##### 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 March 31, 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 |  | (I.R.S. employer      
|incorporation or organization)  |  | 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 (May 6, 2003).

Common Stock, $.01 par value: 24,003,138 shares





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TABLE OF CONTENTS



|                               |                                                                                               |                                               |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               |                                                                                               | CONSOLIDATED BALANCE SHEETS                  
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS        
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS        
|                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                               | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | Item 3. Quantitative and Qualitative Disclosures About Market Risk.                          
|                               | Item 4. Controls and Procedures.                                                             
|PART II  OTHER INFORMATION   
|                               | Item 1. Legal Proceedings.                                                                   
|                               | Item 2. Changes in Securities.                                                               
|                               | Item 6. Exhibits and Reports on Form 8-K.                                                    
|SIGNATURE                     
|EXHIBIT 99.1                  



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INDEX

|         |  |                                                                                                        |  |       
|-------- |  | ------------------------------------------------------------------------------------------------------ |  | ------
|         |  |                                                                                                        |  | Page #
|         |  |                                                                                                        |  |       
|PART I.  |  | FINANCIAL INFORMATION                                                                                  |  |       
|Item 1.  |  | Financial Statements                                                                                   |  |       
|         |  | Consolidated Balance Sheets  March 31, 2003 (unaudited) and December 31, 2002                         |  | 2     
|         |  | Consolidated Statements of Operations (unaudited)  Three months ended March 31,
2003 and 2002         |  | 3     
|         |  | Consolidated Statements of Comprehensive Loss (unaudited)  Three months ended March
31, 2003 and 2002 |  | 4     
|         |  | Consolidated Statements of Cash Flows (unaudited)  Three months ended March 31,
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                                             |  | 22    
|Item 4.  |  | Controls and Procedures                                                                                |  | 22    
|PART II. |  | OTHER INFORMATION                                                                                      |  |       
|Item 1.  |  | Legal Proceedings                                                                                      |  | 23    
|Item 2.  |  | Changes in Securities                                                                                  |  | 23    
|Item 3.  |  | N/A                                                                                                    |  |       
|Item 4.  |  | N/A                                                                                                    |  |       
|Item 5.  |  | N/A                                                                                                    |  |       
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                       |  | 23    

1



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##### Table of Contents






PART I  FINANCIAL INFORMATION




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

|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |             |            |  | 
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------------------------------ | ----------- | -------------- | --------- | ----------------- | ----------- | ---------- |  | 
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             | March 31, 2003 |           | December 31, 2002
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                  
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             | (Unaudited)    |           |                   |             |           
|ASSETS                                                                                             |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                  
|Current Assets:                                                                                    |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                  
|                                                                                                   |  | Cash and cash equivalents                                                                                                                                                                                                                  | $                                          | 2,700,495                            |             |                | $         | 2,246,264         |            
|                                                                                                   |  | Restricted cash                                                                                                                                                                                                                            |                                            |                                      | 1,275,000   |                |           |                   | 1,550,000   |           
|                                                                                                   |  | Accounts receivable, net                                                                                                                                                                                                                   |                                            |                                      | 2,720,649   |                |           |                   | 2,894,393   |           
|                                                                                                   |  | Inventories                                                                                                                                                                                                                                |                                            |                                      | 326,998     |                |           |                   | 389,467     |           
|                                                                                                   |  | Current assets held for sale                                                                                                                                                                                                               |                                            |                                      | 1,057,935   |                |           |                   | 1,349,758   |           
|                                                                                                   |  | Prepaid expenses and other                                                                                                                                                                                                                 |                                            |                                      | 676,560     |                |           |                   | 524,863     |           
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            
|                                                                                                   |  |                                                                                                                                                                                                                                            | Total current assets                       |                                      |             | 8,757,637      |           |                   |             | 8,954,745  | 
|Property and equipment, net                                                                        |  |                                                                                                                                                                                                                                            | 1,160,876                                  |                                      |             |                | 1,248,198 |                  
|Intangible assets, net                                                                             |  |                                                                                                                                                                                                                                            | 783,726                                    |                                      |             |                | 930,056   |                  
|Other assets                                                                                       |  |                                                                                                                                                                                                                                            | 167,754                                    |                                      |             |                | 197,754   |                  
|Goodwill, net                                                                                      |  |                                                                                                                                                                                                                                            | 3,790,907                                  |                                      |             |                | 3,790,907 |                  
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            
|                                                                                                   |  |                                                                                                                                                                                                                                            | TOTAL ASSETS                               |                                      | $           | 14,660,900     |           |                   | $           | 15,121,660 | 
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |             |                |           |                   |             |            |  | 
|Current Liabilities:                                                                               |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                  
|                                                                                                   |  | Accounts payable                                                                                                                                                                                                                           |                                            | $                                    | 2,355,300   |                |           | $                 | 1,864,405   |           
|                                                                                                   |  | Accrued liabilities                                                                                                                                                                                                                        |                                            |                                      | 674,844     |                |           |                   | 1,558,307   |           
|                                                                                                   |  | Accrued payroll and related costs                                                                                                                                                                                                          |                                            |                                      | 721,354     |                |           |                   | 797,987     |           
|                                                                                                   |  | Customer deposits                                                                                                                                                                                                                          |                                            |                                      | 434,004     |                |           |                   | 832,607     |           
|                                                                                                   |  | Line of credit and notes payable                                                                                                                                                                                                           |                                            |                                      | 2,544,405   |                |           |                   | 1,556,405   |           
|                                                                                                   |  | Current liabilities of assets held for sale, including notes payable                                                                                                                                                                       |                                            |                                      | 2,477,001   |                |           |                   | 3,125,151   |           
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            
|                                                                                                   |  |                                                                                                                                                                                                                                            | Total current liabilities                  |                                      |             | 9,206,908      |           |                   |             | 9,734,862  | 
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            
|Notes payable and other long-term liabilities, net of current portion                              |  |                                                                                                                                                                                                                                            | 495,694                                    |                                      |             |                | 1,708,804 |                  
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            
|Redeemable convertible preferred stock, 199,560 shares issued and outstanding
as of March 31, 2003 |  |                                                                                                                                                                                                                                            | 1,268,182                                  |                                      |             |                |          |                  
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            
|Stockholders equity:                                                                              |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                  
|                                                                                                   |  | Preferred stock, $.01 par value; 5,000,000 shares authorized; 199,560
shares issued and outstanding as of March 31, 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 23,959,802 shares as of March 31, 2003 and
23,852,024 shares as of December 31, 2002                                                                    |                                            |                                      | 239,598     |                |           |                   | 238,520     |           
|                                                                                                   |  | Additional-paid in capital                                                                                                                                                                                                                 |                                            |                                      | 57,560,113  |                |           |                   | 56,636,991  |           
|                                                                                                   |  | Accumulated deficit                                                                                                                                                                                                                        |                                            |                                      | (54,109,595 | )              |           |                   | (53,197,517 | )         
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            
|                                                                                                   |  |                                                                                                                                                                                                                                            | Total stockholders equity                 |                                      |             | 3,690,116      |           |                   |             | 3,677,994  | 
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            
|                                                                                                   |  |                                                                                                                                                                                                                                            | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                      | $           | 14,660,900     |           |                   | $           | 15,121,660 | 
|                                                                                                   |  |                                                                                                                                                                                                                                            |                                            |                                      |             |                |           |                   |            

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

2



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JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2003 and 2002
(Unaudited)

|                                                                         |                                                    |         |              |           |                    |         |                |           |            |           | 
|------------------------------------------------------------------------ | -------------------------------------------------- | ------- | ------------ | --------- | ------------------ | ------- | -------------- | --------- | ---------- | --------- | 
|                                                                         |                                                    |         |              |           | Three Months Ended
|                                                                         |                                                    |         |              |           |                   
|                                                                         |                                                    |         |              |           | March 31, 2003     |         | March 31, 2002
|                                                                         |                                                    |         |              |           |                    |         |               
|Sales                                                                    |                                                    | $       | 4,733,714    |           |                    | $       | 3,608,655      |          
|Costs of sales                                                           |                                                    |         | 3,822,730    |           |                    |         | 2,561,564      |          
|                                                                         |                                                    |         |              |           |                    |         |                |          
|                                                                         |                                                    |         | Gross profit |           |                    | 910,984 |                |           |            | 1,047,091 | 
|                                                                         |                                                    |         |              |           |                    |         |                |          
|Operating expenses:                                                      |                                                    |         |              |           |                    |         |                |          
|                                                                         | Selling, general and administrative                |         |              | 1,173,610 |                    |         |                | 1,101,862 |           
|                                                                         | Research and development                           |         |              | 102,509   |                    |         |                | 192,791   |           
|                                                                         |                                                    |         |              |           |                    |         |                |          
|                                                                         | Total operating expenses                           |         |              | 1,276,119 |                    |         |                | 1,294,653 |           
|                                                                         |                                                    |         |              |           |                    |         |                |          
|Loss from operations                                                     |                                                    |         | (365,135     | )         |                    |         | (247,562       | )        
|Realized gain on sale of marketable securities                           |                                                    |         |             |           |                    |         | 1,349,721      |          
|Interest and other income                                                |                                                    |         | 23,591       |           |                    |         | 18,229         |          
|Interest and other expense                                               |                                                    |         | (105,126     | )         |                    |         | (57,792        | )        
|                                                                         |                                                    |         |              |           |                    |         |                |          
|Income (loss) from continuing operations                                 |                                                    |         | (446,670     | )         |                    |         | 1,062,596      |          
|Loss from operations of discontinued
operations                          |                                                    |         | (459,987     | )         |                    |         | (1,810,217     | )        
|                                                                         |                                                    |         |              |           |                    |         |                |          
|Net loss                                                                 |                                                    | $       | (906,657     | )         |                    | $       | (747,621       | )        
|                                                                         |                                                    |         |              |           |                    |         |                |          
|Basic and diluted income (loss) per share:                               |                                                    |         |              |           |                    |         |                |          
|                                                                         | Income (loss) per share from continuing
operations |         |              | (.02      | )                  |         |                | .05       |           
|                                                                         | Loss per share from discontinued
operations        |         |              | (.02      | )                  |         |                | (.08      | )         
|                                                                         |                                                    |         |              |           |                    |         |                |          
|Basic and diluted net loss per share                                     |                                                    | $       | (.04         | )         |                    | $       | (.03           | )        
|                                                                         |                                                    |         |              |           |                    |         |                |          
|Shares used in computation of basic and
diluted income (loss) per share: |                                                    |         |              |           |                    |         |                |          
|                                                                         |                                                    | Basic   |              |           | 23,886,503         |         |                |           | 22,879,711 |          
|                                                                         |                                                    |         |              |           |                    |         |                |          
|                                                                         |                                                    | Diluted |              |           | 23,886,503         |         |                |           | 24,083,043 |          
|                                                                         |                                                    |         |              |           |                    |         |                |          

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

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JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three Months Ended March 31, 2003 and 2002
(Unaudited)

|                          |                                                            |   |                    |   |                |   |            |            |  
|------------------------- | ---------------------------------------------------------- | - | ------------------ | - | -------------- | - | ---------- | ---------- | -
|                          |                                                            |   | Three Months Ended
|                          |                                                            |   |                   
|                          |                                                            |   | March 31, 2003     |   | March 31, 2002
|                          |                                                            |   |                    |   |               
|Net loss                  |                                                            | $ | (906,657           | ) |                | $ | (747,621   | )         
|                          |                                                            |   |                    |   |                |   |            |           
|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        |                                                            | $ | (906,657           | ) |                | $ | (2,172,485 | )         
|                          |                                                            |   |                    |   |                |   |            |           

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

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JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2003 and 2002
(Unaudited)

|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |            |          |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ---------------------------------------------- | ---------------------------------------- | ---------- | -------------- | -------- | -------------- | ---------- | ---------- | -------- | -
|                                               |                                                                                                              |                                                |                                          |            | March 31, 2003 |          | March 31, 2002
|                                               |                                                                                                              |                                                |                                          |            |                |          |               
|Cash flows from operating activities:          |                                                                                                              |                                                |                                          |            |                |          |                |           
|                                               | Income (loss) from continuing operations                                                                     |                                                | $                                        | (446,670   | )              |          | $              | 1,062,596  |           
|                                               | Adjustments to reconcile income (loss) from continuing operations
to net cash used in continuing operations: |                                                |                                          |            |                |          |                |            |           
|                                               |                                                                                                              | Depreciation and amortization                  |                                          |            | 162,396        |          |                |            | 122,962    |         
|                                               |                                                                                                              | Services received in exchange for common stock |                                          |            | 1,801          |          |                |            | 1,500      |         
|                                               |                                                                                                              | Gain on sale of marketable securities          |                                          |            |               |          |                |            | (1,349,721 | )       
|                                               |                                                                                                              | Change in assets and liabilities:              |                                          |            |                |          |                |            |            |         
|                                               |                                                                                                              |                                                | Accounts receivable, net                 |            |                | 173,744  |                |            |            | 836,495  |  
|                                               |                                                                                                              |                                                | Inventories                              |            |                | 62,469   |                |            |            | 20,667   |  
|                                               |                                                                                                              |                                                | Prepaid expenses and other               |            |                | (21,600  | )              |            |            | 44,049   |  
|                                               |                                                                                                              |                                                | Customer deposits                        |            |                | (398,603 | )              |            |            | (161,763 | )
|                                               |                                                                                                              |                                                | Accounts payable and accrued liabilities |            |                | (487,734 | )              |            |            | (97,389  | )
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|                                               | Net cash provided by (used in) continuing operations operating
activities                                    |                                                |                                          | (954,197   | )              |          |                | 479,396    |           
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|                                               | Loss from discontinued operations                                                                            |                                                |                                          | (459,987   | )              |          |                | (1,810,217 | )         
|                                               | Changes in net assets and liabilities of discontinued operations                                             |                                                |                                          | (356,327   | )              |          |                | (46,651    | )         
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|                                               | Net cash used in discontinued operations                                                                     |                                                |                                          | (816,314   | )              |          |                | (1,856,868 | )         
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|                                               | Net cash used in operating activities                                                                        |                                                |                                          | (1,770,511 | )              |          |                | (1,377,472 | )         
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|Cash flows from investing activities:          |                                                                                                              |                                                |                                          |            |                |          |                |           
|                                               | Proceeds from sale of marketable securities                                                                  |                                                |                                          |           |                |          |                | 1,399,746  |           
|                                               | Capital expenditures                                                                                         |                                                |                                          | (5,297     | )              |          |                | (85,334    | )         
|                                               | Intangible assets, other assets and goodwill                                                                 |                                                |                                          | (23,543    | )              |          |                | (30,163    | )         
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|                                               | Net cash provided by (used in) investing activities                                                          |                                                |                                          | (28,840    | )              |          |                | 1,284,249  |           
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|Cash flows from financing activities:          |                                                                                                              |                                                |                                          |            |                |          |                |           
|                                               | Net proceeds from the issuance of preferred and common stock                                                 |                                                |                                          | 1,967,582  |                |          |                | 1,767,105  |           
|                                               | Net borrowings (payments) under line of credit                                                               |                                                |                                          | 11,000     |                |          |                | (1,000,000 | )         
|                                               | Decrease in restricted cash                                                                                  |                                                |                                          | 275,000    |                |          |                | 1,000,000  |           
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|                                               | Net cash provided by financing activities                                                                    |                                                |                                          | 2,253,582  |                |          |                | 1,767,105  |           
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|Net increase in cash and cash equivalents      |                                                                                                              |                                                | 454,231                                  |            |                |          | 1,673,882      |           
|Cash and cash equivalents, beginning of period |                                                                                                              |                                                | 2,246,264                                |            |                |          | 4,076,894      |           
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|Cash and cash equivalents, end of period       |                                                                                                              | $                                              | 2,700,495                                |            |                | $        | 5,750,776      |           
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           
|Cash paid for interest                         |                                                                                                              | $                                              | 42,805                                   |            |                | $        | 96,812         |           
|                                               |                                                                                                              |                                                |                                          |            |                |          |                |            |           

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

5



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



|(1) |  | Basis of Presentation and Financial Condition
|--- |  | ---------------------------------------------

The accompanying consolidated financial statements include the accounts of
JMAR Technologies, Inc. (the Company 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 later 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.

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 months ended March 31, 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
months ended March 31, 2003 and 2002, have been prepared by the Company and are
unaudited except for the balance sheet as of December 31, 2002. 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

6



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##### Table of Contents



JMAR 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 months ended March 31, 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 three months ended March 31, 2003. As of March 31,
2003, the Company has stockholders equity of approximately $3.7 million and a
deficit working capital of $449,271. 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 Note 9). Management
believes that the Company has adequate resources to fund its operations and
working capital requirements through December 31, 2003. However, 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. Also, additional financing will be required for 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 favorable terms, or at all.



|(2) |  | Recent Accounting Pronouncements
|--- |  | --------------------------------

In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). This statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to (a)
all entities and (b) legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal operation of long-lived assets, except for certain obligations of
lessees. This statement amends FASB Statement No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, and is effective for financial
statements issued for fiscal years beginning after June 15, 2002. 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.

Statement of Financial Accounting Standards No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146
addresses accounting and reporting costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity. This statement requires that a liability for a cost
associated with an exit or disposal activity shall be recognized and measured
initially at its fair value in the period which the liability is incurred. This
statement is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company has implemented SFAS No. 146 on January 1,
2003. The Company does not believe that the adoption of SFAS 146 will have a
significant impact on its 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

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##### Table of Contents



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

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 believes the
implementation of this Interpretation will not have a material effect upon the
Companys consolidated financial statements.



|(3) |  | Stock-Based Compensation Plans
|--- |  | ------------------------------

The 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 March 31,
|                  |  |             |  |                             
|                  |  |             |  | 2003                         |            | 2002
|                  |  |             |  |                              |            |     
|Net loss:         |  | As Reported |  | $                            | (906,657   | )    |  | $ | (747,621   | )
|                  |  | Pro Forma   |  |                              | (1,794,887 | )    |  |   | (1,531,083 | )
|Basic and diluted |  | As Reported |  |                              | (.04       | )    |  |   | (.03       | )
|loss per share:   |  | Pro Forma   |  |                              | (.08       | )    |  |   | (.07       | )

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 4
percent; 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). Under all Plans, the option or warrant exercise
price is equal to or more than the stocks market price on date of grant.



|(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 March 31, 2003 and December 31, 2002, inventories
consisted of the following:

|                                             |  |                |         |                   |  |   |         | 
|-------------------------------------------- |  | -------------- | ------- | ----------------- |  | - | ------- | 
|                                             |  | March 31, 2003 |         | December 31, 2002
|                                             |  |                |         |                  
|                                             |  | (Unaudited)    |         |                   |  |  
|Raw materials, components and sub-assemblies |  | $              | 224,154 |                   |  | $ | 222,077 | 
|Work-in-process                              |  |                | 53,384  |                   |  |   | 125,315 | 
|Finished goods                               |  |                | 49,460  |                   |  |   | 42,075  | 
|                                             |  |                |         |                   |  |   |         | 
|                                             |  | $              | 326,998 |                   |  | $ | 389,467 | 
|                                             |  |                |         |                   |  |   |         | 

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



|(5) |  | Property and Equipment
|--- |  | ----------------------

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

|                              |  |                |            |                   |  |   |            |  
|----------------------------- |  | -------------- | ---------- | ----------------- |  | - | ---------- | -
|                              |  | March 31,
2003 |            | December 31, 2002
|                              |  |                |            |                  
|Equipment and machinery       |  | $              | 2,984,543  |                   |  | $ | 2,983,443  |  
|Furniture and fixtures        |  |                | 424,386    |                   |  |   | 420,188    |  
|Leasehold improvements        |  |                | 280,283    |                   |  |   | 280,283    |  
|                              |  |                |            |                   |  |   |            |  
|                              |  |                | 3,689,212  |                   |  |   | 3,683,914  |  
|Less-accumulated depreciation |  |                | (2,528,336 | )                 |  |   | (2,435,716 | )
|                              |  |                |            |                   |  |   |            |  
|                              |  | $              | 1,160,876  |                   |  | $ | 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 three months ended March 31, 2003, this segment accounted for
approximately 30% 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 three months ended March 31, 2003, this segment
accounted for approximately 37% of the Companys revenues.

Microelectronics Division  In 2002, JMAR discontinued the standard
products business and the assets of its Sacramento operations were transferred
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 three months
ended March 31, 2003, this segment accounted for approximately 33% of the
Companys revenues.

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##### 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 months ended March 31, 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
|      |                               |  |          |           |          |  |                  |           |           |  |      
|2003: |                               |  |          |           |          |  |                  |           |           |  |       |           |  |  |   |           |   |  |   |           
|      | Revenues                      |  | $        | 1,449,550 |          |  | $                | 1,738,868 |           |  | $     | 1,545,296 |  |  | $ |          |   |  | $ | 4,733,714  |  
|      | Operating income (loss)       |  |          | 53,328    |          |  |                  | (358,113  | )         |  |       | 44,015    |  |  |   | (104,365  | ) |  |   | (365,135   | )
|      | Total assets                  |  |          | 2,687,308 |          |  |                  | 5,593,516 |           |  |       | 1,793,923 |  |  |   | 3,528,218 |   |  |   | 13,602,965 |  
|      | Capital expenditures          |  |          | 3,890     |          |  |                  |          |           |  |       | 1,407     |  |  |   |          |   |  |   | 5,297      |  
|      | Depreciation and
amortization |  |          | 57,807    |          |  |                  | 75,909    |           |  |       | 4,696     |  |  |   | 23,984    |   |  |   | 162,396    |  
|2002: |                               |  |          |           |          |  |                  |           |           |  |       |           |  |  |   |           |   |  |   |           
|      | Revenues                      |  |          | 1,702,163 |          |  |                  | 1,395,330 |           |  |       | 511,162   |  |  |   |          |   |  |   | 3,608,655  |  
|      | Operating income (loss)       |  |          | 77,328    |          |  |                  | (93,436   | )         |  |       | 128,814   |  |  |   | (360,268  | ) |  |   | (247,562   | )
|      | Total assets                  |  |          | 4,721,948 |          |  |                  | 6,471,508 |           |  |       | 1,157,521 |  |  |   | 6,249,503 |   |  |   | 18,600,480 |  
|      | Capital expenditures          |  |          | 40,930    |          |  |                  | 43,356    |           |  |       |          |  |  |   | 1,048     |   |  |   | 85,334     |  
|      | Depreciation and
amortization |  |          | 35,457    |          |  |                  | 63,814    |           |  |       | 3,136     |  |  |   | 20,555    |   |  |   | 122,962    |  



|(7) |  | Comprehensive Loss
|--- |  | ------------------

The
other comprehensive loss for the three months ended March 31, 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 three months
ended March 31, 2002. Accordingly, for the three months ended March 31, 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 three months ended March 31, 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.



|(8) |  | Discontinued Operations/Assets Held for Sale
|--- |  | --------------------------------------------

The loss from operations of discontinued operations of $459,987 for the
three months ended March 31, 2003 includes $41,216 related to the standard
semiconductor products business and $418,771 related to the precision equipment
business. The Company is talking to a number of potential buyers regarding the
sale of the precision equipment business, however, it has not yet received an
offer from any of the potential purchasers of this business. If the sales price
of this business is different from the estimate that the Company has made, the
difference will be reflected in the Companys 2003 Statement of Operations.
Also, if the Company is unable to find a buyer on satisfactory terms, the
Company will have to take alternative actions regarding this business, which
may result in further charges. In accordance with SFAS No. 144, the results of
operations of the precision equipment business for 2003 through the sale date
will be 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 March 31, 2003, the Company has approximately $385,000 accrued for
estimated future losses under this lease. The lease provides for rent and
related expenses of approximately $34,000 per month through August 2005. If the

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

Company is unsuccessful in obtaining a subtenant on acceptable terms,
there could be further losses related to that lease.

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

|                     |                            |                                          |           |             |         |              |           |         |           | 
|-------------------- | -------------------------- | ---------------------------------------- | --------- | ----------- | ------- | ------------ | --------- | ------- | --------- | 
|                     |                            |                                          |           | March 31,   |         | December 31,
|                     |                            |                                          |           | 2003        |         | 2002        
|                     |                            |                                          |           |             |         |             
|                     |                            |                                          |           | (Unaudited) |         |              |           |        
|Current Assets:      |                            |                                          |           |             |         |              |           |        
|                     | Cash                       |                                          | $         | 70,649      |         |              | $         | 101,238 |          
|                     | Accounts receivable        |                                          |           | 324,828     |         |              |           | 454,557 |          
|                     | Inventories                |                                          |           | 625,068     |         |              |           | 727,983 |          
|                     | Prepaid expenses and other |                                          |           | 37,390      |         |              |           | 65,980  |          
|                     |                            |                                          |           |             |         |              |           |        
|                     |                            | $                                        | 1,057,935 |             |         | $            | 1,349,758 |        
|                     |                            |                                          |           |             |         |              |           |        
|Current Liabilities: |                            |                                          |           |             |         |              |           |        
|                     |                            | Payable to distributor                   |           | $           | 692,314 |              |           | $       | 692,314   | 
|                     |                            | Facility lease accrual                   |           |             | 487,621 |              |           |         | 548,374   | 
|                     |                            | Accounts payable                         |           |             | 883,988 |              |           |         | 1,154,463 | 
|                     |                            | Employee related contractual
commitments |           |             | 255,578 |              |           |         | 555,000   | 
|                     |                            | Note payable                             |           |             | 157,500 |              |           |         | 175,000   | 
|                     |                            |                                          |           |             |         |              |           |        
|                     |                            | $                                        | 2,477,001 |             |         | $            | 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 any 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 anytime the market price of the Companys common stock is in 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 plus .75 percent, subject to a floor of 5
percent. The Working Capital Line requires that the Companys quick ratio, as
defined, be .90 or higher. The Companys quick ratio was .99 at March 31, 2003.
The amount outstanding at March 31, 2003 under the Working Capital Line was
$1.3 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

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

converted. The conversion terms of the Series A Preferred are the same as
those pursuant to 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.

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. The conversion terms of the Series B Preferred
are the same as those pursuant to the Working Capital Line. In the quarter
ended March 31, 2003, Laurus converted $4,400 of the Series B Preferred into
5,000 shares of common stock of the Company.

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. In addition, there will be an additional beneficial conversion feature
in the amount of $85,000 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.



|(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 was computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during the period. For the three months ended March 31, 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 March 31, 2003 and 2002, the Company had outstanding warrants, stock
options and shares underlying convertible debt and preferred stock of
9,145,264
and 4,000,043, respectively, all of which are antidilutive and were excluded
from the computation of diluted loss per share. For the three months ended
March 31, 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 (22,879,711) plus dilutive employee
stock options and warrants (966,811) and other dilutive warrants and options
(236,521).



|(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 March 31, 2003 and December 31, 2002 is
related to the Systems Division, acquired in August, 2001. As of March 31, 2003, the Company
had the following amounts related to other intangible assets:

|                      |  |                |         |              |  |                |         |  |  |   |         | 
|--------------------- |  | -------------- | ------- | ------------ |  | -------------- | ------- |  |  | - | ------- | 
|                      |  | Gross Carrying |         | Accumulated  |  | Net Intangible
|                      |  | Amount         |         | Amortization |  | Assets        
|                      |  |                |         |              |  |               
|Patents               |  | $              | 905,531 |              |  | $              | 321,805 |  |  | $ | 583,726 | 
|Unpatented Technology |  |                | 450,000 |              |  |                | 250,000 |  |  |   | 200,000 | 
|                      |  |                |         |              |  |                |         |  |  |   |         | 
|                      |  |                |         |              |  |                |         |  |  | $ | 783,726 | 
|                      |  |                |         |              |  |                |         |  |  |   |         | 

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

Aggregate amortization expense of the intangible assets with determinable
lives was $69,777 for the three months ended March 31, 2003. The unamortized
balance of intangible assets is estimated to be amortized as follows:

|                   |      |                        |         |         | 
|------------------ | ---- | ---------------------- | ------- | ------- | 
|For the Year Ended |      | Estimated Amortization
|December 31,       |      | Expense               
|                   |      |                       
|                   | 2003 |                        | $       | 203,332 | 
|                   | 2004 |                        |         | 176,087 | 
|                   | 2005 |                        |         | 17,446  | 
|                   | 2006 |                        |         | 17,446  | 
|                   | 2007 |                        |         | 17,446  | 
|                   | 2008 |                        |         | 17,446  | 
|Beyond             |      |                        | 334,523 |        
|                   |      |                        |         |        
|                   |      | $                      | 783,726 |        
|                   |      |                        |         |        



|(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 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 $2.5 million of current liabilities of assets held for sale
that are included on JMARs Consolidated Balance Sheet at March 31, 2003.

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 intend to vigorously contest any claims by
All American that it is owed more than $700,000.

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 credit

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

bid of debt held by 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.

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

Item 2.

Overview

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

The Company also 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.

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 months ending March 31, 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 March 31, 2003 and 2002 were
$4,733,714 and $3,608,655, respectively. The net loss for the three months
ended March 31, 2003 and 2002 was $(906,657) and $(747,621), respectively. The
income (loss) from continuing operations for those same periods
was $(446,670)
and $1,062,596, respectively, while the loss from operations for those same
periods was $(365,135) and $(247,562), respectively.

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Included in the net loss and loss from continuing operations for the three
months ended March 31, 2002 is a gain on the sale of marketable securities of
$1,349,721. Also, included in the net loss for the three months ended March
31, 2003 and 2002 is a loss from operations of discontinued operations of
$(459,987) and $(1,810,217), respectively.

The increase in revenues for the three months ended March 31, 2003
compared to the three months ended March 31, 2002 was primarily attributable to
an increase in contract revenues at the Microelectronics Division of $1,085,143
related to the receipt of approximately $5 million in contracts in February
2003, and an increase in other contract revenues from the Systems Division of
$1,195,138. In May, 2002, the Systems Division received an approximately $10
million contract from Naval Air Warfare Center AD (the Navair Contract) which
accounted for approximately $812,000 of the increase in revenues for the three
months ended March 31, 2003. These increases were offset in part by a
reduction in revenues of $1,000,770 from the Companys $34.5 million DARPA
contract due to a delay in receipt of the next incremental funding on that
contract to the second quarter of 2003.

Gross margins for the three months ended March 31, 2003 and 2002 were
19.2% and 29.0%, 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 decrease in the
gross margin in 2003 was primarily due to the contract with Navair for
sub-100nm X-ray masks for NGL Systems (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. 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.

Selling, general and administrative (SG&A) expenses for the three months
ended March 31, 2003 and 2002 were $1,173,610 and $1,101,862, respectively.

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 $2,425,249 and $2,144,964 for the three months ended March 31, 2003 and
2002, respectively. The increase in Customer-Funded RD&E expenditures for the
three months ended March 31, 2003 is related to an increase in contract costs
of $1,162,233 incurred by the Systems Division (approximately $793,537 of
which is related to the Navair Contract) offset by a decrease in contract costs
of $881,948 related to the DARPA contract. Company-Funded RD&E costs are shown
in Operating Expenses and totaled $102,509 and $192,791 for the three months
ended March 31, 2003 and 2002, respectively. Hence, total RD&E expenditures
for the three month periods were $2,527,758 and $2,337,755 for 2003 and 2002,
respectively. Total RD&E expenditures as a percentage of sales were 53.4% and
64.8% for the three months ended March 31, 2003 and 2002, respectively. These
expenditures are primarily related to the continued development of collimated
plasma lithography systems for the semiconductor industry.

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 months ended March 31, 2002 has been restated to reflect the
discontinuation of the precision equipment business.

The loss from operations of discontinued operations of $459,987 for the
three months ended March 31, 2003 includes $41,216 related to the standard
semiconductor products business and $418,771 related to the precision equipment
business, compared to a loss from operations of discontinued operations of $1.8
million in 2002. The Company is in discussions with a number of potential
buyers for the equipment business, however, it has not yet received an offer
from any of the potential purchasers of this business. If the sales price of
this business is different from the estimate that the Company has made, the
difference will be reflected in the Companys 2003 Statement of Operations.
Also, if the Company is unable to find a buyer on satisfactory terms, the
Company will have to take alternative actions regarding this business, which
may result in further charges. The results of operations of the precision
equipment business for 2003 through the

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sale date will be 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 March 31, 2003, the Company has
approximately $385,000 accrued for estimated future losses under this lease.
The lease provides for rent and related expenses of approximately $34,000 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 March 31, 2003 and
2002 was $105,126 and $57,792, respectively. Interest and other expense is
higher for 2003 versus 2002 due to the financing transactions the Company
entered into in 2003 (see Consolidated Liquidity and Financial Condition
below).

Results of Segment Operations

The results of segment operations (excluding corporate) for the three
months ending March 31, 2003 and 2002 are as follows:

|                          |  |          |           |                         |  |      |           |      |  |   |          |   |  |   |         |  
|------------------------- |  | -------- | --------- | ----------------------- |  | ---- | --------- | ---- |  | - | -------- | - |  | - | ------- | -
|                          |  | Revenues |           | Operating Income (Loss)
|                          |  |          |           |                        
|                          |  | 2003     |           | 2002                    |  | 2003 |           | 2002
|                          |  |          |           |                         |  |      |           |     
|Research Division         |  | $        | 1,449,550 |                         |  | $    | 1,702,163 |      |  | $ | 53,328   |   |  | $ | 77,328  |  
|Systems Division          |  |          | 1,738,868 |                         |  |      | 1,395,330 |      |  |   | (358,113 | ) |  |   | (93,436 | )
|Microelectronics Division |  |          | 1,545,296 |                         |  |      | 511,162   |      |  |   | 44,015   |   |  |   | 128,814 |  
|                          |  |          |           |                         |  |      |           |      |  |   |          |   |  |   |         |  
|                          |  | $        | 4,733,714 |                         |  | $    | 3,608,655 |      |  | $ | (260,770 | ) |  | $ | 112,706 |  
|                          |  |          |           |                         |  |      |           |      |  |   |          |   |  |   |         |  

The $252,613 decrease in revenues for the Research Division for the three
months ended March 31, 2003 as compared to the three months ended March 31,
2002 is due to a delay in the next incremental
funding of approximately $5.3 million from the Companys $34.5 million DARPA
contract. The Company expects to receive a portion of that delayed
funding later in the second quarter and the balance in the second
half of 2003.

The $343,538 increase in revenues for the Systems Division for the three
months ended March 31, 2003 as compared to the three months ended March 31,
2002 is due to the receipt in May, 2002 of $3 million in funding for the Navair
Contract, offset in part by lower revenues related to the DARPA contract. The
Company received approximately $3.4 million in additional funding under the
Navair contract in April 2003. The $264,677 increase in the operating
loss of
the System Division 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 limited funding on that contract. In
addition, the Company started another contract later in 2002 which
has low margins due to estimated cost overruns on that contract.
Also, the Systems Division incurred higher sales and marketing costs
in 2003 as part of its CPL commercialization efforts.

The $1,034,134 increase in revenues for the Microelectronics Division for
the three months ended March 31, 2003 as compared to the three months ended
March 31, 2002 is due to the receipt of approximately $5 million in additional
contracts in February, 2003 from General Dynamics Advanced Information Systems
for the development, construction and operation of a semiconductor wafer
fabrication facility at McClellan Air Force Base in Sacramento for the Defense
Microelectronics Agency. The $84,799 decrease in the operating income of the
Microelectronics Division despite the higher revenues is primarily
due to lower margins in 2003 due to a contract cost overrun recorded
in 2003 and a greater percentage of ASIC product revenues in 2002,
and a lower allocation of corporate costs in 2002.

Consolidated Liquidity and Financial Condition

Unrestricted cash and cash equivalents at March 31, 2003 was $2,700,495.
The increase in unrestricted cash and cash equivalents during the three months
ended March 31, 2003 of $454,231 resulted primarily from net proceeds from the
issuance of preferred and common stock of $1,967,582 and a decrease

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of restricted cash of $275,000, offset in part by cash used in continuing
operations of $954,197 primarily related to operating losses and a reduction in
liabilities, and cash used in discontinued operations of $816,314.

JMARs operations will continue to require the use of working capital in
2003 for, among other requirements, 1) certain CPL commercialization costs not
covered by existing contracts; 2) cash requirements of its precision equipment
business until its sale; 3) temporary funding delays related to government
contracts; and 4) corporate costs, primarily related to the cost of being a
public company. Working capital (deficit) as of March 31, 2003 and December
31, 2002 was $(449,271) and $(780,117), respectively. The reduction in the
working capital deficit is primarily due to proceeds received from the issuance
of preferred stock offset in part by the classification as a current liability
as of March 31, 2003 of $1.2 million in notes to the former SAL noteholders due
February 2004 and the Companys losses. 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.

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. The Company can convert
any 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 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 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 .99 at March 31, 2003.

In March 2003, the Company issued $1 million in 8 percent Series A
Convertible Preferred (the Series A Preferred) to Laurus at a fixed
conversion price of $.88 per share. Accrued interest is payable monthly. The
Series A Preferred must be redeemed in two years, if not previously converted.
The conversion terms of the Series A Preferred are the same as those pursuant
to 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.

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 interest is
payable monthly. Principal is payable in cash or stock in twelve equal monthly
installments starting October 1, 2003. The conversion terms of the Series B
Preferred Stock are the same as those pursuant to the Working Capital Line.
Any conversions to equity will offset the requirements to make principal
repayments. In the quarter ended March 31, 2003, Laurus converted $4,400 of the
Series B Preferred into 5,000 shares of common stock of the Company.

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 financing, the Company has
adequate resources to fund operations and working capital requirements through December 31, 2003. However, the Company has $1.2 million in debt due 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

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additional financing to extinguish this debt. In addition, the Company has
determined that it will require additional financing for 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 $3,690,116 as of March 31, 2003.
The continued listing requirement of the Nasdaq National Market System
required the maintenance of no less than $10 million of stockholders equity.
In addition, JMARs shares have recently traded below the $1.00 per share
minimum bid price requirement of Nasdaq. Accordingly, 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. In
addition, JMAR will be afforded a 180 day grace period in which to satisfy the
$1.00 minimum bid price requirement. 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.

In October, 2001, the Companys Universal Blank Shelf Registration
Statement with respect to $25 million of Company securities was declared
effective by the Securities and Exchange Commission. The securities that may be
sold under this registration statement included common stock, preferred stock,
debt, warrants or rights. This Form S-3 Registration Statement is no longer
available for the sale of securities because the Companys market
capitalization does not exceed $75 million. The Company is considering whether
to amend this Form S-3 to a Form S-1 Registration Statement to allow for the
future sale of securities from time to time on a registered basis.

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 registered, however, the holders have agreed to restrictions on their
sale of those JMAR shares to no more than 25% of their JMAR holdings in any
quarter and to refrain from selling any shares for 60 days upon notice from
JMAR of its intention to negotiate an underwritten public offering. 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 satisfies certain source performance
criteria. 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 satisfies certain source performance
criteria and, if earned, this earnout payment is payable 30 days after delivery
and acceptance of the system by the customer.

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Commitments

Future minimum annual commitments under bank and other debt agreements,
non-cancellable operating leases and post-employment benefits as of March 31,
2003 are as follows (unaudited):

|                         |  |      |           |      |  |      |           |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |         |  |  |   |           | 
|------------------------ |  | ---- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | ------- | ---------- |  | ----- | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | --------- | 
|                         |  | 2003 |           | 2004 |  | 2005 |           | 2006 |  | 2007 |         | Thereafter |  | Total
|                         |  |      |           |      |  |      |           |      |  |      |         |            |  |      
|Bank and other
debt      |  | $    | 256,405   |      |  | $    | 1,203,918 |      |  | $    |        |            |  | $     |        |  |  | $ |        |  |  | $ |        |  |  | $ | 1,460,323 | 
|Operating leases         |  |      | 765,472   |      |  |      | 940,228   |      |  |      | 641,029 |            |  |       | 39,970  |  |  |   |        |  |  |   |        |  |  |   | 2,386,699 | 
|Post-employment
benefits |  |      | 154,318   |      |  |      | 211,172   |      |  |      | 211,172 |            |  |       | 211,172 |  |  |   | 211,172 |  |  |   | 138,074 |  |  |   | 1,137,080 | 
|                         |  |      |           |      |  |      |           |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |         |  |  |   |           | 
|                         |  | $    | 1,176,195 |      |  | $    | 2,355,318 |      |  | $    | 852,201 |            |  | $     | 251,142 |  |  | $ | 211,172 |  |  | $ | 138,074 |  |  | $ | 4,984,102 | 
|                         |  |      |           |      |  |      |           |      |  |      |         |            |  |       |         |  |  |   |         |  |  |   |         |  |  |   |           | 

Excluded from the above table is Preferred Stock in the gross amount of $2
million. One million of the Preferred Stock is redeemable, if not previously
converted, in twelve equal monthly payments starting October 2003 and the other
$1 million of Preferred Stock is redeemable, if not previously converted, in
March 2005 (see page 18). 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 $1,311,000 at
March 31, 2003.

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 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 are fully charged to operations when identified. Actual
costs could differ from these estimated costs.

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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
has 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.

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.

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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
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,
failure of advanced technology and new intellectual property to perform as
predicted, the failure of pending patents to be issued, delays in development,
introduction and acceptance of new products, changing business and economic
conditions in various geographic regions, technical obsolescence of existing
products, technical problems in the development or modification of current
products or manufacturing processes, the impact of competitive products and
pricing, including the risk that 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 adverse effect of selling JPSI on
its operating results, less than expected sales proceeds realized from the sale
of JPSI, 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 filed April 18,
2003 and in the Companys other filings with the Securities and Exchange
Commission.




Item 3.Quantitative and Qualitative Disclosures About Market Risk.

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




Item 4.Controls and Procedures.

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

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achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

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

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




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
intend to vigorously contest any claims by All American that it is owed more
than $700,000.




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 2,778 shares of
Common Stock to its outside directors as compensation for services as
directors in January, 2003. These transactions were exempt under
Section 4(2) of the Securities Act of 1933 (the Act).                                                                                                                                                                                                                                     
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (c)(ii) In March, 2003, the Company issued a $3 million revolving
Convertible Note (Laurus Convertible Note) to Laurus Master Fund Ltd.
(Laurus). The Laurus Convertible Note has a fixed conversion price of
$0.92 per share (subject to adjustment downward only upon a default by
the Company and subject to upward adjustment after $2 million has been
converted). Also issued in this transaction were Warrants to purchase
400,000 shares of common stock at prices ranging from $1.058 to $1.33
per share. These issuances were exempt under Section 4(2) of the Act.




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



| | (a) | Exhibits                                                                           
| | --- | -----------------------------------------------------------------------------------
|
| |     | Exhibit 99.1 Certificate pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
|
| | (b) | Reports on Form 8-K                                                                

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| |  | The Company filed a Report on Form 8-K on February 7, 2003 related to
the restructuring of operations to sharpen its focus on its Collimated
Plasma Lithography business area. Under the restructuring, the Company
announced that it is selling its Precision Systems, Inc. motion and
metrology equipment manufacturing operation, and is forming its JMAR
Research, JMAR/SAL NanoLithography, and JMAR Semiconductor operations
into a single corporate entity with three specialized divisions.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company filed a Report on Form 8-K on March 17, 2003 related to the
completion of a financing involving the sale of two series of Preferred
Stock for a total of $2,000,000 in gross proceeds.                                                                                                                                                                                                                                                                                                 

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SIGNATURE

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

JMAR TECHNOLOGIES, INC.

May 14, 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

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Ronald A. Walrod, certify that:

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

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

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

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



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

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



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

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

| |     |  |                        
| | --- |  | -----------------------
| | By: |  | /s/ Ronald A. Walrod   
| |     |  | Ronald A. Walrod       
| |     |  | Chief Executive Officer

May 14, 2003

CERTIFICATION

PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

I, Dennis E. Valentine, certify that:

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

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

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

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



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

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



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

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

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

May 14, 2003

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