##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004
 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 2004
Commission File Number 1-10515 JMAR TECHNOLOGIES, INC. 
  Delaware
    
    68-0131180(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)
 5800 Armada Drive
Carlsbad, CA 92008
(760) 602-3292 
   Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and has been subject to the filing requirements for at
least the past 90 days. Yes [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [  ] No [x] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date (May 10, 2004). Common Stock, $.01 par value: 30,889,465 shares




---



INDEX Page #PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets  March 31, 2004 (unaudited) and December 31, 2003
    
    
    2Consolidated Statements of Operations (unaudited)  Three months ended March 31, 2004 and 2003
    
    
    3Consolidated Statements of Cash Flows (unaudited)  Three months ended March 31, 2004 and 2003
    
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II.
    
    OTHER INFORMATIONItem 1.
    
    N/AItem 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    23Item 3.
    
    N/AItem 4.
    
    N/AItem 5.
    
    N/AItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    24EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  1




---



##### Table of Contents



PART I  FINANCIAL INFORMATION JMAR TECHNOLOGIES, INC. 
 CONSOLIDATED BALANCE SHEETS
 As of March 31, 2004 and December 31, 2003
 March 31, 2004
    
    December 31, 2003(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    10,454,410
    
    
    $
    4,171,179Accounts receivable, net
    
    
    3,780,275
    
    
    
    2,802,025Inventories
    
    
    279,978
    
    
    
    307,152Prepaid expenses and other
    
    
    903,187
    
    
    
    695,170Total current assets
    
    
    15,417,850
    
    
    
    7,975,526Property and equipment, net
    
    
    739,282
    
    
    
    791,773Intangible assets, net
    
    
    644,191
    
    
    
    684,041Other assets
    
    
    326,003
    
    
    
    250,936Goodwill, net
    
    
    3,790,907
    
    
    
    3,790,907TOTAL ASSETS
    
    $
    20,918,233
    
    
    $
    13,493,183LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    583,942
    
    
    $
    1,102,873Accrued liabilities
    
    
    602,684
    
    
    
    561,716Accrued payroll and related costs
    
    
    579,072
    
    
    
    582,357Line of credit and notes payable, net of discount
    
    
    187,869
    
    
    
    2,340,431Current liabilities of discontinued operations, including notes payable
    
    
    660,710
    
    
    
    960,983Total current liabilities
    
    
    2,614,277
    
    
    
    5,548,360Notes payable and other long-term liabilities, net of current portion
    
    
    493,722
    
    
    
    449,873Redeemable convertible preferred stock, 1,056,400 shares issued and outstanding
as of March 31, 2004 and 350,000 shares as of December 31, 2003
    
    
    8,778,119
    
    
    
    2,217,150Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; 1,056,400
shares issued and outstanding as of March 31, 2004 included in redeemable
convertible preferred stock above, and 350,000 issued and outstanding as of
December 31, 2003
    
    
    
    
    
    
    Common stock, $.01 par value; 40,000,000 shares authorized; Issued and
outstanding 30,173,748 shares as of March 31, 2004 and 27,654,845 shares as
of December 31, 2003
    
    
    301,738
    
    
    
    276,548Additional-paid in capital
    
    
    68,273,218
    
    
    
    62,420,135Accumulated deficit
    
    
    (59,542,841
    )
    
    
    (57,418,883
    )Total stockholders equity
    
    
    9,032,115
    
    
    
    5,277,800TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    20,918,233
    
    
    $
    13,493,183
 The accompanying notes to these consolidated financial statements are an
integral part of these consolidated balance sheets. 2




---



##### Table of Contents



JMAR TECHNOLOGIES, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months Ended March 31, 2004 and 2003
 (Unaudited)
 2004
    
    2003Revenues
    
    $
    3,035,376
    
    
    $
    4,733,714Costs of revenues
    
    
    2,369,923
    
    
    
    3,822,730Gross profit
    
    
    665,453
    
    
    
    910,984Operating expenses:Selling, general and administrative
    
    
    1,125,774
    
    
    
    1,067,517Research and development
    
    
    54,097
    
    
    
    102,509Asset writedown
    
    
    
    
    
    
    106,093Total operating expenses
    
    
    1,179,871
    
    
    
    1,276,119Loss from operations
    
    
    (514,418
    )
    
    
    (365,135
    )Interest and other income
    
    
    71,831
    
    
    
    23,591Interest and other expense
    
    
    (449,991
    )
    
    
    (105,126
    )Loss from continuing operations
    
    
    (892,578
    )
    
    
    (446,670
    )Loss from operations of discontinued
operations
    
    
    (62,097
    )
    
    
    (459,987
    )Net loss
    
    
    (954,675
    )
    
    
    (906,657
    )Deemed preferred stock dividends
    
    
    (1,169,283
    )
    
    
    (5,422
    )Loss applicable to common stock
    
    $
    (2,123,958
    )
    
    $
    (912,079
    )Basic and diluted loss per share:Loss per share from continuing
operations
    
    $
    (0.07
    )
    
    $
    (0.02
    )Loss per share from discontinued
operations
    
    
    
    
    
    
    (0.02
    )Basic and diluted loss per share applicable
to common stock
    
    $
    (0.07
    )
    
    $
    (0.04
    )Shares used in computation of basic and
diluted loss per share
    
    
    29,660,437
    
    
    
    23,886,503
 The accompanying notes to these consolidated financial statements are
an integral part of these consolidated statements. 3




---



##### Table of Contents



JMAR TECHNOLOGIES, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Three Months Ended March 31, 2004 and 2003
 (Unaudited)
 2004
    
    2003Cash flows from operating activities:Loss from continuing operations
    
    $
    (892,578
    )
    
    $
    (446,670
    )Adjustments to reconcile loss from continuing operations
to net cash used in continuing operations:Depreciation, amortization and debt discount
    
    
    467,308
    
    
    
    162,396Asset writedown
    
    
    
    
    
    
    106,093Services received in exchange for common stock or warrants
    
    
    
    
    
    
    1,801Change in assets and liabilities:Accounts receivable, net
    
    
    (978,250
    )
    
    
    173,744Inventories
    
    
    27,174
    
    
    
    62,469Prepaid expenses and other
    
    
    99,111
    
    
    
    (127,693
    )Customer deposits
    
    
    
    
    
    
    (398,603
    )Accounts payable and accrued liabilities
    
    
    (437,384
    )
    
    
    (487,734
    )Net cash used in continuing operations operating activities
    
    
    (1,714,619
    )
    
    
    (954,197
    )Loss from discontinued operations
    
    
    (62,097
    )
    
    
    (459,987
    )Changes in net assets and liabilities of discontinued operations
    
    
    (300,273
    )
    
    
    (356,327
    )Net cash used in discontinued operations
    
    
    (362,370
    )
    
    
    (816,314
    )Net cash used in operating activities
    
    
    (2,076,989
    )
    
    
    (1,770,511
    )Cash flows from investing activities:Capital expenditures
    
    
    (19,011
    )
    
    
    (5,297
    )Additions of intangible assets
    
    
    (31,852
    )
    
    
    (23,543
    )Net cash used in investing activities
    
    
    (50,863
    )
    
    
    (28,840
    )Cash flows from financing activities:Net proceeds from the issuance of preferred and common stock
    
    
    9,100,750
    
    
    
    1,967,582Payments of notes payable
    
    
    (835,761
    )
    
    
    Cash payments of preferred stock dividends
    
    
    (59,258
    )
    
    
    Net proceeds from the exercise of options
    
    
    82,191
    
    
    
    Net borrowings under line of credit
    
    
    123,161
    
    
    
    11,000Decrease in restricted cash
    
    
    
    
    
    
    275,000Net cash provided by financing activities
    
    
    8,411,083
    
    
    
    2,253,582Net increase in cash and cash equivalents
    
    
    6,283,231
    
    
    
    454,231Cash and cash equivalents, beginning of period
    
    
    4,171,179
    
    
    
    2,246,264Cash and cash equivalents, end of period
    
    $
    10,454,410
    
    
    $
    2,700,495Cash paid for interest
    
    $
    48,366
    
    
    $
    42,805
 During the three months ended March 31, 2004, the holder of Series C and D
Convertible Preferred Stock converted $2,436,000 of the preferred stock into
1,321,154 shares of common stock of the Company. The Company recorded
$1,769,759 related to the discount representing the beneficial conversion
feature of the redeemable convertible preferred stock and debt and the fair value of
warrants issued in connection with the preferred stock and debt (see Notes 9 and 10). In
addition, during the three months ended March 31, 2004, $1,254,500 of the
Companys working capital line of credit was converted into 1,048,913 shares of
common stock of the Company (see Note 9). Also, during the three months ended
March 31, 2004, the Company repaid $364,239 in convertible notes and $3,034 in
accrued interest with the issuance of 118,121 shares of common stock (see Note
9). The accompanying notes of those consolidated financial statements are an
integral part of these consolidated statements. 4




---



##### Table of Contents



JMAR TECHNOLOGIES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Basis of Presentation and Financial Condition The accompanying consolidated financial statements include the accounts of
JMAR Technologies, Inc. (the Company or JMAR) and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. JMAR Technologies, Inc. develops, manufactures, and supports advanced
laser, sensor, and custom systems for applications in the semiconductor,
biotech, homeland security and nanotechnology markets. The U.S. Department of
Defense is the principal source of funds for the Companys Collimated Plasma
Lithography (CPL) light source, X-ray stepper systems, and X-ray mask research
and development programs. JMAR also provides X-ray steppers and services to the
University of Wisconsins Center for Nanotechnology, to BAE Systems in New
Hampshire, and to others. In addition to the development of nanolithography
tools, JMAR provides semiconductor fabrication process integration and
maintenance support to the Department of Defenses Defense Microelectronics
Activity in Sacramento, California. In the first quarter of 2002, the Company decided to discontinue the
standard semiconductor products business and shift more of its resources to
accelerate the market entry of its CPL products. Also, in furtherance of its
efforts to focus its resources on its CPL business, during the later half of
2002, the Company concluded that its precision equipment business did not fit
with the strategic direction of the Companys CPL business area and that the
markets for that business products would continue to be slow in the near term.
Therefore, in December, 2002, the Company decided to initiate the process of
selling the precision equipment business and, in July 2003, the Company
completed the sale of that business. The standard semiconductor products business and the precision equipment
business have been accounted for in the accompanying consolidated financial
statements as discontinued operations (see Note 8). The accompanying consolidated financial statements as of and for the three
months ended March 31, 2004 and 2003 have been prepared by the Company and are
unaudited. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments of a normal recurring nature which are necessary for a fair
presentation of the results of operations for the interim periods presented.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to such rules and
regulations. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these interim consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Companys Form 10-K for the year ended December 31, 2003. The results of
operations for the three months ended March 31, 2004 are not necessarily
indicative of the results to be expected for the full year. (2) Recent Accounting Pronouncements In September 2001, FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It
applies to (a) all entities and (b) legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or normal operation of long-lived assets, except for certain
obligations of lessees. This statement amends FASB Statement No. 19, Financial
Accounting and Reporting 5




---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited) by Oil and Gas Producing Companies, and is effective for financial statements
issued for fiscal years beginning after September 15, 2002. The Company has
implemented SFAS No. 143 effective January 1, 2003. The impact of such adoption
did not have a material effect on the Companys financial statements. Statement of Financial Accounting Standards No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146
addresses accounting and reporting costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. This statement requires that a liability for a cost
associated with an exit or disposal activity shall be recognized and measured
initially at its fair value in the period which the liability is incurred. This
statement is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company has implemented SFAS No. 146 effective January
1, 2003. The impact of such adoption did not have a material effect on its
financial statements. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of SFAS No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. This statement also amends the disclosure requirements of SFAS
No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The Company has implemented SFAS No. 148
effective January 1, 2003 regarding disclosure requirements for condensed
financial statements for interim periods (see Note 3). The FASB has issued Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,  an interpretation of FASB Nos. 5, 57 and 107 and
rescission of FASB Interpretation No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. Implementation of these provisions of the
Interpretation is not expected to have a material impact on the Companys
consolidated financial statements. The disclosure requirements of the
Interpretation are effective for financial statements of interim or annual
periods ended after December 15, 2002, and have been adopted in the
accompanying consolidated financial statements, with no additional disclosure
required. The FASB has issued Interpretation No. 46, Consolidation of Variable
Interest Entities  an interpretation of Accounting Research Bulletin (ARB)
No. 51. This Interpretation defines a variable interest entity and provides
that if a business enterprise has a controlling financial interest in a
variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be included in consolidated
financial statements with those of the business enterprise. Furthermore, the
Board indicates that the voting interest approach of ARB No. 51 is not
effective in identifying controlling financial interests in entities that are
not controllable through voting interest or in which the equity investors do
not bear the residual economic risk. This Interpretation applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after September
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The implementation of this
Interpretation did not have a material effect on the Companys financial
statements. In November 2002, the EITF reached a consensus on Issue 00-21, titled
Accounting for Revenue Arrangements with Multiple Deliverables, which
addresses how to account for arrangements that involve the delivery or
performance of multiple products, services, and/or rights to use assets.
Revenue arrangements with multiple deliverables are divided into separate units
of accounting if the deliverables in the arrangement meet the following
criteria: (1) the delivered item has value to the customer on a standalone
basis; (2) there is objective and reliable evidence of the fair value of
undelivered items; and (3) delivery of any undelivered 6




---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited) item is probable. Arrangement consideration should be allocated among the
separate units of accounting based on their relative fair values, with the
amount allocated to the delivered item being limited to the amount that is not
contingent on the delivery of additional items or meeting other specified
performance conditions. The new standard is required to be adopted for all new
applicable revenue arrangements no later than the third quarter of 2003. The
implementation of EITF 00-21 did not have a material effect on the Companys
financial statements. In May 2003 FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
requires that certain financial instruments previously presented as equity or
temporary equity be presented as liabilities. Such instruments include
mandatory redeemable preferred and common stock, and certain options and
warrants. SFAS 150 is effective for financial instruments issued, entered into
or modified after May 31, 2003 and is generally effective at the beginning of
the first interim period beginning after September 15, 2003. The adoption of
SFAS 150 did not have a material effect on the Companys financial statements. In December 2003 the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104 (SAB No. 104), Revenue Recognition to
update SAB No. 101, Revenue Recognition in Financial Statements. SAB No. 104
revises or rescinds portions of the interpretive guidance included in SAB No.
101 in order to make SAB No. 101 consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The principal
revisions relate to the recission of material no longer necessary because of
private sector developments in U.S. generally accepted accounting principles.
SAB No. 104 also rescinds the Revenue Recognition in Financial Statements
Frequently Asked Questions and Answer document issued in conjunction with SAB
No. 101 and incorporates related portions of that document into SAB No. 104.
The adoption of SAB No. 104 did not have a material effect on the Companys
financial statements. (3) Stock-Based Compensation Plans The Company has six stock option or warrant plans, the 1991 Stock Option
Plan (the 1991 Plan), the 1999 Stock Option Plan (the 1999 Plan), the
Management Anti-Dilution Plan (the Anti-Dilution Plan), two incentive plans
which provide for the issuance of options and warrants to Research Division
employees (the Research Division Plans) and an incentive plan which provided
for the issuance of warrants to JPSI employees (the JPSI Plans). The Company
is also a party to non-plan option and warrant agreements with several
individuals. The Company accounts for these plans under APB Opinion No. 25,
using the intrinsic value method, under which no compensation cost has been
recognized. Had compensation cost for these plans been determined using the
fair value method under SFAS No. 123, the Companys loss applicable to common
stock and loss per share would have been the following pro forma amounts
(unaudited): Three Months Ended March 31,2004
    
    2003Loss applicable to
common stock:
    
    As Reported
    
    $
    (2,123,958
    )
    
    $
    (912,079
    )Pro Forma
    
    
    (2,793,047
    )
    
    
    (1,800,309
    )Basic and
diluted loss per share:
    
    As Reported
    
    
    (0.07
    )
    
    
    (0.04
    )Pro Forma
    
    
    (0.09
    )
    
    
    (0.08
    )
 The fair value of each option and warrant grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of approximately 2.74
percent; expected dividend yields of 0 percent; and expected lives of 6 years.
For grants in 2004 and 2003, the expected volatility used was 259 percent and
275 percent, respectively. The Company was authorized to grant options or warrants to its employees
(including directors) and consultants for up to 1,480,000 shares under the 1991
Plan, 1,900,000 shares under the 1999 Plan, 806,637 shares under the
Anti-Dilution Plan, 350,000 shares under the Research Division Plans and
450,000 shares under the JPSI Plan (Plans). In addition, 613,000 non-qualified
options have been granted to five employees 7




---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited) outside of the above plans. Except as noted below, under all Plans, the option
or warrant exercise price was equal to or more than the stocks market price on
date of grant for grants made during the three months ended
March 31, 2004 and 2003. Options for a total of 3,000 shares were granted to the
Companys directors in payment of meeting fees in the three months ended March
31, 2004 which had an exercise price of $1.00 below the market price. Options
usually have a term of ten years and vest one-third per year after date of
grant. During the quarter ended March 31, 2004, 3,000 options were granted
pursuant to the 1999 Plan. (4) Inventories Inventories are carried at the lower of cost (on the first-in, first-out
basis) or market and are comprised of materials, direct labor and applicable
manufacturing overhead. At March 31, 2004 and December 31, 2003, inventories
consisted of the following: March 31, 2004
    
    December 31, 2003(Unaudited)Raw materials, components and sub-assemblies
    
    $
    217,773
    
    
    $
    214,694Work-in-process
    
    
    61,051
    
    
    
    87,981Finished goods
    
    
    1,154
    
    
    
    4,477$
    279,978
    
    
    $
    307,152
 (5) Accounts Receivable At March 31, 2004 and December 31, 2003, accounts receivable consisted of
the following: March 31, 2004
    
    December 31, 2003(Unaudited)Trade
    
    $
    447,849
    
    
    $
    546,505Trade  unbilled
    
    
    214,349
    
    
    
    108,800U.S. Government  billed
    
    
    7,302
    
    
    
    522,123U.S. Government  unbilled
    
    
    3,110,775
    
    
    
    1,624,597$
    3,780,275
    
    
    $
    2,802,025
 All unbilled receivables at March 31, 2004 are expected to be billed and
collected within one year except for withheld contract fees of $576,536 which
will be billed and collected at the completion of the applicable contract.
Payment to the Company for performance on certain U.S. Government contracts is
subject to progress payment audits by the Defense Contract Audit Agency and are
recorded at the amounts expected to be realized. Included in the unbilled
amount is $2,086,256 related to the Companys contract with DARPA. In late
March and early April 2004, DARPA released $1.6 million in funding related to
the Companys CPL contract after the successful completion of the demonstration
of planned improvements to the beta source power output and reliability. The
Company expects DARPA to release another $5.4 million in funding against its
$34.5 million DARPA contract in 2004. Of the remaining balance of unbilled
receivables, $352,646 is related to withheld fees for prior contracts to be
billed pending DCAA audit, and $309,686 is related to the normal billing cycle. (6) Property and Equipment At March 31, 2004 and December 31, 2003, property and equipment consisted
of the following: 8




---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited) March 31, 2004
    
    December 31, 2003(Unaudited)Equipment and machinery
    
    $
    2,792,707
    
    
    $
    2,774,470Furniture and fixtures
    
    
    435,817
    
    
    
    435,043Leasehold improvements
    
    
    280,283
    
    
    
    280,2833,508,807
    
    
    
    3,489,796Less-accumulated depreciation
    
    
    (2,769,525
    )
    
    
    (2,698,023
    )$
    739,282
    
    
    $
    791,773
 (7) Segment Information The Company operates in
three business segments, as follows: Research Division (formerly JMAR Research)  Located in San Diego,
California, this segment carries out contract research and development
involving JMARs patented high brightness (Britelight) lasers and
laser-produced plasma (LPP) technology. The results of this R&D are applied to
the Companys CPL light source, EUV generators, and related
laser product developments.
Until recently, the exclusive focus of the Research Divisions R&D efforts has
been on advanced semiconductor lithography applications. In 2003, the Company
embarked on an effort to identify additional applications for its laser and LPP
technologies. Substantially all of the Research Divisions R&D is funded by
contracts from the Defense Advanced Research Projects Agency (DARPA) of the
U.S. Department of Defense. During the three months ended March 31, 2004 and
2003, this segment accounted for approximately 37% and 30%, respectively, of
the Companys revenues. The technologies developed at the Research Division are transitioned to
JMARs Systems Division for product engineering and future production. Systems Division (formerly JMAR/SAL NanoLithography)  This segment
develops and manufactures X-ray lithography steppers. Located in Vermont, this
Division also serves as JMARs product design and manufacturing arm, carrying
out the engineering, production, and integration of JMARs CPL light sources
and CPL stepper systems. The Systems Division also applies its engineering and
manufacturing expertise to the development of new products using a combination
of JMAR and third party technology, as in the case of its design and
manufacture of alpha and beta READ sensors for FemtoTrace, Inc. for
environmental and homeland security applications. During the three months ended
March 31, 2004 and 2003, this segment accounted for approximately 29% and 37%,
respectively, of the Companys revenues. Microelectronics Division (formerly JMAR Semiconductor)  This segment
provides process integration and maintenance support for the Defense
Microelectronics Activitys semiconductor fabrication facility in Sacramento,
California. It also designs and produces application specific integrated
circuits (ASICs) for military and commercial markets. During the three months
ended March 31, 2004 and 2003, this segment accounted for approximately 34% and
33%, respectively, of the Companys revenues. 9




---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited) The accounting policies of the reportable segments are the same as those
described in Note 2 of the Companys consolidated financial statements included
in the Form 10-K for the year ended December 31, 2003. The Company evaluates
the performance of its operating segments primarily based on revenues and
operating income. Corporate costs are generally allocated to the segments. Segment information for the three months ended March 31, 2004, and 2003
(excluding discontinued operations) is as follows: Research
    
    Systems
    
    MicroelectronicsDivision
    
    Division
    
    Division
    
    Corporate
    
    Total2004:Revenues
    
    $
    1,103,807
    
    
    $
    890,734
    
    
    $
    1,040,835
    
    
    $
    
    
    
    $
    3,035,376Operating loss
    
    
    (69,575
    )
    
    
    (389,781
    )
    
    
    (55,062
    )
    
    
    
    
    
    
    (514,418
    )Total assets
    
    
    4,144,215
    
    
    
    4,698,097
    
    
    
    1,021,064
    
    
    
    11,054,857
    
    
    
    20,918,233Capital expenditures
    
    
    4,243
    
    
    
    2,849
    
    
    
    2,633
    
    
    
    9,286
    
    
    
    19,011Depreciation and
amortization
    
    
    41,593
    
    
    
    74,034
    
    
    
    6,893
    
    
    
    344,788
    
    
    
    467,3082003:Revenues
    
    $
    1,449,550
    
    
    $
    1,738,868
    
    
    $
    1,545,296
    
    
    $
    
    
    
    $
    4,733,714Operating income (loss)
    
    
    53,328
    
    
    
    (358,113
    )
    
    
    44,015
    
    
    
    (104,365
    )
    
    
    (365,135
    )Total assets
    
    
    2,687,308
    
    
    
    5,593,516
    
    
    
    1,793,923
    
    
    
    3,528,218
    
    
    
    13,602,965Capital expenditures
    
    
    3,890
    
    
    
    
    
    
    
    1,407
    
    
    
    
    
    
    
    5,297Depreciation and
amortization
    
    
    57,807
    
    
    
    75,909
    
    
    
    4,696
    
    
    
    23,984
    
    
    
    162,396
 Sales to the United States Government totaled $1,642,396 and $2,735,851
for the three months ended March 31, 2004 and 2003, respectively. In addition,
sales to General Dynamics Advanced Information Systems were $1,034,781 and
$1,497,226 for the three months ended March 31, 2004 and 2003, respectively. (8) Discontinued Operations The loss from operations of discontinued operations of $62,097 for the
three months ended March 31, 2004 is related to imputed interest on the
discounted value of the future lease payments of the former facility of the
standard semiconductor products business. The loss from operations of
discontinued operations of $459,987 for the three months ended March 31, 2003
consists of $41,216 related to the standard semiconductor products business and
$418,771 related to the precision equipment business. In July 2003, the Company
sold JMAR Precision Systems, Inc. (JPSI) to several private investors. Under
the terms of the sale, JMAR received $500,000 in a combination of cash and
promissory notes, and the buyer assumed 14 of the remaining 25 months of JPSIs
facility lease. The notes are secured by the assets of JPSI and the lease
obligation is secured by personal property of the buyers. In addition, all JPSI
receivables as of the closing were assigned to JMAR and JMAR agreed to pay all
trade and employee related liabilities existing as of the closing and unknown
liabilities, if any. The buyers have assumed all other ongoing commitments of
JPSI. The results of operations of the precision equipment business for 2003
through the sale date are reported in discontinued operations in 2003. The
decrease in the loss of operations of discontinued operations is due to the
sale of JPSI in July 2003. Prior to December 31, 2001, as the level of business expected from the
standard semiconductor products business did not materialize, the Company
decided to take action to sublease the Irvine facility and move the standard
semiconductor products business into a smaller facility and recorded a reserve
against the Irvine facility lease. The Company does not yet have a subtenant
for this facility. The lease provides for rent and related expenses of
approximately $36,000 per month through August 2005. At March 31, 2004 and December 31, 2003, net liabilities of assets
discontinued consisted of the following: 10




---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited) March 31,
    
    December 31,2004
    
    2003(Unaudited)Current Liabilities:Facility lease accrual
    
    $
    524,270
    
    
    $
    598,466Accounts payable
    
    
    36,174
    
    
    
    230,978Employee related contractual
commitments
    
    
    
    
    
    
    10,384Note payable
    
    
    100,266
    
    
    
    121,155$
    660,710
    
    
    $
    960,983
 (9) Line of Credit and Notes Payable In March 2003, the Company entered into a Revolving Fixed Price
Convertible Note (Working Capital Line) with Laurus Master Fund (Laurus). The
Working Capital Line allows the Company to borrow from time-to-time up to 85%
of eligible accounts receivable of the Company to a maximum of $3 million.
Advances in excess of this formula are allowed, however, with the consent of
Laurus. Laurus can convert any portion of the principal outstanding to common
stock at a fixed price per share (Conversion Price) any time the market price
of the Companys common stock is in excess of the Conversion Price. The Company
can convert a portion of the principal outstanding to common stock at the
Conversion Price if the market price of the Companys common stock averages
118% of the Conversion Price or higher for 22 consecutive trading days. The
initial terms of the Working Capital Line provided that after $2 million of
conversions into equity, the Conversion Price would be increased. The
Conversion Price initially was $.92, but was increased to $2.85 in January 2004
after $2 million of the Working Capital Line had been converted
at which time the Company granted additional warrants for the
purchase of 100,000 shares of its common stock. During the
three months ended March 31, 2004, $827,000 of the Working Capital Line was
converted into common stock at $.92 per share, or 898,913 shares, and $427,500
was converted into common stock at $2.85 per share, or 150,000 shares (see Note
10). The balance outstanding under the line was approximately $188,000 at
March 31, 2004. In connection with the Working Capital Line, the Company issued warrants
to Laurus to purchase 400,000 and 100,000 shares of common stock in March 2003
and January 2004, respectively, at prices ranging from $1.06 to $5.15 and paid
fees of $74,400 in March 2003. The Company recorded a discount of $412,633 and
$502,761 in March 2003 and January 2004, respectively, representing the
intrinsic value of the beneficial conversion feature and fair value of
warrants. At March 31, 2004, the unamortized discount and fees of $455,408 was included in prepaid expenses
and other in the accompanying Balance Sheet. In addition, there will be an
additional beneficial conversion feature in the amount of $210,923 recorded as
additional borrowings are made against the Working Capital Line. The discount
is amortized over the remaining life of the Working Capital Line or upon conversion, resulting in $324,105 of interest
expense for the three months ending March 31, 2004. In February 2004, the Company repaid $1.2 million in convertible notes,
plus accrued interest, issued to the former shareholders of SAL, by retiring a
total of $364,239 in notes and $3,034 in accrued interest with the issuance of
118,121 shares of common stock valued at $3.11 per share and repaying the
remaining amount of $835,761 in notes and accrued interest of $6,961 with cash. (10) Equity Transactions In January 2004, the Company sold for cash $1.5 million of 8 percent
Series E Convertible Preferred Stock (Series E Preferred) to Laurus at a fixed
conversion price of $2.85 per share. The Series E Preferred is redeemable in
cash or stock (if the closing market price of the Companys common stock is
118% of the Conversion Price or higher for the 11 trading days prior to the
redemption date) in eighteen equal monthly installments starting in August
2004, if not previously converted. Conversions to equity are offset against the
required repayments. Except for the conversion price, the conversion terms of
the Series E Preferred are the same as the conversion terms of the Working
Capital Line (see Note 9). 11




---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited) In February 2004, the Company sold for cash $8 million of 2 percent
Convertible Preferred Stock (Series F, G and H Preferred) to Laurus at a fixed
conversion price of $3.11 to $3.47 per share (depending upon the Series), with
an average conversion price of $3.34 per share. The Series F, G and H Preferred
is redeemable in cash or stock (if the closing market price of the Companys
common stock is 118% of the Conversion Price or higher for the eleven trading
days prior to the redemption date) in twenty-five equal monthly installments of
$150,000 starting in January 2005 with the balance redeemable in February 2007,
if not previously converted. Conversions to equity are offset against the
required repayments. Except for the conversion price, the conversion terms of
the Series F, G and H Preferred are the same as the conversion terms of the
Working Capital Line (see Note 9). As
of May 10, 2004, the total outstanding preferred stock, warrants and
Working Capital Line held by Laurus are convertible or exercisable into
approximately 4.4 million shares. In connection with the above financing transactions with Laurus, the
Company issued to Laurus warrants to purchase 290,000 shares of common stock at
prices ranging from $3.42 to $5.00. In addition, in connection with the
adjustment to the conversion price on the Working Capital Line (see Note 9),
the Company issued to Laurus warrants to purchase 100,000 shares of common
stock at an exercise price of $5.15. As a result of the convertible preferred stock and
warrants issued, the Company recorded a discount representing the beneficial
conversion feature and the fair value of the warrants issued of approximately
$1.3 million. The beneficial conversion feature was recognized during the first
quarter of fiscal year 2004 as a reduction of preferred stock and amortized to
loss applicable to common stock over the earlier of the redemption period or the conversion dates. The following table summarizes the preferred stock activity through March
31, 2004. Three Months Ended March 31, 2004FinancingNet Balance at
    
    
    
    
    
    BCF and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Balance atDecember 31,
    
    Gross
    
    Fair Value
    
    Fees and
    
    
    
    
    
    
    
    
    
    March 31,Series
    
    2003
    
    Amount
    
    of Warrants
    
    Costs
    
    Amortization
    
    Conversions
    
    2004C
    
    $
    875,223
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    624,777
    
    
    $
    1,500,000
    
    
    $
    D
    
    
    1,341,927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    356,627
    
    
    
    936,000
    
    
    
    762,554E
    
    
    
    
    
    
    1,500,000
    
    
    
    600,061
    
    
    
    62,000
    
    
    
    82,758
    
    
    
    
    
    
    
    920,697F
    
    
    
    
    
    
    2,000,000
    
    
    
    207,422
    
    
    
    72,062
    
    
    
    12,514
    
    
    
    
    
    
    
    1,733,030G
    
    
    
    
    
    
    2,000,000
    
    
    
    153,172
    
    
    
    72,062
    
    
    
    12,514
    
    
    
    
    
    
    
    1,787,280H
    
    
    
    
    
    
    4,000,000
    
    
    
    306,343
    
    
    
    144,125
    
    
    
    25,026
    
    
    
    
    
    
    
    3,574,558$
    2,217,150
    
    
    $
    9,500,000
    
    
    $
    1,266,998
    
    
    $
    350,249
    
    
    $
    1,114,216
    
    
    $
    2,436,000
    
    
    $
    8,778,119
 All of the preferred stock, warrants and the Working Capital Line (the
Securities) held by Laurus contain provisions that restrict the right of
Laurus to convert or exercise its JMAR securities in order to limit its
percentage beneficial ownership. If Laurus were to waive these beneficial
ownership limitations the Securities would be convertible for or exercisable
into more than 4.99% of the outstanding shares of the Companys common stock.
However, Laurus has not requested such a waiver. Laurus has also agreed that
none of the Securities shall be converted or exercised to the extent that
conversion or exercise of the Securities would result in Laurus beneficially
owning more than 19.9% of the Companys outstanding number of shares of common
stock unless and until the Company obtains stockholder approval in accordance
with NASDAQ corporate governance rules, or an exemption from the applicable
provision of NASDAQ corporate governance rules. Subsequent to March 31, 2004, the remaining amount of the Series D
Preferred of $762,554 was converted into 488,817 shares of common stock at
$1.56 per share. 12




---



##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited) In connection with all of the financing transactions with Laurus, the
Company issued warrants to Laurus to purchase a total of 1,390,000 shares of
common stock at prices ranging from $1.058 to $5.15. In addition, Laurus was
granted the right to receive a warrant to purchase one share of common stock at
$3.13 for every $20 of principal of the Working Capital Line converted to
equity in excess of the first $2 million up to a total of 50,000 shares. During the three months ending March 31, 2004, the Company received
proceeds of $82,191 for the exercise of warrants and options into 38,267 shares
of common stock. During the three months ended March 31, 2003, the Company
issued 2,778 shares of common stock for services. These issuances were valued
based upon the fair market value of the Companys common stock at the date of
issue. Included
in the loss applicable to common stock in the Statement of Operations
for the three months ended March 31, 2004 and 2003 are preferred
stock dividends of $1,169,283 and $5,422, respectively. The amount for
2004 represents $55,067 of preferred stock dividends paid or payable
in cash and $1,114,216 related to the discount representing the
beneficial conversion feature of the redeemable convertible preferred
stock and the fair value of warrants issued in connection with the
preferred stock. The entire amount for 2003 represents preferred
stock dividends payable in cash. (11) Earnings Per Share The Company accounts for earnings per share in accordance with SFAS No.
128, Earnings per Share. Basic earnings per common share were computed by
dividing loss applicable to common stock by the weighted average number of
shares of common stock outstanding during the period. For the three months
ended March 31, 2004 and 2003 the denominator in the diluted loss per share
computation was the same as the denominator for basic loss per share due to
antidilutive effects of the Companys warrants, stock options, convertible debt
and convertible preferred stock. As of March 31, 2004 and 2003, the Company
had shares issuable under outstanding warrants, stock options, convertible debt
and convertible preferred stock of 8,350,341 and 9,145,264, respectively, all
of which are antidilutive and were excluded from the computation of diluted
loss per share. (12) Intangible Assets The Company adopted SFAS No. 142 Goodwill and Other Intangible Assets
(SFAS 142) effective January 1, 2002. In accordance with SFAS 142, the Company
does not amortize goodwill. The Companys goodwill of $3,790,907 at March 31,
2004 and December 31, 2003 is related to the Systems Division, acquired in
August, 2001. As of March 31, 2004, the Company had the following amounts
related to other intangible assets: Gross Carrying
    
    Accumulated
    
    Net IntangibleAmount
    
    Amortization
    
    AssetsPatents
    
    $
    984,976
    
    
    $
    454,160
    
    
    $
    530,816Unpatented Technology
    
    
    450,000
    
    
    
    400,000
    
    
    
    50,000License
    
    
    65,000
    
    
    
    1,625
    
    
    
    63,375$
    644,191
 Aggregate amortization expense of the intangible assets with determinable
lives was $71,702 for the three months ended March 31, 2004. The unamortized
balance of intangible assets is estimated to be amortized as follows: For the Year Ended
    
    Estimated AmortizationDecember 31,
    
    Expense2004
    
    $
    122,9912005
    
    
    66,2672006
    
    
    66,2672007
    
    
    44,6012008
    
    
    49,7232009
    
    
    49,723Beyond
    
    
    244,619$
    644,191
 13




---



##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. Overview JMAR Technologies, Inc. develops, manufactures, and supports advanced
laser, sensor, and custom systems for applications in the semiconductor,
biotech, homeland security and nanotechnology markets. The U.S. Department of
Defense is the principal source of funds for the Companys collimated plasma
lithography (CPL) light source, X-ray stepper systems, and X-ray mask research
and development programs. JMAR also provides X-ray steppers and services to the
University of Wisconsins Center for Nanotechnology, to BAE Systems in New
Hampshire, and to others. In addition to the development of nanolithography
tools, JMAR provides semiconductor fabrication process integration and
maintenance support to the Department of Defenses Defense Microelectronics
Activity in Sacramento, California. Sources of Revenue Currently, over 90 percent of the Companys revenues are derived as the
prime contractor or subcontractor for government contracts. The most
significant ongoing contract is the multi-year $34.5 million contract issued to
JMARs Research Division by the U.S. Army Research Laboratory sponsored by
DARPA for further development of the Companys CPL system. Through March 31,
2004, a total of $16.6 million has been received under this contract and the
Company expects to receive an additional $7 million in funding in 2004.
Although the $7 million funding has been appropriated by Congress, DARPA
controls the timing of the funding. In late March and early April 2004, DARPA
released $1.6 million of this $7 million in funding upon the successful
completion of a reliability and performance test which was completed on March
21, 2004. The release of the remaining $5.4 million during 2004 is also subject
to milestones related to the further improvement of the beta source. The
Company believes that it will meet the milestones for release of all of the
remaining $5.4 million. JMARs next most significant contract is a $10 million contract issued to
JMARs Systems Division by Naval Air Warfare Center AD to procure sub-100 nm
X-ray masks used in the development and production of high performance GaAs
MMICs (Navair Contract). Through 2003, a total of $6.4 million has been
received under this contract, and the Company expects to receive $2.1 million
in funding in 2004. The funding for this contract has also been appropriated by
Congress. In connection with the award of the Navair Contract, the Company
entered into a subcontract with IBM to manufacture and deliver X-ray masks to
JMAR. In October 2003, the Company was notified by IBM that effective December
31, 2003 it was discontinuing its Vermont X-ray lithography mask-making
operations and terminating this subcontract. The Company has issued purchase
orders to two other mask suppliers who will provide masks starting in the third
quarter of 2004. The Company believes it has sufficient masks for its planned
lithography exposure tests until these masks are delivered. The third major ongoing revenue source involves the subcontract between
JMARs Microelectronics Division and GDAIS to enhance and maintain the
semiconductor wafer fabrication processes installed at the McClellan Air Force
Base in Sacramento for the DMEA. This work, which started in 1998, has resulted
in a new subcontract each year out of funds available in the DMEAs budget as
an element of the Department of Defenses Advanced Technology Support Program.
The Company received $5 million and $3.5 million in contracts in 2003 and 2004,
respectively, for this program. Management believes that the work performed under the above contracts has
commercial applications, particularly the work under the DARPA contract for the
development of JMARs CPL technology. 14




---



##### Table of Contents



In February 2004, the Company received $8 million in financing from Laurus
Master Fund (Laurus). We intend to use these funds to initiate and advance new
product research and development efforts and to acquire or license products,
technologies or businesses to expand our revenue base. While we believe these
investments will lead to increased revenue in the future, the initial
expenditure of these funds will increase the Companys research and development
expenses and, correspondingly, its net loss in the near term. Results of Operations Revenues. Total revenues for the three months ended March 31, 2004 and
2003 were $3,035,376 and $4,733,714, respectively. Revenues by segment for the
three months ended March 31, 2004 and 2003 were as follows: 2004
    
    2003Research Division
    
    $
    1,103,807
    
    
    $
    1,449,550Systems Division
    
    
    890,734
    
    
    
    1,738,868Microelectronics Division
    
    
    1,040,835
    
    
    
    1,545,296$
    3,035,376
    
    
    $
    4,733,714
 The decrease in revenues for the three months ended March 31, 2004
compared to the three months ended March 31, 2003 was primarily attributable to
a decrease in the Navair Contract revenues of $717,114 at the Systems Division
due to the delay in replacing IBM as the subcontractor on that contract, a
decrease of $554,682 related to two contracts at the Systems Division that are
nearing completion, a decrease in contract revenues at the Microelectronics
Divisions of $462,445 related to vendor delays and a decrease in revenues of
the Research and Systems Divisions related to the DARPA contract of $101,554
due to lower funding received on that contract. Losses. The net loss for the three months ended March 31, 2004 and 2003
was $(954,675) and $(906,657), respectively. The loss from continuing
operations for those same periods was $(892,578) and $(446,670), respectively,
while the loss from operations for those same periods was $(514,418) and
$(365,135), respectively. Included in the net loss for the three months ended
March 31, 2004 and 2003 is a loss from operations of discontinued operations of
$(62,097) and $(459,987), respectively. Also included in the net loss for the
three months ended March 31, 2004 is a non-cash interest charge of $324,105
related to the discount representing the intrinsic value of the beneficial
conversion feature and fair value of warrants related to the Companys Working
Capital Line. Included in the loss from operations in 2003 is a write-off of
abandoned patents in the amount of $106,093. Gross Margins. Gross margins for the three months ended March 31, 2004 and
2003 were 21.9% and 19.2%, respectively. The Companys margins are low because
the majority of its revenues are from contract revenues, which inherently
generate lower margins than product revenues. The primary increase in the gross margin
for the three months ended March 31, 2004 compared to the three months ended
March 31, 2003 is due to low margins in 2003 on the Navair Contract on higher
revenues. The low margins were due to the high subcontract component of the
Navair Contract and the Companys absorption of some of the costs incurred due
to limited funding on that contract. In addition, the gross margin on the
Microelectronics Division contract with GDAIS was higher in 2004 due to lower
material costs and a $70,000 contract cost overrun in 2003. In
addition, the Company recorded a contract reserve of approximately $171,000 in 2004
related to reserves on a contract at the Systems Division. The majority of the
Companys revenues in 2004 will be derived from contracts, so gross margins are
expected to continue at similar levels. Selling, General and Administrative (SG&A).SG&A expenses for the three
months ended March 31, 2004 and 2003 were $1,125,774 and $1,067,517,
respectively. The increase in SG&A expenses in 2004 compared to 2003 is
primarily related to higher payroll costs of approximately $121,000 primarily
due to additional personnel, higher Board of Director costs of approximately
$45,000 due to the implementation of the provisions of Sarbanes-Oxley, and
higher ASIC marketing costs in the amount of approximately $75,000 15




---



##### Table of Contents



offset in part by a decrease in SG&A costs of approximately $146,000 at the
Systems Division due to staff and other cost reductions. Research, Development and Engineering Program (RD&E).The Companys RD&E
consists of two types: customer-funded RD&E (U.S. government and other
companies) and company-funded RD&E. Both types of RD&E costs are expensed when
incurred. Customer-funded RD&E costs incurred, included in Costs of Sales,
totaled $1,330,682 and $2,419,435 for the three months ended March 31, 2004 and
2003, respectively. The decrease in customer-funded RD&E expenditures for the
three months ended March 31, 2004 consists of a decrease of $719,826 related to
the Navair Contract, decreases in two contracts winding down at the Systems
Division of $329,116 and a decrease of $39,811 related to the DARPA Contract. Company-funded RD&E costs are shown in Operating Expenses and totaled
$54,097 and $102,509 for the three months ended March 31, 2004 and 2003,
respectively. Hence, total RD&E expenditures for the three month periods were
$1,384,779 and $2,521,944 for 2004 and 2003, respectively. Total RD&E
expenditures as a percentage of revenues were 45.6% and 53.3% for the three
months ended March 31, 2004 and 2003, respectively. These expenditures are
primarily related to the continued development of collimated plasma lithography
systems for the semiconductor industry. In
February 2004, the Company received $8 million in financing from Laurus. JMAR
intends to use these funds to initiate and advance new product research and
development efforts and to acquire or license products, technologies or
businesses. Accordingly, the Company expects company-funded RD&E to increase
significantly in 2004. Discontinued Operations.The loss from operations of discontinued
operations of $62,097 for the three months ended March 31, 2004 is related to
the standard semiconductor products business. The loss from operations of
discontinued operations of $459,987 for the three months ended March 31, 2003
includes $41,216 related to the standard semiconductor products business and
$418,771 related to the precision equipment business. The decrease in the loss
from operations of discontinued operations is due to the sale of JPSI in July
2003. Prior to December 31, 2001, as the level of business expected from the
standard semiconductor products business did not materialize, the Company
decided to take action to sublease the Irvine facility and move the standard
semiconductor products business into a smaller facility and recorded a reserve
against the Irvine facility lease. The Company does not yet have a subtenant
for this facility. The lease provides for rent and related expenses of
approximately $36,000 per month through August 2005. Interest and Other Expense.Interest and other expense for the three
months ended March 31, 2004 and 2003 was $449,991 and $105,126, respectively.
Interest and other expense is higher for 2004 versus 2003 primarily due to the
financing transactions the Company entered into in late March 2003 and January
2004 (see Consolidated Liquidity and Financial Condition below). Included in
interest expense for the three months ended March 31, 2004 is $324,105 related
to the beneficial conversion feature and fair value of warrants issued in
connection with the Working Capital Line, and was charged to expense using the
effective yield method based on the life of the debt, over the period from the
issuance date to the conversion dates. Also, interest expense for the three
months ended March 31, 2004 and 2003 includes $43,750 and $40,652,
respectively, related to the discounted liability for the retirement in August
2002 of the Companys former Chairman and Chief Executive Officer. Preferred Stock Dividends.Included in the loss applicable to common stock
in the Statement of Operations for the three months ended March 31, 2004 and
2003 are preferred stock dividends of $1,169,283 and $5,422, respectively. The
amount for 2004 represents $55,067 of preferred stock dividends paid or payable
in cash and $1,114,216 related to the discount representing the beneficial
conversion feature of the redeemable convertible preferred stock and the fair
value of warrants issued in connection with the preferred stock. The entire
amount for 2003 represents preferred stock dividends payable in cash. 16




---



##### Table of Contents



Consolidated Liquidity and Financial Condition Cash and cash equivalents at March 31, 2004 was $10,454,410. The increase
in cash and cash equivalents during the three months ended March 31, 2004 of
$6,283,231 resulted primarily from net proceeds from the issuance of preferred
and common stock of $9,100,750, offset in part by the repayment in cash of
$835,761 of the notes to the former SAL noteholders and cash used in continuing
operations of $1,714,619 (primarily related to operating losses, an increase in
accounts receivable and a reduction in liabilities), and cash used in
discontinued operations of $362,370. JMARs operations will continue to use cash in 2004 for, among other
requirements, 1) product research and development efforts and to acquire or
license products, technologies or businesses; 2) temporary funding delays
related to government contracts; 3) corporate costs, primarily related to the
cost of being a public company; 4) facility costs for discontinued businesses;
5) preferred stock redemptions and dividends; and 6) other working capital
needs. As a result of the financing activity discussed below, management
believes that the Company has adequate resources to fund operations and working
capital requirements at least through March 31, 2005. However, the Company has
determined that it will require additional financing to complete or accelerate
the development of some of its high value emerging new products, including its
patented CPL systems for the manufacture of high-performance semiconductors.
Working capital as of March 31, 2004 and December 31, 2003 was $12,803,573 and
$2,427,166, respectively. The increase in working capital is primarily due to
proceeds from the issuance of preferred stock of $9.5 million and the
conversion into common stock of $1,254,500 of the Companys line of credit,
offset in part by the Companys losses. In March 2003, the Company entered into a Revolving Fixed Price
Convertible Note (Working Capital Line) with Laurus. The Working Capital Line
allows the Company to borrow from time-to-time up to 85% of eligible accounts
receivable of the Company to a maximum of $3 million. Advances in excess of
this formula are allowed, however, with the consent of Laurus. Laurus can
convert any portion of the principal outstanding to common stock at a fixed
price per share (Conversion Price) any time the market price of the Companys
common stock is in excess of the Conversion Price. The Company can convert a
portion of the principal outstanding to common stock at the Conversion Price if
the market price of the Companys common stock averages 118% of the Conversion
Price or higher for 22 consecutive trading days. The initial terms of the
Working Capital Line provided that after $2 million of conversions into equity,
the Conversion Price would be increased. The Conversion Price initially was
$.92, but was increased to $2.85 in January 2004 after $2 million of the
Working Capital Line had been converted. The interest rate on the Working Capital Line is equal to the prime rate
(4% at March 31, 2004) plus 0.75 percent, subject to a floor of 5.00 percent.
Accrued interest is payable monthly. The Working Capital Line requires that the
Companys quick ratio, as defined, be 0.90 or higher. The quick ratio is
defined as the sum of cash and accounts receivable divided by the sum of
current liabilities, exclusive of current liabilities of discontinued
operations. The Companys quick ratio was 7.29 at March 31, 2004. As of March
31, 2004, there was approximately $188,000 outstanding under the Working Capital Line. The
term of the Working Capital Line runs until March, 2006. The available
borrowings under the Working Capital Line were approximately $2.5 million at
March 31, 2004, approximately $2.3 million of which was unused at March 31, 2004. In 2003 and 2004, the Company sold the following series of Preferred Stock
to Laurus for cash: Converted in 2003
    
    Converted in 2004Conversion
    
    
    
    
    
    Shares
    
    
    
    
    
    SharesIssuance Date
    
    Series
    
    Amount
    
    Dividend
    
    Price
    
    Amount
    
    Issued
    
    Amount
    
    IssuedMarch, 2003
    
    A
    
    $
    1,000,000
    
    
    
    8
    %
    
    $
    0.88
    
    
    $
    1,000,000
    
    
    
    1,136,363
    
    
    
    
    
    
    
    March, 2003
    
    B
    
    $
    1,000,000
    
    
    
    3
    %
    
    $
    0.88
    
    
    $
    1,000,000
    
    
    
    1,136,364
    
    
    
    
    
    
    
    September, 2003
    
    C
    
    $
    1,500,000
    
    
    
    8
    %
    
    $
    2.08
    
    
    
    
    
    
    
    
    
    
    $
    1,500,000
    
    
    
    721,154December, 2003
    
    D
    
    $
    2,000,000
    
    
    
    8
    %
    
    $
    1.56
    
    
    
    
    
    
    
    
    
    
    $
    2,000,000
    
    
    
    1,282,051January, 2004
    
    E
    
    $
    1,500,000
    
    
    
    8
    %
    
    $
    2.85
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February, 2004
    
    F
    
    $
    2,000,000
    
    
    
    2
    %
    
    $
    3.11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February, 2004
    
    G
    
    $
    2,000,000
    
    
    
    2
    %
    
    $
    3.28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February, 2004
    
    H
    
    $
    4,000,000
    
    
    
    2
    %
    
    $
    3.47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 17




---



##### Table of Contents



The Series E, F, G and H Preferred Stock are redeemable in cash (or common
stock if the closing market price of the Companys common stock is 118% of the
Conversion Price or higher for the 11 trading days prior to the redemption
date) at various amounts and dates (see below under Commitments), if not
previously converted. Conversions to equity are offset against the required
repayments. Except for the conversion price, the conversion terms of the Series
E through H Preferred Stock are the same as the conversion terms of the Working
Capital Line. In connection with all of the above financing transactions with Laurus,
the Company issued warrants to Laurus to purchase a total of 1,390,000 shares
of common stock at prices ranging from $1.058 to $5.15. In addition, Laurus was
granted the right to receive a warrant to purchase one share of common stock at
$3.13 for every $20 of principal of the Working Capital Line converted to
equity in excess of the first $2 million up to a total of 50,000 shares. The shares of common stock issuable to Laurus under all of the preferred
stock and warrants described above have been included in registration
statements declared effective by the Securities and Exchange Commission. In February, 2003, under a Shelf Registration Statement, the Company sold
100,000 shares of its common stock and a warrant for 20,000 shares, exercisable
at $1.25 per share, for gross proceeds of $100,000. The Companys stockholders equity was $9,032,115 as of March 31, 2004. In
May, 2003, the Company transferred to the Nasdaq SmallCap Market, where it is
required to maintain no less than $2.5 million of stockholders equity to
retain its listing. Substantial continued losses without increases in equity
would cause the Company to fall below this NASDAQ requirement, which would
require it to come into compliance or face delisting. The delisting of the
Companys stock could adversely affect its ability to raise funds in the
future. The Company believes that it has available to it several potential
sources of capital to meet NASDAQ listing standards, particularly the
above-described financings. In February 2004 the Company received approximately $3.5 million in
additional contracts from General Dynamics and in late March 2004 and early
April 2004, DARPA released $1.6 million in funding. In addition, JMAR expects
to receive approximately $5.4 million in additional CPL contract funding from
DARPA and another $2.1 million in funds from NAVAIR. Commitments Future minimum annual commitments under non-cancellable operating leases
(net of subleases) and post-employment benefits as of March 31, 2004 are as
follows (unaudited): 2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    TotalOperating leases
    
    $
    791,951
    
    
    $
    553,937
    
    
    $
    39,970
    
    
    $
    
    
    
    $
    
    
    
    $
    1,385,858Post-employment
benefits
    
    
    154,318
    
    
    
    282,377
    
    
    
    269,377
    
    
    
    269,377
    
    
    
    254,484
    
    
    
    1,229,933$
    946,269
    
    
    $
    836,314
    
    
    $
    309,347
    
    
    $
    269,377
    
    
    $
    254,484
    
    
    $
    2,615,791
 The operating leases are primarily for office facilities. The
post-employment benefits are presented at the total amount to be paid, whereas
the liability has been discounted for financial reporting purposes. Excluded from the above table are redemption obligations under Series E,
F, G and H Preferred Stock in the gross amount of $9.5 million. Also excluded
from the above table is the Companys $3 million Working Capital Line, of which
none was outstanding at March 31, 2004. If not previously converted, the Series
E through H Preferred Stock are redeemable as follows: 18




---



##### Table of Contents



GrossAmount
    
    ConvertedOutstanding
    
    Subsequent
    
    Scheduled Redemptionsat March 31,
    
    to March 31,Description
    
    2004
    
    2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    TotalSeries D Preferred
    
    $
    1.1M
    
    
    $
    1.1M
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Series E Preferred
    
    $
    1.5M
    
    
    
    
    
    
    
    416,667
    
    
    
    1,000,000
    
    
    
    83,333
    
    
    
    
    
    
    
    1,500,000Series F Preferred
    
    $
    2.0M
    
    
    
    
    
    
    
    
    
    
    
    450,000
    
    
    
    450,000
    
    
    
    1,100,000
    
    
    
    2,000,000Series G Preferred
    
    $
    2.0M
    
    
    
    
    
    
    
    
    
    
    
    450,000
    
    
    
    450,000
    
    
    
    1,100,000
    
    
    
    2,000,000Series H Preferred
    
    $
    4.0M
    
    
    
    
    
    
    
    
    
    
    
    900,000
    
    
    
    900,000
    
    
    
    2,200,000
    
    
    
    4,000,000$
    416,667
    
    
    $
    2,800,000
    
    
    $
    1,883,333
    
    
    $
    4,400,000
    
    
    $
    9,500,000
 Under the Merger Agreement entered into with the former shareholders and
creditors of SAL, Inc. (now operating as the Companys Systems Division), those
persons could earn up to three contingent earnout payments upon the
satisfaction of three earnout conditions. For the first earnout, the SAL
creditors were eligible to receive $500,000 in convertible notes upon the
satisfaction of a stepper limited throughput test (without the CPL light
source) by June 30, 2002. This requirement was not met by the June 30, 2002
deadline, and, therefore, the Company did not have to issue the $500,000 in
convertible notes. For the second earnout, the SAL shareholders can earn
$500,000 in convertible notes upon the satisfaction of a lithography
demonstration milestone. This milestone must be met 90 days after the Companys
CPL beta source has satisfied certain negotiated source performance criteria. In
successful tests of the integrated system in March 2004, the source
demonstrated improved reliability and performance; however, the specific source
performance criteria specified in the Merger Agreement have not yet been met.
If issued, the $500,000 in Convertible Notes would be due 24 months after
issuance and would have a conversion price equal to 120% of the average of the
closing prices for the ten days prior to issuance. The third earnout condition can result in payment of up to 354,736 JMAR
shares and up to $1.2 million in convertible notes upon receipt by the Company
of a qualifying order for a CPL system from a commercial customer and delivery
to the customer. Under the Merger Agreement, the deadline for receipt of this
order is 180 days after the CPL source has satisfied the above mentioned source
performance criteria. If earned, this earnout payment would be payable 30 days
after delivery and acceptance of the system by the customer. On April 30, 2004, the Company sent a letter to former shareholders and
creditors (Holders) of SAL, Inc. proposing an amendment (Amendment) to the
second and third earnouts. Although the Company has continued to improve the
CPL source and it has recently demonstrated improved lithographic
performance, the CPL source does not yet meet the specific technical criteria
set forth in the Merger Agreement and, therefore, the time to commence the
required demonstration has not yet begun. Specifically, although the
CPL source
has demonstrated throughput approaching that required of the earnout, it has
done so using a more sensitive resist than that required by the earnout.
Because of the open-ended nature of the earnout, the payment of the second and
third earnouts could be delayed for an indeterminate time. Because of this
uncertainty, the Company believes that the current situation is unsatisfactory
for both JMAR and the Holders. Upon acceptance of the Amendment by 95 percent of the Holders, the Company
proposes to (i) satisfy the second earnout by issuing a total of $500,000 in
shares of common stock, valued at the average of the closing prices of JMARs
common stock for the five days prior to issuance, and (ii) require the
satisfaction of the third earnout conditions by December 31, 2005. At December 31, 2003, the Company had approximately $57 million of Federal
net operating loss carryforwards subject to certain annual limitations, which
expire from 2004 through 2023. To the extent the Company has taxable income in
the future, these carryforwards may be used by the Company to reduce its cash
outlay for taxes. 19




---



##### Table of Contents



Critical Accounting Policies and Estimates Managements Discussion and Analysis of Financial Condition and Results of
Operations discusses JMARs consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments,
including those related to revenues, goodwill and intangible assets, beneficial
conversion feature, deferred taxes, litigation accrual and stock based
compensation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the
following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements. Revenues Product revenues are recognized when the product is shipped FOB shipping
point, all risks of ownership have passed to the customer and the Company has
performed all obligations in accordance with Staff Accounting Bulletin No 101,
Revenue Recognition in Financial Statements (SAB No. 101). Contract revenues are recognized based on the percentage of completion
method wherein income is recognized pro-rata over the life of the contract
based on the ratio of total incurred costs to anticipated total costs of the
contract. The program manager prepares a statement of work, schedule and
budget for each contract. At least monthly, actual costs are compared to budget
and technical progress is compared to the planned schedule. The Company
prepares an estimate of costs to complete for each contract at least quarterly.
Estimated losses based on this review are fully charged to operations when
identified. Actual costs could differ from these estimated costs. Goodwill and Intangible Assets In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002, the Company has established reporting units and
applies a two-step fair value approach to evaluating goodwill impairment, using
at least an annual assessment. The Company compares the fair value of the
business unit with the carrying amount of the assets associated with the
business unit. The fair value of each business unit is determined using a risk
adjusted discount rate to compute a net present value of estimated future cash
flows and a consideration of market capitalization of the Company. The second
step measures the amount of the impairment, if any. Patent costs capitalized
are amortized over ten years, and other intangible assets are amortized over
not more than five years. Patent costs capitalized are reviewed quarterly for
realizability. Beneficial Conversion Feature In accordance with Financial Accounting Standards Board (FASB) Emerging
Issues Task Force Issue (EITF) No. 98-5 and FASB EITF No. 00-27, the Company
records a beneficial conversion feature (BCF) related to the issuance of
convertible preferred stock and convertible debt that have conversion features
at fixed rates that are in-the-money when issued and records the fair value of
warrants issued with those instruments. The BCF for the convertible instruments
and fair value of warrants is recognized and measured by allocating a portion
of the proceeds to additional paid-in capital and as a discount to the
convertible instrument equal to the intrinsic value of the conversion features.
Such amount is calculated at the issuance date as the difference between the
conversion price and the relative fair value of the common stock and warrants
into which the security is convertible or exercisable. 20




---



##### Table of Contents



For convertible preferred stock and related warrants, the recorded
discount is recognized as a dividend from the date of issuance to the earlier
of the redemption dates or the conversion dates using the effective yield
method. For convertible debt and related warrants, the recorded discount is
recognized as interest expense using the effective yield method based on the
life of the debt, over the period from the issuance date to the conversion
dates. Deferred Taxes JMAR records a valuation allowance to reduce its deferred tax assets to
the amount that management believes is more likely than not to be realized in
the foreseeable future, based on estimates of foreseeable future taxable income
and taking into consideration historical operating information. In the event
management estimates that it will not be able to realize all or part of its net
deferred tax assets in the foreseeable future, a valuation allowance is
recorded through a charge to income in the period such determination is made.
Likewise, should management estimate that it will be able to realize its
deferred tax assets in the future in excess of its net recorded asset, an
adjustment to reduce the valuation allowance would increase income in the
period such determination is made. Litigation Accrual Estimated amounts for litigation reserves that are probable and can be
reasonably estimated are recorded as liabilities. Estimates are based upon the
facts and circumstances of each case and, in part, on advice from legal counsel
regarding probable outcomes, if determinable. Management reviews its estimates
on a quarterly basis. Stock-Based Compensation Plans The Company accounts for its stock option and warrant plans under APB
Opinion No. 25, using the intrinsic value method, under which no compensation
cost has been recognized for issuances to employees. Options and warrants
issued to non-employees (other than directors) are accounted for based on the
fair value of the equity instrument issued. The fair value is calculated based
on the Black-Scholes pricing model. The resulting value is amortized over the
service period. Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995 Certain statements contained in this Form 10-Q which are not related to
historical results, including statements regarding JMARs future sales or
profit growth, competitive position or products, projects or processes
currently under development, the ability of the Company to successfully
introduce new products into the commercial marketplace or to apply those
products, projects or processes to alternative applications are forward-looking
statements. These forward-looking statements are based on certain assumptions
and are subject to certain risks and uncertainties that could cause actual
future performance and results to differ materially from those stated or
implied in the forward-looking statements. In addition to the several risks and uncertainties described in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations, additional risks and uncertainties include the following:  
    
    the possible lack of funds to continue development and
commercialization of our CPL products due to delays in funding or
cancellation of government contracts;
    
    possible delays in securing, or inability to secure other financing,
whether from the public or private debt or equity markets or from
commercial lenders or otherwise;
    
    the possible inability to develop, manufacture and market, in a
timely manner, innovative products that meet the needs of new customers
and new industries, which will require the Company to increase its
product engineering, manufacturing and sales and marketing
infrastructure; 21




---



##### Table of Contents




    
    the possible inability to achieve the levels of power and reliability
in its CPL source required to enter the GaAs, contact hole and
mainstream silicon markets, despite the expenditure of additional
significant funds;
    
    the possible delay in the near-term recovery of the GaAs chip market
resulting in further delays in the demand for the increased throughput
offered by the Companys CPL system;
    
    despite substantial technical, marketing and sales efforts and the
expenditure of significant funds by the Company, the failure to convince
semiconductor manufacturers to adopt the Companys CPL technology over
other existing and possible future alternative lithography technologies,
including the use of electron beam systems for GaAs chip manufacturing,
193 immersion lithography for silicon contact hole processing and EUV
lithography for future mainstream silicon manufacturing;
    
    the possible failure of the Companys other new product development
efforts, which can involve lengthy and capital intensive programs that
are subject to many unforeseen risks, delays, problems and costs and
uncertainties as to the markets demand for such new products;
    
    the possible failure to form alliances with stepper, mask and resist
companies to develop the appropriate infrastructure to support the
Companys CPL lithography technology;
    
    the possible lack of availability of critical components from third
party suppliers, including laser diodes, x-ray collimators, x-ray masks
and photo-resist, or the inability to obtain such components at
acceptable costs;
    
    possible fluctuations in margins, or the failure to lower
manufacturing costs sufficiently to achieve acceptable margins;
    
    the possible failure of pending patents to be issued and
uncertainties as to the breadth or degree of protection of existing or
future patents in the fields of x-ray lithography and EUV light sources;
and
    
    other risks detailed in the Companys Form 10-K for the year ended
December 31, 2003 and in the Companys other filings with the Securities
and Exchange Commission. 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk. The Companys exposure to interest rate risk is minimal due to the
relatively small amount of investments and variable rate debt. The Company has
no investments in derivative financial instruments. 
 Item 4.Controls and Procedures. The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is
accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and the Companys Chief Financial Officer, of the
effectiveness as of March 31, 2004 of the design and operation of the Companys
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)).
Based on such evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure 22




---



##### Table of Contents



controls and procedures were effective in timely alerting them to material
information required to be included in the Companys reports filed or submitted
under the Exchange Act of 1934. There have been no significant changes in the Companys internal control
over financial reporting during the quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 
 PART II  OTHER INFORMATION 
 Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (c)(i) In January and February 2004, the Company issued Series E, F, G
and H Convertible Preferred Stock to Laurus Master Fund in the amounts
of $1.5 million, $2 million, $2 million and $4 million, respectively.
The Series E, F, G and H Convertible Preferred Stock have fixed
conversion prices of $2.85, $3.11, $3.28 and $3.47, respectively. Also
issued in these transactions were warrants to purchase 90,000 shares of
common stock at an exercise price of $5.00 per share, 50,000 shares of
common stock at an exercise price of $3.42 per share, 50,000 shares of
common stock at an exercise price of $3.61 per share and 100,000 shares
of common stock at an exercise price of $3.82 per share. The other
material terms of these securities are described in the Notes to
Consolidated Financial Statements and in the Managements Discussion
and Analysis of Financial Condition and Results of Operations elsewhere
in this Report. These issuances were exempt under Section 4(2) of the
Securities Act of 1933. (c)(ii) In January 2004, in connection with the increase in the
conversion price to $2.85 for the Companys Working Capital Line, the
Company issued warrants to purchase 100,000 shares of common stock at an
exercise price of $5.15 per share. The other material terms of these
securities are described in the Notes to Consolidated Financial
Statements and in the Managements Discussion and Analysis of
Financial Condition and Results of Operations elsewhere in this Report.
This issuance was exempt under Section 4(2) of the Securities Act of
1933. (e)(i) On February 23, 2000, C. Neil Beer, a director, executed a
Secured Promissory Note in favor of the Company (the Note) in the
original principal amount of $14,250, with interest accruing at the
prime rate, payable on demand by the Company. In March 2004, Dr. Beer
repaid the Note and accrued interest in full by delivering to the
Company a total of 7,552 shares of common stock of the Company. This
transaction is considered a purchase of shares by the Company and is
reflected in the table below. Purchases of Equity Securities Total
    
    Average
    
    Total Number of Shares
    
    Maximum Number ofNumber of
    
    Price
    
    Purchased as Part of
    
    Shares that May YetShares
    
    Per
    
    Publicly Announced
    
    be Purchased UnderPeriod
    
    Purchased
    
    Share
    
    Program (1)
    
    Plans or ProgramsJanuary 1-31, 2004
    
    
    7,552
    
    
    $
    2.35
    
    
    
    0
    
    
    
    0February 1-29, 2004
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0March 1-31, 2004
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0
 (1) The Company has no currently effective publicly announced stock repurchase program. 23




---



##### Table of Contents



Item 6.Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits Exhibit 31.1
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 31.2
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  (b)
    
    Reports on Form 8-K None. 24




---



##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. JMAR TECHNOLOGIES, INC.May 17, 2004
    
    By:
    
    /s/
    
    Ronald A. WalrodRonald A. Walrod, Chief Executive Officerand Authorized OfficerBy:
    
    /s/
    
    Dennis E. ValentineDennis E. Valentine, Chief Accounting Officer
 25