##### 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, 2002
Commission File Number 1-10515

JMAR TECHNOLOGIES, INC.




(Exact name of registrant as specified in its charter)


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

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

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


Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and has been subject to the filing requirements for at
least the past 90 days.

Yes [ X ]     No [   ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date (November 8, 2002).

Common Stock, $.01 par value: 23,847,678 shares





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INDEX


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                           
|                               | Item 4. Controls and Procedures                                                              
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings                                                                    
|                               | Item 2. Changes in Securities                                                                
|                               | Item 5. Other Information                                                                    
|                               | Item 6. Exhibits and Reports on Form 8-K                                                     
|EXHIBIT 10.1                  
|EXHIBIT 99.1                  



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##### Table of Contents



|         |  |                                                                                       |  |  |    |        |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  |  | -- | ------ | -- | 
|         |  |                                                                                       |  |  |    | Page #
|         |  |                                                                                       |  |  |    |       
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |  |    |       
|        
|        
|        
|        
|Item 1.  |  | Financial Statements                                                                  |  |  |    |       
|        
|        
|        
|        
|         |  | Consolidated Balance Sheets  September 30, 2002 (unaudited) and December 31, 2001    |  |  | 2  |       
|        
|        
|        
|        
|         |  | Consolidated Statements of Operations (unaudited)  Three months ended September 30,  |  |  |    |       
|         |  | 2002 and 2001 and nine months ended September 30, 2002 and 2001                       |  |  | 3  |       
|        
|        
|        
|        
|         |  | Consolidated Statements of Comprehensive Loss (unaudited)  Three months ended        |  |  |    |       
|         |  | September 30, 2002 and 2001 and nine months ended September 30, 2002 and 2001         |  |  | 4  |       
|        
|        
|        
|        
|         |  | Consolidated Statements of Cash Flows (unaudited)  Nine months ended September 30,   |  |  |    |       
|        
|        
|        
|        
|         |  | 2002 and 2001                                                                         |  |  | 5  |       
|         |  | Notes to Consolidated Financial Statements (unaudited)                                |  |  | 6  |       
|        
|        
|        
|        
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |  | 15 |       
|        
|        
|        
|        
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 24 |       
|        
|        
|        
|        
|Item 4.  |  | Controls and Procedures                                                               |  |  | 24 |       
|        
|        
|        
|        
|PART II. |  | OTHER INFORMATION                                                                     |  |  |    |       
|        
|        
|        
|        
|Item 1.  |  | Legal Proceedings                                                                     |  |  | 25 |       
|        
|        
|        
|        
|Item 2.  |  | Changes in Securities                                                                 |  |  | 26 |       
|        
|        
|        
|        
|Item 3.  |  | N/A                                                                                   |  |  |    |        |    | 
|        
|        
|        
|        
|Item 4.  |  | N/A                                                                                   |  |  |    |        |    | 
|        
|        
|        
|        
|Item 5.  |  | Other Information                                                                     |  |  |    |        | 26 | 
|        
|        
|        
|        
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                      |  |  | 26 |       

1



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##### Table of Contents






PART I  FINANCIAL INFORMATION




|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |            |  | 
|--------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ----------------- | ----------- |  | --------- | ----------- | ---------- |  | 
|ASSETS                                                                |                                                                                                                                                                      | September 30, 2002                         |                                      | December 31, 2001
|                                                                      |                                                                                                                                                                      |                                            |                                     
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   | (Unaudited) |  |           |             |           
|Current Assets:                                                       |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Cash and cash equivalents                                                                                                                                            |                                            | $                                    | 3,189,616         |             |  | $         | 4,115,129   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Restricted cash                                                                                                                                                      |                                            |                                      | 2,250,000         |             |  |           | 3,000,000   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accounts receivable, net                                                                                                                                             |                                            |                                      | 4,771,634         |             |  |           | 5,101,742   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Notes and other receivables                                                                                                                                          |                                            |                                      | 15,063            |             |  |           | 19,481      |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Inventories, net                                                                                                                                                     |                                            |                                      | 3,870,932         |             |  |           | 4,517,146   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Marketable securities available for sale                                                                                                                             |                                            |                                      |                  |             |  |           | 1,474,889   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Prepaid expenses and other                                                                                                                                           |                                            |                                      | 503,974           |             |  |           | 514,416     |           
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |           
|                                                                      |                                                                                                                                                                      | Total current assets                       |                                      |                   | 14,601,219  |  |           |             | 18,742,803 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Property and equipment, net                                           |                                                                                                                                                                      |                                            | 1,646,022                            |                   |             |  | 1,770,628 |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Intangible
assets, net                                                |                                                                                                                                                                      |                                            | 1,188,125                            |                   |             |  | 1,479,972 |            
|Other assets                                                          |                                                                                                                                                                      |                                            | 182,351                              |                   |             |  | 667,490   |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Goodwill, net                                                         |                                                                                                                                                                      |                                            | 3,970,640                            |                   |             |  | 3,957,732 |            
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |           
|                                                                      |                                                                                                                                                                      | TOTAL ASSETS                               |                                      | $                 | 21,588,357  |  |           | $           | 26,618,625 | 
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |           
|                                                                      |                                                                                                                                                                      |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |                   |             |  |           |             |            |  | 
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |            |  | 
|Current Liabilities:                                                  |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accounts payable                                                                                                                                                     |                                            | $                                    | 2,132,309         |             |  | $         | 2,086,552   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accrued liabilities                                                                                                                                                  |                                            |                                      | 968,075           |             |  |           | 1,395,003   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accrued payroll and related costs                                                                                                                                    |                                            |                                      | 1,663,970         |             |  |           | 985,315     |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Customer deposits                                                                                                                                                    |                                            |                                      | 858,131           |             |  |           | 1,483,804   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Line of credit                                                                                                                                                       |                                            |                                      | 2,250,000         |             |  |           | 3,000,000   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Notes payable                                                                                                                                                        |                                            |                                      | 63,532            |             |  |           | 142,257     |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Net current liabilities of discontinued operations                                                                                                                   |                                            |                                      | 1,764,436         |             |  |           | 1,806,407   |           
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |           
|                                                                      |                                                                                                                                                                      | Total current liabilities                  |                                      |                   | 9,700,453   |  |           |             | 10,899,338 | 
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Notes payable and other long-term liabilities, net of current portion |                                                                                                                                                                      |                                            | 1,327,329                            |                   |             |  | 1,419,632 |            
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |           
|Stockholders equity:                                                 |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Preferred stock, $.01 par value;
5,000,000 shares authorized; none issued and outstanding
as of September 30, 2002 and December 31, 2001                             |                                            |                                      |                  |             |  |           |            |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 23,845,422 as of September 30, 2002 and
22,840,392 shares as of December 31, 2001 |                                            |                                      | 238,454           |             |  |           | 228,404     |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Additional-paid in capital                                                                                                                                           |                                            |                                      | 56,605,387        |             |  |           | 54,343,211  |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accumulated other comprehensive income                                                                                                                               |                                            |                                      |                  |             |  |           | 1,424,864   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accumulated deficit                                                                                                                                                  |                                            |                                      | (46,283,266       | )           |  |           | (41,696,824 | )         
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |           
|                                                                      |                                                                                                                                                                      | Total stockholders equity                 |                                      |                   | 10,560,575  |  |           |             | 14,299,655 | 
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |           
|                                                                      |                                                                                                                                                                      | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                      | $                 | 21,588,357  |  |           | $           | 26,618,625 | 
|                                                                      |                                                                                                                                                                      |                                            |                                      |                   |             |  |           |             |           

2



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##### Table of Contents






JMAR TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF OPERATIONSFor the Three Months Ended September 30, 2002 and 2001 and
Nine Months Ended September 30, 2002 and 2001
(Unaudited)

|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |           |           | 
|------------------------------------------------------------------ | ------------------------------------------- | ------------ | ---------- | ------------------ | --------- | ------------------ | ---------- | ------------------ | ------- | ------------------ | ---------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                                                                   |                                             |              |            | Three Months Ended |           | Nine Months Ended 
|                                                                   |                                             |              |            |                    |           |                   
|                                                                   |                                             |              |            | September 30, 2002 |           | September 30, 2001 |            | September 30, 2002 |         | September 30, 2001
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                   
|Sales                                                              |                                             | $            | 7,325,395  |                    |           | $                  | 5,447,090  |                    |         | $                  | 17,995,597 |           |           | $ | 13,311,632 |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Costs of sales                                                     |                                             |              | 6,024,000  |                    |           |                    | 4,619,003  |                    |         |                    | 14,180,091 |           |           |   | 10,175,999 |          
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   |                                             | Gross profit |            |                    | 1,301,395 |                    |            |                    | 828,087 |                    |            |           | 3,815,506 |   |            |           | 3,135,633 | 
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Operating expenses:                                                |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Selling, general and
administrative         |              |            | 2,225,947          |           |                    |            | 1,657,932          |         |                    |            | 5,273,270 |           |   |            | 4,662,001 |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Research, development and
engineering       |              |            | 430,705            |           |                    |            | 603,861            |         |                    |            | 1,247,384 |           |   |            | 1,746,158 |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Asset writedowns and special items                                 |                                             |              | 1,074,324  |                    |           |                    | 636,000    |                    |         |                    | 1,074,324  |           |           |   | 684,000    |          
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|                                                                   | Total operating expenses                    |              |            | 3,730,976          |           |                    |            | 2,897,793          |         |                    |            | 7,594,978 |           |   |            | 7,092,159 |          
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|Loss from operations                                               |                                             |              | (2,429,581 | )                  |           |                    | (2,069,706 | )                  |         |                    | (3,779,472 | )         |           |   | (3,956,526 | )        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Realized gain on sale of
marketable securities                     |                                             |              |           |                    |           |                    |           |                    |         |                    | 1,349,721  |           |           |   | 1,189,273  |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Interest and other income                                          |                                             |              | 15,551     |                    |           |                    | 43,409     |                    |         |                    | 54,065     |           |           |   | 211,846    |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Interest and other expense                                         |                                             |              | (59,626    | )                  |           |                    | (38,080    | )                  |         |                    | (177,472   | )         |           |   | (74,639    | )        
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|Loss from continuing operations before
income taxes                |                                             |              | (2,473,656 | )                  |           |                    | (2,064,377 | )                  |         |                    | (2,553,158 | )         |           |   | (2,630,046 | )        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Deferred income tax expense                                        |                                             |              |           |                    |           |                    |           |                    |         |                    | (484,423   | )         |           |   |           |          
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|Loss from continuing operations                                    |                                             |              | (2,473,656 | )                  |           |                    | (2,064,377 | )                  |         |                    | (3,037,581 | )         |           |   | (2,630,046 | )        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Loss from operations of discontinued
operations                    |                                             |              | (363,000   | )                  |           |                    | (491,089   | )                  |         |                    | (1,548,861 | )         |           |   | (1,397,407 | )        
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net loss                                                           |                                             | $            | (2,836,656 | )                  |           | $                  | (2,555,466 | )                  |         | $                  | (4,586,442 | )         |           | $ | (4,027,453 | )        
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|Basic and diluted loss per share:                                  |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Loss per share from continuing
operations   |              | $          | (.10               | )         |                    | $          | (.09               | )       |                    | $          | (.13      | )         |   | $          | (.12      | )        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Loss per share from discontinued
operations |              |            | (.02               | )         |                    |            | (.02               | )       |                    |            | (.07      | )         |   |            | (.06      | )        
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Basic and diluted net loss per share                               |                                             | $            | (.12       | )                  |           | $                  | (.11       | )                  |         | $                  | (.20       | )         |           | $ | (.18       | )        
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          
|Basic and diluted shares used in
computation of net loss per share |                                             |              | 23,844,685 |                    |           |                    | 22,607,571 |                    |         |                    | 23,360,208 |           |           |   | 22,325,149 |          
|                                                                   |                                             |              |            |                    |           |                    |            |                    |         |                    |            |           |           |   |            |          

3



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##### Table of Contents






JMAR TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSFor the Three Months Ended September 30, 2002 and 2001 and
Nine Months Ended September 30, 2002 and 2001
(Unaudited)

|                                 |                                                 |   |                    |   |                    |   |                    |          |                    |   |            |   |  |   |            |          |  
|-------------------------------- | ----------------------------------------------- | - | ------------------ | - | ------------------ | - | ------------------ | -------- | ------------------ | - | ---------- | - |  | - | ---------- | -------- | -
|                                 |                                                 |   | Three Months Ended |   | Nine Months Ended 
|                                 |                                                 |   |                    |   |                   
|                                 |                                                 |   | September 30, 2002 |   | September 30, 2001 |   | September 30, 2002 |          | September 30, 2001
|                                 |                                                 |   |                    |   |                    |   |                    |          |                   
|Net loss                         |                                                 | $ | (2,836,656         | ) |                    | $ | (2,555,466         | )        |                    | $ | (4,586,442 | ) |  | $ | (4,027,453 | )       
|                                
|                                
|                                
|                                
|Other comprehensive gain (loss): |                                                 |   |                    |   |                    |   |                    |          |                    |   |            |   |  |   |            |         
|                                
|                                
|                                
|                                
|                                 | Unrealized gain (loss) on
marketable securities |   |                    |  |                    |   |                    | (435,278 | )                  |   |            |  |  |   |            | (482,156 | )
|                                 |                                                 |   |                    |   |                    |   |                    |          |                    |   |            |   |  |   |            |         
|Comprehensive loss               |                                                 | $ | (2,836,656         | ) |                    | $ | (2,990,744         | )        |                    | $ | (4,586,442 | ) |  | $ | (4,509,609 | )       
|                                 |                                                 |   |                    |   |                    |   |                    |          |                    |   |            |   |  |   |            |         

4



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##### Table of Contents






JMAR TECHNOLOGIES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Nine Months Ended September 30, 2002 and 2001(Unaudited)

|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |           |            |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------- | ---------- | ------------------ | ---------- | ------------------ | ---------- | --------- | ---------- | -
|                                               |                                                                                                     |                                          |                                                     |            | September 30, 2002 |            | September 30, 2001
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                   
|Cash flows from operating activities:          |                                                                                                     |                                          |                                                     |            |                    |            |                    |           
|                                              
|                                              
|                                              
|                                              
|                                               | Loss from continuing operations                                                                     |                                          | $                                                   | (3,037,581 | )                  |            | $                  | (2,630,046 | )        
|                                              
|                                              
|                                              
|                                              
|                                               | Adjustments to reconcile loss from continuing operations to net cash
used in continuing operations: |                                          |                                                     |            |                    |            |                    |            |          
|                                              
|                                              
|                                              
|                                              
|                                               | Depreciation and amortization                                                                       |                                          |                                                     | 781,179    |                    |            |                    | 756,689    |          
|                                              
|                                              
|                                              
|                                              
|                                               | Services received in exchange for common stock                                                      |                                          |                                                     | 5,999      |                    |            |                    | 16,120     |          
|                                              
|                                              
|                                              
|                                              
|                                               | Gain on sale of marketable securities                                                               |                                          |                                                     | (1,349,721 | )                  |            |                    | (1,189,273 | )        
|                                              
|                                              
|                                              
|                                              
|                                               | Asset
writedowns and special items                                                                  |                                          |                                                     | 512,807    |                    |            |                    | 335,000    |          
|                                              
|                                              
|                                              
|                                              
|                                               | Change in assets and liabilities:                                                                   |                                          |                                                     |            |                    |            |                    |            |          
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                     | Accounts receivable, net                 |                                                     |            | 330,108            |            |                    |            | 2,260,511 |           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                     | Inventories                              |                                                     |            | 646,214            |            |                    |            | 267,185   |           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                     | Prepaid expenses and other               |                                                     |            | 14,860             |            |                    |            | 272,712   |           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                     | Customer deposits                        |                                                     |            | (625,673           | )          |                    |            |          |           
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                     | Accounts payable and accrued liabilities |                                                     |            | 297,484            |            |                    |            | (559,678  | )         
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|                                               |                                                                                                     |                                          | Net cash used in continuing operations              |            |                    | (2,424,324 | )                  |            |           | (470,780   | )
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|                                               | Loss from discontinued operations                                                                   |                                          |                                                     | (1,548,861 | )                  |            |                    | (1,397,407 | )        
|                                              
|                                              
|                                              
|                                              
|                                               | Changes in net liabilities of discontinued operations                                               |                                          |                                                     | (41,971    | )                  |            |                    | (1,477,474 | )        
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                     |                                          | Net cash used in discontinued operations            |            |                    | (1,590,832 | )                  |            |           | (2,874,881 | )
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|                                               |                                                                                                     |                                          | Net cash used in operating activities               |            |                    | (4,015,156 | )                  |            |           | (3,345,661 | )
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|Cash flows from investing activities:          |                                                                                                     |                                          |                                                     |            |                    |            |                    |           
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from sale of marketable securities                                                         |                                          |                                                     | 1,399,746  |                    |            |                    | 1,207,923  |          
|                                              
|                                              
|                                              
|                                              
|                                               | Capital expenditures                                                                                |                                          |                                                     | (289,209   | )                  |            |                    | (451,795   | )        
|                                              
|                                              
|                                              
|                                              
|                                               | Intangible
assets, other assets and goodwill                                                        |                                          |                                                     | 396,714    |                    |            |                    | (498,285   | )        
|                                              
|                                              
|                                              
|                                              
|                                               | Payments received on notes receivable                                                               |                                          |                                                     |           |                    |            |                    | 7,738      |          
|                                              
|                                              
|                                              
|                                              
|                                               | Payment for purchase of JSAL, net of cash acquired                                                  |                                          |                                                     |           |                    |            |                    | (1,139,625 | )        
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|                                              
|                                              
|                                              
|                                              
|                                               |                                                                                                     |                                          | Net
cash provided by (used in) investing activities |            |                    | 1,507,251  |                    |            |           | (874,044   | )
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|Cash flows from financing activities:          |                                                                                                     |                                          |                                                     |            |                    |            |                    |           
|                                              
|                                              
|                                              
|                                              
|                                               | Net proceeds from the issuance of common stock                                                      |                                          |                                                     | 1,753,420  |                    |            |                    |           |          
|                                              
|                                              
|                                              
|                                              
|                                               | Net borrowings (payments) under line of credit                                                      |                                          |                                                     | (750,000   | )                  |            |                    | 1,675,000  |          
|                                              
|                                              
|                                              
|                                              
|                                               | Decrease in restricted cash                                                                         |                                          |                                                     | 750,000    |                    |            |                    |           |          
|                                              
|                                              
|                                              
|                                              
|                                               | Payments of notes payable and other long-term liabilities                                           |                                          |                                                     | (171,028   | )                  |            |                    | (125,417   | )        
|                                              
|                                              
|                                              
|                                              
|                                               | Increase in notes payable and other long-term liabilities                                           |                                          |                                                     |           |                    |            |                    | 170,416    |          
|                                              
|                                              
|                                              
|                                              
|                                               | Net proceeds from the exercise of options and warrants                                              |                                          |                                                     |           |                    |            |                    | 38,787     |          
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|                                               |                                                                                                     |                                          | Net cash provided by financing activities           |            |                    | 1,582,392  |                    |            |           | 1,758,786  |  
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|Net decrease in cash and cash equivalents      |                                                                                                     |                                          | (925,513                                            | )          |                    |            | (2,460,919         | )         
|                                              
|                                              
|                                              
|                                              
|Cash and cash equivalents, beginning of period |                                                                                                     |                                          | 4,115,129                                           |            |                    |            | 9,856,768          |           
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|Cash and cash equivalents, end of period       |                                                                                                     | $                                        | 3,189,616                                           |            |                    | $          | 7,395,849          |           
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|Cash paid for interest                         |                                                                                                     | $                                        | 131,446                                             |            |                    | $          | 33,310             |           
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          
|Non-cash Item:                                 |                                                                                                     |                                          |                                                     |            |                    |            |                    |           
|                                              
|                                              
|                                              
|                                              
|                                               | Change in unrealized gains in
marketable securities                                                 |                                          | $                                                   |           |                    |            | $                  | (482,156   | )        
|                                               |                                                                                                     |                                          |                                                     |            |                    |            |                    |            |          

5



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##### Table of Contents






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

(1) Basis of Presentation and Financial Condition

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

The accompanying consolidated financial statements as of and for the three
and nine months ended September 30, 2002 and 2001 have been prepared by the
Company and are unaudited except for the balance sheet as of December 31, 2001.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements include all adjustments of a
normal recurring nature which are necessary for a fair presentation of the
results of operations for the interim periods presented. Certain information
and footnote disclosures normally included in financial statements have been
condensed or omitted pursuant to such rules and regulations.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these interim consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Companys Form 10-K for the year ended December 31, 2001. The results of
operations for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the full year.

The Company has determined that it will require additional financing for
working capital needs by March 31, 2003 and that it will require additional
financing to complete or accelerate the development of some of its high value
emerging new products, including its patented CPL systems for the manufacture
of high-performance semiconductors. The Company believes that it has available
to it several potential sources of capital, including private offerings to
individual investors and additional debt or equity sales in the public market,
as well as additional contract funding from both current and new customers for
its research and development programs. The Company is also pursuing
opportunities for strategic relationships with semiconductor industry partners,
one of the goals of which would involve receipt of additional funding, in order
to accelerate the commercialization of its emerging CPL products. However,
there can be no assurance that additional financings will be available when
needed, on favorable terms, or at all.

6



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##### Table of Contents



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

(2) Recent Accounting Pronouncements

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

Statement of Financial Accounting Standards No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146
addresses accounting and reporting costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. This statement requires that a liability for a cost
associated with an exit or disposal activity shall be recognized and measured
initially at its fair value in the period which the liability is incurred. This
statement is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not believe that the adoption of SFAS 146
will have a significant impact on its financial statements.

(3) Inventories

Inventories are carried at the lower of cost on the first-in, first-out
basis or market and are comprised of materials, direct labor and applicable
manufacturing overhead. At September 30, 2002 and December 31, 2001,
inventories consisted of the following:

|                                                 |  |                    |            |                   |  |   |            |  
|------------------------------------------------ |  | ------------------ | ---------- | ----------------- |  | - | ---------- | -
|                                                 |  | September 30, 2002 |            | December 31, 2001
|                                                 |  |                    |            |                  
|                                                 |  | (Unaudited)        |            |                   |  |  
|Raw materials, components and sub-assemblies     |  | $                  | 4,157,413  |                   |  | $ | 4,449,071  |  
|                                                
|                                                
|                                                
|                                                
|Work-in-process                                  |  |                    | 1,451,639  |                   |  |   | 1,422,452  |  
|                                                
|                                                
|                                                
|                                                
|Finished goods                                   |  |                    | 303,943    |                   |  |   | 760,766    |  
|                                                 |  |                    |            |                   |  |   |            |  
|                                                 |  |                    | 5,912,995  |                   |  |   | 6,632,289  |  
|                                                
|                                                
|                                                
|                                                
|Less  Reserve for excess and obsolete inventory |  |                    | (2,042,063 | )                 |  |   | (2,115,143 | )
|                                                 |  |                    |            |                   |  |   |            |  
|                                                 |  | $                  | 3,870,932  |                   |  | $ | 4,517,146  |  
|                                                 |  |                    |            |                   |  |   |            |  

(4) Property and Equipment

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

|                              |  |                    |            |                   |  |   |            |  
|----------------------------- |  | ------------------ | ---------- | ----------------- |  | - | ---------- | -
|                              |  | September 30, 2002 |            | December 31, 2001
|                              |  |                    |            |                  
|                              |  | (Unaudited)        |            |                   |  |  
|Equipment and machinery       |  | $                  | 4,511,935  |                   |  | $ | 4,330,415  |  
|                             
|                             
|                             
|                             
|Furniture and fixtures        |  |                    | 659,713    |                   |  |   | 560,594    |  
|                             
|                             
|                             
|                             
|Leasehold improvements        |  |                    | 372,220    |                   |  |   | 387,901    |  
|                              |  |                    |            |                   |  |   |            |  
|                              |  |                    | 5,543,868  |                   |  |   | 5,278,910  |  
|                             
|                             
|                             
|                             
|Less-accumulated depreciation |  |                    | (3,897,846 | )                 |  |   | (3,508,282 | )
|                              |  |                    |            |                   |  |   |            |  
|                             
|                             
|                             
|                             
|                              |  | $                  | 1,646,022  |                   |  | $ | 1,770,628  |  
|                              |  |                    |            |                   |  |   |            |  

7



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##### Table of Contents



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

(5) Segment Information

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

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

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

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

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

|                    |                                    |  |               |            |           |  |           |            |       |  |   |            |   |  |   |            |  
|------------------- | ---------------------------------- |  | ------------- | ---------- | --------- |  | --------- | ---------- | ----- |  | - | ---------- | - |  | - | ---------- | -
|                    |                                    |  | Front-end     |            |           |  |           |            |       |  |   |            |   |  |  
|                    |                                    |  | Semiconductor |            |           |  |           |            |       |  |   |            |   |  |  
|                    |                                    |  | Equipment and |            | Precision |  |           |            |       |  |   |            |  
|                    |                                    |  | Services      |            | Equipment |  | Corporate |            | Total
|                    |                                    |  |               |            |           |  |           |            |      
|Nine Months Ended   |                                    |  |               |            |           |  |           |            |       |  |   |            |   |  |   |           
|                   
|                   
|                   
|                   
|September 30, 2002: |                                    |  |               |            |           |  |           |            |       |  |   |            |   |  |   |           
|                   
|                   
|                   
|                   
|                    | Revenues                           |  | $             | 14,656,910 |           |  | $         | 3,338,687  |       |  | $ |           |   |  | $ | 17,995,597 |  
|                   
|                   
|                   
|                   
|                    | Asset writedowns and
special items |  |               |           |           |  |           |           |       |  |   | (1,074,324 | ) |  |   | (1,074,324 | )
|                   
|                   
|                   
|                   
|                    | Operating income (loss)            |  |               | 136,244    |           |  |           | (2,841,392 | )     |  |   | (1,074,324 | ) |  |   | (3,779,472 | )
|                   
|                   
|                   
|                   
|                    | Total assets                       |  |               | 12,889,553 |           |  |           | 5,295,096  |       |  |   | 3,403,708  |   |  |   | 21,588,357 |  

8



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##### Table of Contents



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

|                                       |                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|-------------------------------------- | ---------------------------------- |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|Three Months Ended
September 30, 2002: |                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |           
|                                      
|                                      
|                                      
|                                      
|                                       | Revenues                           |  | $ | 6,462,633  |   |  | $ | 862,762    |   |  | $ |           |   |  | $ | 7,325,395  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Asset writedowns and
special items |  |   |           |   |  |   |           |   |  |   | (1,074,324 | ) |  |   | (1,074,324 | )
|                                      
|                                      
|                                      
|                                      
|                                       | Operating loss                     |  |   | (96,851    | ) |  |   | (1,258,406 | ) |  |   | (1,074,324 | ) |  |   | (2,429,581 | )
|                                      
|                                      
|                                      
|                                      
|Nine Months Ended
September 30, 2001:  |                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |           
|                                      
|                                      
|                                      
|                                      
|                                       | Revenues                           |  |   | 8,667,089  |   |  |   | 4,644,543  |   |  |   |           |   |  |   | 13,311,632 |  
|                                      
|                                      
|                                      
|                                      
|                                       | Asset writedowns and
special items |  |   | (198,000   | ) |  |   | (486,000   | ) |  |   |           |   |  |   | (684,000   | )
|                                      
|                                      
|                                      
|                                      
|                                       | Operating income (loss)            |  |   | 276,667    |   |  |   | (4,005,241 | ) |  |   | (227,952   | ) |  |   | (3,956,526 | )
|                                      
|                                      
|                                      
|                                      
|                                       | Total assets                       |  |   | 12,038,872 |   |  |   | 8,121,062  |   |  |   | 14,224,438 |   |  |   | 34,384,372 |  
|                                      
|                                      
|                                      
|                                      
|Three Months Ended
September 30, 2001: |                                    |  |   |            |   |  |   |            |   |  |   |            |   |  |   |           
|                                      
|                                      
|                                      
|                                      
|                                       | Revenues                           |  |   | 4,397,576  |   |  |   | 1,049,514  |   |  |   |           |   |  |   | 5,447,090  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Asset writedowns and
special items |  |   | (198,000   | ) |  |   | (438,000   | ) |  |   |           |   |  |   | (636,000   | )
|                                      
|                                      
|                                      
|                                      
|                                       | Operating income (loss)            |  |   | 61,642     |   |  |   | (2,113,348 | ) |  |   | (18,000    | ) |  |   | (2,069,706 | )

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

(6) Comprehensive Loss

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

(7)  Acquisition of Semiconductor Advanced Lithography, Inc.

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced Lithography, Inc. (SAL), in a
merger of SAL with and into Subsidiary (Merger). SAL (subsequently renamed
JMAR/SAL NanoLithography, Inc. or JSAL) is a provider of XRL stepper systems
and the leading developer of CPL systems. Consideration for the Merger
consisted of an aggregate of 603,051 shares of the Companys Common Stock
valued at $1.7 million, $1.2 million in cash and $1.2 million in notes (the
Notes). The Notes are convertible into shares of the Companys Common Stock
at a price of $4.302, which exceeded the market value of the Companys common
stock at the date of the Merger. The Notes, bearing interest at 8%, are
convertible by the holders at any time and, after six months from the closing,
the Company can force conversion if the average price, as defined, of the
Companys Common Stock during any ten day trading

9



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##### Table of Contents



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

period exceeds $6.45. Interest on the Notes is payable quarterly, with the
principal due, if not converted, on February 7, 2004. All stock options and
warrants issued by SAL which were outstanding immediately prior to the
Acquisition were either exercised pursuant to their terms or were terminated.
There were no settlements of options or warrants and there was no increase to
JMARs purchase price as a result of the issuance of additional SAL shares upon
exercise of the outstanding options and warrants.

Under the Merger Agreement, SALs former shareholders and creditors could
earn up to three contingent earnout payments upon the satisfaction of three
earnout conditions. For the first earnout, the SAL creditors were eligible to
receive $500,000 in Convertible Notes upon the satisfaction of a
stepper limited throughput test (without the CPL light source) by June 30, 2002. This requirement was not met by the June 30, 2002 deadline, and, therefore, the
Company did not have to issue the $500,000 in Convertible Notes. For the
second earnout, the SAL shareholders can earn $500,000 in Convertible Notes
upon the satisfaction of a lithography demonstration milestone. This milestone
must be met 90 days after the CPL light source is delivered by JRI to JSAL.
JRI has built, and is currently testing, its beta test model CPL
source. This source has already met its fundamental performance
requirement, producing an average 20 watts of 1 nm light on a
sustained basis. To facilitate the transition from JRI to JSAL,
JSAL's technical staff will travel to JRI to participate in
operational reliability testing, to be trained on source operation and
maintenance, and to perform demonstrations of static
lithography. The third earnout condition can result in
payment of up to 354,736 JMAR shares and up to $1.2 million in Convertible
Notes upon receipt by the Company of a qualifying order for a CPL system from a
commercial customer and delivery to the customer. Under the Merger Agreement,
the deadline for receipt of this order is 180 days after the CPL source is
delivered to JSAL. The earnout consideration will increase goodwill when and
if it is paid. The Company has accounted for the Acquisition as a purchase and,
accordingly, results of operations of JSAL have been included in the
consolidated financial statements since August 7, 2001. The allocation of the
purchase price of $4,272,100 (including transaction costs) is as follows:

|                                       |  |   |           |  
|-------------------------------------- |  | - | --------- | -
|Goodwill                               |  | $ | 3,765,593 |  
|                                      
|                                      
|                                      
|                                      
|Identifiable intangibles               |  |   | 785,000   |  
|                                      
|                                      
|                                      
|                                      
|Fair value of tangible assets acquired |  |   | 671,593   |  
|                                      
|                                      
|                                      
|                                      
|Liabilities assumed                    |  |   | (950,086  | )
|                                       |  |   |           |  
|                                       |  | $ | 4,272,100 |  
|                                       |  |   |           |  

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

|                                |  |                           |            |  
|------------------------------- |  | ------------------------- | ---------- | -
|                                |  | For the Nine Months ended
|                                |  | September 30, 2001       
|                                |  |                          
|                                |  | (Proforma)               
|Total revenues                  |  | $                         | 13,774,000 |  
|                                |  |                           |            |  
|                               
|                               
|                               
|                               
|Loss from continuing operations |  | $                         | (4,033,000 | )
|                                |  |                           |            |  
|Loss per share                  |  | $                         | (.18       | )
|                                |  |                           |            |  

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

(8) Discontinued Operations

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

The
loss from operations of discontinued operations of $1,548,861 for the
nine months ended September 30, 2002 includes $400,000 related to the writedown
of inventory shipped to JSI in the first quarter or held by vendors
at March 31, 2002 and subsequently shipped to JSI, $300,000 in estimated losses under a facility lease (see below)
and $205,000 in operating losses expected to be incurred subsequent to the
discontinuance. In June 2002, the Company terminated an agreement with Agile
Equity to locate buyers for these JSI chip assets. The Company does not expect
to find a buyer for this business.

As a result of the Companys decision to discontinue this business, the
Company may have an acceleration of the payment of liabilities, disputed
liabilities may arise, and the Company may incur expenses that it otherwise
would not have incurred. Included in current liabilities in the accompanying
balance sheet as of September 30, 2002 is $1,764,436 of liabilities related to
the discontinued operations. These liabilities include amounts owed to JSIs
distributor and vendors, and the amount accrued related to JSIs leased
facility. JSI has sought to negotiate reductions in JSIs liabilities related
to the discontinued operations. In September, 2002, JSIs distributor initiated
a lawsuit to recover approximately $700,000 owing under its Distributor
Agreement with JSI. The distributor has also alleged that it was fraudulently
induced to refrain from terminating the Distributor Agreement prior to the
discontinuance of the JSI standard chip operations. The distributor is seeking
treble damages, which if the fraud is proven, could be up to $2.1 million above
the $700,000 amount claimed. JSI strongly disputes any claim in excess of the $700,000
contractual obligation and both the Company and JSI intend to vigorously contest these
claims.

JSI is a separately incorporated entity. The Company invested significant
amounts in JSIs equity in September 1999 and has loaned, principally on a
secured basis, in excess of $9,000,000 to JSI since 1999. JSI is considering
several alternatives to reduce the liabilities related to JSIs discontinued
operations, including legal alternatives to limit the ability of
these JSI creditors to pursue their claims against JSI.

In September 2000, JSI moved into a significantly larger facility in
anticipation of realizing its growth plans. Prior to December 31, 2001, the
Company decided to sublease the facility and move JSI into a smaller facility.
Accordingly, in the fourth quarter of 2001, the Company accrued $547,000, its
estimated loss under the September 2000 lease. In the quarter ended September
30, 2002, the Company accrued an additional $300,000 in estimated losses under
this lease. The lease provides for rent and related expenses of approximately
$34,000 per month through August 2005. The Company does not yet have a
subtenant for that facility and, if it is unsuccessful in obtaining a subtenant
on acceptable terms, there could be further losses related to that lease.

At
September 30, 2002 and December 31, 2001, net current liabilities of
discontinued operations consisted of the following:

|                       |  |                    |           |                   |  |   |           | 
|---------------------- |  | ------------------ | --------- | ----------------- |  | - | --------- | 
|                       |  | September 30, 2002 |           | December 30, 2001
|                       |  |                    |           |                  
|Payable to distributor |  | $                  | 692,314   |                   |  | $ | 692,314   | 
|                      
|                      
|                      
|                      
|Facility lease accrual |  |                    | 548,412   |                   |  |   | 547,137   | 
|                      
|                      
|                      
|                      
|Accounts payable       |  |                    | 523,710   |                   |  |   | 566,956   | 
|                       |  |                    |           |                   |  |   |           | 
|                       |  | $                  | 1,764,436 |                   |  | $ | 1,806,407 | 
|                       |  |                    |           |                   |  |   |           | 

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

(9) Equity Transactions

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

(10) Income Taxes

As of September 30, 2002, the Company had deferred tax assets (primarily
net operating loss carry forwards) of approximately $17 million. In the second
quarter of 2002, because of the Companys continued history of operating
losses, the Company increased its valuation allowance against these deferred
tax assets to reserve all of the deferred tax assets except that amount of the
net operating losses which can be carried back to prior years. Accordingly,
included in the Statement of Operations for the nine months ended September 30,
2002, is a deferred income tax expense of $484,423.

(11) Earnings (Loss) Per Share

For the three and nine months ended September 30, 2002 and 2001, the
denominator in the diluted earnings (loss) per share computation was the same
as the denominator for basic earnings (loss) per share due to antidilutive
effects on the Companys net loss of warrants, stock options and shares
underlying convertible debt. As of September 30, 2002 and 2001, the Company
had outstanding warrants, stock options and shares underlying convertible debt
of 4,281,575 and 3,806,009, respectfully, all of which are antidilutive.

(12) Intangible Assets

The Company adopted Financial Accounting Standards Board No. 142 Goodwill and
Other Intangible Assets (FASB 142) effective January 1, 2002. In accordance
with FASB 142, the Company does not amortize goodwill. The majority of the
Companys goodwill is related to JSAL, acquired in August, 2001,
with the balance related to JPSI, acquired in 1993. As of September 30, 2002, the Company had the following amounts
related to other intangible assets:

|                                 |  |                |           |              |  |                |           |  |  |   |           | 
|-------------------------------- |  | -------------- | --------- | ------------ |  | -------------- | --------- |  |  | - | --------- | 
|                                 |  | Gross Carrying |           | Accumulated  |  | Net Intangible
|                                 |  | Amount         |           | Amortization |  | Assets        
|                                 |  |                |           |              |  |               
|Patents                          |  | $              | 967,951   |              |  | $              | 271,948   |  |  | $ | 696,003   | 
|                                
|                                
|                                
|                                
|Unpatented Technology            |  |                | 450,000   |              |  |                | 152,639   |  |  |   | 297,361   | 
|                                
|                                
|                                
|                                
|Capitalized Software
Development |  |                | 1,208,384 |              |  |                | 1,013,623 |  |  |   | 194,761   | 
|                                 |  |                |           |              |  |                |           |  |  |   |           | 
|                                 |  |                |           |              |  |                |           |  |  | $ | 1,188,125 | 
|                                 |  |                |           |              |  |                |           |  |  |   |           | 

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

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

|                   |              |                        |           |  |   |         | 
|------------------ | ------------ | ---------------------- | --------- |  | - | ------- | 
|For the Year Ended |              | Estimated Amortization
|                  
|                  
|                  
|                  
|                   | December 31, |                        | Expense  
|                   |              |                        |          
|                  
|                  
|                  
|                  
|                   |              |                        | 2002      |  | $ | 120,522 | 
|                  
|                  
|                  
|                  
|                   |              |                        | 2003      |  |   | 427,252 | 
|                  
|                  
|                  
|                  
|                   |              |                        | 2004      |  |   | 209,655 | 
|                  
|                  
|                  
|                  
|                   |              |                        | 2005      |  |   | 97,980  | 
|                  
|                  
|                  
|                  
|                   |              |                        | 2006      |  |   | 130,000 | 
|                  
|                  
|                  
|                  
|                   |              |                        | 2007      |  |   | 165,000 | 
|                  
|                  
|                  
|                  
|                   |              |                        | Beyond    |  |   | 37,716 
|                   |              |                        |           | 
|                   |              | $                      | 1,188,125 | 
|                   |              |                        |           | 

The
following table summarizes the net loss and net loss per share for
the three and nine months ended September 30, 2002 and 2001
adjusted to exclude goodwill amortization expense:

|                                      |                                               |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |            |  
|------------------------------------- | --------------------------------------------- |  | ------------------ | ---------- | ----------------- |  | ------------- | ---------- | ------------- |  | - | ---------- | - |  | - | ---------- | -
|                                      |                                               |  | Three Months Ended |            | Nine Months Ended
|                                      |                                               |  |                    |            |                  
|                                      |                                               |  | September 30,      |            | September 30,     |  | September 30, |            | September 30,
|                                      |                                               |  | 2002               |            | 2001              |  | 2002          |            | 2001         
|                                      |                                               |  |                    |            |                   |  |               |            |              
|Net loss                              |                                               |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |           
|                                      | Reported net loss                             |  | $                  | (2,836,656 | )                 |  | $             | (2,555,466 | )             |  | $ | (4,586,442 | ) |  | $ | (4,027,453 | )
|                                      | Goodwill amortization                         |  |                    |           |                   |  |               | 9,081      |               |  |   |           |   |  |   | 27,243     |  
|                                      |                                               |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |           
|                                      | Adjusted net loss                             |  | $                  | (2,836,656 | )                 |  | $             | (2,546,385 | )             |  | $ | (4,586,442 | ) |  | $ | (4,000,210 | )
|                                      |                                               |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |           
|Basic and diluted net loss per share: |                                               |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |           
|                                      | Reported basic and diluted
net loss per share |  | $                  | (.12       | )                 |  | $             | (.11       | )             |  | $ | (.20       | ) |  | $ | (.18       | )
|                                      | Goodwill amortization                         |  |                    |           |                   |  |               |           |               |  |   |           |   |  |   |           |  
|                                      |                                               |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |           
|                                      | Adjusted basic and diluted
net loss per share |  | $                  | (.12       | )                 |  | $             | (.11       | )             |  | $ | (.20       | ) |  | $ | (.18       | )
|                                      |                                               |  |                    |            |                   |  |               |            |               |  |   |            |   |  |   |           

(13) Severance Agreement

Pursuant
to an Employment Agreement dated September, 2001 with Dr. Martinez,
the Companys former Chairman and Chief Executive Officer, if the
Company delivered notice of its intention not to renew or discontinued his
status of Chairman or CEO, or both, other than for cause, then Dr. Martinezs
employment was to continue for three years at the highest total compensation
rate (including bonuses, director fees and similar payments) he had received in
any previous 12 month period. This amount is approximately $375,000 per annum.
In such event, the Company also agreed to maintain comparable medical insurance
benefits for such three year period.

In May, 2002, Dr. Martinez informed the
Board of Directors of his desire to retire. The Board and Dr. Martinez engaged
in discussions regarding Dr. Martinezs future role with the Company. In order
to set a definite date for the transition to a new CEO, in July, 2002, the
Board of Directors exercised the Companys rights under the Employment
Agreement to discontinue Dr. Martinezs status as CEO effective August 16,
2002. Following negotiations between Dr. Martinez and the Board, an agreement
was reached to restructure this payment obligation to spread the payments over
six years to reduce the impact of the original agreement on the Companys cash
flow. In consideration for this modification, the Company will provide
comparable medical insurance benefits for six years, and modified 942,242 of
the options and warrants held by Dr. Martinez to (1) vest all unvested options
and warrants (141,269 options), (2) provide that, in those options that have an
expiration date within the next six years, the early termination provision that
would otherwise have resulted in the termination of the options and warrants 60
days after termination of his employment was waived, and (3) provide that all
remaining options and warrants will expire on the later of August 15, 2008 or
60 days after Dr. Martinez ceases to be a director. The Company recorded a
charge in the third quarter of 2002 in the amount of $1,074,324 resulting from
this event. The charge includes $561,517 for the discounted
post-employment
payments over six years and $512,807 for the intrinsic value of
Dr. Martinezs
options and warrants resulting from the modification of those options and
warrants.

(14) Legal Proceedings

Anorad Lawsuit.

In April, 2001, JMAR Precision Systems, Inc. (JPSI), a subsidiary of
JMAR 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.
In October, Anorad filed a Complaint in Los Angeles Superior Court against Mr.
Rao, JPSI and JMAR seeking a Temporary Restraining Order and a Preliminary
Injunction against Mr. Rao, JPSI and JMAR from using or disclosing any

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

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. In November, 2001, a preliminary injunction was issued enjoining
all defendants from using any Anorad confidential information that might be in
their possession and requiring the return of the same, if any, to Anorad. The
preliminary injunction also prohibited Mr. Rao or his agents from calling upon,
contacting or soliciting business from any present or former customers of
Anorad whose identity Mr. Rao learned while at Anorad. This restriction does
not preclude Mr. Rao, JMAR or JPSI from calling upon, contacting or soliciting business
or customers of Anorad who have also been customers of JMAR or JPSI before Mr.
Rao joined JPSI. This matter was stayed by the Court pending arbitration of any
claims between Anorad and Mr. Rao. In May, 2002, the plaintiff dismissed Rao
without prejudice and the Court lifted the stay to allow discovery to
re-commence. The parties are in settlement discussions. Mr. Rao, JMAR and JPSI
each denies that it possesses or has used any Anorad trade secrets
and are vigorously contesting these claims.

JMAR Semiconductor (JSI) Liabilities and the All American Lawsuit.

Following the discontinuance of JSIs standard chip business in the first
quarter of 2002, JSI sought to negotiate debt reductions from the creditors
associated with the discontinued portion of its business. JSI was a party to a
Distributor Agreement with All American Semiconductor, Inc.
(All American) under which All American had purchased approximately $700,000 of JSI chips. In
accordance with generally accepted accounting principles, that transaction was
reflected as deferred revenue (a liability) and not as revenue pending sale to
the ultimate customer. Under the terms of the agreement, if All American
properly terminated the distribution agreement, it had the right to require JSI
to repurchase those chips. Soon after the announcement by JMAR that JSI had
discontinued its standard chip business, All American gave notice of
termination of the Distributor Agreement and returned the JSI semiconductor
chips it held, allegedly creating an obligation on JSIs part to repay
approximately $700,000 to All American. The $700,000 claim of All American is
included in net current liabilities of discontinued operations in JMARs Consolidated Balance Sheet.

In September, 2002, a Complaint was filed by All American against JSI and JMAR in San Diego Superior
Court. The Complaint alleges that JSI owes All American approximately $700,000.
The Complaint also alleges that All American was induced to refrain from
terminating the agreement until the JSI business had been discontinued. All
American claims that such actions constituted fraud and that it is
entitled to treble (triple) damages. All American has also alleged that JMAR
is the alter ego of JSI and, therefore, should be held
responsible for the obligations of JSI. While recognizing that the
approximately $700,000 in indebtedness may be owed by JSI to All American under
the agreement, JSI asserts that the obligations are merely of a contractual
nature and strongly disputes that any of the actions taken constitute fraud.
JMAR also disputes that it is the alter ego of JSI in light of the fact that
JSI is a separately incorporated entity that has been more than adequately
capitalized over its years of operations. JMAR claims that there is
insufficient evidence to support the alter ego theory and believes that it will
ultimately prevail on this issue. JMAR and JSI intend to vigorously contest
any claims by All American that it is owed more than $700,000.

If JSI is unsuccessful in negotiating acceptable debt reductions from All
American and its other creditors, JSI may pursue various legal alternatives to
limit the ability of these JSI creditors to pursue their claims against JSI.

Tyson Foods Lawsuit.

In August, 2002, JPSI was served with a Complaint
naming Adco and JPSI as defendants related to the sale by Adco to
Tyson of packaging machines that contain certain JPSI components. The
Complaint alleges a claim of breach of implied warranty of
merchantability against JPSI and Adco. The Complaint also alleges
claims against Adco (and not JPSI) of breach of warranty of fitness
for a particular purpose, breach of express warranty and breach of
contract for a particular purpose. The JPSI components sold to Adco
represent approximately $20,000-$30,000 of the total costs of the system
sold by Adco to Tyson. The Complaint seeks incidental, consequential
and compensatory damages arising from the alleged malfunctioning of
two packaging systems purchased by Tyson from Adco for $436,601. The
Complaint also alleges that $80,000 has been incurred in repair,
training and technical support costs. It is unclear from the
Complaint how much of the alleged damages Tyson is seeking from JPSI,
as opposed to the other co-defendant. JMAR believes that it has
insurance coverage for some or most of any defense costs and awards
that might arise from this suit. Notwithstanding the filing of this
lawsuit, JMAR continues to work with Tyson to resolve its equipment
issues.

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##### Table of Contents






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

Item 2.

Overview

JMAR Technologies, Inc. is a developer of collimated laser plasma
lithography (CPL) sources and stepper systems for the making of advanced
semiconductor chips. These systems are based on the Companys proprietary and
patented solid state laser systems and its expertise in laser plasma-generated
x-rays. The development of the Companys CPL source and stepper systems has
been principally funded by the U.S. Defense Advanced Research Projects Agency
(DARPA). The strategy of the Companys CPL business is to initially sell
advanced lithography systems to manufacturers of Gallium Arsenide-based
semiconductors (which are used in high performance electronics required for
military systems and the growing commercial market for high speed
communications applications). With planned investments from strategic partners
and other sources, the Companys goal is to introduce higher throughput
lithography systems to the multi-billion dollar silicon-based semiconductor
manufacturing industry in a timeframe sooner than competing Next Generation
Lithography technologies, such as Extreme Ultraviolet technologies.

The Company also manufactures and sells precision measurement and
positioning systems that are used in the inspection, fabrication and repair of
semiconductors, data storage devices, biomedical products and other products in
industries that require a high level of precision in the manufacturing
processes.

The Company also provides semiconductor process technologies and services
under contracts that support the Department of Defenses mission to ensure a
supply of semiconductor products for military systems.

Through December 31, 2001, the Company operated in three segments as
follows: Front-end Semiconductor Equipment and Services, Precision Equipment,
and Semiconductor Products and Processes. In the first quarter of 2002, the
Company decided to discontinue and sell its standard semiconductor products
business and shift more of its resources to accelerate the market entry of its
collimated plasma lithography (CPL) products. The standard semiconductor
products portion of JMAR Semiconductor Inc.s (JSI) business had been a
developmental effort, involving the design, manufacture and introduction of new
standard product semiconductor chips. With the severe downturn in the
worldwide semiconductor market beginning in 2000 and continuing into 2002, JSI
had little success in selling its new standard product chips. The Company
determined that substantial additional capital would have been required for
these new chips to become established in what became an over-supplied chip
market, as well as to develop newer, higher value chips. The Company concluded
that it would not continue to invest its resources in this business. As a
result of this decision, as of January 1, 2002, the Company operates in two
segments, the Front-end Semiconductor Equipment and Services segment and the
Precision Equipment segment. The standard semiconductor products business
component has been reflected in these financial statements as a discontinued
operation and the other business component of JSIs business (semiconductor
process technology services) has been included in the Front-end Semiconductor
Equipment and Services segment.

Results of Consolidated Operations

Total revenues for the three months ended September 30, 2002 and 2001 were
$7,325,395 and $5,447,090, respectively, of which contract revenues accounted
for $6,164,186 and $4,242,075, respectively.
The net loss for the three months ended September 30, 2002 and 2001 was
$(2,836,656) and $(2,555,466), respectively. The loss from continuing
operations for those same periods was $(2,473,656) and $(2,064,377),
respectively.

Total revenues for the nine months ended September 30, 2002 and 2001 were
$17,995,597 and $13,311,632, respectively, of which contract revenues accounted
for $13,959,514 and $8,376,937, respectively. The balance of the revenues
primarily consist of sales of the Companys precision equipment. The net loss
for the nine months ended September 30, 2002 and 2001 was $(4,586,442) and
$(4,027,453), respectively. Loss from continuing operations for those same
periods was $(3,037,581) and $(2,630,046),

15



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##### Table of Contents



respectively, while the loss from operations for those same periods was
$(3,779,472) and $(3,956,526), respectively.

Included in the net loss and loss from continuing operations before income
taxes for the nine months ended September 30, 2002 and 2001 is a gain on the
sale of marketable securities of $1,349,721 and $1,189,273, respectively.
Included in the net loss
and loss from continuing operations for the three and nine months ended
September 30, 2002 are special items of $1,074,324 for charges recorded related to the retirement in August, 2002 of the Companys Chairman
and Chief Executive Officer. Also included in the net loss and loss from
continuing operations for the nine months ended September 30, 2002 is a
deferred income tax expense of $484,423 resulting from an increase in the
valuation allowance against the Companys deferred tax assets. Included in the
net loss and loss from
operations for the three and nine months ended September 30, 2001 are asset
writedowns and special items of $636,000 and $684,000, respectively.
Also, included in the net loss for the nine months ended
September 30, 2002 and 2001 is a loss from operations of
discontinued operations of $1,548,861 and $1,397,407, respectively,
and the net loss for the three months ended September 30, 2002
and 2001 includes a loss from operations of discontinued operations
of $363,000 and $491,089, respectively.

The increase in revenues for the three and nine months ended September 30,
2002 compared to the three and nine months ended September 30, 2001 was
primarily attributable to other contract revenues from JMAR/SAL
NanoLithography, Inc. (JSAL), of $1,209,853 and $3,616,920 for the three and
nine months ended September 30, 2002, respectively, along with an increase in
CPL revenue for the three and nine months of 2002 of $340,670 and $1,770,465,
respectively. JSAL was acquired in August 2001. In 2002, JSAL received an
approximately $10 million contract from Naval Air Warfare Center AD (the
Navair Contract) which accounted for approximately $864,585 and $2,347,079,
respectively, in revenues for the three and nine months ended September 30,
2002.

For the nine months ended September 30, 2002 compared to the nine months
ended September 30, 2001, the increase in contract revenues of $5,582,577 was
offset in part by a decrease in revenues of $1,305,856 of the Companys
precision instrument products in the Precision Equipment Segment. The
Companys precision equipment business continues to suffer from the effects of
the economic downturn on the semiconductor and general technology industries.
The Companys customers and potential customers have slowed down capital
purchasing and in many cases have little visibility over their expected needs
in 2003, absent an economic recovery in the technology sector. The
Company believes that it is positioned to participate in an eventual industry
recovery, but at present the Companys ability to forecast orders for its
precision instrument products continues to be limited due to these continuing
marketplace uncertainties. As a result, the timing of receipt and shipment of
orders could have a material impact on quarterly results.

Total gross margins for the nine months ended September 30, 2002 and 2001
were 21.2% and 23.6%, respectively. Gross margins for product sales for the
nine months ended September 30, 2002 and 2001 were 23.4% and 13.7%,
respectively, and gross margins for contract sales for those two periods were
20.6% and 29.4%, respectively. Total gross margins for the three months ended
September 30, 2002 and 2001 were 17.8% and 15.2%, respectively. Gross margin
(loss) for product sales for the three months ended September 30, 2002 and 2001
were 21.5% and (29.3)%, respectively, and gross margins for contract sales for
those two periods were 17.0% and 27.8%, respectively. The decrease in the
gross margin for contract sales is primarily due to the Navair Contract having
lower margins due to its high subcontract component, and the Companys
absorption of some of the costs incurred due to limited funding on the
contract. The increase in the gross margin for product sales in 2002 was due
primarily to higher inventory reserves in 2001 (increase of $431,000 for both
periods in 2001 compared to 2002) and higher margins on spare parts sales at
JSAL. The Company continues to experience competitive pressures on certain
precision instrument products, which may impact gross margins in the future.

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Selling, general and administrative (SG&A) expenses for the nine months
ended September 30, 2002 and 2001 were $5,273,270 and $4,662,001, respectively.
SG&A expenses for the three months ended September 30, 2002 and 2001 were
$2,225,947 and $1,657,932, respectively. The increase in SG&A expenses for the
third quarter of 2002 is primarily due to an increase in SG&A
costs of approximately $108,000 related to JSAL, which the
Company acquired in August 2001, increased sales and marketing costs
of approximately $96,000 in the
Precision Equipment Segment, an increase of approximately $192,000 in
legal costs, costs of approximately $58,000 related to the
Companys search for a new CEO and increased accounting and tax
services of
approximately $51,000.

The Companys research, development and engineering program (RD&E)
consists of two types: Customer-Funded RD&E (U.S. government and other
companies) and Company-Funded RD&E. Both types of RD&E costs are expensed when
incurred. Customer-Funded RD&E costs incurred, included in Costs of Sales,
totaled $4,299,301 and $2,591,483 for the three months ended September 30, 2002
and 2001, respectively, and $9,530,303 and $4,462,840 for the nine month
periods ended September 30, 2002 and 2001, respectively. The increase in
Customer-Funded RD&E expenditures for the nine months ended September 30, 2002
is related to an increase of approximately $1,795,261 in the collimated plasma
lithography program contract funding provided by DARPA, which is directed
toward development of JMARs CPL technology for the commercial semiconductor
market, and an increase in contract costs of $3,278,405 incurred by JSAL
(approximately $2,337,391 of which is related to the Navair Contract) which was
acquired in August 2001. Company-Funded RD&E costs are shown in Operating
Expenses and totaled $430,705 and $603,861 for the three months ended
September 30, 2002 and 2001, respectively, and $1,247,384 and $1,746,158 for
the nine months ended September 30, 2002 and 2001, respectively. Hence, total
RD&E expenditures for the three month periods were $4,730,006 and $3,195,344
for 2002 and 2001, respectively, and $10,777,687 and $6,208,998 for the nine
month periods in 2002 and 2001, respectively. Total RD&E expenditures as a
percentage of sales were 64.6% and 58.7% for the three months ended September
30, 2002 and 2001, respectively, and 59.9% and 46.6% for the nine months ended
September 30, 2002 and 2001, respectively. These expenditures are primarily
related to the continued development of collimated plasma lithography systems
for the semiconductor industry and other metrology applications, development of
a high efficiency EUV generation system for advanced semiconductor lithography
and the engineering development of higher performance test, measurement and
inspection systems. The Company expects to incur higher Company-Funded RD&E
costs in the near future as its lithography systems get closer to
commercialization. As discussed in Consolidated Liquidity and
Financial Condition, the Company believes that it has available
to it several potential sources of capital to finance these increased
costs, including strategic relationships with semiconductor industry
partners.

Asset writedowns and special items for the three and nine months ended
September 30, 2002 of $1,074,324 is for charges related to the retirement in August,
2002 of the Companys Chairman and Chief Executive Officer. Asset writedowns and special items for the three and
nine months ended September 30, 2001 of $636,000 and $684,000,
respectively, includes $335,000 in asset writedowns related to discontinued
projects and $301,000 and $349,000, respectively, in severance related to
reductions in force and other terminations.

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

The loss from operations of discontinued operations of $1,548,861 for the
nine months ended September 30, 2002 includes $400,000 related to the writedown
of inventory shipped to JSI in the first quarter or held by vendors
at March 31, 2002 and subsequently shipped to JSI, $300,000 in estimated losses under a facility lease (see below)
and $205,000 in costs expected to be incurred subsequent to the discontinuance.
In June 2002, the Company terminated an agreement with Agile Equity to locate
buyers for these JSI chip assets. The Company does not expect to find a buyer
for this business.

As
a result of the Companys decision to discontinue its standard
semiconductor products business, the
Company may have an acceleration of the payment of liabilities, disputed
liabilities may arise, and the Company may incur expenses that it otherwise
would not have incurred. Included in current liabilities in the accompanying
balance sheet as

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of September 30, 2002 is $1,764,436 of liabilities related to the
discontinued operations. These liabilities include amounts owed to
JSIs distributor and vendors, and the amount accrued related to
JSIs leased facility. JSI has sought to negotiate reductions in JSIs
liabilities related to the discontinued operations. In September, 2002, JSIs
distributor initiated a lawsuit to recover approximately $700,000 owing under
its Distributor Agreement with JSI. The distributor has also alleged that it
was fraudulently induced to refrain from terminating the Distributor Agreement
prior to the discontinuance of the JSI standard chip operations. The
distributor is seeking treble damages, which if the fraud is proven, could be
up to $2.1 million above the $700,000 amount claimed. JSI
strongly disputes any claim in
excess of the $700,000 contractual obligation and both the Company and JSI intend to
vigorously contest these claims.

JSI is a separately incorporated entity. The Company invested significant
amounts in JSIs equity in September 1999 and has loaned, principally on a
secured basis, in excess of $9,000,000 to JSI since 1999. JSI is considering
several alternatives to reduce the liabilities related to JSIs discontinued
operations, including legal alternatives to limit the ability of these
JSI creditors to pursue their claims against JSI.

In September 2000, JSI moved into a significantly larger facility in
anticipation of realizing its growth plans. Prior to December 31, 2001, the
Company decided to sublease the facility and move JSI into a smaller facility.
Accordingly, in the fourth quarter of 2001 the Company accrued $547,000, its
estimated loss under that lease. In the quarter ended September 30, 2002, the
Company accrued an additional $300,000 in estimated losses under this lease.
The lease provides for rent and related expenses of approximately $34,000 per
month through August 2005. The Company does not yet have a subtenant for that
facility and, if it is unsuccessful in obtaining a subtenant on acceptable
terms, there could be further losses related to that lease.

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

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

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

Pursuant
to an Employment Agreement with Dr. Martinez, the Companys
former Chairman and Chief Executive Officer, if the
Company delivered notice of its intention not to renew or discontinued his
status of Chairman or CEO, or both, other than for cause, then Dr. Martinezs
employment was to continue for three years at the highest total compensation
rate (including bonuses, director fees and similar payments) he had received in
any previous 12 month period. This amount is approximately $375,000 per annum.
In such event, the Company also agreed to maintain comparable medical insurance
benefits for such three year period. In May, 2002, Dr. Martinez informed the
Board of Directors of his desire to retire. The Board and Dr. Martinez engaged
in discussions regarding Dr. Martinezs future role with the Company. In order
to set a definite date for the transition to a new CEO, in July, 2002, the
Board of Directors exercised the Companys rights under the Employment
Agreement to discontinue Dr. Martinezs status as CEO effective August 16,
2002. Following negotiations between Dr. Martinez and the Board, an agreement
was reached to restructure this payment obligation to spread the payments over
six years to reduce the impact of the original agreement on the Companys cash
flow. In consideration for this modification, the Company will provide
comparable medical insurance benefits for six years, and modified 942,242 of
the options and warrants held by Dr. Martinez to (1) vest all unvested options
and warrants (141,269 options), (2) provide that, in those options that have an
expiration date within the next six years, the early termination provision that
would otherwise have resulted in the termination of the options and warrants 60
days after termination of his employment was waived, and (3) provide that all
remaining options and warrants will expire on the later of August 15, 2008 or
60 days after Dr. Martinez ceases to be a director. The Company recorded a
charge in the third quarter of 2002 in the amount of $1,074,324 resulting from
this event. The charge includes

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$561,517 for the discounted
post-employment payments over six years and
$512,807 for the intrinsic value of Dr. Martinezs options and warrants
resulting from the modification of those options and warrants.

Results of Segment Operations

Front-end Semiconductor Equipment and Services Segment

This segment includes the operations of JMAR Research, Inc. (JRI),
JMAR/SAL NanoLithography, Inc. (JSAL) and the semiconductor process
technology business of JMAR Semiconductor, Inc. (JSI). Revenue for the three
months ended September 30, 2002 as compared to the three months ended September
30, 2001 for the Front-end Semiconductor Equipment and Services Segment
increased $2,065,057 from $4,397,576 to $6,462,633. Revenue for the nine month
period in 2002 as compared to 2001 for this Segment increased $5,989,821 from
$8,667,089 to $14,656,910. This increase is primarily attributable to
$1,209,853 and $3,616,920 for the three and nine months ended September 30,
2002, respectively, of other contract revenues from JSAL, acquired in August
2001, along with an increase in CPL contract revenue (Customer-Funded RD&E) for
the three and nine months of 2002 of $340,670 and $1,770,465, respectively.
Operating income (loss) of the Front-end Semiconductor Equipment and Services
Segment for the three months ended September 30, 2002 as compared to the three
months ended September 30, 2001 decreased $158,493 to a (loss) of $(96,851)
from income of $61,642. Operating income for the nine month period in 2002 as
compared to 2001 for this Segment decreased $140,423 to $136,244 from
$276,667. Despite the higher revenues in 2002 as compared to 2001,
operating income was lower due to a decrease in margins primarily related to a contract with Navair due to its high subcontract component
and the Companys absorption of some of the costs incurred due to
limited funding on the contract.

Precision Equipment Segment

This segment consists of the operations of JMAR Precision Systems, Inc.
(JPSI). Revenues for the nine month period in 2002 as compared to 2001 for
this Segment decreased $1,305,856 from $4,644,543 to $3,338,687. This decrease
in revenue for the nine months was related to the continuing severe economic
downturn primarily in the semiconductor industry which has caused our target
companies to curtail capital equipment purchases. The Company sees this
slowness in customer demand for its precision instrument products continuing
into 2003. Revenue for the three months ended September 30, 2002 as compared
to the three months ended September 30, 2001 for the Precision Equipment
Segment decreased $186,752, from $1,049,514 to $862,762. Operating loss for
the nine month period in 2002 as compared to 2001 for this Segment decreased
$1,163,849 to a loss of $2,841,392 from a loss of $4,005,241. Despite the
significantly lower revenues for the nine months in 2002 as compared to 2001,
the operating loss decreased due to the reduction of employees, other cost
cutting efforts and higher margins in 2002 due primarily to higher
inventory reserves in 2001 (increase of $431,000 for 2001 compared to
2002). The operating loss of the Precision Equipment Segment for the
three months ended September 30, 2002 as compared to the three months ended
September 30, 2001 decreased $854,942 to a loss of $1,258,406 from a loss of
$2,113,348.

Consolidated Liquidity and Financial Condition

Unrestricted cash and cash equivalents at September 30, 2002 and December
31, 2001 were $3,189,616 and $4,115,129, respectively. The decrease in
unrestricted cash and cash equivalents during the nine months ended September
30, 2002 was $925,513. That decrease resulted primarily from cash used in
continuing operations of $2,424,324 primarily related to operating losses
(exclusive of the gain on the sale of the Bede stock) and a decrease in
customer deposits, cash used in discontinued operations of $1,590,832 and
payments under the Companys working capital bank line of $750,000, offset in
part by net proceeds from the issuance of common stock of $1,753,420, proceeds
from the sale of marketable securities of $1,399,746 and a decrease in
restricted cash of $750,000.

During the first quarter of 2002, the Company decided to discontinue and
sell its standard semiconductor products business and shift more of its
resources to accelerate the market entry of its CPL products. This portion of
JSIs business had been a developmental effort,
involving the design, manufacture and introduction of new standard product
semiconductor chips. With the severe downturn in the worldwide semiconductor
market beginning in 2000 and continuing into 2002, JSI had little success in
selling its new standard product chips. The Company determined that substantial
additional capital would have been required for these new chips to become
established in what became an over-supplied chip market, as well as to develop
newer, higher value chips. As a result of the Companys decision to
discontinue this business, the Company may have an acceleration of the payment
of liabilities, disputed liabilities may arise, and the

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Company may incur expenses that it otherwise would not have incurred.
Included in current liabilities in the accompanying balance sheet as of
September 30, 2002 is $1,764,436 of liabilities related to the discontinued
operations. In September 2000, JSI moved into a significantly larger facility
in anticipation of realizing its growth plans. Prior to December 31, 2001, the
Company decided to sublease the facility used by JSI and move JSI into a
smaller facility. Accordingly, in the fourth quarter of 2001 the Company
accrued $547,000, its estimated loss under that lease. In the quarter ended
September 30, 2002, the Company accrued an additional $300,000 in estimated
losses under this lease. The lease provides for rent and related expenses of
approximately $34,000 per month through August 2005. The Company does not yet
have a subtenant for that facility and if it is unsuccessful in obtaining a
subtenant on acceptable terms, there could be further losses related to that
lease.

JMARs operations will continue to require the use of working capital.
Working capital as of September 30, 2002 and December 31, 2001 was $4,900,766
and $7,843,465, respectively. The decrease in working capital is primarily due
to the Companys losses and paydown of the Companys working capital bank line,
offset in part by net proceeds from the issuance of common stock. The working
capital of the Company had generally been funded through its working capital
line (the Line) with Comerica Bank (the Bank) with interest at prime rate
and through third-party contracts. Due to the Companys continued losses, in
November 2001, the Bank reduced the amount of the Line to $3 million and
requires a $3 million compensating balance. Pursuant to this new line of
credit, there are no financial covenants or ratios. The Line expires March 31,
2003. The Company is pursuing alternative banking arrangements, however, there
can be no assurance that the Company will be able to enter into acceptable
alternative banking arrangements.

The
Company has determined that it will require additional financing for
working capital purposes by March 31, 2003 and that it will also require
additional financing to complete or accelerate the development of some of its
high value emerging new products, including its patented CPL systems for the
manufacture of high-performance semiconductors. The Companys
stockholders equity was $10,560,575 as of September 30,
2002. As of November 1,
2002, a continued listing requirement of the Nasdaq National Market System is
the maintenance of no less than $10 million of
stockholders equity. Continued losses without increases in
equity would cause the Company to fall below this NASDAQ requirement
which would require it to come into compliance or face delisting. The
delisting of the Companys stock could adversely affect its
ability to raise funds in the future. The
Company believes that it has available to it several potential sources of
capital for its working capital needs, as well as to meet NASDAQ
listing standards, including private offerings of equity to individual investors and
additional debt or equity sales in the public market, as well as additional
contract funding from both current and new customers for its research and
development programs. The Company is also pursuing opportunities for strategic
relationships with semiconductor industry partners, one of the goals of which
would involve receipt of additional funding, in order to accelerate the
commercialization of its emerging CPL products. However, there can be no
assurance that additional financings will be available when needed, on
favorable terms, or at all.

In October, 2001, the Companys Universal Blank Shelf Registration
Statement with respect to $25 million of Company securities was declared
effective by the Securities and Exchange Commission. The securities that may be
sold under this registration statement may be common stock, preferred stock,
debt, warrants or rights. The Company may sell registered securities in the public
market from time-to-time at its discretion when market conditions are favorable
and at prices that will be negotiated at those times. In March 2002, pursuant
to this Registration Statement, the Company sold 1 million shares of its Common
Stock for gross proceeds of $2 million. In connection with this sale of stock,
the Company issued to the purchasers warrants to purchase 150,000 shares of its
Common Stock at an exercise price of $2.50 per share, expiring in four years.
Also, the Company paid a placement agent fee of 6% of the gross proceeds, a
$25,000 non-accountable expense allowance and warrants to purchase 20,000
shares of the Companys Common Stock at an exercise price of $2.40 per share.
This Form S-3 Registration Statement will no longer be available for the sale of
securities if the Companys market capitalization does not exceed $75 million
when the Companys next Form 10-K is filed (on or before March 31, 2003).

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced Lithography, Inc. (SAL), in a
merger of SAL with and into Subsidiary (Merger). Consideration for the
Merger consisted of an aggregate of 603,051 shares of its Common Stock, $1.2
million in cash and $1.2 million in notes (the Notes). The Notes are
convertible into shares of the Companys Common Stock at a price of $4.302.
The Notes are convertible by the holders at any time and the Company can force
conversion if the average price, as defined, of the Companys Common Stock
during any ten day trading period exceeds $6.45. The Notes bear interest at 8%
and are payable quarterly, with the principal due, if not converted, on February
7, 2004. The shares issued by the Company were unregistered; however, pursuant
to an agreement

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with the SAL shareholders, the Company filed a registration statement with
the Securities and Exchange Commission which became effective in June 2002.
Holders of more than 5,000 shares of JMAR stock have agreed to restrictions on
their sale of those JMAR shares to no more than 25% of their JMAR holdings in
any quarter and to refrain from selling any shares for 60 days upon notice from
JMAR of its intention to negotiate an underwritten public offering.

Under the Merger Agreement, SALs former shareholders and creditors could
earn up to three contingent earnout payments upon the satisfaction of three
earnout conditions. For the first earnout, the SAL creditors were eligible to
receive $500,000 in Convertible Notes upon the satisfaction of a
stepper limited
throughput test (without the CPL light source) by June 30, 2002. This requirement was not met by the June 30, 2002 deadline, and, therefore, the
Company did not have to issue the $500,000 in Convertible Notes. For the
second earnout, the SAL shareholders can earn $500,000 in Convertible Notes
upon the satisfaction of a lithography demonstration milestone. This milestone
must be met 90 days after the CPL light source is delivered by JRI to JSAL.
JRI has built, and is currently testing,
its beta test model CPL source. This source has already met its
fundamental performance requirement, producing an average 20 watts of
1 nm light on a sustained basis. To facilitate the
transition from JRI to JSAL, JSALs technical staff will travel to JRI to participate in operational
reliability testing, to be trained on source operation and maintenance, and to perform demonstrations
of static lithography. The third earnout condition can result in
payment of up to 354,736 JMAR shares and up to $1.2 million in Convertible
Notes upon receipt by the Company of a qualifying order for a CPL system from a
commercial customer and delivery to the customer. Under the Merger Agreement,
the deadline for receipt of this order is 180 days after the CPL source is
delivered to JSAL.

JSI
has sought to negotiate reductions in certain of JSIs liabilities related to the
discontinued operations. As of September 30, 2002, these liabilities amounted
to approximately $1 million. In September, 2002, JSIs distributor initiated a lawsuit to
recover approximately $700,000 owing under its Distributor Agreement with JSI.
The distributor has also alleged that it was fraudulently induced to refrain
from terminating the Distributor Agreement prior to the discontinuance of the
JSI standard chip operations. The distributor is seeking treble damages, which
if the fraud is proven, could be up to $2.1 million above the $700,000 amount
claimed. JSI strongly disputes any claim in excess of the $700,000
contractual obligation
and both the Company and JSI intend to vigorously contest these claims.

JSI is a separately incorporated entity. The Company invested significant
amounts in JSIs equity in September 1999 and has loaned, principally on a
secured basis, in excess of $9,000,000 to JSI since 1999. JSI is considering
several alternatives to reduce the liabilities related to JSIs discontinued
operations, including legal alternatives to limit the ability of these
JSI creditors to pursue their claims against JSI. If the Company is unsuccessful in
obtaining a significant reduction in these liabilities, it will adversely
affect the Companys liquidity.

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

At December 31, 2001, the Company had approximately $39 million of Federal
net operating loss carryforwards subject to certain annual limitations, which
expire from 2004 through 2016. To the extent the Company has taxable income in
the future, these carryforwards may be used by the Company to reduce its cash
outlay for taxes.

Critical Accounting Policies and Estimates

Managements Discussion and Analysis of Financial Condition and Results of
Operations discusses JMARs consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.

On an ongoing basis, management evaluates its estimates and judgments,
including those related to bad debts, inventories, software development costs,
intangible assets including goodwill, income taxes, litigation and warranty
obligations. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which

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form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.

Revenues

Product revenues are generally recognized when the product is shipped and
all risks of ownership have passed to the customer. Contract revenues are
recognized based on the percentage of completion method wherein income is
recognized pro-rata over the life of the contract based on the ratio of total
incurred costs to anticipated total costs of the contract. Actual costs could
differ from these estimated costs. Estimated losses are fully charged to
operations when identified.

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

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

Allowances for doubtful accounts

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

Inventory reserves

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

Capitalized software

The Companys policy for the treatment of software development costs are
based on Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. In accordance with SFAS No. 86, costs incurred internally in
creating a computer software product are charged to expense when incurred until
technological feasibility has been established, at which time such costs are
capitalized. Technological feasibility is established upon completion

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of a detail program design. Thereafter, the Company reports the costs at the
lower of amortized cost or net realizable value. The Company annually compares the
unamortized cost to the net realizable value and writes-off the amount by which
the unamortized capitalized costs exceed the net realizable value. Amortization
is calculated based on the greater of the amount capitalized as a percentage of
estimated revenues over the total estimated revenues for the software as a
whole, or on a straight line basis, based on the estimated useful life of the
products. Software development costs currently being amortized are being
amortized using the straight line basis over three years. Capitalization of
software development costs cease when the product is available for general
release to customers. General release is typically when the product is first
shipped to a distributor and available for sale.

Goodwill and intangible assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002, the Company has established reporting units and
applies a two-step fair value approach to evaluating goodwill impairment, using
at least an annual assessment. The Company compares the fair value of the
business unit with the carrying amount of the assets associated with the
business unit. The fair value of each business unit is determined using a risk
adjusted discount rate to compute a net present value of estimated future cash
flows. The second step measures the amount of the impairment, if any.

Deferred taxes

JMAR records a valuation allowance to reduce its deferred tax assets to
the amount that management believes is more likely than not to be realized in
the foreseeable future, based on estimates of foreseeable future taxable income
and taking into consideration historical operating information. In the event
management estimates that it will not be able to realize all or part of its net
deferred tax assets in the foreseeable future, a valuation allowance is
recorded through a charge to income in the period such determination is made.
Likewise, should management estimate that it will be able to realize its
deferred tax assets in the future in excess of its net recorded asset, an
adjustment to reduce the valuation allowance would increase income in the
period such determination is made.

Litigation accrual

Estimated amounts for litigation reserves that are probable and can be
reasonably estimated are recorded as liabilities. Estimates are based upon the
facts and circumstances of each case and, in part, on advice from legal counsel
regarding probable outcomes, if determinable. Management reviews its estimates
on a quarterly basis.

Warranty reserve

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

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

Certain statements contained in this Form 10-Q which are not related to
historical results, including statements regarding JMARs future sales or
profit growth, competitive position or products, projects or processes
currently under development, the ability of the Company to successfully
introduce those products into the commercial marketplace or to apply those
products, projects or processes to alternative applications and the
availability of future bank or equity investor financing are forward-looking
statements that necessarily are based on certain assumptions and are subject to
certain risks and uncertainties that could cause actual future performance and
results to differ materially from those stated or implied in the
forward-looking statements. These risks and uncertainties include the lack of
funds to continue development and commercialization of our CPL products in
accordance with our proposed schedule of product introductions, due to delays
in funding of government contracts and delays in securing, or inability to
secure, other financing, whether from the public or private debt or equity
markets or from commercial lenders or otherwise. Other risks include
concentration of sales to certain markets and customers, such as the
semiconductor industry, delays in shipments or cancellations of orders, failure
of expected orders to materialize, fluctuations

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in margins, timing of future orders, lack of availability of critical
components, customer reorganizations, failure of advanced technology and new
intellectual property to perform as predicted, the failure of pending patents
to be issued, delays in development, introduction and acceptance of new
products, changing business and economic conditions in various geographic
regions, technical obsolescence of existing products, technical problems in the
development or modification of current products or manufacturing processes, the
impact of competitive products and pricing, including the risk that the EUV LLC
is successful in developing an acceptable next generation lithography process
that becomes the process of choice for the semiconductor industry or that the
semiconductor industry fails to adopt CPL as the lithography alternative, the
degree of success of technology transfer (e.g., advanced lithography sources,
etc.) to commercial products, availability of working capital to support
growth, continued government funding of advanced lithography, successful
integration of acquisitions, declining credit markets, other competitive
factors and temporary cessation of operations at one or more of its division
facilities due to natural events such as floods, earthquakes and fires, and
other risks detailed in the Companys Form 10-K for the year ended December 31,
2001, in the Companys Form S-3/A filed on May 31, 2002 and in the Companys
other filings with the Securities and Exchange Commission.




Item 3.Quantitative and Qualitative Disclosures About Market Risk.

The Companys exposure to interest rate risk is minimal due to the
relatively small amount of investments and variable rate debt. The Company has
no investments in derivative financial instruments.




Item 4.Controls and Procedures

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Companys Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is
accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and the
Companys Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures. Based on the
foregoing, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective.

There have been no significant changes in the Companys internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date the Company completed its evaluation.

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PART II  OTHER INFORMATION

Item 1. Legal Proceedings

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| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Anorad Lawsuit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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| | In April, 2001, JMAR Precision Systems, Inc. (JPSI), a subsidiary of
JMAR Technologies, Inc. (JMAR) 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. In October, Anorad filed a
Complaint in Los Angeles Superior Court against Mr. Rao, JPSI and JMAR
seeking a Temporary Restraining Order and a Preliminary Injunction
against Mr. Rao, JPSI and JMAR 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. In November, 2001, a preliminary
injunction was issued enjoining all defendants from using any Anorad
confidential information that might be in their possession and requiring
the return of the same, if any, to Anorad. The preliminary injunction
also prohibited Mr. Rao or his agents from calling upon, contacting or
soliciting business from any present or former customers of Anorad whose
identity Mr. Rao learned while at Anorad. This restriction does not
preclude Mr. Rao, JMAR or JPSI from calling upon, contacting or soliciting
business or customers of Anorad who have also been customers of JMAR or
JPSI before Mr. Rao joined JPSI. This matter was stayed by the Court
pending arbitration of any claims between Anorad and Mr. Rao. In May,
2002, the plaintiff dismissed Rao without prejudice and the Court lifted
the stay to allow discovery to re-commence. The parties are in
settlement discussions. Mr. Rao, JMAR and JPSI each denies that it
possesses or has used any Anorad trade secrets and are vigorously
contesting these claims.
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| | JMAR Semiconductor (JSI) Liabilities and the All American Lawsuit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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| | Following the discontinuance of JSIs standard chip business in the
first quarter of 2002, JSI sought to negotiate debt reductions from the
creditors associated with the discontinued portion of its business. JSI
was a party to a Distributor Agreement with All American
Semiconductor, Inc. (All American) under which All
American had purchased approximately
$700,000 of JSI chips. In accordance with generally accepted
accounting principles, that transaction was reflected as deferred
revenue (a liability) and not as revenue pending sale to the ultimate
customer. Under the terms of the agreement, if All American properly
terminated the distribution agreement, it had the right to require JSI
to repurchase those chips. Soon after the announcement by JMAR that JSI
had discontinued its standard chip business, All American gave notice of
termination of the Distributor Agreement and returned the JSI
semiconductor chips it held, allegedly creating an obligation on JSIs
part to repay approximately $700,000 to All American. The $700,000
claim of All American is included in the total of approximately $1.8
million of JSI liabilities that are included in JMARs Consolidated
Balance Sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In September, 2002, a Complaint was filed by All American against JSI and JMAR in San Diego
Superior Court. The Complaint alleges that JSI owes All American
approximately $700,000. The Complaint also alleges that All American
was induced to refrain from terminating the agreement until the JSI
business had been discontinued. All American claims that such actions
constituted fraud and that it is entitled to treble (triple)
damages. All American has also alleged that JMAR is the
alter ego of JSI and, therefore, should be held responsible for the
obligations of JSI. While recognizing that the approximately $700,000
in indebtedness may be owed by JSI to All American under the agreement,
JSI asserts that the obligations are merely of a contractual nature and
strongly disputes that any of the actions taken constitute fraud. JMAR
also disputes that it is the alter ego of JSI in light of the fact
that JSI is a separately incorporated entity that has been more than
adequately capitalized over its years of operations. JMAR claims that
there is insufficient evidence to support the alter ego theory and
believes that it will ultimately prevail on this issue. JMAR and JSI
intend to vigorously contest any claims by All American that it is owed
more than $700,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If JSI is unsuccessful in negotiating acceptable debt reductions from
All American and its other creditors, JSI may pursue various legal
alternatives to limit the ability of these JSI creditors to pursue their
claims against JSI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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| | Tyson Foods Lawsuit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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| | In August, 2002, JMAR Precision Systems, Inc. (JPSI) was served with a
Complaint naming Adco and JPSI as defendants related to the sale by Adco
to Tyson of packaging machines that contain certain JPSI components. The
Complaint alleges a claim of breach of implied warranty of
merchantability against JPSI and Adco. The Complaint also alleges
claims against Adco (and not JPSI) of breach of warranty of fitness for
a particular purpose, breach of express warranty and breach of contract
for a particular purpose. The JPSI components sold to Adco represent
approximately $20,000-$30,000 of the total costs of the system sold by
Adco to Tyson. The Complaint seeks incidental, consequential and
compensatory damages arising from the alleged malfunctioning of two
packaging systems purchased by Tyson from Adco for $436,601. The
Complaint also alleges that $80,000 has been incurred in repair,
training and technical support costs. It is unclear from the
Complaint how much of the alleged damages Tyson is seeking from JPSI,
as opposed to the other co-defendant. JMAR believes that it has
insurance coverage for some or most of any defense costs and awards that
might arise from this suit. Notwithstanding the filing of this lawsuit,
JMAR continues to work with Tyson to resolve its equipment issues.




Item 2. Changes in Securities

| |                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c)(i) Pursuant to the Board Member Compensation Program adopted by the
Company in August 1997, the Company issued a total of 1,475 shares of
Common Stock to its outside directors as compensation for services as
directors in August, 2002. These transactions were exempt under Section
4(2) of the Securities Act of 1933 (the Act).                                      
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| | (c)  (ii) As a part of the 2002 incentive plans for the JMAR Research
division and the JMAR Precision Systems division, non-qualified options
to purchase 200,000 and 70,000 shares, respectively, were granted out of
non-shareholder approved plans to key employees of JMAR Research and
JMAR Precision Systems. These transactions were exempt under Section
4(2) of the Act.




Item 5. Other Information

| |                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has deemed the Presidents of its operating subsidiaries to be executive officers of the Company. The following changes in the executive officers
of the Company occurred in the third and fourth quarters:                                                                                                                                                                                  
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| | As of September 13, 2002,
Marvin W. Sepe is no longer President of JMAR Semiconductor, Inc.
(JSI). Larry Johnson has been elected as President of JSI.
Mr. Sepes employment will terminate on November 30, 2002.                                                                                                                                                                                     
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| | Prior to November 8, 2002,
John H. Carosella held the positions of Senior Vice President,
Corporate Development of the Company and President of JMAR Research,
Inc. (JRI). As of November 8, 2002, Mr. Carosellas employment terminated and he no longer is an executive officer of the Company.
Ronald A. Walrod, the Companys Chief Executive Officer, has assumed the duties of President of JRI.




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits



| |  |  | Exhibit 10.1 Agreement between the Company and John S. Martinez dated September 16, 2002.
| |  |  | -----------------------------------------------------------------------------------------
|
| |  |  | Exhibit 99.1 Certificate pursuant to section 906 of the Sarbanes-Oxley Act of 2002.      

(b)  Reports on Form 8-K

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company filed a Report on Form 8-K on July 22, 2002 related to the
announcement of the impending retirement of John S. Martinez, the
Companys Chief Executive Officer. The Company filed a Report on Form
8-K on August 13, 2002 related to the appointment of Grant Thornton LLP
as its certifying accountant. The Company filed a Report on Form 8-K on
August 14, 2002 related to the certifications required by the
Sarbanes-Oxley Act of 2002.

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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, 2002 |  | By: |  | /s/ Ronald A. WalrodRonald A. Walrod,
Chief Executive Officer and Authorized Officer
|                 
|                  |  | By: |  | /s/ Dennis E. ValentineDennis E. Valentine,
Chief Accounting Officer                

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Ronald A. Walrod, certify that:

1) I have reviewed this quarterly report on Form 10-Q of JMAR
Technologies, Inc.;

2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;

3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report;

4) The registrants other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:



| | a)   designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b)   evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date), and                                                                                                  
|
| | c)   presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5) The registrants other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrants auditors and the
audit committee of the registrants board of directors:



| | a)   all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b)   any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        

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6) The registrants other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

|                  |  |     |  |                                         
|----------------- |  | --- |  | ----------------------------------------
|                  |  | By: |  | /s/ Ronald A. Walrod                    
|                  |  |     |  |                                         
|                  |  |     |  | Ronald A. Walrod
Chief Executive Officer
|                 
|                 
|                 
|                 
|November 14, 2002 |  |     |  |                                         

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Dennis E. Valentine, certify that:

1) I have reviewed this quarterly report on Form 10-Q of JMAR
Technologies, Inc.;

2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4) The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| | a)   designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b)   evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date), and                                                                                                  
|
| | c)   presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5) The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors:



| | a)   all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b)   any fraud, whether or not
material, that involves management or
other employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6) The registrants other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                  |  |                                            
|----------------- |  | -------------------------------------------
|                  |  | By: /s/ Dennis E. Valentine                
|                  |  |                                            
|                  |  | Dennis E. Valentine
Chief Financial Officer
|                 
|                 
|                 
|                 
|November 14, 2002 |  |                                            

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