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, 2001

  [ ]    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. $ 0

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. $15,216,107 (Based on price of $0.303 per share on January 23, 2004.)

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 January 23, 2004
            -----                            ----------------------------------
Common Stock, Par Value $0.01                             60,894,046


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.    Properties......................................................  17

Item 3.    Legal Proceedings...............................................  17

Item 4.    Submission of Matters to a Vote of Security Holders.............  17

                                     PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder
            Matters........................................................  18

Item 6.    Management's Discussion and Analysis of Financial Condition and
            Results of Operations..........................................  21

Item 7.    Financial Statements and Supplementary Data.....................  28

Item 8.    Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure.......................................  28

                                    PART III

Item 9.    Directors and Executive Officers of the Registrant..............  28

Item 10.   Executive Compensation..........................................  33

Item 11.   Security Ownership of Certain Beneficial Officers and
            Management.....................................................  35

Item 12.   Certain Relationships and Related Transactions..................  38

                                     PART IV

Item 13.   Exhibits and Reports on Form 8-K................................  39

Item 14.   Controls and Procedures.........................................  40

           Signatures......................................................  41

           Index to Financial Statements...................................  42

           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

         THIS ANNUAL REPORT SUBMISSION FOR THE PERIOD ENDED DECEMBER 31, 2001 IS
BEING FILED IN ARREARS AS OF THE CURRENT DATE. CERTAIN DISCLOSURES OR ACTIVITIES
OF THE COMPANY RELATED TO THAT PRIOR PERIOD ARE NO LONGER MEANINGFUL OR RELEVANT
TO THE COMPANY'S CURRENT BUSINESS STRATEGY, OBJECTIVES AND PERFORMANCE. THIS
DOCUMENT CONSEQUENTLY LIMITS ITS DISCLOSURE AND DISCUSSIONS TO THOSE EVENTS AND
CIRCUMSTANCES THAT WERE MATERIAL TO THE COMPANY FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001. RELEVANT DISCLOSURE FOR THE CURRENT PERIOD IS INCLUDED WHERE
APPROPRIATE. READERS ARE ALSO DIRECTED TO THE COMPANY'S ANNUAL REPORT FOR FISCAL
YEAR ENDED DECEMBER 31, 2002 (AMENDMENT #2) FILED WITH THE SEC ON DECEMBER 22,
2003 FOR A CURRENT UPDATE OF THE COMPANY'S POSITION AND HISTORICAL ACTIVITIES
FOLLOWING THE PERIOD ENDED DECEMBER 31, 2001.

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,

                                       -1-
<PAGE>

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.

         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 metals extraction and recovery technology
company. The technology originated from research in microbiology on how
microbial cells efficiently acquire their essential nutrient metals such as
calcium, copper, zinc, etc. The Company has synthesized these natural
hydrometallurgical process plants and has successfully applied the technology on
a commercial processing level for certain periods during 1999 through 2001,
consistent with demand for its manufactured zinc sulfate end product. The
Company generated only limited revenues in 2001 from these activities, which was
not sufficient to cover its operating expenses. The Company has not generated
any revenues related to the implementation of its MR3 technology in the
subsequent period following the end of fiscal year 2001, as it revised its
business strategy during that timeframe to focus on more stable and lucrative
prospects for its technology. 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. The key aspect of the MR3 system is its unique
affinity and selectivity for an individual target metal, even within multiple
metal ion environments.

                                       -2-
<PAGE>

         In fiscal year 2001, the Company primarily focused its activities on
continuing the processing of industrial wastes and other complex metals sources
into specialty chemical products and pure metals. The Company also targeted
United States domestic carbon steel mills for the placement of MR3 processing
facilities to process both electric arc furnace ("EAF") and electro galvanizing
line ("EGL") waste effluents into commercially viable metals products. In 2000
and 2001, the Company was also involved in concept and feasibility evaluations
of prospective industries for the application of its MR3 technology including,
but not limited to the processing of waste effluent from the process streams of
semiconductor wafer production; remediation of highly toxic mercury wastes from
the manufacture of PVC plastic pipe; and an international project regarding the
processing of mixed-metals sludge derived from the incineration of metals
wastes. The Company experienced some success in treating test samples from such
sources, but was not able to secure a commercial contract for its services from
the targeted prospects during fiscal year 2001.

         In July 2001, the Company announced that it had entered into a letter
of Intent to license London Manhattan Partners--a New York and London based
private investment firm positioned in specialized industries where metals
recovery or removals are paramount--for the marketing and operation of its MR3
technology on a worldwide basis. The license was to provide for the payment of
license fees to MR3 in three annual installments, plus ongoing annual running
royalty payments. The Company would also receive systems sales and operating
revenues under the license. The Company further announced in July that it was in
the process of signing a joint revenue sharing agreement with AmSteel Corp., a
Delaware Company with a presence in the international metals market, for
site-specific projects in Korea and the Philippines. As of the end of fiscal
year 2001 and beyond, the Company had not entered into any business activities
related to its affiliations with the aforementioned parties and is no longer
pursuing an active business relationship with them.

         The Company's present 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. 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. MR3 has developed a proprietary process for the recovery,
separation and purifying of a broad range of metals.

         The metals and specialty chemical products produced by the Company's
process are expected to achieve purity levels greater than 99.9% and will be
offered for sale to metals and chemical commodities brokers and other end-users,
where applicable. The Company intends to charge contract fees for various waste
removal and remediation services related to its proprietary technology. These
remediation services are also expected to achieve efficiencies of greater than
99.9% in extracting the targeted waste metals from the source waste streams. At
present, the Company does not have any production facilities operational at a
commercial processing level.

         The Company's belief that it will be able to provide end products
achieving purity levels of greater than 99.9% is based on the Company's actual
processing experience at its treatment facility in Butte, Montana and quality
control testing by third parties in connection with practical applications of
the technology. The resultant liquid zinc sulfate (ZnSO4.H2O) product generated
by the Company in Butte routinely exhibited results of greater than 99.9% purity
in quality control analysis performed by Company personnel. The MR3 technology
has also been tested in practical applications involving plutonium extraction
and treatment of nuclear waste streams. Testing of the nuclear related
post-treatment product was performed by independent third party companies. In
each of these cases, the entities documented and reported end-product purity
levels greater than 99.9%. Management believes that the past performance of its

                                       -3-
<PAGE>

technology in practical field applications will translate accordingly to
applications of the technology in other future commercial environments.

         For the foreseeable future, the Company's primary business objectives
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.

         The Company has recently established strategic relationships with
mining and engineering consultancy firms, such as Arrakis, Inc. 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 will also offer fee based services to its clients including: (i)
materials assessment and pre-engineering services; (2) plant engineering and
construction services; (3) fabrication, delivery and installation of fully
configured process components including the necessary proprietary automation
systems and medias; (4) plant monitoring, operational and maintenance services;
and (v) special selective media preparation and production.

         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. Products are 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.

         From second quarter 1999 to fourth quarter 2001, the Company processed
zinc waste dust on a commercial level at its MR3 treatment facility located in
Butte, Montana. The raw zinc waste materials used for processing at the
Company's Butte facility were obtained from varied sources including zinc
trading and recycling firms, such as Dominion Zinc Company of Spokane,
Washington (a subsidiary of US Zinc) and several metals brokerage firms, such as
Freidman Metals Brokerage of Louisville, Kentucky. The facility consisted of
certain MR3 owned manufacturing, processing and storage equipment, which was
situated within 6,600 square feet of a leased building within an industrial
zoned area of Butte. The Company did not own the building or land on which the
processing took place.

         At its peak in 2000, the Butte facility produced, sold and shipped an
average of 100 tons a month of pure liquid zinc sulfate to a single customer,
Carus Chemical Company, Peru, Illinois, for use as part of a corrosion inhibitor
in several California municipal water systems, including Los Angeles and the
County of Marin. In 2001, the Company had a dependence on Carus Chemical Company

                                       -4-
<PAGE>

as the sole customer for its liquid zinc sulfate production and was unsuccessful
in contracting with other customers on terms acceptable to the Company for sale
of the product.

         In fourth quarter of 2001, the Company discontinued operation of the
Butte facility due to economic considerations. The demand for its zinc sulfate
product by its primary customer was seasonal in nature and management ultimately
determined that it could not economically justify maintaining low-level
operations in the winter period when such demand was excessively small. The
decision to permanently close the Butte site, which was temporarily closed for
the slow winter season, was based on a combination of a predicted sluggish
economy and the high freight charges customers were paying for the Company's
zinc sulfate shipments from Butte. Certain Company owned equipment, located at
the Butte facility, was subsequently sold to relinquish, in part, existing
obligations to the Company's landlords in Butte. The balance of the $11,700
liability (for past due rent to the Butte landlords) was written off the
Company's books as of September 30, 2003.

         In 2002, the Company recorded an extraordinary expense item of $202,907
under operating expenses related to the valuation of property and equipment in
connection with the closure of the Butte, Montana facility. Upon review of the
state of the property and equipment, it was determined that certain MR3
manufacturing property and equipment were impaired, as determined based on the
quoted market prices for similar assets. Consequently, the carrying value of MR3
property and equipment was written down and an impairment loss in the amount of
$202,907 was included in operating expenses during the year ended December 31,
2002.

         In April 2001, the Company opened a Pittsburgh, Pennsylvania business
development office for the purpose of facilitating business projects and
management relationships for the processing of electric arc furnace ("EAF") in
carbon steel mills. Mr. Larry Hopper, then the Company's President and COO,
conducted his marketing and business activities from the Pittsburgh office. Mr.
Hopper was promoted from Senior Vice President to President and COO in January
2001 in recognition of his being a key component in leading the Company out of
its development stage and accelerating the ramp up of the MR3 technology into
MR3's primary commercial markets.

         Due to the severe economic downturn in the domestic steel industry as a
whole and subsequent financial instability of many steel mills in the period
following the establishment of the Pittsburgh office, the Company subsequently
suspended negotiations with representatives of the mills for the foreseeable
future. The Pittsburgh office was officially closed in March of 2002. The
Company may, however, elect to pursue or license this business niche in the
future depending on available resources and prevailing economic conditions.

         In keeping with its revamped business strategy following year end 2001,
the Company entered into various agreements and joint ventures with domestic and
international parties for the processing of mining and waste materials into
commercially viable metals and metal products. As of the date hereof, the
Company has not generated any revenues from such agreements, but has expended
certain upfront development expenses in some cases as part of its due diligence
on the projects. Disclosure of these agreements and their related terms,
conditions, and present status are more fully detailed in the Company's annual
report on Form 10-KSB for the period ended December 31, 2002 (Amendment #2)
filed with the SEC on December 22, 2003.

         In fiscal year 2001, the Company relied on four primary executives to
oversee its business activities: (i) Mr. Randall S. Reis - Chairman, CEO and
Director; (ii) Mr. Larry J. Hopper - President and COO; (iii) Mr. Irving W.
DeVoe - Chief Science Officer and Director; and Mr. David N. Firshein - Vice
President of Finance (interim). As of the end of 2001, Mr. Firshein no longer
served the Company in that executive position. Effective in March 2003, Mr.
Larry Hopper's employment agreement was terminated by the Company. On December

                                       -5-
<PAGE>

6, 2001, Mr. Steven N. Schorr resigned as a director of the Company to
concentrate his activities on the Bioponic AGS spin-off. The resignation of Mr.
Schorr was not related to any disagreement with the Company. The Company has
subsequently strengthened its management team with the addition of key members
whose profiles are detailed in this annual report.

         Notably, in April 2003, Mr. Bradley N. Rotter joined the Company as
President and Chief Operating Officer. Mr. Rotter is broadly experienced in the
financial capital and commodity markets and has been a private equity investor
for twenty years. Mr. Rotter has been an investor in the Company since 2001. Mr.
Rotter will serve in the Company's San Francisco headquarters. On November 24,
2003, the Company appointed Mr. Rotter, then President and Chief Operating
Officer, as the Company's Chief Executive Officer replacing Mr. Randall S. Reis
who retained his position as Chairman of the Board. At the end of November 2003,
the Company appointed Mr. John K. Burns as President and Chief Operating
Officer. Both Mr. Rotter and Mr. Burns were subsequently nominated as Directors
of the Company.

         The Company has recently retained SRK engineering, an independent,
international consultancy group offering services mainly from earth and water
resource industries. 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.

MR3 Technology

         The Company's proprietary MR3 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.

         The MR3 System generates 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

                                       -6-
<PAGE>

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.


         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:

                                       -7-
<PAGE>

--------------------------------------------------------------------------------
                    MR3 Media - Features and Characteristics
--------------------------------------------------------------------------------
Affinity:                         Very high capture efficiency in solutions
                                  containing low metal concentration.

--------------------------------- ----------------------------------------------
Specificity and Selectivity:      The ability to capture specific metals while
                                  ignoring others 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.

         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, Co-60, Sr-90, Pu) from water.

                                      -8-
<PAGE>

    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.

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.

         In connection with current client discussions and management's general
outlook for the near future, the Company's primary emphasis will be on the
production and sale of precious metals. According to the most recent United
States Geological Survey ("USGS"), gold mining companies and producers of gold
are beginning to have difficulties in successfully replacing annual production
with new reserves. An estimate by an industry association indicates that
worldwide gold exploration expenditures decreased for the fifth consecutive
year. Consequently, given the above trends and recent uncertainties in global
political matters, management reasonably expects the historical demand for gold
and other precious metals to continue or expand for the foreseeable future. It
is generally accepted that no single company has sufficient market power to

                                       -9-
<PAGE>

affect the price or supply of gold in the world market. Management reasonably
believes that there will be numerous buyers for its output of gold and other
precious metals once it is fully processed into bars or strips.

         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

         The Company previously reported its intent to establish an MR3
processing facility in Colorado in connection with its planned precious metals
extraction agreement with Consolidated Empire Gold. In February 2003, the
Company leased a site in Lakewood, Colorado for this purpose. As a consequence
of the Company terminating its agreement with CEG, the Company has elected to
not establish the processing facility in Lakewood at this time. Alternatively,
management intends to fabricate a series of MR3 technology processing facilities
("plants") in various geographical locations in accordance with project and
application agreements entered into with other prospective clients. In October
2003, the Company arranged a $1,250,000 credit facility with a private equity
and financing group--High Stakes Capital LLC--to provide the financing for the
initial plant or pilot level system implementations.

         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. For the foreseeable future, the Company intends to 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,

                                      -10-
<PAGE>

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.

Current Projects

         Disclosure on the Company's current project status is more fully
detailed in the Company's annual report on form 10-KSB for the period ended
December 31, 2002 (Amendment #2) filed with the SEC on December 22, 2003.

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 the Company. 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. 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 manufactured products. Management further believes
that such raw waste materials can be reasonably obtained without substantive
mining operations and at little to manageable cost.

         The Company expects that it will achieve a competitive advantage with
such competitors through the cost effective utilization of its proprietary
metals extraction production capabilities at the commercial level. The Company
has yet to prove, however, the cost effectiveness of such operations at
commercial processing levels on a full year basis. Despite its limited
full-scale production level experience, management has no reason to believe that
its MR3 technology could not be implemented on a cost effective basis over a
full year period.

         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. In
addition, management believes that no single company has sufficient market power
to materially affect the price or supply of gold or other precious metals in the
world market.

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

                                      -11-
<PAGE>

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 2001 are directly
related to personnel and consulting costs. The Company does not presently
license any third party technology in its operations. Research and development
expenditures for 2001 were approximately $136,000.

         In consideration of its planned activities, the Company expects that
its research and development expenditures will materially increase in 2004 and
beyond. The majority of research and development work will be undertaken at a
technical support facility located in Beverly, Massachusetts. The laboratory
meets and operates under the standards set by the State of Massachusetts
regulatory arm of the Department of Environmental Quality. The Company's
research and development efforts are conducted under the supervision of its
present Chief Science Officer, Dr. Irving DeVoe.

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.

         "Plant operations" for use of the Company's technology is generally
defined as the basic steps involved from the acquisition of the source material
to production of target metals (or specialty chemical products) to disposal of
residue waste materials. The steps involved in the MR3 procedure typically
include: (i) transfer and handling of the source materials to the MR3 technology
processing site; (ii) milling if required; (iii) mixing of source material with
liquid medium (usually water); (iv) metals extraction through introduction of
chemicals such as acid; (v) separation of solids from metals laden liquid (raw
liquor); (vi) processing of law liquor through unique modules to separate target
metals and chemical products; and (vii) recycling of water base and disposal of
any contaminants and processed sources materials.

         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, as may be required, will likely be obtained from the various
state(s) controlled Department of Mines. In 2003, the Company received an
Exploration Permit for the Empire Gold mine site and conducted preliminary

                                      -12-
<PAGE>

construction activities. Given the cancellation of the Empire Gold processing
agreement, the Company has no current plans to conduct further mining related
operations at this time in Colorado. The permits for operating the Company's
chemical-based processing facility at its future 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.

Compliance with Environmental Laws

         The Company's precious metals projects are subject to various federal
(Environmental Protection Agency), 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 2003 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 foreign jurisdiction where it intends to operate to
maintain environmental quality. As a result, the Company will likely be subject
to certain environmental regulations in Taiwan and elsewhere with regard to its
projected joint venture project with Linsa Associates. Management reasonably
projects that the joint venture will be in substantial compliance with all known
environmental regulations and laws in Taiwan at the time commercial processing
commences. However, it cannot be known at this time what additional future laws
and regulations, if any, might be adopted in Taiwan or elsewhere, nor their
possible effect on the Company.

         In 2001 and 2002, 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, 2002. In January 2004, the Company
settled the matter with the Montana Department of Environmental Quality for the
sum of $38,502 payable in six monthly installments commencing on January 30,
2004.

Patents, Trademarks and Other Licenses

         The Company claims no patents or trademarks. The Company has no
licenses with the exception of its Joint Venture and Technology Transfer
Agreement with Linsa Associates Ltd., which is more fully disclosed in the
Company's annual report on form 10-KSB for the period ended December 31, 2002 as
filed with the SEC on December 22, 2003.

                                      -13-
<PAGE>

Employees

         As of December 31, 2001, MR3 employed five full-time employees, three
of which were in senior or executive management, one in administrative matters
and one in technical services. In consideration of its increased business
activities in 2003, The Company took steps to strengthen its management team in
the areas of executive, project and technical management. As of December 31,
2003, the Company employed 11 full-time employees. The Company hires independent
contractors and other professional services consultants 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.

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 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 anticipated
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. Also, 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.

         Since 2000, the Company's technology has only been employed at a
high-rate commercial processing level for a limited period of time in a single
high-level production application. 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
Company's potential revenues and profits.

                                      -14-
<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 is considered to be an emerging growth stage
company in the early stages of operation. 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.

         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 from 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 outside funding sources to satisfy
the Company's future increasing financing demands if its operations do not
produce the anticipated level of profitability. There can be no assurance that

                                      -15-
<PAGE>

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 31.5 % of the Company's outstanding common stock
as of December 31, 2003. 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 Company's common stock

         The Company's common stock is traded on the "pink sheets" and its
securities are quoted and 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, 2002 and 2001, the Company had net losses of
$1,011,350 and $1,191,843, respectively. At fiscal year end 2003, 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.

                                      -16-
<PAGE>

ITEM 2.  PROPERTIES

         In 2001, the Company's principal office was located at Pier 54, San
Francisco, California 94107. The property, a three-room suite of approximately
480 square feet, was leased on a month-to-month term at the rate of $1,920 per
month. The Company now leases 1,873 square feet of office space at 435 Brannan
Street, Suite #200, San Francisco, California for its executive offices and no
longer has any obligations under the prior commitment. The Company is committed
under its operating lease for a period of two years beginning October 1, 2002
and expiring September 30, 2004. This lease requires monthly rental payments of
approximately $2,497.

         In 2001, the Company's MR3 processing plant was located at 104
Parkmont, Butte, Montana. The plant had approximately 6,600 square feet of
processing and office space and was leased on a month-to-month basis for $1,500
per month. Although MR3 ceased operations in Butte in fourth quarter of 2001,
the Company continued to assess rent liability on the property through March 31,
2003.

         Beginning April 2001, the Company occupied 2,766 square feet of office
space located at 1 Penn Center East, Suite #200, Pittsburgh, Pennsylvania as a
business development office for the purpose of facilitating business
opportunities with carbon steel mills. The lease was for a five-year term with
monthly payments of $3,688. The Company subsequently terminated its lease for
the office space as of March 15, 2002.

         In 2001, the Company shared laboratory space in a building located at
40 Congress Street, Salem, Massachusetts, on a month-to-month rental basis at
the rate of $500 per month. The Company now leases 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. The Company is committed under its commercial lease in
Beverly for a period of three years beginning November 1, 2003 and expiring on
October 30, 2006. The lease requires monthly rental payments of approximately
$6,432. In connection with this lease, the Company terminated its month-to-month
laboratory lease arrangement in Salem, Massachusetts.

         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

         The Company is not a party to any material pending legal proceedings
and, to the best of its knowledge, no such action by or against the Company has
been threatened.

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 fiscal year ending December 31, 2001 and the Company did not hold an
annual meeting of shareholders during that same period.

                                      -17-
<PAGE>

                                     PART II

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

Market Information

         The Company's common stock is currently traded over-the-counter in the
pink sheets and quoted through the National Quotation Bureau's ("NQB")
Electronic Quotation System under the symbol "MRMR". Quotations in the Company's
stock commenced in October 1998, when trading began on NASD's "Electronic
Bulletin Board" ("OTCBB") under the symbol "BPON". Effective October 8, 1999,
the stock traded only in the pink sheets and no longer on the OTCBB. The
Company's symbol was changed to "MRMR" in July 2000 to reflect the change in the
Company's name to MR3 Systems, Inc.

         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
calendar years 2001 and 2000. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. Detail on high ask and low bid prices for calendar years 2002 and
2003 are provided in the Company's annual report on Form 10-KSB (Amendment #2)
as filed with the SEC on December 22, 2003.

Year             Quarter Ending                  High Bid         Low Bid
----             --------------                  --------         -------
2000             March 31, 2000                  $  1.35          $  0.15
                 June 30, 2000                   $  2.25          $  0.60
                 September 30, 2000              $  1.50          $  0.41
                 December 31, 2000               $  0.51          $  0.13

2001             March 31, 2001                  $  0.34          $  0.08
                 June 30, 2001                   $  0.19          $  0.05
                 September 30, 2001              $  0.22          $  0.05
                 December 31, 2001               $  0.22          $  0.05


         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.

                                      -18-
<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, 2001 and 2003 there were approximately 350 and 365
shareholders of record, respectively, 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, 2001 and 2003, there were approximately 84 and 75
shareholders of record, respectively, of MR3 Systems, Inc. Series A Preferred
Stock. As of December 31, 2001 and 2003, there were 259,214 and 237,464 shares,
respectively, 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, 2001. Through
the end of fiscal year 2001, the Company had not adopted any formal equity based
compensation plan for the benefit of employees and/or non-employees. With the
one exception noted below, all securities disclosed in the table below resulted
from individual grants of options and warrants for services provided to the

                                      -19-
<PAGE>

Company or expected to be provided to the Company. Such grants were unrelated to
any written compensation plan or agreement. In the case of Dr. Irving DeVoe,
Chief Science Officer of MR3, and Mr. David Blythe, the majority of their
options and warrants were granted pursuant to employment agreements and/or
related non-dilution rights granted to them. Terms of Dr. DeVoe's and Mr.
Blythe's agreements are more fully detailed and disclosed in the Company's
Registration Statement on Form 10-SB filed with the Securities and Exchange
Commission on February 12, 2001. Of the 14,965,657 aggregate warrants noted
below, 3,934,067 were issued in fiscal year 2001.
<TABLE>
<CAPTION>

                      EQUITY COMPENSATION PLAN INFORMATION

                                    Number of securities to       Weighted average
                                    be issued upon exercise       exercise price of        Number of securities
                                    of outstanding options,      outstanding options,     remaining available for
    Plan category                     warrants and rights        warrants and rights          future issuance
----------------------------      --------------------------    --------------------      ------------------------
                                              (a)                        (b)                        (c)
<S>                                       <C>                          <C>                           <C>
Equity compensation plans                     -0-                        -0-                        -0-
approved by security holders
Equity compensation plans not             14,965,657                   $ 0.29                       -0-
approved by security holders
Total                                     14,965,657                   $ 0.29                       -0-
</TABLE>

Recent Sales of Unregistered Securities

         Funding and Dilutive Instruments

         In fiscal year 2001, the Board of Directors granted 1,000,000, 750,000,
and 300,000 warrants to purchase common shares of the Company's stock to Mr.
Samir Gad, Mr. Bradley Rotter, and Mr. Mel Kelm, shareholders of the Company,
for beneficial services provided or anticipated to be provided to MR3.

         In December 2003, the Company issued 71,429 common shares at a price of
$0.35 per share to a qualified investor pursuant to a private offering of
shares. The Company received $25,000 in proceeds in connection with this sale.
In consideration for this private sale of securities, the Company issued the
shareholder 71,429 warrants to purchase common shares of the Company's stock at
a price of $0.50 per share. The warrants are exercisable over a four-year
period, but the Company may reduce the term of the exercise period if it meets
certain performance criteria.

         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, 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.

         In the first three quarters of 2003, the Company raised approximately
$1,663,400 pursuant to various notes, convertible debentures, and the private
sale of securities to qualified investors. The terms and conditions associated
with these various financial instruments, as well as those issued in fiscal year

                                      -20-
<PAGE>

2002, are more fully disclosed in the Company's annual report on Form 10-KSB
(Amendment #2) for the period ended December 31, 2002, as filed with the SEC on
December 22, 2003.

         Fiscal Year 2001 Stock Issuances

In fiscal year 2001, the Company issued 8,574,091 shares of its common stock to
56 individuals or entities pursuant to stock sales, conversion of preferred
stock, direct issuances to employees and stock issued for services rendered. The
Company received an aggregate of $ 685,649 in either cash or equivalent services
in exchange for the common stock issued. The detailed transactions are more
fully disclosed below and related parties identified as appropriate:

a.       5,784,316 common shares were sold to 39 individuals over the course of
         fiscal year 2001 at prices ranging from $0.05 to $0.19.

b.       In first quarter 2001, 2,500,000 common shares were sold to Mr. Bradley
         Rotter, currently Chief Executive Officer, who became an officer of the
         Company as of April 2003, at a price of $0.10 per share.

c.       In first quarter 2001, 15,500 common shares were issued to 12 employees
         of the Butte, Montana operating facility as part of an incentive
         program initiated by management.

d.       In third quarter of 2001, 212,650 common shares were issued to Mr. Gary
         Abreim, Chief Financial Officer of the Company as of April 2003, at a
         price of $0.05 per share in compensation for services provided to the
         Company.

e.       In the first half of 2002, 61,625 shares of common stock were issued to
         3 individuals pursuant to the conversion of preferred shares at an
         average price of $3.24 per share. The preferred shares were converted
         to common shares on a one-to-one ratio.

         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.
The 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.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         PLAN OF OPERATION

         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

                                      -21-
<PAGE>

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 Company intends to produce
these metals and metal products in facilities 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.

         The Company is presently migrating its technology to new industries and
has incurred losses from its inception through December 31, 2003. From second
quarter 1999 to fourth quarter 2001, the Company processed zinc waste dust on a
commercial level at its MR3 treatment facility located in Butte, Montana and
generated only limited revenues during that period. In fourth quarter of 2001,
the Company discontinued operation of the Butte facility due to unfavorable
economic considerations.

         For the foreseeable future, the Company's primary business objectives
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.

Results of Operations

         Fiscal year Ended December 31, 2001 Compared to Fiscal Year Ended
December 31, 2000

         The Company recognizes revenue when manufactured product is shipped to
a customer or at the time other services are rendered. The Company realized
$57,749 in revenues for fiscal year 2001 compared to $130,566 for fiscal year
2000. The decline in revenues of $72,817 was attributed to the Company
discontinuing its processing operations in Butte in the latter half of 2001. The
demand for its liquid zinc sulfate product by its primary customer was seasonal
in nature and management ultimately determined that it could not economically
justify maintaining operations in the winter period when such demand was
extremely low. The decision to permanently close the Butte site, which was
temporarily closed for the slow winter season, was based on a combination of a
forecasted sluggish economy and the high freight charges customers were paying
for the Company's zinc sulfate shipments from Butte

                                      -22-
<PAGE>

         The components that make up cost of goods sold typically 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. Cost of goods sold for 2001 amounted to
$387,635 compared to $288,267 for 2000. This 34.5% increase was attributed in
part to a property tax assessment and the write off of inventory and waste
cleanup expenses in connection with the discontinuance of operations in Butte.
Although the Company ceased operations in late 2001, the Company continued to be
obligated for certain personnel and overhead expenses for most of 2001. As a
consequence of the increase in cost of goods sold with a corresponding decrease
in sales, gross margin for 2001 amounted to a loss of $329,886 compared to a
loss of $157,701 for 2000. Given the disparity in operations for the full year
in 2000 and partial year 2001, comparison of gross margin percentage for the two
periods is not meaningful.

         General operating expenses--less depreciation, amortization and
consideration for impairment loss--declined 29.3% from $1,066,614 in fiscal year
2000 to $753,936 for the comparable period in 2001. The decline is primarily
attributable to a substantive decline in research and development expenses in
2001, as well as a decline in personnel expenses in 2001.

         Research and development expense declined from $481,598 in 2000 to
$136,365 in 2001. In 2000, the first full year of operation of the Butte
facility, the Company recorded material research and development expenses
related to the adaptation and continued advancement of the MR3 technology for
metals extraction and recovery.

         Personnel expenses declined 25.9% from $275,185 in 2000 to $204,032 in
2001. In 2000, the Company recorded compensation expense of $130,141 for options
and warrants granted to an officer of the Company. Compensation cost was
measured by the excess of the fair market price of the stock over the option
exercise price on the measurement date (the intrinsic value method). The Company
did not record any similar compensation expense in 2001. In 2001, personnel
expense includes a full year of compensation to the aforementioned officer
compared to partial year compensation in 2000.

         In 2001, aggregate rent and office expense increased by $86,575 from
$114,557 in 2000 compared to $201,132 in 2001. The increase resulted primarily
from increased expenses related to the establishment in early 2001 and operation
of the Company's business development office in Pittsburgh, Pennsylvania.

         Outside services and professional fees increased by $17,133 from
$195,274 in 2000 to $212,407 in 2001. In 2000 and 2001, the Company recorded
compensation cost of $87,200 and $134,960, respectively, which are included in
the outside services and professional fees, in connection with the grant of
options and warrants to third party consultants during the designated periods.
Such grants were not issued as part of any Company stock option plan.

         Depreciation increased by 8.0% from $58,772 in 2000 to $63,472 in 2001.
The increase in 2001 is a result of full year depreciation on property and
equipment purchased in 2000 compared to partial depreciation for such equipment
for fiscal year 2000. In addition, certain leasehold improvements related to the
build out of the Butte facility were written off at the end of 2001.

         At year-end 2000, the Company recorded an impairment loss of $70,051
related to the write-off of certain intangible assets. There was no such
impairment loss recorded in fiscal year 2001.

         The Company recorded net interest expense of $57,112 and $20,749 for
fiscal years 2000 and 2001, respectively. Interest expense related primarily to
accrued interest on notes payable, deferred compensation to certain officers,
and interest recorded in connection with warrants issued. In 2000, the Company

                                      -23-
<PAGE>

recorded interest expense approximating $30,000 related to the issuance of
warrants in connection with the extension of the maturity date of a note payable
to an independent third party. The Company expects its interest expense to
increase in fiscal years 2002 and beyond with the extension of existing note
payables, the addition of convertible debentures, and the expectation of
securing other debt instruments.

         The Company's net loss for fiscal year 2001 declined 15.9% to
$1,191,843 compared to $1,417,541 for fiscal year 2000. The decrease in net loss
for 2001 was primarily attributed to a $345,233 decrease in research and
development expenses and a $71,153 decrease in personnel expenses compared to
the same period in 2000. These decreases were partially offset by an increase in
gross margin loss of $172,185 in 2001 compared to 2000.

Net Operating Losses

         At December 31, 2001, and 2000, the Company has available approximately
$6,525,000,and $5,595,000 in net operating loss carryforwards available to
offset future federal and state income taxes, respectively, which expire through
2020. Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. This and other components of deferred tax
asset accounts are described above. At December 31, 2001 and 2000, 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
shareholders and other third parties. 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, 2001, the Company had a working capital deficit of
$931,485 compared to a working capital deficit of $607,657 at December 31, 2000.
The 53.3% increase in working capital deficit at December 31, 2001 is primarily
attributed to increases in accounts payable, payroll taxes payable and accrued
expenses in 2001 as the Company elected to discontinue unprofitable revenue
generating operations in Butte during the period and transition to other more
lucrative business opportunities. This generated increased expenses not offset
by any corresponding revenues. At December 31, 2001, the Company had $55 in cash
and accounts receivable compared to $12,368 at December 31, 2000. The decrease
in cash and accounts receivable is attributed the discontinuation of the
Company's revenue generating operations in Butte.

         As of December 31, 2001, the Company had total assets of $343,476 and a
total shareholder's holder's deficit of $651,512 compared with total assets of
$422,166 and total stockholder's deficit of $279,662 at December 31, 2000. Total
assets decreased primarily due to the decline in current assets, as described
above, and a decline in property and equipment value through normal depreciation
and the write-off of certain leasehold improvements. The Company elected not to
purchase material property and equipment in fiscal year 2001. The increase in
total shareholder's deficit from fiscal year 2000 to 2001 is principally the net
result of the increase in accumulated deficit of $1,191,843 related to the loss
from operations of the Company's business activities in 2001 partially offset by
$734,868 in additional paid-in-capital recorded by the Company for the period.

                                      -24-
<PAGE>

         For the year ended December 31, 2001, cash used by operating activities
decreased to $664,733 from $1,046,764 for the comparable period ended December
31, 2000. This 36.5% decrease is attributed to a decrease in overall corporate
general and administrative expenses related to the Company's decision to
transition its business activities from liquid zinc sulfate production to other
more lucrative business activities in the mining and environmental remediation
sectors.

         In fiscal year ended 2001, the Company realized cash flow from
financing activities of $663,385 compared with $1,157,469 for the comparable
period in 2000. Cash realized from financing activities in 2000 and 2001
resulted from proceeds from the sale of the Company's common stock and
conversion of warrants. In 2001 the Company recorded net cash used from
investing activities of $1,798 compared to $108,442 for the 2000 period. Cash
used in investing activities for 2000 and 2001 was related to the purchase of
property and equipment during the two periods.

         In 2001, the Company leased its facilities either on a month-to-month
basis without a minimum commitment or on a lease basis with certain timeframe
commitments and obligations. In 2003, the Company no longer leases facilities on
a month-to-month basis and is under contractual lease for its operating
facilities. The Company believes that its existing facilities, as of December
31, 2003, 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.

Plan of Operation

         In third quarter 2003, the Company continued to develop opportunities
for the separation and recovery of precious metals from mining sources and other
viable metals-related environmental remediation prospects. Management entered
into discussions with both domestic and international prospective candidates for
its metals extraction and recovery services and specialty chemical production.
In addition, the Company entered into discussions with several candidates in the
nuclear industry with a focus on environmental remediation projects. In
anticipation of the need for working capital to provide marketing, preliminary
sample testing and project validation services related to the aforementioned
client prospects, the Company concluded a private placement in July with eleven
qualified investors for total net proceeds of $735,000 (see Part II, Item 2 -
Change in Securities).

         In early third quarter 2003, the Company continued with the preliminary
tasks of sampling, laboratory testing, gold media development, mining and zoning
permits, water rights acquisition, grade control program planning, equipment
purchase and facility build out in connection with its metals extraction
agreement with Consolidated Empire Gold ("CEG"), which was entered into in June
of 2002. Concurrent with these activities, the Company retained an independent
mining consultancy firm, Arrakis, Inc., to perform an in-depth feasibility study
of all projected cost related to the Company's fulfilling its obligations under
the specified agreement.

         Upon review, in fourth quarter 2003, of the data generated by the
feasibility study, management deemed the upfront expenses related to
conventional mining requirements and pretreatment--to make the raw materials
suitable for processing using the MR3 technology--to be too capital intensive
and involving activity beyond the current scope of the Company's core
competencies at this stage in its corporate development. Consequently, on
October 21, 2003 the Company executed a termination and mutual release agreement
with CEG in connection with the aforementioned operating agreements. The Company
may choose to revisit this opportunity if a suitable mining partner is
identified to handle the mining aspects and pretreatment requirements of the
project or if CEG chooses to pay these expenses of its own accord.

                                      -25-
<PAGE>

         In fiscal year 2003, the Company raised approximately $1,288,000
pursuant to various notes, convertible debentures and the private sale of
securities to qualified investors. The funds have primarily been used to retire
past liabilities and for general working capital. Management does not deem these
funds to be sufficient to satisfy its cash requirements for fiscal year 2004 if
the Company aggressively follows its current business strategy. The primary and
most significant expenditures for 2004 are expected in the area of salaries,
consulting, professional fees, research and development, rent, travel, reduction
of payables, fabrication of processing systems and certain engineering costs
related to its current operating agreements.

         The Company intends to meet its ongoing cash requirements for this
period through a combination of funding sources including, but not limited to
private placements, debt instruments with private parties, sales of technology
licenses and anticipated revenues generated from contractual applications of its
technology. Management can provide no assurance that any funds will be derived
from such sources, but reasonably believes that it will be successful in doing
so. Management intends to adjust its monthly rate of expenditures proportional
to its cash reserves and funds raised over the next twelve months. In addition,
potential revenues derived from its technology related engineering and
consulting fees, are expected to supplement the cash reserves of the Company.

         In October 2003, the Company arranged a $1,250,000 credit facility with
High Stakes Capital LLC--a private equity and financing group--to further its
ability to construct, equip and deploy the first in a planned series of MR3
processing plants. The Company received the first $250,000 of loan proceeds on
October 14, 2003 and the second distribution of $250,000 on December 19, 2003.
These amounts are over and above the aforementioned $1,288,000 in investment
funds received in 2003. The location of the first processing plant will depend
to a large degree on the first contract entered into by the Company for its
metals processing or environmental remediation services. Management intends to
use this processing plant for multiple purposes including research and
development, project specific validation, and processing of precious metal
bearing concentrates from domestic sources (primarily from the western portion
of the United States). The Company will also use its Technical Support Center in
Beverly, Massachusetts for its sample testing, media development, project
validation and research and development.

         The Company expects engineering, design, construction and equipping
costs to exceed $1 million in connection with the establishment of the first MR3
processing plant and envisions a schedule of completion within six months of
initiation. Follow on plants are likely to vary in cost as a function of the
plant size related directly to the particular project or application. The
Company may require additional funds over and above the current credit facility
if sufficient revenues are not generated from contractual applications during
2004. 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.

         Although the geographical location for this first MR3 processing plant
has yet to be determined, the Company has already expended funds toward its
engineering development and design. The Company has selected a
contractor--Toltec Engineering Services, LLC of Payson, Arizona--to fabricate
its unique MR3 related equipment (e.g. modules, tanks, pumps, flow transmitters,
etc.) and has submitted its initial order for long lead-time hardware. The
Company has also established strategic relationships with mining and engineering
consulting firms--such as Arrakis, Inc. and SRK Engineering--to assist the
Company in its pre-engineering and assessment activities and fine-tuning of its
process technology to commercial operating levels.

                                      -26-
<PAGE>

         Management is in discussion with seven prospects for processing
precious metal concentrates from their source locations. In addition, management
is reviewing prospects for specialty chemical production in two international
locations and two nuclear-related domestic environmental remediation projects.
The Company is currently evaluating source samples from certain of these
aforementioned parties to determine the viability of the project application and
is in various stages of negotiation with regards to structuring related
compensation agreements. The operations of any MR3 processing facility is not
expected to be labor intensive and accordingly management expects to hire only a
limited number of additional employees, if any, in association with each of
these projects.

         The Company is in the process of collecting and/or testing samples for
the processing of slag deposits (the vitreous mass left as a residue by the
smelting of metallic ore) located in various domestic and international
locations. In many cases, slag deposits owned by third parties are shipped to
jurisdictions outside the country of origin for processing. Management believes
that it can offer a more economically favorable alternative to these parties by
processing the deposits on site for the extraction of metals such as copper (Cu)
and zinc (Zn). The Company is also testing samples from an international
location for the processing of gold ore samples encapsulated with certain
amounts of copper and zinc. The Company's processing of the encapsulated ores is
intended to resolve both an economical metals separation problem, as well as an
environmental one for acid mine drainage caused by the presence of these metals.
In addition, the Company is testing metallic ores containing nickel, gold,
platinum, and cobalt with high concentrations of sulfides from a prospective
Canadian client. The Company is developing a pre-treatment process for the
reduction of such sulfides so as to facilitate the extraction and recovery of
the valuable metals.

         The Company is leveraging its strategic relations with its industrial
consultants and its personal network to create visibility for the Company in the
mining, metals and environmental remediation industries. In addition, the
Company plans on increasing exposure to the Company by participation and
exhibiting at the Prospectors and Developers Association of Canada ("PDAC")
convention to be held in Toronto in March 2004. Management intends to feature
its sulfur and arsenic removal process at the show, as well as discussing
results of its laboratory testing of the MR3 technology, pre-engineering
economics and service/pilot agreements available to prospective clients.

         The Company's licensing activities are directed toward three primary
sectors--mining, industrial and environmental. The Company's direct effort in
identifying mining related prospects has yielded numerous interested parties.
The Company's preliminary strategy is to price its licensing fees in the range
of $3 million for an initial site master license with an option to expand to
additional site licenses at $1 million each. The design of the MR3 System lends
itself to be scalable without material difficulty. The Company will supply the
initial materials and provide for recurring materials (equipment, reagents, and
media) to the licensee 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 the original 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 the licensee savings in capital and operating costs from their normal
operations. In addition, management recognizes that it may be required to adjust
its pricing strategy for its licensing product due to market demand and other
economic considerations.

Effects of Inflation

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

                                      -27-
<PAGE>

Recent Accounting Pronouncements

         In 2001, 2002, and 2003, the Company adopted certain accounting
pronouncements, the results of which are reflected in the Company's financial
statements and accompanying notes for fiscal years 2001 and 2000. Disclosure on
the various accounting pronouncements adopted by the Company during 2001, 2002,
and 2003 are more fully detailed in Section 1 (Summary of Significant Accounting
Policies; Recent Accounting Pronouncements) of the Company's financial
statements attached hereto.

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.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers and directors of the Company at December 31,
2001 were as follows: (1)

     Name                     Age                 Position
     ----                     ---                 --------

Randall S. Reis               60            Chairman, CEO & Director
Larry J. Hopper               46            President & COO
Irving W. DeVoe               64            Chief Science Officer and Director

(1)  On December 6, 2001, Mr. Steven N. Schorr resigned as a director of the
     Company. The resignation of Mr. Schorr was not related to any disagreement
     with the Company.


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

     Name                     Age                 Position
     ----                     ---                 --------
Randall S. Reis               62            Chairman of the Board
Bradley N. Rotter             48            Chief Executive Officer and Director
John K. Burns                 53            President and Director
Gary Abreim                   61            Chief Financial Officer
Irving W. DeVoe               66            Chief Science Officer

(1)  Pursuant to the terms of his employment agreement, the Company elected to
     terminate the employment of Mr. Larry Hopper, President and Chief Operating
     Officer, on March 15, 2003. On August 8, 2003, the Company executed a

                                      -28-
<PAGE>

     settlement agreement with Mr. Hopper whereby the Company settled any and
     all potential claims against the Company related to his period of
     employment with the Company and subsequent termination. In consideration of
     the settlement, Mr. Hopper was paid a lump sum of $65,000 and was issued
     vested warrants to purchase 800,000 shares of the Company's common stock at
     an exercise price of twenty cents ($0.20).

     On January 12, 2002, Dr. Irving DeVoe resigned his positions as Director
     and Chief Science Officer of the Company. Dr. DeVoe continued, however, to
     provide technical, management and advisory services to the Company as Chief
     Scientist on a consulting basis. In June 2003, Dr. DeVoe entered into a
     full time employment agreement with the Company and resumed the position of
     Chief Science Officer.

     In November 2003, Mr. Bradley N. Rotter was appointed Chief Executive
     Officer and Mr. John K. Burns was appointed President. Both were also
     nominated to be Directors of the Company.

         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.

         With the exception of Mr. John Burns, none of the officers and /or
directors of the Company are currently officers or directors of any other
publicly traded corporation. Mr. Burns serves as an independent director on the
boards of Emgold Mining Corporation (EMR, TSX) and Northern Orion Resources
(NNO, TSX) both of Vancouver, Canada. 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.

         The business experience of each of the current officer and directors
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.).

                                      -29-
<PAGE>

         Bradley N. Rotter. Mr. Rotter joined the Company on April 1, 2003 as
President and Chief Operating Officer. In November 2003, Mr. Rotter was
appointed Chief Executive Officer and nominated to be a Director of the Company.
Mr. Rotter has over 25 years of experience in the capital, commodity and
securities markets where he was instrumental in arranging financing for various
companies including public and private placement of debt and equity, as well as
other financing instruments. From 1988 to the present, Mr. Rotter has served as
a principal officer and/or managing partner of various equity and
specialty-financing companies, including Point West Capital Corporation, a San
Francisco based publicly traded entity; and the Echelon Group and Presage
Corporation, both privately operated companies based in San Francisco. In
recognition of one innovative securitization, Mr. Rotter was awarded the Private
Deal of the Year Award in 1995 by the Investors Dealers Digest publication. Mr.
Rotter currently serves on the board of directors of Authentisure, a privately
held company located in San Francisco involved in the business of digital
authentication. Mr. Rotter's undergraduate education was at the United States
Military Academy at West Point and he holds an MBA degree from the University of
Chicago.

         John K. Burns. Mr. Burns joined the Company in November 2003 as
President and was subsequently nominated to be a Director of the Company. He has
over 30 years of management, financial and consulting experience with both
domestic and international firms. He has acted as an advisor or consultant to
numerous financial and mining related firms in the areas of business management,
fund raising, and financial consulting. Such firms include, but are not limited
to Ettuscan Minerals Ltd, Halifax Nova Scotia; Emgold Mining Corporation,
Vancouver, Canada; Coexis Limited, Rickmansworth, England; Societe General De
Surveillance, Geneva; Stone and Webster International Engineering, Denver,
Colorado; Wheaton River Minerals Ltd, Toronto, Canada and Toth Aluminum Company,
New Orleans, Louisiana. From March 2000 to December 2002, Mr. Burns served as
President and CEO, and then Chairman, of Global Fiduciary Trade Services (GFTS -
now called EcoNovo). GFTS was established to provide global fiduciary trade,
trust and corporate services over the Internet. In February of 1997, Mr. Burns
became President and CEO of Frontier Resources Management, a special purpose,
natural resources project management company with US$18M in capital. From 1992
to 1997 Mr. Burns was Global Head and Managing Director of the Derivative
Trading and Finance Group at Barclays Metals London, a unit of Barclays Bank
PLC, London, England. He was responsible for building and managing the team and
the systems necessary to support the trading of derivatives and the paper
created from related structured financings. From 1982 to 1990, Mr. Burns worked
in a number of trading positions on the equity options, FX and commodity desks
at Drexel Burnham and developed the trading and risk management systems used to
support derivative trading activities on each desk. In 1986, Mr. Burns took the
position of Vice President, Senior Risk Manager and CFO of the Drexel
Commodities Group at Drexel Burnham Lambert Inc., New York, New York and of
Drexel Burnham Lambert Trade Finance Ltd, New York.

Mr. Burns serves as an independent director on the boards of Emgold Mining
Corporation (EMR, TSX) and Northern Orion Resources (NNO, TSX) both of
Vancouver, Canada. He is also a US Director of Coexis Ltd., Rickmansworth, U.K.
and a Director of Equinom Inc. Chicago, Illinois; both privately held technology
companies and software authors. Mr. Burns is an Associated Person of FRM
Management LLC in Chicago Ill. Mr. Burns is the author of a number of option and
volatility related financial products including: DIVAs (Drexel Implied
Volatility Agreements) and DRAFTs (Drexel Range Adjusted Forward Transactions).
He is the author and sponsor of the World Commodity Banking System proposal. Mr.
Burns is a graduate of the University of Pennsylvania (B.S., 1973). He also
completed non-major courses in accounting, finance, marketing and computer
science at Wharton while as an undergraduate and in continuing postgraduate, but
non-degree studies.

                                      -30-
<PAGE>

         Gary Abreim. Mr. Abreim assumed the role of Chief Financial Officer on
April 1, 2003. From first quarter 2001 through 2002, Mr. Abreim provided
financial consulting services to the Company from time to time on an as needed
basis. From 1999 to the present, Mr. Abreim worked as a business development
consultant and interim chief financial officer to various early stage private
companies. His emphasis was in the areas of financial reporting, planning,
systems implementation and monitoring, cash management, asset recovery and
workouts. Prior to that, from 1990 to 1999, Mr. Abreim was Chief Financial
Officer of Ally Capital Group; a California based private asset management
company, merchant bank and SBIC, where he was responsible for managing the
multiple operating functions, financial reporting and regulatory compliance for
$70 million of portfolio assets. Mr. Abreim is also Treasurer of Arete Relief
Services; a Northern California based registered charity that provides medical,
educational, and hunger relief in less developed countries. Mr. Abreim received
his BS and MBA degrees from UCLA in California. He also achieved his CPA
certificate in 1967 while working with Arthur Andersen & Co, but is not
presently certified.

         Irving W. DeVoe, Ph.D. Dr. DeVoe currently serves as the Chief Science
Officer of the Company and is the inventor of the MR3 technology and author of
26 U.S. and International patents. He has over nineteen years of experience in
technology development, management, and direct supervision of R&D operations
related to hazardous chemical technology. Dr. DeVoe joined the Company in
October 1997 in connection with the acquisition of MR3, Inc., the predecessor to
MR3 Systems, Inc. In January 2002, due to the limited operations of the Company
at the time, Dr. DeVoe elected to resign his positions as a Director and Chief
Science Officer of the Company. He continued to fulfill the duties of Chief
Scientist of the Company, as a principal consultant from leased laboratory
facilities in Salem, Massachusetts. From 1993 to 1995, Dr. DeVoe was engaged as
a technical consultant to Metanetix Technical Services ("MTS"), a subsidiary of
Hariston, Inc., a British Columbia public company. MTS was located in Butte,
Montana and provided engineering process design R&D services for Metanetix
Corporation, also a subsidiary of Hariston, Inc. From 1991 to 1993, he founded
and acted as President of DeVoe Environmental Laboratory ("DVL"), a private
company located in Palm Springs, California. DVL was created to design,
construct, deliver and operate a pilot plant facility to provide soil cleaning
technology and services for the Toronto Harbor Commission. Formerly a Research
Associate at Argonne National Laboratory, U.S. Atomic Energy Commission, Dr.
DeVoe has acted as a consultant to government and industry, has made numerous
contributions to scientific journals, and has been an invited speaker at
scientific symposia throughout the world. He earned a B.S. degree from Aurora
University and a Ph. D. from the University of Oregon Medical School. Dr (Oregon
Health Science University). Dr. DeVoe was also awarded a Post Doctorate Fellow
from the National Research Council of Canada in 1969.

         Other Senior Management, Significant Persons and Contributors

Rainer Bauder. Mr. Bauder joined the Company in July 2001, to support Dr. DeVoe
at the Salem research laboratories and was appointed a Vice President in October
2003. Mr. Bauder has over 15 years of European experience as a chemical research
technician, with special skills in chromatography. From 1986 to 1988 he served
as an analytic technician at Nuclear Power Plant KKL, CH-Leibstadt, monitoring
plant fluids and emergency systems, handling and analytical determinations of
open radioactive sources, monitoring of ground water and river water for cooling
systems, and supervising of gas and water sampling units. From 1988 to 1993 he
was an agrochemical research technician working with metabolism studies in soil,
plant and animals according to OECD and FDA guidelines using HPLC and TLC. From
1993 to 1994 he was a research technician for Ciba-Geigy Ltd., in Basel,
Switzerland, also conducting metabolism studies in soil, plant and animals, and
examining the behavior of (formulated) agrochemicals in the environment using
14C radio-tracer technique (HPLC/TLC/GC). From 1994 to 1998 he was a senior
technician for Techform Engineering Ltd., Embrach, Switerland, where he headed
the analytical laboratory, analytical support for research and development, laid
out and realized laboratory experiments, including chemical development of

                                      -31-
<PAGE>

industrial processes like fly ash treatment of incineration plants, and
monitored pilot plants and technical support. From 1998 until joining the
Company in 2001, Mr. Bauder was a service engineer for Shimadzu Switzerland
Ltd., working with instruments, including Total Carbon Analyzers (TOC) and
Gaschromatographs (GC-GC/MS).

Peter Odintsov. Mr. Odintsv joined the Company in December 2003 as Vice
President of Operations and is chiefly responsible for managing the information
requirements of the Company. Mr. Odintsov has over a decade of experience in
information systems and related operations. In addition he has had extensive
experience in modeling and database management. In 1991, as a Portfolio Analyst
for Allegiance Capital, located in San Francisco, he administered a $40 million
loan portfolio and managed the interface with the Trustee and investor group. He
also served as head of the Information Systems at Point West Capital
Corporation, a San Francisco based publicly traded venture capital firm from
1999 to 2003. In 1998, Mr. Odintsov became a founder of Prominvest Consulting in
Tomsk, Russia, where he conducted the feasibility studies and provided
consulting services for the acquisition of the Tomsk Pencil Factory by a private
Russian company. He has also worked as a consultant to many Russian businesses
on foreign exporting and fundraising activities. Mr. Odintsov is a graduate of
Polytechnic University in Tomsk, Russia, with a B.S. in Management Information
Systems in Banking (1996), along with courses toward a Masters Degree in
Information Systems in Economics.

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.

Samir Gad. Mr. Gad has provided management, business and financial consulting
services to the Company since 1999. Mr. Gad has international business
experience in the world optical market. From 1979 to 1986 he held sales related
positions with two of the five major U.S. contact lens manufacturers, including
Eastern Regional Manager with Bausch & Lomb Canada. In 1986 he launched his own
contact lens distribution business based in Montreal, Quebec. Mr. Gad
established strategic relationships with associates in the United States, Europe
and the Middle East, including founding and establishing the first independent
European contact lens distributor based in Paris, France. Mr. Gad also
distributed contact lenses from a U.S. based company, Imperial Optical, Inc. As
President and CEO of Imperial Optical, he has evolved his company's focus from
classical contact lens distribution practices to more innovative relationships
including exclusive distribution agreements with buying groups and joint
ventures leading to the launching of private label disposable lenses. In
addition to Imperial Optical's core business activity, it also holds an
exclusive agency agreement with one of the five major U.S. contact lens
manufacturers for its management of the entire Middle Eastern region including
the Arab Gulf area. Mr. Gad is a graduate of the Microbiology and Immunology
Department, Faculty of Medicine, McGill University.

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

                                      -32-
<PAGE>

the representations of the reporting persons, we believe that these persons are
in compliance with all applicable filing requirements for the fiscal year ended
December 31, 2001.

Audit Committee

         In fiscal year 2001, the Company had not appointed members to an audit
committee and, therefore, the Board of Directors conducted the respective role
of an audit committee for that period. The Company intends to establish an audit
committee within the guidelines of the Sarbanes-Oxley Act of 2002 as soon as
practicable. 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.

ITEM 10. EXECUTIVE COMPENSATION

         The following Summary Compensation Table indicates certain compensation
information for the Chief Executive Officer, President and Chief Operating
Officer and Chief Science Officer (collectively referred to as the "Named
Executive Officers") for the periods indicated. 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.
<TABLE>
<CAPTION>

                           Summary Compensation Table

                                                                       Long Term Compensation Awards
                        Annual Compensation                                  Awards           Payout
                                                                      --------------------  ----------
                                                                      Restricted   LTIP     Securities    All Other
        Name and                                                        Stock      Pay      Underlying     Compen-
   Principal Position      Year      Salary       Bonus      Other      Awards     -out      Options/      sation
   ------------------      ----      ------       -----      -----    ---------  ---------  ----------   ----------
                                       ($)         ($)        ($)                              SARs          ($)
                                                                                               (#)
<S>                       <C>        <C>       <C>          <C>         <C>      <C>         <C>          <C>
Randall S. Reis           2001       47,594                                                       -
Chairman & Chief          2000      122,500                                                       -
Executive Officer(1)      1999       96,000                                                       -

Larry J. Hopper           2001       25,500                                                       -
President, COO,           2000       28,000                                                    500,000
and Senior Vice           1999                                                                    -
President (2)

Irving W. DeVoe           2001       37,000                                                  1,774,067
Chief Science Officer     2000      120,000                                                    967,138
and Director(3)           1999       96,000
</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, 2001, and 2000 was
     $37,906 and $25,500, respectively. Mr. Reis' employment agreement with the
     Company specifies a gross annual salary of $120,000.

                                      -33-
<PAGE>

(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, 2001, and 2000 was
     $46,566 and $0, respectively. On January 15, 2003, pursuant to Mr. Hopper's
     employment agreement, he was provided with a 60-day notice of employment
     termination. Securities underlying options include warrants granted during
     the noted period at $0.25 per share with a five-year exercise period.

(3)  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, 2001, and 2000 was
     $51,000 and $28,000, respectively. Dr. DeVoe's employment agreement with
     the Company specifies a gross annual salary of $120,000. Securities
     underlying options include warrants granted during the noted period at
     $0.10 per share with a five-year exercise period.

<TABLE>
<CAPTION>
                      Option/SAR Grants in Fiscal Year 2001

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

                          Number of            % of Total
                         Securities           Options/SARs
                         Underlying            Granted to
                        Options/SARs          Employees in          Exercise or Base       Expiration
     Name                Granted (#)          Fiscal Year (1)        Price ($/Share)          Date
     ----               ------------          -------------         ----------------       ----------
<S>                        <C>                    <C>                     <C>               <C>
Irving W. DeVoe              341,375              18.31%                  $0.10              2/15/06
Irving W. DeVoe            1,432,692              76.86%                  $0.10             11/15/06
</TABLE>

(1)  There was an aggregate of 1,864,067 warrants issued in fiscal year 2001 to
     employees of the Company.

                 Aggregated Option Exercises in Fiscal Year 2001

                                 None exercised.

Employment Agreements

         In fiscal years 2001 and 2002, the Company did not enter into any new
employment agreements.

         In fiscal year 2003, the Company entered into employment agreements
with Mr. Jody J. Sitkoski - Vice President; Randall S. Reis - Chairman of the
Board; Bradley N. Rotter - Chief Executive Officer; and Dr. Irving W. DeVoe -
Chief Science Officer. The terms of the employment agreements are more fully
disclosed in the Company's annual report on Form 10-KSB (Amendment #2) for the
period ended December 31, 2002, as filed with the SEC on December 22, 2003.

                                      -34-
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following tables set forth information, to the best knowledge of
the Company, as of December 31, 2001 and December 31, 2003, respectively,
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 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 best 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.

         Security Ownership of certain beneficial owners and management
                              at December 31, 2001

      Name and Address                 Amount and Nature
     of Beneficial Owner              of Beneficial Owner           Percent of
   as of December 31, 2001          as of December 31, 2001          Class (1)
   -----------------------          -----------------------          -------

Randall S. Reis *                         5,291,687                    11.10%

Irving W. DeVoe*                          5,784,605(2)                 12.14%
100 Cummings Center, S-336-H
Beverly, MA 01915

Bradley N. Rotter                         3,250,000(3)                  6.82%
101 Lombard Street; St 101 W
San Francisco, CA. 94111

Steven M. Schorr                          6,560,273(4)                 13.76%
P.O. Box 2120
Kihei, HI 96753

Mel Kelm                                  2,568,000(5)                  5.39%
Pfeiffer Ridge, #7
Big Sur, CA 93920

Larry J. Hopper *                           500,000(6)                  1.05%

All directors and executive
officers as a group (3)                  11,576,292(7)                 24.29%

*    Director and/or executive officer

                                      -35-
<PAGE>

(1)  Based upon 40,483,101 shares of common stock outstanding on December 31,
     2001, 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 6,681,644 shares of common stock which are exercisable within
     sixty days. Therefore, for the purposes of calculating percentage ownership
     as indicated in the table above 47,164,745 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 4,441,205 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 10/30/04 through 11/15/06.

(3)  Includes 750,000 shares that may be acquired by Mr. Rotter pursuant to the
     exercise of warrants priced at $0.25 per share and expiring 2/11/06.

(4)  Includes 1,190,439 shares that may be acquired by Mr. Schorr pursuant to
     the exercise of warrants priced at $0.10 and expiring 11/30/04.

(5)  Includes 300,000 shares that may be acquired by Mr. Kelm pursuant to the
     exercise of warrants priced at $0.05 and expiring 7/15/06.

(6)  Includes 500,000 shares that may be acquired by Mr. Hopper pursuant to the
     exercise of warrants priced at $0.25 and expiring 8/15/2005.

(7)  Includes 4,441,205 shares that may be acquired by one executive officer
     pursuant to the exercise of warrants priced at $0.10 per share and expiring
     during the period 10/30/04 and 11/15/06.


                                      -36-
<PAGE>

         Security Ownership of certain beneficial owners and management
                              at December 31, 2003

      Name and Address                 Amount and Nature
     of Beneficial Owner              of Beneficial Owner           Percent of
   as of December 31, 2003          as of December 31, 2003          Class (1)
   -----------------------          -----------------------          -------
Randall S. Reis *                         6,521,687(2)                  7.96%

Irving W. DeVoe*                          6,983,489(3)                  8.52%
100 Cummings Center, S-336-H
Beverly, MA 01915

Bradley N. Rotter *                       9,866,662(4)                 12.04%

John K. Burns *                           1,000,000(5)                  1.22%

Gary K. Abreim *                          1,277,450(6)                  1.56%

Steven M. Schorr                          4,932,647(7)                  6.02%
P.O. Box 2120
Kihei, HI 96753

Mel Kelm                                  5,783,357(8)                  7.06%
Pfeiffer Ridge, #7
Big Sur, CA 93920

Theodore H. Swindells &                   4,499,999(9)                  5.49%
High Stakes Capital, LLC
11400 S.E. 8th St.; Unit 420
Belleuve, WA 98004

All directors and executive
officers as a group (5)                  25,649,288(10)               31.30%

*    Director and/or Executive Officer

(1)  Based upon 60,894,046 shares of common stock outstanding on December 31,
     2003, 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 21,061,190 shares of common stock which are exercisable within
     sixty days. Therefore, for the purposes of calculating percentage ownership
     as indicated in the table above 81,955,236 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.

                                      -37-
<PAGE>

(3)  Includes 5,440,089 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 10/30/04 through 12/31/07.

(4)  Includes 6,533,329 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 2/01/09

(5)  Includes 1,000,000 shares that may be acquired by Mr. Burns pursuant to the
     exercise of warrants priced at $0.35 per share and expiring 11/04/08.

(6)  Includes 1,000,000 shares that may be acquired by Mr. Abreim pursuant to
     the exercise of warrants priced at $0.03 per share and expiring 12/31/07.

(7)  Includes 1,590,439 shares that may be acquired by Mr. Schorr pursuant to
     the exercise of warrants between $0.07 and $0.10 and expiring during the
     period 11/30/04 and 09/1/07.

(8)  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.

(9)  Includes 3,666,666 shares that nay be acquired by Mr. Swindells and High
     Stakes Capital, LLC pursuant to the exercise of warrants priced between
     $0.23 and $0.36 and expiring during the period 7/21/08 and 10/06/08.

(10) Includes 14,973,418 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 10/30/04 and 2/1/09.

     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. On October 19, 1999, the Company entered
into agreements with Dr. Irving DeVoe and David Blythe, an employee, to grant
them anti-dilution protection against any further stock issuances by the
Company. Mr. Blythe's anti-dilution rights expired on June 1, 2001 with his
termination as an employee. On June 14, 2003, Dr. DeVoe entered into a new
employment agreement with the Company concurrent with which he waived his
anti-dilution rights.

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:

         On February 15, 2001 and November 15, 2001, the Company issued 341,375
warrants and 1,432,692 warrants, respectively to purchase common shares of the
Company's stock at a price of $0.10 per share for a five year period to Dr.
Irving W. DeVoe, Chief science Officer. These warrants were issued pursuant to
an anti-dilution agreement in effect at the time of issuance with Dr. DeVoe.

         With the exception noted below, details on related 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 for
fiscal years 2002 and 2003 are more fully disclosed in the Company's annual

                                      -38-
<PAGE>

report on Form 10-KSB (Amendment #2) for the period ended December 31, 2002, as
filed with the SEC on December 22, 2003.

         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, 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.

                                     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 Emarethre
         Corporation changing name to MR3 Systems, Inc., filed March 31, 2000
         (1)

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. (1)

10.1     Loan Agreement (Credit Facility) between High Stakes Capital LLC and
         the Company dated October 7, 2003 (2)

21.1     Subsidiary of the Company (3)

23.1     Consent of Pohl, McNabola, Berg & Company

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

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

                                      -39-
<PAGE>


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

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

(3)  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 no reports on Form 8-K during the twelve months of its fiscal
year ended December 31, 2001.

ITEM 14. 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-14(c) under the Securities Exchange Act of 1934) are effective within the
limitations noted below. 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 2004. Management expects to be in compliance with the
internal control requirements of Section 404 of the Sarbanes-Oxley Act prior to
the required compliance date in 2005.

         Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include,
but are not limited to the fact human judgment in decision-making can be faulty
and that breakdowns in internal control can occur because of human failures such
as simple errors, mistakes or intentional circumvention of the established
procedures.

         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
slight deficiencies and material weaknesses.

                                      -40-
<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:  February 10, 2004               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.

<TABLE>
<CAPTION>

       Signature                           Title                                 Date
       ---------                           -----                                 ----

<S>                               <C>                                       <C>
/s/ RANDALL S. REIS               Chairman of the Board                     February 10, 2004
----------------------------
    Randall S. Reis

/s/ BRADLEY N. ROTTER             Chief Executive Officer and Director      February 10, 2004
----------------------------
    Bradley N. Rotter

/s/ JOHN K. BURNS                 President, Chief Operating Officer        February 10, 2004
----------------------------      and Director
    John K. Burns

/s/ GARY K. ABREIM                Chief Financial Officer                   February 10, 2004
----------------------------
    Gary K. Abreim
</TABLE>



                                      -41-
<PAGE>

                                MR3 SYSTEMS, INC

                              FINANCIAL STATEMENTS

                           DECEMBER 31, 2001 AND 2000


                                 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-31



                                      -42-
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
MR3 Systems, Inc

We have audited the balance sheets of MR3 Systems, Inc, as of December 31, 2001
and 2000, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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, 2001 and 2000, 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.

As discussed in Note 13, MR3 Systems, Inc's management concluded that an
intangible asset should be written off at December 31, 2000. Accordingly, the
Company recorded an impairment loss of $70,051 in the financial statements for
the period ended December 31, 2000.


Pohl, McNabola, Berg & Company LLP
San Francisco, CA
March 20, 2003, except for Note 12 and Note 13, which are dated December 1, 2003

                                       F-1
<PAGE>
<TABLE>
<CAPTION>

                                MR3 SYSTEMS, INC
                                 BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000

                                                                         2001            2000
                                                                     ------------    ------------
<S>                                                                  <C>             <C>
ASSETS
   Cash                                                              $         55    $      3,201
   Accounts receivable                                                         --           9,167
   Inventory                                                                   --          18,355
                                                                     ------------    ------------

       Total current assets                                                    55          30,723
                                                                     ------------    ------------
   Property, equipment and leaseholds,
    net of accumulated depreciation and amortization                      325,951         387,625
   Property held for sale                                                      --              --
   Deposits                                                                17,470           3,818
                                                                     ------------    ------------

       Total non-current assets                                           343,421         391,443
                                                                     ------------    ------------

         TOTAL ASSETS                                                $    343,476    $    422,166
                                                                     ============    ============

LIABILITIES
   Accounts payable                                                  $    361,125    $    212,949
   Payroll taxes payable                                                  168,406         115,271
   Accrued expenses                                                       178,111          97,139
   Note payable                                                            84,254          84,254
   Short term notes payable                                               139,644         128,767
                                                                     ------------    ------------

       Total current liabilities                                          931,540         638,380
                                                                     ------------    ------------

   Liabilities related to discontinued division                            63,448          63,448
                                                                     ------------    ------------

       Total long term liabilities                                         63,448          63,448
                                                                     ------------    ------------

         TOTAL LIABILITIES                                                994,988         701,828
                                                                     ------------    ------------
SHAREHOLDERS' DEFICIT
   Common stock: 100,000,000 shares authorized; par value $0.01
    issued and outstanding 40,483,101 shares in 2001,
     and 31,909,010 shares in 2000                                        404,831         319,090
   Preferred  stock: 5,000,000    shares  authorized; par value
     $0.01 Series A, 1,250,000 shares authorized; issued
      and outstanding 259,214 shares in 2001
       and 320,839 shares in 2000                                           2,592           3,208
   Additional paid-in capital                                           7,012,531       6,277,663
   Accumulated deficit                                                 (8,071,466)     (6,879,623)
                                                                     ------------    ------------

         Total shareholders' deficit                                     (651,512)       (279,662)
                                                                     ------------    ------------

         TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                 $    343,476    $    422,166
                                                                     ============    ============
</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, 2001 AND 2000

                                                     2001            2000
                                                 ------------    ------------
Income
  Sales                                          $     57,749    $    130,566
  Cost of goods sold                                  387,635         288,267
                                                 ------------    ------------

      Gross margin                                   (329,886)       (157,701)
                                                 ------------    ------------
Operating Expenses
  Research and development                            136,365         481,598
  Mining expenses                                          --              --
  Office expenses                                     137,682          94,357
  Personnel expenses                                  204,032         275,185
  Outside services and professional fees              212,407         195,274
  Rent                                                 63,450          20,200
  Impairment loss on intangible assets                     --          70,051
  Depreciation                                         63,472          58,772
                                                 ------------    ------------

      Total operating expenses                        817,408       1,195,437
                                                 ------------    ------------
Other (Income) and Expenses
  Interest (income) and expense                        20,749          57,112
  Other (income) and expense                           23,000           6,491
                                                 ------------    ------------
      Total other (income) and expense                 43,749          63,603
                                                 ------------    ------------

         Net loss before taxes                     (1,191,043)     (1,416,741)
                                                 ------------    ------------

         Provision for income taxes                       800             800
                                                 ------------    ------------

Net loss                                         $ (1,191,843)   $ (1,417,541)
                                                 ============    ============

  Loss per share:
         Basic - continuing operations           $      (0.03)   $      (0.05)
                                                 ============    ============
         Diluted - continuing operations         $      (0.03)   $      (0.05)
                                                 ============    ============

Weighted average number of shares:
         Basic                                     37,393,288      28,647,119
                                                 ============    ============
         Diluted                                   37,393,288      28,647,119
                                                 ============    ============

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

                                       F-3
<PAGE>
<TABLE>
<CAPTION>

                                MR3 SYSTEMS, INC
                       STATEMENTS OF SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000


                                       Common                      Preferred            Additional
                                       Stock                         Stock                 paid-
                            --------------------------    --------------------------        in         Accumulated
                               Shares         Amount         Shares         Amount        Capital        Deficit         Total
                            -----------    -----------    -----------    -----------    -----------    -----------    -----------
<S>                          <C>           <C>                <C>        <C>            <C>            <C>            <C>
Balance December 31, 1999    24,870,964    $   248,710        556,455    $     5,565    $ 4,895,877    $(5,297,786)   $  (147,635)

Sale of common stock          5,284,739         52,847             --             --      1,099,622             --      1,152,469

Conversion of preferred
stock into common stock         235,616          2,356       (235,616)        (2,356)            --             --             --

Conversion of notes
payable into common stock       200,000          2,000             --             --         18,000             --         20,000

Exercise of warrants
into common stock             1,313,859         13,139             --             --        118,248             --        131,387

Shares repurchased of
warrants exercised              (58,668)          (587)            --             --       (125,800)            --       (126,387)

Compensation recognized
on options granted                   --             --             --             --        217,341             --        217,341

Warrant issuance                     --             --             --             --         30,000             --         30,000

Common stock issued for
services                         62,500            625             --             --         24,375             --         25,000

Dividends-in-kind                    --             --             --             --             --       (164,296)      (164,296)

Net loss                             --             --             --             --             --     (1,417,541)    (1,417,541)
                            -----------    -----------    -----------    -----------    -----------    -----------    -----------

Balance December 31, 2000    31,909,010    $   319,090        320,839    $     3,208    $ 6,277,663    $(6,879,623)   $  (279,662)
                            ===========    ===========    ===========    ===========    ===========    ===========    ===========


Sale of common stock          8,175,016         81,750             --             --        581,635             --        663,385

Conversion of preferred
stock into common stock          61,625            616        (61,625)          (616)            --             --             --

Compensation recognized
on options granted                   --             --             --             --        134,960             --        134,960

Common stock issued for
services                        337,450          3,375             --             --         18,273             --         21,648

Net loss                             --             --             --             --             --     (1,191,843)    (1,191,843)
                            -----------    -----------    -----------    -----------    -----------    -----------    -----------

Balance December 31, 2001    40,483,101    $   404,831        259,214    $     2,592    $ 7,012,531    $(8,071,466)   $  (651,512)
                            ===========    ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

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

                                       F-4
<PAGE>
<TABLE>
<CAPTION>

                                MR3 SYSTEMS, INC
                            STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000


                                                               2001            2000
                                                           ------------    ------------
<S>                                                        <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                 $ (1,191,843)   $ (1,417,541)
  Adjustments to reconcile net loss to net cash used
  by operating activities:
   Depreciation and amortization                                 63,472          58,772
   Impairment loss on intangible assets                              --          70,051
   Compensation expense on stock options granted                134,960         217,341
   Amortization of warrant issuance                                  --          30,000
   Shares issued for Services                                    21,648          25,000

 Changes in assets and liabilities
   Accounts receivable                                            9,167          (4,652)
   Inventory                                                     18,355           1,602
   Prepaid expenses and deposits                                (13,652)         25,274
   Accounts payable                                             148,176          79,903
   Payroll taxes payable                                         53,135          26,894
   Accrued expenses                                              80,972        (133,854)
   Accrued interest on shareholder notes                         10,877          11,198
   Liabilities related to discontinued division                      --         (36,752)
                                                           ------------    ------------
     Net cash used by operating activities                 $   (664,733)   $ (1,046,764)
                                                           ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchase of property and equipment                      $     (1,798)   $   (108,442)
                                                           ------------    ------------

     Net cash used by investing activities                 $     (1,798)   $   (108,442)
                                                           ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from sale of common stock and warrants         $    663,385    $  1,157,469
                                                           ------------    ------------

     Net cash provided by financing activities             $    663,385    $  1,157,469
                                                           ------------    ------------
</TABLE>

                                   (continued)

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

                                       F-5
<PAGE>
<TABLE>
<CAPTION>

                               MR3 SYSTEMS, INC.
                      STATEMENTS OF CASH FLOWS (CONTINUED)
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

                                                               2001            2000
                                                           ------------    ------------
<S>                                                        <C>             <C>
   Increase (decrease) in cash and short-term
    investments                                            $     (3,146)   $      2,263

   Balance at beginning of year                                   3,201             938
                                                           ------------    ------------

   Balance at end of year                                  $         55    $      3,201
                                                           ============    ============


Supplemental disclosures:

   Cash paid for interest                                  $        984    $     10,297
                                                           ============    ============
   Cash paid for taxes                                     $        800    $        800
                                                           ============    ============

Supplemental Schedule of Non-Cash
Investing and Financing Activities:
                                                               2001            2000
                                                           ------------    ------------

   Conversion of notes payable into common stock           $         --    $     20,000
                                                           ============    ============

   Conversion of accrued interest into common stock        $         --    $         --
                                                           ============    ============

   Common stock issued for services                        $     21,648    $     25,000
                                                           ============    ============

   Compensation expense on stock options
    and warrants granted                                   $    134,960    $    217,341
                                                           ============    ============

   Amortization of warrant issuance
                                                           $         --    $     30,000
                                                           ============    ============

   Conversion of Accounts payable into Note Payable        $         --    $     84,254
                                                           ============    ============
</TABLE>
<TABLE>
<CAPTION>

   Dividend-in-kind:

     During the year ended December 31, 2000, the net assets of the Company's
     discontinued division Airponic Growing Systems, of $164,296 have been
     charged to the Company's accumulated deficit.

                                                                               2000
                                                                           ------------
<S>                                                                        <C>
     Inventory                                                             $    120,251
     Property and equipment, net                                                  1,932
     Intangible assets                                                           42,113
     Charge to accumulated deficit                                             (164,296)
                                                                           ------------
     Total                                                                 $         --
                                                                           ============
</TABLE>

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

                                       F-6
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

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 reserve for obsolete inventory, and
depreciation. Actual results could differ from those estimates.

                                       F-7
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

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 times maintains cash balances in excess of the federally insured
limit of $100,000 per institution. There were no uninsured balances as of
December 31, 2001 and 2000.

Revenue recognition
-------------------

The Company recognizes revenue when merchandise is shipped to a customer or at
the time services are rendered. 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, 2001 AND 2000

1.       Summary of Significant Accounting Policies (continued)
         -----------------------------------------------------

Accounts receivable and the allowance for doubtful accounts
-----------------------------------------------------------

Accounts receivable were typically unsecured. The Company performs ongoing
credit evaluations of its customers' financial condition. It generally requires
no collateral and maintains reserves for potential credit losses on customer
accounts when necessary. Accounts receivable amounted to $9,167 at December 31,
2000.

The Company establishes an allowance for uncollectible trade accounts receivable
based on historical collection experience and management evaluation of
collectibility of outstanding accounts receivable. It is reasonably possible
that the Company's estimate of the allowance for doubtful accounts will change.
There was no allowance for doubtful accounts at December 31, 2000.

Inventory
---------

Inventory consisted principally of raw materials used in the extraction process
and is stated at the lower of cost (first-in, first-out method) or market.
Management reviews the quality and salability of the inventory on a periodic
basis and establishes reserves based upon the lower of cost or fair market
value. There was no inventory at December 31, 2001. Inventory amounted to
$18,355 at December 31, 2000.

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                          3-25 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.

                                       F-9
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

1.       Summary of Significant Accounting Policies (continued)
         -----------------------------------------------------

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 expense 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. There were no capital lease obligations at December
31, 2001 and 2000.

Advertising costs
-----------------

The Company expenses advertising costs as incurred. There were no advertising
costs for the years ended December 31, 2001 and 2000.

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.

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.

                                      F-10
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

1.       Summary of Significant Accounting Policies (continued)
         -----------------------------------------------------

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.

Adoption of SFAS-133: Accounting for Derivative Instruments
-----------------------------------------------------------
and Hedging Activities
----------------------

The Company has adopted Financial Accounting Standards Board Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities", which requires
that all derivative instruments be recorded on the balance sheet at fair value.
The Company is currently not engaged in hedging activities nor does it have any
derivative instruments, thus there is no impact on the current periods financial
statements

Intangible assets
-----------------

The Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets." 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.

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.

Intangible assets subject to amortization include purchased designs and
proprietary rights for the metals extraction and separation technology capable
of processing industrial wastes and other complex metal sources into pure metals
and specialty chemical products. Impairment loss of this intangible asset
amounted to $70,051 for the period ended December 31, 2000.

                                      F-11
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

1.       Summary of Significant Accounting Policies (continued)
         -----------------------------------------------------

Comprehensive income (loss)
---------------------------

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, 2001 and 2000, comprehensive
income (loss) is equivalent to the Company's reported net income (loss).

Deferred revenue
----------------

The Company recognizes revenues as earned. Amounts billed in advance of the
period in which service is rendered are recorded as a liability under "Deferred
revenue."

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 FAS-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.

In March 2000, the FASB released 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. The Company's policies
comply with the guidance provided by FIN No.44.

Research and development cost
-----------------------------

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

                                      F-12
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

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.

                                      F-13
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

1.       Summary of Significant Accounting Policies (continued)
         -----------------------------------------------------

Recent accounting pronouncements
--------------------------------

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations,"
which supercedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001, and eliminates the
pooling-of-interests method. In addition, SFAS 141 establishes specific criteria
for the recognition of intangible assets separately from goodwill and requires
unallocated negative goodwill to be written off immediately as an extraordinary
gain. The provisions of SFAS 141 are required to be adopted July 1, 2001. The
adoption of SFAS 141 will not change the method of accounting used in previous
business combinations including those the Company accounted for under the
pooling-of-interests method. The adoption of this statement did not have any
impact on the Company's financial condition or results from operations.

In July 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective
for fiscal years beginning after December 15, 2001. Certain provisions shall
also be applied to acquisitions initiated subsequent to June 30, 2001. SFAS 142
supercedes APB Opinion No. 17, "Intangible Assets," and requires, among other
things, the discontinuance of amortization related to goodwill and
indefinite-lived intangible assets. These assets will then be subject to an
impairment test at least annually. In addition, the standard includes provisions
upon adoption for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles and reclassification of certain intangibles out of previously
reported goodwill. The adoption of this statement will not have a material
impact on the Company's financial condition or results from operations.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires liability recognition for obligations
associated with the retirement of tangible long-lived asset and the associated
asset retirement costs. The Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002 with earlier application
encouraged. The implementation of SFAS No. 143 will not have a material affect
on the Company's results of operations or financial position.

In August 2001, the FASB issued SFAFS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of", in that it removes goodwill from its impairment scope and
allows for different approaches in cash flow estimation. However, SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for (a) recognition and
measurement of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of. SFAS No. 144 also supersedes the business
segment concept in APB opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," in
that it permits presentation of a component of an entity, whether classified as
held for sale or disposed of, as a discontinued operation. However, SFAS No. 144
retains the requirement of APB Opinion No. 30 to report discontinued operations
separately from continuing operations. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001 with earlier application encouraged. The Company will adopt
the provisions of SFAFS No. 144 effective January 1, 2002.

                                      F-14
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

1.       Summary of Significant Accounting Policies (continued)
         -----------------------------------------------------

Recent accounting pronouncements (continued)
--------------------------------------------

In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 ("SFAS 145"), "Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS 145 eliminates the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect. Management does not expect the adoption of SFAS 145 to have a
material impact on the Company's financial position, cash flows or results of
operations.

In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This statement amends SFAS No.123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation. Management does not expect the adoption
of SFAS 148 to have a material impact on the Company's financial position, cash
flows or results of operations.

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. Management does not expect the adoption of SFAS 149 to have a
material impact on the Company's 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.
Management does not expect the adoption of SFAS 150 to have a material impact on
the Company's financial position, cash flows or results of operations.

                                      F-15
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

2.       Spin-off
         --------

In 1999, the Company announced plans to spin off its Airponic Growing Systems
business to shareholders in a taxable distribution, and the Company's board of
directors approved the spin-off effective April 29, 2000, to shareholders of
record as of January 31, 2000, through the issuance of shares in a new
corporation, Bioponics AGS, Inc. Common shares were distributed on a basis of
one share of Bioponics AGS, Inc. for every two shares of the Company's common
stock. 13,734,369 common shares of Bioponics AGS, Inc. were issued to 422
shareholders.

The consolidated financial results of the Company reflect the divestiture of
Airponics Growing Systems, Inc. The net assets of the discontinued segment of
$164,296 are noted as follows and have been charged against the Company's
accumulated deficit to reflect the spin-off:

         Inventory                                     $     120,251
         Property and equipment, net                           1,932
         Intangible assets                                    42,113
                                                       -------------
         Total                                         $     164,296
                                                       =============

Operating activity for this discontinued division was minimal during the year
ended December 31, 2000.

                                      F-16
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

3.       Property and Equipment
         ----------------------

Property and equipment at December 31, 2001 and 2000 consisted of the following:

                                                          2001          2000
                                                       ---------     ---------
         Office furniture and fixtures                 $  70,282     $  70,282
         Computer and manufacturing equipment            471,991       470,193
         Leasehold improvements                           19,278        19,278
                                                       ---------     ---------

         Total property and equipment                    561,551       559,753
         Less accumulated depreciation                  (235,600)     (172,128)
                                                       ---------     ---------

         Total                                         $ 325,951     $ 387,625
                                                       =========     =========

Depreciation expense for the years ended December 31, 2001 and 2000 was $63,472
and $58,772, respectively.


4.       Accrued Expenses
         ----------------

The Company's Board of Director agreed to defer certain salaries and incentives
earned in December 31, 2001 and 2000 for certain officers and key employees.

Accrued interest represent the interest earned on the outstanding notes payable
balances at December 31, 2001 and 2000 due to shareholders and related parties.

Accrued expenses at December 31, 2001 and 2000 consisted of the following:

                                                          2001          2000
                                                       ---------     ---------
         Deferred compensation                         $ 171,689     $  82,967
         Accrued interest                                  6,422         4,422
         Accrued payroll                                      --         9,750
                                                       ---------     ---------
         Total                                         $ 178,111     $  97,139
                                                       =========     =========

                                      F-17
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

5.       Notes Payable
         -------------

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

In 2000, the Company had a 10% note payable with an outstanding principal
balance of $100,000 plus accrued interest of $8,767. The Company reached an
agreement with the lender to modify the terms of the note, due to cash flow
problems experienced by the Company. The lender agreed to convert $20,000 of
principal to common stock at a conversion price of $0.10 per share and receive
additional warrants convertible into 300,000 shares of the Company's common
stock at an exercise price of $0.10 per share and the principal amount of the
note was modified to include the accrued interest balance. The Company charges
included in the Statements of Operations for the year ended December 31, 2000
were $30,000.

In 2001, the Company reached another agreement with this lender to modify the
terms of the note. The outstanding principal balance on the note was $119,644,
which included accrued interest of $10,877.

Short-term notes payable at December 31, 2001 consisted of the following:

                                                                        2001
                                                                     ----------
         10% demand convertible note, due January 2003 with
         interest and principal due and payable on maturity
         date. Note holder has the option to convert the note
         into shares of common stock at $0.10 per share if
         the note becomes overdue                                    $  119,644

         Demand note payable, unsecured, interest at 10%                 20,000
                                                                     ----------

         Total short-term notes payable                              $  139,644
                                                                     ==========


Short-term notes payable at December 31, 2000 consisted of the following:

                                                                        2000
                                                                     ----------
         10% demand convertible note, due January 2002 with
         interest and principal due and payable on maturity
         date. Note holder has the option to convert the note
         into shares of common stock at $0.10 per share if
         the note becomes overdue                                    $  108,767

         Demand note payable, unsecured, interest at 10%                 20,000
                                                                     ----------

         Total short-term notes payable                              $  128,767
                                                                     ==========

Accrued interest on these notes amounted to $6,422 and $4,422 at December 31,
2001 and 2000, respectively.

                                      F-18
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

6.       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 dividend, 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 dividend 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.

Dividends-in-kind
-----------------

In April 2000, the Company concluded a spin off its Airponic Growing Systems
division to shareholders in a taxable distribution. The Company's board of
directors approved the spin-off to shareholders of record as of January 31,
2000. As of December 31, 2000, the net assets of the discontinued division of
$164,296 have been charged against the Company's accumulated deficit to reflect
the spin-off. (See Note 2)

                                      F-19
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

7.       Income Taxes
         ------------

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

                                                         2001           2000
                                                      -----------   -----------
              Current
                Federal                               $        --   $        --
                State                                         800           800
                                                      -----------   -----------

                                                              800           800
              Deferred
                Federal                                        --            --
                State                                          --            --
                                                      -----------   -----------

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

              Provision for income taxes              $       800   $       800
                                                      ===========   ===========


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 at December 31:

                                                         2001          2000
                                                      -----------   -----------
  Deferred tax asset
    Net operating loss carryforward                   $ 2,506,679   $ 2,149,268
    Amortization of intangible assets                      26,340        29,342
    Deferred benefits and other accruals                  175,629       118,178
                                                      -----------   -----------

  Total deferred tax asset                              2,708,648     2,296,788

  Deferred tax liability
    Differences between book and tax depreciation          90,595        89,778
    State income tax benefit                              105,755        88,023
                                                      -----------   -----------

  Total deferred tax liability                            196,350       177,801
                                                      -----------   -----------

  Net deferred tax asset before valuation allowance     2,512,298     2,118,987
  Less valuation allowance                             (2,512,298)   (2,118,987)
                                                      -----------   -----------

  Net deferred tax asset                              $        --   $        --
                                                      ===========   ===========

                                      F-20
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

7.       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, 2001 and 2000 is as follows:

                                                        2001           2000
                                                     ----------     ----------
         Income tax provision  (benefit) computed
         at federal statutory rate                       (34.00%)       (34.00%)

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

         Valuation allowance                              42.92%         42.92%
                                                     ----------     ----------

         Effective income tax rate                         0.08%          0.08%
                                                     ==========     ==========

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, 2001 and 2000, the Company has available approximately
$6,525,000 and $5,595,000 in net operating loss carryforwards available to
offset future federal and state income taxes, respectively, which expire through
2020. 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, 2001 and 2000, 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.

8.       Commitments and Contingencies
         -----------------------------

Office leases
-------------

During the years 2001 and 2000 The Company rented facilities in Salem,
Massachusetts and Butte, Montana, which were used as production and research and
development facilities. These rental agreements are month-to-month.

Beginning in April 2001, the Company occupied 2,766 square feet of office space
located at 1 Penn Center East, Suite #200, Pittsburgh, Pennsylvania as a
business development office for the purpose of facilitating business
opportunities with carbon steel mills. The lease was for a five-year term with
monthly payments of $3,688. Rental payments under this lease amounted to $33,192
for the period ended December 31, 2001. The Company subsequently terminated its
lease for the office space as of March 15, 2002.

Total rent expense under all these operating leases for the years ended December
31, 2001 and 2000 amounted to $90,400, and $46,700 respectively.

                                      F-21
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

8.       Commitments and Contingencies (continued)
         ----------------------------------------

Environmental remediation
-------------------------

The accompanying financial statements include accruals for the estimated future
costs associated with certain environmental remediation activities related to
the past use and disposal of hazardous materials. Substantially all such costs
relate to facilities or locations that are no longer in operation. Due to a
number of uncertainties, including uncertainty of timing, the scope of
remediation, future technology, regulatory changes and other factors, the
ultimate remediation costs may exceed the amounts estimated. However, in the
opinion of management, such additional costs are not expected to be material
relative to liquidity, financial position or future of operations. These costs
were estimated at $5,000 for the year ended December 31, 2001.

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 for the sum of $38,502 payable in
six monthly installments commencing on January 30, 2004.

9.       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, 2001 and 2000, 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

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 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.

Stock options and warrants issued as of December 31, 2001 and 2000 are
summarized as follows:
<TABLE>
<CAPTION>

                                                  2001                          2000
                                       --------------------------    --------------------------
                                                        Average                       Average
                                                        Exercise                      Exercise
                                          Shares         Price          Shares         Price
                                       -----------    -----------    -----------    -----------
<S>                                     <C>           <C>             <C>           <C>
Outstanding at beginning of year        11,299,090    $      0.35     10,211,691    $      0.37
Granted                                  3,934,067           0.12      2,445,758           0.16
Exercised                                       --             --     (1,313,859)         (0.10)
Forfeited/Cancelled                       (267,500)         (0.50)       (44,500)         (2.44)
                                       -----------    -----------    -----------    -----------

Outstanding at end of year              14,965,657    $      0.29     11,299,090    $      0.35
                                       ===========    ===========    ===========    ===========

Exercisable at end of year              14,965,657    $      0.29     11,299,090    $      0.35
                                       ===========    ===========    ===========    ===========
</TABLE>

                                      F-22
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

9.       Stock Options and Warrants (continued)
         -------------------------------------

The following tables presents information about stock options and warrants
granted during the years ended December 31, 2001 and 2000 where the exercise
price of some options and warrants differed from the market price of the
Company's stock on the grant date:

                                                       Weighted
                                                       Number         Average
                                                       of Shares      Exercise
                                                       Granted         Price
                                                      ----------     ----------
         Year ended December 31, 2000:

         Exercise price equals market value            1,367,138     $     0.12
         Exercise price greater than market
          value                                          176,000           0.39
         Exercise price less than market value           902,620           0.18
                                                      ----------     ----------

         Total granted during year                     2,445,758     $     0.16
                                                      ==========     ==========

         Year ended December 31, 2001:

         Exercise price equals market value            1,693,375     $     0.09
         Exercise price greater than market
          value                                        2,240,692           0.15
         Exercise price less than market value                --             --
                                                      ----------     ----------

         Total granted during year                     3,934,067     $     0.12
                                                      ==========     ==========


FASB interpretation No. 44 of APB-25 relating to transactions involving stock
-----------------------------------------------------------------------------
compensation
------------

In March 2000, FASB issued Interpretation No. 44 (FIN-44) (Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25). This Interpretation clarifies the definition of employee for
purposes of applying APB Opinion No. 25 (Accounting for Stock Issued to
Employees), the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation was effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. The Company has adopted the provisions of FIN-44.

Pursuant to FASB Interpretation No. 44, the Company applies provisions of SFAS
No. 123 for options and warrants granted to third parties. Accordingly, in 2001
and 2000 compensation cost has been recognized for its stock options and
warrants granted to outside third parties.

                                      F-23
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

9.       Stock Options and Warrants (continued)
         -------------------------------------

Independent consultant stock options and warrants
-------------------------------------------------

During the years ended December 31, 2001 and 2000, the Company's board of
directors approved the grant of stock options or warrants to various independent
consultants to purchase an aggregate of 2,257,710 and 398,201 shares of its
common stock, respectively. These options have an exercise price of $0.10 to
$0.25 in 2001 and $0.20 to $0.50 in 2000. All of these option or warrants shares
were vested immediately. As a result, the Company recorded $134,960 and $87,200
in compensation expense, which is included in outside services and professional
fees in the Statements of Operations, at December 31, 2001 and 2000,
respectively. These options or warrants were not issued as part of any of the
Company's Stock Option Plans.

The following table summarizes information with respect to options outstanding
and exercisable at December 31, 2001:
<TABLE>
<CAPTION>

                                        Warrants and                       Warrants and
                                     Options Outstanding                Options Exercisable
                        ----------------------------------------     -------------------------
                          Number         Weighted                      Number
                        Outstanding      Average       Weighted      Exercisable      Weighted
                          as of         Remaining      Average          as of         Average
     Range of            December      Contractual     Exercise      December 31,     Exercise
  Exercise Prices        31, 2001         Life          Price           2001           Price
--------------------    ----------     ----------     ----------     ----------     ----------
<S>                        <C>               <C>      <C>               <C>         <C>
$   0.05-0.07              300,000           4.53     $     0.05        300,000     $     0.05

$        0.10           10,809,421           3.35     $     0.10     10,809,421     $     0.10

$   0.12-0.25            2,619,000           3.59     $     0.20      2,619,000     $     0.20

$   0.38-0.40              250,000           2.81     $     0.39        250,000     $     0.39

$   0.50-0.53              340,236           3.18     $     0.50        340,236     $     0.50

$   1.00-4.00              647,000           0.90     $     3.77        647,000     $     3.77
                        ----------                    ----------     ----------     ----------

                        14,965,657                    $     0.29     14,965,657     $     0.29
                        ==========                    ==========     ==========     ==========
</TABLE>

                                      F-24
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

9.       Stock Options and Warrants (continued)
         -------------------------------------

The following table summarizes information with respect to options outstanding
and exercisable at December 31, 2000:

<TABLE>
<CAPTION>

                                        Warrants and                       Warrants and
                                     Options Outstanding                Options Exercisable
                        ----------------------------------------     -------------------------
                          Number         Weighted                      Number
                        Outstanding      Average       Weighted      Exercisable      Weighted
                          as of         Remaining      Average          as of         Average
     Range of            December      Contractual     Exercise      December 31,     Exercise
  Exercise Prices        31, 2000         Life          Price           2000           Price
--------------------    ----------     ----------     ----------     ----------     ----------
<S>                        <C>               <C>      <C>               <C>         <C>
$        0.10            7,983,354           3.94     $     0.10      7,983,354     $     0.10

$   0.12-0.25            1,861,000           4.38     $     0.18      1,861,000     $     0.18

$   0.38-0.40              250,000           3.81     $     0.39        250,000     $     0.39

$   0.50-0.53              557,736           2.72     $     0.50        557,736     $     0.50

$   1.00-4.00              647,000           1.90     $     3.77        647,000     $     3.77
                        ----------                    ----------     ----------     ----------

                        11,299,090                    $     0.35     11,299,090     $     0.35
                        ==========                    ==========     ==========     ==========
</TABLE>


The exercise periods for the options range from immediate to five years from the
date of the grant and all options and warrants granted were immediately vested
and exercisable.

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.

Under APB-25, the cost of compensation is measured by the excess of the fair
market price of the stock over the option exercise price on the measurement
date. This is referred to as the intrinsic value method. Accordingly, the
Company recorded compensation expense of $130,141 in 2000 for options and
warrants granted below fair market value. In 2001, The Company did not grant
warrants or options below the fair market value.

                                      F-25
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

9.       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:

                                                2001              2000
                                            -------------     -------------
         Net Loss:
           As reported                      $  (1,191,843)    $  (1,417,541)
           Pro forma                        $  (1,302,387)    $  (1,679,517)

         Basic and diluted loss per
          common share
           As reported
             Basic                          $       (0.03)    $       (0.05)
             Diluted                        $       (0.03)    $       (0.05)
           Pro forma
             Basic                          $       (0.03)    $       (0.06)
             Diluted                        $       (0.03)    $       (0.06)

Options/warrants are generally granted at prices equal to the current fair value
of the Company's common stock at the date of grant. All options and warrants
granted during the years ended December 31, 2001 and 2000 vested immediately.

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: 2001: dividend yield of 0%; expected volatility of 200%; risk-free
interest rate of 5.8%, and expected life of 5 years. 2000: dividend yield of 0%;
expected volatility of 300%; risk-free interest rate of 6.8%, and expected life
of 5 years The weighted-average fair value of options and warrants granted were
$0.07 and $0.17 for 2001 and 2000, 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.

                                      F-26
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

9.       Stock Options and Warrants (continued)
         -------------------------------------

Options and warrants repricing
------------------------------

Sharp declines in the market price of the Company's common stock during the
years 2001 and 2000 resulted in many outstanding employee stock options and
warrants being exercisable at prices that exceeded the current market price,
thereby substantially impairing the effectiveness of such options as performance
incentives. Consistent with the Company's philosophy of using such equity
incentives to motivate and retain management and employees, the Company's board
of directors (the Board) determined it to be in the best interests of the
Company and its shareholders to restore the performance incentives intended to
be provided by employee stock options by repricing such options and warrants at
a price equal to the fair market price since the decline.

In 2000, the Company's Board decided to reprice options and warrants to purchase
2,035,730 shares, which were granted during 1999 or prior at $0.25 to $0.50 per
share; and the options and warrants were repriced at $0.10. All other terms of
the repriced options and warrants remained unchanged. Options and warrants to
purchase 35,000 shares, which were granted during 1997 at $4.00 per share were
repriced at $0.20.

The effect of this option and warrant repricing on the pro forma disclosures is
considered a modification of the terms of the outstanding options and warrants.
Accordingly, the 2001 and 2000 pro forma disclosure includes compensation cost
for the incremental fair value resulting from such modification.

10.      Concentrations
         --------------

All sales from continuing operations for the years ended December 31, 2001 and
2000 were made to one major customer.

11.      Related Party Transactions
         --------------------------

The Company renewed its employment agreement with the Chief Executive Officer of
the Company on July 5, 1996 for an additional five-year term for a base
compensation of $120,000 per annum. Deferred compensation, which is included in
accrued expenses, amounted to $37,906 and $25,500 for the years ended December
31, 2001 and 2000, respectively.

In addition, the Company recorded deferred compensation for another officer and
a major shareholder in the amount of $51,000 and $28,000 for the years ended
December 31, 2001 and 2000, respectively.

                                      F-27
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

12.      Subsequent Events
         -----------------

In April 2002, the Company entered into a Joint Venture and Technology Transfer
Agreement with Linsa Associates Ltd to commercialize the MR3 Technology in
certain international territories. Both parties agree to share all the
distributable profits to which they are collectively entitled on a 50/50 basis.

In June 2002, the Company entered into a MR3 Metals Extraction Agreement with
Consolidated Empire Gold, Inc., of Evergreen, Colorado, to process gold from the
gold tailings located at a previously mined site. On October 23, 2002, the
Company entered into an expanded MR3 Metals Extraction Agreement with
Consolidated Empire Gold, Inc., which included the processing of the gold ore at
this site.

The Company has negotiated a lease agreement for its new office facility at 435
Brannan Street, San Francisco, California. The lease is for a period of two
years beginning October 1, 2002 and expiring September 30, 2004. This lease
requires monthly rental payments of approximately $2,497.

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. The Company
intends to sell some of its old manufacturing equipment. In addition, property
and equipment were reviewed in light of the decision to close the MR3 plant in
Butte, Montana. The review indicated that MR3 manufacturing property and
equipment were impaired, as determined based on the quoted market prices for
similar assets.

In 2002, the Company issued $50,000 of 12% convertible subordinated notes, due
on October 1, 2007. Interest is due and payable at maturity. The notes are
convertible by the holders 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 to
for general corporate purposes.

During the year 2002, the Company issued $75,000 of several convertible
promissory notes to different noteholders.

During 2002, the Company entered into promissory note agreements with different
investors to finance the operations of the new plant in Colorado. These notes
amount to an aggregate of $464,500, mature in five (5) five years from the date
of issuance and bear a 12 percent interest rate per year. These notes grant the
note holder the right to purchase common stock warrants at the rate of two (2)
warrants per dollar loaned at a price of fifteen cents ($0.15) per share.

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 restricted shares of the Company's common stock at twelve cents ($0.12) per
share and retained their attached warrants. 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
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.

                                      F-28
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

12.      Subsequent Events (continued)
         ----------------------------

In February 15, 2003, the Company entered into an operating lease agreement with
SICO, LLC to lease a 10,000 square-foot building in Colorado. The lease is a
three-year lease commencing in April 2003 and ending in March 2006 and requires
a monthly payment of approximately $4,583. In light of the subsequent
termination of its agreement with Empire Gold in October 2003, the Company is
seeking to either mutually terminate its lease agreement with SICO, LLC or have
a third party assume the Company's lease obligations.

In February 2003, the Company issued a 12% convertible note to one of its
shareholders with a five-year maturity date. The note amounted to $15,000.

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

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. The Company has the option of accelerating the term of
the B warrant from four years (or the remaining term) to nine months if it
achieves all of the following benchmarks: (i) the Company becomes current with
its reporting requirements to the Securities and Exchange Commission; (ii) the
Company files and becomes effective on a registration statement for said
underlying shares and (iii) the company achieves listing on the OTC Bulletin
Board exchange. Mr. Bradley Rotter, the Company's Chief Executive Officer,
participated in the private placement in the amount of $100,000.

In September 2003, the Company retained the Wells Group, Inc., a Scottsdale,
Arizona based investor relations consulting firm to implement a proactive
national investor relations campaign on behalf of the Company. The term of the
agreement is twelve months and either party may terminate the agreement with
thirty days notice after the sixth month. In compensation for its services, the
Wells Group will receive 250,000 restricted shares of the Company's common stock
for each three-month period the Wells Group provides its services under the
agreement.

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 Company
received its first $250,000 of loan proceeds on October 14, 2003 and an
additional $250,000 on December 17, 2003. 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.

                                      F-29
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

12.      Subsequent Events (continued)
         ----------------------------

On November 1, 2003, the Company opened a technical support center (TSC) in
Beverly, Massachusetts and transferred all equipment and technical resources
from its Salem laboratory to the TSC.

On November 24, 2003, the Company appointed Bradley N. Rotter as the Company's
Chief Executive Officer replacing Mr. Randall S. Reis who will retain his
position as chairman of the board. In November 2003, the Company also appointed
Mr. John K. Burns as President of the Company replacing Mr. Rotter in that
position. Both Mr. Rotter and Mr. Burns were subsequently nominated for
Directors of the Company.

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. Upon completion of
the initial three-year term, the employment agreement automatically renews on a
month-to-month basis until terminated or until the parties negotiate a new term.
During the first year of the initial agreement, Mr. Sitkoski will be paid an
annual sum of $75,000. During the second and third year of this agreement, Mr.
Sitkoski will be paid a base salary equal to 80% of the salary paid by the
Company to its highest-paid employee, but no less than $75,000 per year. Either
the Company or Mr. Sitkoski may terminate the agreement with or without cause or
reason with 60-calendar day's written notice to the other party. In connection
with this employment agreement, Mr. Sitkoski was granted options to purchase
1,000,000 shares of the Company's common stock at an exercise price of five
cents ($0.05) per share. Such options immediately vest upon his execution of the
agreement. Mr. Sitkoski was also granted options to purchase an additional
2,000,000 shares at an exercise price of fifteen ($0.15) per share, which vest
immediately upon completion of the initial three-year term of the agreement.

In second quarter 2003, the Company entered into three-year employment
agreements with Randall S. Reis, the Company's Chairman and CEO and Bradley N.
Rotter, 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. 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 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 vest at a rate of 83,334 warrants per month for the
three-year term of the agreement. Monthly vesting of the 3,000,000 warrants to
accelerate to 166,667 warrants per month for each month following the month in
which the Company either; (i) sells its first bar of gold produced in a
commercial MR3 gold extraction facility, or (ii) receives its first revenue from
a license sale.

                                      F-30
<PAGE>

                                MR3 SYSTEMS, INC
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2001 AND 2000

12.      Subsequent Events (continued)
         ----------------------------

Employment agreements (continued)

In June 2003, the Company entered into a three-year employment agreement with
Dr. Irving DeVoe, who is employed as Chief Scientist and is the inventor of the
MR3 technology. 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 is
reimbursed for ordinary and necessary expenses incurred in performance of his
duties on behalf of the Company. Also, during the term of the agreement, the
Company is obligated 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 during each of the Company's fiscal years ending December 31. Such
royalties shall be paid on or before January 31 of each year covered by the
agreement, and shall terminate once a cumulative total of $2,500,000 in
royalties has been paid to Dr. DeVoe. The agreement further specifies that Dr.
DeVoe may not compete with the Company or any of its affiliates in the offer,
sale or marketing of products or services that are competitive with the products
or services offered by the Company, during the term of the agreement or for a
six month period following termination of the agreement.

In December 2003, the Company entered into a 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, 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.

13.      Modification to Previously Issued Audited Financial Statements
         --------------------------------------------------------------

During 1999, the Company incurred certain costs in connection with the MR3
technology. These costs were capitalized and had a net book value of $70,051 at
December 31, 1999. Subsequently, the Company determined that this asset was
impaired and should have been written off during 2000. The effect of this change
is noted as follows:

                                               2001           2000
                                            -----------    -----------
         Net loss as previously
         reported                           $(1,198,872)   $(1,354,520)

         Asset write-off                             --        (70,051)

         Reversal of amortization                 7,029          7,030
                                            -----------    -----------

         Net loss                           $(1,191,843)   $(1,417,541)
                                            ===========    ===========

                                      F-31