##### 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, 2003
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 o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

|             
|-------------
|Yes o    No x

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date (August 11, 2003).

Common Stock, $.01 par value:
25,316,328 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.                          
|                               | Item 4. Controls and Procedures.                                                             
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings.                                                                   
|                               | Item 2. Changes in Securities.                                                               
|                               | Item 4. Submission of Matters to a Vote of Security Holders.                                 
|                               | Item 6. Exhibits and Reports on Form 8-K.                                                    
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  



---



##### Table of Contents



INDEX

|         |  |                                                                                       |  |                                                                                                                                                   |    |        |   | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- | -- | ------ | - | 
|         |  |                                                                                       |  |                                                                                                                                                   |    | Page #
|         |  |                                                                                       |  |                                                                                                                                                   |    |       
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                                                                   |    |       
|Item 1.  |  | Financial Statements                                                                  |  |                                                                                                                                                   |    |       
|         |  |                                                                                       |  | Consolidated Balance Sheets  June 30, 2003 (unaudited) and December 31, 2002                                                                     |    |        | 2 | 
|         |  |                                                                                       |  | Consolidated Statements of Operations (unaudited)  Three months ended June 30, 2003 and 2002
and six months ended June 30, 2003 and 2002         |    |        | 3 | 
|         |  |                                                                                       |  | Consolidated Statements of Comprehensive Loss (unaudited)  Three months ended June 30, 2003
and 2002 and six months ended June 30, 2003 and 2002 |    |        | 4 | 
|         |  |                                                                                       |  | Consolidated Statements of Cash Flows (unaudited)  Six months ended June 30, 2003 and 2002                                                       |    |        | 5 | 
|         |  |                                                                                       |  | Notes to Consolidated Financial Statements (unaudited)                                                                                            |    |        | 6 | 
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                                                                                   | 15 |       
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                                                   | 24 |       
|Item 4.  |  | Controls and Procedures                                                               |  |                                                                                                                                                   | 24 |       
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                                                                                   |    |       
|Item 1.  |  | Legal Proceedings                                                                     |  |                                                                                                                                                   | 24 |       
|Item 2.  |  | Changes in Securities                                                                 |  |                                                                                                                                                   | 25 |       
|Item 3.  |  | N/A                                                                                   |  |                                                                                                                                                   |    |       
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                                                                   | 25 |       
|Item 5.  |  | N/A                                                                                   |  |                                                                                                                                                   |    |       
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                                                   | 25 |       

1



---



##### Table of Contents






PART I  FINANCIAL INFORMATION




JMAR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
As of June 30, 2003 and December 31, 2002

|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |             |            | 
|------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------- | ---------- | ----------------- | --------- | ----------- | ---------- | 
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           | June 30, 2003 |            | December 31, 2002
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                  
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           | (Unaudited)   |            |                   |           |            
|ASSETS                                                                                           
|Current Assets:                                                                                   |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|                                                                                                  | Cash and cash equivalents                                                                                                                                                                                                                 |                                            | $         | 2,144,825     |            |                   | $         | 2,246,264   |           
|                                                                                                  | Restricted cash                                                                                                                                                                                                                           |                                            |           | 668,416       |            |                   |           | 1,550,000   |           
|                                                                                                  | Accounts receivable, net                                                                                                                                                                                                                  |                                            |           | 2,500,459     |            |                   |           | 2,894,393   |           
|                                                                                                  | Inventories                                                                                                                                                                                                                               |                                            |           | 381,358       |            |                   |           | 389,467     |           
|                                                                                                  | Current assets held for sale                                                                                                                                                                                                              |                                            |           | 744,061       |            |                   |           | 1,349,758   |           
|                                                                                                  | Prepaid expenses and other                                                                                                                                                                                                                |                                            |           | 813,995       |            |                   |           | 524,863     |           
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|                                                                                                  |                                                                                                                                                                                                                                           | Total current assets                       |           |               | 7,253,114  |                   |           |             | 8,954,745  | 
|Property and equipment, net                                                                       |                                                                                                                                                                                                                                           |                                            | 957,011   |               |            |                   | 1,248,198 |            
|Intangible assets, net                                                                            |                                                                                                                                                                                                                                           |                                            | 743,487   |               |            |                   | 930,056   |            
|Other assets                                                                                      |                                                                                                                                                                                                                                           |                                            | 196,253   |               |            |                   | 197,754   |            
|Goodwill, net                                                                                     |                                                                                                                                                                                                                                           |                                            | 3,790,907 |               |            |                   | 3,790,907 |            
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|                                                                                                  |                                                                                                                                                                                                                                           | TOTAL ASSETS                               |           | $             | 12,940,772 |                   |           | $           | 15,121,660 | 
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                             
|Current Liabilities:                                                                              |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|                                                                                                  | Accounts payable                                                                                                                                                                                                                          |                                            | $         | 1,932,795     |            |                   | $         | 1,864,405   |           
|                                                                                                  | Accrued liabilities                                                                                                                                                                                                                       |                                            |           | 804,665       |            |                   |           | 1,558,307   |           
|                                                                                                  | Accrued payroll and related costs                                                                                                                                                                                                         |                                            |           | 583,269       |            |                   |           | 797,987     |           
|                                                                                                  | Customer deposits                                                                                                                                                                                                                         |                                            |           | 145,277       |            |                   |           | 832,607     |           
|                                                                                                  | Line of credit and notes payable                                                                                                                                                                                                          |                                            |           | 3,135,954     |            |                   |           | 1,556,405   |           
|                                                                                                  | Current liabilities of assets held for sale, including notes payable                                                                                                                                                                      |                                            |           | 2,195,118     |            |                   |           | 3,125,151   |           
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|                                                                                                  |                                                                                                                                                                                                                                           | Total current liabilities                  |           |               | 8,797,078  |                   |           |             | 9,734,862  | 
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|Notes payable and other long-term liabilities, net of current portion                             |                                                                                                                                                                                                                                           |                                            | 510,192   |               |            |                   | 1,708,804 |            
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|Redeemable convertible preferred stock, 133,261 shares issued and
outstanding as of June 30, 2003 |                                                                                                                                                                                                                                           |                                            | 794,509   |               |            |                   |          |            
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|Stockholders equity:                                                                             |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|                                                                                                  | Preferred stock, $.01 par value; 5,000,000 shares authorized; 133,261 shares
issued and outstanding as of June 30, 2003 included in redeemable
convertible preferred stock above, and none issued and outstanding as of
December 31, 2002 |                                            |           |              |            |                   |           |            |           
|                                                                                                  | Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 24,718,728 shares as of June 30, 2003 and
23,852,024 shares as of December 31, 2002                                                                    |                                            |           | 247,188       |            |                   |           | 238,520     |           
|                                                                                                  | Additional-paid in capital                                                                                                                                                                                                                |                                            |           | 58,262,616    |            |                   |           | 56,636,991  |           
|                                                                                                  | Accumulated deficit                                                                                                                                                                                                                       |                                            |           | (55,670,811   | )          |                   |           | (53,197,517 | )         
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|                                                                                                  |                                                                                                                                                                                                                                           | Total stockholders equity                 |           |               | 2,838,993  |                   |           |             | 3,677,994  | 
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            
|                                                                                                  |                                                                                                                                                                                                                                           | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |           | $             | 12,940,772 |                   |           | $           | 15,121,660 | 
|                                                                                                  |                                                                                                                                                                                                                                           |                                            |           |               |            |                   |           |            

The accompanying notes to these consolidated financial statements are an
integral part of these consolidated balance sheets.

2



---



##### Table of Contents






JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2003 and 2002
and Six Months Ended June 30, 2003 and 2002
(Unaudited)

|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |           |            |           | 
|------------------------------------------------------------------------ | -------------------------------------------------- | ------- | ------------ | --------- | ------------------ | ------- | ---------------- | --------- | ------------- | --------- | ------------- | --------- | ---------- | --------- | ---------- | --------- | ---------- | --------- | 
|                                                                         |                                                    |         |              |           | Three Months Ended |         | Six Months Ended
|                                                                         |                                                    |         |              |           |                    |         |                 
|                                                                         |                                                    |         |              |           | June 30, 2003      |         | June 30, 2002    |           | June 30, 2003 |           | June 30, 2002
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |              
|Sales                                                                    |                                                    | $       | 5,027,654    |           |                    | $       | 4,585,622        |           |               | $         | 9,761,368     |           |            | $         | 8,194,277  |          
|Costs of sales                                                           |                                                    |         | 4,055,835    |           |                    |         | 3,117,815        |           |               |           | 7,878,565     |           |            |           | 5,679,378  |          
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|                                                                         |                                                    |         | Gross profit |           |                    | 971,819 |                  |           |               | 1,467,807 |               |           |            | 1,882,803 |            |           |            | 2,514,899 | 
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|Operating expenses:                                                      |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|                                                                         | Selling, general and administrative                |         |              | 1,219,960 |                    |         |                  | 1,390,313 |               |           |               | 2,393,570 |            |           |            | 2,492,176 |           
|                                                                         | Asset writedown                                    |         |              | 200,056   |                    |         |                  |          |               |           |               | 200,056   |            |           |            |          |           
|                                                                         | Research and development                           |         |              | 119,323   |                    |         |                  | 190,341   |               |           |               | 221,832   |            |           |            | 383,132   |           
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|                                                                         | Total operating expenses                           |         |              | 1,539,339 |                    |         |                  | 1,580,654 |               |           |               | 2,815,458 |            |           |            | 2,875,308 |           
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|Loss from operations                                                     |                                                    |         | (567,520     | )         |                    |         | (112,847         | )         |               |           | (932,655      | )         |            |           | (360,409   | )        
|Realized gain on sale of marketable securities                           |                                                    |         |             |           |                    |         |                 |           |               |           |              |           |            |           | 1,349,721  |          
|Interest and other income                                                |                                                    |         | 42,866       |           |                    |         | 20,285           |           |               |           | 66,457        |           |            |           | 38,514     |          
|Interest and other expense                                               |                                                    |         | (125,700     | )         |                    |         | (60,054          | )         |               |           | (230,826      | )         |            |           | (117,846   | )        
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|Income (loss) from continuing operations
before income taxes             |                                                    |         | (650,354     | )         |                    |         | (152,616         | )         |               |           | (1,097,024    | )         |            |           | 909,980    |          
|Income tax expense                                                       |                                                    |         |             |           |                    |         | (484,423         | )         |               |           |              |           |            |           | (484,423   | )        
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|Income (loss) from continuing operations                                 |                                                    |         | (650,354     | )         |                    |         | (637,039         | )         |               |           | (1,097,024    | )         |            |           | 425,557    |          
|Loss from operations of discontinued
operations                          |                                                    |         | (686,830     | )         |                    |         | (365,126         | )         |               |           | (1,146,817    | )         |            |           | (2,175,343 | )        
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|Net loss                                                                 |                                                    |         | (1,337,184   | )         |                    |         | (1,002,165       | )         |               |           | (2,243,841    | )         |            |           | (1,749,786 | )        
|Preferred stock dividends                                                |                                                    |         | (224,030     | )         |                    |         |                 |           |               |           | (229,453      | )         |            |           |           |          
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|Loss applicable to common stock                                          |                                                    | $       | (1,561,214   | )         |                    | $       | (1,002,165       | )         |               | $         | (2,473,294    | )         |            | $         | (1,749,786 | )        
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|Basic and diluted income (loss) per share:                               |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|                                                                         | Income (loss) per share from continuing
operations |         | $            | (0.03     | )                  |         | $                | (0.03     | )             |           | $             | (0.05     | )          |           | $          | 0.02      |           
|                                                                         | Loss per share from discontinued
operations        |         |              | (0.03     | )                  |         |                  | (0.01     | )             |           |               | (0.05     | )          |           |            | (0.10     | )         
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|Basic and diluted loss per share applicable to
common stock              |                                                    | $       | (0.06        | )         |                    | $       | (0.04            | )         |               | $         | (0.10         | )         |            | $         | (0.08      | )        
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|Shares used in computation of basic and
diluted income (loss) per share: |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|                                                                         |                                                    | Basic   |              |           | 24,236,140         |         |                  |           | 23,841,609    |           |               |           | 24,065,809 |           |            |           | 23,103,559 |          
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          
|                                                                         |                                                    | Diluted |              |           | 24,236,140         |         |                  |           | 23,841,609    |           |               |           | 24,065,809 |           |            |           | 23,998,349 |          
|                                                                         |                                                    |         |              |           |                    |         |                  |           |               |           |               |           |            |           |            |          

The accompanying notes to these consolidated financial statements are an
integral part of these consolidated statements.

3



---



##### Table of Contents






JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three Months Ended June 30, 2003 and 2002
and Six Months Ended June 30, 2003 and 2002
(Unaudited)

|                          |                                                            |   |                    |   |                  |   |               |   |               |   |            |   |  |   |            |            |  
|------------------------- | ---------------------------------------------------------- | - | ------------------ | - | ---------------- | - | ------------- | - | ------------- | - | ---------- | - |  | - | ---------- | ---------- | -
|                          |                                                            |   | Three Months Ended |   | Six Months Ended
|                          |                                                            |   |                    |   |                 
|                          |                                                            |   | June 30, 2003      |   | June 30, 2002    |   | June 30, 2003 |   | June 30, 2002
|                          |                                                            |   |                    |   |                  |   |               |   |              
|Net loss                  |                                                            | $ | (1,337,184         | ) |                  | $ | (1,002,165    | ) |               | $ | (2,243,841 | ) |  | $ | (1,749,786 | )         
|                          |                                                            |   |                    |   |                  |   |               |   |               |   |            |   |  |   |            |           
|Other comprehensive loss: |                                                            |   |                    |   |                  |   |               |   |               |   |            |   |  |   |            |           
|                          | Holding loss on marketable securities                      |   |                    |  |                  |   |               |  |               |   |            |  |  |   |            | (75,143    | )
|                          | Reclassification adjustment for
gains included in net loss |   |                    |  |                  |   |               |  |               |   |            |  |  |   |            | (1,349,721 | )
|                          |                                                            |   |                    |   |                  |   |               |   |               |   |            |   |  |   |            |           
|                          | Other comprehensive loss                                   |   |                    |  |                  |   |               |  |               |   |            |  |  |   |            | (1,424,864 | )
|                          |                                                            |   |                    |   |                  |   |               |   |               |   |            |   |  |   |            |           
|Comprehensive loss        |                                                            | $ | (1,337,184         | ) |                  | $ | (1,002,165    | ) |               | $ | (2,243,841 | ) |  | $ | (3,174,650 | )         
|                          |                                                            |   |                    |   |                  |   |               |   |               |   |            |   |  |   |            |           

The accompanying notes to these consolidated financial statements are an
integral part of these consolidated statements.

4



---



##### Table of Contents






JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2003 and 2002
(Unaudited)

|                                               |                                                                                                              |                                                |                                          |            |               |          |               |            |            |            |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ---------------------------------------------- | ---------------------------------------- | ---------- | ------------- | -------- | ------------- | ---------- | ---------- | ---------- | -
|                                               |                                                                                                              |                                                |                                          |            | June 30, 2003 |          | June 30, 2002
|                                               |                                                                                                              |                                                |                                          |            |               |          |              
|Cash flows from operating activities:          |                                                                                                              |                                                |                                          |            |               |          |               |           
|                                               | Income (loss) from continuing operations                                                                     |                                                | $                                        | (1,097,024 | )             |          | $             | 425,557    |           
|                                               | Adjustments to reconcile income (loss) from continuing operations
to net cash used in continuing operations: |                                                |                                          |            |               |          |               |            |           
|                                               |                                                                                                              | Depreciation, amortization and debt discount   |                                          |            | 342,245       |          |               |            | 297,791    |           
|                                               |                                                                                                              | Services received in exchange for common stock |                                          |            | 5,402         |          |               |            | 3,000      |           
|                                               |                                                                                                              | Gain on sale of marketable securities          |                                          |            |              |          |               |            | (1,349,721 | )         
|                                               |                                                                                                              | Asset writedown                                |                                          |            | 200,056       |          |               |            |           |           
|                                               |                                                                                                              | Change in assets and liabilities:              |                                          |            |               |          |               |            |            |           
|                                               |                                                                                                              |                                                | Accounts receivable, net                 |            |               | 393,934  |               |            |            | (1,030,294 | )
|                                               |                                                                                                              |                                                | Inventories                              |            |               | 8,109    |               |            |            | (1,433,873 | )
|                                               |                                                                                                              |                                                | Prepaid expenses and other               |            |               | (187,535 | )             |            |            | 59,042     |  
|                                               |                                                                                                              |                                                | Customer deposits                        |            |               | (687,330 | )             |            |            | (258,439   | )
|                                               |                                                                                                              |                                                | Accounts payable and accrued liabilities |            |               | (894,664 | )             |            |            | 200,037    |  
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |           
|                                               | Net cash used in continuing operations operating activities                                                  |                                                |                                          | (1,916,807 | )             |          |               | (3,086,900 | )         
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |           
|                                               | Loss from discontinued operations                                                                            |                                                |                                          | (1,146,817 | )             |          |               | (2,175,343 | )         
|                                               | Changes in net assets and liabilities of discontinued operations                                             |                                                |                                          | (390,530   | )             |          |               | (300,945   | )         
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |            |           
|                                               | Net cash used in discontinued operations                                                                     |                                                |                                          | (1,537,347 | )             |          |               | (2,476,288 | )         
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |           
|                                               | Net cash used in operating activities                                                                        |                                                |                                          | (3,454,154 | )             |          |               | (5,563,188 | )         
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |           
|Cash flows from investing activities:          |                                                                                                              |                                                |                                          |            |               |          |               |           
|                                               | Proceeds from sale of marketable securities                                                                  |                                                |                                          |           |               |          |               | 1,399,746  |           
|                                               | Capital expenditures                                                                                         |                                                |                                          | (48,542    | )             |          |               | (115,697   | )         
|                                               | Intangible assets, other assets and goodwill                                                                 |                                                |                                          | (53,120    | )             |          |               | 390,917    |           
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |            |           
|                                               | Net cash provided by (used in) investing activities                                                          |                                                |                                          | (101,662   | )             |          |               | 1,674,966  |           
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |           
|Cash flows from financing activities:          |                                                                                                              |                                                |                                          |            |               |          |               |           
|                                               | Net proceeds from the issuance of preferred and common stock                                                 |                                                |                                          | 1,957,974  |               |          |               | 1,753,420  |           
|                                               | Net borrowings (payments) under line of credit                                                               |                                                |                                          | 614,819    |               |          |               | (825,000   | )         
|                                               | Decrease in restricted cash                                                                                  |                                                |                                          | 881,584    |               |          |               | 825,000    |           
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |            |           
|                                               | Net cash provided by financing activities                                                                    |                                                |                                          | 3,454,377  |               |          |               | 1,753,420  |           
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |           
|Net decrease in cash and cash equivalents      |                                                                                                              |                                                | (101,439                                 | )          |               |          | (2,134,802    | )         
|Cash and cash equivalents, beginning of period |                                                                                                              |                                                | 2,246,264                                |            |               |          | 4,076,894     |           
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |           
|Cash and cash equivalents, end of period       |                                                                                                              | $                                              | 2,144,825                                |            |               | $        | 1,942,092     |           
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |           
|Cash paid for interest                         |                                                                                                              | $                                              | 78,391                                   |            |               | $        | 26,828        |           
|                                               |                                                                                                              |                                                |                                          |            |               |          |               |           

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: During the six
months ended June 30, 2003, the holder of Series A and B
Convertible Preferred Stock converted $667,392 of the
Preferred Stock into 758,400 shares of common stock of the Company (see Note 10).

The accompanying notes to these consolidated financial statements are an
integral part of these consolidated statements.

5



---



##### Table of Contents






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

(1)  Basis of Presentation and Financial Condition

The accompanying consolidated financial statements include the accounts of
JMAR Technologies, Inc. (the Company or JMAR) and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the December 31,
2002 financial statements to conform with the 2003 presentation.

Founded in 1987, we are a semiconductor industry-focused company. JMAR is
the originator of Collimated Plasma Lithography (CPL), a next-generation
lithography (NGL) alternative designed to deliver affordable, sub-100 nanometer
chip-making capability in a compact format to the semiconductor industry. In
addition to CPL, JMAR develops other products for the public and private
sectors based on its proprietary Britelight laser light source. JMARs
operations include its Research Division in San Diego, California, where
research and development of lasers and laser produced plasma generators is
performed; its Systems Division in Burlington, Vermont, where CPL Stepper
Systems and other products are designed and manufactured; and its
Microelectronics Division, based in Sacramento, California, where JMAR provides
process integration and maintenance support for the U.S. Governments Defense
Microelectronics Activity semiconductor fabrication facility.

In the first quarter of 2002, the Company decided to discontinue and sell
its standard semiconductor products business and shift more of its resources to
accelerate the market entry of its CPL products. The standard semiconductor
products portion of JMARs business had been a developmental effort, involving
the design, manufacture and introduction of new standard product semiconductor
chips. With the severe downturn in the worldwide semiconductor market
beginning in 2000 and continuing into 2002, the Company had little success in
selling its new standard product chips. The Company determined that
substantial additional capital would have been required for these new chips to
become established in what became an over-supplied chip market, as well as to
develop newer, higher value chips. The Company concluded that it would not
continue to invest its resources in this business.

In furtherance of its efforts to focus its resources on its CPL business,
during the latter half of 2002, the Company concluded that its precision
equipment business did not fit with the strategic direction of the Companys
CPL business area and that the markets for that business products would
continue to be slow in the near term. Therefore, in December, 2002, the
Company decided to initiate the process of selling this business and, in July
2003, the Company completed the sale of this business.

The standard semiconductor products business and the precision equipment
business have been accounted for in the accompanying consolidated financial
statements as discontinued operations and the statement of operations for the
three and six months ended June 30, 2002 has been restated to reflect the
discontinuation of the precision equipment business (See Note 8).

The accompanying consolidated financial statements as of and for the three
and six months ended June 30, 2003 and 2002, have been prepared by the Company
and are unaudited. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments of a normal recurring nature which are necessary for a fair
presentation of the results of operations for the interim periods presented.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to such rules and
regulations.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Although the Company believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these interim consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in
6Table of ContentsJMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)the Companys Form 10-K for the year ended December 31, 2002. The results of
operations for the three and six months ended June 30, 2003 are not necessarily
indicative of the results to be expected for the full year.The Company incurred significant losses for the years ended December 31,
2002 and 2001 and for the six months ended June 30, 2003. As of June 30, 2003,
the Company has stockholders equity of approximately $2.8 million and a
deficit working capital of $1.5 million. Management has taken steps to reduce
its future cash flow requirements through the discontinuance of its standard
semiconductor products and precision equipment businesses mentioned above.
Additionally, management has completed additional debt and preferred stock
financings in the first quarter of 2003 (see Notes 9 and 10). Management
believes that the Company has adequate resources to fund its operations and
working capital requirements through December 31, 2003. However,
the Company is expecting an additional funding of $2.6 million
within the next several months under its DARPA contract. If this funding is
delayed, the Company may need to obtain financing to continue the
work under the contract. Also, the Company
has $1.2 million in debt due in February, 2004 to the former creditors of SAL,
Inc., which the Company acquired in August, 2001. The Company has had
preliminary discussions with the representative of the noteholders of this debt
regarding the extinguishment of this debt with stock or otherwise amending the
terms of the debt. If the Company is unsuccessful in its negotiations with the
noteholders, it will need to raise additional financing to extinguish this
debt. In addition, in the first quarter of 2004, the Company expects a normal
funding delay under its DARPA contract requiring the Company to finance costs
incurred on this contract prior to the receipt of funds. Additional
financing will also be required for other working capital requirements in 2004 and
to complete or accelerate the development of its CPL systems. There can be no
assurance that additional financings will be available when needed, on
reasonable terms, or at all.(2)  Recent Accounting PronouncementsIn June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). This statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to (a)
all entities and (b) legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal operation of long-lived assets, except for certain obligations of
lessees. This statement amends FASB Statement No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, and is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
has implemented SFAS No. 143 effective January 1, 2003. The impact of such
adoption is not anticipated to have a material effect on the Companys
financial statements.In
November 2002, the EITF reached a consensus on Issue 00-21, titled
Accounting for Revenue Arrangements with Multiple
Deliverables, which addresses how to account for arrangements
that involve the delivery or performance of multiple products,
services, and/or rights to use assets. Revenue arrangements with
multiple deliverables are divided into separate units of accounting
if the deliverables in the arrangement meet the following criteria:
(1) the delivered item has value to the customer on a
standalone basis; (2) there is objective and reliable evidence
of the fair value of undelivered items; and (3) delivery of any
undelivered item is probable. Arrangement consideration should be
allocated among the separate units of accounting based on their
relative fair values, with the amount allocated to the delivered item
being limited to the amount that is not contingent on the delivery of
additional items or meeting other specified performance conditions.
The new standard is required to be adopted for all new applicable
revenue arrangements no later than the third quarter of 2003.
Management believes the implementation of EITF 00-21 will not have a
material effect upon the Companys financial statements.In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of SFAS No.
123. This statement provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. This statement also amends the disclosure requirements of SFAS
No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. The Company has implemented SFAS No. 148
effective January 1, 2003 regarding disclosure requirements for condensed
financial statements for interim periods.The FASB has issued Interpretation No. 46, Consolidation of Variable
Interest Entities  an interpretation of Accounting Research Bulletin (ARB)
No. 51. This Interpretation defines a variable interest entity and provides
that if a business enterprise has a controlling financial interest in a
variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be included in consolidated
financial statements with those of the business enterprise. Furthermore, the
Board indicates that the voting interest approach of ARB No. 51 is not
effective in identifying controlling financial interests in entities that are
not controllable through voting interest or in which the equity investors do
not bear the residual economic risk. This Interpretation applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Management believes7Table of ContentsJMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)the implementation of this Interpretation will not have a material effect upon
the Companys consolidated financial statements.In May
2003 FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, which requires that certain financial instruments
previously presented as equity or temporary equity be presented as
liabilities. Such instruments include mandatory redeemable preferred
and common stock, and certain options and warrants. SFAS 150 is
effective for financial instruments issued, entered into or modified
after May 31, 2003 and is generally effective at the beginning
of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 is not expected to have a material effect
on the Companys financial position or results of its operations.(3)  Stock-Based Compensation PlansThe Company has eight stock option or warrant plans: the 1991 Stock Option
Plan (the 1991 Plan), the 1999 Stock Option Plan (the 1999 Plan), the
Management Anti-Dilution Plan (the Anti-Dilution Plan), two incentive plans
which provide for the issuance of options and warrants to Research Division
employees (the Research Division Plans), two incentive plans which provide
for the issuance of options and warrants to JPSI employees (the JPSI Plans),
and an incentive plan which provides for the issuance of options to
Microelectronics Division employees (the Microelectronics Division Plan). The
Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined using the fair value method under SFAS No. 123, the Companys
net loss and loss per share would have been the following pro forma amounts
(unaudited):

|                  |                 |             |           |   |            |       |                             |   |                           |       |      |   |            |       |   |   |            |       |   |  | 
|----------------- | --------------- | ----------- | --------- | - | ---------- | ----- | --------------------------- | - | ------------------------- | ----- | ---- | - | ---------- | ----- | - | - | ---------- | ----- | - |  | 
|                  |                 |             |           |   |            |       | Three Months Ended June 30, |   | Six Months Ended June 30,
|                  |                 |             |           |   |            |       |                             |   |                          
|                  |                 |             |           |   |            |       | 2003                        |   | 2002                      |       | 2003 |   | 2002      
|                  |                 |             |           |   |            |       |                             |   |                           |       |      |   |           
|Net loss:         |                 | As Reported |           | $ | (1,337,184 | )     |                             | $ | (1,002,165                | )     |      | $ | (2,243,841 | )     |   | $ | (1,749,786 | )    
|                  |                 | Pro Forma   |           |   | (2,271,060 | )     |                             |   | (2,591,845                | )     |      |   | (3,190,683 | )     |   |   | (3,341,998 | )    
|Basic and diluted |                 | As Reported |           |   | (0.06      | )     |                             |   | (0.04                     | )     |      |   | (0.10      | )     |   |   | (0.08      | )    
|                  | loss per share: |             | Pro Forma |   |            | (0.09 | )                           |   |                           | (0.11 | )    |   |            | (0.13 | ) |   |            | (0.14 | )

The fair value of each option and warrant grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rate of
approximately 2.74 percent (4 percent in 2002); expected dividend yields of 0 percent; expected lives of 6 years and
expected volatility of 142 percent.

The Company was authorized to grant options or warrants to its employees
(including directors) and consultants for up to 1,480,000 shares under the 1991
Plan, 1,900,000 shares under the 1999 Plan, 806,637 shares under the
Anti-Dilution Plan, 350,000 shares under the Research Division Plans, 550,000
shares under the JPSI Plans and 25,000 shares under the Microelectronics
Division Plan (the Plans). The options granted under the JPSI Plans expire
60 days after termination of employment, therefore, effective as of September
16, 2003 all but 53,000 warrants under the JPSI Plans will have expired unless
exercised due to the sale of JPSI and termination of JPSI employees. Under all
Plans, the option or warrant exercise price is equal to or more than the
stocks market price on date of grant. During the quarter ended June 30, 2003,
355,000 options were granted pursuant to the 1999 Plan.

(4)  Inventories

Inventories are carried at the lower of cost on the first-in, first-out
basis or market and are comprised of materials, direct labor and applicable
manufacturing overhead. At June 30, 2003 and December 31, 2002, inventories
consisted of the following:

|                                             |  |               |         |                   |  |   |         | 
|-------------------------------------------- |  | ------------- | ------- | ----------------- |  | - | ------- | 
|                                             |  | June 30, 2003 |         | December 31, 2002
|                                             |  |               |         |                  
|                                             |  | (Unaudited)   |         |                   |  |  
|Raw materials, components and sub-assemblies |  | $             | 215,144 |                   |  | $ | 222,077 | 
|Work-in-process                              |  |               | 84,489  |                   |  |   | 125,315 | 
|Finished goods                               |  |               | 81,725  |                   |  |   | 42,075  | 
|                                             |  |               |         |                   |  |   |         | 
|                                             |  | $             | 381,358 |                   |  | $ | 389,467 | 
|                                             |  |               |         |                   |  |   |         | 

8



---



##### Table of Contents



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

(5)  Property and Equipment

At June 30, 2003 and December 31, 2002, property and equipment consisted
of the following:

|                              |  |               |            |                   |  |   |            |  
|----------------------------- |  | ------------- | ---------- | ----------------- |  | - | ---------- | -
|                              |  | June 30, 2003 |            | December 31, 2002
|                              |  |               |            |                  
|                              |  | (Unaudited)   |            |                   |  |  
|Equipment and machinery       |  | $             | 2,760,094  |                   |  | $ | 2,983,443  |  
|Furniture and fixtures        |  |               | 435,043    |                   |  |   | 420,188    |  
|Leasehold improvements        |  |               | 280,283    |                   |  |   | 280,283    |  
|                              |  |               |            |                   |  |   |            |  
|                              |  |               | 3,475,420  |                   |  |   | 3,683,914  |  
|Less-accumulated depreciation |  |               | (2,518,409 | )                 |  |   | (2,435,716 | )
|                              |  |               |            |                   |  |   |            |  
|                              |  | $             | 957,011    |                   |  | $ | 1,248,198  |  
|                              |  |               |            |                   |  |   |            |  

(6)  Segment Information

In the first quarter of 2002, the Company decided to discontinue and sell
its standard semiconductor products business and shift more of its resources to
accelerate the market entry of its CPL products. JMARs standard semiconductor
products business initiative involved the design, manufacture and introduction
of new standard product semiconductor chips. With the severe downturn in the
worldwide semiconductor market beginning in 2000 and continuing into 2002, the
Company had little success in selling its new standard product chips. The
Company determined that substantial additional capital would have been required
for these new chips to become established in what became an over-supplied chip
market, as well as to develop newer, higher value chips. The Company concluded
that it would not continue to invest its resources in this business.

In furtherance of its efforts to focus its resources on its CPL business,
during the later half of 2002, the Company concluded that the precision
equipment business did not fit with the strategic direction of the Companys
CPL business area and that the markets for that segments products would
continue to be slow in the near term. Therefore, in December, 2002, the
Company decided to initiate the process of selling this business.

As a result of these decisions, and to streamline the Companys operations
and better support the commercialization of its emerging CPL semiconductor
manufacturing systems and related technologies, the Company now operates in
three business segments, as follows:

Research Division (formerly JMAR Research)  This segments role is as an
innovator of laser and laser-produced plasma technologies for the Companys CPL
Source, EUV generators, and related products such as high-brightness lasers.
During the six months ended June 30, 2003 and 2002, this segment accounted for
approximately 31% and 26%, respectively, of the Companys revenues.

Systems Division (formerly JMAR/SAL NanoLithography)  This segment
encompasses the development of X-ray lithography steppers, and the product
engineering, production and integration of CPL light sources and complete CPL
stepper systems. During the six months ended June 30, 2003 and
2002, this segment
accounted for approximately 42% and 59%, respectively, of the Companys revenues.

Microelectronics Division  In 2002, JMAR discontinued the standard
products business and the assets of its Sacramento operations were sold to JSI
Microelectronics, Inc., a wholly-owned subsidiary of the Company, now the
Microelectronics Division. This segment provides process integration and
maintenance support for the Defense Microelectronics Activity semiconductor
fabrication facility in Sacramento, California, and ASIC design and production
capability for the military and commercial markets. During the six months ended
June 30, 2003 and 2002, this segment accounted for approximately
27% and 15%, respectively, of the Companys
revenues.

9



---



##### Table of Contents



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

The accounting policies of the reportable segments are the same as those
described in Note 2 of the Companys Form 10-K for the year ended December 31,
2002. The Company evaluates the performance of its operating segments
primarily based on revenues and operating income. Corporate costs are
generally allocated to the segments.

Segment information for the three and six months ended June 30, 2003 and
2002 (excluding discontinued operations) is as follows (2002 has been restated
to reflect the new business segments):

|                                  |                               |  |          |           |          |  |                  |           |           |  |       |           |   |  |   |           |   |  |   |            |  
|--------------------------------- | ----------------------------- |  | -------- | --------- | -------- |  | ---------------- | --------- | --------- |  | ----- | --------- | - |  | - | --------- | - |  | - | ---------- | -
|                                  |                               |  | Research |           | Systems  |  | Microelectronics |           |           |  |       |           |   |  |  
|                                  |                               |  | Division |           | Division |  | Division         |           | Corporate |  | Total
|                                  |                               |  |          |           |          |  |                  |           |           |  |      
|Six Months Ended June 30, 2003:   |                               |  |          |           |          |  |                  |           |           |  |       |           |   |  |   |           |   |  |   |           
|                                  | Revenues                      |  | $        | 3,053,292 |          |  | $                | 4,099,364 |           |  | $     | 2,608,712 |   |  | $ |          |   |  | $ | 9,761,368  |  
|                                  | Operating income (loss)       |  |          | 234,271   |          |  |                  | (843,381  | )         |  |       | 104,793   |   |  |   | (228,282  | ) |  |   | (732,599   | )
|                                  | Asset writedown               |  |          | (200,056  | )        |  |                  |          |           |  |       |          |   |  |   |          |   |  |   | (200,056   | )
|                                  | Total assets                  |  |          | 2,588,993 |          |  |                  | 5,615,588 |           |  |       | 1,692,140 |   |  |   | 2,299,990 |   |  |   | 12,196,711 |  
|                                  | Goodwill                      |  |          |          |          |  |                  | 3,790,907 |           |  |       |          |   |  |   |          |   |  |   | 3,790,907  |  
|                                  | Capital expenditures          |  |          | 31,722    |          |  |                  | 2,578     |           |  |       | 10,719    |   |  |   | 3,523     |   |  |   | 48,542     |  
|                                  | Depreciation and
amortization |  |          | 117,494   |          |  |                  | 161,805   |           |  |       | 10,885    |   |  |   | 52,061    |   |  |   | 342,245    |  
|Three Months Ended June 30, 2003: |                               |  |          |           |          |  |                  |           |           |  |       |           |   |  |   |           |   |  |   |           
|                                  | Revenues                      |  |          | 1,603,742 |          |  |                  | 2,360,496 |           |  |       | 1,063,416 |   |  |   |          |   |  |   | 5,027,654  |  
|                                  | Operating income (loss)       |  |          | 168,843   |          |  |                  | (473,168  | )         |  |       | 60,778    |   |  |   | (123,917  | ) |  |   | (367,464   | )
|                                  | Asset writedown               |  |          | (200,056  | )        |  |                  |          |           |  |       |          |   |  |   |          |   |  |   | (200,056   | )
|                                  | Capital expenditures          |  |          | 27,832    |          |  |                  | 2,578     |           |  |       | 9,312     |   |  |   | 3,523     |   |  |   | 43,245     |  
|                                  | Depreciation and
amortization |  |          | 59,687    |          |  |                  | 85,896    |           |  |       | 6,189     |   |  |   | 28,077    |   |  |   | 179,849    |  
|Six Months Ended June 30, 2002:   |                               |  |          |           |          |  |                  |           |           |  |       |           |   |  |   |           |   |  |   |           
|                                  | Revenues                      |  |          | 2,124,122 |          |  |                  | 4,867,090 |           |  |       | 1,203,065 |   |  |   |          |   |  |   | 8,194,277  |  
|                                  | Operating income (loss)       |  |          | 175,520   |          |  |                  | (187,345  | )         |  |       | 244,922   |   |  |   | (593,506  | ) |  |   | (360,409   | )
|                                  | Total assets                  |  |          | 6,148,554 |          |  |                  | 7,836,771 |           |  |       | 1,501,082 |   |  |   | 2,221,177 |   |  |   | 17,707,584 |  
|                                  | Goodwill                      |  |          |          |          |  |                  | 3,739,777 |           |  |       |          |   |  |   |          |   |  |   | 3,739,777  |  
|                                  | Capital expenditures          |  |          | 58,154    |          |  |                  | 56,495    |           |  |       |          |   |  |   | 1,048     |   |  |   | 115,697    |  
|                                  | Depreciation and
amortization |  |          | 101,722   |          |  |                  | 151,712   |           |  |       | 2,218     |   |  |   | 42,139    |   |  |   | 297,791    |  
|Three Months Ended June 30, 2002: |                               |  |          |           |          |  |                  |           |           |  |       |           |   |  |   |           |   |  |   |           
|                                  | Revenues                      |  |          | 421,959   |          |  |                  | 3,471,760 |           |  |       | 691,903   |   |  |   |          |   |  |   | 4,585,622  |  
|                                  | Operating income (loss)       |  |          | 30,675    |          |  |                  | (26,391   | )         |  |       | 116,108   |   |  |   | (233,239  | ) |  |   | (112,847   | )
|                                  | Capital expenditures          |  |          | 17,224    |          |  |                  | 13,139    |           |  |       |          |   |  |   |          |   |  |   | 30,363     |  
|                                  | Depreciation and
amortization |  |          | 66,265    |          |  |                  | 87,898    |           |  |       | (918      | ) |  |   | 21,584    |   |  |   | 174,829    |  

The asset writedown of $200,056 relates to an asset held by the Research
Division that will not be used by the Company in the future.

Sales to
the United States Government aggregated $3,499,673, $5,925,018,
$3,325,692 and $5,939,232 for the three and six months ended
June 30, 2003 and 2002, respectively. In addition, sales to
General Dynamics Advanced Information Systems were $1,058,881,
$2,556,107, $588,613 and $1,000,696 for the three and six months ended
June 30, 2003 and 2002, respectively.

(7)  Comprehensive Loss

The other comprehensive loss for the six months ended June 30, 2002
represents the Companys investment in Bede plc (Bede). In January 2002, the
Company sold its remaining 545,500 shares of its investment in Bede for net
proceeds of approximately $1.4 million. The gain from that transaction of
$1,349,721 is included in this Consolidated Statement of Operations for the six
months ended June 30, 2002. For the three and six months ended June 30, 2003,
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 that period. For the six months ended June 30, 2002, the Company had
an additional unrealized loss on marketable securities of $75,143 for the
period from January 1, 2002 to the sale date of the securities, however, that
loss was realized as a result of the sale of the securities.

10



---



##### Table of Contents



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

(8)  Discontinued Operations/Assets Held for Sale

The loss from operations of discontinued operations of $686,830 and
$1,146,817 for the three and six months ended June 30, 2003 includes $270,761
and $311,977, respectively, related to the standard semiconductor products
business and $416,069 and $834,840, respectively, related to the precision
equipment business. In July 2003, the Company sold JPSI to several private
investors (see Note 14). In accordance with SFAS No. 144, the results of
operations of the precision equipment business for 2003 through the sale date
are reported in discontinued operations.

In September 2000, JSI moved into a significantly larger facility in
anticipation of realizing its growth plans. Prior to December 31, 2001, the
Company decided to take action to sublease the facility and move JSI into a
smaller facility. The Company does not yet have a subtenant for this facility
and, as of June 30, 2003, the Company has approximately $433,000 accrued for
estimated future losses under this lease including $150,000 accrued in the
quarter ended June 30, 2003. The lease provides for rent and related expenses
of approximately $36,000 per month through August 2005. If the Company is
unsuccessful in obtaining a subtenant on acceptable terms, there could be
further losses related to that lease.

At June 30, 2003 and December 31, 2002, net assets and liabilities of
assets held for sale consisted of the following:

|                     |                                          |   |             |         |              |   |           |           | 
|-------------------- | ---------------------------------------- | - | ----------- | ------- | ------------ | - | --------- | --------- | 
|                     |                                          |   | June 30,    |         | December 31,
|                     |                                          |   | 2003        |         | 2002        
|                     |                                          |   |             |         |             
|                     |                                          |   | (Unaudited) |         |              |   |          
|Current Assets:      |                                          |   |             |         |              |   |           |          
|                     | Cash                                     |   | $           | 26,107  |              |   | $         | 101,238   | 
|                     | Accounts receivable                      |   |             | 551,545 |              |   |           | 454,557   | 
|                     | Inventories                              |   |             | 143,403 |              |   |           | 727,983   | 
|                     | Prepaid expenses and other               |   |             | 23,006  |              |   |           | 65,980    | 
|                     |                                          |   |             |         |              |   |           |          
|                     |                                          | $ | 744,061     |         |              | $ | 1,349,758 |          
|                     |                                          |   |             |         |              |   |           |          
|Current Liabilities: |                                          |   |             |         |              |   |           |          
|                     | Payable to distributor                   |   | $           | 692,314 |              |   | $         | 692,314   | 
|                     | Facility lease accrual                   |   |             | 638,621 |              |   |           | 548,374   | 
|                     | Accounts payable                         |   |             | 378,027 |              |   |           | 1,154,463 | 
|                     | Employee related contractual
commitments |   |             | 335,834 |              |   |           | 555,000   | 
|                     | Note payable                             |   |             | 150,322 |              |   |           | 175,000   | 
|                     |                                          |   |             |         |              |   |           |          
|                     |                                          | $ | 2,195,118   |         |              | $ | 3,125,151 |          
|                     |                                          |   |             |         |              |   |           |          

(9)  Line of Credit

In March 2003, the Company entered into a $3 million Revolving Fixed Price
Convertible 3 Year Note (the Working Capital Line) with Laurus Master Fund
(Laurus) replacing its previous bank credit agreement, which required a
compensating balance of $1.5 million at December 31, 2002. Advances under the
Working Capital Line are up to 85% of eligible accounts receivable of the
Company. The Company can convert a portion of the principal outstanding under
the Working Capital Line to common stock at $.92 per share (the Conversion
Price) if the market price of the Companys common stock averages 118% of the
Conversion Price or higher for 22 consecutive trading days. Laurus can convert
any portion of the principal outstanding to common stock at the Conversion
Price any time the market price of the Companys common stock is in

11



---



##### Table of Contents



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

excess of the Conversion Price. After the first $2 million of conversions into
common stock, the Conversion Price will be adjusted upward. The interest rate
on the Working Capital Line is prime (4 percent at June 30, 2003) plus .75
percent, subject to a floor of 5 percent. The Working Capital Line requires
that the Companys quick ratio be .90 or higher. The Companys
quick ratio was .80 at June 30, 2003. Quick ratio is defined as
the sum of cash and accounts receivable divided by the sum of current
liabilities
exclusive of current liabilities of assets held for sale. The Company has received a waiver from
Laurus waiving compliance of this covenant during the period from June 30, 2003
to October 1, 2003. The amount outstanding at June 30, 2003 under the Working
Capital Line was $2.2 million.

(10)  Equity Transactions

In February 2003, under its Universal Blank Shelf Registration Statement,
the Company sold 100,000 shares of its common stock for gross proceeds of
$100,000. In connection with this transaction, the Company issued to the
purchaser warrants to purchase 20,000 shares of its common stock at an exercise
price of $1.25 per share.

In March 2003, the Company also sold for cash, under its Universal Blank
Shelf Registration Statement, $1 million of 8 percent Series A Convertible
Preferred Stock (Series A Preferred) to Laurus at a fixed conversion price of
$.88 per share. The Series A Preferred is redeemable in two years, if not
previously converted. Except for the conversion price, the conversion terms of the Series A Preferred are the
same as the conversion terms of the Working Capital Line. The proceeds received
under the Series A Preferred were initially restricted, however, the funds are
released as the Preferred Stock is converted to common stock. As of
June 30, 2003, restricted cash was $668,416. During the three
and six months ended June 30, 2003, Laurus converted $327,448 of the Series A
Preferred into 372,100 shares of common stock of the Company. An additional
$162,800 of Series A Preferred was converted in July 2003.

In addition, in March, 2003, the Company sold for cash, under its
Universal Blank Shelf Registration Statement, $1 million of 3 percent Series B
Convertible Preferred Stock (Series B Preferred) to Laurus at a fixed
conversion price of $.88 per share. The Series B Preferred is redeemable in
cash or stock (if the closing market price of the Companys common stock is
118% of the Conversion Price or higher for the 11 trading days prior to the
redemption date) in twelve equal monthly installments starting October 1, 2003,
if not previously converted. Conversions to equity are offset against the
required principal repayments and, as a result of conversions to date, the first
installment payment is scheduled for May, 2004. Except for the
conversion price, the conversion terms of the
Series B Preferred are the same as the conversion terms of the Working Capital Line.
In the six months ended June 30, 2003, Laurus converted $339,944 of the Series
B Preferred into 386,300 shares of common stock of the Company. An additional
$288,640 of Series B Preferred was converted in July 2003.

In connection with all of the above financing transactions with Laurus,
the Company issued to Laurus warrants to purchase 550,000 shares of common
stock at prices ranging from $1.058 to $1.33. In addition, Laurus will be
issued a warrant to purchase one share of common stock for every $20 of
principal under the Working Capital Line converted to equity, up to a total of
150,000 shares, at an exercise price of $1.15 per share. The Company valued all
of these warrants using the Black-Scholes model and recorded the fair value of
$374,000 as a discount to the convertible debt and preferred stock. As a result
of the convertible securities issued to Laurus described above, the Company
recorded an additional discount of $444,000 representing the intrinsic value of
the beneficial conversion feature for the convertible debt and preferred stock,
which will be amortized over the redemption period of the preferred stock and
the life of the debt using the effective interest method. Included in the loss
applicable to common stock in the Statement of Operations for the six months
ended June 30, 2003 is preferred stock dividends of $229,453 which represents
$27,604 of dividends paid in cash and $201,849 related to the beneficial
conversion feature. Included in interest expense for the six months ended June
30, 2003 is $7,109 related to the beneficial conversion feature
attributable to the convertible debt. In addition,
there will be an additional beneficial conversion feature in the amount of
$32,000 recorded as additional borrowings are made against the Working Capital
Line and an additional beneficial conversion charge of $94,000 will be recorded
prorata upon conversion of the convertible debt for the warrants issued
thereon. In connection with the Preferred Stock issuances, the Company paid
Laurus fees of $109,000 and incurred other costs of approximately $33,000.

12



---



##### Table of Contents



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

(11)  Earnings (Loss) Per Share

The Company accounts for earnings per share in accordance with SFAS No.
128, Earnings per Share. Basic earnings per common share were computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during the period. For the three and six months ended June 30, 2003
and 2002, the denominator in the diluted net loss per share computation was the
same as the denominator for basic loss per share due to antidilutive effects of
the Companys warrants, stock options and shares underlying convertible debt
and preferred stock. As of June 30, 2003 and 2002, the Company had outstanding
warrants, stock options and shares underlying convertible debt and preferred
stock of 9,256,312 and 4,000,043, respectively, all of which are antidilutive
and were excluded from the computation of diluted loss per share. For the six
months ended June 30, 2002, the diluted income from continuing operations was
computed by dividing the income from continuing operations by the sum of the
weighted average number of shares of common stock (23,103,559) plus dilutive
employee stock options and warrants (894,790).

(12)  Intangible Assets

The Company adopted Financial Accounting Standards Board No. 142 Goodwill
and Other Intangible Assets (FASB 142) effective January 1, 2002. In
accordance with FASB 142, the Company does not amortize goodwill. The
Companys goodwill of $3,790,907 at June 30, 2003 and December 31, 2002 is
related to the Systems Division, acquired in August 2001. As of June 30, 2003,
the Company had the following amounts related to other intangible assets:

|                      |  |                |         |              |  |                |         |  |  |   |         | 
|--------------------- |  | -------------- | ------- | ------------ |  | -------------- | ------- |  |  | - | ------- | 
|                      |  | Gross Carrying |         | Accumulated  |  | Net Intangible
|                      |  | Amount         |         | Amortization |  | Assets        
|                      |  |                |         |              |  |               
|Patents               |  | $              | 935,108 |              |  | $              | 354,121 |  |  | $ | 580,987 | 
|Unpatented Technology |  |                | 450,000 |              |  |                | 287,500 |  |  |   | 162,500 | 
|                      |  |                |         |              |  |                |         |  |  |   |         | 
|                      |  |                |         |              |  |                |         |  |  | $ | 743,487 | 
|                      |  |                |         |              |  |                |         |  |  |   |         | 

Aggregate amortization expense of the intangible assets with determinable
lives was $69,816 and $139,593 for the three and six months ended June 30,
2003, respectively. The unamortized balance of intangible assets is estimated
to be amortized as follows:

|                   |  |                        |         | 
|------------------ |  | ---------------------- | ------- | 
|For the Year Ended |  | Estimated Amortization
|December 31,       |  | Expense               
|                   |  |                       
|2003               |  | $                      | 133,516 | 
|2004               |  |                        | 182,002 | 
|2005               |  |                        | 23,362  | 
|2006               |  |                        | 23,362  | 
|2007               |  |                        | 23,362  | 
|2008               |  |                        | 23,361  | 
|Beyond             |  |                        | 334,522 | 
|                   |  |                        |         | 
|                   |  | $                      | 743,487 | 
|                   |  |                        |         | 

(13)  Legal Proceeding

Following the discontinuance of the standard semiconductor products
business of JMAR Semiconductor, Inc. (JSI) in the first quarter of 2002, JSI
sought to negotiate debt reductions from the creditors associated with the
discontinued portion of its business. JSI was a party to a Distributor
Agreement with All American Semiconductor, Inc. (All American) under which
All American had purchased approximately $700,000 of JSI chips for resale to
customers. The Company reflected the proceeds as deferred revenue (a
liability) and not as revenue pending sale to the ultimate customer. Under the
terms of the Distributor Agreement, if All American properly terminated the
Distributor Agreement, it had the right to

13



---



##### Table of Contents



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

require JSI to repurchase those chips for the $700,000 paid by All American.
Soon after the announcement by JMAR that JSI had discontinued its standard chip
business, All American gave notice of termination of the Distributor Agreement
and returned the chips it held, creating an obligation on JSIs part to repay
approximately $700,000 to All American. The $700,000 claim of All American is
included in the total of approximately $2.2 million of current liabilities of
assets held for sale that are included on JMARs Consolidated Balance Sheet at
June 30, 2003 (see Note 8).

In September, 2002, a Complaint was filed by All American against JSI and
JMAR in San Diego Superior Court. The Complaint alleges that JSI owes All
American approximately $700,000. The Complaint also alleges that All American
was induced to refrain from terminating the agreement until after the JSI
business had been discontinued. All American claims that such actions
constituted fraud and that it is entitled to treble (triple) damages. All
American has also alleged that JMAR is the alter ego of JSI and based on that
theory should be held responsible for the obligations of JSI. While
recognizing that the approximately $700,000 in indebtedness may be owed by JSI
to All American under the agreement, JSI asserts that the obligations are
merely of a contractual nature and strongly disputes that any of the actions
taken constitute fraud. JMAR also disputes that it is the alter ego of JSI
in light of the facts that JSI is a separately incorporated entity that has
been more than adequately capitalized over its years of operations and, that
JSI, and not JMAR, was the party to the Distributor Agreement and was the sole
direct contact with All American. JMAR believes that there is insufficient
evidence to support the alter ego theory and believes that it will ultimately
prevail on this issue. JMAR and JSI are vigorously contesting any claims by
All American that it is owed more than $700,000. In May, 2003, All American
amended its Complaint to add JSI Microelectronics, Inc. (JME) as a defendant.
In July, 2003 the defendants Demurrer was granted with the Court allowing All
American to refile an Amended Complaint. Because JMAR, JME and JSI believe the
All American Complaint remains defective and does not state valid claims, JMAR,
JSI and JME have recently filed another Demurrer and Motion to Strike. The
parties have engaged in a Mediation process in an attempt to settle this
action, but there are no assurances this matter will settle prior to trial.

After unsuccessfully engaging in efforts to sell the standard chip portion
of JSI, in the fourth quarter of 2002, JSI transferred all of its assets and
liabilities to a third party fiduciary in an assignment for the benefit of
creditors. Under this state law procedure, the assignee liquidated the JSI
assets and the proceeds from the sale of those assets will be equitably
distributed among the creditors of JSI and the claims of creditors of JSI are
limited to those proceeds. Following the assignment of those assets, the
fiduciary sold those assets to JSI Microelectronics, Inc., a wholly-owned
subsidiary of the Company, at a price equal to a 10% premium over an
independently appraised value of those assets, with the purchase price
consisting of cash, assumption of certain trade debt owed to suppliers who are
critical to the ongoing operations and the waiver of any claims on
debt owed by JSI to the
Company. The Company has accounted for this transaction by recording the
purchase of the assets at the lower of cost or fair value and the remaining
amount of the liabilities owed to the unsecured creditors by JSI are reflected
in net current liabilities of assets held for sale in the accompanying
Consolidated Balance Sheet.

(14)  Subsequent Event

In July 2003, the Company sold JPSI to several private investors. Under
the terms of the sale, JMAR received $500,000 in a combination of
cash and non-interest bearing
promissory notes, and the buyer assumed 14 of the remaining 25 months of JPSIs
facility lease. The notes are secured by the assets of JPSI and the lease
obligation is secured by personal property of the buyers. In addition, all JPSI
receivables as of the closing were assigned to JMAR and JMAR agreed to pay all
trade and employee related liabilities existing as of the closing and unknown
liabilities, if any. The buyers have assumed all other ongoing commitments of
JPSI. In accordance with SFAS No. 144, the results of operations of the
precision equipment business for 2003 through the sale date are reported in
discontinued operations.

14



---



##### Table of Contents






Item 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

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

Through December 31, 2001, the Company operated in three segments as
follows: Front-end Semiconductor Equipment and Services, Precision Equipment,
and Semiconductor Products and Processes. In the first quarter of 2002, the
Company decided to discontinue its standard semiconductor products business and
shift more of its resources to accelerate the market entry of its CPL products.
The standard semiconductor products portion of JMARs business had been a
developmental effort, involving the design, manufacture and introduction of new
standard product semiconductor chips. With the severe downturn in the
worldwide semiconductor market beginning in 2000 and continuing into 2002, the
Company had little success in selling its new standard product chips. The
Company determined that substantial additional capital would have been required
for these new chips to become established in what became an over-supplied chip
market, as well as to develop newer, higher value chips. The Company concluded
that it would not continue to invest its resources in this business.

In furtherance of its efforts to focus its resources on its CPL business,
the Company concluded during the latter half of 2002 that the precision
equipment business did not fit with the strategic direction of the Companys
CPL business area and that the markets for that segments products would
continue to be slow in the near term. Therefore, in December, 2002, the
Company decided to initiate the process of selling that business and, in July
2003, the Company completed the sale of this business.

The standard semiconductor products business and the precision equipment
business have been accounted for in the accompanying consolidated financial
statements as discontinued operations and the statement of operations for the
three and six months ending June 30, 2002 has been restated to reflect the
discontinuation of the precision equipment business.

As a result of these decisions, and to streamline the Companys operations
and better support the commercialization of its emerging CPL semiconductor
manufacturing systems and related technologies, the Company now operates in
three business segments: the Research Division, the Systems Division and the
Microelectronics Division.

Results of Consolidated Operations

Total revenues for the three months ended June 30, 2003 and 2002 were
$5,027,654 and $4,585,622, respectively. The net loss for the three months
ended June 30, 2003 and 2002 was

15



---



##### Table of Contents



$(1,337,184) and $(1,002,165), respectively. The loss from continuing
operations for those same periods was $(650,354) and $(637,039), respectively,
while the loss from operations for those same periods was $(567,520) and
$(112,847), respectively.

Total revenues for the six months ended June 30, 2003 and 2002 were
$9,761,368 and $8,194,277, respectively. The net loss for the six months ended
June 30, 2003 and 2002 was $(2,243,841) and $(1,749,786), respectively. The
income (loss) from continuing operations for those same periods was
$(1,097,024) and $425,557, respectively, while the loss from operations for
those same periods was $(932,655) and $(360,409), respectively.

Included in the net loss for the three and six months ended June 30, 2003
is a loss from operations of discontinued operations of $(686,830) and
$(1,146,817), respectively. Included in the net loss and loss from
operations for the three and six months ended June 30, 2003 is
an asset writedown of $200,056. Included in the net loss and income from continuing
operations for the six months ended June 30, 2002 is a gain on the sale of
marketable securities of $1,349,721. Also, included in the net loss for the
three and six months ended June 30, 2002 is a loss from operations of
discontinued operations of $(365,126) and $(2,175,343), respectively, and a
deferred income tax expense of $484,423 resulting from an increase in the
valuation allowance against the Companys deferred tax assets.

The increase in revenues for the three and six months ended June 30, 2003
compared to the three and six months ended June 30, 2002 was primarily
attributable to an increase in contract revenues at the Microelectronics
Division of $470,268 and $1,555,411, respectively, related to the receipt of
approximately $5 million in contracts from General Dynamics Advanced
Information Systems (GDAIS) in February 2003. In May, 2002, the Systems
Division received an approximately $10 million contract from Naval Air Warfare
Center AD for sub-100nm x-ray masks for Next Generation Lithography
Systems (the Navair Contract). In addition, for the six months ended June
30, 2003 compared to the six months ended June 30, 2002, there
was an increase in the Navair Contract revenues of
$876,439 offset by a decrease in revenues related to the DARPA contract
of $890,653.

Gross margins for the six months ended June 30, 2003 and 2002 were 19.3%
and 30.7%, respectively. Gross margins for the three months ended June 30,
2003 and 2002 were 19.3% and 32.0%, respectively. The Companys margins are
low because the majority of its revenues are from government contracts or
subcontracts, which inherently generate lower margins than product revenues.
The further decrease in the gross margin in 2003 was due to lower margins at the
Systems Division related to non-DARPA contracts for the six months ended June
30, 2003 (11.4%) compared to 2002 (17.1%). This reduction is related to the
Navair
Contract having lower margins due to its high subcontract component, and the
Companys absorption of some of the costs incurred due to limited funding on
that contract. In addition, the Company started another contract later in 2002,
which has low margins due to estimated costs overruns on that contract. In
addition, gross margins on the DARPA contract were lower for the six months
ended June 30, 2003 (30.6%) compared to 2002 (37.6%) due to higher overhead
costs in 2003 at the Systems Division. Also, gross margins on the
Microelectronics Division contract with GDAIS were lower for the six months
ended June 30, 2003 (15.1%) compared to 2002 (34.2%) due to a contract cost
overrun of $70,000 recorded in 2003 and a higher amount of material costs in
2003. The majority of the Companys revenues in 2003 will be derived from
government contracts or subcontracts, so gross margins will continue at similar
levels as they have been for the first six months of 2003.

Selling, general and administrative (SG&A) expenses for the six months
ended June 30, 2003 and 2002 were $2,393,570 and $2,492,176, respectively.
SG&A expenses for the three months ended June 30, 2003 and 2002 were $1,219,960
and $1,390,313, respectively. The decrease in SG&A expenses for 2003 was
primarily attributable to lower legal costs in 2003 and a reduction in SG&A
costs of the Systems Division.

The
asset writedown of $200,056 relates to an asset held by the Research
Division that will not be used by the Company in the future.

The Companys research, development and engineering program (RD&E)
consists of two types: Customer-Funded RD&E (U.S. government and other
companies) and Company-Funded RD&E. Both types of RD&E costs are expensed when
incurred. Customer-Funded RD&E costs incurred, included in Costs of Sales,
totaled $3,134,489 and $2,814,968 for the three months ended June 30, 2003 and
2002, respectively, and $5,541,764 and $4,805,326 for the six month periods
ended June 30, 2003 and 2002,

16



---



##### Table of Contents



respectively. The increase in Customer-Funded RD&E expenditures for the six
months ended June 30, 2003 is related to an increase in other
contract costs of $1,048,676 incurred by the Systems Division (approximately
$797,845 of which is related to the Navair Contract) offset by a decrease in
contract costs of $312,238 related to the DARPA contract. Company-Funded RD&E
costs are shown in Operating Expenses and totaled $119,323 and $190,341 for
the three months ended June 30, 2003 and 2002, respectively, and $221,832 and
$383,132 for the six months ended June 30, 2003 and 2002, respectively. Hence,
total RD&E expenditures for the three month periods were $3,253,812 and
$3,005,309 for 2003 and 2002, respectively, and $5,763,596 and $5,188,458 for
the six month periods in 2003 and 2002, respectively. Total RD&E expenditures
as a percentage of sales were 64.7% and 65.5% for the three months ended June
30, 2003 and 2002, respectively, and 59.0% and 63.3% for the six months ended
June 30, 2003 and 2002, respectively. These expenditures are primarily related
to the continued development of collimated plasma lithography systems for the
semiconductor industry.

The loss from operations of discontinued operations of $686,830 and
$1,146,817, respectively, for the three and six months ended June 30, 2003
includes $270,761 and $311,977, respectively, related to the standard
semiconductor products business and $416,069 and $834,840, respectively,
related to the precision equipment business. The loss from operations of
discontinued operations of $365,126 and $2,175,343, respectively, for the three
and six months ended June 30, 2002 includes none and $1,185,861, respectively,
related to the standard semiconductor products business and $365,126 and
$989,482, respectively, related to the precision equipment business. In July
2003, the Company sold JPSI to several private investors. Under the terms of
the sale, JMAR received $500,000 in a combination of cash and promissory notes,
and the buyer assumed 14 of the remaining 25 months of JPSIs facility lease.
The notes are secured by the assets of JPSI and the lease obligation is secured
by personal property of the buyers. In addition, all JPSI receivables as of
the closing were assigned to JMAR and JMAR agreed to pay all trade and employee
related liabilities existing as of the closing and unknown liabilities, if any.
The buyers have assumed all other ongoing commitments of JPSI. The results of
operations of the precision equipment business for 2003 through the sale date
are reported in discontinued operations in 2003. The decrease in the loss
of discontinued operations is primarily due to the shutdown of the operations
of JSI in 2002.

In September 2000, JMAR Semiconductor, Inc. (JSI) moved into a
significantly larger facility in anticipation of realizing its growth plans.
Prior to December 31, 2001, the Company decided to take action to sublease the
facility and move JSI into a smaller facility. The Company does not yet have a
subtenant for this facility and, as of June 30, 2003, the
Company has approximately $433,000
accrued for estimated future losses under this lease, including $150,000
accrued in the quarter ended June 30, 2003. The lease provides for rent and
related expenses of approximately $36,000 per month through August 2005. If
the Company is unsuccessful in obtaining a subtenant on acceptable terms, there
could be further losses related to that lease.

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

Interest and other expense for the three months ended June 30, 2003 and
2002 was $125,700 and $60,054, respectively, and for the six months ended June
30, 2003 and 2002 was $230,826 and $117,846, respectively. Interest and other
expense are higher for 2003 versus 2002 due to the financing transactions the
Company entered into in 2003 (see Consolidated Liquidity and Financial
Condition below). Included in interest expense for the three and six months
ended June 30, 2003 is $7,109 related to the beneficial conversion feature.

Included in the loss applicable to common stock in the Statement of
Operations for the three and six months ended June 30, 2003 is preferred stock
dividends of $224,030 and $229,453, respectively.

17



---



##### Table of Contents



The amount for the six months ended June 30, 2003 represents $27,604
dividends paid in cash and $201,849 related to the beneficial conversion
feature.

Results of Segment Operations

The
results of segment operations (excluding corporate costs allocable to
discontinued operations) for the three and
six months ending June 30, 2003 and 2002 are as follows:

|                          |  |                             |           |                           |  |          |           |               |  |           |          |      |  |      |         |      |  |   |           |           |  |   |           |  |  |   |          |   |  |   |          |  
|------------------------- |  | --------------------------- | --------- | ------------------------- |  | -------- | --------- | ------------- |  | --------- | -------- | ---- |  | ---- | ------- | ---- |  | - | --------- | --------- |  | - | --------- |  |  | - | -------- | - |  | - | -------- | -
|                          |  | Three Months Ended June 30, |           | Six Months Ended June 30,
|                          |  |                             |           |                          
|                          |  |                             |           |                           |  |          |           |               |  | Operating |          |      |  |      |         |      |  |   |           | Operating
|                          |  | Revenues                    |           | Income (Loss)             |  | Revenues |           | Income (Loss)
|                          |  |                             |           |                           |  |          |           |              
|                          |  | 2003                        |           | 2002                      |  | 2003     |           | 2002          |  | 2003      |          | 2002 |  | 2003 |         | 2002
|                          |  |                             |           |                           |  |          |           |               |  |           |          |      |  |      |         |     
|Research Division         |  | $                           | 1,603,742 |                           |  | $        | 421,959   |               |  | $         | 168,843  |      |  | $    | 30,675  |      |  | $ | 3,053,292 |           |  | $ | 2,124,122 |  |  | $ | 234,271  |   |  | $ | 175,520  |  
|Systems Division          |  |                             | 2,360,496 |                           |  |          | 3,471,760 |               |  |           | (473,168 | )    |  |      | (26,391 | )    |  |   | 4,099,364 |           |  |   | 4,867,090 |  |  |   | (843,381 | ) |  |   | (187,345 | )
|Microelectronics Division |  |                             | 1,063,416 |                           |  |          | 691,903   |               |  |           | 60,778   |      |  |      | 116,108 |      |  |   | 2,608,712 |           |  |   | 1,203,065 |  |  |   | 104,793  |   |  |   | 244,922  |  
|                          |  |                             |           |                           |  |          |           |               |  |           |          |      |  |      |         |      |  |   |           |           |  |   |           |  |  |   |          |   |  |   |          |  
|                          |  | $                           | 5,027,654 |                           |  | $        | 4,585,622 |               |  | $         | (243,547 | )    |  | $    | 120,392 |      |  | $ | 9,761,368 |           |  | $ | 8,194,277 |  |  | $ | (504,317 | ) |  | $ | 233,097  |  
|                          |  |                             |           |                           |  |          |           |               |  |           |          |      |  |      |         |      |  |   |           |           |  |   |           |  |  |   |          |   |  |   |          |  

The $1,181,783 increase in revenues for the Research Division for the
three months ended June 30, 2003 as compared to the three months ended June 30,
2002 and the $929,170 increase in revenues for the Research Division for the
six months ended June 30, 2003 as compared to the six months ended June 30,
2002 is primarily due to approximately $1.5 million in unfunded costs incurred
related to its lithography work for DARPA in the quarter ended June 30, 2002
which were recognized as revenue in the quarter ended
September 30, 2002 when
the funding was received. The operating income of the Research
Division as a percentage of revenues is higher for the three months
ended June 30, 2003 compared to the three months ended
June 30, 2002 due to lower overhead costs in 2003.

The $1,111,264 decrease in revenues for the Systems Division for the three
months ended June 30, 2003 as compared to the three months ended June 30, 2002
and the $767,726 decrease in revenues for the six months ended
June 30, 2003 as
compared to the six months ended June 30, 2002 is primarily due to lower
revenues related to the DARPA contract. In addition to the lower
revenues in 2003, the $446,777 and $656,036 increase in
the operating loss of the Systems Division for the three and six months ended
June 30, 2003 as compared to the three and six months ended June 30, 2002 is
due to a decrease in the gross margin in 2003 primarily due to the Navair
Contract having lower margins due to its high subcontract component, and the
Companys absorption of some of the costs incurred due to the limited funding
on that contract. In addition, the Systems Division started another contract later in
2002, which has low margins due to estimated cost overruns on that contract.
Due to these losses, in July 2003 the Systems Division reduced its
headcount by 20 percent. Several
sales and marketing positions at the Systems Division were eliminated
as a result of the consolidation of the sales and
marketing activity with the hiring of John Ricardi as Vice President of
Business Development. The balance of the reductions were for positions deemed
not critical to the ongoing CPL commercialization effort.

The increase in revenues of $371,513 and $1,405,647 for the
Microelectronics Division for the three and six months ended June 30, 2003 as
compared to the three and six months ended June 30, 2002 is due to the receipt
of approximately $5 million in additional contracts in February, 2003 from
General Dynamics Advanced Information Systems to enhance
the semiconductor wafer fabrication processes installed at the foundry at McClellan Air
Force Base in Sacramento owned by the Defense Microelectronics Agency. The decrease
in the operating income of $55,330 and $140,129 of the Microelectronics
Division despite the higher revenues is primarily due to lower margins in 2003
due to a contract cost overrun of approximately $70,000 recorded in 2003, and a
higher allocation of corporate costs in 2003.

18



---



##### Table of Contents



Consolidated Liquidity and Financial Condition

Unrestricted cash and cash equivalents at June 30, 2003 was $2,144,825.
The decrease in unrestricted cash and cash equivalents during the six months
ended June 30, 2003 of $101,439 resulted primarily from cash used in continuing
operations of $1,916,807 primarily related to operating losses and a reduction
in liabilities, and cash used in discontinued operations of $1,537,347 offset
by proceeds from the issuance of preferred and common stock of
$1,957,974, a decrease in restricted cash of $881,584 and a net increase in
line of credit borrowings of $614,819.

JMARs
operations will continue to require the use of cash in
2003 and into 2004 for, among other requirements, 1) certain CPL commercialization costs not
covered by existing contracts; 2) temporary funding delays related to
government contracts; and 3) corporate costs, primarily related to the cost of
being a public company. Working capital (deficit) as of June 30, 2003 and
December 31, 2002 was $(1,543,964) and $(780,117), respectively. The increase
in the working capital deficit is primarily due to the classification as a
current liability as of June 30, 2003 of $1.2 million in notes to the former
SAL noteholders due February 2004 and the Companys losses offset in part by
proceeds received from the issuance of preferred stock. The Company has had
preliminary discussions with the representative of the SAL noteholders
regarding the extinguishment of this debt with stock or otherwise amending the
terms of the debt. However, there can be no assurance that the terms of this
debt will be amended.

In March 2003, the Company entered into a $3 million Revolving Fixed Price
Convertible 3 Year Note (the Working Capital Line) with Laurus Master Fund
(Laurus). Advances under the Working Capital Line are at an advance rate up
to 85% of eligible accounts receivable of the Company, however, advances in
excess of this formula are allowed, with the consent of Laurus. The Company can
convert a portion of the principal outstanding to common stock at $.92 per
share (the Conversion Price) if the market price of the Companys common
stock averages 118% of the Conversion Price or higher for 22 consecutive
trading days. Laurus can convert any portion of the principal outstanding to
common stock at the Conversion Price any time the market price of the Companys
common stock is in excess of the Conversion Price. After the first $2 million
of conversions into equity, the Conversion Price will be adjusted upward. The
interest rate on the Working Capital Line is prime (4% at
June 30, 2003) plus .75 percent, subject to
a floor of 5 percent. Accrued interest is payable monthly. The Working Capital
Line requires that the Companys quick ratio, as defined, be .90 or higher. The
Companys quick ratio was .80 at June 30, 2003. Quick ratio
is defined as the sum of cash and accounts receivable divided by the
sum of current liabilities, exclusive of current liabilities of
assets held for sale. The Company has received a
waiver from Laurus waiving compliance of this covenant during the period from
June 30, 2003 to October 1, 2003. As of June 30, 2003, $2.2 million was
outstanding under the Working Capital Line.

In March 2003, the Company issued $1 million in shares of 8 percent Series
A Convertible Preferred (the Series A Preferred) to Laurus at a fixed
conversion price of $.88 per share. Accrued dividends are payable monthly. The
Series A Preferred must be redeemed in two years, if not
previously converted. Except for the conversion price, the conversion terms of the Series A Preferred are the same as
the conversion terms of the Working Capital Line. The proceeds received under the Series A
Preferred are initially restricted, however, the funds are released as the
Preferred Stock is converted to common stock. For the six months ended June
30, 2003, Laurus converted $327,448 of the Series A Preferred into 372,100
shares of common stock of the Company. An additional $162,800 of Series A
Preferred was converted in July 2003.

In addition, in March 2003, the Company also issued $1 million in shares
of 3 percent Series B Convertible Preferred Stock (the Series B Preferred) to
Laurus at a fixed conversion price of $.88 per share. Accrued dividends are
payable monthly. Principal is payable in cash or stock in twelve equal monthly
installments starting October 1, 2003. Except for the conversion
price, the conversion terms of the Series B
Preferred Stock are the same as the conversion terms of the Working Capital Line.
Conversions to equity are offset against the required principal repayments and, as a
result of conversions to date, the first installment payment is
scheduled for May, 2004. For the six months ended June 30, 2003, Laurus converted $339,944
of the Series B Preferred into 386,300 shares of common stock of the Company.
An additional $288,640 of Series B Preferred was converted in July 2003.

19



---



##### Table of Contents



In connection with all of the above financing transactions with Laurus,
the Company issued to Laurus warrants to purchase 550,000 shares of common
stock at prices ranging from $1.058 to $1.33. In addition, Laurus will be
issued a warrant to purchase one share of common stock for every $20 of
principal of the Working Capital Line converted to equity, up to a total of
150,000 shares, at an exercise price of $1.15 per share.

In February, 2003, under its Universal Blank Shelf Registration Statement,
the Company sold 100,000 shares of its Common Stock and a Warrant for 20,000
shares, exercisable at $1.25 per share, for gross proceeds of $100,000. The
Series A and B Convertible Preferred Stock and 300,000 of the Warrants
described above were also sold under the Universal Blank Shelf Registration
Statement.

Management
believes that, including the above financings, the Company has
adequate resources to fund operations and working capital requirements through
December 31, 2003. However, the Company is expecting an
additional funding of $2.6 million within the next several months
under its DARPA contract. If this funding is delayed, the Company
may need to obtain financing to continue the work under the
contract. Also, the Company has $1.2 million in debt due in
February 2004 to the former creditors of SAL, Inc., which the Company acquired
in August, 2001 (SAL Notes). The Company has had preliminary discussions
with the representative of the noteholders of this debt regarding the
extinguishment of this debt with stock or otherwise amending the terms of the
debt. If the Company is unsuccessful in its negotiations with the noteholders,
it will need to raise additional financing to extinguish this debt. Also, in
the first quarter of 2004, the Company expects a normal funding delay under its
DARPA contract requiring the Company to finance costs incurred on this contract
prior to the receipt of funds. In addition, the Company has determined
that it will require additional financing for other working capital
requirements in 2004 and to complete or accelerate the development of some of
its high value emerging new products, including its patented CPL systems for
the manufacture of high-performance semiconductors. However, there can be no
assurance that additional financings will be available when needed, on
favorable terms, or at all.

The Companys stockholders equity was $2,838,993 as of June 30, 2003.
The Company transferred to the Nasdaq SmallCap Market on May 9, 2003, where it
is required to maintain no less than $2.5 million of stockholders equity to
retain its listing. Continued losses without increases in equity would cause
the Company to fall below this NASDAQ requirement, which would require it to
come into compliance or face delisting. The delisting of the Companys stock
could adversely affect its ability to raise funds in the future. The Company
believes that it has available to it several potential sources of capital to
meet NASDAQ listing standards, particularly the above described financings and
extinguishment of the SAL Notes with stock. The Company is also pursuing
opportunities for strategic relationships with semiconductor industry partners,
one of the goals of which would involve receipt of additional funding, in order
to accelerate the commercialization of its emerging CPL products.

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced Lithography, Inc. (SAL), in a
merger of SAL with and into Subsidiary (Merger). Consideration for the
Merger consisted of an aggregate of 603,051 shares of the Companys common
stock, $1.2 million in cash and $1.2 million in notes (the SAL Notes). The
SAL Notes are convertible into shares of the Companys common stock at a price
of $4.302. The SAL Notes are convertible by the holders at any time and the
Company can force conversion if the average price, as defined, of the Companys
common stock during any ten-day trading period exceeds $6.45. Interest on the
SAL Notes is payable quarterly, with the entire principal amount due, if not
converted, on February 7, 2004. The resale by the holders of the conversion
shares is covered by an effective registration statement. As discussed above,
the Company is considering the extinguishment of the SAL Notes with common
stock of the Company.

Under the Merger Agreement, SALs former shareholders and creditors could
earn up to three contingent earnout payments upon the satisfaction of three
earnout conditions. For the first earnout, the SAL creditors were eligible to
receive $500,000 in Convertible Notes upon the satisfaction of a stepper
limited throughput test (without the CPL light source) by June 30, 2002. This
requirement was not met by the June 30, 2002 deadline, and, therefore, the
Company did not have to issue the $500,000 in Convertible Notes. For the
second earnout, the SAL shareholders can earn $500,000 in Convertible Notes
upon the satisfaction of a lithography demonstration milestone. This milestone
must be met 90 days after the CPL light source is integrated with the stepper
at the Systems Division in Vermont and

20



---



##### Table of Contents



has satisfied certain negotiated
source performance criteria. The specific source performance
criteria specified in the Merger Agreement have not yet been met, so the 90 day
period to satisfy this milestone has not yet commenced. The third earnout
condition can result in payment of up to 354,736 JMAR shares and up to $1.2
million in Convertible Notes upon receipt by the Company of a qualifying order
for a CPL system from a commercial customer and delivery to the customer.
Under the Merger Agreement, the deadline for receipt of this order is 180 days
after the CPL source is integrated with the stepper at the Systems Division in
Vermont and has satisfied the above-mentioned source performance criteria. If
earned, this earnout payment is payable 30 days after delivery and acceptance
of the system by the customer. The Company is in preliminary discussions with
the representative of the holders of these earnouts concerning possible
modification of the earnout provisions.

Commitments

Future minimum annual commitments under bank and other debt agreements,
non-cancellable operating leases (net of subleases) and post-employment
benefits as of June 30, 2003 are as follows (unaudited):

|                         |  |      |         |      |  |      |           |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |         |  |  |   |           | 
|------------------------ |  | ---- | ------- | ---- |  | ---- | --------- | ---- |  | ---- | ------- | ---------- |  | ----- | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | --------- | 
|                         |  | 2003 |         | 2004 |  | 2005 |           | 2006 |  | 2007 |         | Thereafter |  | Total
|                         |  |      |         |      |  |      |           |      |  |      |         |            |  |      
|Bank and other
debt      |  | $    |        |      |  | $    | 1,200,000 |      |  | $    |        |            |  | $     |        |  |  | $ |        |  |  | $ |        |  |  | $ | 1,200,000 | 
|Operating leases         |  |      | 503,448 |      |  |      | 826,854   |      |  |      | 496,277 |            |  |       | 39,970  |  |  |   |        |  |  |   |        |  |  |   | 1,866,549 | 
|Post-employment
benefits |  |      | 97,464  |      |  |      | 211,172   |      |  |      | 211,172 |            |  |       | 211,172 |  |  |   | 211,172 |  |  |   | 138,074 |  |  |   | 1,080,226 | 
|                         |  |      |         |      |  |      |           |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |         |  |  |   |           | 
|                         |  | $    | 600,912 |      |  | $    | 2,238,026 |      |  | $    | 707,449 |            |  | $     | 251,142 |  |  | $ | 211,172 |  |  | $ | 138,074 |  |  | $ | 4,146,775 | 
|                         |  |      |         |      |  |      |           |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |         |  |  |   |           | 

Excluded from the above table is Series A and B Preferred Stock in the gross amount of
$1.3 million. The Series B Preferred Stock in the amount of $660,056 at June
30, 2003 is redeemable, if not previously converted, in twelve equal monthly
payments starting January 2004 and the Series A Preferred Stock is
redeemable, if not previously converted, in March 2005 (see page 19). Also
excluded from the above table is the Companys $3 million Working Capital Line.
The Working Capital Line balance fluctuates based on the amount of accounts
receivable of the Company and was $2,170,241 at June 30, 2003.

As noted above, pursuant to the acquisition of SAL, as described above,
its former shareholders and creditors can earn up to two earnout payments upon
the satisfaction of certain earnout conditions.

At December 31, 2002, the Company had approximately $44 million of Federal
net operating loss carryforwards subject to certain annual limitations, which
expire from 2004 through 2022. To the extent the Company has taxable income in
the future, these carryforwards may be used by the Company to reduce its cash
outlay for taxes.

Critical Accounting Policies and Estimates

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

On an ongoing basis, management evaluates its estimates and judgments,
including those related to revenues, allowances for doubtful accounts,
inventory reserves, goodwill and intangible assets, deferred taxes, litigation
accrual, warranty reserve and stock based compensation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the

21



---



##### Table of Contents



following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.

Revenues

Product revenues are recognized when the product is shipped FOB shipping
point, all risks of ownership have passed to the customer and the Company has
performed all obligations in accordance with Staff Accounting Bulletin No 101,
Revenue Recognition in Financial Statements (SAB No. 101).

Contract revenues are recognized based on the percentage of completion
method wherein income is recognized pro-rata over the life of the contract
based on the ratio of total incurred costs to anticipated total costs of the
contract. The program manager prepares a statement of work, schedule and
budget for each contract. At least monthly, actual costs are compared to budget
and technical progress is compared to the planned schedule. The Company
prepares an estimate of costs to complete for each contract at least quarterly.
Estimated losses based on this review, if any, are fully charged to operations when
identified. Actual costs could differ from these estimated costs.

Allowances for Doubtful Accounts

JMAR maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of JMARs customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Management reviews delinquent accounts at least quarterly to identify
potential doubtful accounts, and together with customer follow-up estimates the
amount of potential losses. Historically, the Companys losses from bad debts
have been minimal.

Inventory Reserves

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

Goodwill and Intangible Assets

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

Deferred Taxes

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

22



---



##### Table of Contents



Litigation Accrual

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

Warranty Reserve

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

Stock-Based Compensation Plans

The Company accounts for its stock option and warrant plans under APB
Opinion No. 25, using the intrinsic value method, under which no compensation
cost has been recognized for issuances to employees. Options and Warrants
issued to non-employees (other than directors) are accounted for based on the
fair value of the equity instrument issued. The fair value is determined based
on the Black-Scholes method. The resulting value is amortized over the service
period.

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

Certain statements contained in this Form 10-Q which are not related to
historical results, including statements regarding JMARs future sales or
profit growth, competitive position or products, projects or processes
currently under development, the ability of the Company to successfully
introduce those products into the commercial marketplace or to apply those
products, projects or processes to alternative applications and the
availability of future bank or equity investor financing are forward-looking
statements that necessarily are based on certain assumptions and are subject to
certain risks and uncertainties that could cause actual future performance and
results to differ materially from those stated or implied in the
forward-looking statements. These risks and uncertainties include the lack of
funds to continue development and commercialization of our CPL products in
accordance with our proposed schedule of product introductions due to delays
in funding of government contracts and delays in securing, or inability to
secure, other financing, whether from the public or private debt or equity
markets or from commercial lenders or otherwise. Other risks include failure of advanced technology and new intellectual property to perform as
predicted,
concentration of sales to certain markets and customers, such as the
semiconductor industry, delays in shipments or cancellations of orders, failure
of expected orders to materialize, fluctuations in margins, timing of future
orders, lack of availability of critical components, customer reorganizations,
the failure of pending patents to be issued, delays in development,
introduction and acceptance of new products, changing business and economic
conditions in various geographic regions, technical obsolescence of existing
products, technical problems in the development or modification of current
products or manufacturing processes, the impact of competitive products and
pricing, including the risk that current lithography technologies can continue
to economically produce smaller feature sizes or that the EUV LLC is successful
in developing an acceptable next generation lithography process that becomes
the process of choice for the semiconductor industry or that the semiconductor
industry fails to adopt CPL as the lithography alternative, the degree of
success of technology transfer (e.g., advanced lithography sources, etc.) to
commercial products, availability of working capital to support growth,
continued government funding of advanced lithography, successful integration of
acquisitions, declining credit markets, the non-payment of the deferred
purchase price received in the sale of JPSI, greater JPSI liabilities assumed
than estimated, 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, 2002, in the Companys Form S-3/A filed May 21,
2003 and in the Companys other filings with the Securities and Exchange
Commission.

23



---



##### Table of Contents






Item 3.Quantitative and Qualitative Disclosures About Market Risk.

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




Item 4.Controls and Procedures.

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

The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and the Companys Chief Financial Officer, of the
effectiveness as of June 30, 2003 of the design and operation of the Companys
disclosure controls and procedures. Based on the foregoing, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective as of June 30, 2003.

There have been no significant changes in the Companys internal control
over financial reporting during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.




PART II  OTHER INFORMATION




Item 1.Legal Proceedings.

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

As was previously reported, in September 2002, a Complaint was filed by
All American Semiconductor, Inc. (All American) against JSI and JMAR in San
Diego Superior Court. The Complaint alleges that JSI owes All American
approximately $700,000 related to termination of a distribution agreement. The
Complaint also alleges that All American was induced to refrain from
terminating the agreement until after the JSI business had been discontinued.
All American claims that such actions constituted fraud and that it is entitled
to treble (triple) damages. All American has also alleged that JMAR is the
alter ego of JSI and based on that theory should be held responsible for the
obligations of JSI. While recognizing that the approximately $700,000 in
indebtedness may be owed by JSI to All American under the agreement, JSI
asserts that the obligations are merely of a contractual nature and strongly
disputes that any of the actions taken constitute fraud. JMAR also disputes
that it is the alter ego of JSI in light of the facts that JSI is a
separately incorporated entity that has been more than adequately capitalized
over its years of operations and, that JSI, and not JMAR, was the party to the
Distributor Agreement and was the sole direct contact with All American. JMAR
believes that there is insufficient evidence to support the alter ego theory
and believes that it will ultimately prevail on this issue. JMAR and JSI are
vigorously contesting any claims by All American that it is owed more than
$700,000. In May, 2003, All American amended its Complaint to add JSI
Microelectronics, Inc. (JME) as a defendant. In July, 2003 the defendants
Demurrer was granted with the Court allowing All American to refile an Amended
Complaint. Because JMAR, JME and JSI believe the All American Complaint
remains defective and does not state valid claims, JMAR, JSI and JME have
recently filed another Demurrer and Motion to Strike. The parties have engaged
in a Mediation process in an attempt to settle this action, but there are no
assurances this matter will settle prior to trial.

24



---



##### Table of Contents






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 5,526 shares of
Common Stock to its outside directors as compensation for services as
directors in April and June, 2003. These transactions were exempt under
Section 4(2) of the Securities Act of 1933 (the Act).
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 4.Submission of Matters to a Vote of Security Holders.



| |  |  | At the Companys Annual Meeting of Shareholders held on June 6, 2003, the
following matters were voted on:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (a) The following directors were elected: James H. Banister, Jr.,
(21,972,598 affirmative votes and 380,382 votes withheld); C. Neil Beer
(21,972,598 affirmative votes and 380,382 votes withheld); Vernon H.
Blackman (21,971,974 affirmative votes and 381,006 votes withheld);
Charles A. Dickinson (21,971,974 affirmative votes and 381,006 votes
withheld); John S. Martinez (21,424,922 affirmative votes and 928,058
votes withheld); Barry Ressler (21,774,813 affirmative votes and 578,167
votes withheld); Ronald A. Walrod (21,972,598 affirmative votes and
380,382 votes withheld).
|
| |  |  | (b) A motion to ratify the appointment of Grant Thornton, LLP as the
Companys independent auditor for the fiscal year ending December 31,
2003 was passed with 22,004,318 affirmative votes, 164,265 negative votes
and 184,397 abstaining votes.                                                                                                                                                                                                                                                                                                                                                 




Item 6.Exhibits and Reports on Form 8-K.



| |  |  | (a) Exhibits
| |  |  | ------------

| |  |                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------
| |  | Exhibit 31.1 Certificate of Ronald A. Walrod pursuant to section 302
of the Sarbanes-Oxley Act of 2002.   
| |  |                                                                                                           
| |  | Exhibit 31.2 Certificate of Dennis E. Valentine pursuant to section
302 of the Sarbanes-Oxley Act of 2002.
| |  |                                                                                                           
| |  | Exhibit 32.1 Certificate pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.                       



| |  |  | (b) Reports on Form 8-K                                                                                                                           
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company filed a Report on Form 8-K on May 20, 2003 related to the
announcement of its financial results for the quarter ended March 31,
2003. 
|
| |  |  | The Company filed a Report on Form 8-K on May 1, 2003 related to an
amendment to two financing transactions with Laurus Master Fund, Ltd.         
|
| |  |  | The Company filed a Report on Form 8-K on April 1, 2003 related to the
announcement of its financial results for the year ended December 31,
2002.

25



---



##### Table of Contents



SIGNATURE

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

|                |  |     |  |                                                                         |  | 
|--------------- |  | --- |  | ----------------------------------------------------------------------- |  | 
|                |  |     |  | JMAR TECHNOLOGIES, INC.                                                 |  | 
|                |  |     |  |                                                                         |  | 
|                |  |     |  |                                                                         |  | 
|August 11, 2003 |  | By: |  | /s/ Ronald A. Walrod                                                    |  | 
|                |  |     |  |                                                                         |  | 
|                |  |     |  | Ronald A. Walrod, Chief Executive Officer        and
Authorized Officer |  | 
|                |  |     |  |                                                                         |  | 
|                |  |     |  |                                                                         |  | 
|                |  | By: |  | /s/ Dennis E. Valentine                                                 |  | 
|                |  |     |  |                                                                         |  | 
|                |  |     |  | Dennis E. Valentine, Chief Accounting Officer                           |  | 

26