
         Diluted                                    $        (0.04)      $         (0.04)
</TABLE>

Options/warrants are generally granted at prices equal to the current fair value
of the Company's common stock at the date of grant.

The fair value of these  options  was  estimated  at the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions:  2004:  dividend  yield  of  0%;  expected  volatility  of  50-90%;
risk-free  interest rate of 5.1%,  and average  expected life of 5 years;  2003:
dividend yield of 0%;  expected  volatility of 50%;  risk-free  interest rate of
4.9%, and expected life of 5 years. The  weighted-average  fair value of options
and warrants granted were $0.08 and $0.07 for 2004 and 2003, respectively.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options,  which have no vesting  restrictions and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion,  the  existing  models do not  necessarily  provide a  reliable  single
measure of the fair value of its stock options.

Options and warrants repricing

In 2004 and 2003, the Company  recorded  $298,186 and $85,475,  respectively  of
compensation  expense  resulting  from repriced  options and warrants from prior
years. The pro forma disclosures  include  compensation cost for the incremental
fair value resulting from such  modifications on options and warrants granted to
employees.

                                      F-28
<PAGE>

                               MR3 SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

12.      Related Party Transactions

In second  quarter  2004,  the  Company  entered  into a  three-year  employment
agreement with Dr. William C. Tao, the Company's Chief Executive  Officer.  Upon
completion of the three-year term, the employment agreement automatically renews
on a month-to-month  basis until terminated or until the parties negotiate a new
term.  Neither party may terminate the agreement without cause. Upon termination
of the agreement by Dr. Tao for "good  reason"--as  specified in the  employment
agreement--the  Company  is  obligated  to pay Dr.  Tao the  following  material
amounts: (a) all accrued benefits;  (b) a lump sum cash payment equal to one and
one-half times his base salary in effect;  and (c) a lump sum cash payment equal
to one and one-half  times his highest annual bonus paid or payable prior to his
termination of the agreement for good reason. The agreement  specifies an annual
salary  of  $108,000,  automobile  allowance  of $500  per  month  and a  flight
allowance of $250 per month through  December 2004. In addition,  the Company is
obligated  to pay  limited  premiums  associated  with a  $2,000,000  term  life
insurance policy on Dr. Tao with the  beneficiaries to be designated by him. The
Company has further agreed to provide  family health  insurance to Dr. Tao until
such time as a company  group plan is adopted.  Dr. Tao will be  reimbursed  for
ordinary and necessary  expenses incurred in performance of his duties on behalf
of the  Company.  As further  consideration  for  entering  into the  employment
agreement,  Dr. Tao was granted  1,500,000  warrants,  vesting  immediately,  to
purchase shares of the Company's common stock at an exercise price of thirty-two
cents  ($0.32) for a five-year  period.  Dr. Tao was also granted an  additional
3,500,016  warrants at a price of $0.32 for a five-year period,  which vest at a
rate of 145,834 warrants per month for a twenty-four month period.

In 2004, the Company entered into a consulting agreement with Nevada Hospitality
Incorporated  ("NHI") for certain  services related to assistance in forming and
implementing  a  comprehensive  strategy for  establishing  its metals  recovery
technology  in the  state  of  Nevada  in the form of a  toll-based,  processing
service  for  various  mining  consortia.  Dr.  Tao  is  a  Director  of  Nevada
Hospitality  Incorporated.  In  2004,  the  Company  paid  NHI and  its  related
associates $ 31,000 and granted 5 year warrants for 96,000 shares at an exercise
price of $0.35 that vest over a 12 month period.

In January 2003, the Company  granted Mr. Jody  Sitkoski,  Vice  President,  one
million  (1,000,000)  warrants to purchase common shares of the Company's common
stock at a price of five cents  ($0.05)  per share and two  million  (2,000,000)
warrants to purchase  common shares of the Company's  common stock at a price of
fifteen cents ($0.15) per share. One million of the warrants vested  immediately
and the balance of two million warrants vest as of December 31, 2005.

In  second  quarter  2003,  the  Company  entered  into  three-year   employment
agreements with Randall S. Reis, then the Company's Chairman and CEO and Bradley
N. Rotter, then the Company's  President,  COO and board member. Upon completion
of the  three-year  term,  the employment  agreements  automatically  renew on a
month-to-month basis until terminated or until the parties negotiate a new term.
The agreements specify an annual salary of $120,000 for Mr. Reis and Mr. Rotter,
which may be accrued and converted into shares of the Company's  common stock at
the market price in effect at the end of the applicable pay period.

                                      F-29
<PAGE>

                               MR3 SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

12.      Related Party Transactions (continued)

In addition, Mr. Reis and Mr. Rotter receive an automobile allowance of $500 per
month and are  reimbursed  for  ordinary  and  necessary  expenses  incurred  in
performance of their duties on behalf of the Company.  Either the Company or the
employed  party may terminate the agreement with or without cause or reason with
60-calendar  days' written  notice to the other party.  Upon  termination of the
employee's  agreement by the Company without cause,  the Company is obligated to
pay the employee his then base salary for six (6) months at the rate of the base
salary then in effect,  which six month period shall begin on the effective date
of the termination.  As further  consideration  for entering into the employment
agreement,  Mr. Reis was granted 1,000,000  warrants,  vesting  immediately,  to
purchase shares of the Company's  common stock at an exercise price of ten cents
($0.10) for a five-year  period.  Mr.  Rotter was  granted  3,000,000  warrants,
vesting immediately,  at a price of $0.10 for a five-year period. Mr. Rotter was
also  granted  an  additional  3,000,000  warrants  at a price  of  $0.10  for a
five-year  period,  which vested at a rate of 83,334  warrants per month for the
three-year term of the agreement.

Mr. Rotter was  subsequently  appointed Chief Executive  Officer of the Company,
replacing Mr. Reis who remained as Chairman. Mr. Rotter resigned his position as
Chief Executive  Officer as of April 30, 2004. Mr. Rotter remained a non-officer
employee of the  Company  through  August 31,  2004 in a finance and  investment
guidance position. Mr. Rotter maintained his position as a Director of MR3 until
his successor,  Dr. William C. Tao, was elected at the Company's  annual meeting
held  on  September  20,  2004.  In   consideration   of  his   performance  and
contributions during the noted four month period, the Company granted Mr. Rotter
333,336 warrants,  vesting immediately after August 31, 2004, and exercisable at
$0.23 for a five-year period,  which represents the total amount of warrants Mr.
Rotter  would  have  received  during  the  period  pursuant  to his  employment
agreement  had it been in effect  through  August 31,  2004.  Upon Mr.  Rotter's
resignation, 1,916,671 of Mr. Rotter's unvested warrants were cancelled.

Deferred  compensation  for  Randall  S.  Reis,  which is  included  in  accrued
expenses,  amounted to $27,578 and $18,878 for the years ended December 31, 2004
and 2003,  respectively.  Deferred  compensation for Bradley N. Rotter, which is
included in accrued  expenses,  amounted to $72,000  and  $57,000,  for the year
ended December 31, 2004 and 2003, respectively.

In June 2003, the Company  entered into a three-year  employment  agreement with
Dr. Irving DeVoe,  who was employed as Chief Science Officer and is the inventor
of the MR3  technology and who  subsequently  resigned his position in 2004. The
agreement  specifies an annual  salary of $120,000 for Dr.  DeVoe,  which may be
accrued and converted  into shares of the  Company's  common stock at the market
price in effect at the end of the applicable pay period. In addition,  Dr. DeVoe
receives  an  automobile  allowance  of $500 per  month and was  reimbursed  for
ordinary and necessary  expenses incurred in performance of his duties on behalf
of the Company. The obligation to pay Dr. DeVoe an annual royalty equal to 5% of
the net profits of the Company  received from the sale or utilization of its MR3
technologies  terminated  upon  Dr.  DeVoe's  resignation.   In  June  2003,  in
connection  with Dr. Irving DeVoe's waiver of his  anti-dilution  agreement with
MR3, the Company  granted him 200,000  shares of restricted  common stock of the
Company.

                                      F-30
<PAGE>

                               MR3 SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

12.      Related Party Transactions (continued)

In July 2003, the Company  concluded a private  placement with eleven accredited
investors  for total net proceeds of  $735,000.  The proceeds are to be used for
working  capital  and  general  corporate  purposes.  Pursuant  to this  private
placement,  investors purchased  restricted shares of the Company's common stock
at a price of twelve  cents  ($0.12)  per  share.  Each  share of  common  stock
purchased  carried two attached  purchase  warrants,  "A" and "B." The A warrant
allows the holder to purchase  common shares at an exercise  price of thirty-six
cents  ($0.36)  per share for a term of four  years.  The B warrant  allows  the
holder to purchase common shares at price of twenty-five cents ($0.25) per share
for a term of four years.  Mr.  Bradley  Rotter,  formerly the  Company's  Chief
Executive  Officer,  participated  in the  private  placement  in the  amount of
$100,000.

In October 2003,  management  arranged a $1,250,000  credit  facility which will
allow the  Company  to  further  its  ability to deploy the first in a series of
plants to utilize its metals separation and purification technology.  The credit
facility  consists  of  a  14%  Promissory  Note  in  the  principal  amount  of
$1,250,000,  due March 1, 2006,  or an earlier  date 24 months from the date the
first plant is  completed  and  operational.  The Company is obligated to submit
requests for funds against the credit  facility in connection with its financing
needs related to plant development and construction.  Attached to the Promissory
Note are five-year warrants to purchase 2,000,000 shares of the Company's common
stock at a price of $0.23 per  share.  The  credit  facility  also has an equity
conversion feature allowing the lender, a private equity and financing group, to
convert the loan into percentage  ownership in the plant.  The Company  received
its first $250,000 of loan proceeds on October 14, 2003 and its second  $250,000
of loan proceeds on December 17, 2003.  The Company  received its third $250,000
of loan  proceeds on February 4, 2004  bringing its total  borrowings  under the
$1,250,000 credit facility to $750,000.

In  November  2003,  the Company  granted  John K.  Burns,  President  and Chief
Operating Officer, 1,000,000 warrants to purchase common shares of the Company's
stock at a price of thirty-five cents ($0.35) per share over a five-year period.
Mr. Burns resigned his position in 2004.

In December 2003, the Company entered into an agreement with Toltec  Engineering
Services LLC ("Toltec") of Payson, Arizona, for the manufacture and installation
of certain MR3 Technology related equipment. The agreement totaled approximately
$260,000 and obligated  Toltec to manufacture and install the equipment to MR3's
specification.  The  agreement  further  obligated  Toltec to supply  supporting
printed   documentation  to  the  Company  upon  delivery  of  the  manufactured
equipment.  Mr. David DeVoe,  President  of Toltec,  is a former  officer of the
Company and is related to Dr. Irving DeVoe,  the Company's  former Chief Science
Officer.

In December 2003, the Company  entered into a $100,000  promissory note with The
Aberdeen Trust,  Grosvenor Trust Company Limited, as Trustee, for the purpose of
a bridge  loan to the  Company.  Mr.  Bradley  Rotter,  former  Chief  Executive
Officer, is the beneficial owner of the Aberdeen Trust. The Company is obligated
to pay back the full  amount of the note plus any  interest  accrued  at 12% per
annum on or before  April 15,  2004.  In  consideration  for  entering  into the
promissory note,  Aberdeen Trust was granted warrants to purchase 200,000 shares
of the Company's common stock at $0.35 per share for a five-year period.

                                      F-31
<PAGE>

                               MR3 SYSTEMS, INC.
                         NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2004 AND 2003

13.      Agreements

Effective  February  26,  2004 the  Company  amended  its  agreement  with Linsa
Associates,  Ltd.  ("Linsa") to reduce the restricted  areas under the agreement
from thirty-six jurisdictions to two (Taiwan and Egypt) including,  however, any
transactions  done outside of a restricted area with  subsidiaries or affiliates
of companies  headquartered  within a restricted  area,  provided  that Linsa is
transacting  business with such companies within the restricted area at the time
of any such outside transaction.

On October 18, 2004,  MR3 Systems,  Inc.  ("MR3 or the  Company")  filed a legal
action MR3 Systems,  Inc. v. Linsa  Associates,  Ltd., et. al.  CGC-04-435558 in
California  Superior  Court,  in and for the City and  County of San  Francisco,
against Linsa,  Ltd., et al.  ("Linsa"),  for breach of contract and declaratory
relief in  connection  with the  Company's  MR3  Technology  Transfer  Agreement
("Agreement")  with Linsa.  These claims arise out of Linsa's failure to use its
best  efforts  to  commercialize  the MR3  Technology,  as  required  under  the
Agreement, and to correct a default on monies owed to MR3 for services performed
under the Agreement.  The parties have agreed to stay further prosecution on the
legal matter pending voluntary non-binding mediation.

14.      Subsequent Events

Subsequent to December 31, 2004, the company received an additional  $210,000 in
loans from the private  financing group which had loaned the company $100,000 in
December 2004.  These notes are  short-term  and bear 20% interest.  The Company
also received loans of $25,000 from four stockholders that bear interest at 10%.
These noteholders were also granted 5 year warrants to purchase 50,000 shares of
common stock at $0.10 per share.

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