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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 June 30, 2002
Commission File Number 1-10515

JMAR TECHNOLOGIES, INC.

---

(Exact name of registrant as specified in its charter)


|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 68-0131180                             
|                                                               |  |                                        
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. employer
identification number)

5800 Armada Drive
Carlsbad, CA 92008
(760) 602-3292

---

(Address, including zip code and telephone number including
area code of registrants principal executive office)


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 the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date (August 9, 2002).

Common Stock, $.01 par value: 23,843,947 shares





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##### Table of Contents



INDEX

|         |  |                                                                                       |  |                                                                                                                                                   |    |        |   | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ------ | - | 
|         |  |                                                                                       |  |                                                                                                                                                   |    | Page #
|         |  |                                                                                       |  |                                                                                                                                                   |    |       
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                                                                   |    |       
|Item 1.  |  | Financial Statements                                                                  |  |                                                                                                                                                   |    |       
|         |  |                                                                                       |  | Consolidated Balance Sheets  June 30, 2002 (unaudited) and December 31, 2001                                                                     |    |        | 2 | 
|         |  |                                                                                       |  | Consolidated Statements of Operations (unaudited)  Three months ended June 30, 2002 and 2001
and six months ended June 30, 2002 and 2001         |    |        | 3 | 
|         |  |                                                                                       |  | Consolidated Statements of Comprehensive Loss (unaudited)  Three months ended June 30, 2002 and
2001 and six months ended June 30, 2002 and 2001 |    |        | 4 | 
|         |  |                                                                                       |  | Consolidated Statements of Cash Flows
(unaudited)  Six months ended June 30, 2002 and 2001                                                       |    |        | 5 | 
|         |  |                                                                                       |  | Notes to Consolidated Financial Statements (unaudited)                                                                                            |    |        | 6 | 
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                                                                                   | 11 |       
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                                                   | 16 |       
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                                                                                   |    |       
|Item 1.  |  | N/A                                                                                   |  |                                                                                                                                                   |    |       
|Item 2.  |  | Changes in Securities                                                                 |  |                                                                                                                                                   | 17 |       
|Item 3.  |  | N/A                                                                                   |  |                                                                                                                                                   |    |       
|Item 4.  |  | N/A                                                                                   |  |                                                                                                                                                   |    |       
|Item 5.  |  | N/A                                                                                   |  |                                                                                                                                                   |    |       
|Item 6.  |  | Reports on Form 8-K                                                                   |  |                                                                                                                                                   | 17 |       

1



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TABLE OF CONTENTS



|                               |                                                                                               |                                               |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               |                                                                                               | CONSOLIDATED BALANCE SHEETS                  
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS        
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS        
|                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                               | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk.                          
|PART II  OTHER INFORMATION   
|                               | Item 2. Changes in Securities                                                                
|                               | Item 6. Reports on Form 8-K                                                                  
|SIGNATURE                     



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##### Table of Contents






PART I  FINANCIAL INFORMATION




JMAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
As of June 30, 2002 and December 31, 2001

|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |             |   |            | 
|--------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ------------- | ---------- | ----------------- | ----------- | - | ---------- | 
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             | June 30, 2002 |            | December 31, 2001
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                  
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             | (Unaudited)   |            |                   |             |  
|ASSETS                                                               
|Current Assets:                                                       |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|                                                                      | Cash and cash equivalents                                                                                                                                       |                                                                                                    | $                                          | 2,077,564   |               |            | $                 | 4,115,129   |  
|                                                                      | Restricted cash                                                                                                                                                 |                                                                                                    |                                            | 2,175,000   |               |            |                   | 3,000,000   |  
|                                                                      | Accounts receivable, net                                                                                                                                        |                                                                                                    |                                            | 6,491,296   |               |            |                   | 5,101,742   |  
|                                                                      | Notes and other receivables                                                                                                                                     |                                                                                                    |                                            | 14,934      |               |            |                   | 19,481      |  
|                                                                      | Inventories, net                                                                                                                                                |                                                                                                    |                                            | 5,280,504   |               |            |                   | 4,517,146   |  
|                                                                      | Marketable securities available for sale                                                                                                                        |                                                                                                    |                                            |            |               |            |                   | 1,474,889   |  
|                                                                      | Prepaid expenses and other                                                                                                                                      |                                                                                                    |                                            | 501,302     |               |            |                   | 514,416     |  
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|                                                                      |                                                                                                                                                                 |                                                                                                    | Total current assets                       |             |               | 16,540,600 |                   |             |   | 18,742,803 | 
|Property and equipment, net                                           |                                                                                                                                                                 |                                                                                                    | 1,618,433                                  |             |               |            | 1,770,628         |            
|Other assets, net                                                     |                                                                                                                                                                 |                                                                                                    | 1,509,932                                  |             |               |            | 2,147,462         |            
|Goodwill, net                                                         |                                                                                                                                                                 |                                                                                                    | 3,957,732                                  |             |               |            | 3,957,732         |            
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|                                                                      |                                                                                                                                                                 |                                                                                                    | TOTAL ASSETS                               |             | $             | 23,626,697 |                   |             | $ | 26,618,625 | 
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                 
|Current Liabilities:                                                  |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|                                                                      | Accounts payable                                                                                                                                                |                                                                                                    | $                                          | 2,357,448   |               |            | $                 | 2,086,552   |  
|                                                                      | Accrued liabilities                                                                                                                                             |                                                                                                    |                                            | 864,759     |               |            |                   | 1,395,003   |  
|                                                                      | Accrued payroll and related costs                                                                                                                               |                                                                                                    |                                            | 1,026,445   |               |            |                   | 985,315     |  
|                                                                      | Customer deposits                                                                                                                                               |                                                                                                    |                                            | 1,225,365   |               |            |                   | 1,483,804   |  
|                                                                      | Line of credit                                                                                                                                                  |                                                                                                    |                                            | 2,175,000   |               |            |                   | 3,000,000   |  
|                                                                      | Notes payable                                                                                                                                                   |                                                                                                    |                                            | 57,174      |               |            |                   | 142,257     |  
|                                                                      | Net current liabilities of discontinued operations                                                                                                              |                                                                                                    |                                            | 1,680,985   |               |            |                   | 1,806,407   |  
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|                                                                      |                                                                                                                                                                 |                                                                                                    | Total current liabilities                  |             |               | 9,387,176  |                   |             |   | 10,899,338 | 
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|Notes payable and other long-term liabilities, net of current portion |                                                                                                                                                                 |                                                                                                    | 1,358,096                                  |             |               |            | 1,419,632         |            
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|Stockholders equity:                                                 |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|                                                                      | Preferred stock, $.01 par value;                                                                                                                                |                                                                                                    |                                            |             |               |            |                   |             |  
|                                                                      |                                                                                                                                                                 | 5,000,000 shares authorized; none issued and outstanding
as of June 30, 2002 and December 31, 2001 |                                            |             |              |            |                   |             |  |           
|                                                                      | Common stock, $.01 par value; 40,000,000 shares authorized; Issued and outstanding 23,843,947 as of June 30, 2002 and
22,840,392 shares as of December 31, 2001 |                                                                                                    |                                            | 238,439     |               |            |                   | 228,404     |  
|                                                                      | Additional-paid in capital                                                                                                                                      |                                                                                                    |                                            | 56,089,596  |               |            |                   | 54,343,211  |  
|                                                                      | Accumulated other comprehensive income                                                                                                                          |                                                                                                    |                                            |            |               |            |                   | 1,424,864   |  
|                                                                      | Accumulated deficit                                                                                                                                             |                                                                                                    |                                            | (43,446,610 | )             |            |                   | (41,696,824 | )
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|                                                                      |                                                                                                                                                                 |                                                                                                    | Total stockholders equity                 |             |               | 12,881,425 |                   |             |   | 14,299,655 | 
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            
|                                                                      |                                                                                                                                                                 |                                                                                                    | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |             | $             | 23,626,697 |                   |             | $ | 26,618,625 | 
|                                                                      |                                                                                                                                                                 |                                                                                                    |                                            |             |               |            |                   |            

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##### Table of Contents






JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2002 and 2001 and
Six Months Ended June 30, 2002 and 2001
(Unaudited)

|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |           |           | 
|------------------------------------------------------------------ | ------------------------------------------- | ------------ | ---------- | ------------------ | --------- | ---------------- | ---------- | ------------- | --------- | ------------- | ---------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                                                                   |                                             |              |            | Three Months Ended |           | Six Months Ended
|                                                                   |                                             |              |            |                    |           |                 
|                                                                   |                                             |              |            | June 30, 2002      |           | June 30, 2001    |            | June 30, 2002 |           | June 30, 2001
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |              
|Sales                                                              |                                             | $            | 6,133,686  |                    |           | $                | 3,318,379  |               |           | $             | 10,670,202 |           |           | $ | 7,864,542  |          
|Costs of sales                                                     |                                             |              | 4,710,760  |                    |           |                  | 2,288,269  |               |           |               | 8,156,091  |           |           |   | 5,544,611  |          
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|                                                                   |                                             | Gross profit |            |                    | 1,422,926 |                  |            |               | 1,030,110 |               |            |           | 2,514,111 |   |            |           | 2,319,931 | 
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|Operating expenses:                                                |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|                                                                   | Selling, general and
administrative         |              |            | 1,503,237          |           |                  |            | 1,633,505     |           |               |            | 3,047,323 |           |   |            | 3,064,454 |          
|                                                                   | Research, development and
engineering       |              |            | 397,662            |           |                  |            | 698,869       |           |               |            | 816,679   |           |   |            | 1,142,297 |          
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|                                                                   | Total operating expenses                    |              |            | 1,900,899          |           |                  |            | 2,332,374     |           |               |            | 3,864,002 |           |   |            | 4,206,751 |          
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|Loss from operations                                               |                                             |              | (477,973   | )                  |           |                  | (1,302,264 | )             |           |               | (1,349,891 | )         |           |   | (1,886,820 | )        
|Realized gain on sale of
marketable securities                     |                                             |              |           |                    |           |                  | 1,189,273  |               |           |               | 1,349,721  |           |           |   | 1,189,273  |          
|Interest and other income                                          |                                             |              | 20,626     |                    |           |                  | 64,323     |               |           |               | 38,514     |           |           |   | 168,437    |          
|Interest and other expense                                         |                                             |              | (60,395    | )                  |           |                  | (24,156    | )             |           |               | (117,846   | )         |           |   | (36,559    | )        
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|Loss from continuing operations before
income taxes                |                                             |              | (517,742   | )                  |           |                  | (72,824    | )             |           |               | (79,502    | )         |           |   | (565,669   | )        
|Deferred income tax expense                                        |                                             |              | (484,423   | )                  |           |                  |           |               |           |               | (484,423   | )         |           |   |           |          
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|Loss from continuing operations                                    |                                             |              | (1,002,165 | )                  |           |                  | (72,824    | )             |           |               | (563,925   | )         |           |   | (565,669   | )        
|Loss from operations of discontinued
operations                    |                                             |              |           |                    |           |                  | (404,722   | )             |           |               | (1,185,861 | )         |           |   | (906,318   | )        
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|Net loss                                                           |                                             | $            | (1,002,165 | )                  |           | $                | (477,546   | )             |           | $             | (1,749,786 | )         |           | $ | (1,471,987 | )        
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|Basic and diluted loss per share:                                  |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|                                                                   | Loss per share from continuing
operations   |              | $          | (.04               | )         |                  | $          |              |           |               | $          | (.03      | )         |   | $          | (.03      | )        
|                                                                   | Loss per share from discontinued
operations |              |            |                   |           |                  |            | (.02          | )         |               |            | (.05      | )         |   |            | (.04      | )        
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|Basic and diluted net loss per share                               |                                             | $            | (.04       | )                  |           | $                | (.02       | )             |           | $             | (.08       | )         |           | $ | (.07       | )        
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          
|Basic and diluted shares used in
computation of net loss per share |                                             |              | 23,841,609 |                    |           |                  | 22,238,799 |               |           |               | 23,103,559 |           |           |   | 22,229,419 |          
|                                                                   |                                             |              |            |                    |           |                  |            |               |           |               |            |           |           |   |            |          

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##### Table of Contents






JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three Months Ended June 30, 2002 and 2001 and
Six Months Ended June 30, 2002 and 2001
(Unaudited)

|                                 |                                                 |   |                    |   |                  |   |               |         |               |   |            |   |  |   |            |         |  
|-------------------------------- | ----------------------------------------------- | - | ------------------ | - | ---------------- | - | ------------- | ------- | ------------- | - | ---------- | - |  | - | ---------- | ------- | -
|                                 |                                                 |   | Three Months Ended |   | Six Months Ended
|                                 |                                                 |   |                    |   |                 
|                                 |                                                 |   | June 30, 2002      |   | June 30, 2001    |   | June 30, 2002 |         | June 30, 2001
|                                 |                                                 |   |                    |   |                  |   |               |         |              
|Net loss                         |                                                 | $ | (1,002,165         | ) |                  | $ | (477,546      | )       |               | $ | (1,749,786 | ) |  | $ | (1,471,987 | )      
|Other comprehensive gain (loss): |                                                 |   |                    |   |                  |   |               |         |               |   |            |   |  |   |            |        
|                                 | Unrealized gain (loss) on
marketable securities |   |                    |  |                  |   |               | 459,426 |               |   |            |  |  |   |            | (46,878 | )
|                                 |                                                 |   |                    |   |                  |   |               |         |               |   |            |   |  |   |            |        
|Comprehensive loss               |                                                 | $ | (1,002,165         | ) |                  | $ | (18,120       | )       |               | $ | (1,749,786 | ) |  | $ | (1,518,865 | )      
|                                 |                                                 |   |                    |   |                  |   |               |         |               |   |            |   |  |   |            |        

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##### Table of Contents






JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)

|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |            |            |            |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------------------------- | ----------------------------------------- | ---------- | ---------------- | ---------- | ------------- | ---------- | ---------- | ---------- | -
|                                               |                                                                                                     |                                          |                                           |            | Six Months Ended
|                                               |                                                                                                     |                                          |                                           |            |                 
|                                               |                                                                                                     |                                          |                                           |            | June 30, 2002    |            | June 30, 2001
|                                               |                                                                                                     |                                          |                                           |            |                  |            |              
|Cash flows from operating activities:          |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               | Loss from continuing operations                                                                     |                                          | $                                         | (563,925   | )                |            | $             | (565,669   | )         
|                                               | Adjustments to reconcile loss from continuing operations to net cash
used in continuing operations: |                                          |                                           |            |                  |            |               |            |           
|                                               | Depreciation and amortization                                                                       |                                          |                                           | 508,548    |                  |            |               | 362,150    |           
|                                               | Services received in exchange for common stock                                                      |                                          |                                           | 3,000      |                  |            |               | 2,400      |           
|                                               | Gain on sale of marketable securities                                                               |                                          |                                           | (1,349,721 | )                |            |               | (1,189,273 | )         
|                                               | Change in assets and liabilities:                                                                   |                                          |                                           |            |                  |            |               |            |           
|                                               |                                                                                                     | Accounts receivable, net                 |                                           |            | (1,389,554       | )          |               |            | 2,499,667  |           
|                                               |                                                                                                     | Inventories                              |                                           |            | (763,358         | )          |               |            | (576,572   | )         
|                                               |                                                                                                     | Prepaid expenses and other               |                                           |            | 17,658           |            |               |            | 54,950     |           
|                                               |                                                                                                     | Other assets                             |                                           |            | (10,408          | )          |               |            |           |           
|                                               |                                                                                                     | Customer deposits                        |                                           |            | (258,439         | )          |               |            | 5,513      |           
|                                               |                                                                                                     | Accounts payable and accrued liabilities |                                           |            | (218,212         | )          |               |            | (1,301,301 | )         
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               |                                                                                                     |                                          | Net cash used in continuing operations    |            |                  | (4,024,411 | )             |            |            | (708,135   | )
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               | Loss from discontinued operations                                                                   |                                          |                                           | (1,185,861 | )                |            |               | (906,318   | )         
|                                               | Changes in net liabilities of discontinued operations                                               |                                          |                                           | (125,422   | )                |            |               | (1,085,972 | )         
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               |                                                                                                     |                                          | Net cash used in discontinued operations  |            |                  | (1,311,283 | )             |            |            | (1,992,290 | )
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               |                                                                                                     |                                          | Net cash used in operating activities     |            |                  | (5,335,694 | )             |            |            | (2,700,425 | )
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|Cash flows from investing activities:          |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               | Proceeds from sale of marketable securities                                                         |                                          |                                           | 1,399,746  |                  |            |               | 1,207,923  |           
|                                               | Capital expenditures                                                                                |                                          |                                           | (109,511   | )                |            |               | (385,531   | )         
|                                               | Other assets                                                                                        |                                          |                                           | 484,423    |                  |            |               | 18,053     |           
|                                               | Payments received on notes receivable                                                               |                                          |                                           |           |                  |            |               | 7,738      |           
|                                               | Patent costs                                                                                        |                                          |                                           | (83,330    | )                |            |               | (71,635    | )         
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               |                                                                                                     |                                          | Net cash provided by investing activities |            |                  | 1,691,328  |               |            |            | 776,548    |  
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|Cash flows from financing activities:          |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               | Net proceeds from the issuance of common stock                                                      |                                          |                                           | 1,753,420  |                  |            |               |           |           
|                                               | Net borrowings (payments) under line of credit                                                      |                                          |                                           | (825,000   | )                |            |               | 1,900,000  |           
|                                               | Decrease in restricted cash                                                                         |                                          |                                           | 825,000    |                  |            |               |           |           
|                                               | Payments of notes payable and other long-term liabilities                                           |                                          |                                           | (146,619   | )                |            |               | (88,026    | )         
|                                               | Net proceeds from the exercise of options and warrants                                              |                                          |                                           |           |                  |            |               | 48,992     |           
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               |                                                                                                     |                                          | Net cash provided by financing activities |            |                  | 1,606,801  |               |            |            | 1,860,966  |  
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|Net decrease in cash and cash equivalents      |                                                                                                     |                                          | (2,037,565                                | )          |                  |            | (62,911       | )         
|Cash and cash equivalents, beginning of period |                                                                                                     |                                          | 4,115,129                                 |            |                  |            | 9,856,768     |           
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|Cash and cash equivalents, end of period       |                                                                                                     | $                                        | 2,077,564                                 |            |                  | $          | 9,793,857     |           
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|Cash paid for interest                         |                                                                                                     | $                                        | 92,548                                    |            |                  | $          | 26,828        |           
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           
|Non-cash Item:                                 |                                                                                                     |                                          |                                           |            |                  |            |               |           
|                                               | Change in unrealized gains in
marketable securities                                                 |                                          | $                                         |           |                  |            | $             | (46,878    | )         
|                                               |                                                                                                     |                                          |                                           |            |                  |            |               |           

5



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##### 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) and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
In the first quarter of 2002, the Company decided to discontinue and sell its
standard semiconductor products business. This portion of JMAR Semiconductor
Inc.s (JSI) business has been a developmental effort, involving the design,
manufacture and introduction of new standard product semiconductor chips. With
the severe downturn in the worldwide semiconductor market, JSI had little
success in selling its new standard product chips. Given the required
substantial additional capital to get these chips established in the market, as
well as to develop newer, higher value chips, JMAR has determined it is in the
best interests of the Company and its shareholders to focus its principal
efforts on its other business areas. The standard semiconductor products
business of JSI has been accounted for in the accompanying
consolidated financial statements
as discontinued operations and the statement of operations for the three and
six months ended June 30, 2001 have been restated to reflect the discontinuation
of this business.

The accompanying consolidated financial statements as of and for the three
and six months ended June 30, 2002 and 2001 have been prepared by
the Company and are unaudited except for the balance sheet as of December 31,
2001. 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, 2001. The results of operations for the three and six months
ended June 30, 2002 are not necessarily indicative of the results to be
expected for the full year.

The Company has determined that it may require additional financing
for working capital needs later in 2002 and 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.
The Company believes that it has available to it several potential
sources of capital, including private offerings to individual
investors and additional debt or equity sales in the public market,
as well as additional contract funding from both current and new
customers for its research and development programs. The Company is
also pursuing opportunities for strategic relationships with
semiconductor industry partners, one of the goals of which would
involve receipt of additional funding, in order to accelerate the
commercialization of its emerging CPL products. However, there can be no
assurance that additional financings will be available when needed,
on favorable terms, or at all.

(2) Recent Accounting Pronouncements

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 (SFAS 145), Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. The provisions of this
Statement related to the rescission of Statement 4 shall be
applied in fiscal years beginning after May 15, 2002. The
provisions in paragraphs 8 and 9(c) of this Statement related to
Statement 13 shall be effective for transactions occurring after
May 15, 2002. All other provisions of this Statement shall be effective for financial statements issued on or after
May 15, 2002. SFAS 145 amends other existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The Company does not believe that the adoption of
SFAS 145 will have a significant impact on its 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 does not
believe that the adoption of SFAS 146 will have a significant impact on its financial statements.

(3) 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. Included in work-in-progress at June 30, 2002 is
approximately $1.5 million of unfunded contract costs. At June 30, 2002 and December 31, 2001, inventories
consisted of the following:

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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)

|                                                 |  |               |            |                   |  |   |            |  
|------------------------------------------------ |  | ------------- | ---------- | ----------------- |  | - | ---------- | -
|                                                 |  | June 30, 2002 |            | December 31, 2001
|                                                 |  |               |            |                  
|                                                 |  | (Unaudited)  
|Raw materials, components and sub-assemblies     |  | $             | 4,172,331  |                   |  | $ | 4,449,071  |  
|Work-in-process                                  |  |               | 2,722,729  |                   |  |   | 1,422,452  |  
|Finished goods                                   |  |               | 352,507    |                   |  |   | 760,766    |  
|                                                 |  |               |            |                   |  |   |            |  
|                                                 |  |               | 7,247,567  |                   |  |   | 6,632,289  |  
|Less  Reserve for excess and obsolete inventory |  |               | (1,967,063 | )                 |  |   | (2,115,143 | )
|                                                 |  |               |            |                   |  |   |            |  
|                                                 |  | $             | 5,280,504  |                   |  | $ | 4,517,146  |  
|                                                 |  |               |            |                   |  |   |            |  

(4) Property and Equipment

At June 30, 2002 and December 31, 2001, property and equipment consisted
of the following:

|                              |  |               |            |                   |  |   |            |  
|----------------------------- |  | ------------- | ---------- | ----------------- |  | - | ---------- | -
|                              |  | June 30, 2002 |            | December 31, 2001
|                              |  |               |            |                  
|                              |  | (Unaudited)  
|Equipment and machinery       |  | $             | 4,349,221  |                   |  | $ | 4,330,415  |  
|Furniture and fixtures        |  |               | 646,935    |                   |  |   | 560,594    |  
|Leasehold improvements        |  |               | 371,020    |                   |  |   | 387,901    |  
|                              |  |               |            |                   |  |   |            |  
|                              |  |               | 5,367,176  |                   |  |   | 5,278,910  |  
|Less-accumulated depreciation |  |               | (3,748,743 | )                 |  |   | (3,508,282 | )
|                              |  |               |            |                   |  |   |            |  
|                              |  | $             | 1,618,433  |                   |  | $ | 1,770,628  |  
|                              |  |               |            |                   |  |   |            |  

(5) Segment Information

In the Companys Form 10-K for the year ended December 31, 2001, three
segments were reported. These three segments were the Front-end Semiconductor
Equipment and Services Segment, the Precision Equipment Segment and the
Semiconductor Products and Processes Segment. In the first quarter of 2002,
the Company decided to discontinue and sell its standard semiconductor products
business. Accordingly, this business component has been accounted for in the
accompanying consolidated financial statements as discontinued
operations, and the other
business component of JSI (semiconductor process technology services), which represented all of the revenues in 2001, 2000
and 1999 of the Semiconductor Products and Processes Segment, is now included
in the Front-end Semiconductor Equipment and Services Segment. The
segment information for the three and six months ended June 30,
2001 has been restated to conform with the new presentation.

The Companys two Segments offer varying products and services that are
affected by different economic conditions. The Front-end
Semiconductor Equipment and Services Segment business primarily
consists of United States government contracts while the Precision
Equipment Segment sells to commercial customers. Further, the Segments reflect the
manner in which the Company views the operating units.

Front-end Semiconductor Equipment and Services: This segment includes the
operations of JMAR Research, Inc. (JRI), JMAR/SAL NanoLithography, Inc.
(JSAL) and the semiconductor process technology business of JSI. During the quarter ended June 30, 2002, the Company announced it had renamed its
proprietary X-ray lithography
technology as Collimated Plasma Lithography (CPL). It did
so to avoid any further confusion within the semiconductor industry
between the Companys lithography technology and the
synchrotron-based x-ray source lithography which the semiconductor
industry has rejected as impractical for commercial products. In our JRI and JSAL businesses, we conceive and create leading-edge
microelectronics manufacturing systems based on our patented
collimated laser plasma source (CPS) technology and other
advanced light sources for higher-performance semiconductor manufacturing and
inspection. With the Companys acquisition of JSAL, it believes
it is now the leading
supplier of X-ray lithography steppers for the synchrotron market as
well as the leading developer of CPL systems for the semiconductor
industry. This segment also includes the
Semiconductor Process Technology Services business of JMAR Semiconductor, Inc.
(JSI).

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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)

Precision Equipment: This segment consists of the operations of JMAR
Precision Systems, Inc. (JPSI). In our JPSI division, we manufacture
state-of-the-art precision inspection, motion control and light-based
manufacturing and metrology systems for the microelectronics industry,
including high-performance laser-light based precision systems for repairing
defective semiconductors and systems for fabricating advanced bio-chip
products.

Segment information for the three and six months ended June 30, 2002 and
2001 was as follows:

|                                  |                         |  |               |            |           |  |           |            |       |  |   |            |  |  |   |            |  
|--------------------------------- | ----------------------- |  | ------------- | ---------- | --------- |  | --------- | ---------- | ----- |  | - | ---------- |  |  | - | ---------- | -
|                                  |                         |  | Front-end     |            |           |  |           |            |       |  |   |            |  |  |  
|                                  |                         |  | Semiconductor |            |           |  |           |            |       |  |   |            |  |  |  
|                                  |                         |  | Equipment and |            | Precision |  |           |            |       |  |   |            | 
|                                  |                         |  | Services      |            | Equipment |  | Corporate |            | Total
|                                  |                         |  |               |            |           |  |           |            |      
|Six Months Ended
June 30, 2002:   |                         |  |               |            |           |  |           |            |       |  |   |            |  |  |   |           
|                                  | Revenues                |  | $             | 8,194,277  |           |  | $         | 2,475,925  |       |  | $ |           |  |  | $ | 10,670,202 |  
|                                  | Operating income (loss) |  |               | 233,096    |           |  |           | (1,582,987 | )     |  |   |           |  |  |   | (1,349,891 | )
|                                  | Total assets            |  |               | 11,071,909 |           |  |           | 6,063,650  |       |  |   | 6,491,138  |  |  |   | 23,626,697 |  
|Three Months Ended
June 30, 2002: |                         |  |               |            |           |  |           |            |       |  |   |            |  |  |   |           
|                                  | Revenues                |  |               | 4,585,622  |           |  |           | 1,548,064  |       |  |   |           |  |  |   | 6,133,686  |  
|                                  | Operating income (loss) |  |               | 121,891    |           |  |           | (599,864   | )     |  |   |           |  |  |   | (477,973   | )
|Six Months Ended
June 30, 2001:   |                         |  |               |            |           |  |           |            |       |  |   |            |  |  |   |           
|                                  | Revenues                |  |               | 4,269,513  |           |  |           | 3,595,029  |       |  |   |           |  |  |   | 7,864,542  |  
|                                  | Operating income (loss) |  |               | 5,073      |           |  |           | (1,891,893 | )     |  |   |           |  |  |   | (1,886,820 | )
|                                  | Total assets            |  |               | 6,408,604  |           |  |           | 9,701,479  |       |  |   | 16,667,072 |  |  |   | 32,777,155 |  
|Three Months Ended
June 30, 2001: |                         |  |               |            |           |  |           |            |       |  |   |            |  |  |   |           
|                                  | Revenues                |  |               | 1,999,979  |           |  |           | 1,318,400  |       |  |   |           |  |  |   | 3,318,379  |  
|                                  | Operating loss          |  |               | (266,508   | )         |  |           | (1,035,756 | )     |  |   |           |  |  |   | (1,302,264 | )

Corporate assets are principally cash,
other assets, goodwill and assets of discontinued
operations.

(6) Comprehensive Loss

The unrealized gain (loss) for the three and six
months ended June 30, 2001 represents the difference in market value of the
Companys investment in Bede plc (Bede) between March 31, 2001 and June 30,
2001, and December 31, 2000 and June 30, 2001, respectively.

8



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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)

In January 2002, the Company sold its remaining 545,500 shares of its
investment in Bede for net proceeds of approximately $1.4 million. The net
proceeds and gain from that transaction are included in this Consolidated
Statement of Operations for the six months ended June 30, 2002. Accordingly,
for the three and six months ended June 30, 2002, the Company did not have any
elements of comprehensive income or loss, and therefore, there was no
difference in the Companys net loss and comprehensive loss for those periods.
For the six months ended June 30, 2002, the Company had an additional
unrealized loss on marketable securities of $75,143 for the period from January
1, 2002 to the sale date of the securities, however, that loss was realized as
a result of the sale of the securities.

(7) Acquisition of Semiconductor Advanced Lithography, Inc.

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced Lithography, Inc. (SAL), in a merger of SAL with and into Subsidiary (Merger).
SAL (subsequently renamed JMAR/SAL NanoLithography, Inc. or JSAL) is a
provider of XRL stepper systems and the leading developer of CPL
systems. Consideration for the Merger consisted of an
aggregate of 603,051 shares of the Companys Common Stock valued at $1.7
million, $1.2 million in cash and $1.2 million in notes (the Notes). The
Notes are convertible into shares of the Companys Common Stock at a price of
$4.302, which exceeded the market value of the Companys common stock at the date of the Merger. The Notes, bearing interest at 8%, are convertible by the holders at
any time and, after six months from the closing, the Company can force
conversion if the average price, as defined, of the Companys Common Stock
during any ten day trading period exceeds $6.45. Interest on the
Notes is payable quarterly with the principal due, if not converted,
on February 7, 2004. All stock options and warrants
issued by SAL which were outstanding immediately prior to the Acquisition were
either exercised pursuant to their terms or were terminated. There were no
settlements of options or warrants and there was no increase to JMARs purchase
price as a result of the issuance of additional SAL shares upon exercise of the
outstanding options and warrants.

Under the Merger
Agreement, SALs former shareholders and creditors 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 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 pay the
$500,000 in Convertible Notes. The failure to meet this earnout condition has no impact on the
schedule to conduct lithography demonstrations planned for third and
fourth quarters of 2002. For the second earnout, the SAL
shareholders can earn $500,000 in Convertible Notes upon the satisfaction of a lithography demonstration
milestone. Under the Merger Agreement, this milestone must be met by
the later of September 30, 2002, or 90 days after the CPL
light source is delivered by JRI to
JSAL. JRI is completing its final assembly of the CPL light source,
followed by
acceptance testing, with the expectation of shipping the CPL light
source to JSAL in mid-September,
2002. The Company also expects to begin lithography demonstrations with the completed system by late
September or early October 2002. However, under the terms of the Merger Agreement, the SAL shareholders have until
90 days after receipt by JSAL of the CPL source to satisfy this earnout condition. The final
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 the later
of December 31, 2002, or 180 days after the CPL source is delivered to JSAl. The earnout consideration will increase goodwill when
and if it is paid. The Company has accounted for the Acquisition as a purchase
and, accordingly, results of operations of JSAL have been included as of August
7, 2001. The allocation of the purchase price of $4,246,284 is as follows:

|                                       |  |   |           |  
|-------------------------------------- |  | - | --------- | -
|Goodwill                               |  | $ | 3,739,777 |  
|Identifiable intangibles               |  |   | 785,000   |  
|Fair value of tangible assets acquired |  |   | 671,593   |  
|Liabilities assumed                    |  |   | (950,086  | )
|                                       |  |   |           |  
|                                       |  | $ | 4,246,284 |  
|                                       |  |   |           |  

The following unaudited proforma information gives effect to the
acquisition of SAL as if the acquisition occurred on January 1, 2001. In
connection with the Acquisition, SAL entered into agreements with several of
its creditors which reduced the related liabilities due those creditors by
approximately $8,000,000 through a combination of debt forgiveness and by
payment of the $1.2 million cash purchase price by the Company. Such debt
reductions are not reflected in the statement of operations of the Company.
The proforma loss from continuing operations excludes any impact, other than
interest expense, from the debt settlements of SAL directly attributable to the
Acquisition. The Company has recorded the transaction in accordance with SFAS
No. 141 during the third quarter of 2001. Pursuant to SFAS No. 141, goodwill
resulting from the SAL acquisition will not be amortized. The identifiable
intangibles acquired in the Acquisition will be amortized over three years
using the straight-line method. Identifiable assets include patents and
technological know-how. Patents were valued based on a discounted cash flow
model and technological know-how was valued based on replacement cost of
underlying documentation. These statements do not purport to be indicative of
the results of operations which actually would have occurred had the
acquisition of SAL occurred on January 1, 2001 or which may be expected to
occur in the future.

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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(Unaudited)

|                                |  |                          |            |  
|------------------------------- |  | ------------------------ | ---------- | -
|                                |  | For the Six Months ended
|                                |  | June 30, 2001           
|                                |  |                         
|Total revenues                  |  | $                        | 8,309,000  |  
|                                |  |                          |            |  
|Loss from continuing operations |  | $                        | (1,429,000 | )
|                                |  |                          |            |  
|Loss per share                  |  | $                        | (.06       | )
|                                |  |                          |            |  

(8) Discontinued Operations

During the first quarter of 2002, the Company decided to discontinue and
sell its standard semiconductor products business and shift more of its
resources to accelerate the market entry of its CPL products.
This portion of JMAR Semiconductor Inc.s (JSI) business has been a
developmental effort, involving the design, manufacture and introduction of new
standard product semiconductor chips. With the severe downturn in the
worldwide semiconductor market, JSI had little success in selling its new
standard product chips. These products would have required substantial
additional capital to get these chips established in the market, as well as to
develop newer, higher value chips.

The loss from operations of discontinued operations of $1,185,861 for the
six months ended June 30, 2002 includes $400,000 related to the writedown of
inventory shipped to JSI in the first quarter or held by vendors but not yet
shipped to JSI and $205,000 in operating losses expected to be incurred through
the sale of this product line. In June 2002, the Company terminated an
agreement with Agile Equity to locate buyers for these JSI chip assets. Although the Company
continues to attempt to sell the business, it has not yet identified a buyer.

As a result of the Companys decision to discontinue this business, the
Company may have an acceleration of the payment of liabilities, disputed
liabilities may arise, and the Company may incur expenses that it otherwise
would not have incurred. Included in current liabilities in the accompanying
balance sheet as of June 30, 2002 is $1,680,985 of liabilities related to the
discontinued operations. These liabilities include amounts owed to JSIs
distributor and vendors, and the amount accrued related to JSIs leased facility.

In September 2000, JSI moved into a significantly larger facility in
anticipation of realizing its growth plans. Prior to December 31, 2001, the
Company decided to sublease the facility and move JSI into a
smaller facility. Accordingly, in the fourth quarter of 2001, the Company
accrued $547,000, its estimated loss under the September 2000 lease.
As of June 30, 2002, the remaining accrual is approximately $350,000. The lease provides for
rent and related expenses of approximately $34,000 per month through August
2005. The Company does not yet have a subtenant for that facility and, if it is
unsuccessful in obtaining a subtenant on acceptable terms, there could be
further losses related to that lease.

(9) Equity Transactions

In March 2002, under
its Universal Blank Shelf Registration Statement, the
Company sold 1 million shares of its Common Stock for gross proceeds of $2
million. In connection with this transaction, the Company issued to the
purchasers warrants to purchase 150,000 shares of its Common Stock at an
exercise price of $2.50 per share, expiring in four years. Also, the Company
paid a placement agent a fee of 6% of the gross proceeds, a $25,000
non-accountable expense allowance and warrants to purchase 20,000 shares of the
Companys Common Stock at an exercise price of $2.40 per share. Out of the
gross proceeds of $2 million, the warrants to purchase 170,000 shares of the
Companys Common Stock have been valued based on the Black-Scholes method at
approximately $305,000 in the accompanying consolidated financial statements as
paid-in-capital with a corresponding reduction in the amount assigned
to common stock.

(10) Income Taxes

As of June 30,
2002, the Company had deferred tax assets (primarily net operating
loss carryforwards) of approximately $16.6 million. Because of
the Companys continued history of operating losses, in the second quarter of 2002 the Company
increased its valuation allowance against these deferred tax assets to
reserve all of the deferred tax assets except that amount of the net
operating losses which can be carried back to prior years.
Accordingly, included in the Statement of Operations for the three
and six months ended June 30, 2002, is a deferred income tax
expense of $484,423.

(11) Earnings (Loss) Per Share

For the three and six
months ended June 30, 2002 and 2001, the denominator in the
diluted earnings (loss) per share computation was the same as the denominator for basic earnings (loss)
per share due to antidilutive effects on the Companys net loss of warrants, stock options and shares underlying convertible
debt. As of June 30, 2002 and 2001, the Company had outstanding
warrants, stock options and shares underlying convertible debt of
1,469,126 and 3,861,166, respectively, all of which
are antidilutive.

(12) Intangible Assets

The Company adopted Financial Accounting Standards
Board No. 142 Goodwill and Other Intangible Assets
(FASB 142) effective January 1, 2002. In accordance
with FASB 142, the Company does not amortize goodwill. The
majority of the Companys goodwill is related to JSAL, acquired
in August, 2001. The Company has done a preliminary comparison of the fair value
of JSAL with the carrying amount of assets associated with JSAL and
based on this preliminary review has determined that none of the
goodwill recorded as of June 30, 2002 was impaired. The Company expects to formerly document this review
by September 30, 2002 and does not believe that the completion
of this review will result in an impairment of assets.
As of June 30, 2002, the Company had the following amounts related to other intangible assets:

|                                 |  |                       |           |                          |  |            |         |  |  |   |           | 
|-------------------------------- |  | --------------------- | --------- | ------------------------ |  | ---------- | ------- |  |  | - | --------- | 
|                                 |  |                       |           |                          |  | Net       
|                                 |  |                       |           |                          |  | Intangible
|                                 |  | Gross Carrying Amount |           | Accumulated Amortization |  | Assets    
|                                 |  |                       |           |                          |  |           
|Patents                          |  | $                     | 987,085   |                          |  | $          | 238,313 |  |  | $ | 748,772   | 
|Technology Package               |  |                       | 450,000   |                          |  |            | 119,930 |  |  |   | 330,070   | 
|Capitalized Software Development |  |                       | 1,207,753 |                          |  |            | 958,813 |  |  |   | 248,940   | 
|                                 |  |                       |           |                          |  |            |         |  |  |   |           | 
|                                 |  |                       |           |                          |  |            |         |  |  | $ | 1,327,782 | 
|                                 |  |                       |           |                          |  |            |         |  |  |   |           | 

Aggregate
amortization expense of the intangible assets with determinable lives was $126,396 for the three months ended June 30, 2002. The unamortized balance of intangible assets is
estimated to be amortized as follows:

|                                |  |                                |           | 
|------------------------------- |  | ------------------------------ | --------- | 
|For the Year Ended December 31, |  | Estimated Amortization Expense
|                                |  |                               
|2002                            |  | $                              | 493,686   | 
|2003                            |  |                                | 260,696   | 
|2004                            |  |                                | 128,402   | 
|2005                            |  |                                | 95,000    | 
|2006                            |  |                                | 130,000   | 
|2007                            |  |                                | 165,000   | 
|Beyond                          |  |                                | 54,998    | 
|                                |  |                                |           | 
|                                |  | $                              | 1,327,782 | 
|                                |  |                                |           | 

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##### Table of Contents






MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 2.

Through December 31, 2001, the Company operated in three segments as
follows: Front-end Semiconductor Equipment and Services, Precision Equipment,
and Semiconductor Products and Processes. In the first quarter of 2002, the
Company decided to discontinue and sell its standard semiconductor products
business and shift more of its resources to accelerate the market entry of its
collimated plasma lithography (CPL) products.
The standard semiconductor products portion of JMAR Semiconductor Inc.s (JSI)
business has been a developmental effort, involving the design, manufacture and
introduction of new standard product semiconductor chips. With the severe
downturn in the worldwide semiconductor market, JSI had little success in
selling its new standard product chips. These products would have
required
substantial additional capital to become established in the market, as well as
to develop newer, higher value chips. The Company has concluded that it will
not continue to invest its resources in this business. As a result of this
decision, as of January 1, 2002, the Company operates in two segments, the
Front-end Semiconductor Equipment and Services segment and the Precision
Equipment segment. The standard semiconductor products business component has
been reflected in these financial statements as a discontinued operation and
the other business component of JSIs business (semiconductor
process technology services) has been included in the Front-end Semiconductor
Equipment and Services Segment.

Results of Consolidated Operations

The net loss for the three months ended June 30, 2002 and 2001 was
$(1,002,165) and $(477,546), respectively. Loss from continuing operations
before income taxes for those same periods was $(517,742) and $(72,824),
respectively, while loss from operations for those same periods was $(477,973)
and $(1,302,264), respectively. Total revenues for the three months ended June
30, 2002 and 2001 were $6,133,686 and $3,318,379, respectively. Contract
revenues for the three months ended June 30, 2002 and 2001 were $4,503,035 and
$1,923,013, respectively. Included in the net loss and loss from
continuing operations before income taxes for the three months ended
June 30, 2001 is a gain on the sale of marketable securities of $1,189,273.

The net loss for the six months ended June 30, 2002 and 2001 was
$(1,749,786) and $(1,471,987), respectively. Loss from continuing operations
before income taxes for those same periods was $(79,502) and $(565,669),
respectively, while the loss from operations for those same periods was
$(1,349,891) and $(1,886,820), respectively. Total revenues for the six months
ended June 30, 2002 and 2001 were $10,670,202 and $7,864,542, respectively.
Contract revenues for the six months ended June 30, 2002 and 2001 were
$7,795,328 and $4,134,862, respectively. The balance of the revenues
primarily consist of sales of the Company's precision equipment. Included in the net loss and loss from
continuing operations before income taxes for the six
months ended June 30, 2002 and 2001 is a gain on the sale of marketable
securities of $1,349,721 and $1,189,273, respectively.

Included in the net loss for the three and six months ended June 30, 2002
is a deferred income tax expense of $484,423 resulting from an
increase in the
valuation allowance against the Companys deferred tax assets.

The increase in revenues for the three and six months ended June 30, 2002
compared to the three and six months ended June 30, 2001 was primarily
attributable to a significant increase in CPL revenue for the
three and six months of 2002 of $454,088 and $1,429,795, respectively, along
with other contract revenues from JMAR/SAL NanoLithography, Inc.
(JSAL), of $2,140,521 and $2,624,350 for the three and six months ended June 30,
2002, respectively. JSAL was acquired in August 2001. In 2002, JSAL received an approximately
$10 million contract from Naval Air Warfare Center AD (the
Navair Contract) which accounted for approximately
$1.6 million in
revenues for the three and six months ended June 30, 2002.

For
the six months ended June 30, 2002 compared to the six months ended June 30,
2001, the increase in contract revenues was offset in part by a
decrease for the six months in revenues of
$1,119,104 of the Companys precision instrument products due to
the lower sales in the first quarter. However, revenues of the
Companys precision instrument products for the three months
ended June 30, 2002 were 67 percent higher than the revenues for the
three months ended March 31, 2002. The Companys ability to forecast orders for its precision instrument
products continues to be limited due to continuing marketplace
uncertainties,
which often impedes our customers abilities to accurately forecast their
needs. As a result, the timing of receipt and shipment of orders could have a
material impact on quarterly results in 2002.

As of June 30, 2002, the Company had incurred approximately
$1.5 million in unfunded
costs related to its lithography work for the Defense Advanced
Research Projects Agency (DARPA). As of June 30, 2002,
these costs are included in inventory in the accompanying balance
sheet. The Company had expected to
receive additional contract funding of approximately $8 million in the second
quarter for this work. The

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Company now expects to receive this additional contract funding in September
and will reflect the revenue associated with these costs in the third quarter.

Total gross margins for the six months ended June 30, 2002 and 2001 were
23.6% and 29.5%, respectively. Gross margins for product sales for the six
months ended June 30, 2002 and 2001 were 24.1% and 27.5%, respectively, and
gross margins for contract sales for those two periods were 
23.4% and 31.3%,
respectively. Total gross margins for the three months ended June 30, 2002 and
2001 were 23.2% and 31.0%, respectively. Gross margins for product sales for
the three months ended June 30, 2002 and 2001 were 26.1% and 29.5%,
respectively, and gross margins for contract sales for those two periods were
22.1% and 32.1%, respectively. The decrease in the gross margin for contract
sales is primarily due to the Navair Contract
having lower margins due to its high subcontract component, and the
Companys absorption of some of the costs incurred due to limited funding on the contract.
The decrease in the gross margin for product sales in 2002 was due primarily to
underutilized manufacturing capacity and competitive pressures on product
pricing in its precision instrument business. The Company continues to experience competitive pressures on certain
precision instrument products, which may impact gross margins in the future.
The Company is currently integrating its CPL source and stepper and
anticipates commencing wafer exposures using this integrated system by the end
of the third quarter or early in the fourth quarter of 2002. Additional efforts are ongoing to increase the
CPL power output of our CPL sources to meet commercially viable
requirements for the gallium arsenide (GaAs) chip manufacturing industry with
the goal of receiving an order for
a commercial system in early 2003. The Company expects that as its
patented CPL products enter the marketplace and gain
acceptance, they will substantially improve gross profit margins.

Selling, general and administrative (SG&A) expenses for the six months
ended June 30, 2002 and 2001 were $3,047,323 and $3,064,454, respectively. SG&A
expenses for the three months ended June 30, 2002 and 2001 were $1,503,237 and
$1,633,505, respectively. The decrease in SG&A expenses for the second quarter
of 2002 is primarily due to a reduction in SG&A costs in the Precision
Equipment segment primarily related to a reduction of employees in that segment
and other cost cutting efforts offset in part by SG&A
costs related to JSAL, which the Company acquired in August 2001.

The Companys research, development and engineering program (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 $3,086,038 and $825,590 for the three months ended June 30, 2002 and
2001, respectively, and $5,231,002 and $1,871,357 for the six month periods
ended June 30, 2002 and 2001, respectively. The increase in Customer-Funded
RD&E expenditures for the six months ended June 30, 2002 is related to an
increase of approximately $1,227,886 in the collimated plasma lithography program contract
funding provided by DARPA, most of
which is directed toward development of JMARs CPL source
technology for the commercial semiconductor market and contract costs of
$2,137,367 incurred by JSAL (approximately $1.5 million of which is related to the Navair
Contract) which was acquired in August 2001. Company-Funded RD&E costs are
shown in Operating Expenses and totaled $397,662 and $698,869 for the three
months ended June 30, 2002 and 2001, respectively, and $816,679 and $1,142,297
for the six months ended June 30, 2002 and 2001, respectively. Hence, total
RD&E expenditures for the three month periods were $3,483,700 and $1,524,459
for 2002 and 2001, respectively, and $6,047,681 and $3,013,654 for the six
month periods in 2002 and 2001, respectively. RD&E expenditures as a
percentage of sales were 56.8% and 45.9% for the three months ended June 30,
2002 and 2001, respectively, and 56.7% and 38.3% for the six months ended June
30, 2002 and 2001, respectively. These expenditures are primarily related to
the continued development of point sources for collimated plasma lithography for the
semiconductor industry and other metrology applications, development of a high
efficiency EUV generation system for advanced semiconductor lithography and the
engineering development of higher performance test, measurement and inspection
systems for the semiconductor, optical network and biomedical
industries. The Company expects to incur higher Company-Funded
RD&E costs in the near future as its lithography systems get
closer to commercialization.

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During the first quarter of 2002, the Company decided to discontinue and
sell its standard semiconductor products business and shift more of its
resources to accelerate the market entry of its collimated plasma lithography products.
This portion of JMAR Semiconductor Inc.s (JSI) business has been a
developmental effort, involving the design, manufacture and introduction of new
standard product semiconductor chips. With the severe downturn in the
worldwide semiconductor market, JSI had little success in selling its new
standard product chips. These products would have required substantial
additional capital to get these chips established in the market, as well as to
develop newer, higher value chips.

The loss from operations of discontinued operations of $1,185,861 for the
six months ended June 30, 2002 includes $400,000 related to the writedown of
inventory shipped to JSI in the first quarter or held by vendors but not yet
shipped to JSI and $205,000 in costs expected to be incurred through the sale
of this product line. In June 2002, the Company terminated an agreement with
Agile Equity to locate buyers for these JSI chip assets. Although the Company continues to attempt
to sell the business, it has not yet identified a buyer.

As a result of the Companys decision to discontinue this business, the
Company may have an acceleration of the payment of liabilities, disputed
liabilities may arise, and the Company may incur expenses that it otherwise
would not have incurred. Included in current liabilities in the accompanying
balance sheet as of June 30, 2002 is $1,680,985 of liabilities related to the
discontinued operations.

In September 2000, JSI moved into a significantly larger facility in
anticipation of realizing its growth plans. Prior to December 31, 2001, the
Company decided to sublease the facility and move JSI into a
smaller facility. Accordingly, in the fourth quarter of 2001 the Company
accrued $547,000, its estimated loss under that lease. The lease provides for
rent and related expenses of approximately $34,000 per month through August
2005. The Company does not yet have a subtenant for that facility and, if it is
unsuccessful in obtaining a subtenant on acceptable terms, there could be
further losses related to that lease.

Interest and other expense is higher for 2002 versus 2001 due to interest on the
$1.2 million notes issued to the former shareholders of SAL and higher average
borrowings in 2002 of the Companys working capital line (the Line) with
Comerica Bank.

The gain on sale of marketable securities of $1,349,721 for 2002 is
related to the sale of the Companys remaining 545,500 shares of its investment
in Bede plc (Bede) in January 2002. The gain on sale of marketable
securities of $1,189,273 for 2001 is related to the sale of 500,000 shares of
its investment in Bede in April 2001.

Interest and other income is lower for 2002 versus 2001 due to
lower average cash balances and lower interest rates.

In May 2002, Dr. Martinez informed the Board of Directors of his desire to retire.
Dr. Martinez remains as a director on the Board of Directors and is
presently Chairman of the Board. The Board of Directors and Dr. Martinez
engaged in discussions regarding Dr. Martinezs future role with the Company and
the terms of his compensation for providing such future services. In order to
set a definite date for the transition to a new CEO, the Board of
Directors exercised the Companys rights under his Employment Agreement to
discontinue Dr. Martinezs status as Chief Executive Officer effective August
16, 2002. The Company has engaged an executive search firm and the Board of
Directors has been in the process of evaluating prospective candidates for the
CEO position. As discussed in the Companys Form 10-K filed with the SEC on
April 1, 2002, under the terms of the Amended and Restated Employment Agreement,
dated May 1, 1996, as amended September 7, 2001, between
the Company and Dr. Martinez (Employment Agreement), as a result of the
Boards action Dr. Martinez will continue as an employee of the Company for a term of three years
and will be compensated for such employment at the highest total compensation
rate (including bonuses and other incentive payments, directors fees and
similar compensation) paid to him during any prior consecutive 12 month period
of his employment with the Company. This will result in payment to
Dr. Martinez of approximately $375,000 per annum for three years. The Employment Agreement also requires the
Company to continue in force and maintain all insurance policies in
which Dr. Martinez participates for such three year term. Dr. Martinez has
proposed to the Company a restructuring of this agreement which he
believes would be in the best interests of JMAR and its shareholders.
Under his proposal the payout of his compensation would be stretched
out over six years to reduce the negative impact on JMARs cash
flow during the next three years. The Company and
Dr. Martinez are negotiating the terms of such a restructuring,
but there can be no assurance such an agreement will be reached. The
Company will record a charge in the third quarter of 2002 for the
compensation payable to Dr. Martinez resulting from this event.

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Results of Segment Operations

Front-end Semiconductor Equipment and Services Segment

This segment includes
the operations of JMAR Research, Inc. (JRI), JMAR/SAL
NanoLithography, Inc. (JSAL) and the semiconductor process technology business of JMAR Semiconductor, Inc.
(JSI). Revenue for the three months ended June 30, 2002 as compared to the three
months ended June 30, 2001 for the Front-end Semiconductor Equipment and
Services Segment increased $2,585,643 from $1,999,979 to $4,585,622. Revenue
for the six month period in 2002 as compared to 2001 for this Segment increased
$3,924,764 from $4,269,513 to $8,194,277. This increase is primarily
attributable to a significant increase in CPL contract revenue (Customer-Funded RD&E)
for the three and six months of 2002 of $454,088 and $1,429,795, respectively,
along with $2,140,521 and $2,624,350 for the three and six months ended June
30, 2002, respectively, of other contract revenues from JSAL, acquired in
August 2001. Operating income (loss) of the Front-end Semiconductor Equipment
and Services Segment for the three months ended June 30, 2002 as compared to
the three months ended June 30, 2001 increased $388,399 from net loss of
$(266,508) to income of $121,891. Operating income for the six month period in
2002 as compared to 2001 for this Segment increased $228,023 from $5,073 to $233,096.

Precision Equipment Segment

This segment consists
of the operations of JMAR Precision Systems, Inc. (JPSI). Revenue for the three months ended June 30, 2002 as compared to the three
months ended June 30, 2001 for the Precision Equipment Segment increased
$229,664, from $1,318,400 to $1,548,064. Revenues for the six month period in
2002 as compared to 2001 for this Segment decreased $1,119,104 from $3,595,029
to $2,475,925. This decrease in revenue for the six months was related to the
continuing severe economic downturn primarily in the semiconductor industry
which has caused our target companies to curtail capital equipment
purchases. The Company sees this slowness in customer demand for its
precision instrument products continuing into the third quarter. However, revenues for the three months ended June 30, 2002 were 67
percent higher than the revenues for the three months ended March 31,
2002 of $927,861. The operating loss of the Precision Equipment Segment for the three months
ended June 30, 2002 as compared to the three months ended June 30, 2001
decreased $435,892 from a loss of $(1,035,756) to a loss of $(599,864). Operating
loss for the six month period in 2002 as compared to 2001 for this Segment
decreased $308,906 from a loss of $(1,891,893) to a loss of $(1,582,987). Despite
the significantly lower revenues for the six months in 2002 as compared to
2001, the operating loss decreased due to the reduction of employees and other
cost cutting efforts.

Consolidated Liquidity and Financial Condition

Unrestricted cash and cash equivalents at June 30, 2002 and December 31,
2001 were $2,077,564 and $4,115,129, respectively. The decrease in
unrestricted cash and cash equivalents during the six months ended June 30,
2002 was $2,037,565. That decrease resulted primarily from cash used in continuing
operations of $4,024,411 primarily related to operating losses (exclusive of the
gain on the sale of the Bede stock) and increases in accounts
receivable and inventories, cash used in discontinued operations of
$1,311,283 and payments under the Company's working capital bank line
of $825,000, offset in part by net proceeds from the issuance of common stock of
$1,753,420, proceeds from the sale of marketable securities of $1,399,746 and a
decrease in restricted cash of $825,000.

During the first quarter of 2002, the Company decided to discontinue and
sell its standard semiconductor products business and shift more of its
resources to accelerate the market entry of its CPL products.
This portion of JMAR Semiconductor Inc.s (JSI) business has been a
developmental effort, involving the design, manufacture and introduction of new
standard product semiconductor chips. With the severe downturn in the
worldwide semiconductor market, JSI had little success in selling its new
standard product chips. These products would have required substantial
additional capital to get these chips established in the market, as well as to
develop newer, higher value chips. As a result of the Companys decision to
discontinue this business, the Company may have an acceleration of the payment
of liabilities, disputed liabilities may arise, and the Company may incur
expenses that it otherwise would not have incurred. Included in current
liabilities in the accompanying balance sheet as of June 30,
2002 is $1,680,985
of liabilities related to the discontinued operations. In September 2000, JSI
moved into a significantly larger facility in anticipation of realizing its
growth plans. Prior to December 31, 2001, the Company decided to sublease the
facility used by JSI and move JSI into a smaller facility. Accordingly, in the
fourth quarter of 2001 the Company accrued $547,000, its estimated loss under
that lease. The lease provides for rent and related expenses of approximately
$34,000 per month through August 2005. The Company does not yet have

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a subtenant for that facility and if it is unsuccessful in obtaining a
subtenant on acceptable terms, there could be further losses related to that
lease.

JMARs operations will continue to require the use of working capital.
Working capital as of June 30, 2002 and December 31, 2001 was $7,153,424 and
$7,843,465, respectively. The decrease in working capital is primarily due to
the Companys losses and paydown of the Companys working
capital bank line,
offset in part by net proceeds from the issuance of common stock. The working
capital of the Company had generally been funded through its working capital
line (the Line) with Comerica Bank (the Bank) with interest at prime rate
and through third-party contracts. Due to the Companys continued losses, in
November 2001, the Bank reduced the amount of the Line to $3 million and
requires a $3 million compensating balance. Pursuant to this new line of
credit, there are no financial covenants or ratios. The Line expires March 31,
2003. The Company is pursuing alternative banking arrangements, however, there
can be no assurance that the Company will be able to enter into acceptable
alternative banking arrangements.

The Company has
determined that it may require additional financing for working
capital needs later in 2002 and 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. The Company
believes that it has available to it several potential sources of capital,
including private offerings to individual investors and additional debt or
equity sales in the public market, as well as additional contract funding from
both current and new customers for its research and development programs. The
Company is also pursuing opportunities for strategic relationships
with semiconductor industry partners, one of the goals of which would
involve receipt of additional funding, in order to accelerate the commercialization of
its emerging CPL products. However, there can be no assurance that additional
financings will be available when needed, on favorable terms, or at all.

In October, 2001, the
Companys Universal Blank Shelf
Registration Statement with respect to $25 million of Company
securities was declared effective by the Securities and Exchange
Commission. The securities that may be sold under this
registration statement may be common stock, preferred stock, debt or warrants.
The Company may sell registered securities in the public market from
time-to-time at its discretion when market conditions are favorable and at
prices that will be negotiated at those times. In March 2002, pursuant to this
Registration Statement, the Company sold 1 million shares of its Common Stock
for gross proceeds of $2 million. In connection with this sale of stock, the
Company issued to the purchasers warrants to purchase 150,000 shares of its
Common Stock at an exercise price of $2.50 per share, expiring in four years.
Also, the Company paid a placement agent fee of 6% of the gross proceeds, a
$25,000 non-accountable expense allowance and warrants to purchase 20,000
shares of the Companys Common Stock at an exercise price of $2.40 per share.

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced Lithography, Inc. (SAL), in a merger of SAL with and into Subsidiary (Merger).
Consideration for the Merger consisted of an aggregate of 603,051 shares of its
Common Stock, $1.2 million in cash and $1.2 million in notes (the Notes).
The Notes are convertible into shares of the Companys Common Stock at a price
of $4.302. The Notes are convertible by the holders at any time and the
Company can force conversion if the average price, as defined, of the Companys
Common Stock during any ten day trading period exceeds $6.45. The
Notes bear interest at 8% and is payable quarterly, with the
principal due, if not converted, on February 7, 2004. The shares
issued by the Company were unregistered; however, pursuant to an agreement with
the SAL shareholders, the Company filed a registration statement with the
Securities and Exchange Commission which became effective in June
2002. Holders of more than 5,000 shares of JMAR stock
have agreed to restrictions on their sale of those JMAR shares to no more than
25% of their JMAR holdings in any quarter and to refrain from selling any
shares for 60 days upon notice from JMAR of its intention to negotiate an
underwritten public offering.

Under the Merger Agreement, SALs
former shareholders and creditors 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 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 pay the
$500,000 in Convertible Notes. The failure to meet this earnout
condition has no impact on the schedule to conduct lithography
demonstrations
planned for third and fourth quarters of 2002. For the second
earnout, the SAL shareholders
can earn $500,000 in Convertible
Notes upon the satisfaction of a lithography demonstration milestone.
Under the Merger Agreement, this
milestone must be met by the later of September 30, 2002, or
90 days after the CPL light source is
delivered by JRI to JSAL. JRI is completing its final assembly of the CPL
light source, followed by acceptance testing, with the expectation of shipping the CPL light
source to JSAL in mid-September, 2002. The Company also expects
to begin lithography demonstrations with the completed system by late
September or early October, 2002. However, under the terms of the Merger Agreement, the
SAL shareholders have until
90 days after receipt by JSL of the CPL source to satisfy this earnout condition. The final 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 the later
of December 31, 2002, or 180 days after the CPL source is
delivered to JSAL.

In 2001, the Company was awarded an additional $9 million of contract
funding for its X-ray lithography program (which it has
renamed Collimated Plasma Lithography, or CPL) from the U.S. Army Research
Laboratory sponsored by the Defense Advanced Research Projects

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Agency (DARPA). In addition, in February 2002, JMAR announced the
receipt of a Letter of Intent from the Department of the Army to execute a
formal contract funded by DARPA valued at up to $34.5 million. Subsequently,
the Company received a formal contract in the amount of approximately $5.3
million, pursuant to the Letter of Intent. The contract directs JMAR to proceed
immediately to deliver with all diligence JMARs patented first-of-a-kind,
one-nanometer point source CPL/XRL system to produce high-performance semiconductor
integrated circuits needed to support a wide range of critical military
missions. As with all multi-year government contracts, the amount and timing
of the funding of this contract are dependent upon the annual appropriation of
funds by Congress. As of June 30, 2002, the Company had incurred
approximately $1.5 million in
costs related to its lithography contract work for DARPA and an additional
approximately $700,000 in July 2002. The Company had expected to receive additional contract
funding of approximately $8 million in the second quarter for this work. The
Company expects to receive this additional contract funding in September and
will reflect the revenues associated with these costs in the third quarter.
Further delays in the receipt of this expected funding may impact the Companys
liquidity.

The Company is
negotiating discounts and exploring other alternatives to reduce the
liabilities related to JSIs discontinued standard semiconductor
products business. If the Company is unsuccessful in obtaining a
significant reduction in these liabilities, it will adversely affect
the Company's liquidity.

In January 2002, the Company sold the remaining 545,500 shares of its
investment in Bede plc for net proceeds of approximately $1.4 million.

At December 31, 2001, the Company had approximately $39 million of Federal
net operating loss carryforwards subject to certain annual limitations, which
expire from 2004 through 2016. 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.

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 bad debts, inventories, software development costs,
intangible assets including goodwill, income taxes, litigation and warranty
obligations. 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.

JMAR maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of JMARs customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Management reviews delinquent accounts on a continuous basis to
identify potential doubtful accounts, and together with customer
follow-up estimates the amount of potential losses.

At each year-end, the Company prepares a report which indicates the date
that each inventory part was last used. Any inventory parts that have not been
used in the past two years are isolated and reviewed for possible excess and/or
obsolescence based on current and future requirements. The inventory reserve
is adjusted based upon that review. In addition, any known excess and/or
obsolete inventory not meeting the above requirement is evaluated for inclusion
in the reserve. Obsolete inventory is disposed of after a thorough
investigation. Quarterly, any known excess and/or obsolete inventory based on
changes in the business or other factors are evaluated and the reserve adjusted
accordingly.

The Companys policy for the treatment of software development costs are
based on Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. In accordance with SFAS No. 86, costs incurred internally in
creating a computer software product are charged to expense when incurred until
technological feasibility has been established, at which time such costs are
capitalized. Technological feasibility is established upon completion of a
detail program design. Thereafter, the Company reports the costs at the lower
of amortized cost or net realizable value. Amortization is calculated based on
the greater of the amount capitalized as a percentage of estimated revenues
over the total estimated revenues for the software as a whole, or on a straight
line basis, based on the estimated useful life of the products. Software
development costs currently being amortized are being amortized using the
straight line basis over three years. Capitalization of software development
costs cease when the product is available for general release to customers.
General release is typically when the product is first shipped to a distributor
and available for sale.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002, the Company had established reporting units and
will apply a two-step fair value approach to evaluating goodwill impairment, using
at least an annual assessment. The Company will compare 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 will be determined using a risk adjusted discount rate to compute a net
present value of future cash flows.

JMAR records a valuation allowance to reduce its deferred tax assets to
the amount that it 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 determines that
it will not be able to realize all or part of its net deferred tax assets in
the foreseeable future, an adjustment to the deferred tax assets is charged to income in
the period such determination is made. Likewise, should management determine that it
will be able to realize its deferred tax assets in the future in excess of its
net recorded asset, an adjustment to the deferred tax asset would increase
income in the period such determination is made.

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.

Product revenues are generally recognized when the product is shipped and
all risks of ownership have passed to the customer. 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. Actual costs could
differ from these estimated costs. Estimated losses are fully charged to
operations when identified.

The majority of the Companys product sales are standard products modified
as necessary to be integrated with the customers manufacturing line while
still meeting all of our published vendor specifications regarding performance.
The systems are assembled and tested by the Company prior to shipment based on
either customer specifications and acceptance criteria and/or in-house
specifications and acceptance criteria. Usually, the customers environment is
no different than that at the Companys facility. Large, custom systems are
usually inspected, tested and accepted by the customer in the Companys
facility. JMAR Precision Systems is ISO 9001 certified, which requires JPSI to have implemented
detailed acceptance procedures prior to product shipment, and is in compliance
with those procedures. Product revenue is generally recorded at time of
shipment when title is transferred (assuming all applicable revenue recognition
criteria are met) in accordance with Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements.

Sales to distributors are recorded as revenue if all revenue recognition
criteria are met, including those of SFAS No. 48, Revenue Recognition When
Right of Return Exists, if applicable. Generally, revenue is recorded upon
shipment to distributors if 1) there is no right of return, or returns can be
estimated; and 2) product shipped is a standard product for which the Company
has a history of selling. In contrast to distributors, sales representatives
are merely elements of the Companys sales force. Orders are obtained by or
through sales representatives, but the product is never sold to a sales
representative; rather the product is sold to and shipped directly to customers
and recorded as revenue at that time.

The Company records a warranty reserve based on 1% of product sales. Warranty costs
are offset against the reserve. Each quarter the reserve is analyzed to ensure
that it is adequate based on actual and estimated future warranty activity.

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 those products into the commercial marketplace or to apply those
products, projects or processes to alternative applications and the
availability of future bank or equity investor financing are forward-looking
statements that necessarily 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. These risks and uncertainties include
the lack of funds to continue development and commercialization of our
CPL products in accordance with our proposed schedule of product
introductions, due to delays in funding of government contracts and
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. Other risks include concentration of sales to certain markets and customers, such as the
semiconductor industry, delays in shipments or cancellations of orders, failure
of expected orders to materialize, fluctuations in margins, timing of future
orders, lack of availability of critical components, customer reorganizations,
failure of advanced technology and new intellectual property to perform as
predicted, the failure of pending patents to be issued, delays in development, introduction and acceptance of new products,
changing business and economic conditions in various geographic regions,
technical obsolescence of existing products, technical problems in the
development or modification of current products or manufacturing processes, the
impact of competitive products and pricing, including the risk that the EUV LLC
is successful in developing an acceptable next generation lithography process
that becomes the process of choice for the semiconductor industry or that the
semiconductor industry fails to adopt CPL as the lithography
alternative, the degree of success
of technology transfer (e.g., advanced lithography sources, etc.) to commercial
products, availability of working capital to support growth, continued
government funding of advanced lithography, successful integration of
acquisitions, declining credit markets, other competitive factors and temporary
cessation of operations at one or more of its division facilities due to
natural events such as floods, earthquakes and fires, and other risks detailed
in the Companys Form 10-K for the year ended December 31, 2001, in the
Companys Form S-3/A filed on May 31, 2002 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.

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PART II  OTHER INFORMATION




Item 2.     Changes in Securities

| |  |                                                                                                                                                                                                                                                                                                                                                                            
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (c)(i) Pursuant to the Board Member Compensation Program adopted by the
Company in August 1997, the Company issued a total of 1,405 and 1,270
shares of Common Stock to its outside directors as compensation for
services as directors in April and June, 2002, respectively. These
transactions were exempt under Section 4(2) of the Securities Act of
1933 (the Act).
|
| |  | (c)(ii) As a
part of a 2002 incentive plan, in June, 2002 the Company granted
10,000 non-qualified options to a member of the Corporate office
staff and allocated another 4,000 non-qualified options for future
grant to members of the Corporate office administrative staff. These
transactions were exempt under Section 4(2) of the Act.                             




Item 6.     Reports on Form 8-K

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (b) Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The Company filed a Report on Form 8-K on June 21, 2002 related to the
dismissal of Arthur Andersen LLP as its certifying accountant. The
Company filed a Report on Form 8-K on July 22, 2002 related
to the announcement of the impending retirement of John S.
Martinez, the Companys Chief Executive Officer. The
Company filed a Report on Form 8-K on August 13, 2002 related to
the appointment of Grant Thornton LLP as its certifying accountant.

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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.                                               
|               
|               
|August 14, 2002 |  | By: |  | /s/ John S. Martinez                                                  
|                |  |     |  |                                                                       
|                |  |     |  | John S. Martinez, Chief Executive Officer
      and Authorized Officer
|               
|                |  | By: |  | /s/ Dennis E. Valentine                                               
|                |  |     |  |                                                                       
|                |  |     |  | Dennis E. Valentine, Chief Accounting Officer                         

18