##### 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 June 30, 2001
Commission File Number 1-10515

| |  |                                                        |  | 
| |  | ------------------------------------------------------ |  | 
| |  | JMAR TECHNOLOGIES, INC                                 |  | 
| |  |                                                        |  | 
| |  | (Exact name of registrant as specified in its charter) |  | 

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

| |  |                                                                                                                   |  | 
| |  | ----------------------------------------------------------------------------------------------------------------- |  | 
| |  | 5800 Armada Drive
Carlsbad, CA 92008
(760) 602-3292                                                               |  | 
| |  |                                                                                                                   |  | 
| |  | (Address, including zip code and telephone number including
area code of registrants principal executive office) |  | 

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

Yes [X] No [   ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date (August 8, 2001).

Common Stock, $.01 par value: 22,855,117 shares





---

TABLE OF CONTENTS



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

INDEX

|         |  |                                                                                                                                       |  |        |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | -- | 
|         |  |                                                                                                                                       |  | Page #
|         |  |                                                                                                                                       |  |       
|PART I.  |  | FINANCIAL INFORMATION                                                                                                                 |  |       
|        
|        
|        
|        
|Item 1.  |  | Financial Statements                                                                                                                  |  |       
|        
|        
|        
|        
|         |  | Consolidated Balance Sheets  June 30, 2001 and December 31, 2000                                                                     |  |        | 2 
|        
|        
|        
|        
|         |  | Consolidated Statements of Operations  Three months ended
June 30, 2001 and 2000 and six months ended June 30, 2001 and 2000         |  |        | 3 
|        
|        
|        
|        
|         |  | Consolidated Statements of Comprehensive Loss  Three months ended
June 30, 2001 and 2000 and six months ended June 30, 2001 and 2000 |  |        | 4 
|        
|        
|        
|        
|         |  | Consolidated Statements of Cash Flows  Six months ended
June 30, 2001 and 2000                                                       |  |        | 5 
|        
|        
|        
|        
|         |  | Notes to Consolidated Financial Statements                                                                                            |  |        | 6 
|        
|        
|        
|        
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                                 |  |        | 10
|        
|        
|        
|        
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                            |  |        | 13
|        
|        
|        
|        
|PART II. |  | OTHER INFORMATION                                                                                                                     |  |       
|        
|        
|        
|        
|Item 1.  |  | N/A                                                                                                                                   |  |        |   
|        
|        
|        
|        
|Item 2.  |  | Changes in Securities                                                                                                                 |  |        | 15
|        
|        
|        
|        
|Item 3.  |  | N/A                                                                                                                                   |  |        |   
|        
|        
|        
|        
|Item 4.  |  | N/A                                                                                                                                   |  |        |   
|        
|        
|        
|        
|Item 5.  |  | N/A                                                                                                                                   |  |        |   
|        
|        
|        
|        
|Item 6.  |  | Reports on Form 8-K                                                                                                                   |  |        | 15

1



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##### Table of Contents









PART I  FINANCIAL INFORMATION

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

|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |             |            | 
|--------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------- | ---------- | ----------------- | --------- | ----------- | ---------- | 
|                                                                      |                                                                                                                                                                 |                                            |           | June 30, 2001 |            | December 31, 2000
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                  
|                                                                      |                                                                                                                                                                 |                                            |           | (Unaudited)   |            |                   |           |            
|ASSETS                                                                |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Current Assets:                                                       |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Cash and cash equivalents                                                                                                                                       |                                            | $         | 9,793,857     |            |                   | $         | 9,856,768   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accounts receivable, net                                                                                                                                        |                                            |           | 4,282,609     |            |                   |           | 6,904,638   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Notes and other receivables                                                                                                                                     |                                            |           | 20,123        |            |                   |           | 57,383      |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Inventories                                                                                                                                                     |                                            |           | 7,115,463     |            |                   |           | 6,310,628   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Marketable securities available for sale                                                                                                                        |                                            |           | 1,312,468     |            |                   |           | 2,657,418   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Prepaid expenses and other                                                                                                                                      |                                            |           | 599,464       |            |                   |           | 1,163,543   |           
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                      |                                                                                                                                                                 | Total current assets                       |           |               | 23,123,984 |                   |           |             | 26,950,378 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Property and equipment, net                                           |                                                                                                                                                                 |                                            | 3,625,282 |               |            |                   | 3,291,477 |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other assets, net                                                     |                                                                                                                                                                 |                                            | 5,776,057 |               |            |                   | 3,649,218 |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Goodwill, net                                                         |                                                                                                                                                                 |                                            | 251,832   |               |            |                   | 300,501   |            
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                      |                                                                                                                                                                 | TOTAL ASSETS                               |           | $             | 32,777,155 |                   |           | $           | 34,191,574 | 
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                  |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Current Liabilities:                                                  |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accounts payable                                                                                                                                                |                                            | $         | 1,266,351     |            |                   | $         | 2,223,642   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accrued liabilities                                                                                                                                             |                                            |           | 1,178,316     |            |                   |           | 888,490     |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accrued payroll and related costs                                                                                                                               |                                            |           | 950,640       |            |                   |           | 1,003,687   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Line of credit                                                                                                                                                  |                                            |           | 3,000,000     |            |                   |           | 1,100,000   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Notes payable                                                                                                                                                   |                                            |           | 442,452       |            |                   |           | 191,178     |           
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                      |                                                                                                                                                                 | Total current liabilities                  |           |               | 6,837,759  |                   |           |             | 5,406,997  | 
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|Notes payable and other long-term liabilities, net of current portion |                                                                                                                                                                 |                                            | 238,368   |               |            |                   | 339,908   |            
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|Stockholders equity:                                                 |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Preferred stock, $.01 par value;
5,000,000 shares authorized; none issued and outstanding
as of June 30, 2001 and December 31, 2000                             |                                            |           |              |            |                   |           |            |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 22,252,066 as of June 30, 2001 and
22,224,650 shares as of December 31, 2000 |                                            |           | 222,521       |            |                   |           | 222,247     |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Additional-paid in capital                                                                                                                                      |                                            |           | 52,683,341    |            |                   |           | 52,628,372  |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accumulated other comprehensive income                                                                                                                          |                                            |           | 1,262,443     |            |                   |           | 2,589,340   |           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accumulated deficit                                                                                                                                             |                                            |           | (28,467,277   | )          |                   |           | (26,995,290 | )         
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                      |                                                                                                                                                                 | Total stockholders equity                 |           |               | 25,701,028 |                   |           |             | 28,444,669 | 
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |            
|                                                                      |                                                                                                                                                                 | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |           | $             | 32,777,155 |                   |           | $           | 34,191,574 | 
|                                                                      |                                                                                                                                                                 |                                            |           |               |            |                   |           |            

2



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##### Table of Contents






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

|                                                                   |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |           |           | 
|------------------------------------------------------------------ | ------------------------------------- | ------------ | ---------- | ------------------ | ------- | ---------------- | ---------- | ------------- | --------- | ------------- | ---------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                                                                   |                                       |              |            | Three Months Ended |         | Six Months Ended
|                                                                   |                                       |              |            |                    |         |                 
|                                                                   |                                       |              |            | June 30, 2001      |         | June 30, 2000    |            | June 30, 2001 |           | June 30, 2000
|                                                                   |                                       |              |            |                    |         |                  |            |               |           |              
|Sales                                                              |                                       | $            | 3,318,379  |                    |         | $                | 5,167,577  |               |           | $             | 7,864,542  |           |           | $ | 9,966,622  |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Costs of sales                                                     |                                       |              | 2,345,895  |                    |         |                  | 3,377,090  |               |           |               | 5,676,534  |           |           |   | 6,529,708  |          
|                                                                   |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |          
|                                                                   |                                       | Gross profit |            |                    | 972,484 |                  |            |               | 1,790,487 |               |            |           | 2,188,008 |   |            |           | 3,436,914 | 
|                                                                   |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |          
|Operating expenses:                                                |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Selling, general and
administrative   |              |            | 1,980,601          |         |                  |            | 1,569,068     |           |               |            | 3,838,849 |           |   |            | 3,197,892 |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Research, development and
engineering |              |            | 698,869            |         |                  |            | 509,552       |           |               |            | 1,142,297 |           |   |            | 1,048,480 |          
|                                                                   |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |          
|                                                                   | Total operating expenses              |              |            | 2,679,470          |         |                  |            | 2,078,620     |           |               |            | 4,981,146 |           |   |            | 4,246,372 |          
|                                                                   |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |          
|Loss from operations                                               |                                       |              | (1,706,986 | )                  |         |                  | (288,133   | )             |           |               | (2,793,138 | )         |           |   | (809,458   | )        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Other income (expense), net                                        |                                       |              | 1,184,294  |                    |         |                  | (32,384    | )             |           |               | 1,180,318  |           |           |   | (44,255    | )        
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Interest income                                                    |                                       |              | 64,322     |                    |         |                  | 137,944    |               |           |               | 167,827    |           |           |   | 174,984    |          
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Interest expense                                                   |                                       |              | (19,176    | )                  |         |                  | (15,457    | )             |           |               | (26,994    | )         |           |   | (99,897    | )        
|                                                                   |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |          
|Net loss                                                           |                                       | $            | (477,546   | )                  |         | $                | (198,030   | )             |           | $             | (1,471,987 | )         |           | $ | (778,626   | )        
|                                                                   |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |          
|Basic and diluted net loss per share                               |                                       | $            | (.02       | )                  |         | $                | (.01       | )             |           | $             | (.07       | )         |           | $ | (.04       | )        
|                                                                   |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |          
|Basic and diluted shares used in
computation of net loss per
share |                                       |              | 22,238,799 |                    |         |                  | 22,117,686 |               |           |               | 22,229,419 |           |           |   | 20,802,005 |          
|                                                                   |                                       |              |            |                    |         |                  |            |               |           |               |            |           |           |   |            |          

3



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##### Table of Contents






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

|                                 |                                                 |   |                    |         |                  |   |               |   |               |   |            |         |   |   |          |   | 
|-------------------------------- | ----------------------------------------------- | - | ------------------ | ------- | ---------------- | - | ------------- | - | ------------- | - | ---------- | ------- | - | - | -------- | - | 
|                                 |                                                 |   | Three Months Ended |         | Six Months Ended
|                                 |                                                 |   |                    |         |                 
|                                 |                                                 |   | June 30, 2001      |         | June 30, 2000    |   | June 30, 2001 |   | June 30, 2000
|                                 |                                                 |   |                    |         |                  |   |               |   |              
|Net loss                         |                                                 | $ | (477,546           | )       |                  | $ | (198,030      | ) |               | $ | (1,471,987 | )       |   | $ | (778,626 | )
|                                
|                                
|                                
|                                
|Other comprehensive gain (loss): |                                                 |   |                    |         |                  |   |               |   |               |   |            |         |   |   |          |  
|                                
|                                
|                                
|                                
|                                 | Unrealized gain (loss) on
marketable securities |   |                    | 459,426 |                  |   |               |  |               |   |            | (46,878 | ) |   |          |  | 
|                                 |                                                 |   |                    |         |                  |   |               |   |               |   |            |         |   |   |          |  
|Comprehensive loss               |                                                 | $ | (18,120            | )       |                  | $ | (198,030      | ) |               | $ | (1,518,865 | )       |   | $ | (778,626 | )
|                                 |                                                 |   |                    |         |                  |   |               |   |               |   |            |         |   |   |          |  

4



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##### Table of Contents






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

|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |            |            |            |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------- | ---------- | ---------------- | ---------- | ------------- | ---------- | ---------- | ---------- | -
|                                                     |                                                                             |                                                            |                                           |            | Six Months Ended
|                                                     |                                                                             |                                                            |                                           |            |                 
|                                                     |                                                                             |                                                            |                                           |            | June 30, 2001    |            | June 30, 2000
|                                                     |                                                                             |                                                            |                                           |            |                  |            |              
|Cash flows from operating activities:                |                                                                             |                                                            |                                           |            |                  |            |               |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                    |                                                            | $                                         | (1,471,987 | )                |            | $             | (778,626   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                                            |                                           |            |                  |            |               |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Depreciation and amortization                              |                                           |            | 736,365          |            |               |            | 477,712    |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Services received in exchange for common stock or warrants |                                           |            | 2,400            |            |               |            | 2,403      |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Gain on sale of marketable securities                      |                                           |            | (1,189,273       | )          |               |            |           |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Change in assets and liabilities:                                           |                                                            |                                           |            |                  |            |               |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | (Increase) decrease in:                                    |                                           |            |                  |            |               |            |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Accounts receivable, net                                   |                                           |            | 2,622,029        |            |               |            | (14,572    | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Inventories                                                |                                           |            | (804,835         | )          |               |            | 57,573     |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Prepaid expenses and other                                 |                                           |            | 73,637           |            |               |            | (174,658   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Other assets                                               |                                           |            |                 |            |               |            | (51,835    | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Decrease in:                                               |                                           |            |                  |            |               |            |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Accounts payable and accrued liabilities                   |                                           |            | (720,512         | )          |               |            | (1,157,178 | )         
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           
|                                                     |                                                                             |                                                            | Net cash used in operating activities     |            |                  | (752,176   | )             |            |            | (1,639,181 | )
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           
|Cash flows from investing activities:                |                                                                             |                                                            |                                           |            |                  |            |               |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Expenditures for software development                                       |                                                            |                                           | (1,223,674 | )                |            |               | (851,698   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of marketable securities                                 |                                                            |                                           | 1,207,923  |                  |            |               |           |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Capital expenditures                                                        |                                                            |                                           | (759,018   | )                |            |               | (889,003   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Other assets                                                                |                                                            |                                           | (563,914   | )                |            |               | (248,717   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payments received on notes receivable                                       |                                                            |                                           | 7,738      |                  |            |               | 8,706      |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Increase in notes receivable                                                |                                                            |                                           |           |                  |            |               | (692,973   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Patent costs                                                                |                                                            |                                           | (78,516    | )                |            |               | (32,190    | )         
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           
|                                                     |                                                                             |                                                            | Net cash used in investing activities     |            |                  | (1,409,461 | )             |            |            | (2,705,875 | )
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           
|Cash flows from financing activities:                |                                                                             |                                                            |                                           |            |                  |            |               |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net borrowings (payments) under line of credit                              |                                                            |                                           | 1,900,000  |                  |            |               | (4,990,000 | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net borrowings (payments) of notes payable
and other long-term liabilities  |                                                            |                                           | 149,734    |                  |            |               | (48,977    | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net proceeds from the exercise of options and warrants                      |                                                            |                                           | 48,992     |                  |            |               | 16,004,975 |           
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           
|                                                     |                                                                             |                                                            | Net cash provided by financing activities |            |                  | 2,098,726  |               |            |            | 10,965,998 |  
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           
|Net (decrease) increase in cash and cash equivalents |                                                                             |                                                            | (62,911                                   | )          |                  |            | 6,620,942     |           
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of period       |                                                                             |                                                            | 9,856,768                                 |            |                  |            | 2,323,127     |           
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           
|Cash and cash equivalents, end of period             |                                                                             | $                                                          | 9,793,857                                 |            |                  | $          | 8,944,069     |           
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           
|Non-cash Item:                                       |                                                                             |                                                            |                                           |            |                  |            |               |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Change in unrealized gains in marketable securities                         |                                                            | $                                         | (46,878    | )                |            | $             |           |           
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           
|Cash paid for interest                               |                                                                             | $                                                          | 26,828                                    |            |                  | $          | 30,166        |           
|                                                     |                                                                             |                                                            |                                           |            |                  |            |               |           

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

(1) Basis of Presentation and
Financial Condition

The accompanying consolidated financial statements include the accounts of
JMAR Technologies, Inc. (the Company) and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared by
the Company and are unaudited except for the balance sheet as of December 31,
2000. The financial statements have been prepared in accordance with generally
accepted accounting principles, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying consolidated financial statements include all adjustments of a
normal recurring nature which are necessary for a fair presentation of the
results for the interim periods presented. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted pursuant to such rules and regulations.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Although
the Company believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Companys Form 10-K for the year ended December 31,
2000. The results of operations for the three and six months ended June 30,
2001 are not necessarily indicative of the results to be expected for the full
year.

Management believes that the Company has adequate
resources to fund operations and working capital requirements through the end of 2001 based on the
current level of operations and business conditions.  However, the Company has determined that it may
require additional financing for working capital needs in early 2002 and that it will require additional
financing to complete or accelerate the development of some of its high value emerging new products,
including new communications semiconductor products and its patented PXS point X-ray sources for
lithography for the semiconductor industry and other metrology applications.  In addition to the above
financing needs, additional funds could be required for future
acquisitions should the Company elect
to pursue such acquisitions.  The Company believes that it has available to it several potential
sources of capital including private offerings to individual investors and additional debt or equity
sales in the public market as well as additional contract funding
from both current and new customers for its research and development
services.  The Company also intends to pursue opportunities for strategic
relationships, which may include additional funding, in order to accelerate the commercialization
of its emerging products.  However, there can be no assurance that additional financings will be
available when needed, on favorable terms, or at all.

(2) New Accounting Standards

The Company has adopted Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133, which is effective for fiscal years after June 15, 2000, and
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, unless specific
hedge accounting criteria are met. The Companys adoption of SFAS 133 did not
have a material impact on its financial statements because it does not
currently hold any derivative instruments and does not engage in any hedging
activities.

On July 20, 2001, the Financial Accounting Standards Board issued
Statement No. 141 (SFAS 141), Business Combinations, and Statement No. 142
(SFAS 142), Goodwill and Other Intangible Assets. SFAS 141 addresses the
accounting for acquisitions of businesses and is effective for acquisitions
occurring on or after July 1, 2001. SFAS 142 addresses the method of
identifying and measuring goodwill and other intangible assets acquired in a
business combination, eliminates further amortization of goodwill, and requires
periodic evaluations of impairment of goodwill balances. In addition, the
useful lives of recognized intangible assets acquired in transactions completed
before July 1, 2001 will be reassessed and the remaining amortization periods
adjusted accordingly. SFAS 142 is effective January 1, 2002.

Based on the values assigned to goodwill as of June 30, 2001, the Company
expects that the elimination of goodwill amortization would have a positive
impact on reported net income for the year ended December 31, 2002 of
approximately $97,000. The Company is currently assessing the impact of adoption of
SFAS 141 and SFAS 142 on other intangible assets and the respective impact on
the consolidated results of operations, financial position and cash flows.

6



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

(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 June 30, 2001 and December 31, 2000, inventories
consisted of the following:

|                                             |  |               |           |                   |  |           |           | 
|-------------------------------------------- |  | ------------- | --------- | ----------------- |  | --------- | --------- | 
|                                             |  | June 30, 2001 |           | December 31, 2000
|                                             |  |               |           |                  
|                                             |  |               |           |                   |  | (Audited)
|                                            
|                                            
|                                            
|                                            
|Raw materials, components and sub-assemblies |  | $             | 4,516,977 |                   |  | $         | 4,622,923 | 
|                                            
|                                            
|                                            
|                                            
|Work-in-process                              |  |               | 2,044,230 |                   |  |           | 1,655,989 | 
|                                            
|                                            
|                                            
|                                            
|Finished goods                               |  |               | 554,256   |                   |  |           | 31,716    | 
|                                             |  |               |           |                   |  |           |           | 
|                                             |  | $             | 7,115,463 |                   |  | $         | 6,310,628 | 
|                                             |  |               |           |                   |  |           |           | 

(4) Property and Equipment

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

|                              |  |               |            |                   |  |           |            |  
|----------------------------- |  | ------------- | ---------- | ----------------- |  | --------- | ---------- | -
|                              |  | June 30, 2001 |            | December 31, 2000
|                              |  |               |            |                  
|                              |  |               |            |                   |  | (Audited)
|                             
|                             
|                             
|                             
|Equipment and machinery       |  | $             | 6,830,762  |                   |  | $         | 6,255,944  |  
|                             
|                             
|                             
|                             
|Furniture and fixtures        |  |               | 965,365    |                   |  |           | 792,350    |  
|                             
|                             
|                             
|                             
|Leasehold improvements        |  |               | 354,003    |                   |  |           | 342,818    |  
|                              |  |               |            |                   |  |           |            |  
|                              |  |               | 8,150,130  |                   |  |           | 7,391,112  |  
|                             
|                             
|                             
|                             
|Less-accumulated depreciation |  |               | (4,524,848 | )                 |  |           | (4,099,635 | )
|                              |  |               |            |                   |  |           |            |  
|                              |  | $             | 3,625,282  |                   |  | $         | 3,291,477  |  
|                              |  |               |            |                   |  |           |            |  

(5) Segment Information

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

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

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

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

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

|                                  |                |  |                  |            |              |  |               |           |       |  |   |            |  |  |   |            |  
|--------------------------------- | -------------- |  | ---------------- | ---------- | ------------ |  | ------------- | --------- | ----- |  | - | ---------- |  |  | - | ---------- | -
|                                  |                |  |                  |            |              |  | Semiconductor |           |       |  |   |            |  |  |  
|                                  |                |  | Microelectronics |            | Products and |  |               |           |       |  |   |            | 
|                                  |                |  | Equipment        |            | Processes    |  | Corporate     |           | Total
|                                  |                |  |                  |            |              |  |               |           |      
|Six Months Ended
June 30, 2001:   |                |  |                  |            |              |  |               |           |       |  |   |            |  |  |   |           
|                                 
|                                 
|                                 
|                                 
|                                  | Revenues       |  | $                | 6,532,096  |              |  | $             | 1,332,446 |       |  | $ |           |  |  | $ | 7,864,542  |  
|                                 
|                                 
|                                 
|                                 
|                                  | Operating loss |  |                  | (1,948,626 | )            |  |               | (844,512  | )     |  |   |           |  |  |   | (2,793,138 | )
|                                 
|                                 
|                                 
|                                 
|                                  | Total assets   |  |                  | 13,937,214 |              |  |               | 8,638,669 |       |  |   | 10,201,272 |  |  |   | 32,777,155 |  
|                                 
|                                 
|                                 
|                                 
|Three Months Ended
June 30, 2001: |                |  |                  |            |              |  |               |           |       |  |   |            |  |  |   |           
|                                 
|                                 
|                                 
|                                 
|                                  | Revenues       |  | $                | 2,617,510  |              |  | $             | 700,869   |       |  | $ |           |  |  | $ | 3,318,379  |  
|                                 
|                                 
|                                 
|                                 
|                                  | Operating loss |  |                  | (1,334,077 | )            |  |               | (372,909  | )     |  |   |           |  |  |   | (1,706,986 | )
|                                 
|                                 
|                                 
|                                 
|Six Months Ended
June 30, 2000:   |                |  |                  |            |              |  |               |           |       |  |   |            |  |  |   |           
|                                 
|                                 
|                                 
|                                 
|                                  | Revenues       |  | $                | 7,992,123  |              |  | $             | 1,974,499 |       |  | $ |           |  |  | $ | 9,966,622  |  
|                                 
|                                 
|                                 
|                                 
|                                  | Operating loss |  |                  | (689,384   | )            |  |               | (120,074  | )     |  |   |           |  |  |   | (809,458   | )
|                                 
|                                 
|                                 
|                                 
|                                  | Total assets   |  |                  | 15,829,420 |              |  |               | 4,643,752 |       |  |   | 9,239,063  |  |  |   | 29,712,235 |  
|                                 
|                                 
|                                 
|                                 
|Three Months Ended
June 30, 2000: |                |  |                  |            |              |  |               |           |       |  |   |            |  |  |   |           
|                                 
|                                 
|                                 
|                                 
|                                  | Revenues       |  | $                | 4,317,420  |              |  | $             | 850,157   |       |  | $ |           |  |  | $ | 5,167,577  |  
|                                 
|                                 
|                                 
|                                 
|                                  | Operating loss |  |                  | (198,207   | )            |  |               | (89,926   | )     |  |   |           |  |  |   | (288,133   | )

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

(6) Comprehensive Loss

SFAS No. 130 Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses). This statement requires that an enterprise: (a)
classify items of other comprehensive income by their nature in a financial
statement; and (b) display the accumulated balance of other comprehensive
income separately from stockholders equity in the equity section of a balance
sheet. In accordance with SFAS No. 115, for the three months and six months ended June 30, 2001,
the Company had an unrealized gain (loss) on marketable securities of $459,426 and
$(46,878), respectively resulting in a comprehensive loss for the three and six
months ended June 30, 2001 of $18,120 and $1,518,865, respectively. The
unrealized gain (loss) for the three and six months ended June 30, 2001,
respectively, represents the difference in market value of the Companys
investment in Bede plc (Bede) between March 31,
2001 and June 30, 2001, and December 31, 2000 and June 30, 2001, respectively.
For the three and six months ended June 30, 2000, the Company did not have any
elements of comprehensive income or loss, and therefore, there was no
difference in the Companys net loss and comprehensive loss for those periods.

In April 2001, the Company sold 500,000 shares of its investment in Bede
for net proceeds of approximately $1.2 million. The net proceeds and gain from
that transaction have been reported in this 10-Q filing.

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##### Table of Contents



(7) Subsequent Event

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced
Lithography, Inc. (SAL), a Delaware corporation, in a merger of SAL with and
into Subsidiary (Merger). Consideration for the Merger consisted of an
aggregate of 603,051 shares of its Common Stock, $1.2 million in cash and $1.2 million in notes (the Notes).
The Notes are convertible into shares of the Companys Common
Stock at a price of $4.302. The Notes are convertible by the holders at any time and, after six months from the closing, the
Company can force conversion if the average price, as defined, of the Company's Common Stock during any
ten day trading period exceeds $6.45.  The shares issued by the Company
are unregistered; however, the Company has agreed to file a registration
statement with the Securities and Exchange Commission by November 5, 2001 and
use its reasonable efforts to obtain its effectiveness. The holders have
agreed to restrictions on their sale of those JMAR shares to no more than 25%
of their JMAR holdings in any quarter and to refrain from selling any shares
for 60 days upon notice from JMAR of its intention to negotiate an underwritten
public offering. In addition, SALs former shareholders and creditors could
receive as contingent earnout consideration up to 354,736 shares of the
Companys Common Stock and up to $2.2 million of Convertible Notes upon
achievement of certain technical and market milestones over the next
17 months.
The Company will account
for the Acquisition as a purchase and, accordingly, results of
operations of SAL will be included
as of August 7, 2001.

The following unaudited proforma information gives effect to the
acquisition of SAL as if the acquisition occurred on January 1 of each
respective proforma period. In connection with the Acquisition, SAL entered
into agreements with several of its creditors which reduced the related
liabilities due those creditors by approximately $8,000,000. Such debt
reductions will not be reflected in the statement of operations of the Company.
The proforma loss from continuing operations excludes any impact, other than
interest expense, from the debt settlements of SAL directly attributable to the
Acquisition. The pro forma information includes amortization of a
preliminary estimate of goodwill that would have been recorded prior
to the issuance of SFAS Nos. 141 and 142. The Company is in the
process of determining the preliminary fair values of the net
tangible and intangible assets acquired and will record the
transaction in accordance with SFAS No. 141 during the third
quarter of 2001. Pursuant to SFAS No. 141, goodwill resulting
from the SAL acquisition will not be amortized. These statements do not purport to be indicative of the results
of operations which actually would have occurred had the acquisition of SAL
occurred on January 1 of each respective period or which may be expected to
occur in the future.

|                                |  |                                   |            |      |  |   |            |  
|------------------------------- |  | --------------------------------- | ---------- | ---- |  | - | ---------- | -
|                                |  | For the Six Months Ended June 30,
|                                |  |                                  
|                                |  | 2000                              |            | 2001
|                                |  |                                   |            |     
|Total revenues                  |  | $                                 | 10,223,000 |      |  | $ | 8,309,000  |  
|                                |  |                                   |            |      |  |   |            |  
|Loss from continuing operations |  | $                                 | (1,979,000 | )    |  | $ | (2,335,000 | )
|                                |  |                                   |            |      |  |   |            |  
|Loss per share                  |  | $                                 | (.09       | )    |  | $ | (.10       | )
|                                |  |                                   |            |      |  |   |            |  

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

Item 2.

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

Results of Consolidated Operations

Revenues for the three months ended June 30, 2001 were $3,318,379 compared
with $5,167,577 for the three months ended June 30, 2000. The Companys net
loss increased from a net loss of $198,030 for the three months ended June 30,
2000 to a net loss of $477,546 for the three months ended June 30, 2001. For
the six months ended June 30, 2001, revenues were $7,864,542 compared with
$9,966,622 for the six month period ended June 30, 2000. Net loss for the
first half of 2001 and 2000 was $1,471,987 and $778,626, respectively.

The decline in revenues for the second quarter of 2001 was attributable to
a significant drop in shipments of the Companys precision instrument products
related to the severe economic downturn which has caused companies to curtail
capital equipment purchases.

The Companys ability to forecast orders for its precision instrument
products and semiconductor chips continues to be limited due to continuing
marketplace uncertainties which often impedes customers abilities to
accurately forecast their needs. As a result, the timing of receipt and
shipment of orders could have a material impact on quarterly results in 2001.

Gross margins for the six months ended June 30, 2001 and 2000 were 27.8%
and 34.5%, respectively. This decrease was due primarily to competitive
pressures on product pricing, the need to increase inventory reserves
($150,000) and amortization of software development costs ($173,193 increase to
costs of sales in 2001 versus 2000). The Company believes that JSI will evolve
from a lower profit margin contract semiconductor development business to a
higher margin commercial business focused on the communications semiconductor
products markets. As this evolution progresses, JMAR expects its overall gross
profit margins to improve. The Company also expects that as its patented,
laser-driven advanced light products enter the marketplace and gain acceptance,
they will also substantially improve gross profit margins.

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

Selling, general and administrative (SG&A) expenses for the three months
ended June 30, 2001 and 2000 were $1,980,601 and $1,569,068, respectively, and
were $3,838,849 and $3,197,892 for the six months ended June 30, 2001 and 2000,
respectively. The increase in SG&A expenses in 2001 is primarily due to an
increase in sales and marketing costs in the Semiconductor Products and
Processes Segment due to the buildup of the sales and marketing infrastructure
related to the Companys market entry of its new semiconductor standard
products.

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 are expensed when
incurred. Customer-Funded RD&E costs incurred, included in Costs of Sales,
totaled $825,590 and $1,065,621 for the three months ended June 30, 2001 and
2000, respectively, and $1,871,357 and $1,690,274 for the six month periods
ended June 30, 2001 and 2000, respectively. The increase in Customer-Funded
RD&E expenditures for the six months ended June 30, 2001 is related to an
increase of approximately $335,000 in the X-ray lithography program contract
funding provided by the Defense Advanced Research Projects Agency, most of
which is directed toward development of JMARs X-

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##### Table of Contents



ray lithography source technology for the commercial semiconductor market,
offset in part, by a decrease related to the Companys contract for the
development of a unique microcircuit architecture and devices for the
replacement of obsolete integrated circuits. Company-Funded RD&E costs are
shown in Operating Expenses and totaled $698,869 and $509,552 for the three
months ended June 30, 2001 and 2000, respectively, and
$1,142,297 and $1,048,480
for the six months ended June 30, 2001 and 2000, respectively. Hence, total
RD&E expenditures for the three month periods were $1,524,459 and $1,575,173
for 2001 and 2000, respectively, and $3,013,654 and $2,738,754 for the six
month periods in 2001 and 2000, respectively. In addition to these RD&E
expenditures, capitalized software development costs were $524,845 and $397,344
for the three months ended June 30, 2001 and 2000, respectively, and $1,223,674
and $851,698 for the six months ended June 30, 2001 and 2000, respectively.
Combining capitalized software development costs and RD&E costs, these
expenditures as a percentage of sales were 61.8% and 38.2% for the three months
ended June 30, 2001 and 2000, respectively, and 53.9% and 36.0% for the six
months ended June 30, 2001 and 2000, respectively. These expenditures are
primarily related to the continued development of point X-ray sources (PXS)
for lithography for the semiconductor industry and other metrology
applications, the continued development of new communications semiconductor
products, development of a high efficiency EUV generation system for advanced
semiconductor lithography, the development of new software for the Companys
test and measurement systems and the engineering development of higher
performance test, measurement and inspection systems for the semiconductor,
optical network and biomedical industries.

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

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

Results of Segment Operations

Microelectronics Equipment Segment

Revenue for the three months ended June 30, 2001 as compared to the three
months ended June 30, 2000 for the Microelectronics Equipment Segment decreased
from $4,317,420 to $2,617,510. Revenue for the six month period in 2001 as
compared to 2000 for this Segment decreased from $7,992,123 to $6,532,096. This
decrease is attributable to a decrease in revenues of the Companys precision
instrument products, offset in part by an increase in X-ray lithography
contract revenues. Because of the lower revenues and lower margins of certain
of the Companys precision instrument products, the operating loss of the
Microelectronics Equipment Segment for the three months ended June 30, 2001 as
compared to the three months ended June 30, 2000 increased from $198,207 to
$1,334,077. Operating loss for the six month period in 2001 as compared to
2000 for this Segment increased from $689,384 to $1,948,626.

Semiconductor Products and Processes Segment

Revenue of the Semiconductor Products and Processes (SPP) Segment for the
three months ending June 30, 2001 compared to the three months ending June 30,
2000 decreased from $850,157 to $700,869. Revenue for the six month period in
2001 as compared to 2000 for this Segment decreased from $1,974,499 to
$1,332,446. This decrease is attributable to the general worldwide slowdown in
the semiconductor industry which, coupled with unforeseen delays in new product
testing and qualification processes in Taiwan, significantly slowed the planned
sales buildup and market entry of JSIs new standard products. Revenues were
also impacted by the planned reassignment of certain engineering assets from
contract chip development work to internally-funded commercial product
development and marketing activities. The SPP Segment incurred an operating
loss of $372,909 for the quarter ended June 30, 2001 compared with a loss of
$89,926 for the prior year quarter. Operating loss for the six month period in
2001 as compared to 2000 for this Segment increased from $120,074 to $844,512.
The increased operating loss was caused by a combination of the lower sales
revenues as well as the build-up at JSI of the sales and marketing staff and
engineering and administrative functions related to the development and planned
introduction of the Companys new commercial semiconductor products.

11



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Consolidated Liquidity and Financial Condition

Cash and cash equivalents at June 30, 2001 and December 31, 2000 were
$9,793,857 and $9,856,768, respectively. The net decrease in cash and cash
equivalents during the six months ended June 30, 2001 was $62,911. That
decrease resulted primarily from expenditures for software development of
$1,223,674, capital expenditures of $759,018, cash used in operations of
$752,176, foundry license costs of $200,000, mask costs of $232,000 and patent
costs of $78,516 offset in part by borrowings under the Companys working
capital bank line of $1,900,000, proceeds from the sale of marketable
securities of $1,207,923 and borrowings of notes payable of $149,734.

JMARs operations will continue to require the use of working capital. The
working capital of the Company has generally been funded through its $5,000,000
working capital line (the Line) with Comerica Bank (the Bank) with interest
at prime rate and through third-party contracts. Advances on the Line are
based on a formula of 80 percent of eligible accounts receivable, 35 percent of
eligible inventories (up to $2.5 million) and up to $500,000 for certain
foreign receivables. The Line contains several covenants relating to, among
other matters, the maintenance of certain minimum income/loss levels and
financial ratios, which, if not met by the Company, could impact the
availability of advances pursuant to the Line. As of June 30, 2001, the
availability pursuant to the Line was $3.1 million, of which the Company had borrowed $3 million, and the Company was in
compliance with all of the covenants under the Line. Assuming operating losses continue at the same rate, the Company anticipates that it will
be in violation of the profitability covenant at September 30, 2001.  Subsequent to June 30, 2001, the
Company repaid the outstanding balance on the Line.

Management believes that the Company has adequate resources to fund
operations and working capital requirements through the end of 2001 based on
the current level of operations and business conditions. However, the Company has determined that it may require additional financing for working capital
needs in early 2002 and that it may require additional financing to complete or
accelerate the development of some of its high value emerging new products,
including new communications semiconductor products and its patented PXS point
X-ray sources for lithography for the semiconductor industry and other
metrology applications. In addition to the above financing needs, additional
funds could be required for future acquisitions should the Company elect to
pursue such acquisitions. The Company believes that it has available to it
several potential sources of capital including private offerings to individual
investors and additional debt or equity sales in the public market as
well as additional contract funding from both current and new
customers for its research and development services. The
Company also intends to pursue opportunities for strategic relationships, which
may include additional funding, in order to accelerate the commercialization of
its emerging products. However, there can be no assurance that additional
financings will be available when needed, on favorable terms, or at all.

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

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced Lithography, Inc. (SAL), a Delaware corporation,
in a merger of SAL with and into Subsidiary (Merger). Consideration for the Merger consisted of an
aggregate of 603,051 shares of its Common Stock, $1.2 million in cash and $1.2 million in notes (the Notes). The Notes are convertible into shares of the
Companys Common Stock at a price of $4.302. The Notes are convertible by the holders at any time and,
after six months from the closing, the Company can force conversion if the average price, as defined, of
the Company's Common Stock during any ten day trading period exceeds $6.45.  The shares issued by the Company are unregistered; however, the Company has agreed to file a registration
statement with the Securities and Exchange Commission by November 5, 2001 and
use its reasonable efforts to obtain its effectiveness. The holders have
agreed to restrictions on their sale of those JMAR shares to no more than 25%
of their JMAR holdings in any quarter and to refrain from selling any shares
for 60 days upon notice from JMAR of its intention to negotiate an underwritten
public offering. In addition, SALs former shareholders and creditors could
receive as contingent earnout consideration up to 354,736 shares of the
Companys Common Stock and up to $2.2 million of Convertible Notes upon
achievement of certain technical and market milestones over the next 17

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months. In connection with the Merger, JMAR agreed to provide working capital loans to SAL from time to time up to a maximum
of $1.2 million through June 30, 2002 for working capital to build its X-ray steppers
to be integrated with JMARs X-ray sources.

In 2001, the Company was awarded an additional $9 million of contract
funding for its X-ray lithography program from the U.S. Army Research
Laboratory sponsored by the Defense Advanced Research Projects Agency. Some of
these funds, plus additional government funding expected later in 2001, will
help finance the construction of an X-ray stepper at SAL.

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

At December 31, 2000, the Company had in excess of $28 million of Federal
net operating loss carryforwards, subject to certain annual limitations, which
expire from 2004 through 2015. To the extent the Company has taxable income in
the future, these carryforwards may be used by the Company to reduce its cash
outlay for taxes.

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

Certain statements contained in this Form 10-Q which are not related to
historical results, including statements regarding JMARs future sales or
profit growth, competitive position or products, projects or processes
currently under development, the ability of the Company to successfully
introduce those products into the commercial marketplace or to apply those
products, projects or processes to alternative applications and the
availability of future bank or equity investor financing are forward-looking
statements that necessarily are based on certain assumptions and are subject to
certain risks and uncertainties that could cause actual future performance and
results to differ materially from those stated or implied in the
forward-looking statements. These risks and uncertainties include
concentration of sales to certain markets and customers, such as the
semiconductor and telecommunications industries, delays in shipments or
cancellations of orders, failure of expected orders to materialize,
fluctuations in margins, timing of future orders, lack of availability of
critical components, customer reorganizations, failure of advanced technology
and new intellectual property to perform as predicted, the failure of pending
patents to be issued, uncertainties associated with the timing of the funding
of government contracts, fluctuations in demand, delays in development,
introduction and acceptance of new products, changing business and economic
conditions in various geographic regions, technical obsolescence of existing
products, technical problems in the development or modification of current
products or manufacturing processes, the impact of competitive products and
pricing, including the risk that the EUV LLC is successful in developing an
acceptable next generation lithography process that becomes the process of
choice for the semiconductor industry or that the semiconductor industry fails
to adopt X-ray lithography as the lithography alternative, shifts in demand for
the Companys products, the degree of success of technology transfer (e.g.,
advanced lithography sources, etc.) to commercial products, availability of
working capital to support growth, continued government funding of advanced
lithography, successful integration of acquisitions, declining credit markets,
other competitive factors and temporary cessation of operations at one or more
of its division facilities due to natural events such as floods, earthquakes
and fires, and other risks detailed in the Companys Form 10-K for the year
ended December 31, 2000, in the Companys Form 8-K filed on February 15, 2000
and in the Companys other filings with the Securities and Exchange Commission.




Item 3.Quantitative and Qualitative Disclosures About Market Risk.

As of June 30, 2001, the Company owned 545,500 shares of Bede plc
(Bede). Since its initial placement in November, 2000, the
Bede shares have been traded on the London Stock Exchange. To date, the low
and high of Bede shares has been 1.10 British pounds and 2.25 British pounds.
JMARs Bede investment is subject to foreign exchange risk because it is valued
in foreign currency (British pounds) and changes in the foreign exchange rate
will result in changes in the dollar-denominated value of the Bede investment
on the Companys consolidated financial statements. As of June 30, 2001, the
potential change in fair value of the Bede investment assuming a 10%
unfavorable change in the underlying foreign exchange rates would be a
reduction in the unrealized gain of approximately $114,000.

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

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

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PART II  OTHER INFORMATION



|Item 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 408 shares of
Common Stock to its outside directors as compensation for services as
directors in May 2001. These transactions were exempt under Section
4(2) of the Securities Act of 1933.                                                                                                                                                                                                
|       
|        |  | (ii) In April 2001, the Company issued to sixteen employees of JMAR
Research, Inc. warrants exercisable into an aggregate of 92,000 shares
of Common Stock at an exercise price of $3.25 per share. The warrants
were issued in a transaction exempt under Section 4(2) of the Securities
Act of 1933. One-third of the warrants are exercisable on January 1,
2002, one-third are exercisable on January 1, 2003 and the remaining
one-third are exercisable on January 1, 2004. The warrants expire on
January 1, 2011.






|Item 6. |  | Reports on Form 8-K                                                                 
|------- |  | ------------------------------------------------------------------------------------
|       
|        |  | (b) Reports on Form 8-K                                                             
|       
|        |  | There were no reports filed on Form 8-K during the three months ended June 30, 2001.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                |                                                                  |                     
|--------------- | ---------------------------------------------------------------- | --------------------
|                | JMAR TECHNOLOGIES, INC.                                         
|               
|August 13, 2001 | By:                                                              | /s/ John S. Martinez
|                |                                                                 
|                | John S. Martinez, Chief Executive Officer
and Authorized Officer

| |                                               |                        
| | --------------------------------------------- | -----------------------
| | By:                                           | /s/ Dennis E. Valentine
| |                                              
| | Dennis E. Valentine, Chief Accounting Officer

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