##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549-1004
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended September 30, 2005
Commission File Number 1-10515
 JMAR TECHNOLOGIES, INC.
  Delaware
    
    68-0131180(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification number)
 
 
   þ o
 o þ
 o þ




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INDEX
  
 Page #PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets  September 30, 2005 (unaudited) and December 31, 2004
    
    
    2Consolidated Statements of Operations (unaudited)  Three months and nine months
ended September 30, 2005 and 2004
    
    
    3Consolidated Statements of Cash Flows (unaudited)  Nine months ended September 30,
2005 and 2004
    
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    30PART II.
    
    OTHER INFORMATIONItem 1.
    
    N/AItem 2.
    
    N/AItem 3.
    
    N/AItem 4.
    
    N/AItem 5.
    
    N/AItem 6.
    
    Exhibits
    
    
    31EXHIBIT 4.1EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 JMAR TECHNOLOGIES, INC.
 
 CONSOLIDATED BALANCE SHEETS
 As of September 30, 2005 and December 31, 2004
 (Unaudited)
 September 30, 2005
    
    
    December 31, 2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,775,105
    
    
    $
    6,599,588Accounts receivable
    
    
    2,302,531
    
    
    
    3,090,922Inventories
    
    
    357,721
    
    
    
    335,336Prepaid expenses and other
    
    
    637,529
    
    
    
    925,943Total current assets
    
    
    8,072,886
    
    
    
    10,951,789Property and equipment, net
    
    
    975,046
    
    
    
    879,012Intangible assets, net
    
    
    1,874,708
    
    
    
    537,191Other assets
    
    
    430,895
    
    
    
    642,174Goodwill
    
    
    4,415,932
    
    
    
    4,415,932TOTAL ASSETS
    
    $
    15,769,467
    
    
    $
    17,426,098LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,142,752
    
    
    $
    943,027Accrued liabilities
    
    
    358,146
    
    
    
    673,869Accrued payroll and related costs
    
    
    771,527
    
    
    
    731,718Billings in excess of costs incurred
    
    
    682,225
    
    
    
    861,383Current portion of notes payable and other liabilities
    
    
    116,124
    
    
    
    145,019Current liabilities of discontinued operations, including notes payable
    
    
    64,098
    
    
    
    416,391Total current liabilities
    
    
    3,134,872
    
    
    
    3,771,407Notes payable and other long-term liabilities, net of current portion
    
    
    402,072
    
    
    
    465,492Redeemable convertible preferred stock, 885,000 shares issued and
outstanding as of September 30, 2005 and 908,333 shares issued and
outstanding as of December 31, 2004, net of unamortized discount of
$1,219,570 and $996,059, respectively
    
    
    7,630,430
    
    
    
    8,087,274Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; 885,000 shares
issued and outstanding as of September 30, 2005 included in redeemable
convertible preferred stock above, and 908,333 shares issued and outstanding
as of December 31, 2004
    
    
    
    
    
    
    Common stock, $.01 par value; 80,000,000 shares authorized; 35,211,427
shares issued and outstanding as of September 30, 2005 and 31,376,735
shares issued and outstanding as of December 31, 2004
    
    
    352,114
    
    
    
    313,767Additional-paid in capital
    
    
    76,392,189
    
    
    
    70,087,057Accumulated deficit
    
    
    (72,142,210
    )
    
    
    (65,298,899
    )Total stockholders equity
    
    
    4,602,093
    
    
    
    5,101,925TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    15,769,467
    
    
    $
    17,426,098
  2




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months Ended September 30, 2005 and 2004
 and Nine Months Ended September 30, 2005 and 2004
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004
    
    
    September 30, 2005
    
    
    September 30, 2004Revenues
    
    $
    2,333,832
    
    
    $
    2,257,737
    
    
    $
    6,915,843
    
    
    $
    8,304,550Costs of revenues
    
    
    1,633,201
    
    
    
    2,042,918
    
    
    
    4,983,097
    
    
    
    6,754,436Gross profit
    
    
    700,631
    
    
    
    214,819
    
    
    
    1,932,746
    
    
    
    1,550,114Operating expenses:Selling, general and administrative
    
    
    1,859,853
    
    
    
    1,250,882
    
    
    
    4,975,867
    
    
    
    3,703,636Research and development
    
    
    986,704
    
    
    
    514,790
    
    
    
    2,384,181
    
    
    
    708,702Asset writedowns
    
    
    
    
    
    
    35,737
    
    
    
    99,218
    
    
    
    85,313Total operating expenses
    
    
    2,846,557
    
    
    
    1,801,409
    
    
    
    7,459,266
    
    
    
    4,497,651Loss from operations
    
    
    (2,145,926
    )
    
    
    (1,586,590
    )
    
    
    (5,526,520
    )
    
    
    (2,947,537
    )Interest and other income
    
    
    70,209
    
    
    
    17,922
    
    
    
    151,315
    
    
    
    111,430Interest and other expense
    
    
    (60,595
    )
    
    
    (74,641
    )
    
    
    (210,352
    )
    
    
    (561,229
    )Loss from continuing operations
    
    
    (2,136,312
    )
    
    
    (1,643,309
    )
    
    
    (5,585,557
    )
    
    
    (3,397,336
    )Loss from operations of discontinued
operations
    
    
    
    
    
    
    (52,549
    )
    
    
    
    
    
    
    (40,100
    )Net loss
    
    
    (2,136,312
    )
    
    
    (1,695,858
    )
    
    
    (5,585,557
    )
    
    
    (3,437,436
    )Deemed preferred stock dividends
    
    
    (443,951
    )
    
    
    (233,958
    )
    
    
    (1,257,755
    )
    
    
    (1,938,339
    )Loss applicable to common stock
    
    $
    (2,580,263
    )
    
    $
    (1,929,816
    )
    
    $
    (6,843,312
    )
    
    $
    (5,375,775
    )Basic and diluted loss per share:Loss per share from continuing
operations
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.20
    )
    
    $
    (0.17
    )Loss per share from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic and diluted loss per share applicable to
common stock
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.20
    )
    
    $
    (0.17
    )Shares used in computation of basic and
diluted loss per share
    
    
    35,209,761
    
    
    
    31,088,814
    
    
    
    34,734,438
    
    
    
    32,010,917
  3




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Nine Months Ended September 30, 2005 and 2004
 (Unaudited)
 2005
    
    
    2004Cash flows from operating activities:Loss from continuing operations
    
    $
    (5,585,557
    )
    
    $
    (3,397,336
    )Adjustments to reconcile loss from continuing operations
to net cash used in continuing operations:Depreciation, amortization and debt discount
    
    
    481,937
    
    
    
    848,934Asset writedowns
    
    
    99,218
    
    
    
    85,313Services received in exchange for common stock or warrants
    
    
    77,074
    
    
    
    8,999Change in assets and liabilities:Accounts receivable
    
    
    788,391
    
    
    
    (1,437,705
    )Inventories
    
    
    (22,385
    )
    
    
    111,431Prepaid expenses and other
    
    
    313,716
    
    
    
    (19,784
    )Billings in excess of costs incurred
    
    
    (179,158
    )
    
    
    143,131Accounts payable and accrued liabilities
    
    
    (70,686
    )
    
    
    (195,227
    )Net cash used in continuing operations operating activities
    
    
    (4,097,450
    )
    
    
    (3,852,244
    )Loss from discontinued operations
    
    
    
    
    
    
    (40,100
    )Changes in net assets and liabilities of discontinued operations
    
    
    (352,293
    )
    
    
    (635,435
    )Net cash used in discontinued operations
    
    
    (352,293
    )
    
    
    (675,535
    )Net cash used in operating activities
    
    
    (4,449,743
    )
    
    
    (4,527,779
    )Cash flows from investing activities:Capital expenditures
    
    
    (347,504
    )
    
    
    (315,256
    )Additions of intangible assets and other assets
    
    
    (127,534
    )
    
    
    (159,228
    )Net cash used in investing activities
    
    
    (475,038
    )
    
    
    (474,484
    )Cash flows from financing activities:Net proceeds from the issuance of preferred stock
    
    
    
    
    
    
    9,057,914Net proceeds from the issuance of common stock
    
    
    3,845,924
    
    
    
    Payments of notes payable and other long-term liabilities
    
    
    
    
    
    
    (958,647
    )Cash payments of preferred stock dividends
    
    
    (512,293
    )
    
    
    (196,865
    )Preferred stock redemptions
    
    
    (233,333
    )
    
    
    (166,667
    )Net proceeds from the exercise of options
    
    
    
    
    
    
    157,275Net cash provided by financing activities
    
    
    3,100,298
    
    
    
    7,893,010Net increase
(decrease) in cash and cash equivalents
    
    
    (1,824,483
    )
    
    
    2,890,747Cash and cash equivalents, beginning of period
    
    
    6,599,588
    
    
    
    4,171,179Cash and cash equivalents, end of period
    
    $
    4,775,105
    
    
    $
    7,061,926Cash paid for interest
    
    $
    26,057
    
    
    $
    18,436
   4




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JMAR TECHNOLOGIES, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Basis of Presentation and Financial Condition
  TM TM
    5




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JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
 (2) Recent Accounting Pronouncements
  ,
    (3) Stock Option Plans
  6




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Loss applicable to common stock:
    
    As Reported
    
    $
    (2,580,263
    )
    
    $
    (1,929,816
    )
    
    $
    (6,843,312
    )
    
    $
    (5,375,775
    )Stock based compensation expense
    
    
    
    
    (187,884
    )
    
    
    (212,580
    )
    
    
    (450,819
    )
    
    
    (559,739
    )Pro Forma
    
    $
    (2,768,147
    )
    
    $
    (2,142,396
    )
    
    $
    (7,294,131
    )
    
    $
    (5,935,514
    )Basic and diluted loss per share:
    
    As Reported
    
    $
    (0.07
    )
    
    $
    (0.06
    )
    
    $
    (0.20
    )
    
    $
    (0.17
    )Stock based compensation expense
    
    
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.02
    )Pro Forma
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    (0.21
    )
    
    $
    (0.19
    )
   (4) Accounts Receivable
  September 30, 2005
    
    
    December 31, 2004Billed
    
    $
    1,847,411
    
    
    $
    944,046Unbilled
    
    
    455,120
    
    
    
    2,146,876$
    2,302,531
    
    
    $
    3,090,922
  7




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
 (5) Inventories
  September 30, 2005
    
    
    December 31, 2004Raw materials, components and sub-assemblies
    
    $
    132,427
    
    
    $
    88,684Work-in-process
    
    
    
    
    
    
    245,498Finished goods and demonstration units
    
    
    225,294
    
    
    
    1,154$
    357,721
    
    
    $
    335,336
 (6) Property and Equipment
  September 30, 2005
    
    
    December 31, 2004Equipment, machinery and software
    
    $
    3,418,236
    
    
    $
    3,156,252Furniture and fixtures
    
    
    391,501
    
    
    
    440,990Leasehold improvements
    
    
    376,998
    
    
    
    283,2184,186,735
    
    
    
    3,880,460Less-accumulated depreciation
    
    
    (3,211,689
    )
    
    
    (3,001,448
    )$
    975,046
    
    
    $
    879,012
 (7) Segment Information
  Research Division/Vermont Operations
    8




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
   Microelectronics Division (formerly JMAR Semiconductor)
  Sensor Products Group
 TM
   SensorResearch
    
    Vermont
    
    Microelectronics
    
    ProductsDivision
    
    Operations
    
    Division
    
    Group
    
    Corporate
    
    TotalNine Months Ended September 30,
2005:Revenues
    
    $
    1,537,060
    
    
    $
    2,795,597
    
    
    $
    2,583,186
    
    
    $
    
    
    
    $
    
    
    
    $
    6,915,843Operating loss
    
    
    (1,657,674
    )
    
    
    (626,684
    )
    
    
    (1,051,569
    )
    
    
    (2,048,335
    )
    
    
    (142,258
    )
    
    
    (5,526,520
    )Asset writedowns
    
    
    (99,218
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99,218
    )Depreciation & amortization
    
    
    69,671
    
    
    
    27,200
    
    
    
    74,763
    
    
    
    6,785
    
    
    
    303,518
    
    
    
    481,937Total assets
    
    
    1,774,719
    
    
    
    5,395,667
    
    
    
    909,707
    
    
    
    1,638,202
    
    
    
    6,051,172
    
    
    
    15,769,467Goodwill
    
    
    
    
    
    
    4,415,932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,415,932Capital expenditures
    
    
    28,880
    
    
    
    51,439
    
    
    
    5,428
    
    
    
    23,326
    
    
    
    238,431
    
    
    
    347,504
 9




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
 SensorResearch
    
    Vermont
    
    Microelectronics
    
    ProductsDivision
    
    Operations
    
    Division
    
    Group
    
    Corporate
    
    TotalThree Months Ended September 30,
2005:Revenues
    
    $
    396,728
    
    
    $
    1,081,373
    
    
    $
    855,731
    
    
    $
    
    
    
    $
    
    
    
    $
    2,333,832Operating loss
    
    
    (673,134
    )
    
    
    (161,407
    )
    
    
    (399,087
    )
    
    
    (869,267
    )
    
    
    (43,031
    )
    
    
    (2,145,926
    )Depreciation & amortization
    
    
    25,842
    
    
    
    12,880
    
    
    
    25,147
    
    
    
    3,251
    
    
    
    100,046
    
    
    
    167,166Capital expenditures
    
    
    19,605
    
    
    
    1,218
    
    
    
    1,798
    
    
    
    11,049
    
    
    
    134,805
    
    
    
    168,475Nine Months Ended September 30,
2004:Revenues
    
    
    3,290,449
    
    
    
    2,234,545
    
    
    
    2,779,556
    
    
    
    
    
    
    
    
    
    
    
    8,304,550Operating loss
    
    
    (424,647
    )
    
    
    (1,494,455
    )
    
    
    (327,674
    )
    
    
    (586,626
    )
    
    
    (114,135
    )
    
    
    (2,947,537
    )Asset writedowns
    
    
    (85,313
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (85,313
    )Depreciation and amortization
    
    
    126,721
    
    
    
    169,154
    
    
    
    30,306
    
    
    
    629
    
    
    
    522,124
    
    
    
    848,934Total assets
    
    
    4,879,660
    
    
    
    4,561,074
    
    
    
    1,640,290
    
    
    
    10,694
    
    
    
    7,647,701
    
    
    
    18,739,419Goodwill
    
    
    
    
    
    
    4,415,932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,415,932Capital expenditures
    
    
    12,669
    
    
    
    7,922
    
    
    
    153,365
    
    
    
    11,323
    
    
    
    129,977
    
    
    
    315,256Three Months Ended September 30,
2004:Revenues
    
    
    897,069
    
    
    
    537,272
    
    
    
    823,396
    
    
    
    
    
    
    
    
    
    
    
    2,257,737Operating loss
    
    
    (355,143
    )
    
    
    (672,291
    )
    
    
    (150,438
    )
    
    
    (373,106
    )
    
    
    (35,612
    )
    
    
    (1,586,590
    )Asset writedowns
    
    
    (35,737
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,737
    )Depreciation and amortization
    
    
    44,421
    
    
    
    20,020
    
    
    
    15,964
    
    
    
    629
    
    
    
    91,042
    
    
    
    172,076Capital expenditures
    
    
    8,426
    
    
    
    
    
    
    
    126,626
    
    
    
    11,323
    
    
    
    117,162
    
    
    
    263,537
   (8) Discontinued Operations
    10




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
   September 30,
    
    
    December 31,2005
    
    
    2004Current Liabilities:Facility lease accrual
    
    $
    
    
    
    $
    275,221Accounts payable and accruals
    
    
    64,098
    
    
    
    103,726Note payable
    
    
    
    
    
    
    37,444$
    64,098
    
    
    $
    416,391
 (9) Line of Credit and Notes Payable
    11




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  (10) Equity
Transactions
      12




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
   GrossAmountOutstanding atSeptember 30,
    
    
    Scheduled RedemptionsDescription
    
    2005
    
    
    2006
    
    
    2007
    
    
    TotalSeries E Preferred
    
    $
    1,000,000
    
    
    $
    1,000,000
    
    
    $
    
    
    
    $
    1,000,000Series F Preferred
    
    $
    1,962,500
    
    
    
    187,500
    
    
    
    1,775,000
    
    
    
    1,962,500Series G Preferred
    
    $
    1,962,500
    
    
    
    187,500
    
    
    
    1,775,000
    
    
    
    1,962,500Series H Preferred
    
    $
    3,925,000
    
    
    
    375,000
    
    
    
    3,550,000
    
    
    
    3,925,000$
    1,750,000
    
    
    $
    7,100,000
    
    
    $
    8,850,000
    Net Balance atNet Balance at
    
    
    Amendment Fair
    
    
    Discount
    
    
    
    
    
    
    September 30,Series
    
    December 31, 2004
    
    
    Value
    
    
    Amortization
    
    
    Redemptions
    
    
    2005E
    
    $
    752,306
    
    
    $
    79,390
    
    
    $
    274,738
    
    
    $
    83,333
    
    
    $
    864,321F
    
    
    1,812,092
    
    
    
    215,717
    
    
    
    139,558
    
    
    
    37,500
    
    
    
    1,698,433G
    
    
    1,844,699
    
    
    
    234,696
    
    
    
    134,139
    
    
    
    37,500
    
    
    
    1,706,642H
    
    
    3,678,177
    
    
    
    537,000
    
    
    
    294,857
    
    
    
    75,000
    
    
    
    3,361,034$
    8,087,274
    
    
    $
    1,066,803
    
    
    $
    843,292
    
    
    $
    233,333
    
    
    $
    7,630,430
 13




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
  FinancingNet Balance
    
    
    
    
    
    
    
    
    
    
    Fair Value
    
    
    Fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Balanceat
    
    
    
    
    
    
    
    
    
    
    of
    
    
    and
    
    
    Discount
    
    
    
    
    
    
    
    
    
    
    atSeries
    
    December 31, 2003
    
    
    Gross Amount
    
    
    BCF
    
    
    Warrants
    
    
    Costs
    
    
    Amortization
    
    
    Conversions
    
    
    Redemptions
    
    
    September 30, 2004C
    
    $
    875,223
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    624,777
    
    
    $
    1,500,000
    
    
    $
    
    
    
    $
    D
    
    
    1,341,927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    658,073
    
    
    
    2,000,000
    
    
    
    
    
    
    
    E
    
    
    
    
    
    
    1,500,000
    
    
    
    381,609
    
    
    
    218,451
    
    
    
    59,534
    
    
    
    245,806
    
    
    
    
    
    
    
    166,667
    
    
    
    919,545F
    
    
    
    
    
    
    2,000,000
    
    
    
    54,250
    
    
    
    144,282
    
    
    
    72,062
    
    
    
    48,781
    
    
    
    
    
    
    
    
    
    
    
    1,778,187G
    
    
    
    
    
    
    2,000,000
    
    
    
    
    
    
    
    151,571
    
    
    
    72,062
    
    
    
    48,095
    
    
    
    
    
    
    
    
    
    
    
    1,824,462H
    
    
    
    
    
    
    4,000,000
    
    
    
    
    
    
    
    319,301
    
    
    
    144,125
    
    
    
    115,942
    
    
    
    
    
    
    
    
    
    
    
    3,652,516$
    2,217,150
    
    
    $
    9,500,000
    
    
    $
    435,859
    
    
    $
    833,605
    
    
    $
    347,783
    
    
    $
    1,741,474
    
    
    $
    3,500,000
    
    
    $
    166,667
    
    
    $
    8,174,710
     14




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
    (11) Earnings Per Share
  (12) Intangible Assets
  September 30, 2005
    
    
    December 31, 2004Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Intangible
    
    
    Carrying
    
    
    Accumulated
    
    
    IntangibleAmount
    
    
    Amortization
    
    
    Assets
    
    
    Amount
    
    
    Amortization
    
    
    AssetsPatents
    
    $
    986,370
    
    
    $
    496,595
    
    
    $
    489,775
    
    
    $
    908,032
    
    
    $
    489,174
    
    
    $
    418,858Unpatented Technology
    
    
    450,000
    
    
    
    450,000
    
    
    
    
    
    
    
    450,000
    
    
    
    450,000
    
    
    
    Licenses
    
    
    1,398,266
    
    
    
    13,333
    
    
    
    1,384,933
    
    
    
    126,250
    
    
    
    7,917
    
    
    
    118,333$
    1,874,708
    
    
    
    
    
    
    
    
    
    
    $
    537,191
    15




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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
(Unaudited)
 For the Year Ended
    
    Estimated AmortizationDecember 31,
    
    Expense2005
    
    $
    101,1302006
    
    
    449,5202007
    
    
    449,5202008
    
    
    431,1862009
    
    
    180,5402010
    
    
    56,050Beyond
    
    
    206,762$
    1,874,708
 16




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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 Item 2.
 Overview
    Sources of Revenue
 Contract Research and Development, Technical Support, and Production Programs
     17




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##### Table of Contents



Standard Products
 BriteLight 
 VersaCAM 
 BioSentry 
 New Products Under Development
   18




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##### Table of Contents



Results of Operations
 Revenues
 Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Research Division/Vermont Operations
    
    $
    1,478,101
    
    
    $
    1,434,341
    
    
    $
    4,332,657
    
    
    $
    5,524,994Microelectronics Division
    
    
    855,731
    
    
    
    823,396
    
    
    
    2,583,186
    
    
    
    2,779,556Sensor Products Group
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,333,832
    
    
    $
    2,257,737
    
    
    $
    6,915,843
    
    
    $
    8,304,550
  Losses
  19




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##### Table of Contents



Gross Margins
 Selling, General and Administrative (SG&A).
 Research, Development and Engineering Program (RD&E).
 
    
    Customer-funded RD&E costs incurred, primarily related to the DARPA Contract and the
NAVAIR Contract, are included in Costs of Revenues, and totaled $620,873 and $901,115 for
the three months ended September 30, 2005 and 2004, respectively, and $1,972,401 and
$3,625,837 for the nine-month periods ended September 30, 2005 and 2004, respectively. The
decrease in customer-funded RD&E expenditures for the three and nine months ended September
30, 2005 consists of a decrease of $275,725 and $1,784,885, respectively, related to the
DARPA Contract and decreases in two contracts completed in 2004 at the Vermont Operations
of $248,961 and $771,560, respectively. These decreases were offset in part by an increase
in 2005 of $244,444 and $903,009, respectively, related to the NAVAIR Contract.
    
    Company-funded RD&E costs associated with product development are shown in Operating
Expenses and totaled $986,704 and $514,790 for the three months ended September 30, 2005
and 2004, respectively, and $2,384,181 and $708,702 for the nine months ended September 30,
2005 and 2004, respectively. The increase in 2005 is primarily due to product development
for our XRM, XNP, BioSentry and VersaCAM (formerly OASIS) new products.
  20




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##### Table of Contents



Discontinued Operations.
 Interest and Other Expense.
 Preferred Stock Dividends.
 21




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##### Table of Contents



Consolidated Liquidity and Financial Condition
 General.
  Sale of Common Stock
  Issuances of Preferred Stock.
 Issuance Date
    
    Series
    
    Amount
    
    Dividend
    
    Conversion PriceJanuary, 2004
    
    E
    
    $1,500,000
    
    8%
    
    $2.85(1)February, 2004
    
    F
    
    $2,000,000
    
    Prime (2)
    
    $3.11(1)February, 2004
    
    G
    
    $2,000,000
    
    Prime (2)
    
    $3.28(1)February, 2004
    
    H
    
    $4,000,000
    
    Prime (2)
    
    $3.47(1)
  (1)
    
    Reduced to $2.00 pursuant to February 1, 2005 agreement (see below)(2)
    
    Prime rate at September 30, 2005 was 6.75 percent
 22




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##### Table of Contents



Working Capital Line.
  23




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##### Table of Contents



Cash Used in Continuing Operations
 Cash Used in Discontinued Operations
 Cash Used in Investing Activities
 Cash Provided by Financing Activities
 Stockholders Equity.
 24




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##### Table of Contents



Commitments
  2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalLeases
    
    $
    162,929
    
    
    $
    615,422
    
    
    $
    534,502
    
    
    $
    468,680
    
    
    $
    355,490
    
    
    $
    1,085,222
    
    
    $
    3,222,245Deferred
compensation
    
    
    48,732
    
    
    
    267,175
    
    
    
    275,297
    
    
    
    185,955
    
    
    
    56,003
    
    
    
    
    
    
    
    833,162$
    211,661
    
    
    $
    882,597
    
    
    $
    809,799
    
    
    $
    654,635
    
    
    $
    411,493
    
    
    $
    1,085,222
    
    
    $
    4,055,407
  Preferred Stock Redemption Obligations
  GrossAmountOutstandingat September 30,
    
    
    Scheduled RedemptionsDescription
    
    2005
    
    
    2006
    
    
    2007
    
    
    TotalSeries E Preferred
    
    $
    1,000,000
    
    
    $
    1,000,000
    
    
    $
    
    
    
    $
    1,000,000Series F Preferred
    
    $
    1,962,500
    
    
    
    187,500
    
    
    
    1,775,000
    
    
    
    1,962,500Series G Preferred
    
    $
    1,962,500
    
    
    
    187,500
    
    
    
    1,775,000
    
    
    
    1,962,500Series H Preferred
    
    $
    3,925,000
    
    
    
    375,000
    
    
    
    3,550,000
    
    
    
    3,925,000$
    1,750,000
    
    
    $
    7,100,000
    
    
    $
    8,850,000
 PointSource License Agreement
  25




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##### Table of Contents



LXT Alliance Agreement (BioSentry)
   Net Operating Loss Carryforward
  Critical Accounting Policies and Estimates
  26




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##### Table of Contents



Revenues
  Goodwill and Intangible Assets
    27




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##### Table of Contents



Beneficial Conversion Feature and Warrant Valuation
   Allowances for Doubtful Accounts
  Deferred Taxes
  28




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##### Table of Contents



Stock Option Plans
  Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
   
    
    delays and unanticipated technological or engineering difficulties in the Companys new
product development efforts, which involve lengthy and capital intensive programs that are
subject to many unforeseen risks, delays, problems and costs and uncertainties as to the
markets demand for such new products;
    
    the risk that the performance validation tests of the BioSentry Beta units are not
successfully completed due to unforeseen issues with the installation or operation of the
units outside the controlled environment of JMARs facility;
    
    the risk associated with the concentration of the Companys business and receivables
with a small number of customers, including its government contracts and its contract with
FemtoTrace, Inc. for the fabrication of READ alpha and beta units;
    
    the risk that competitors with greater resources enter the markets for the Companys new
products;
    
    the risk that the Company will not be able to convince customers to substitute the
BioSentry for existing products, such as particle detection, filtering and other water
decontamination technologies;
    
    the risk that our portfolio of intellectual property does not contain all of the
intellectual property rights that may be required to develop, manufacture and commercialize
our new products and that we may be unable to license such technologies on reasonable
terms;
    
    the effect of government regulations and required approvals on the BioSentry and X-ray
products;
    
    longer than anticipated purchase approval cycles and more extensive selling efforts in
connection with the sale of the Companys new products to utilities and other regulated
customers;
 29




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##### Table of Contents




    
    the risk that the Company is subject to claims for product liability arising from the
sale of its new products and, specifically with regard to its BioSentry system, that the
Company is unable to obtain adequate product liability insurance to cover these risks at a
reasonable cost, and that the Company is unable to obtain indemnification agreements from
its customers to hold the Company harmless from such claims;
    
    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, for working capital
needs, preferred stock redemptions or for development of the Companys new products;
    
    the continued dilution to current shareholders resulting from the sale of additional
equity interests to finance the Companys product development and commercialization
efforts;
    
    unanticipated difficulties and costs in establishing the Companys Vermont operations as
the manufacturing center for the Companys new products;
    
    the lack of availability of critical components from third party suppliers, including
laser diodes, X-ray optics (including zone plates), holographic optical elements and other
optics or the inability to obtain such components at acceptable costs;
    
    fluctuations in margins, or the failure to lower manufacturing costs sufficiently to
achieve acceptable margins;
    
    the failure of pending patents to be issued and uncertainties as to the breadth or
degree of protection of existing or future patents covering the Companys X-ray, BioSentry
and other technologies and applications; and
    
    other risks detailed in the Companys Form 8-K, filed March 30, 2005, and in other
filings with the Securities and Exchange Commission.
 
 Item 3.
  
 Item 4.
   30




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 6.
 Exhibit 4.1
    
    Common Stock Purchase Warrant for 50,000 shares dated July 1, 2005issued to Dian Griesel, President of The Investor Relations Group, ascompensation for investor and public relations services.Exhibit 10.1
    
    Standard Industrial Net Lease, dated July 1, 2005, between Collins-TechR.B. and JMAR Technologies, Inc.Exhibit 10.2
    
    Letter Subcontract, dated July 6, 2005, between General DynamicsAdvanced Information Systems, Inc. and JMAR Technologies, Inc.sMicroelectronics Division.Exhibit 10.3
    
    Third Amendment to McClellan Park Standard Form Gross Lease Agreement,dated July 7, 2005, between MP Holdings, LLC and JMAR Technologies, Inc.sMicroelectronics Division.Exhibit 10.4
    
    Purchase order, dated September 21, 2005, between General DynamicsAdvanced Information Systems, Inc. and JMAR Technologies, Inc.sMicroelectronics Division.Exhibit 10.5
    
    Amendments to Certificates of Designations of Series E, F, G and HConvertible Preferred Stock, each dated October 20, 2005, between Laurus MasterFund, Ltd. and JMAR Technologies, Inc.Exhibit 31.1
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act2002.Exhibit 31.2
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Actof 2002.Exhibit 32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.
 31




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##### Table of Contents



November 11, 2005
    
    By:
    
    
    
    /s/
    
    Ronald A. WalrodRonald A. Walrod, Chief Executive Officerand Authorized OfficerBy:
    
    
    
    /s/
    
    Dennis E. ValentineDennis E. Valentine, Chief Accounting Officer
 32