##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 30, 2001
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 (November 8, 2001).

Common Stock, $.01 par value: 22,856,436 shares





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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 1. Legal Proceedings                                                                                         
|                               | Item 2. Changes in Securities                                                                                     
|                               | Item 4. Submission of Matters to a Vote of Security Holders                                                       
|                               | Item 6. Reports on Form 8-K                                                                                       
|SIGNATURE                     



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INDEX

|        |  |                                                                                                                                                                          |  |       
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------
|        |  |                                                                                                                                                                          |  | Page #
|        |  |                                                                                                                                                                          |  |       
|PART I  |  | FINANCIAL INFORMATION                                                                                                                                                    |  |       
|       
|       
|       
|       
|Item 1. |  | Financial Statements                                                                                                                                                     |  |       
|       
|       
|       
|       
|        |  | Consolidated Balance Sheets  September 30, 2001 (unaudited) and December 31, 2000                                                                                       |  | 2     
|       
|       
|       
|       
|        |  | Consolidated Statements of Operations  Three months ended
September 30, 2001 and 2000 (unaudited) and nine months ended
September 30, 2001 and 2000 (unaudited)         |  | 3     
|       
|       
|       
|       
|        |  | Consolidated Statements of Comprehensive Loss  Three months ended
September 30, 2001 and 2000 (unaudited) and nine months ended
September 30, 2001 and 2000 (unaudited) |  | 4     
|       
|       
|       
|       
|        |  | Consolidated Statements of Cash Flows  Nine months ended
September 30, 2001 and 2000 (unaudited)                                                                        |  | 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                                                                                                               |  | 15    
|       
|       
|       
|       
|PART II |  | OTHER INFORMATION                                                                                                                                                        |  |       
|       
|       
|       
|       
|Item 1. |  | Legal Proceedings                                                                                                                                                        |  | 16    
|       
|       
|       
|       
|Item 2. |  | Changes in Securities                                                                                                                                                    |  | 16    
|       
|       
|       
|       
|Item 3. |  | N/A                                                                                                                                                                      |  |       
|       
|       
|       
|       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                                                                      |  | 16    
|       
|       
|       
|       
|Item 5. |  | N/A                                                                                                                                                                      |  |       
|       
|       
|       
|       
|Item 6. |  | Reports on Form 8-K                                                                                                                                                      |  | 16    

1



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##### Table of Contents






PART I  FINANCIAL INFORMATION




JMAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
As of September 30, 2001 and December 31, 2000

|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |             |            | 
|--------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------------ | ---------- | ----------------- | --------- | ----------- | ---------- | 
|                                                                      |                                                                                                                                                                      |                                            |           | September 30, 2001 |            | December 31, 2000
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                  
|                                                                      |                                                                                                                                                                      |                                            |           | (Unaudited)        |            |                   |           |            
|ASSETS                                                                |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|Current Assets:                                                       |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|                                                                      | Cash and cash equivalents                                                                                                                                            |                                            | $         | 7,395,849          |            |                   | $         | 9,856,768   |           
|                                                                      | Accounts receivable, net                                                                                                                                             |                                            |           | 4,792,169          |            |                   |           | 6,904,638   |           
|                                                                      | Notes and other receivables                                                                                                                                          |                                            |           | 45,212             |            |                   |           | 57,383      |           
|                                                                      | Inventories                                                                                                                                                          |                                            |           | 6,336,687          |            |                   |           | 6,310,628   |           
|                                                                      | Marketable securities available for sale                                                                                                                             |                                            |           | 877,190            |            |                   |           | 2,657,418   |           
|                                                                      | Prepaid expenses and other                                                                                                                                           |                                            |           | 408,855            |            |                   |           | 1,163,543   |           
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|                                                                      |                                                                                                                                                                      | Total current assets                       |           |                    | 19,855,962 |                   |           |             | 26,950,378 | 
|Property and equipment, net                                           |                                                                                                                                                                      |                                            | 4,002,880 |                    |            |                   | 3,291,477 |            
|Other assets, net                                                     |                                                                                                                                                                      |                                            | 6,541,315 |                    |            |                   | 3,649,218 |            
|Goodwill, net                                                         |                                                                                                                                                                      |                                            | 3,984,215 |                    |            |                   | 300,501   |            
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|                                                                      |                                                                                                                                                                      | TOTAL ASSETS                               |           | $                  | 34,384,372 |                   |           | $           | 34,191,574 | 
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                  |                                                                                                                                                                      |                                            |           |                    |           
|Current Liabilities:                                                  |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|                                                                      | Accounts payable                                                                                                                                                     |                                            | $         | 2,141,594          |            |                   | $         | 2,223,642   |           
|                                                                      | Accrued liabilities                                                                                                                                                  |                                            |           | 1,988,628          |            |                   |           | 888,490     |           
|                                                                      | Accrued payroll and related costs                                                                                                                                    |                                            |           | 1,106,820          |            |                   |           | 1,003,687   |           
|                                                                      | Line of credit                                                                                                                                                       |                                            |           | 2,775,000          |            |                   |           | 1,100,000   |           
|                                                                      | Notes payable                                                                                                                                                        |                                            |           | 541,996            |            |                   |           | 191,178     |           
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|                                                                      |                                                                                                                                                                      | Total current liabilities                  |           |                    | 8,554,038  |                   |           |             | 5,406,997  | 
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|Notes payable and other long-term liabilities, net of current portion |                                                                                                                                                                      |                                            | 1,403,869 |                    |            |                   | 339,908   |            
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|Stockholders equity:                                                 |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|                                                                      | Preferred stock, $.01 par value;
5,000,000 shares authorized; none issued and outstanding
as of September 30, 2001 and December 31, 2000                             |                                            |           |                   |            |                   |           |            |           
|                                                                      | Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 22,855,792 as of September 30, 2001 and
22,224,650 shares as of December 31, 2000 |                                            |           | 228,558            |            |                   |           | 222,247     |           
|                                                                      | Additional-paid in capital                                                                                                                                           |                                            |           | 54,393,485         |            |                   |           | 52,628,372  |           
|                                                                      | Accumulated other comprehensive income                                                                                                                               |                                            |           | 827,165            |            |                   |           | 2,589,340   |           
|                                                                      | Accumulated deficit                                                                                                                                                  |                                            |           | (31,022,743        | )          |                   |           | (26,995,290 | )         
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|                                                                      |                                                                                                                                                                      | Total stockholders equity                 |           |                    | 24,426,465 |                   |           |             | 28,444,669 | 
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            
|                                                                      |                                                                                                                                                                      | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |           | $                  | 34,384,372 |                   |           | $           | 34,191,574 | 
|                                                                      |                                                                                                                                                                      |                                            |           |                    |            |                   |           |            

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JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2001 and 2000 and
Nine Months Ended September 30, 2001 and 2000
(Unaudited)

|                                                                   |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |           |           | 
|------------------------------------------------------------------ | ------------------------------------- | ------------ | ---------- | ------------------ | --------- | ----------------- | ---------- | -------------- | --------- | -------------- | ---------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                                                                   |                                       |              |            | Three Months Ended |           | Nine Months Ended
|                                                                   |                                       |              |            |                    |           |                  
|                                                                   |                                       |              |            | Sept. 30, 2001     |           | Sept. 30, 2000    |            | Sept. 30, 2001 |           | Sept. 30, 2000
|                                                                   |                                       |              |            |                    |           |                   |            |                |           |               
|Sales                                                              |                                       | $            | 5,448,727  |                    |           | $                 | 3,769,493  |                |           | $              | 13,313,269 |           |           | $ | 13,736,115 |          
|Costs of sales                                                     |                                       |              | 4,264,158  |                    |           |                   | 2,739,950  |                |           |                | 9,940,692  |           |           |   | 9,269,658  |          
|                                                                   |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |          
|                                                                   |                                       | Gross profit |            |                    | 1,184,569 |                   |            |                | 1,029,543 |                |            |           | 3,372,577 |   |            |           | 4,466,457 | 
|                                                                   |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |          
|Operating expenses:                                                |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |          
|                                                                   | Selling, general and
administrative   |              |            | 1,909,503          |           |                   |            | 1,654,268      |           |                |            | 5,423,352 |           |   |            | 4,817,160 |          
|                                                                   | Research, development and
engineering |              |            | 603,861            |           |                   |            | 485,660        |           |                |            | 1,746,158 |           |   |            | 1,534,140 |          
|                                                                   | Asset writedowns and special items    |              |            | 1,232,000          |           |                   |            | 29,000         |           |                |            | 1,557,000 |           |   |            | 64,000    |          
|                                                                   |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |          
|                                                                   | Total operating expenses              |              |            | 3,745,364          |           |                   |            | 2,168,928      |           |                |            | 8,726,510 |           |   |            | 6,415,300 |          
|                                                                   |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |          
|Loss from operations                                               |                                       |              | (2,560,795 | )                  |           |                   | (1,139,385 | )              |           |                | (5,353,933 | )         |           |   | (1,948,843 | )        
|Other income (expense), net                                        |                                       |              | (1,063     | )                  |           |                   | 22,717     |                |           |                | 1,179,255  |           |           |   | (21,538    | )        
|Interest income                                                    |                                       |              | 43,409     |                    |           |                   | 98,322     |                |           |                | 211,236    |           |           |   | 273,306    |          
|Interest expense                                                   |                                       |              | (37,017    | )                  |           |                   | (9,447     | )              |           |                | (64,011    | )         |           |   | (109,344   | )        
|                                                                   |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |          
|Net loss                                                           |                                       | $            | (2,555,466 | )                  |           | $                 | (1,027,793 | )              |           | $              | (4,027,453 | )         |           | $ | (1,806,419 | )        
|                                                                   |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |          
|Basic and diluted net loss per share                               |                                       | $            | (.11       | )                  |           | $                 | (.05       | )              |           | $              | (.18       | )         |           | $ | (.08       | )        
|                                                                   |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |          
|Basic and diluted shares used in
computation of net loss per
share |                                       |              | 22,607,571 |                    |           |                   | 22,182,396 |                |           |                | 22,325,149 |           |           |   | 21,262,135 |          
|                                                                   |                                       |              |            |                    |           |                   |            |                |           |                |            |           |           |   |            |          

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JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three Months Ended September 30, 2001 and 2000 and
Nine Months Ended September 30, 2001 and 2000
(Unaudited)

|                                 |                                          |   |                    |          |                   |   |                |   |                |  |  |  |  |   |            |          |   |   |            |   |  |  |  |  | 
|-------------------------------- | ---------------------------------------- | - | ------------------ | -------- | ----------------- | - | -------------- | - | -------------- |  |  |  |  | - | ---------- | -------- | - | - | ---------- | - |  |  |  |  | 
|                                 |                                          |   | Three Months Ended |          | Nine Months Ended
|                                 |                                          |   |                    |          |                  
|                                 |                                          |   | Sept. 30, 2001     |          | Sept. 30, 2000    |   | Sept. 30, 2001 |   | Sept. 30, 2000
|                                 |                                          |   |                    |          |                   |   |                |   |               
|Net loss                         |                                          | $ | (2,555,466         | )        |                   | $ | (1,027,793     | ) |                |  |  |  |  | $ | (4,027,453 | )        |   | $ | (1,806,419 | )
|Other comprehensive gain (loss): |                                          |   |                    |          |                   |   |                |   |                |  |  |  |  |   |            |          |   |   |            |  
|                                 | Unrealized loss on
marketable securities |   |                    | (435,278 | )                 |   |                |  |                |  |  |  |  |   |            | (482,156 | ) |   |            |  | 
|                                 |                                          |   |                    |          |                   |   |                |   |                |  |  |  |  |   |            |          |   |   |            |  
|Comprehensive loss               |                                          | $ | (2,990,744         | )        |                   | $ | (1,027,793     | ) |                |  |  |  |  | $ | (4,509,609 | )        |   | $ | (1,806,419 | )
|                                 |                                          |   |                    |          |                   |   |                |   |                |  |  |  |  |   |            |          |   |   |            |  

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JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000
(Unaudited)

|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |            |           |            |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | ---------- | ------------------ | ---------- | ------------------ | ---------- | --------- | ---------- | -
|                                                     |                                                                                                         |                                                            |                                           |            | Nine Months Ended 
|                                                     |                                                                                                         |                                                            |                                           |            |                   
|                                                     |                                                                                                         |                                                            |                                           |            | September 30, 2001 |            | September 30, 2000
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                   
|Cash flows from operating activities:                |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|                                                     | Net loss                                                                                                |                                                            | $                                         | (4,027,453 | )                  |            | $                  | (1,806,419 | )        
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities:                             |                                                            |                                           |            |                    |            |                    |            |          
|                                                     |                                                                                                         | Depreciation and amortization                              |                                           |            | 1,268,451          |            |                    |            | 780,488   |           
|                                                     |                                                                                                         | Services received in exchange for common stock or warrants |                                           |            | 16,120             |            |                    |            | 2,403     |           
|                                                     |                                                                                                         | Gain on sale of marketable securities                      |                                           |            | (1,189,273         | )          |                    |            |          |           
|                                                     |                                                                                                         | Asset
writedowns                                           |                                           |            | 766,000            |            |                    |            |          |           
|                                                     | Change in assets and liabilities, net of effects from acquisitions, asset
writedowns and special items: |                                                            |                                           |            |                    |            |                    |            |          
|                                                     |                                                                                                         | (Increase) decrease in:                                    |                                           |            |                    |            |                    |            |           |           
|                                                     |                                                                                                         | Accounts receivable, net                                   |                                           |            | 2,382,873          |            |                    |            | 1,657,001 |           
|                                                     |                                                                                                         | Inventories                                                |                                           |            | (447,886           | )          |                    |            | (777,790  | )         
|                                                     |                                                                                                         | Prepaid expenses and other                                 |                                           |            | 272,712            |            |                    |            | (318,650  | )         
|                                                     |                                                                                                         | Other assets                                               |                                           |            |                   |            |                    |            | (86,985   | )         
|                                                     |                                                                                                         | Increase
(decrease) in:                                    |                                           |            |                    |            |                    |            |           |           
|                                                     |                                                                                                         | Accounts payable and accrued liabilities                   |                                           |            | 61,492             |            |                    |            | (876,266  | )         
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|                                                     |                                                                                                         |                                                            | Net cash used in operating activities     |            |                    | (896,964   | )                  |            |           | (1,426,218 | )
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|Cash flows from investing activities:                |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|                                                     | Expenditures for software development                                                                   |                                                            |                                           | (2,006,237 | )                  |            |                    | (1,395,025 | )         |            |  
|                                                     | Proceeds from sale of marketable securities                                                             |                                                            |                                           | 1,207,923  |                    |            |                    |           |          
|                                                     | Capital expenditures                                                                                    |                                                            |                                           | (797,258   | )                  |            |                    | (1,341,047 | )        
|                                                     | Other assets                                                                                            |                                                            |                                           | (673,671   | )                  |            |                    | (347,401   | )         |            |  
|                                                     | Payments received on notes receivable                                                                   |                                                            |                                           | 7,738      |                    |            |                    | 12,016     |          
|                                                     | Increase in notes receivable                                                                            |                                                            |                                           |           |                    |            |                    | (692,973   | )        
|                                                     | Payment
for purchase of JSAL, net of cash acquired                                                      |                                                            |                                           | (1,139,625 | )                  |            |                    |           |          
|                                                     | Patent costs                                                                                            |                                                            |                                           | (91,391    | )                  |            |                    | (54,539    | )        
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|                                                     |                                                                                                         |                                                            | Net cash used in investing activities     |            |                    | (3,492,521 | )                  |            |           | (3,818,969 | )
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|Cash flows from financing activities:                |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|                                                     | Net borrowings (payments) under line of credit                                                          |                                                            |                                           | 1,675,000  |                    |            |                    | (4,990,000 | )        
|                                                     | Net borrowings (payments) of notes payable
and other long-term liabilities                              |                                                            |                                           | 214,779    |                    |            |                    | (170,637   | )        
|                                                     | Net proceeds from the exercise of options and warrants                                                  |                                                            |                                           | 38,787     |                    |            |                    | 16,110,625 |          
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|                                                     |                                                                                                         |                                                            | Net cash provided by financing activities |            |                    | 1,928,566  |                    |            |           | 10,949,988 |  
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|Net (decrease) increase in cash and cash equivalents |                                                                                                         |                                                            | (2,460,919                                | )          |                    |            | 5,704,801          |           
|Cash and cash equivalents, beginning of period       |                                                                                                         |                                                            | 9,856,768                                 |            |                    |            | 2,323,127          |           
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|Cash and cash equivalents, end of period             |                                                                                                         | $                                                          | 7,395,849                                 |            |                    | $          | 8,027,928          |           
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|Non-cash Item:                                       |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|                                                     | Change in unrealized gains in marketable securities                                                     |                                                            | $                                         | (482,156   | )                  |            | $                  |           |          
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           
|Cash paid for interest                               |                                                                                                         | $                                                          | 33,310                                    |            |                    | $          | 50,972             |           
|                                                     |                                                                                                         |                                                            |                                           |            |                    |            |                    |           

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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.

The accompanying consolidated financial statements have been prepared by
the Company and are unaudited except for the balance sheet as of December 31,
2000. The 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 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 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 consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Companys Form 10-K for the year ended December 31,
2000. The results of operations for the three and nine months ended September
30, 2001 are not necessarily indicative of the results to be expected for the
full year.

Management believes that the Company has adequate resources to fund
operations and working capital requirements at least through June 30, 2002
based on the current level of operations and business conditions. However, 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 new communications semiconductor products and its patented
PXS point X-ray sources for lithography for the semiconductor industry and
other metrology applications. In addition to the above financing needs,
additional funds could be required for future acquisitions should the Company
elect to pursue such acquisitions. 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 services. The Company also intends to pursue
opportunities for strategic relationships, which may include additional
funding, in order to accelerate the commercialization of its emerging products.
However, there can be no assurance that additional financings will be
available when needed, on favorable terms, or at all.

(2) New Accounting Standards

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

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations. This statement addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, Business Combinations,and FASB Statement No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. All business
combinations in the scope of this statement are to be accounted for using one
method, the purchase method. The Company will adopt the provisions of SFAS No.
141 for all business combinations initiated after June 30, 2001. The adoption
of this statement had no effect on the financial statements.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets.SFAS 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired
in a business combination) should be accounted for in financial statements upon
their acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. Upon adoption of SFAS 142, goodwill is
no longer subject to amortization over its estimated useful life. SFAS No. 142
requires that the Company apply a fair value approach to evaluating goodwill
impairment, using at least an annual assessment, as compared to the current
model under SFAS No. 121 that is based on projected future cash flows. Upon
adoption of SFAS No. 142, the Company will cease the amortization of its
goodwill and may be required to record an impairment of goodwill under the fair
value approach. The Company has not yet determined if an impairment exists
under the new fair value approach or the amount of any such impairment that may
exist upon adoption. Any impairment identified upon adoption will be reported
as a cumulative effect of a change in accounting method in the statement of
operations.

In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). This statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to (a)
all entities and (b) legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal operation of long-lived assets, except for certain obligations
of lessees. This statement amends FASB Statement No. 19, Financial Accounting
and Reporting by Oil and Gas Producing Companies, and is effective for
financial statements issued for
fiscal years beginning after June 15, 2002. Management has not determined the
impact of the adoption of this statement on the Companys financial position or
results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that
Opinion). The provisions of SFAS 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001, with early
application encouraged and generally are to be applied prospectively. We have
not yet determined the impact of the adoption of SFAS 144 on our financial
condition and results of operations.

(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. At September 30, 2001 and December 31, 2000,
inventories consisted of the following:

|                                             |  |                    |           |                   |  |           |           | 
|-------------------------------------------- |  | ------------------ | --------- | ----------------- |  | --------- | --------- | 
|                                             |  | September 30, 2001 |           | December 31, 2000
|                                             |  |                    |           |                  
|                                             |  |                    |           |                   |  | (Audited)
|Raw materials, components and sub-assemblies |  | $                  | 4,511,122 |                   |  | $         | 4,622,923 | 
|Work-in-process                              |  |                    | 1,723,967 |                   |  |           | 1,655,989 | 
|Finished goods                               |  |                    | 101,598   |                   |  |           | 31,716    | 
|                                             |  |                    |           |                   |  |           |           | 
|                                             |  | $                  | 6,336,687 |                   |  | $         | 6,310,628 | 
|                                             |  |                    |           |                   |  |           |           | 

(4) Property and Equipment

At September 30, 2001 and December 31, 2000, property and equipment
consisted of the following:

|                              |  |                    |            |                   |  |           |            |  
|----------------------------- |  | ------------------ | ---------- | ----------------- |  | --------- | ---------- | -
|                              |  | September 30, 2001 |            | December 31, 2000
|                              |  |                    |            |                  
|                              |  |                    |            |                   |  | (Audited)
|Equipment and machinery       |  | $                  | 7,664,407  |                   |  | $         | 6,255,944  |  
|Furniture and fixtures        |  |                    | 761,981    |                   |  |           | 792,350    |  
|Leasehold improvements        |  |                    | 383,147    |                   |  |           | 342,818    |  
|                              |  |                    |            |                   |  |           |            |  
|                              |  |                    | 8,809,535  |                   |  |           | 7,391,112  |  
|Less-accumulated depreciation |  |                    | (4,806,655 | )                 |  |           | (4,099,635 | )
|                              |  |                    |            |                   |  |           |            |  
|                              |  | $                  | 4,002,880  |                   |  | $         | 3,291,477  |  
|                              |  |                    |            |                   |  |           |            |  

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

(5) Segment Information

The Companys two Segments offer varying products and services that are
affected by different economic conditions. Further, the Segments reflect the
manner in which the Company views the operating segments.

Microelectronics Equipment Segment: This segment includes the manufacture,
marketing and sale of the Companys measurement and inspection systems,
positioning and motion control systems and biotech processing systems. This
segment also includes the development of the Companys microtechnology emerging
products, including: next-generation X-ray lithography systems and
non-lithography X-ray systems for inspecting tomorrows high-performance
semiconductors; ultra-precision laser machining systems; and other leading-edge
products based on its patented laser technology.

Semiconductor Products and Processes Segment: This segment is a fabless
supplier of semiconductors using advanced software design tools and established
semiconductor manufacturing facilities (foundries), focusing on the development
and delivery of high-performance custom and standard microcircuits for the
commercial and military marketplaces with emphasis on broadband communications
applications. This segment also provides high value services related to the
upgrade and enhancement of a CMOS integrated circuit fabrication facility and
related wafer processing technology for the low-volume and prototype
manufacture of electronic circuits used in operational military systems.

Segment information for the nine and three months ended September 30, 2001 and
2000 was as follows:

|                                       |                |  |                  |            |              |  |               |            |       |  |   |           |   |  |   |            |  
|-------------------------------------- | -------------- |  | ---------------- | ---------- | ------------ |  | ------------- | ---------- | ----- |  | - | --------- | - |  | - | ---------- | -
|                                       |                |  |                  |            |              |  | Semiconductor |            |       |  |   |           |   |  |  
|                                       |                |  | Microelectronics |            | Products and |  |               |            |       |  |   |           |  
|                                       |                |  | Equipment        |            | Processes    |  | Corporate     |            | Total
|                                       |                |  |                  |            |              |  |               |            |      
|Nine Months Ended
September 30, 2001:  |                |  |                  |            |              |  |               |            |       |  |   |           |   |  |   |           
|                                       | Revenues       |  | $                | 11,255,672 |              |  | $             | 2,057,597  |       |  | $ |          |   |  | $ | 13,313,269 |  
|                                       | Operating loss |  |                  | (3,850,364 | )            |  |               | (1,275,617 | )     |  |   | (227,952  | ) |  |   | (5,353,933 | )
|                                       | Total assets   |  |                  | 18,282,066 |              |  |               | 8,721,929  |       |  |   | 7,380,377 |   |  |   | 34,384,372 |  
|Three Months Ended
September 30, 2001: |                |  |                  |            |              |  |               |            |       |  |   |           |   |  |   |           
|                                       | Revenues       |  | $                | 4,723,576  |              |  | $             | 725,151    |       |  | $ |          |   |  | $ | 5,448,727  |  
|                                       | Operating loss |  |                  | (2,111,690 | )            |  |               | (431,105   | )     |  |   | (18,000   | ) |  |   | (2,560,795 | )
|Nine Months Ended
September 30, 2000:  |                |  |                  |            |              |  |               |            |       |  |   |           |   |  |   |           
|                                       | Revenues       |  | $                | 10,904,918 |              |  | $             | 2,831,197  |       |  | $ |          |   |  | $ | 13,736,115 |  
|                                       | Operating loss |  |                  | (1,770,892 | )            |  |               | (177,951   | )     |  |   |          |   |  |   | (1,948,843 | )
|                                       | Total assets   |  |                  | 15,004,290 |              |  |               | 8,927,610  |       |  |   | 5,017,441 |   |  |   | 28,949,341 |  
|Three Months Ended
September 30, 2000: |                |  |                  |            |              |  |               |            |       |  |   |           |   |  |   |           
|                                       | Revenues       |  | $                | 2,912,795  |              |  | $             | 856,698    |       |  | $ |          |   |  | $ | 3,769,493  |  
|                                       | Operating loss |  |                  | (1,081,508 | )            |  |               | (57,877    | )     |  |   |          |   |  |   | (1,139,385 | )

In the table above, Corporate assets are principally cash, deferred income
taxes and other assets.

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

(6) Comprehensive Loss

SFAS No. 130 Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses). This statement requires that an enterprise: (a)
classify items of other comprehensive income by their nature in a financial
statement; and (b) display the accumulated balance of other comprehensive
income separately from stockholders equity in the equity section of a balance
sheet. In accordance with SFAS No. 115, for the three months and nine months
ended September 30, 2001, the Company had an unrealized loss on marketable
securities of $435,278 and $482,156, respectively, resulting in a comprehensive
loss for the three and nine months ended September 30, 2001 of $2,990,744 and
$4,509,609, respectively. The unrealized loss for the three and nine
months ended September 30, 2001 represents the difference in
market value of the Companys investment in Bede plc (Bede) between June 30,
2001 and September 30, 2001, and December 31, 2000 and September 30, 2001,
respectively. For the three and nine months ended September 30, 2000, 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.

In April 2001, the Company sold 500,000 shares of its investment in Bede
for net proceeds of approximately $1.2 million. The net proceeds and gain from
that transaction are included in this Consolidated Statement of
Operations for the nine months ended September 30, 2001.

(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), a
Delaware corporation, 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, 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. The shares issued by the Company are unregistered;
however, pursuant to an agreement with the SAL shareholders, the
Company filed a registration statement with the Securities and
Exchange Commission on November 6, 2001 and has agreed to use its reasonable efforts to
obtain its effectiveness. The holders 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. In
addition, SALs former shareholders and creditors could receive as contingent
earnout consideration up to 354,736 shares of the Companys Common Stock and up
to $2.2 million of Convertible Notes upon achievement of certain technical and
market milestones over the next 17 months. The Company has
accounted for the
Acquisition as a purchase and, accordingly, results of operations of
SAL have been included as of August 7, 2001. Additionally, the
allocation of the purchase price resulted in goodwill of
$3.7 million.

The following unaudited proforma information gives effect to the
acquisition of SAL as if the acquisition occurred on January 1 of each
respective proforma period. 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. Such debt
reductions will not be 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 proforma information includes amortization of goodwill that would have been recorded prior to the issuance of

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SFAS Nos. 141 and 142. 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. 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 of each respective period or which may be expected to
occur in the future.

|                                |  |                                         |            |      |  |   |            |  
|------------------------------- |  | --------------------------------------- | ---------- | ---- |  | - | ---------- | -
|                                |  | For the Nine Months Ended September 30,
|                                |  |                                        
|                                |  | 2000                                    |            | 2001
|                                |  |                                         |            |     
|Total revenues                  |  | $                                       | 14,464,000 |      |  | $ | 13,776,000 |  
|                                |  |                                         |            |      |  |   |            |  
|Loss from continuing operations |  | $                                       | (3,354,000 | )    |  | $ | (5,430,000 | )
|                                |  |                                         |            |      |  |   |            |  
|Loss per share                  |  | $                                       | (.15       | )    |  | $ | (.24       | )
|                                |  |                                         |            |      |  |   |            |  

(8) Line of Credit

Currently the Company has a $5,000,000
working capital line (the Line) with Comerica Bank (the Bank) with interest at prime rate.
The Line contains several covenants relating to, among other matters, the maintenance of certain
minimum income/loss levels and financial ratios, which, if not met by the Company, could impact
the availability of advances pursuant to the Line. As of
September 30, 2001, the Company was in compliance with all of the covenants under the Line except
for the quarterly net loss covenant. The Bank has waived the third
quarter 2001 quarterly net loss covenant.
Assuming operating losses continue at the same rate, the Company anticipates that it will also be in
violation of the profitability covenant at December 31, 2001. Due to the Company's
continued losses, the Bank has indicated that it most likely will reduce the amount of the Line
in the near future to $3 million and require a $3 million
compensating cash balance. In addition,
if the Company's losses continue, the Bank may take further actions regarding the Line, including
termination of the Line. Subsequent to September 30, 2001, the
Company repaid the entire outstanding balance on the Line. As of November
14, 2001, after repayment of the Line, the Company had in excess of
$5 million in cash.

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

Item 2.

The Company operates in two segments as follows: Microelectronics
Equipment and Semiconductor Products and Processes.

Results of Consolidated Operations

Revenues for the three months ended September 30, 2001 were $5,448,727
compared with $3,769,493 for the three months ended September 30, 2000. The
Companys net loss increased from a net loss of $1,027,793 for the three months
ended September 30, 2000 to a net loss of $2,555,466 for the three months ended
September 30, 2001. For the nine months ended September 30, 2001, revenues
were $13,313,269 compared with $13,736,115 for the nine month period ended
September 30, 2000. Net loss for the first nine months of 2001 and 2000 was
$4,027,453 and $1,806,419, respectively. Included in the net loss for
the three and nine months ended September 30, 2001 are asset
writedowns and special items of $1,232,000 and
$1,557,000, respectively.

The increase in revenues for the third quarter of
2001 compared to the prior period was attributable to
a significant increase in X-ray lithography contract revenues offset in part by
a significant drop in shipments of the Companys precision instrument products
related to the severe economic downturn which has caused companies to curtail
capital equipment purchases. In addition, as a consequence of the
September 11 terrorist attacks in the U.S., this slowing of
economic activity has become worse, resulting in a further
retrenchment in overall spending by companies. Also, the Company is
unable to predict what impact the events of September 11 and
ensuing military actions might have on the amount and timing of
future government funding to the Company.

The Companys ability to forecast orders for its precision instrument
products and semiconductor chips continues to be limited due to continuing
marketplace uncertainties which often impedes 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.

Gross margins for the nine months ended September 30, 2001 and 2000 were
25.3% and 32.5%, respectively. This decrease was due primarily to
underutilized manufacturing capacity, competitive pressures on product pricing,
the need to increase inventory reserves ($225,000) and amortization of software
development costs ($424,000 increase to costs of sales in 2001 versus 2000).
The Company believes that as its sales of standard product chips
increase over time its JMAR Semiconductor division will evolve from a lower profit margin contract
semiconductor development business to a higher margin commercial business
focused on the broadband information transfer products markets. As this
evolution progresses, JMAR expects its overall gross profit margins to improve.
The Company also expects that as its patented, laser-driven advanced light
products enter the marketplace and gain acceptance, they will also
substantially improve gross profit margins.

The Companys operating results in 2001 were also impacted by JMARs
continuing investments to accelerate the time-to-market for several new
high-performance products for the microelectronics equipment marketplace.
These investments include increased payroll costs with the addition of several
senior technical specialists and managers to direct and help speed the
Companys new precision instrument, laser and X-ray product development
programs.

Selling, general and administrative (SG&A) expenses for the three months
ended September 30, 2001 and 2000 were $1,909,503 and $1,654,268, respectively,
and were $5,423,352 and $4,817,160 for the nine months ended September 30, 2001
and 2000, respectively. The increase in SG&A expenses in 2001 is primarily due
to an increase in sales and marketing costs in the Semiconductor Products and
Processes Segment due to the buildup of the sales and marketing infrastructure
related to the Companys market entry of its new semiconductor standard
products. In addition, there were $226,684 in SG&A costs in the third quarter
related to JMAR/SAL NanoLithography, Inc., 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

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of RD&E are expensed when incurred. Customer-Funded RD&E costs incurred,
included in Costs of Sales, totaled $2,591,483 and $1,052,193 for the three
months ended September 30, 2001 and 2000, respectively, and
$4,462,840 and
$2,742,467 for the nine month periods ended September 30, 2001 and 2000,
respectively. The increase in Customer-Funded RD&E expenditures for the nine
months ended September 30, 2001 is related to an increase of approximately
$1,822,000 in the X-ray lithography program contract funding provided by the
Defense Advanced Research Projects Agency, most of which is directed toward
development of JMARs X-ray lithography source technology for the commercial
semiconductor market, offset in part, by a decrease related to the Companys
contract for the development of a unique microcircuit architecture and devices
for the replacement of obsolete integrated circuits for the Defense
Microelectronics Activity. Company-Funded RD&E costs
are shown in Operating Expenses and totaled $603,861 and $485,660 for the
three months ended September 30, 2001 and 2000, respectively, and $1,746,158
and $1,534,140 for the nine months ended September 30, 2001 and 2000,
respectively. Hence, total RD&E expenditures for the three month periods were
$3,195,344 and $1,537,853 for 2001 and 2000, respectively, and
$6,208,998 and
$4,276,607 for the nine month periods in 2001 and 2000, respectively. In
addition to these RD&E expenditures, capitalized software development costs
were $782,563 and $543,327 for the three months ended September 30, 2001 and
2000, respectively, and $2,006,237 and $1,395,025 for the nine months ended
September 30, 2001 and 2000, respectively. Combining capitalized software
development costs and RD&E costs, these expenditures as a percentage of sales
were 73.0% and 55.2% for the three months ended September 30, 2001 and 2000,
respectively, and 61.7% and 41.3% for the nine months ended September 30, 2001
and 2000, respectively. These expenditures are primarily related to the
continued development of point X-ray sources (PXS) for lithography for the
semiconductor industry and other metrology applications, the continued
development of new communications semiconductor products, development of a high
efficiency EUV generation system for advanced semiconductor lithography, the
development of new software for the Companys test and measurement systems and
the engineering development of higher performance test, measurement and
inspection systems for the semiconductor, optical network and biomedical
industries.

Asset writedowns and special items for the three and nine months ended
September 30, 2001 of $1,232,000 and $1,557,000, respectively, includes
$766,000 in asset writedowns related to discontinued projects, $301,000 and
$349,000, respectively, in severance related to reductions in force and other
terminations and $165,000 and $442,000, respectively, in legal costs
associated with several matters that were resolved as of
September 30, 2001. The amounts in 2000 are for legal costs and severance.

Interest expense is less for 2001 versus 2000 due to
significantly lower average borrowings in 2001 of the Companys working capital
line (the Line) with Comerica Bank.

Other income (expense) for 2001 includes a gain of $1,189,273 on the sale
of 500,000 shares of the Companys investment in Bede plc in April 2001.

Results of Segment Operations

Microelectronics Equipment Segment

Revenue for the three months ended September 30, 2001 as compared to the
three months ended September 30, 2000 for the Microelectronics Equipment
Segment increased from $2,912,795 to $4,723,576. Revenue for the nine month
period in 2001 as compared to 2000 for this Segment increased from $10,904,918
to $11,255,672. This increase for the nine and three months is attributable to
an increase in X-ray lithography contract revenues, offset in part by a
decrease in revenues of the Companys precision instrument products. The
operating loss of the Microelectronics Equipment Segment for the three months
ended September 30, 2001 as compared to the three months ended September 30,
2000 increased from $1,081,508 to $2,111,690. Operating loss for the nine
month period in 2001 as compared to 2000 for this Segment increased from
$1,770,892 to $3,850,364. The higher operating losses in 2001 versus 2000 were
due to lower revenues and lower margins of certain of the Companys precision
instrument products and, for the three and nine months ended
September 30, 2001, there were $1,067,000 and $1,115,000,
respectively, of asset writedowns and
severance amounts.

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Semiconductor Products and Processes Segment

Revenue of the Semiconductor Products and Processes (SPP) Segment for the
three months ending September 30, 2001 compared to the three months ending
September 30, 2000 decreased from $856,698 to $725,151. Revenue for the nine
month period in 2001 as compared to 2000 for this Segment decreased from
$2,831,197 to $2,057,597. This decrease is attributable to the general
worldwide slowdown in the semiconductor industry which, coupled with unforeseen
delays in new product testing and qualification processes in Taiwan,
significantly slowed the planned sales buildup and market entry of JSIs new
standard products. Revenues were also impacted by the planned reassignment of
certain engineering assets from contract chip development work to
internally-funded commercial product development and marketing activities. The
SPP Segment incurred an operating loss of $431,105 for the quarter ended
September 30, 2001 compared with a loss of $57,877 for the prior year quarter.
Operating loss for the nine month period in 2001 as compared to 2000 for this
Segment increased from $177,951 to $1,275,617. The increased operating loss was
caused by a combination of the lower sales revenues as well as the build-up at
JSI of the sales and marketing staff and engineering and administrative
functions related to the development and planned introduction of the Companys
new commercial semiconductor products.

Consolidated Liquidity and Financial Condition

Cash and cash equivalents at September 30, 2001 and December 31, 2000 were
$7,395,849 and $9,856,768, respectively. The net decrease in cash and cash
equivalents during the nine months ended September 30, 2001 was $2,460,919.
That decrease resulted primarily from expenditures for software development of
$2,006,237, capital expenditures of $797,258, cash used in operations of
$896,964, foundry license costs of $200,000, mask costs of $289,512
and payment for purchase price of JSAL of $1,139,625 offset in part by borrowings under the Companys working
capital bank line of $1,675,000, proceeds from the sale of marketable
securities of $1,207,923 and borrowings of notes payable of $214,779.

JMARs operations will continue to require the use of working capital.
Working capital as of September 30, 2001 and December 31,
2000 was $11,301,924 and $21,543,381, respectively. The decrease in
working capital is primarily due to the Companys losses,
software development and other standard chip product activities,
decrease in receivables, cash paid to SAL shareholders as part of the
purchase price, capital equipment purchases and decline in market
value of the Companys investment in Bede. The
working capital of the Company has generally been funded through its $5,000,000
working capital line (the Line) with Comerica Bank (the Bank) with interest
at prime rate and through third-party contracts. Advances on the Line are
based on a formula of 80 percent of eligible accounts receivable, 35 percent of
eligible inventories (up to $2.5 million) and up to $500,000 for certain
foreign receivables. The Line contains several covenants relating to, among
other matters, the maintenance of certain minimum income/loss levels and
financial ratios, which, if not met by the Company, could impact the
availability of advances pursuant to the Line. As of September 30, 2001, the
Company was in compliance with all of the covenants under the Line except for
the quarterly net loss covenant. The Bank has waived the third quarter 2001 quarterly net loss covenant. Assuming operating losses continue at the same
rate, the Company anticipates that it will also be in violation of the
profitability covenant at December 31, 2001. Due to the
Companys continued losses, the Bank has indicated that it most
likely will reduce the amount of the Line in the near future to
$3 million and require a $3 million compensating cash
balance. In addition, if the Companys losses continue, the Bank
may take further action regarding the Line, including termination of
the Line. Subsequent to September 30, 2001, the Company repaid
the entire outstanding balance on the Line. As of November 14, 2001,
after repayment of the Line, the Company had in excess of
$5 million in cash.

Management believes that the Company has adequate resources to fund
operations and working capital requirements at least through June 30, 2002
based on the current level of operations and business conditions. However, 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 new communications semiconductor products and its patented
PXS point X-ray sources for lithography for the semiconductor industry and
other metrology applications. In addition to the above financing needs,
additional funds could be required for future acquisitions should the Company
elect to pursue such acquisitions. 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 services. The Company also intends to pursue
opportunities for strategic relationships, which may include additional
funding, in order to accelerate the commercialization of its emerging products.
However, there can be no assurance that additional financings will be
available when needed, on favorable terms, or at all.

On August 8, 2001, the Company filed a Universal Blank Shelf
Registration Statement with respect to $25 million of Company securities. The
registration statement was declared effective by the Securities and

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Exchange Commission on October 11, 2001. 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.
No securities have been sold under this registration statement as of
the filing of this Report.

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), a
Delaware corporation, 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, 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. The shares issued by the Company are unregistered;
however, pursuant to an agreement with the SAL shareholders, the
Company filed a registration statement with the Securities and
Exchange Commission on November 6, 2001 and has agreed to use its reasonable efforts to
obtain its effectiveness. The holders 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. In
addition, SALs former shareholders and creditors could receive as contingent
earnout consideration up to 354,736 shares of the Companys Common Stock and up
to $2.2 million of Convertible Notes upon achievement of certain technical and
market milestones over the next 17 months. In connection with the Merger, JMAR
agreed to provide working capital loans to SAL from time to time up to a
maximum of $1.2 million through June 30, 2002 for working capital to build its
X-ray steppers to be integrated with JMARs X-ray sources.

In 2001, the Company was awarded an additional $9 million of contract
funding for its X-ray lithography program from the U.S. Army Research
Laboratory sponsored by the Defense Advanced Research Projects
Agency. Most of these funds have been used for the continued
development of the Company's X-ray light source at the Company's
JMAR Research division, with the remaining funds, plus additional
government funding expected later in 2001, being used to finance the
construction of an X-ray stepper at the Company's JSAL division.

In April 2001, the Company sold 500,000 shares of its investment in Bede
plc for net proceeds of approximately $1.2 million. The net proceeds and gain
from that transaction are reported in this 10-Q filing which were used in
connection with the SAL acquisition mentioned above.

At December 31, 2000, the Company had in excess of $28 million of Federal
net operating loss carryforwards, subject to certain annual limitations, which
expire from 2004 through 2015. 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.

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
concentration of sales to certain markets and customers, such as the
semiconductor and telecommunications industries, 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, uncertainties associated with the timing of the funding
of government contracts, fluctuations in demand, 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

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generation lithography process that becomes the process of choice for the
semiconductor industry or that the semiconductor industry fails to adopt X-ray
lithography as the lithography alternative, shifts in demand for the Companys
products, 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, 2000, in the Companys Form 8-K filed on February 15, 2000
and in the Companys other filings with the Securities and Exchange Commission.




Item 3.Quantitative and Qualitative Disclosures About Market Risk.

As of September 30, 2001, the Company owned 545,500 shares of Bede plc
(Bede). Since its initial placement in November, 2000, the Bede shares have
been traded on the London Stock Exchange. To date, the low and high of Bede
shares has been 1.10 British pounds and 2.25 British pounds. JMARs Bede
investment is subject to foreign exchange risk because it is valued in foreign
currency (British pounds) and changes in the foreign exchange rate will result
in changes in the dollar-denominated value of the Bede investment on the
Companys consolidated financial statements. As of September 30, 2001, the
potential change in fair value of the Bede investment assuming a 10%
unfavorable change in the underlying foreign exchange rates would be a
reduction in the unrealized gain of approximately $71,000.

The Companys investment in Bede is reflected in its Consolidated Balance
Sheets and Statements of Operations and Comprehensive Loss in accordance with
Statement of Financial Accounting Standard No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Reductions in value of the Bede
investment are reflected on the Consolidated Balance Sheet as reductions in a
current asset and stockholders equity, and, when realized, as a reduction in
the unrealized gain unless the value of the Bede investment declines below the
Companys basis of $35,520, at which time the maximum loss to the Company would
be $35,520. The actual gains or losses from these transactions are reflected
in the Companys Statement of Operations when realized.

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 1. Legal Proceedings

In April, 2001, the Companys subsidiary, JMAR Precision Systems, Inc. (JPSI)
hired Shankar Rao as JPSIs Vice President of its Precision Motion Control
(PMC) business area. Subsequently, Mr. Rao was made Senior Vice President of
JPSI. Mr. Rao was formerly an employee of Anorad Corporation (Anorad).
Anorad competes with the PMC business area of JPSI. On October 22, 2001,
Anorad filed a Complaint in Los Angeles Superior Court against Mr. Rao, JPSI
and the Company seeking a Temporary Restraining Order and a Preliminary
Injunction against Mr. Rao, JPSI and the Company from using or disclosing any
Anorad trade secret information that may be in their possession. The Complaint
also seeks damages in an unspecified amount for the alleged misappropriation of
Anorad trade secrets, the breach by Mr. Rao of his employee confidentiality
agreement with Anorad, interference with contractual relations and unfair
competition. At a hearing on October 23, 2001, the Court denied Anorads
Motion for a Temporary Restraining Order and set a hearing date for its Motion
for Preliminary Injunction. The Company believes that Anorads claims are
without merit and that it has defenses to this lawsuit and the Company intends
to vigorously contest this matter.




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 675 shares of
Common Stock to its outside directors as compensation for services as
directors in August 2001. These transactions were exempt under Section
4(2) of the Securities Act of 1933.




|        |                                                                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of
Security Holders
 
At the Companys Annual Meeting of Shareholders held on August 9, 2001, the following matter was
voted on:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) The following directors were elected: John S. Martinez (19,537,863
affirmative votes and 1,572,113 votes withheld); James H. Banister, Jr.
(20,333,590 affirmative votes and 776,386 votes withheld); C. Neil Beer
(20,289,290 affirmative votes and 820,686 votes withheld); Vernon H. Blackman
(20,273,690 affirmative votes and 836,286 votes withheld); and Barry Ressler
(20,333,590 affirmative votes and 776,386 votes withheld).




Item 6. Reports on Form 8-K

| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) Reports on Form 8-K                                                                                                                                                                                                          
|
| | The Company filed a Report on Form 8-K on August 22, 2001 and a Report
on Form 8-K/A on September 11, 2001 related to the acquisition by the
Company of all of the outstanding equity of Semiconductor Advanced
Lithography, Inc.

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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.                                         
|                 
|November 14, 2001 | 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

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