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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K



|[x] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|--- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2001

or



|[  ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
|---- | ----------------------------------------------------------------------------------------------------------

Commission file number 1-10515

JMAR Technologies, Inc.

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(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 68-0131180                          
|                                                               |  |                                     
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|5800 Armada Drive, Carlsbad, CA                                |  | 92008                               
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip code)                          
|                                                              
|Registrants telephone number, including area code:            |  | (760) 602-3292                      

Securities registered pursuant to Section 12(b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|                   
|                    |  |                                          

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [  ]





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The aggregate market value of common stock held by non-affiliates of the
Registrant as of March 29, 2002 was approximately $76 million. The aggregate
market value was based on the closing price on February 12, 2002 for the common
stock as quoted on the NASDAQ National Market System, multiplied by the number
of shares outstanding on March 29, 2002, excluding the common stock held by
executive officers, directors and stockholders whose ownership exceeds 5% of
the common stock outstanding at March 29, 2002. Exclusion of such shares
should not be construed to indicate that any such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant or that such person is controlled by or under common
control with the Registrant.

Number of shares outstanding of common stock: Common Stock, $.01 Par
Value  23,841,272 shares as of March 29, 2002.

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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. BUSINESS                                                                             
|                  | Item 2. PROPERTIES                                                                           
|                  | Item 3. LEGAL PROCEEDINGS                                                                    
|                  | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II          
|                  | Item 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS             
|                  | Item 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                  | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                  | Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                  | Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                  | Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE    
|PART III         
|                  | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                  | Item 11. EXECUTIVE COMPENSATION                                                              
|                  | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                  | Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV          
|                  | Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|Index to Exhibits
|EXHIBIT 10.8     
|EXHIBIT 10.9     
|EXHIBIT 10.10    
|EXHIBIT 23.1     
|EXHIBIT 99.1     



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PART I




Item 1. BUSINESS

GENERAL

Founded in 1987, San Diego, California based JMAR Technologies, Inc. (the
Company or JMAR) is a provider of precision micro- and nanotechnology
products. JMAR is the worlds leading developer and manufacturer of X-ray
lithography sources and systems used for the manufacture of semiconductor chips
and is a leading developer of proprietary advanced laser, X-ray and EUV light
sources for other high-value microelectronics products. In addition, JMAR
manufactures precision measurement, positioning and light-based manufacturing
systems for inspection and repair of semiconductors and continues to play an
important role in adapting its precision semiconductor manufacturing technology
to the fabrication of data storage, advanced biomedical and optical
communications products.

Subsequent to December 31, 2001, 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 X-ray lithography products. This portion of
JMAR Semiconductor Inc.s (JSI) business has been a developmental effort,
involving the design, manufacture and introduction of new standard product
semiconductor chips. With the severe downturn in the worldwide semiconductor
market, JSI has had little success in selling its new standard product chips to
date. Given the required substantial additional capital to get these chips
established in the market, as well as to develop newer, higher value chips,
JMAR has determined it is in the best interests of the Company and its
shareholders to focus its principal efforts on its other business areas.

The Managements Discussion and Analysis of Financial Condition and
Results of Operations section starting on page 18 as well as the financial
statements contained herein discuss the segments as they existed prior to the
Companys decision to discontinue and sell its standard semiconductor
products business.
However, as a result of the decision to discontinue and sell the Companys
standard semiconductor products business, beginning in the first quarter of
2002, JMARs operations will be conducted in two
business segments, located in Southern California and Central Vermont, as
follows:

Front-end Semiconductor Equipment and Services This segment includes the
operations of JMAR Research, Inc. (JRI), recently-acquired Semiconductor
Advanced Lithography, Inc. (SAL) (renamed JMAR/SAL NanoLithography, Inc., or
JSAL), and the Semiconductor Process Technology Services business of JSI. In
our JRI and JSAL businesses, we conceive and create leading-edge
microelectronics manufacturing systems based on our patented X-ray
lithography and other
advanced light sources for higher-performance semiconductor manufacturing and
inspection. With the Companys acquisition of JSAL, we are now the leading
supplier of X-ray lithography steppers. This segment of our business
represented approximately 69% of our sales in 2001.

Precision Equipment This segment consists of the operations
of JMAR Precision Systems, Inc. (JPSI). In our JPSI division, we manufacture
state-of-the-art precision inspection, motion control and light-based
manufacturing and metrology systems for the microelectronics industry,
including high-performance laser-light based precision systems for repairing
defective semiconductors and systems for fabricating advanced bio-chip
products. This segment of our business represented 31% of our sales in 2001.

BUSINESS SUMMARY

Front-end Semiconductor Equipment and Services:This segment is comprised of
the Companys NanoLight Business area at JRI and JSAL and the Semiconductor
Process Technology Services business of JSI.

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NanoLight Business Area

The NanoLight Business Area includes JMAR Research, Inc. (JRI), the
Companys wholly-owned research and development subsidiary and JMAR/SAL
NanoLithography, Inc. (JSAL), the Companys wholly-owned lithography systems
subsidiary. NanoLights mission is to produce high-value commercial products
from JMARs leading-edge advanced light technologies developed during the past
decade by JRI. Those technologies include JMARs patented all-solid-state
Brightlight lasers, the PXS laser plasma X-ray and EUV sources now being
developed for use in semiconductor lithography processes, and other advanced
applications.

JRI performs profitable research and development
contract work for third party customers, primarily the U.S. government. JMARs
contract and company-funded R&D programs have created a broad world-class
technology base that provides the foundation for an array of important new
commercial product lines and business areas. During 2001, JMARs revenues from
government contracts for advanced lithography constituted
approximately 53% of the Companys revenues.

Advanced Semiconductor Lithography.Semiconductors are the engines that
drive the technology industry. While the economics of most industries are
driven by consumption or deterioration, the economics of the semiconductor
industry are driven by continuous innovation to satisfy demanding performance
goals. Achieving this innovation requires continuing advances in the ability
of the industry to produce ever-smaller circuit feature sizes which make it
possible to produce more compact, higher density, faster-operating
semiconductors.

Lithography is one of the most critical steps in the production of
semiconductors. It is a photographic process which uses precision light
sources to copy intricate computer-generated electronic circuit designs onto
semiconductor chips. A typical lithography system consists of an illumination
source integrated into a printing apparatus known as a stepper or an
aligner. The combined system is installed in the semiconductor fabrication
line. In order to make the smaller circuit feature sizes needed to meet the
future needs of the rapidly growing microelectronics industry, next-generation
lithography (NGL) systems, employing shorter wavelength illumination sources,
will be required. JMAR believes it is the leading developer of a compact
high-intensity X-ray lithography source intended to address the need for next
generation lithography technologies.

In X-ray lithography, the illumination is provided by an X-ray source.
JMARs point source X-ray lithography technology utilizes the Companys
patented Britelight high-power, picosecond-class, diode-pumped solid state
laser technology to generate the X-rays required to print microscopic circuits
finer than 0.15 micron feature sizes (one micron is about one-one hundredth of
the thickness of a human hair).

As the semiconductor industry moves toward squeezing more and more
circuits onto each chip, uncertainty exists as to whether current optical
lithography technologies will remain either feasible or economically viable.
Major reasons to develop and adopt new advanced lithography technologies
include the need for new light sources that can efficiently deliver the shorter
wave lengths required, and the lack of availability and high cost of
appropriate optical materials. Extensive process development work at several
leading centers around the world has demonstrated the viability of X-ray
lithography to produce these smaller feature sizes using large immobile X-ray
sources known as synchrotrons. The Company believes that most of the
semiconductor industry considers these synchrotron sources to be overly
cumbersome, too expensive and extremely inflexible for anything other than
scientific feasibility and proof-of-principle demonstrations.

The goal of
JMARs X-ray Lithography (XRL) program has been to provide an acceptable
alternative to the synchrotron for semiconductor manufacturing applications by
developing a proprietary compact point source that is expected to be
economically competitive with and no larger than conventional optical
lithography sources. JMARs Picosecond X-ray Source (PXS) consists of
several individual modules each powered by the Companys patented Britelight
laser. These modules produce a rapid train of

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very short and powerful light pulses having intensities of many hundreds
of trillions of watts per square centimeter that are focused into a
microwave-oven-size chamber to produce X-rays. The Company believes that once
these much smaller and more cost effective X-ray lithography systems become
commercially available, they will be well received by the semiconductor
industry.

Semiconductors are manufactured using a variety of substances, with the
predominant substrate being silicon. Other substances, often referred to as
compound semiconductors, are used for certain, specific applications, such as
for ultra-high speed communications semiconductors. The compound semiconductor
material which has been used most frequently for these high-speed purposes has
been Gallium Arsenide (GaAs). Until recently, GaAs has been used principally
for military communications applications, but its commercial uses have been
increasing. The market for gallium arsenide chips is expected to grow at a solid 30% per year through 2004,
when it is estimated to hit $6 billion. The high bandwidth segment of this
market is reported to be growing at an even faster rate. The Company believes
that X-ray lithography could play a key role in enabling the cost-effective
manufacture of the high performance circuits needed for these applications.

Historically,
manufacturers of GaAs chips have not achieved
the high volumes of wafer throughput as are required by the silicon
manufacturers. As the demand for GaAs chips grows, there will be a
need for higher throughput lithography processes. JMAR believes its X-ray
lithography source technology will enable GaAs semiconductor manufacturers to
increase their throughput at more economical costs compared to existing processing methods. Following
planned increases in the throughput capability of its PXS sources,
JMAR believes they
will play a significant role in silicon semiconductor manufacturing in the
future. See Market-Advanced Lithography below and Factors That May Affect
Future Results in the Managements Discussion and Analysis below.

JMARs advanced
lithography source development program has benefited from the
investment of in excess of $38 million in Company and government funds over the
past decade and an additional approximately $22 million
investment in stepper system development in JSAL of
government funds prior to JMAR owning JSAL. In January 1994, after working on
Company funds and relatively small government funded X-ray lithography R&D
contracts, JMAR received a $6.9 million multi-year contract to develop its
laser-plasma PXS for use in a point source X-ray stepper system. In July 1998,
JMAR received an additional $13 million multi-year contract to continue this
development and to construct an X-ray lithography point source demonstration
system. In June, 2000, JMAR began a two-year $12.8 million phase of source
development aimed at integrating its scalable, modular X-ray source with an
X-ray stepper supplied by SAL, Inc., a leading X-ray stepper manufacturer and
now a subsidiary of JMAR, and installing this integrated system at a
semiconductor manufacturing demonstration test site. These contracts were
issued by the U.S. Army Research Laboratory and are sponsored by the Defense
Advanced Research Projects Agency (DARPA) of the Department of Defense. In
February 2002 JMAR announced the receipt of a Letter of Intent from the
Department of the Army to execute a formal contract funded by the Defense
Advanced Research Projects Agency (DARPA) valued at up to $34.5 million. The
contract directs JMAR to proceed immediately to deliver with all diligence
JMARs patented first-of-a-kind, one-nanometer point source XRL system to produce high-performance semiconductor integrated circuits
needed to support a wide range of critical military missions.

During the course of
this work on its XRL program, JMAR has
achieved several major X-ray production performance milestones which it
considers to be important breakthroughs. In the past two years, the Company
demonstrated the feasibility of superimposing simultaneous laser beams from
multiple Britelight modules within spot sizes of a few microns and time scales
of a few trillionths of a second. This has led to substantial increases in the
X-ray power output of the PXS. In certified testing in December 2000, the
power output from the PXS improved from 3 watts in 1999 to 21.5 watts of 1-2 nm
wavelength synchrotron-like X-ray emission. The Company believes that this
X-ray output increase positions JMARs PXS sources as a near-term enabling
technology for the higher-volume, cost-effective production of GaAs chips
required for the rapidly expanding, highest bandwidth wireless and optical
communications markets.

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During 2001, JMAR continued to refine its PXS technology with the
objective of meeting a target of integrating PXS sources into one or more
available X-ray steppers for commercial or military gallium arsenide chip
manufacturers. JMAR also worked to scale-up the PXS to deliver higher X-ray
power to support higher wafer throughput.

In January 2001, prior to its acquisition of SAL, JMAR awarded an initial
phase contract valued in excess of $1 million to SAL, to start construction of
a NanoPulsar XRL system which will be powered by a JMAR
PXS-125 laser plasma X-ray source. By the end of the second quarter of 2002,
JMAR plans to complete the integration of its XRL point source system with an
upgraded Model 5 stepper produced by JMARs JSAL division. JMAR plans to
conduct lithography demonstrations of its operating XRL system by the end of
September, 2002. The goal is to then install this integrated system at a
government-approved GaAs microcircuit production facility, to be used for
system demonstrations and semiconductor manufacturing process evaluation
purposes.

JMARs high-power X-ray point source is also unique in the world in its
ability to accommodate an X-ray collimator at close proximity, and hence with
large collection efficiency. JMAR has subcontracted this collimator
development to other DARPA-sponsored companies and national laboratories. The
complete PXS-125 source will include a collimator developed by X-ray Optical
Systems, Inc., under contract with JRI. This effort has produced the worlds
first full-field illumination collimators, with a measured lithography exposure
gain of 12 at a point source-to-mask/wafer exposure
distance equal to that used in the
NanoPulsar. A gain of 12 means that the exposure of the wafer is 12 times
faster than without the collimator while the illuminated field is free from the
distortions which are associated with an uncollimated point source.

Combining the high X-ray power output with the expected gain enhancement
from the X-ray collimator, JMAR believes that its PXS is able to meet a
throughput performance that is sufficient for initial GaAs commercial needs,
and far exceeds the performance of any other existing X-ray point source. It
represents a significant advance in the Companys drive to develop a compact,
lower-cost alternative to the large, costly synchrotrons for advanced
semiconductor lithography and other applications.

EUV Source Development.During 2001, the Company was granted an exclusive
license by the University of Central Florida Research Foundation (UCFRF) to
make, use and sell products, processes or systems which incorporate patented
technology developed by the University of Central Florida to convert laser
beams into Extreme Ultraviolet (EUV) and other types of advanced light sources.
JMAR intends to combine the licensed technology with its patented high-power
Britelight lasers to produce advanced next generation lithography sources to
enable the mass processing of ultra-high performance semiconductors. The
fields of use covered by the exclusive license include lithography tools and
metrology testing and inspection equipment using light wavelengths in the range
from 0.40 nanometer to 150 nanometers. This range includes the portion of the
wavelength spectrum currently deemed to be of the greatest interest to industry
for semiconductor X-ray lithography. It also includes the EUV wavelengths.

JMAR believes that development of an EUV source based on the UCF
technology is highly complementary to the Companys current X-ray lithography
activities because EUV is considered to be one of the leading alternative
technologies for powering next generation lithography (NGL) tools. Such tools
will be required for high-volume production of the minute microcircuits needed
for future ultra-high performance microelectronic products. In 1996, a
consortium of leading semiconductor chip manufacturers known as the EUV LLC,
led by Intel Corporation, made a substantial investment in a major program
using both National Laboratory and semiconductor equipment industry resources
to develop a lithography process and related equipment based on the use of EUV
light. One of the keys to the ultimate success of that process is the
development of an efficient high-power EUV light source.

JMAR has been collaborating with the UCF School of Optics to develop a
practical EUV source technology with optimum power output. It has been
demonstrated that, by modifying JMARs

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Britelight laser beam properties from those which are optimal to produce
X-rays, and then directing that modified beam into a toaster-size chamber
containing the licensed technology, the lasers energy can be converted into
EUV radiation at a higher rate than laser plasma EUV generation sources have
reported to date.

High Performance Soft X-ray Sources for Metrology Applications.The
Companys NanoLight Business Area is seeking to commercialize other
applications of its PXS technology. The Company believes that the very small,
less than ten microns in diameter X-ray spot size generated by the PXS coupled
with its one nanometer wavelength X-ray output also opens the door for JMAR to
produce additional major-market commercial X-ray systems for a range of
processing applications such as semiconductor wafer inspection for failure
analysis, fault detection, metrology of lithography and in-line defect or
contamination detection. Rather than using multiple PXS modules as is the case
for lithography and other higher power applications, these X-ray tools are
expected to utilize a single PXS module for high resolution X-ray imaging,
X-ray fluorescence and X-ray photoelectron spectroscopy applications. JMAR will address
these opportunities as they arise.

Semiconductor Process Technology Services

JSI provides technology
development and high-value technology services to other semiconductor producers
in the aerospace and defense industries. This area of the business provided
the substantial majority of revenues for JSI in 2001, largely based on a
contract originally awarded to JSI by General Dynamics Information Systems in
1998. Work under this contract
includes the development, construction and operation of the semiconductor wafer
fabrication facility at McClellan Air Force Base in Sacramento for the Defense
Microelectronics Activity. This facility was completed in 1999 with facility
qualification and process development, and new process instruction continuing
throughout 2001.

Under these ongoing programs, JSI uses its unique semiconductor industry
experience and existing relationships to define and/or acquire the technologies
needed to support customers missions. New long-term programs were
captured for the placement, implementation and maintenance of these new
state-of-the-art technologies. In a unique arrangement, JSI maintains
access to use these facilities to support certain commercial design
and wafer fabrication needs. In 2000, JSI expanded its relationship with the
government customer funding the work in this area by entering into a
Cooperative Research and Development Agreement (CRADA) with the Defense
Microelectronics Activity (DMEA) that designates JSI as the commercial interface
for the use of the DMEA capabilities by other aerospace contractors.

During 2001, the Semiconductor Process Technology Services product line
accounted for approximately 14% of the Companys revenues.

Precision Equipment

Measurement and Inspection (M & I) Systems.JPSI manufactures a range
of non-contact, high-resolution video/laser measurement systems and sells them
to manufacturers of semiconductors, data storage devices, printer systems and
biochip products. Its products include the compact Mirage tabletop inspection
system, the larger JMAR series 3000 and 4000 systems and the Lumina, the
newest member of JMARs M&I systems family. The extremely versatile Mirage is
used by the Companys customers for a variety of applications including
incoming and outgoing inspection, off-line process control of manufacturing
equipment, process verification and many laboratory functions. JPSIs standard
Series 3000 system contains larger size X-Y stages that allow measurement and
inspection of parts having dimensions exceeding the capability of the Mirage
while the even larger Series 4000 system combines video and laser height probes
to provide high accuracy measurements in all three dimensions (X-Y-Z).

Lumina, the newest member of the Companys M&I Systems family, is ideal
for performing the critical micro-measurements needed to manufacture flat panel
displays, microelectronics artwork, precision etched parts, and a broad range
of other microelectronic and micro-medical devices. Using JMARs high
performance motion control subsystems and precision optics, the Lumina
produces highly accurate measurements of large complex parts at
industry-leading throughput speeds.

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This product line utilizes state-of-the-art machine vision and laser
position sensors integrated with programmable optics and lighting control,
precision X-Y-Z motion control and other computer controlled functions to check
variations in geometries in microelectronics components. Proprietary
algorithms are written by JPSI for edge-sensing, height-sensing and
point-locating and used to determine straightness of lines, dimensional data,
height measurements, angles and radii of curvature of microelectronic devices.
During 2001, JMARs non-contact video and laser-based Measurement and
Inspection Systems product line accounted for approximately
$2.2 million, or 12% of the Companys revenues.

Positioning and Motion Control Products.JPSI manufactures a wide range of
precision positioning stages and motion control devices for the
microelectronics industry. These stages, which are the fundamental building
blocks of many microelectronic manufacturing systems, are integrated into
custom measurement and microelectronic processing products and systems
manufactured by both JMAR and its turnkey OEM system customers. During 2001,
the Positioning and Motion Control product line accounted for approximately
$2.2 million, or 12% of the Companys revenues.

Lithography Systems and other Products for Bio-Medical Applications.In
the past four years, JPSI has manufactured and sold lithography alignment
systems to a leading manufacturer of DNA biochips. Biochips are used by the
biomedical industry to acquire, analyze and manage genetic information to
improve the diagnosis, monitoring and treatment of diseases. JPSI continues to
provide service and parts for those systems and to explore that customers
future equipment needs. In addition to selling its alignment systems, JPSI has
made in-roads with other customers in the biotech industry by selling precision
stages that are used in its customers biochip manufacturing systems. During
2001, this product line accounted for approximately $1.2 million
or 6% of the Companys revenues.

Laser Repair Systems.The Precision Systems division also manufactures and
sells systems which utilize state-of-the-art lasers for microelectronics
repair. These systems serve a continuing need for higher precision instruments
to probe, inspect and repair semiconductor assemblies such as Multi-Chip
Modules (MCM). JMARs current laser repair system models use the Companys
optical inspection stations to locate open and short circuits and excimer
lasers to repair short circuits by removing excess material.

Laser Processing System.In a recent effort funded by a leading disk
drive manufacturer, JPSI has developed and assembled laser processing tools for
use in removing excess material during the production of disk drive components.
JMARs laser processing system utilizes state-of-the-art lasers, motion
platforms, controls and intelligence for processing of critical disk drive
components. JMAR is seeking follow-on orders from this customer. During 2001,
this product line accounted for approximately $400,000, or 2% of the
Companys revenues.

Atomic Vision Products.In 2000, JPSI introduced its initial nanometrology
Atomic Vision instrument which integrates atomic force microscopy (AFM)
technology into the Companys Disk Inspection Systems (DIS) to extend its
imaging resolution to better than one thousandth of a micron. These new Atomic
Vision (AV) systems are currently undergoing evaluation by both semiconductor
and disk drive customers for failure analysis, process control and research and
development applications where nanometrology precision is required. JMARs
fully integrated AV systems can rapidly verify and map product flaws of
nanometer scale, enable precision optical identification of microelectronic
components and perform off-line high speed atomic force scanning of a variety
of high value in-process and finished parts. JPSI has been working with a
major disk drive manufacturer to customize this product to its specific
requirements and expects to sell at least one of these systems in 2002.

Custom Products.In addition to its standard products, JPSI designs,
engineers and manufactures customized systems based on its motion control,
measurement and/or laser system capabilities to meet specified requirements of
customers. Frequently, the design of a particular custom product may lead to
additional sales of that product to the customer.

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MARKET

The Companys technology base has applications in several market areas:

Front-end Semiconductor Equipment and Services

Advanced Lithography.The total size of the lithography system market is
substantial. The semiconductor industry purchases between 500 to 1,000 new
lithography systems per year at prices ranging from approximately $700,000 to
$10 million, depending upon the circuit feature sizes and other factors
with the estimated cost of future next generation
lithography systems for the production of high performance silicon
semiconductor chips ranging as high as $50 million. Historically, as circuit feature sizes have become smaller, the prices of the
lithography systems have increased rapidly.

Currently, most semiconductors are manufactured using optical lithography
(meaning using light sources which require optics to focus the light).
Semiconductor manufacturers purchase lithography tools from a number of
established stepper suppliers. The principal suppliers of optical lithography
steppers for high volume semiconductor production are Nikon, Canon, ASML (who
has recently acquired Silicon Valley Group Lithography Systems (SVGL)) and
Ultratech Systems.

The silicon semiconductor industry is currently transitioning its highest
performance fab lines to the initial production of circuitry having feature
sizes as small as 0.13 microns (critical dimension). The Company understands
that, with the exception of JMAR, the primary focus of stepper manufacturers
for the near-term will continue to be on the development and marketing of
optical lithography steppers. The International Technology Roadmap for
Semiconductors (ITRS) 2001 Edition, sponsored by the Semiconductor Industry
Association, projects that 0.13 micron generation lithography will also use
optical technology. The next generation lithography (NGL) technologies
competing to succeed optical lithography processes for the silicon market are
XRL, extreme ultraviolet (EUV), electron beam and ion projection technology.
Each of these NGL technologies has its major semiconductor manufacturer
proponents. X-ray lithography process development has been conducted over more
than a decade, by several other organizations, including IBM and several large
Japanese semiconductor companies, using synchrotron X-ray sources. JMAR and
other proponents of XRL believe that as a result of this effort, XRL is the
most advanced and mature technology for the 0.10 micron generation and beyond.

JSAL was established
several years ago to focus on the XRL stepper market. As of the end of 2001, a total of about 20 X-ray
steppers have been sold worldwide for XRL process development
primarily for use with synchrotron X-ray sources. Sixteen of those have
been provided by JSAL.

Because of the
uniqueness and the advanced development status of its patented
technology, JMAR believes that it
is the leading developer of XRL point
sources and XRL systems. The Company further believes that its current X-ray
power output is sufficient for commercially viable Gallium Arsenide chip
production. Once its X-ray output attains levels adequate for commercially
viable silicon chip production rates, JMAR believes its NanoPulsar series of
X-ray systems will provide the silicon semiconductor industry with a lower
cost, much more compact and flexible alternative to synchrotron facilities for
X-ray lithography process development and production. JMAR also expects its XRL
systems will provide a much lower cost alternative to the EUV systems currently
under development for Next Generation Lithography.

Each of the NGL technologies has technical issues which need to be
addressed before it is adopted for use by the silicon semiconductor industry.
In addition, the extension of optical lithography technologies to smaller
feature sizes has its own limitations to resolve. The principal roadblocks to
the adoption of XRL often cited by critics are the high cost and time required
to modify current factory designs to accommodate synchrotron X-ray sources and
the difficulties in manufacturing lithography masks having feature sizes of
0.10 micron and below. The principal roadblocks often cited by critics for the
extension of deep UV lithography technology to 0.13 micron feature sizes is the
availability of the required optical components and the projected higher costs
of the masks and stepper systems.

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While the demand for ultra-high speed communications devices has paused in
its historically rapid growth, industry followers project a return to
prior growth rates in
2003. GaAs, not silicon, is the material of choice for many
semiconductor components operating at these ultra-high bandwidths. The market
for these devices is expected to grow from about $2 billion in 2001 to more
than $6 billion in 2004.

GaAs devices which operate at ultra-high bandwidths need to have
transistors imbedded in the chips which use a gate technology, commonly
referred to as T-gate. Current and envisioned optical and EUV lithography
systems cannot produce these T-gates. Electron beam systems and X-ray
lithography can produce these T-gates. JMAR believes that its NanoPulsar
X-ray technology, powered by the Companys unique PXS series of laser plasma
point sources, is capable of greater throughput and will be economically
superior to these electron beam systems and is ideally suited to meet the need
for a cost effective lithography process to satisfy this demand.

The Companys XRL program is focused on the development of the PXS powered
NanoPulsar system as a commercially-viable X-ray source initially for the
GaAs chip market and then for low-volume production, process
development applications for the silicon chip market, and ultimately as an
alternative to the synchrotron and other NGL technologies for high volume
production of silicon chips. Commercial NanoPulsar source/stepper systems for
XRL are expected to cost less and be of comparable, or smaller, size than
projected optical DUV stepper systems for the 0.13 micron generation of silicon
production and beyond.

Although JMAR does
not believe that synchrotrons will be adopted as a light source by
the semiconductor industry, there is an installed base of
synchrotrons at research facilities world-wide. In light of the fact
that JSAL has sold fifteen x-ray steppers for use with synchrotrons,
and continues to service and upgrade many of those, JMAR intends to
pursue further sales of x-ray steppers for use with synchrotrons and
other applications that may emerge in the future.

At the present time, the Company believes that the market for point source
X-ray lithography systems for the next few years is limited to the sale of
systems to support the GaAs chip market. It is estimated that
these systems will be priced in the $8-10 million range. The Company expects
the market for XRL steppers for the GaAs market to expand as more GaAs
manufacturers seek to develop and sell the higher bandwidth chips. If XRL is
adopted by the silicon semiconductor market, the units sold in this market
should increase substantially and operate to much tighter requirements, while
selling at a higher price.

Precision Equipment

Measurement and Inspection Systems.In this market, the Company
concentrates on providing manufacturing equipment for the microelectronics
industry, including applicable sectors of the semiconductor, computer disk
drive, bio-chip and printer systems industries. The Company believes that the
total annual sales for all companies in the niches within this market in which
it currently competes is about $250 million.

The Company provides equipment needed to improve manufacturing process
yields in environments where precision sub-micron accuracy and repeatability
for parts measurement or inspection are required and contact between the
measurement device and the products could result in damage or contamination.
The Company uses non-contact technologies such as optical/video with image
analysis, atomic-force microscopy and laser distance probes. By combining its
expertise in non-contact technologies with strong systems integration skills,
JMAR believes it is able to provide the solutions required by these targeted
market segments. The Company also believes that the trend toward smaller and
more intricate electronic devices will continue to increase the demand for
non-contact technologies and parts handling, higher resolution imaging of flaws
in parts and full system integration to provide the turnkey solutions in which
it specializes.

Lithography Systems for Bio-Chip Applications.The Company provides
micro-positioning lithography alignment systems and non-lithography micro-array
positioning subsystems for the biochip industry. These systems enable the
fabrication of bio-chip products for a range of material identification
applications as well as for improving the diagnosis, monitoring and treatment
of many diseases. DNA biochips manufactured by the Companys customers are
also being used for managing genetic information that can contribute to the
study of the human aging process and the Human Genome.

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According to the October 25, 1999 Business Week magazine, surveys by
brokerage houses and market-research firms indicated an immediate market for
biochips of about $1 billion, with the potential to grow rapidly in the next
decade. The Company believes its systems can find use in a number of
applications by a variety of companies in the biochip and biomedical industries
and is pursuing these opportunities.

Positioning and Motion Control Subsystems.Positioning components
manufactured and sold by the Company include air bearing, cross-roller bearing
and linear motor positioning stages and motion controllers with positioning
accuracies ranging from 0.05 microns to 10 microns, motorized x-y tables,
z-elevators, linear and rotary stages, and complete motion control solutions.
These products are incorporated into the Companys measurement, inspection and
other manufacturing system products and are also sold to major semiconductor
equipment OEMs for sophisticated surface analysis and inspection equipment,
and to manufacturers of biochip micro-array systems. The Company believes that
the total annual sales in the niches within this market in which it currently
competes is about $300 million.

MANUFACTURING

The Company believes that alternative suppliers are readily available for
most of the critical components that it requires to manufacture its precision
instrument products. Due to the complex nature of the capital equipment that
the Company manufactures at its Precision Systems division, it purchases a
substantial amount of off-the-shelf components from outside vendors for
integration into its final systems. These items include computers, optics,
television cameras and motors. In the past, the Company has encountered some
difficulties procuring these items but does not rely on exclusive sole source
suppliers. Accordingly, it does not currently expect parts availability to
create any significant problems in the foreseeable future. Due to the
complexity of the equipment that the Companys Precision Systems division
manufactures, delivery times after receipt of an order typically range from 30
to 90 days for standard products and from 90 days to one year for customized
and special products.

In the case of our X-ray lithography development program, we have
subcontracted portions of the development effort to third party suppliers, who
may initially be sole suppliers for the prototype unit, but we anticipate
having multiple sources of supply for the components used in our future
production systems. In particular, our X-ray light source requires a component
called a collimator, which collects the X-ray output from our X-ray source and
directs the X-rays to the wafer. We have received collimators in the past from
X-ray Optical Systems, Inc. (XOS) and are using one of their current
collimators on the X-ray lithography system currently being integrated with a
JSAL stepper. We have engaged XOS to develop a higher-efficiency collimator to
be developed by the end of 2002 to be used with our first commercial systems.
This higher-efficiency collimator and future improvements are needed to
increase the X-ray power of our lithography equipment in order to achieve our
goal of entering the high volume silicon lithography market by 2005. If we
cannot obtain these high-efficiency collimators when needed then we will need
to rely on other alternatives to increase X-ray power of our systems, which
could involve additional re-engineering and related delays and additional costs
which could adversely affect our business.

RESEARCH AND DEVELOPMENT

Company-funded expenditures for research, development and engineering
(RD&E) were $2,211,627, $2,299,635, $2,105,294, $2,026,482 and $1,699,010 for
the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively.
Total expenditures for RD&E, including funding provided by third party
contracts from the U.S. government and other companies were $9,041,754,
$6,424,830, $7,250,287, $5,863,796 and $3,186,149 for the years ended December
31, 2001, 2000, 1999, 1998 and 1997, respectively.

JRI is performing R&D contract work to develop an X-ray
lithography system based on its advanced solid state laser technology. This
work, which has important potential

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commercial applications, is primarily funded by the Defense Advanced Research Projects
Agency (DARPA) of the Department of Defense. Government
funding for these dual-use technologies, however, is very vulnerable to changes
in the political environment. For this reason, the Company is exploring
strategic alliance discussions with commercial microelectronics manufacturers
to enlist their participation in the continuing development and
commercialization of this technology.

Some of the more significant research and development projects the Company
has worked on in 2001 include (i) the continued development of point X-ray
sources (PXS) for lithography for the semiconductor industry and other
metrology applications; (ii) the continued development of a high efficiency EUV
generation system for advanced semiconductor lithography; (iii) the development
of new software for the Companys test and measurement systems; and (iv) the
engineering development of higher performance test, measurement and inspection
systems for the semiconductor, optical network and biomedical industries.

The main R&D emphasis in 2002 at JMARs Research and NanoLight Business
Area is the production of a modular PXS X-ray source to be integrated with
JSALs NanoPulsar XRL system for placement in a foundry for performance
validations and process evaluations starting in 2002.

DISTRIBUTION

JMAR sells its products on a worldwide basis. It uses a combination of
direct regional sales personnel, distributors and sales representatives to
market its products in the United States. Foreign sales are handled through
independent distributors and representatives. The distributors normally
purchase equipment for their own account and resell it to the end user in
compliance with local laws and customs. They are normally appointed as
exclusive distributors or representatives for either a geographic area or a
targeted product line and are responsible for service support, training and
installation to local customers.

IMPACT OF UNCERTAIN ECONOMIC ENVIRONMENT

The Company sells its products primarily to much larger technology
companies who either use them to manufacture their own micro-electronic
components or integrate them into electronic products which they market
directly to end users. Therefore, JMAR is vulnerable to any economic downturn
which affects the viability of that portion of its customer base, but it could
also benefit from the increase in R&D funding which often becomes available at
such times.

JPSI is primarily engaged in producing relatively high-end technology
products and services, some of which can contribute to the creation of
revolutionary new products of the type needed to jump-start the Industry.
However, it is not postured to take the lead in creating such products.
Accordingly, the Company believes that the future near-term business prospects
of this division will depend primarily on the general level of economic
activity in the Technology Industry marketplace.

On the other hand, JMARs two operating divisions which comprise the
NanoLight Business Area are postured to play a key role in helping the
semiconductor industry begin to re-assert itself in the near future. JMARs
new lithography technology is helping to lay the foundation for the production
of advanced semiconductors that could provide the foundation for a wide-range
of new end products, the capabilities of which will only be limited by the
creativity of the overall Industry.

JMARs NanoLight Business Area, though capital limited today, is rapidly
moving to assemble all of the capabilities needed to provide the semiconductor
industry with the ability to manufacture higher performance, more
cost-effective electronic circuitry having the potential to transport voice,
video, and data at much higher rates, and with greater clarity than ever
before. By so doing, many prototype or yet undemonstrated consumer, business,
scientific and military product applications, not practical today because of
poor economics, insufficient bandwidth (or speed), or both, may suddenly be
brought to life and inserted into the mainstream economy with the improved
speeds and economics made possible by their more powerful semiconductor chips.
JMAR expects that its rapidly advancing

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lithography technology, now nearing practical application at JSAL, will
begin to play an ever-growing role in enabling chip manufacturers to produce
higher performance semiconductor products targeted, initially, for the high
bandwidth communications market.

JSAL acts as the focal point for the development, application and
marketing of JMARs XRL systems. Its near term efforts center on meeting the
needs of the GaAs (i.e., Compound Semiconductor) device fabricators as they
enter production of high frequency devices using 150 nm and below critical
dimensions. Its efforts build on the experience gained in deploying systems
for use with synchrotron sources and in its development of early point source
illuminated systems.

The Company believes that the diverse, but inter-related content of its
technology business provides JMAR with a mutually-complementary and
mutually-supportive business base that should tide JMAR through the current
Technology Industry slowdown. This business base, which includes important R&D
contract support from the U.S. government, also places the Company in a good
position to contribute to, and benefit significantly from, the expected upturn
in the Technology Industry.

COMPETITION

Front-end Semiconductor Equipment and Services

Advanced X-ray Source Development

The Company believes that it has established itself as the worlds leading
developer of X-ray lithography point source systems powered by its patented PXS
collimated laser plasma source technology. The Company also believes that it
has achieved X-ray outputs which will enable it to meet a throughput
performance sufficient for GaAs production needs and which exceed the levels
achieved by the competing electron beam systems. The Company believes that its
NanoPulsar series of XRL systems will be capable of generating X-rays of
sufficient intensity to demonstrate 0.10 micron and smaller feature sizes at
commercially-viable manufacturing rates, for GaAs chip production and, with
planned increases in X-ray power, the Company believes its PXS can produce
sufficient X-ray power for silicon chip process development and manufacturing
in the future.

Semiconductor Process Technology Services

In the area of technology services provided to the aerospace and
government markets, JSI has very few competitors. The success of JSI in this
area is due to the broad range of technologies it can address and its abilities
to reach across many major producers for technology and support. The programs
that JSI performs are high-level engineering labor-intensive activities,
requiring in-depth knowledge and complete understanding of the technology being
addressed. This type of work is generally not addressed by the major producers
due to its high quality labor content and lack of direct production pay-off
from the use of such resources.

Precision Equipment

JMAR is an established provider of precision motion control X-Y staging,
components and systems. There are three major domestic competitors. These
competitors carry a much broader line, have much larger distribution channels,
and frequently have a larger stock of off-the-shelf inventory. In addition,
there are approximately five competitors (Newport, Anorad, NEAT, Schneeberger
and Aerotech) specializing in specific niches. Rather than compete in the
generalized motion control and positioning product marketplace, the Company has
established itself as an integrator of X-Y positioning and motion control
subsystems and platforms for several substantial OEM customers.

JMAR believes that it is a recognized leader in measurement and inspection
systems utilizing vision and laser based depth probes. There are approximately
three major domestic competitors (Newport, OGP and View Engineering) and three major
foreign competitors (Mitutoya, Nikon and Zeiss) within JPSIs marketplace. The
majority of JPSIs competitors in this area supply standard off-the-shelf

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measurement and inspection systems for the microelectronics industry. JPSIs
strengths against its competition are its ability to integrate its positioning
and motion control products with its standard measurement and inspection
systems to provide turnkey system solutions for manufacturing, process control
and quality control requirements. The Companys vision and laser-based systems
are targeted for high-end applications requiring high resolution, sub-micron
edge detection, positioning and measurement accuracy. Due to the focus on the
high performance portion of this market, in the past JMARs products have been
priced at the higher end of the competition. In the latter half of
2001 and so far in 2002, JPSI
has made
significant in-roads in reducing the cost of its products, along with product
upgrades, and it believes its products compete favorably with those of its
competition.

PATENTS AND PROPRIETARY TECHNOLOGY

During the past several years JMARs patent protection efforts have
resulted in the issuance of 16 patents, 9 pending U.S. patent applications and several
provisional patent applications. In addition, several of the issued U.S.
patents have also been issued as foreign patents. In many cases, several
patents were continuations-in-part which cover the same subject matter as
earlier issued patents, with added improvements thereto. The issued patents
contain numerous claims covering various types of laser plasma X-ray sources,
high-brightness solid state lasers, point-source lithography system technology,
advanced collimator technology, improved X-ray source chambers, improved laser
amplifiers, internal imaging of semiconductor devices (nanotomography), laser
ablation of materials, ultraviolet and extreme ultraviolet (EUV)
microlithography systems and key X-ray lithography stepper technology, each of
which represents a major opportunity for potential growth for JMAR. The
expiration dates of these patents range from 2004 to 2017. JMAR is also a
party to an exclusive license with the University of Florida covering certain
EUV technology. Because the later patents cover many of the fundamental
aspects of the earlier patents, with more recent improvements, the more
recently issued patents are generally more important than the earlier patents.

The Companys policy is to apply for a patent on each of its significant
inventions not only to preserve its proprietary rights but also to protect
against reverse engineering by others and to avoid being locked out of the
use of its own technology by other patents. However, the Company does not
place its principal reliance on patent protection; rather, it seeks to maintain
a competitive advantage through an aggressive R&D program, protection of
non-patented proprietary data, maintenance of its advanced laser-optics
expertise, superior product performance and active marketing of its products.
However, it is recognized that lasers and X-ray lithography are the subject of
very substantial R&D activity by many very competent companies and that other
approaches may be developed and patented, making the field very competitive.

CUSTOMERS

For fiscal years 2001, 2000 and 1999, the United States Government
accounted for approximately 66%, 45% and 58%, respectively, of total sales. A
major portion of the Companys government contract sales involves research and
development aimed at producing commercially-viable products and technology.
Foreign sales accounted for 3%, 7% and 11% of the Companys revenues in 2001,
2000 and 1999, respectively. In 2001, 2000 and 1999, IBM accounted for 5.0%,
5.6% and 10.3% of JMARs revenues, respectively. Installations in IBMs
foreign facilities accounted for 1.0%, 0.7% and 6.0% of the Companys revenues
in 2001, 2000 and 1999, respectively, and are included in the above foreign
sales numbers. In 2001, 2000 and 1999, 4.9%, 16.3% and 13.4%, respectively, of
the Companys revenues were derived from sales of DNA biochip lithographic
alignment systems to Affymetrix, Inc.

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EMPLOYEES

Currently, the Company has approximately 120 full-time employees. The
Company is not subject to any collective bargaining agreements and believes
that it maintains excellent relations with its employees.

INFORMATION REGARDING INDUSTRY SEGMENTS, SIGNIFICANT CUSTOMERS AND EXPORT SALES

As a result of the decision to discontinue and sell the Companys
standard semiconductor products business, the Company will operate in two segments as
follows: Front-end Semiconductor Equipment and Services and Precision
Equipment. Prior to the Companys decision to discontinue and sell
its standard semiconductor products business, the Company operated in the above two
segments as well as the Semiconductor Products and Processes Segment.
Financial information relating to the Companys segments, significant customers
and export sales for the three years ended December 31, 2001 is incorporated by
reference from Note 14 of Notes to Consolidated Financial Statements.




Item 2. PROPERTIES

The Company has a total of approximately 85,000 square feet of laboratory,
office, manufacturing and storage space under leases between the Company or its
four subsidiaries and their respective landlords. The Companys corporate
headquarters occupies 4,856 square feet in Carlsbad, California approximately
35 miles north of San Diego International Airport. This lease expires on
September 30, 2005.

NanoLight and JRI lease 9,280 square feet located in the Torrey Pines
Business Park in the Sorrento Valley region of San Diego, 15 miles north of San
Diego International Airport. The Sorrento Valley space is used for the
Companys expanding advanced light technology development activities, including
X-ray lithography. That lease expires on February 28, 2003.

JPSI leases a total of 28,500 square feet of manufacturing, office and
storage space in two separate buildings located 25 miles north of Los Angeles
International Airport in Chatsworth, California, a suburb of Los Angeles. The
facility lease expires in August, 2002.

JMAR Semiconductor leases 25,556 square feet of office and storage space
in Irvine, California south of Los Angeles which expires on August 31, 2005.
JSI is currently attempting to sublease this space. JSI also leases 2,567
square feet of office and storage space in Sacramento, California. That lease
expires in April, 2002. JSI expects to renew this lease prior to its
expiration.

JSAL leases a total of 14,640 square feet of office and storage space in
South Burlington, Vermont. That lease expires in March 2003.

The Company believes that its physical properties are adequate for its
current needs.




Item 3. LEGAL PROCEEDINGS

In April, 2001, the Companys subsidiary, JMAR Precision Systems, Inc.
(JPSI) hired Shankar Rao as JPSIs Vice President of its Precision Motion
Control (PMC) business area. Subsequently, Mr. Rao was made Senior Vice
President of JPSI. Mr. Rao was formerly an employee of Anorad Corporation
(Anorad). Anorad competes with the PMC business area of
JPSI. In October, Anorad filed a Complaint in Los Angeles Superior Court against Mr.
Rao, JPSI and the Company seeking a Temporary Restraining Order and a
Preliminary Injunction against Mr. Rao, JPSI and the Company from using or
disclosing any Anorad trade secret information that may be in their possession.
The Complaint also seeks damages in an unspecified amount for the alleged
misappropriation of Anorad trade secrets, the breach by Mr. Rao of his employee
confidentiality agreement with Anorad, interference with contractual relations
and unfair competition.

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This matter has been stayed by
the Court pending arbitration of any claims between Anorad and Mr. Rao. The Company
denies that it possesses or has used any Anorad trade secrets and if
the court action is reinstated, the Company believes that it has defenses to this lawsuit and intends to vigorously contest
this matter.




Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.




PART II




Item 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS

The Companys Common Stock is traded on the Nasdaq National Market tier of
the Nasdaq Stock Market (NASDAQ-NMS) under the symbol JMAR. The 2001 and
2000 high and low transaction prices for the common stock as reported by
NASDAQ-NMS are set forth in the following table.

Common Stock Price

|     |  |                |  |       |      |  |     |      |  |  |  | 
|---- |  | -------------- |  | ----- | ---- |  | --- | ---- |  |  |  | 
|     |  |                |  |       | High |  | Low |     
|     |  |                |  |       |      |  |     |     
|2001 |  |                |  |       |      |  |     |      |  |  |  | 
|     |  | First Quarter  |  | 7.61  |      |  |     | 2.97 | 
|     |  | Second Quarter |  | 5.49  |      |  |     | 2.63 | 
|     |  | Third Quarter  |  | 4.47  |      |  |     | 1.75 | 
|     |  | Fourth Quarter |  | 3.77  |      |  |     | 1.90 | 
|2000 |  |                |  |       |      |  |     |      |  |  |  | 
|     |  | First Quarter  |  | 22.75 |      |  |     | 4.88 | 
|     |  | Second Quarter |  | 11.50 |      |  |     | 3.50 | 
|     |  | Third Quarter  |  | 12.50 |      |  |     | 4.69 | 
|     |  | Fourth Quarter |  | 8.72  |      |  |     | 2.50 | 

As of February 28, 2002, there are approximately 10,000 holders of JMARs
common stock.

The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future. The payment of dividends in the future by
the Company on its Common Stock will be dependent on its earnings and financial
condition and such other factors considered relevant by the Companys Board of
Directors.

Pursuant to the Director Compensation Program adopted by the Company in
August, 1997, the Company issued a total of 956 shares of Common Stock in
October, 2001 to its outside directors as compensation for services as a
director. These transactions were exempt under Section 4(2) of the Securities
Act of 1933.

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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data that follows has been extracted
from the Companys Consolidated Financial Statements, which have been audited
by Arthur Andersen LLP, independent public accountants. It should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the Consolidated Financial Statements and Notes
thereto, which are included elsewhere in this report.

Consolidated Statements of Operations Data  For the Years Ended December 31,

|                                                                |  |      |            |      |  |      |            |      |  |      |            |   |  |   |            |   |  |   |             |  
|--------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                                |  | 1997 |            | 1998 |  | 1999 |            | 2000 |  | 2001
|                                                                |  |      |            |      |  |      |            |      |  |     
|Revenues                                                        |  | $    | 21,461,627 |      |  | $    | 24,560,834 |      |  | $    | 24,767,740 |   |  | $ | 19,626,600 |   |  | $ | 18,712,607  |  
|Gross profit                                                    |  |      | 8,830,316  |      |  |      | 9,187,891  |      |  |      | 7,051,994  |   |  |   | 5,923,223  |   |  |   | 2,900,550   |  
|Operating expenses                                              |  |      | 7,303,374  |      |  |      | 8,279,582  |      |  |      | 9,197,098  |   |  |   | 9,469,777  |   |  |   | 18,951,234  |  
|Income (loss) from operations                                   |  |      | 1,526,942  |      |  |      | 908,309    |      |  |      | (2,145,104 | ) |  |   | (3,546,554 | ) |  |   | (16,050,684 | )
|Interest expense                                                |  |      | (181,562   | )    |  |      | (181,227   | )    |  |      | (240,928   | ) |  |   | (136,313   | ) |  |   | (103,613    | )
|Interest income                                                 |  |      | 88,402     |      |  |      | 89,575     |      |  |      | 25,205     |   |  |   | 324,550    |   |  |   | 244,102     |  
|Other income
(expense), net                                     |  |      | 16,503     |      |  |      | (27,612    | )    |  |      | 111,833    |   |  |   | 2,133,552  |   |  |   | 1,208,661   |  
|Income (loss) before income
taxes                               |  |      | 1,450,285  |      |  |      | 789,045    |      |  |      | (2,248,994 | ) |  |   | (1,224,765 | ) |  |   | (14,701,534 | )
|Income tax (provision) benefit                                  |  |      | 345,000    |      |  |      | (32,204    | )    |  |      |           |   |  |   |           |   |  |   |            |  
|Net income (loss)                                               |  |      | 1,795,285  |      |  |      | 756,841    |      |  |      | (2,248,994 | ) |  |   | (1,224,765 | ) |  |   | (14,701,534 | )
|Net income (loss) per basic share                               |  |      | .11        |      |  |      | .04        |      |  |      | (.12       | ) |  |   | (.06       | ) |  |   | (.65        | )
|Basic shares used in
computation of net income
(loss) per share |  |      | 17,065,860 |      |  |      | 18,046,860 |      |  |      | 18,045,914 |   |  |   | 21,468,763 |   |  |   | 22,484,905  |  

Consolidated Balance Sheet Data  December 31,

|                      |  |      |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|--------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                      |  | 1997 |            | 1998 |  | 1999 |            | 2000 |  | 2001
|                      |  |      |            |      |  |      |            |      |  |     
|Working capital       |  | $    | 9,634,527  |      |  | $    | 9,213,134  |      |  | $    | 7,468,743  |  |  | $ | 21,543,381 |  |  | $ | 7,843,465  | 
|Total assets          |  |      | 17,268,878 |      |  |      | 22,874,833 |      |  |      | 20,673,768 |  |  |   | 34,191,574 |  |  |   | 26,618,625 | 
|Short-term debt       |  |      | 922,246    |      |  |      | 2,693,975  |      |  |      | 5,195,490  |  |  |   | 1,291,178  |  |  |   | 3,280,037  | 
|Long-term liabilities |  |      | 907,235    |      |  |      | 475,362    |      |  |      | 642,913    |  |  |   | 339,908    |  |  |   | 1,419,632  | 
|Stockholders equity  |  |      | 12,488,212 |      |  |      | 13,253,179 |      |  |      | 10,909,461 |  |  |   | 28,444,669 |  |  |   | 14,299,655 | 

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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. Subsequent to December
31, 2001, 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 X-ray lithography products. This portion of JMAR Semiconductor
Inc.s (JSI) business has been a developmental effort, involving the design,
manufacture and introduction of new standard product semiconductor chips. With
the severe downturn in the worldwide semiconductor market, JSI has had little
success in selling its new standard product chips to date. These products
would require substantial additional capital to become established in
the market, as well as to develop newer, higher value chips. The
Company has concluded that it will not continue to invest its
resources in this business. As a result of this decision, in
the future the Company will operate in two segments, the Front-end
Semiconductor Equipment and Services segment and the Precision
Equipment segment. The standard semiconductor products business will be reflected in
future financial statements as a discontinued operation and the
remainder of JSIs business included in the Semiconductor Products and
Processes Segment will be included in the Front-end Semiconductor Equipment and
Services Segment.

Results of Consolidated Operations

Net loss for each of the fiscal years ended December 31, 2001, 2000 and
1999 was $14,701,534, $1,224,765 and $2,248,994, respectively, while loss from
operations for those same periods was $16,050,684, $3,546,554 and $2,145,104,
respectively. Total revenues for 2001, 2000 and 1999 were $18,712,607,
$19,626,600 and $24,767,740, respectively. Contract revenues for 2001, 2000
and 1999 were $12,776,721, $9,114,357 and $14,452,054, respectively. Included
in the net loss for the years ended December 31, 2001, 2000 and 1999 are asset
writedowns and special items of $9,332,731, $131,663 and $405,471,
respectively. See below for a detailed discussion of the asset
writedowns and special items.

The decrease in total revenues for the year ended December 31, 2001
compared to the prior year was attributable to an approximately
$4.7 million drop in sales of the Companys precision
instrument products as a result of the
severe economic downturn which has caused our target customers to curtail capital
equipment purchases. In addition, as a consequence of the September 11, 2001
terrorist attacks in the U.S., this slowing of economic activity became worse,
resulting in a further retrenchment of overall spending by our target
customers. The
decrease in revenues was also attributable to a decrease in semiconductor
process technology services sales of approximately $804,000 due to the Companys reassignment
at JSI of certain semiconductor engineering resources from external contract revenue
microchip development projects to internally-funded chip development and
marketing activities. The decreases in revenues for 2001 compared to 2000 were
offset in part by a significant increase in X-ray lithography contract revenues
of $3,864,260 as well as other contract revenues from JMAR/SAL NanoLithography,
Inc. (JSAL) of $724,884, acquired in August 2001.

In 1999, the semiconductor process technology services business recorded
significant revenue compared to 2000 attributable to non-recurring subcontracts
related to construction of a semiconductor fabrication facility for the
Defense Microelectronics Activity located in Sacramento, California. Furthermore, the
fiscal 2000 revenues of this business were affected by the planned reassignment
of a substantial portion of the Companys semiconductor engineering staff from
government funded contract chip development work to internally funded
commercial product development and marketing activities consistent with the
Companys plans to accelerate its entry into the commercial telecom
semiconductor product market.

The Companys ability to forecast orders for its precision instrument
products continues to be limited due to continuing marketplace uncertainties
which often impedes customers abilities to accurately forecast their needs.
As a result, the timing of receipt and shipment of orders could have a material
impact on quarterly results in 2002.

Total gross margins for the fiscal years ended December 31, 2001, 2000 and
1999 were 15.5%, 30.2% and 28.5%, respectively. Gross margin (loss) for
product sales for the three years ended December 31, 2001, 2000 and 1999 were
(8)%, 34% and 35%, respectively, and gross margins for contract sales for those
three years were 26%, 25% and 24%, respectively. The decrease in the gross
margin for product sales in 2001 was due primarily to underutilized
manufacturing capacity, competitive

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pressures on product pricing and the need to
increase inventory reserves to address the risks of excess quantities
of materials held as a result of slow demand ($1.8 million
increase in
2001, including $1.2 million in the fourth quarter, compared to a $250,000 increase in 2000). The higher total gross margins
for 2000 compared to 1999 are primarily due to a change in the mix
of revenue sources wherein 2000 revenue had a smaller amount of lower margin
contract revenues of the semiconductor process technology services
business compared to 1999. Also included in 2000 is a charge to cost of sales to increase the reserve for
excess and obsolete inventory of $250,000 at JPSI. The Company continues to
experience competitive pressures on certain precision instrument products,
which may impact gross margins in the future. The Company expects that as its
patented, laser-driven advanced light products enter the marketplace and gain
acceptance, they will substantially improve gross profit margins. The Company
is currently integrating its X-ray source and stepper and anticipates
conducting wafer exposures using this integrated system by the end of the third
quarter of 2002. Additional efforts are ongoing to increase the X-ray power
output of our X-ray sources to meet commercially viable requirements for the
GaAs chip manufacturing industry with the expectation of receiving
an order for a commercial system by the end of 2002.

Selling, general and administrative (SG&A) expenses for the fiscal years
ended December 31, 2001, 2000 and 1999 were $7,406,876, $7,038,479 and
$6,686,333, respectively. The increase in SG&A expenses in 2001 is primarily
due to an increase in sales and marketing costs in the Semiconductor Products
and Processes Segment of $455,426 due to the buildup of the sales and marketing
infrastructure related to the Companys market entry of its standard semiconductor
products. In addition, there were $562,327 in SG&A costs in 2001
related to JSAL. These increases were offset, in part, by a reduction in SG&A
costs in the Precision Equipment segment of approximately $720,000
primarily related to the reduction in employees during 2001 in that segment and
other cost cutting programs implemented during 2001. The increase in SG&A
expenses in 2000 compared to 1999 is primarily due to an increase in sales and
marketing costs in the Semiconductor Products and Processes Segment.

The Companys research, development and engineering program (RD&E)
consists of two types: Customer-Funded RD&E (U.S. government and other
companies) and Company-Funded RD&E. Both types of RD&E are expensed when
incurred. Customer-Funded RD&E costs incurred, included in Contract Costs of
Sales, totaled $6,830,127, $4,125,195 and $5,144,993 for the fiscal years
ended December 31, 2001, 2000 and 1999, respectively. The increase in
Customer-Funded RD&E expenditures for 2001 is related to an increase of
approximately $2,432,936 in the X-ray lithography program contract funding
provided by the Defense Advanced Research Projects Agency, most of which is
directed toward development of JMARs X-ray lithography source technology for
the commercial semiconductor market, and contract costs of $579,434 incurred by
JSAL which was acquired in August 2001. These increases were offset, in part,
by a decrease of $307,438 related to the Companys contract for the development
of a unique microcircuit architecture and devices for the replacement of
obsolete integrated circuits for the Defense Microelectronics Activity.
Company-Funded RD&E costs are shown in Operating Expenses and totaled
$2,211,627, $2,299,635 and $2,105,294 for the fiscal years ended December 31,
2001, 2000 and 1999, respectively. Hence, total RD&E expenditures for those
three years were $9,041,754, $6,424,830 and $7,250,287, respectively. RD&E
expenditures as a percentage of sales were 48.3%, 32.7% and 29.3% for the years
ended December 31, 2001, 2000 and 1999, respectively. These expenditures are
primarily related to the continued development of point X-ray sources for
lithography for the semiconductor industry and other metrology applications,
development of a high efficiency EUV generation system for advanced
semiconductor lithography, the development of new software for the Companys
test and measurement systems and the engineering development of higher
performance test, measurement and inspection systems for the semiconductor,
optical network and biomedical industries.

Due to the lack of
progress in selling JSIs standard semiconductor
products and the additional investment required for that product
line, JMAR has recorded, as of December 31, 2001, significant
write-offs related to impairments in JSIs assets. Asset writedowns and special items for the year ended December 31, 2001 of
$9,332,731 includes $7,420,000 in asset impairments at JSI, $364,000 in asset
writedowns related to other discontinued projects, $547,000 in lease
termination costs at JSI, $349,000 in severance related to reductions in force
and other terminations at JPSI and $653,000 in legal costs associated with
several matters, all but one of which was resolved at December 31, 2001. The
asset writedowns at JSI include $4,650,000 of capitalized software development
costs for products that have not generated significant sales to date and
are doubtful of generating future revenues, $2,056,000 of fixed assets including outside

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purchased software for operating assets that will
not be realizable as a result of no future sales, $420,000 of other assets and $294,000 of inventory.
In September 2000, JSI moved into a significantly larger facility in
anticipation of realizing its growth plans. Prior to December 31, 2001, the Company decided to sublease the facility used
by JSI and move JSI into a smaller facility. Accordingly, in the
fourth quarter of 2001 the Company accrued
its expected loss under that lease. The asset writedowns of other
discontinued projects related to NRV writedowns related to demo
products
($335,000) where the Company has put the projects on hold and $29,000 for the
writedown of abandoned patent applications. The majority of the severance amounts are
related to two negotiated severance agreements, the majority of which has been
paid in cash in 2001 or will be paid in cash in 2002. The balance of the
severance amount is related to several reductions in force during 2001 of a
total of 34 employees. The reductions in force represented 31% of the work
force at JPSI and were not associated with a
restructuring, exit plan or business combination. The legal costs have either
been paid in cash prior to December 31, 2001 or have been accrued at December
31, 2001 and will be paid subsequently to December 31, 2001. The
amount of the asset writedowns and special items for the quarter
ended December 31, 2001 was $8,207,000. The amounts for special
items in
2000 are for legal costs and severance and the amount in 1999 is for
termination costs for a former employee and legal costs.

Interest expense for the fiscal years ended December 31, 2001, 2000, and
1999 was $103,613, $136,313 and $240,928, respectively. Interest expense is
less for 2001 versus 2000 due to lower borrowing costs due to the reduction in
prime rate in 2001. Interest expense is significantly less in 2000 versus 1999
due to the repayment of the Companys working capital line (the Line) with
Comerica Bank in late March 2000. The terms of the Line are described in
Consolidated Liquidity and Financial Condition, below.

The gain on sale of marketable securities of $1,189,273 and $2,184,476 for
2001 and 2000, respectively, is related to the sale of 500,000 shares and
890,000 shares, respectively, of the Companys investment in Bede plc in April
2001 and December 2000, respectively. Other income (expense) for 1999 includes
a writedown of $88,344 of a note receivable from an officer of the Company.

Results of Segment Operations

Front-end Semiconductor Equipment and Services Segment

Revenue for the year ended December 31, 2001 as compared to the year ended
December 31, 2000 for the Front-end Semiconductor Equipment and Services
Segment increased $4,589,144 from $5,263,850 to $9,852,994. This increase is
due to a significant increase in X-ray lithography contract revenues of
$3,864,260 as well as other contract revenues from JSAL of $724,884, acquired
in August, 2001. Operating income of the Front-end Semiconductor Equipment and
Services Segment for the year ended December 31, 2001 as compared to the year
ended December 31, 2000 decreased $84,007 from income of $223,109 to income of
$139,102. Despite the increase in revenues in 2001 compared to 2000,
operating income decreased primarily due to asset writedowns of $227,000 and
$185,000 of losses at JSAL which was acquired in August 2001.

Precision Equipment Segment

Revenue for the year ended December 31, 2001 as compared to the year ended
December 31, 2000 for the Precision Equipment Segment decreased
$4,716,927 from $10,512,243 to $5,795,316. This decrease in revenues was
related to the severe economic downturn which has caused companies to curtail
capital equipment purchases. In addition, as a consequence of the September
11, 2001 terrorist attacks in the U.S., this slowing of economic activity
became worse, resulting in a further retrenchment of overall spending by
companies. Operating loss of the Precision Equipment Segment for
the year ended December 31, 2001 as compared to the year ended December 31,
2000 was adversely affected as well increasing $3,061,573 from a loss of
$3,072,269 to a loss of $6,133,842. The significantly higher operating losses
in 2001 versus 2000 were due to lower revenues and lower margins of certain of
the Companys precision instrument

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products, $486,000 of asset writedowns and
severance amounts and $1.8 million
in inventory reserves.

Semiconductor Products and Processes Segment

Revenue for the year ended December
31, 2001 as compared to the year ended December 31, 2000 for the Semiconductor
Products Segment was $3,064,297 and $3,850,507, respectively. The decrease in
revenues in 2001 was attributable to the current worldwide economic slowdown in
the semiconductor industry which delayed the planned sales buildup of the
Companys standard products and the reassignment of certain semiconductor
engineering resources from external contract revenue microchip development
projects to internally-funded chip development and marketing activities.

The operating loss for the year ended December 31, 2001 as compared to the
year ended December 31, 2000 increased from $697,394 to $9,403,079. Subsequent
to December 31, 2001, the Company decided to discontinue and sell its
standard semiconductor products business. This business has been a developmental
effort, involving the design, manufacture and introduction of new standard
product semiconductor chips. With the severe downturn in the worldwide
semiconductor market, JSI has had little success in selling its new standard
product chips to date. These products would require substantial additional
capital to get these chips established in the market, as well as to develop
newer, higher value chips. In 2001, revenues of standard semiconductor
products were approximately $15,000.

Included in the operating loss of this segment for 2001 are $7,420,000 in
asset impairments and $547,000 in lease termination costs. The asset writedowns
include $4,650,000 of capitalized software development costs for
products that have not generated significant sales to date and are
doubtful of generating future revenues, $2,056,000 of
fixed assets including outside purchased software for operating
assets that will not be realizable as a result of no future sales, $420,000 of other assets and
$294,000 of inventory. In September 2000, JSI moved into a
significantly larger facility in anticipation of realizing its growth
plans. Prior to December 31, 2001, the Company decided to
sublease the facility used by JSI and move JSI into a smaller facility.
Accordingly, in the fourth quarter of 2001 the Company accrued its
expected loss under that lease.

As a result of the
Companys decision to discontinue and sell the semiconductor
standard products business, the Company may have an acceleration of the payment of liabilities, disputed liabilities may arise,
and the Company may incur liabilities that it otherwise would not have incurred primarily
including distributor termination costs, certain vendor liabilities and
employee related costs. These amounts are estimated to be approximately
$950,000, of which approximately $700,000 and approximately
$183,000 was accrued at December 31, 2001 and 2000, respectively, the
majority of which represents advance payments for inventory by JSIs
distributor. In March 2002,
JSI had a reduction in force of 13 employees or 50% of its total employees. In
future financial statements, the standard semiconductor products business will be
reflected as a discontinued operation and the remainder of JSIs
business, which represented the majority of the revenues on 2001 and
2000 of
the Semiconductor Products and Processes Segment, will be included in the Front-end Semiconductor Equipment
and Services
Segment.

Consolidated Liquidity and Financial Condition

Unrestricted cash and cash
equivalents at December 31, 2001 and 2000 were $4,115,129
and $9,856,768, respectively. The (decrease) increase in unrestricted cash and cash equivalents for the fiscal years ended
December 31, 2001 and 2000 was $(5,741,639) and $7,533,641, respectively.

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The decrease in
unrestricted cash for 2001 resulted primarily from an increase in
restricted cash of $3,000,000, expenditures for
software development costs primarily related to the Companys commercial
telecom semiconductor chips at JMAR Semiconductor, Inc. (JSI) of $2,479,809,
capital expenditures of $1,170,477 primarily related to capital expenditures
for the Companys commercial telecom semiconductor chips at JSI and the upgrade
and replacement of computers, cash used in operations of $417,246 primarily
related to operating losses (exclusive of the gain on the sale of the Bede
stock and asset writedowns), payment for purchase price of JSAL of $1,112,309, foundry license costs
of $200,000 and mask costs of $289,512 offset in part by borrowings under the
Companys working capital bank line of $1,900,000 and proceeds from the sale of
shares of the Companys investment in Bede of $1,207,923. The Companys
capital expenditure budget for 2002 will be substantially less than in 2001.

The Companys
standard semiconductor products business has been a developmental
effort, involving the design, manufacture and introduction of new standard
product semiconductor chips. With the severe downturn in the worldwide
semiconductor market, JSI has had little success in selling its new standard
product chips to date. These products would require substantial additional
capital to become established in the market, as well as to develop
newer, higher value chips. As a result, subsequent to December 31, 2001, the
Company has decided to discontinue and sell this business. As a
result of the Companys decision to discontinue this business, the Company may
have an acceleration of the payment of liabilities, disputed
liabilities may arise, and the Company may incur liabilities
that it otherwise would not have incurred primarily including distributor
termination costs, certain vendor liabilities and employee related
costs. These
amounts are expected to be approximately $950,000, of which approximately
$700,000 and approximately $183,000 was accrued at December 31, 2001 and 2000, respectively, the majority of which
represents advance payments for inventory by JSIs distributor.

JMARs operations will continue to require the use of working capital.
Working capital as of December 31, 2001 and December 31, 2000 was $7,843,465
and $21,543,381, respectively. The decrease in working capital is primarily
due to the Companys losses, software development and other standard chip
product activities, decreases in receivables and inventory, cash paid to SAL
shareholders as part of the purchase price and capital equipment purchases.
The working capital of the Company had generally been funded through its
working capital line (the Line) with Comerica Bank (the Bank) with interest
at prime rate and through third-party contracts. Due to the Companys
continued losses, in November 2001, the Bank reduced the amount of the Line to
$3 million and requires a $3 million compensating balance. Pursuant to this
new line of credit, there are no financial covenants or ratios. The Line
expires March 31, 2003. The Company is pursuing alternative banking
arrangements.

In March 2002, under its Universal Blank Shelf Registration Statement (see
below), the Company sold 1 million shares of its Common Stock for gross
proceeds of $2 million. Management believes that, including this financing,
the Company has adequate resources to fund operations and working capital
requirements at least through December 31, 2002. However, the Company has
determined that it will require additional financing to complete or accelerate
the development of some of its high value emerging new products, including its
patented PXS point X-ray sources for lithography for the semiconductor industry
and other metrology applications. In addition to the above financing needs,
additional funds could be required for future acquisitions should the Company
elect to pursue such acquisitions. The Company believes that it has available
to it several potential sources of capital including private offerings to
individual investors and additional debt or equity sales in the public market
as well as additional contract funding from both current and new customers for
its research and development services. The Company also intends to pursue
opportunities for strategic relationships, which may include additional
funding, in order to accelerate the commercialization of its emerging products.
However, there can be no assurance that additional financings will be
available when needed, on favorable terms, or at all.

On August 8, 2001, the Company filed a Universal Blank Shelf
Registration Statement with respect to $25 million of Company securities. The
registration statement was declared effective by the Securities and Exchange
Commission on October 11, 2001. The securities that may be sold under this
registration statement may be common stock, preferred stock, debt or warrants.
The Company may

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sell registered securities in the public market from time-to-time at its
discretion when market conditions are favorable and at prices that will be
negotiated at those times. In connection with the sale of stock mentioned
above, the Company issued to the purchasers warrants to purchase 150,000 shares
of its Common Stock at an exercise price of $2.50 per share, expiring in four
years. Also, the Company paid a placement agent a fee of 6% of the gross
proceeds, a $25,000 non-accountable expense allowance and warrants to purchase
20,000 shares of the Companys Common Stock at an exercise price of $2.40 per
share.

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced Lithography, Inc. (SAL), a
Delaware corporation, in a merger of SAL with and into Subsidiary (Merger).
Consideration for the Merger consisted of an aggregate of 603,051 shares of its
Common Stock, $1.2 million in cash and $1.2 million in notes (the Notes).
The Notes are convertible into shares of the Companys Common Stock at a price
of $4.302. The Notes are convertible by the holders at any time and the
Company can force conversion if the average price, as defined, of the Companys
Common Stock during any ten day trading period exceeds $6.45. The shares
issued by the Company are unregistered; however, pursuant to an agreement with
the SAL shareholders, the Company filed a registration statement with the
Securities and Exchange Commission on November 6, 2001 and has agreed to use
its reasonable efforts to obtain its effectiveness. The holders have agreed to
restrictions on their sale of those JMAR shares to no more than 25% of their
JMAR holdings in any quarter and to refrain from selling any shares for 60 days
upon notice from JMAR of its intention to negotiate an underwritten public
offering. In addition, SALs former shareholders and creditors could receive
as contingent earnout consideration up to 354,736 shares of the Companys
Common Stock and up to $2.2 million of Convertible Notes upon achievement of
certain technical and market milestones over the next 17 months. In connection
with the Merger, JMAR agreed to provide working capital loans to SAL from time
to time up to a maximum of $1.2 million through June 30, 2002 for working
capital to build its X-ray steppers to be integrated with JMARs X-ray sources.

In 2001, the Company was awarded an additional $9 million of contract
funding for its XRL program from the U.S. Army Research
Laboratory sponsored by the Defense Advanced Research Projects Agency
(DARPA). In addition, in February 2002, JMAR announced the receipt of a
Letter of Intent from the Department of the Army to execute a formal contract
funded by DARPA valued at up to $34.5 million. The contract directs JMAR to
proceed immediately to deliver with all diligence JMARs patented
first-of-a-kind, one-nanometer point source XRL system to produce
high-performance semiconductor integrated circuits needed to support a wide
range of critical military missions. As with all multi-year government contracts, the
amount and timing of the funding of this contract are dependent upon the annual
appropriation of funds by Congress.

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

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

Critical Accounting Policies and Estimates

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

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

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.

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.

The Companys policy for the treatment of software development costs are
based on Statement of Financial Accounting Standards
(SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed. In
accordance with SFAS No. 86, costs incurred internally in creating a computer
software product are charged to expense when incurred until technological
feasibility has been established, at which time such costs are
capitalized. Technological feasibility is established upon completion of a detail program
design. Thereafter, the Company reports the costs at the lower of amortized
cost or net realizable value. Amortization is calculated based on the greater
of the amount capitalized as a percentage of estimated revenues over the total
estimated revenues for the software as a whole, or on a straight line basis,
based on estimated useful life of the products. Software development costs
currently being amortized are being amortized using the straight line basis over
three years. Capitalization of software development costs cease when the
product is available for general release to customers. General release is
typically when the product is first shipped to a distributor and available for
sale. During the year ended December 31, 2001, the Company
wrote down to fair value $4,650,000 of capitalized software costs
related to the Companys standard semiconductor products.

In accordance with
SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002, the Company
will establish reporting units and apply a two-step fair value approach to
evaluating goodwill impairment, using at least an annual assessment. Prior to
the adoption of SFAS No. 142, the Company evaluated goodwill impairment based
on projected future cash flows. We periodically assess the impairment
of intangible and long-lived assets which require us to make
assumptions and judgments regarding the carrying value of these
assets. The assets are considered to be impaired if we determine that
the carrying value may not be recoverable based upon our assessment
of 1) the assets ability to generate income from operations and
positive cash flow in future periods; 2)  loss of legal
ownership or title to the asset; 3)  significant changes in our
strategic business objectives and utilization of the asset; and
4) the impact of significant negative industry or economic
trends. If the assets are considered to be impaired, the impairment we
recognize is the amount by which the carrying value of the asset
exceeds its fair value. The useful lives and related amortization or
depreciation expense is based on our estimate of the period that the
assets will generate revenues or otherwise be used by us.

JMAR records a valuation allowance to reduce its deferred tax assets to
the amount that it believes is more likely than not to be realized
based on estimates of future taxable income. In the event the Company
determines that it will not be able to
realize all or part of its net deferred tax assets in the future, an adjustment
to the deferred tax assets is charged to income in the period such
determination is made. Likewise, should JMAR determine that it will be able
to realize its deferred tax assets in the future in excess of its net recorded
asset, an adjustment to the deferred tax asset would increase income in the
period such determination is made. As of December 31, 2001, a
net deferred asset of $520,000 is included in other non-current
assets on the Companys Consolidated Balance Sheet.

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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.

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

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

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

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

Factors That May Affect Future Results

Certain statements contained in this Form 10-K which are not related to
historical results, including statements regarding JMARs future sales or
profit growth, competitive position or products, projects or processes
currently under development, the ability of the Company to successfully
introduce those products into the commercial marketplace or to apply those
products, projects or processes to alternative applications and the
availability of future bank or equity investor financing are forward-looking
statements that necessarily are based on certain assumptions and are subject to
certain risks and uncertainties that could cause actual future performance and
results to differ materially from those stated or implied in the
forward-looking statements. These risks and uncertainties include
concentration of sales to certain markets and customers, such as the

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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,
uncertainties associated with the timing of the funding of government
contracts, fluctuations in demand, delays in development, introduction and
acceptance of new products, changing business and economic conditions in
various geographic regions, technical obsolescence of existing products,
technical problems in the development or modification of current products or
manufacturing processes, the impact of competitive products and pricing,
including the risk that the EUV LLC is successful in developing an acceptable
next generation lithography process that becomes the process of choice for the
semiconductor industry or that the semiconductor industry fails to
adopt XRL as the lithography alternative, shifts in demand for the Companys
products, the degree of success of technology transfer (e.g., advanced
lithography sources, etc.) to commercial products, availability of working
capital to support growth, continued government funding of advanced
lithography, successful integration of acquisitions, declining credit markets,
other competitive factors and temporary cessation of operations at one or more
of its division facilities due to natural events such as floods, earthquakes
and fires.

JMARs future operating results are also dependent on its ability to
develop, manufacture and market, in a timely manner, innovative products that
meet customers needs and the continued growth of the semiconductor, biochip,
computer disk drive and general microelectronics industries. Inherent in this
process are a number of risks that the Company must successfully manage in
order to achieve favorable operating results. The process of developing new
high technology products is complex and uncertain and requires innovations that
anticipate customer needs and technological trends. After the products are
developed, the Company must quickly manufacture them in sufficient volumes at
acceptable costs to meet demand and establish the necessary sales and marketing
capabilities to assure adequate and timely sales volume.

The Company has made substantial progress in its PXS X-ray source
development program. However, in order to prove that its technology works and
to produce a completed product, the Company must integrate these highly
technical and complicated systems into a fully integrated prototype. With any
new technology, there is a risk that the market may not appreciate the benefits
of the product. In the GaAs chip market, the Companys X-ray
system will compete with electron beam systems, which have demonstrated
performance. Furthermore, the acceptance of the Companys XRL system is
dependent on the demand for high-speed GaAs chips increasing substantially.
The Companys business plan is to increase the power of its
X-ray sources and make other improvements to its X-ray system in
order to increase the throughput of its products. In order to do so, there are
several technical risks involving the improvement of collimators, X-ray masks
and resists that have to be overcome. If the Company achieves these
improvements, its technology will have to compete with the well-funded EUV
technology development effort for acceptance by silicon semiconductor
manufacturers. Development by others of new or improved products, processes
or technologies may make the Companys proposed products obsolete or less
competitive. Also, the development of sophisticated laser and X-ray products
is a lengthy and capital intensive process and is subject to unforeseen risks,
delays, problems and costs.

Along with some of the risks discussed in the preceding paragraph, there
is no assurance that the Company will market its Britelight lasers as
stand-alone products or that, if the Company should do so, they will be
accepted in the marketplace.

In addition, portions of the Companys manufacturing operations are
sometimes dependent on the ability of a targeted base of suppliers to provide
core technology, sub-assemblies and common manufactured parts in time to meet
critical distribution and manufacturing schedules. From time-to-time the
Company could experience constrained supply of certain component parts due to a
variety of reasons, including strong demand in certain product lines as well as
strong demand in the industry. Such constraints could adversely affect JMARs
operating results until alternate sourcing is developed.

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As is the case for a large number of California-based companies, a
significant portion of the Companys operations are located near major
earthquake faults. The ultimate impact on the Company, significant suppliers
and the general infrastructure is unknown, but operating results could be
materially affected in the event of a major earthquake in close proximity to
the Companys facilities. The Company is predominantly self-insured for losses
and interruptions caused by earthquakes.

The operations of the Company involve the use of substances regulated
under various federal, state and international laws governing the environment.
It is the Companys policy to apply strict standards for environmental
protection even if not subject to regulations imposed by local governments. The
liability for environmental remediation and related costs is accrued when it is
considered probable and the costs can be estimated. Environmental costs are
presently not material to JMARs operations or financial position.

Although JMAR believes that it has the necessary product offerings and
resources for continuing success, future revenue and margin trends cannot be
reliably predicted and may cause the Company to adjust its operations. Factors
external to the Company can result in volatility of the Companys common stock
price. Because of the foregoing factors, recent trends should not be considered
reliable indicators of future stock prices or financial results.

The Company denominates its foreign sales in U.S. dollars and the Company
does not believe that foreign currency fluctuations will have a material
adverse impact on its ability to compete with its domestic-based competitors.
Foreign currency fluctuations, however, could make the Companys products less
affordable in foreign markets and thus, reduce the demand for such products.




Item 7A. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Companys consolidated financial statements prepared in accordance
with Regulation S-X and Report of Independent Public Accountants are set forth
at the end of this Report on pages F-1 through F-22.




Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

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PART III




Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The officers and directors of the Company are as follows:

|                          |  |     |    |          |  |                                                                                                   
|------------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------------------------------
|Name                      |  | Age |    | Position
|                          |  |     |    |         
|John S. Martinez, Ph.D.   |  |     | 71 |          |  | Chief Executive Officer and Chairman of the Board                                                 
|Dennis E. Valentine       |  |     | 46 |          |  | Vice President Finance, Chief Financial Officer
and Chief Administrative Officer                  
|Joseph G. Martinez        |  |     | 44 |          |  | Senior Vice President, General Counsel,
Secretary and Acting President of JMAR Precision
Systems  
|John H. Carosella         |  |     | 58 |          |  | Senior Vice President, Managing Director of
NanoLight Business Area and President of JMAR
Research
|Daniel J. Fleming, Ph.D.  |  |     | 60 |          |  | President of JMAR/SAL NanoLithography                                                             
|Marvin W. Sepe            |  |     | 46 |          |  | President of JMAR Semiconductor                                                                   
|James H. Banister, Jr.    |  |     | 71 |          |  | Director                                                                                          
|C. Neil Beer, Ph.D.       |  |     | 66 |          |  | Director                                                                                          
|Vernon H. Blackman, Ph.D. |  |     | 72 |          |  | Director                                                                                          
|Barry Ressler             |  |     | 61 |          |  | Director                                                                                          
|Charles A. Dickinson      |  |     | 78 |          |  | Director                                                                                          

The directors of the Company are elected by the shareholders to hold
office until the next annual meeting of stockholders and until their respective
successors have been elected and qualified. Officers of the Company are
elected annually by the Board of Directors and hold office until their
successors are duly elected and qualified.

JOHN S. MARTINEZ, Ph.D.,became Chairman of the Board, President, Chief
Executive Officer and a Director of the Company at its inception. From December
1998 to August 2001, E. Fred Schiele served as President and Chief Operating
Officer. At the Annual Board Meeting in August 2001, the Board elected Dr.
Martinez as President and eliminated the position of Chief Operating Officer.
Prior to co-founding the Company in October 1987, he was President of HLX
Laser, Inc., an excimer laser development company and President of Jamar
Enterprises, a management and investment consultant to high-technology
companies. From 1976 to 1984, Dr. Martinez was President and Chief Executive
Officer of Physics International Company (PI), a high-technology research,
development and manufacturing company specializing in high-intensity energy
technology and X-ray generation equipment. During that period, PIs annual
sales grew from approximately $9,000,000 to over $42,000,000 and profits grew
at a compounded annual rate in excess of 32%. From 1961 to 1976, Dr. Martinez
held a number of management positions at TRW, Inc. He formed that companys
High Energy Laser program in 1970 and managed it until he left the company in
1976. Dr. Martinez, a Ford

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Foundation and Atomic Energy Commission Fellowship holder, earned his
Ph.D. in Engineering Science from the University of California (Berkeley) in
1962, his Bachelors degree from Rensselaer Polytechnic Institute (Troy, N.Y.)
in 1951 and is a graduate of the Oak Ridge School of Reactor Technology. He
served on active duty in the U.S. Marine Corps during the Korean War and was
discharged as a Captain in 1954. He is the holder or co-holder of six patents.
Dr. Martinez is the father of Joseph G. Martinez, Senior Vice President,
General Counsel of the Company.

DENNIS E. VALENTINEhas been the Vice President-Finance of the Company
since August 1990, Chief Financial Officer and Chief Administrative Officer
since March 1991 and was Secretary from January 1992 until August 2000. Prior
to joining the Company, Mr. Valentine had over ten years of financial and
management experience with Arthur Andersen LLP. His experience at Arthur
Andersen LLP included extensive work with public companies and consultation
regarding mergers and acquisitions. He was the manager in-charge of the local
office merger and acquisition program and was on the Board of Advisors of the
Orange County Venture Forum. Mr. Valentine received a Bachelor of Science
degree in Business from the University of Southern California in 1978. He is a
member of the American Institute of Certified Public Accountants and the
California Society of Certified Public Accountants.

JOSEPH G. MARTINEZjoined the Company in June 1998 as Vice President and
General Counsel and has been the Companys Secretary since August 2000. Mr.
Martinez was elected Senior Vice President in August 2001. In September 2001,
Mr. Martinez was appointed Acting President of JPSI. From 1986 to 1998, Mr.
Martinez was employed by Parker, Milliken, Clark, OHara & Samuelian, P.C., a
Los Angeles-based law firm which had served as the Companys outside general
corporate counsel since the Companys inception in 1987. From 1993 to 1998,
Mr. Martinez was a shareholder of Parker, Milliken and was the principal
attorney responsible for representing the Company. From 1984 to 1986, Mr.
Martinez was employed by another law firm in Los Angeles. During his tenure at
Parker, Milliken, Mr. Martinez specialized in corporate, securities and general
business law. In 1984 Mr. Martinez received both a Juris Doctor degree from
the University of California, Davis and a Master of Business Administration
from U.C. Berkeley (with an emphasis in Finance and Accounting) in a Joint
Degree Program. He received his B.A. in Genetics from U.C. Berkeley in 1980.
Mr. Martinez has been a member of the California State Bar since 1984. Mr.
Martinez is the son of Dr. John S. Martinez, the Companys Chairman and Chief
Executive Officer.

JOHN H. CAROSELLAis a Senior Vice President of JMAR, Managing Director of
the Companys NanoLight Business Area and, since August 2001, President of JMAR
Research, Inc. Prior to joining the Company in May 2000, for the prior three
years, he was President of Osmic, Inc., a Michigan-based leading developer and
provider of advanced X-ray and neutron optical instruments and products for the
semiconductor lithography and medical equipment manufacturing industries. Prior
to joining Osmic, Mr. Carosella served for nine years as President of Speedring
Systems, Inc., a precision systems manufacturer where he transformed the
company from a $1.5 million per year aerospace contractor to a $10 million per
year supplier of precision electromechanical and optical equipment for the
commercial imaging markets. Mr. Carosella began his professional career with
Eastman Kodak Co., where for 13 years he served as an optical products
development engineer and as engineering services manager. Mr. Carosella holds
a Bachelor of Science degree in Physics from Worchester Polytechnic Institute
and a Master of Science degree in Optical Engineering from the University of
Rochester.

DANIEL J. FLEMING. Ph.D.joined JMAR/SAL NanoLithography, Inc. (JSAL) as
President in August 2001 when SAL, Inc. was merged into JSAL. He had been
President, CEO, and a director of SAL. He brings a strong and diverse
background in the semiconductor electronics business from more than three
decades in the semiconductor industry at IBM Microelectronics, SVG Lithography
Systems (SVGL), and SAL. At SVGL he was responsible for the marketing and
customer support of semiconductor lithography equipment. His earlier experience
at IBM includes executive management of the development and production of
world-class chip products and the underlying materials, process technology and
production equipment. He has held governance and advisory board positions at

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SEMATECH, SRC, and university semiconductor research centers. Dr. Fleming
received a BEE from Rensselaer Polytechnic Institute and a MS (EE) and Ph.D.
(EE) from Syracuse University.

MARVIN W. SEPEjoined JMAR Semiconductor in July 1996 as Executive Vice
President and General Manager and was elected President of that division in May
1997. Mr. Sepe was a director of the Company from July 1996 to December 1997.
For the prior 15 years, he was with TRW Components International Inc., a wholly
owned subsidiary of TRW Inc., where he served as Director of Business
Development for this division of TRW, which grew from $16,000,000 in sales to
nearly $40,000,000 under his strategic direction. Previously, Mr. Sepe held
other management positions within TRW including Marketing, Programs and
Engineering. Prior to joining TRW, Mr. Sepe held the position of Manager of
Worldwide Assembly Operations for Silicon General Inc. (1980-1981) with
manufacturing operations throughout Southeast Asia, as well as the U.S. He
served in the same role at Silicon Systems Inc. (1977-1980), a fast growing
start-up operation for custom semiconductors. Mr. Sepe attended Don Bosco
Technical Institute, California Polytechnic State University SLO, and holds a
Masters Degree in Business Administration from Pepperdine University. Mr. Sepe
has published a number of papers and taught numerous workshops on the economics
and use of semiconductors in space applications.

JAMES H. BANISTER, JR.,has been a director since December 1989 and was a
consultant to the Company from September 1989 until March 1994. From October
1993 to September 1999, Mr. Banister was President, Chief Executive Officer and
a Director of Kinetic Ceramics, Inc. He sold Kinetic Ceramics in October 1999
and formed a new company, Piezomechanical Devices, of which he is President and
sole owner. From August 1987 to June 1988 he was President and CEO of MSI, a
subsidiary of Olin Corporation supplying Signal Intelligence and electronic
warfare equipment and services. When that company was sold by Olin, Mr.
Banister retired to manage his personal investments. Mr. Banister was with
Physics International Company (which became a subsidiary of Olin Corp. in
1985), from June 1964 to August 1987, successively holding the positions of
Contracts Manager, Director of Marketing and Contract Relations, Vice President
and Director of Administration and Senior Vice President responsible for
finance and administration. From 1953 to 1964, Mr. Banister was with Stanford
Research Institute, now SRI International, holding the position of Manager of
Contract Administration. Mr. Banister received a Bachelor of Science degree in
Business and Engineering administration from MIT and has taken graduate courses
in law at Golden Gate College. He has been an officer and director of several
subsidiaries of Physics International Company.

C. NEIL BEER, Ph.D.,has been a director since July 1988 and was an
employee of the Company from May 1991 until November 1992 and a consultant to
the Company from April 1993 to September 1993. Dr. Beer currently is the
Executive Vice President of Computer Technology Associates, Inc. From April
1996 until April 2002, Dr. Beer was the President of SECON, a software and
systems engineering company primarily supporting the national intelligence
community. Prior to that, he was the Colorado Space Advocate, responsible for
the growth of Colorados space industry. From September 1986 to October 1989,
he was President and Chief Executive Officer of Thermo Technologies Corporation
which develops advanced lasers, optics, signal processing and energy conversion
hardware. Previously, he was Deputy for Strategic Defense, Military
Applications, at Livermore National Laboratory. During his career with the
U.S. Air Force, Dr. Beer achieved the rank of Major General and was deputy
Chief of Staff, plans and programs, for the Air Force Space Command. Earlier,
while assigned to the office of the Secretary of Defense, he worked with the
White House staff on policy and support requirements. Dr. Beer was associate
professor of mathematics at the Air Force Academy and a combat pilot in
Southeast Asia. Dr. Beer graduated magna cum laude with a B.S. degree in
engineering from the University of Oklahoma and received his doctorate in
Operations Research in 1972 from that same University. Dr. Beer is recipient
of the NDIA Medal for Outstanding Achievement in Space.

VERNON H. BLACKMAN, Ph.D.,has been a director of the Company since July
1991 and from time to time, has been a consultant of the Company since December
1991. Dr. Blackman served as Chairman of the Board and Chief Executive Officer
of Esscor, a training and simulation service company to the utility industry,
from December 1991 to July 1997. Dr. Blackman also served as

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Chairman of the Board, President and Chief Executive Officer of JAYCOR
from 1989 until March 1991. JAYCOR is a high-technology company that supplies
R&D services to various agencies of the U.S. Government, primarily the
Department of Defense. Prior to joining JAYCOR, Dr. Blackman acted as a
venture investor for his own account and helped to fund the early stage
development of several companies. Dr. Blackman has also served on the Boards
of Directors of several other public companies, including Newport
Pharmaceuticals International, Inc. (1967-1974); Maxwell Laboratories, Inc.
(1966-1974); Topaz, Inc. (1979-1983) at which time Topaz was acquired by Square
D Corporation; and Optical Radiation Corporation (1970-1995). From 1974 to
1982, Dr. Blackman served as President, CEO and Chairman of the Board of
S-Cubed, a high-technology company that provided services and products to
agencies of the U.S. Government. In 1959, Dr. Blackman co-founded MHD Research
which was acquired by Hercules Corporation in 1964. Dr. Blackman received a BA
in Physics from Colgate University in 1951 and a Ph.D. in Physics from
Princeton University in 1955, subsequent to which he served on the faculty as a
research associate for 2 years.

BARRY RESSLERhas been a director of the Company since January 1994. Mr.
Ressler is the Chief Executive Officer and Chairman of the Board of Triton
Thalassic Technologies, Inc. (T3I), a company engaged in the non-chemical
pathogen inactivation of blood products; photo-activation of therapeutic
compounds and the treatment and control of micro-organism contaminated fluids
for the paper, automotive, food packaging and pharmaceutical industries. Mr.
Ressler is also the President of STAR Associates, Inc., a company engaged in
the consultation, strategic planning and project funding of early stage
industrial process and therapeutic/diagnostic technologies. From 1983 to
December 1993 he served as Chief Executive Officer and Chairman of the Board of
Universal Voltronics Corporation (UVC), a public company that developed
high-voltage products for defense, medical and industrial applications. In
March 1990, UVC became a public subsidiary of Thermo Electron Corp. From 1963
until his appointment as CEO and Chairman, he served in various capacities at
UVC. Mr. Ressler is a member of the Biotechnology Center External Advisory
Board of the University of Connecticut, advising the University on the
expansion of biotechnology research initiatives to foster University and
Industry collaborative activities. Mr. Ressler is also a member of the
Nauticos Corp. Sciences Business and Technology Advisory Board. Nauticos Corp.
has developed advanced side scan sonar, ROV and research protocols used in the
discovery of historic and contemporary sunken vessels. Mr. Ressler graduated
from the Pratt Institute with a B.S. in Engineering Science.

CHARLES A. DICKINSONhas been a director of the Company since August 2001.
Mr. Dickinson twice served as Chairman of the Board of Directors of Solectron
Corporation, a $20 billion per-year worldwide leader in electronics
manufacturing, assembly, and test services for electronic companies around the
world. He joined the Solectron Board in 1984, served as Chairman from 1986 to
1990 and from 1994 to September 1996 and continues to serve as a director
today. While an outside director, he accepted the assignment of establishing
Solectrons European business in 1991 and served as President of Solectron
Europe from 1993 to February 1996. From January 2000 to August 2001 he was
Chairman of the Board of Directors of SAL. Before Solectron, Mr. Dickinson was
Chairman, President and CEO of Vermont Micro Systems, Inc. He was also CEO of
Dataproducts Corporation and he served seven years in various general
management roles at Control Data Corporation. Prior to that, he was the
Corporate Vice President of Manufacturing for Memorex and spent 20 years at
RCA. He has served on the Boards of many other public and private companies
over the years and currently is the Chairman of LeCroy Corporation, Inc., a
public company, and privately-held Aavid Thermal Technologies, Inc., Nypro,
Inc. and Systolic Networks. Mr. Dickinson holds a Bachelors of Electrical
Engineering and an MBA from the University of Minnesota.

Section 16(a) Beneficial Ownership Reporting Compliance

A Form 4 filed by Dick Foster in a timely manner in April, 2001 to report
the exercise of options properly reflected the increase in
outstanding shares due to the option exercise on Part I of the Form 4. However, the
corresponding reduction in his outstanding options due to the exercise was not reflected on Part II of the
Form 4. The reduction in the number of his options was properly
reported on a Form 5 filed by Mr. Foster in a timely manner in February, 2002.

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Item 11. EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation for
services in all capacities to the Company during each of the last three fiscal
years of the Companys Chief Executive Officer and the other four most highly
compensated individuals serving as executive officers as of December 31, 2001
whose compensation (salary and bonus) exceeded $100,000. Also included is one
individual who served as an executive officer during part of 2001 and would
have been one of the four most highly compensated officers had he served as an
executive officer at the end of 2001 (collectively, the Named Officers).

Summary Compensation Table

|                           |  |      |      |     |  |                           |         |             |  |                 |        |  |  |                   |        |       |  |  |        |    
|-------------------------- |  | ---- | ---- | --- |  | ------------------------- | ------- | ----------- |  | --------------- | ------ |  |  | ----------------- | ------ | ----- |  |  | ------ | ---
|                           |  |      |      |     |  |                           |         |             |  |                 |        |  |  | Long-Term         |        |       |  | 
|                           |  |      |      |     |  |                           |         |             |  |                 |        |  |  | Compensation      |        | Other
|                           |  |      |      |     |  | Annual Compensation(1)(3) |         | Awards(2)   |  | Compensation($)
|                           |  |      |      |     |  |                           |         |             |  |                
|                           |  |      |      |     |  |                           |         |             |  |                 |        |  |  | Shares Underlying |        |       |  | 
|Name and Principal         |  |      |      |     |  | Salary                    |         | Bonus       |  | Options and     |        |  |  |                  
|Position                   |  | Year |      | ($) |  | ($)                       |         | Warrants(#) |  |                 |        | 
|                           |  |      |      |     |  |                           |         |             |  |                 |        | 
|John S. Martinez,          |  |      | 2001 |     |  |                           | 234,500 | (5)         |  |                 | 0      |  |  |                   | 85,000 |       |  |  | 0      |    
|Chief Executive            |  |      | 2000 |     |  |                           | 231,000 | (5)         |  |                 | 0      |  |  |                   | 60,000 |       |  |  | 88,344 | (6)
|Officer                    |  |      | 1999 |     |  |                           | 192,500 |             |  |                 | 0      |  |  |                   | 52,000 |       |  |  | 0      |    
|Marvin W. Sepe,            |  |      | 2001 |     |  |                           | 160,000 |             |  |                 | 0      |  |  |                   | 0      |       |  |  | 0      |    
|President of JSI           |  |      | 2000 |     |  |                           | 160,000 |             |  |                 | 0      |  |  |                   | 21,238 |       |  |  | 0      |    
|                           |  |      | 1999 |     |  |                           | 140,000 |             |  |                 | 28,667 |  |  |                   | 0      |       |  |  | 0      |    
|Joseph G. Martinez,        |  |      | 2001 |     |  |                           | 149,538 |             |  |                 | 0      |  |  |                   | 22,500 |       |  |  | 0      |    
|Senior Vice                |  |      | 2000 |     |  |                           | 143,000 |             |  |                 | 0      |  |  |                   | 25,000 |       |  |  | 0      |    
|President, General         |  |      | 1999 |     |  |                           | 135,000 |             |  |                 | 0      |  |  |                   | 13,500 |       |  |  | 0      |    
|Counsel                    |  |      |      |     |  |                           |         |             |  |                 |        |  |  |                   |        |       |  |  |        |    
|John H. Carosella,         |  |      | 2001 |     |  |                           | 140,000 |             |  |                 | 0      |  |  |                   | 15,000 |       |  |  | 0      |    
|Managing Director          |  |      | 2000 |     |  |                           | 81,666  | (4)         |  |                 | 0      |  |  |                   | 40,000 |       |  |  | 0      |    
|of NanoLight
Business Area |  |      |      |     |  |                           |         |             |  |                 |        |  |  |                   |        |       |  |  |        |    

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|                     |  |      |      |     |  |                           |         |             |  |                 |   |  |  |                   |        |       |  |  |         | 
|-------------------- |  | ---- | ---- | --- |  | ------------------------- | ------- | ----------- |  | --------------- | - |  |  | ----------------- | ------ | ----- |  |  | ------- | 
|                     |  |      |      |     |  |                           |         |             |  |                 |   |  |  | Long-Term         |        |       |  | 
|                     |  |      |      |     |  |                           |         |             |  |                 |   |  |  | Compensation      |        | Other
|                     |  |      |      |     |  | Annual Compensation(1)(3) |         | Awards(2)   |  | Compensation($)
|                     |  |      |      |     |  |                           |         |             |  |                
|                     |  |      |      |     |  |                           |         |             |  |                 |   |  |  | Shares Underlying |        |       |  | 
|Name and Principal   |  |      |      |     |  | Salary                    |         | Bonus       |  | Options and     |   |  |  |                  
|Position             |  | Year |      | ($) |  | ($)                       |         | Warrants(#) |  |                 |   | 
|                     |  |      |      |     |  |                           |         |             |  |                 |   | 
|E. Fred Schiele,     |  |      | 2001 |     |  |                           | 157,069 |             |  |                 | 0 |  |  |                   | 0      |       |  |  | 182,500 | 
|former President of  |  |      | 2000 |     |  |                           | 182,500 |             |  |                 | 0 |  |  |                   | 47,994 |       |  |  | 0       | 
|JPSI(7)              |  |      | 1999 |     |  |                           | 177,500 |             |  |                 | 0 |  |  |                   | 28,000 |       |  |  | 0       | 
|Dennis E. Valentine, |  |      | 2001 |     |  |                           | 125,768 |             |  |                 | 0 |  |  |                   | 34,113 |       |  |  | 0       | 
|Chief Financial      |  |      | 2000 |     |  |                           | 118,461 |             |  |                 | 0 |  |  |                   | 25,000 |       |  |  | 0       | 
|Officer              |  |      | 1999 |     |  |                           | 110,000 |             |  |                 | 0 |  |  |                   | 17,297 |       |  |  | 0       | 



|(1) |  | Excludes perquisites and other personal benefits, the
aggregate annual amount of which for each Named Officer was less
than the lesser of $50,000 or 10% of the total salary and bonus
reported.                                                                                                                                                                                                                                                                        
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The Company did not grant any restricted stock or stock
appreciation rights or make any long term incentive plan payments
during the fiscal years ended December 31, 2001, 2000 and 1999.                                                                                                                                                                                                                                                                               
|   
|(3) |  | Includes bonus payments under the Management Incentive Bonus
Plan (see page 35) earned by the Named Officers in the year
indicated for services rendered in such year, but which were paid in
the following year.                                                                                                                                                                                                                                                       
|   
|(4) |  | Compensation is for seven months.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(5) |  | Includes $42,000 and $38,500 in 2001 and 2000, respectively, in fees paid
to Jamar Enterprises, an affiliate of Dr. Martinez, for his services as
Chairman of the Board for JPSI, JSI and JRI.                                                                                                                                                                                                                                                                          
|   
|(6) |  | Loan forgiveness income.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(7) |  | Annual compensation for 2001 is for eight and one-half months and
includes accrued vacation of $23,704 paid upon the termination of Mr.
Schieles employment in September 2001. Pursuant to the Employment
Agreement dated November 1998, Mr. Schiele was entitled to
severance (wage continuation) payments for 12 months after
termination. The entire amount of Other Compensation above was
accrued in 2001, but is being paid out bi-weekly until September 2002.

Option Grants in the Last Fiscal Year

The following table sets forth each grant of stock options and warrants
made during the fiscal year ended December 31, 2001 to each of the Named
Officers. Pursuant to Securities and Exchange Commission rules, the table also
shows the value of the options at the end of the terms if the stock price were
to appreciate annually by 5% and 10%, respectively. The assumed values may not
reflect actual value at the times indicated.

|                    |  |            |        |            |  |            |       |            |  |                        |      |                       |  |                      |     |   |         |    |     |     |         |  |     | 
|------------------- |  | ---------- | ------ | ---------- |  | ---------- | ----- | ---------- |  | ---------------------- | ---- | --------------------- |  | -------------------- | --- | - | ------- | -- | --- | --- | ------- |  | --- | 
|                    |  |            |        |            |  | Percentage |       |            |  |                        |      |                       |  |                      |     |   |         |    |     |     |         | 
|                    |  | Shares     |        | of Total   |  |            |       |            |  |                        |      |                       |  |                      |     |   |         |    |     |    
|                    |  | Underlying |        | Options    |  |            |       |            |  |                        |      |                       |  | Potential Realizable
|                    |  | Options    |        | Granted to |  |            |       |            |  |                        |      |                       |  | Value at Assumed    
|                    |  | Granted    |        | Employees  |  | Exercise   |       |            |  |                        |      | Annual Rates of Stock
|                    |  | (Shares)   |        | in Fiscal  |  | Price Per  |       | Expiration |  | Price Appreciation for
|Name                |  | (1)(7)     |        | Year       |  | Share      |       | Date(2)    |  | Option Term           
|                    |  |            |        |            |  |            |       |            |  |                       
|                    |  |            |        |            |  |            |       |            |  |                        |      |                       |  |                      |     |   |         | 5% |     | 10%
|                    |  |            |        |            |  |            |       |            |  |                        |      |                       |  |                      |     |   |         |    |     |    
|John S. Martinez    |  |            | 75,000 | (3)        |  |            | 15.10 |            |  | $                      | 3.25 |                       |  | January 1, 2011      |     | $ | 153,000 |    |     | $   | 388,500 | 
|                    |  |            | 10,000 | (4)        |  |            | 2.01  |            |  | $                      | 3.73 |                       |  | August 10, 2012      |     |   | 26,500  |    |     |     | 69,100  | 
|Marvin W. Sepe      |  |            | 0      |            |  |            | 0     |            |  |                        | N/A  |                       |  |                      | N/A |   |         |    | N/A |     |         |  | N/A | 
|Joseph G. Martinez  |  |            | 22,500 | (5)        |  |            | 4.53  |            |  | $                      | 3.25 |                       |  | January 1, 2011      |     |   | 45,900  |    |     |     | 116,550 | 
|John H. Carosella   |  |            | 15,000 | (6)        |  |            | 3.02  |            |  | $                      | 3.25 |                       |  | January 1, 2011      |     |   | 30,600  |    |     |     | 77,700  | 
|E.
Fred Schiele(9)  |  |            | 0      |            |  |            | 0     |            |  |                        | N/A  |                       |  |                      | N/A |   |         |    | N/A |     |         |  | N/A | 
|Dennis E. Valentine |  |            | 22,500 | (5)        |  |            | 4.53  |            |  | $                      | 3.25 |                       |  | January 1, 2011      |     |   | 45,900  |    |     |     | 116,550 | 
|                    |  |            | 11,613 | (8)        |  |            | 2.34  |            |  | $                      | 3.87 |                       |  | January 4, 2011      |     |   | 28,220  |    |     |     | 71,652  | 

33



---



##### Table of Contents





|(1) |  | Such options were granted under the Companys 1999 Stock
Option Plan (Options). The exercise price of the options reported
above was equal to the fair market value of the Companys common
stock at the date of grant. The terms of each such option are
determined by the Board of Directors. The exercise price and tax
withholding obligations related to exercise may be paid by delivery
of already owned shares, subject to certain conditions.                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Options which are unvested at the time of termination of
optionees employment expire at that time. Vested options also
expire if not exercised within 60 days after termination of
optionees employment or one year following death of optionee if not
exercised by optionees personal representative. Vested options
issued to directors expire one year following resignation as a
director.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) |  | These options are incentive stock options. 10,932 of the options became
exercisable on January 1, 2002; 10,932 become exercisable on January 1,
2003, 2004, 2005, 2006 and 2007; and 9,408 become exercisable on January
1, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) |  | These options are non-qualified stock options. They become
exercisable and vest one-third each year commencing on the first
year after their grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(5) |  | These options are incentive stock options. 3,280 of the
options became exercisable on January 1, 2002; 3,280 become
exercisable on January 1, 2003, 2004, 2005, 2006 and 2007; and 2,820
become exercisable on January 1, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(6) |  | These options are incentive stock options. 2,186 of the options became
exercisable on January 1, 2002; 2,186 become exercisable on January 1,
2003, 2004, 2005, 2006 and 2007; and 1,884 become exercisable on January
1, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(7) |  | These options contain a Reload Option feature whereby if the optionee
exercises the option in whole or in part using shares of Common Stock
owned by the optionee for at least six months, the Company shall grant to
the optionee a new option to purchase that number of shares equal to the
shares transferred to the Company in payment of the exercise price of the
option. In addition, if the optionee exercises the option in whole or in
part with cash, the Company shall grant to the optionee a new option to
purchase that number of shares equal to the amount of cash paid divided by
the market value of the Common Stock on the date of exercise. In both
cases, these Reload Options will have an exercise price equal to the
market price on the date of grant of the Reload Option and are not
exercisable until one year following the date of grant.
|   
|(8) |  | These options are incentive stock options issued pursuant to the
Companys Reload program. They became exercisable and vested on January
4, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(9) |  | On the date of Mr. Schieles termination in September 2001, he held
options and warrants to purchase 92,401 shares which were unvested and
options and warrants for 100,260 which were vested. In connection with
Mr. Schieles termination, the Company agreed to immediately vest all of
his unvested options and waived the provision that required exercise of such
options and warrants within 60 days of termination. Although no
new grants were made to Mr. Schiele in 2001, he is included on
the table to the extent this modification is deemed to be a grant.                                                                                                                                                                                                                                                                                                 

Aggregated Option and Warrant Exercises in Last Fiscal Year and Year End Option
Values

The following table sets forth for each of the Named Officers (i) the
shares acquired and the value realized on each exercise of stock options, if
any, by said officers during the fiscal year ended December 31, 2001; (ii) the
number of shares of common stock underlying employment-related options and
warrants outstanding at December 31, 2001; and (iii) the value of such options
and warrants which are in-the-money:

|                 |  |          |   |          |  |               |   |                   |  |                      |                 |                      |  |   |                 | 
|---------------- |  | -------- | - | -------- |  | ------------- | - | ----------------- |  | -------------------- | --------------- | -------------------- |  | - | --------------- | 
|                 |  |          |   |          |  |               |   |                   |  | Shares Underlying    |                 | Value of            
|                 |  |          |   |          |  |               |   |                   |  | Unexercised          |                 | Unexercised         
|                 |  |          |   |          |  |               |   |                   |  | Options and          |                 | In-the-Money Options
|                 |  |          |   |          |  |               |   |                   |  | Warrants at          |                 | and Warrants at     
|                 |  | Shares   |   |          |  |               |   | December 31, 2001 |  | December 31, 2001(1)
|                 |  | Acquired |   |          |  |               |   |                   |  |                     
|                 |  | on       |   | Value    |  | Exercisable/  |   | Exercisable/     
|Name             |  | Exercise |   | Realized |  | Unexercisable |   | Unexercisable    
|                 |  |          |   |          |  |               |   |                  
|John S. Martinez |  |          | 0 |          |  | $             | 0 |                   |  |                      | 645,535/172,701 |                      |  | $ | 279,976/$36,889 | 
|Marvin W. Sepe   |  |          | 0 |          |  |               | 0 |                   |  |                      | 105,454/13,334  |                      |  | $ | 0/$0            | 

34



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##### Table of Contents



|                    |  |          |        |          |  |               |        |                   |  |                      |                |                      |  |   |                | 
|------------------- |  | -------- | ------ | -------- |  | ------------- | ------ | ----------------- |  | -------------------- | -------------- | -------------------- |  | - | -------------- | 
|                    |  |          |        |          |  |               |        |                   |  | Shares Underlying    |                | Value of            
|                    |  |          |        |          |  |               |        |                   |  | Unexercised          |                | Unexercised         
|                    |  |          |        |          |  |               |        |                   |  | Options and          |                | In-the-Money Options
|                    |  |          |        |          |  |               |        |                   |  | Warrants at          |                | and Warrants at     
|                    |  | Shares   |        |          |  |               |        | December 31, 2001 |  | December 31, 2001(1)
|                    |  | Acquired |        |          |  |               |        |                   |  |                     
|                    |  | on       |        | Value    |  | Exercisable/  |        | Exercisable/     
|Name                |  | Exercise |        | Realized |  | Unexercisable |        | Unexercisable    
|                    |  |          |        |          |  |               |        |                  
|Joseph G. Martinez  |  |          | 0      |          |  |               | 0      |                   |  |                      | 71,033/39,967  |                      |  | $ | 25,586/$0      | 
|John H. Carosella   |  |          | 0      |          |  |               | 0      |                   |  |                      | 23,333/31,667  |                      |  | $ | 0/$0           | 
|E. Fred Schiele     |  |          | 0      |          |  |               | 0      |                   |  |                      | 192,661/0      |                      |  | $ | 40,013/$0      | 
|Dennis E. Valentine |  |          | 15,000 |          |  |               | 13,125 |                   |  |                      | 133,320/70,480 |                      |  | $ | 72,536/$10,924 | 

Options are in-the-money if the fair market value of the underlying
common stock exceeds the exercise price of the option or warrant at December
31, 2001. The fair market value of a share of common stock at December 31,
2001 was $2.99 per share as quoted on the NASDAQ Stock Market at the close of
trading.

Compensation Committee Interlocks and Insider Participation

During fiscal year 2001, executive compensation was set by the Board of
Directors acting as the Compensation Committee. The Compensation Committee
included Dr. Martinez, the Companys Chief Executive Officer, however, the
compensation of Dr. Martinez was set by the Compensation Committee members
without the participation by Dr. Martinez. Except for Dr. Martinez, each
member of the Compensation Committee is neither an officer nor an employee of
the Company.

Employment and Consulting Agreements

Pursuant to Dr. Martinezs employment agreement, the Company agreed to
retain him as Chief Executive Officer of the Company and to pay him an annual
salary of not less than $175,000 plus expenses and normal employee insurance
benefits and a $600 per month auto lease allowance. The Employment Agreement
is automatically renewable on an annual basis unless either party chooses to
terminate it no later than 60 days before the end of the year. If the Company
delivers notice of its intention not to renew or discontinues his status of
Chairman or CEO, or both, other than for cause, then Dr. Martinezs employment
shall continue for 3 years at the highest total compensation rate (including
bonuses, director fees and similar payments) he has received in any
previous
12 month period. In such event, the Company will also maintain his insurance
coverage for such 3 year period. In addition, Jamar Enterprises, an affiliate
of Dr. Martinez, receives $3,500 per month for his services as Chairman of the
Board for JMAR Precision Systems, Inc., JMAR Semiconductor, Inc., and JMAR
Research, Inc.

Incentive Plans

The Company has no defined benefit pension or actuarial plans under which
its executive officers participate.

In 1993, JMAR established a Management Incentive Bonus Plan (the MIBP)
based on profits generated, as well as non-financial goals, and stock
performance each year. Under the MIBP, an executives annual performance bonus
award generally depends on three performance factors: The overall financial
performance of the Company and the performance of the business unit for which
the executive is accountable, non-financial goals and the executives
individual performance. The performance objectives of the Company and the
business unit are derived from the Companys Board-approved annual business
plan, which includes specific financial performance targets relating to revenue
and profits for the fiscal year as well as non-financial goals. MIBP cash
bonuses were paid in fiscal years 1997 and 1998 to those employees deemed to
have made the greatest contributions toward the Companys ability to generate
those profits. Because the Company was not profitable in 1999, 2000 and 2001,
no cash bonuses were paid to the Companys CEO or the other members of its
Corporate Staff. Pursuant to the MIBP, options were awarded to the Named
Executive Officers in fiscal years 1999, 2000 and 2001. (See Summary
Compensation Table above).

35



---



##### Table of Contents



In March 1998, the Board of Directors approved a resolution requiring that
starting with 1997, a substantial portion of each Management Incentive Bonus
earned by its senior officers be used (the MIBP Stock Ownership Requirement)
by such officers to: 1) buy JMAR common shares in the Public Market; and/or 2)
exercise existing stock options or warrants, including payment of income taxes
(if any) resulting from such option or warrant exercises. The long term goal
is for each senior officer designated in the Beneficial Ownership table in this
Report to own JMAR shares having a market value of a minimum of one times his
annual salary. Once any such designated employee achieves that goal they will
no longer be required to allocate a specific portion of their bonus to the
purchase of additional JMAR shares unless their share holdings fall below that
level. The Company believes that this policy will provide additional
incentives to the Companys senior officers to maximize the Companys profits
and share price over the long term.

Directors Fees

Directors who are not salaried employees of the Company receive a retainer
(the Retainer) of $1,000 per quarter and $1,000 for their attendance at each
Board of Directors meeting and Committee meeting and are reimbursed for their
travel, lodging and food expense incurred when attending such meetings. $500
of the Board Meeting compensation is paid in Company Common Stock.

In addition, the directors are eligible to participate in the Companys
Stock Option Plans on the same basis as key employees of the Company and grants
of options will be made by the Board of Directors on a case-by-case basis on
such terms as the Board in its discretion may provide. It has been the
Companys policy to make an annual grant of options to the directors. During
the fiscal year ended December 31, 2001, a grant of options to purchase 10,000
shares of Common Stock was received by Messrs. Martinez, Banister, Beer,
Ressler, Blackman and Dickinson in their capacity as directors. The Companys
policy has been to grant all options to directors at an exercise price equal to
fair value at the date of the grant. The exercise price per share for the
grant of options during 2001 to Messrs. Martinez, Banister, Beer, Ressler and
Blackman was $3.73 and the exercise price per share for the grant to Mr.
Dickinson was $3.83.




Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

The following lists all persons known by the Company to be the beneficial
owner of more than 5 percent of the Companys Common Stock
as of March 29,
2002. A person is deemed to be the beneficial owner of JMAR Common Stock,
whether or not such person has any economic interest therein, if such person
directly or indirectly has (or shares with others) voting or investment power
with respect to the JMAR shares or has the right to acquire such beneficial
ownership within sixty days.

|                                     |  |                    |           |                  |  |  |     |  
|------------------------------------ |  | ------------------ | --------- | ---------------- |  |  | --- | -
|                                     |  | Number of Shares   |           |                  |  | 
|Name and Address                     |  | Beneficially Owned |           | Percent of Total
|                                     |  |                    |           |                 
|John S. Martinez                     |  |                    | 1,613,438 | (1)              |  |  | 6.5 | %
|5800 Armada Drive
Carlsbad, CA 92008 |  |                    |           |                  |  |  |     |  



---

|(1) |  | Includes: (a) 469,965 shares owned of record by the John S.
Martinez Separate Property Trust, of
which Dr. Martinez as trustee, has sole voting and investment power; and
(b) 1,143,473 shares of Common Stock which are issuable upon
exercise of currently exercisable warrants and stock options.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36



---



##### Table of Contents



Security Ownership of Management

The following table sets forth the beneficial ownership of Common Stock of
the Company as of March 29, 2002 by each director, the Named Officers (as
defined in Executive Compensation on page 32 above) and by all directors and
executive officers as a group. The Company has also provided the beneficial
ownership for certain other executive officers who are not Named Officers.
Except as otherwise noted, the following stockholders have sole voting and
investment power with respect to the shares. Information with respect to
beneficial ownership is based on information furnished to the Company by each
stockholder included in the table.

|                                                                  |  |                     |           |                          |  |  |      |  
|----------------------------------------------------------------- |  | ------------------- | --------- | ------------------------ |  |  | ---- | -
|                                                                  |  | Number of Shares of |           | Percentage of           
|                                                                  |  | Common Stock        |           | Outstanding Common Stock
|Beneficial Owner                                                  |  | Beneficially Owned  |           | Beneficially Owned      
|                                                                  |  |                     |           |                         
|John S. Martinez (1)                                              |  |                     | 1,613,438 |                          |  |  | 6.5  | %
|Marvin W. Sepe (2)                                                |  |                     | 262,512   |                          |  |  | 1.1  | %
|Dennis E. Valentine (3)                                           |  |                     | 238,252   |                          |  |  | (14  | )
|E. Fred Schiele (4)                                               |  |                     | 192,661   |                          |  |  | (14  | )
|Charles A. Dickinson (5)                                          |  |                     | 124,398   |                          |  |  | (14  | )
|James H. Banister, Jr. (6)                                        |  |                     | 112,412   |                          |  |  | (14  | )
|Joseph G. Martinez (7)                                            |  |                     | 85,501    |                          |  |  | (14  | )
|Vernon H. Blackman (8)                                            |  |                     | 73,617    |                          |  |  | (14  | )
|Barry Ressler (9)                                                 |  |                     | 50,206    |                          |  |  | (14  | )
|C. Neil Beer (10)                                                 |  |                     | 49,787    |                          |  |  | (14  | )
|John H. Carosella (11)                                            |  |                     | 33,852    |                          |  |  | (14  | )
|Daniel J. Fleming (12)                                            |  |                     | 27,755    |                          |  |  | (14  | )
|All executive officers and
directors as a group (12
persons) (13) |  |                     | 2,864,391 |                          |  |  | 11.0 | %



---

|(1) |  | See footnote (1) to preceding table.                                                                                                                                                                     
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Includes 256,188 shares which are issuable upon exercise of currently
exercisable stock options and warrants.                                                                                            
|   
|   
|   
|   
|(3) |  | Includes 208,060 shares which are issuable upon exercise of currently
exercisable stock options and warrants.                                                                                            
|   
|   
|   
|   
|(4) |  | All shares are issuable upon exercise of currently exercisable stock
options and warrants. Mr. Schieles employment terminated in September,
2001.                                                       
|   
|   
|   
|   
|(5) |  | Includes 58,298 shares which are issuable upon conversion of debt of
which 29,149 are issuable upon conversion of debt held by Mr. Dickinsons
wife. Includes 31,212 shares held by Mr. Dickinsons wife.
|   
|   
|   
|   
|(6) |  | Includes 74,254 shares which are issuable upon exercise of currently
exercisable stock options and warrants.                                                                                             
|   
|   
|   
|   
|(7) |  | Includes 78,996 shares which are issuable upon exercise of currently
exercisable stock options.                                                                                                          

37



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##### Table of Contents



|(8)  |  | Includes 55,000 shares which are issuable upon exercise of currently
exercisable stock options and warrants.                              
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(9)  |  | Includes 39,999 shares which are issuable upon exercise of currently
exercisable stock options.                                           
|    
|    
|    
|    
|(10) |  | Includes 45,008 shares which are issuable upon exercise of currently
exercisable stock options and warrants.                              
|    
|    
|    
|    
|(11) |  | All shares are issuable upon exercise of currently exercisable stock
options.                                                             
|    
|    
|    
|    
|(12) |  | Includes 3,068 shares which are issuable upon conversion of debt.                                                                         
|    
|    
|    
|    
|(13) |  | Includes 2,188,857 shares which are issuable upon exercise of currently
exercisable stock options and warrants or upon conversion of debt.
|    
|    
|    
|    
|(14) |  | Less than one percent.                                                                                                                    




Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.




PART IV




Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



|(a) |  | The following documents are filed as a part of this Report:
|--- |  | -----------------------------------------------------------



| | 1. |  | Financial Statements. Index to Consolidated Financial
Statements:
| | -- |  | -----------------------------------------------------------------

|                                                                                                                     |  |    
|-------------------------------------------------------------------------------------------------------------------- |  | ---
|Report of Independent Public Accountants                                                                             |  | F-2
|Consolidated Balance Sheets as of December 31, 2001 and 2000.                                                        |  | F-3
|Consolidated Statements of Operations and Comprehensive Income for the
Years Ended December 31, 2001, 2000 and 1999. |  | F-4
|Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2001, 2000 and 1999.                |  | F-5
|Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999.                          |  | F-6
|Notes to Consolidated Financial Statements                                                                           |  | F-7



| | 2. |  | Financial Statement Schedules. The following financial
statement schedule of JMAR Technologies, Inc., for the years ended
December 31, 2001, 2000 and 1999 is filed as part of this Report and
should be read in conjunction with the Consolidated Financial
Statements of JMAR Technologies, Inc.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Schedule II. Valuation and Qualifying Accounts



|    |  | Financial Statement Schedules not listed above have been omitted because
they are not applicable or are not required or the information required
to be set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 3.      Exhibits. The Exhibits required to be filed with this Report are listed
in Item 14(c) below.                                                                                                                                           
|   
|(b) |  | Reports on Form 8-K                                                                                                                                                                                                                            

There were no reports filed on Form 8-K during the three months ended
December 31, 2001.

38



---



##### Table of Contents






Index to Exhibits



|(c) |  | Exhibits. The following exhibits are filed, or incorporated by reference
into, this Report:
|--- |  | -------------------------------------------------------------------------------------------

|           |  |                                                                                                                                                                                                                                                                                                                                       
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                           
|           |  |                                                                                                                                                                                                                                                                                                                                       
|2.1(12)    |  | Agreement and Plan of Merger, dated July 24, 2001, by and among JMAR
Technologies, Inc., JMAR/SAL Lithography, Inc., (now JMAR/SAL
NanoLithography, Inc.) and Semiconductor Advanced Lithography, Inc.                                                                                                                                
|3.1(1)(2)  |  | Certificate of Incorporation and amendments thereto.                                                                                                                                                                                                                                                                                  
|3.2(4)     |  | Amendments to Certificate of Incorporation, filed on July 9, 1992,
December 11, 1992, January 11, 1993 and February 1, 1993.                                                                                                                                                                                                          
|3.3(5)     |  | Amendment to Certificate of Incorporation, filed on August 23, 1994.                                                                                                                                                                                                                                                                  
|3.4(8)     |  | Certificate of Ownership and Merger.                                                                                                                                                                                                                                                                                                  
|3.5(1)     |  | Bylaws and amendments thereto.                                                                                                                                                                                                                                                                                                        
|3.6(11)    |  | Amendment to Bylaws adopted June 25, 2000.                                                                                                                                                                                                                                                                                            
|4.1(3)     |  | Form of Common Stock Certificate.                                                                                                                                                                                                                                                                                                     
|4.2(9)     |  | Rights Agreement, dated as of February 12, 1999 between JMAR
Technologies, Inc. and American Securities Trust & Transfer, Inc.,
including the Certificate of Designations, the form of Rights Certificate
and the Summary of Rights attached thereto as Exhibits A, B and C,
respectively.                                            
|10.1(7)    |  | Amended and Restated Employment Agreement between the Company
and John S. Martinez, dated May 1, 1996.(+)                                                                                                                                                                                                                             
|10.2(1)    |  | The Companys 1988 Stock Option Plan.(+)                                                                                                                                                                                                                                                                                              
|10.3(6)    |  | The Companys 1991 Stock Option Plan, as amended.(+)                                                                                                                                                                                                                                                                                  
|10.4(7)    |  | Management Anti-Dilution Incentive Plan, as amended.(+)                                                                                                                                                                                                                                                                               
|10.5(10)   |  | The Companys 1999 Stock Option Plan.(+)                                                                                                                                                                                                                                                                                              
|10.6(7)    |  | Management Incentive Plan Agreement for JMAR Precision Systems, Inc.,
as amended.(+)                                                                                                                                                                                                                                                  
|10.7(11)   |  | Employment Agreement between the Company and John H. Carosella,
dated April 20, 2000.(+)                                                                                                                                                                                                                                              
|10.8       |  | Employment Agreement between the Company and Daniel J.
Fleming, dated August 7, 2001.(+)                                                                                                                                                                                                                                              
|10.9       |  | Loan Revision/Extension Agreement between the Company and Comerica Bank-
California (Comerica) dated March 11, 2002, Loan Extension Letter between the
Company and Comerica dated December 24, 2001, Master Revolving
Note, Security
Agreement and Business Loan Agreement between the Company and
Comerica dated November 19, 2001.
|10.10      |  | Amendment dated September 7, 2001 to Amended and Restated
Employment Agreement between the Company and John S. Martinez.(+)                                                                                                                                                                                                           

39



---



##### Table of Contents





|21.1 |  |  | Subsidiaries of the Company include JMAR Research, Inc. (a
California corporation), JMAR Precision Systems, Inc. (a California
corporation), JMAR Semiconductor, Inc. (a California corporation)
and JMAR/SAL NanoLithography, Inc. (a California Corporation).
|---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|23.1 |  |  | Consent of Independent Public Accountants.                                                                                                                                                                                                                     
|99.1 |  |  | Acknowledgement dated March 29, 2002
of representation letter from Arthur Andersen LLP.                                                                                                                                                                        



---

|(+)  |  | These contracts are management compensation contracts required to be
separately identified pursuant to Item 14 (c) of
Form 10-K.                                                                                                                                                                                  
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(1)  |  | Incorporated by reference to the exhibit filed with the Companys
Registration Statement on Form S-1 (No. 33-32446) filed on December 5,
1989 and amended on January 30, 1990, March 30, 1990 and April 23, 1990,
which Registration Statement became effective May 11, 1990.                                     
|    
|    
|    
|    
|(2)  |  | Incorporated by reference to the exhibit filed with the Companys Form
10-K for the year ended December 31, 1991.                                                                                                                                                                                                 
|    
|    
|    
|    
|(3)  |  | Incorporated by reference to the exhibit filed with the Companys
Registration Statement on Form S-1 (No. 33-47390) filed on April 22,
1992 and amended November 23, 1992, January 11, 1993, January 27, 1993,
February 9, 1993, February 11, 1993, February 12, 1993 and declared
effective on February 16, 1993.
|    
|    
|    
|    
|(4)  |  | Incorporated by reference to the exhibit filed with the Companys Form
10-K for the year ended December 31, 1993.                                                                                                                                                                                                 
|    
|    
|    
|    
|(5)  |  | Incorporated by reference to the exhibit filed with the Companys Form
10-K for the year ended December 31, 1994.                                                                                                                                                                                                 
|    
|    
|    
|    
|(6)  |  | Incorporated by reference to the exhibit filed with the Companys Proxy
Statement for the 1996 Annual Meeting of Shareholders.                                                                                                                                                                                    
|    
|    
|    
|    
|(7)  |  | Incorporated by reference to the exhibit filed with the Companys Form
10-K for the year ended December 31, 1996.                                                                                                                                                                                                 
|    
|    
|    
|    
|(8)  |  | Incorporated by reference to the exhibit filed with the Companys Form
8-K dated June 17, 1998.                                                                                                                                                                                                                   
|    
|    
|    
|    
|(9)  |  | Incorporated by reference to the exhibit filed with the Companys Form
8-A dated March 8, 1999.                                                                                                                                                                                                                   
|    
|    
|    
|    
|(10) |  | Incorporated by reference to the exhibit filed with the Companys Proxy
Statement for the 1999 Annual Meeting of Shareholders.                                                                                                                                                                                    
|    
|    
|    
|    
|(11) |  | Incorporated by reference to the exhibit filed with the Companys Form
10-Q for the quarter ended June 30, 2000.                                                                                                                                                                                                  
|    
|    
|    
|    
|(12) |  | Incorporated by reference to the exhibit filed with the Companys Form
8-K dated August 22, 2001.                                                                                                                                                                                                                 

40



---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                    |  |    
|------------------------------------------------------------------------------------------------------------------- |  | ---
|Report of Independent Public Accountants                                                                            |  | F-2
|Consolidated Balance Sheets as of December 31, 2001 and 2000                                                        |  | F-3
|Consolidated Statements of Operations and Comprehensive Income for the
Years Ended December 31, 2001, 2000 and 1999 |  | F-4
|Consolidated Statements of Stockholders Equity for the Years Ended December 31,
2001, 2000 and 1999                |  | F-5
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2001,
2000 and 1999                          |  | F-6
|Notes to Consolidated Financial Statements                                                                          |  | F-7

F- 1



---



##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To JMAR Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of JMAR
Technologies, Inc. (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations and
comprehensive income, stockholders equity and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements and
the schedule referred to below are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of JMAR Technologies, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
Item 14 is presented for purposes of complying with the Securities and Exchange
Commissions rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.



| | ARTHUR ANDERSEN LLP
| | -------------------

San Diego, California
March 29, 2002

F- 2



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##### Table of Contents



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

|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |             |            |            |  | 
|--------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------------------- | ------------------------------------ | ---------- | ------------ | --------- | ----------- | ---------- | ---------- |  | 
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            | December 31,
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |             
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            | 2001         |           | 2000       
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|                                                                      |                                                                                                                                                                            |                                            |                            | ASSETS                               |            |              |           |             |            |            |  | 
|                                                                      | Current Assets:                                                                                                                                                            |                                            |                            |                                      |            |              |           |             |           
|                                                                      | Cash and cash equivalents                                                                                                                                                  |                                            | $                          | 4,115,129                            |            |              | $         | 9,856,768   |           
|                                                                      | Restricted cash                                                                                                                                                            |                                            |                            | 3,000,000                            |            |              |           |            |           
|                                                                      | Accounts receivable, net                                                                                                                                                   |                                            |                            | 5,101,742                            |            |              |           | 6,904,638   |           
|                                                                      | Notes and other receivables                                                                                                                                                |                                            |                            | 19,481                               |            |              |           | 57,383      |           
|                                                                      | Inventories, net                                                                                                                                                           |                                            |                            | 4,517,146                            |            |              |           | 6,310,628   |           
|                                                                      | Marketable securities available for sale                                                                                                                                   |                                            |                            | 1,474,889                            |            |              |           | 2,657,418   |           
|                                                                      | Prepaid expenses and other                                                                                                                                                 |                                            |                            | 514,416                              |            |              |           | 1,163,543   |           
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|                                                                      |                                                                                                                                                                            |                                            | Total current assets       |                                      |            | 18,742,803   |           |             |            | 26,950,378 | 
|Property and equipment, net                                           |                                                                                                                                                                            |                                            | 1,770,628                  |                                      |            |              | 3,291,477 |            
|Software development costs, net                                       |                                                                                                                                                                            |                                            | 361,952                    |                                      |            |              | 3,168,398 |            
|Other assets, net                                                     |                                                                                                                                                                            |                                            | 1,785,510                  |                                      |            |              | 480,820   |            
|Goodwill, net                                                         |                                                                                                                                                                            |                                            | 3,957,732                  |                                      |            |              | 300,501   |            
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|                                                                      |                                                                                                                                                                            | TOTAL ASSETS                               |                            | $                                    | 26,618,625 |              |           | $           | 34,191,574 |           
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|                                                                      |                                                                                                                                                                            |                                            |                            | LIABILITIES AND STOCKHOLDERS EQUITY |            |              |           |             |            |            |  | 
|Current Liabilities:                                                  |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|                                                                      | Accounts payable                                                                                                                                                           |                                            | $                          | 2,471,975                            |            |              | $         | 2,223,642   |           
|                                                                      | Accrued liabilities                                                                                                                                                        |                                            |                            | 2,634,454                            |            |              |           | 886,710     |           
|                                                                      | Accrued payroll and related costs                                                                                                                                          |                                            |                            | 1,029,068                            |            |              |           | 1,003,687   |           
|                                                                      | Customer deposits                                                                                                                                                          |                                            |                            | 1,483,804                            |            |              |           | 1,780       |           
|                                                                      | Line of credit                                                                                                                                                             |                                            |                            | 3,000,000                            |            |              |           | 1,100,000   |           
|                                                                      | Notes payable                                                                                                                                                              |                                            |                            | 280,037                              |            |              |           | 191,178     |           
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|                                                                      |                                                                                                                                                                            |                                            | Total current liabilities  |                                      |            | 10,899,338   |           |             |            | 5,406,997  | 
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|Notes payable and other long-term liabilities, net of current portion |                                                                                                                                                                            |                                            | 1,419,632                  |                                      |            |              | 339,908   |            
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|Commitments and contingencies                                         |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|Stockholders equity:                                                 |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|                                                                      | Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and
outstanding as of December 31, 2001 and 2000                                                 |                                            |                            |                                     |            |              |           |            |           
|                                                                      | Common stock, $.01 par value; 40,000,000 shares authorized;
Issued and outstanding 22,840,392 shares as of December 31, 2001 and
22,224,650 shares as of December 31, 2000 |                                            |                            | 228,404                              |            |              |           | 222,247     |           
|                                                                      | Additional paid-in capital                                                                                                                                                 |                                            |                            | 54,343,211                           |            |              |           | 52,628,372  |           
|                                                                      | Accumulated other comprehensive income                                                                                                                                     |                                            |                            | 1,424,864                            |            |              |           | 2,589,340   |           
|                                                                      | Accumulated deficit                                                                                                                                                        |                                            |                            | (41,696,824                          | )          |              |           | (26,995,290 | )         
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|                                                                      |                                                                                                                                                                            |                                            | Total stockholders equity |                                      |            | 14,299,655   |           |             |            | 28,444,669 | 
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            
|                                                                      |                                                                                                                                                                            | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                            | $                                    | 26,618,625 |              |           | $           | 34,191,574 |           
|                                                                      |                                                                                                                                                                            |                                            |                            |                                      |            |              |           |            

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

F- 3



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##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2001, 2000 and 1999

|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |            |            | 
|------------------------------------------------- | ---------------------------------------- | ------------------------ | ----------- | ----------------------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                  |                                          |                          |             | Year ended December 31,
|                                                  |                                          |                          |             |                        
|                                                  |                                          |                          |             | 2001                    |            | 2000 |            | 1999      
|                                                  |                                          |                          |             |                         |            |      |            |           
|Product sales                                     |                                          | $                        | 5,935,886   |                         |            | $    | 10,512,243 |            |            | $ | 10,315,686 |           
|Contract sales                                    |                                          |                          | 12,776,721  |                         |            |      | 9,114,357  |            |            |   | 14,452,054 |           
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  |                                          | Total revenues           |             |                         | 18,712,607 |      |            |            | 19,626,600 |   |            |            | 24,767,740 | 
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|Product costs of sales                            |                                          |                          | 6,398,040   |                         |            |      | 6,895,717  |            |            |   | 6,696,863  |           
|Contract costs of sales                           |                                          |                          | 9,414,017   |                         |            |      | 6,807,660  |            |            |   | 11,018,883 |           
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  |                                          | Total costs of sales     |             |                         | 15,812,057 |      |            |            | 13,703,377 |   |            |            | 17,715,746 | 
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  |                                          | Gross profit             |             |                         | 2,900,550  |      |            |            | 5,923,223  |   |            |            | 7,051,994  | 
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|Operating expenses:                               |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  | Selling, general and administrative      |                          |             | 7,406,876               |            |      |            | 7,038,479  |            |   |            | 6,686,333  |           
|                                                  | Research, development and engineering    |                          |             | 2,211,627               |            |      |            | 2,299,635  |            |   |            | 2,105,294  |           
|                                                  | Asset writedowns and special items       |                          |             | 9,332,731               |            |      |            | 131,663    |            |   |            | 405,471    |           
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  |                                          | Total operating expenses |             |                         | 18,951,234 |      |            |            | 9,469,777  |   |            |            | 9,197,098  | 
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|Loss from operations                              |                                          |                          | (16,050,684 | )                       |            |      | (3,546,554 | )          |            |   | (2,145,104 | )         
|Realized
gain on sale of marketable securities    |                                          |                          | 1,189,273   |                         |            |      | 2,184,476  |            |            |   |           |           
|Other income (expense), net                       |                                          |                          | 19,388      |                         |            |      | (50,924    | )          |            |   | 111,833    |           
|Interest income                                   |                                          |                          | 244,102     |                         |            |      | 324,550    |            |            |   | 25,205     |           
|Interest expense                                  |                                          |                          | (103,613    | )                       |            |      | (136,313   | )          |            |   | (240,928   | )         
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|Net loss                                          |                                          |                          | (14,701,534 | )                       |            |      | (1,224,765 | )          |            |   | (2,248,994 | )         
|Other comprehensive income:                       |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  | Unrealized gain on marketable securities |                          |             | 115,542                 |            |      |            | 2,589,340  |            |   |            |           |           
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|Comprehensive income (loss)                       |                                          | $                        | (14,585,992 | )                       |            | $    | 1,364,575  |            |            | $ | (2,248,994 | )         
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|Net loss per share:                               |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  | Basic                                    |                          | $           | (.65                    | )          |      | $          | (.06       | )          |   | $          | (.12       | )         
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  | Diluted                                  |                          | $           | (.65                    | )          |      | $          | (.06       | )          |   | $          | (.12       | )         
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|Shares used in computation of net loss per share: |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  | Basic                                    |                          |             | 22,484,905              |            |      |            | 21,468,763 |            |   |            | 18,045,914 |           
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           
|                                                  | Diluted                                  |                          |             | 22,484,905              |            |      |            | 21,468,763 |            |   |            | 18,045,914 |           
|                                                  |                                          |                          |             |                         |            |      |            |            |            |   |            |           

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

F- 4



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##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2001, 2000 and 1999

|                                                                     |  |              |            |                 |  |            |         |             |  |               |   |               |  |        |   |        |  |   |            |   |  |   |             |   |  |             |            |   |  |   |             |  
|-------------------------------------------------------------------- |  | ------------ | ---------- | --------------- |  | ---------- | ------- | ----------- |  | ------------- | - | ------------- |  | ------ | - | ------ |  | - | ---------- | - |  | - | ----------- | - |  | ----------- | ---------- | - |  | - | ----------- | -
|                                                                     |  |              |            |                 |  |            |         |             |  |               |   |               |  |        |   |        |  |   |            |   |  |   |             |   |  | Accumulated |            |   |  |  
|                                                                     |  | Common Stock |            | Preferred Stock |  | Additional |         |             |  |               |   | Other         |  | Total 
|                                                                     |  |              |            |                 |  | Paid-in    |         | Accumulated |  | Comprehensive |   | Stockholders
|                                                                     |  | Shares       |            | Amount          |  | Shares     |         | Amount      |  | Capital       |   | Deficit       |  | Income |   | Equity
|                                                                     |  |              |            |                 |  |            |         |             |  |               |   |               |  |        |   |       
|Balance, December 31, 1998                                           |  |              | 18,080,853 |                 |  | $          | 180,809 |             |  |               |  |               |  | $      |  |        |  | $ | 36,593,901 |   |  | $ | (23,521,531 | ) |  | $           |           |   |  | $ | 13,253,179  |  
|Stock issued upon exercise of
warrants and options                   |  |              | 38,464     |                 |  |            | 384     |             |  |               |  |               |  |        |  |        |  |   | 18,066     |   |  |   |            |   |  |             |           |   |  |   | 18,450      |  
|Issuance of stock for services                                       |  |              | 6,948      |                 |  |            | 69      |             |  |               |  |               |  |        |  |        |  |   | 7,731      |   |  |   |            |   |  |             |           |   |  |   | 7,800       |  
|Repurchase of stock                                                  |  |              | (68,600    | )               |  |            | (686    | )           |  |               |  |               |  |        |  |        |  |   | (133,953   | ) |  |   |            |   |  |             |           |   |  |   | (134,639    | )
|Issuance of stock related to
acquisition of Continuum
Engineering    |  |              | 12,171     |                 |  |            | 122     |             |  |               |  |               |  |        |  |        |  |   | 3,263      |   |  |   |            |   |  |             |           |   |  |   | 3,385       |  
|Issuance of stock related to
acquisition of minority
interest
of JSI |  |              | 5,000      |                 |  |            | 50      |             |  |               |  |               |  |        |  |        |  |   | 10,230     |   |  |   |            |   |  |             |           |   |  |   | 10,280      |  
|Net loss                                                             |  |              |           |                 |  |            |        |             |  |               |  |               |  |        |  |        |  |   |           |   |  |   | (2,248,994  | ) |  |             |           |   |  |   | (2,248,994  | )
|                                                                     |  |              |            |                 |  |            |         |             |  |               |   |               |  |        |   |        |  |   |            |   |  |   |             |   |  |             |            |   |  |   |             |  
|Balance, December 31, 1999                                           |  |              | 18,074,836 |                 |  |            | 180,748 |             |  |               |  |               |  |        |  |        |  |   | 36,499,238 |   |  |   | (25,770,525 | ) |  |             |           |   |  |   | 10,909,461  |  
|Stock issued upon exercise of
warrants and options                   |  |              | 4,151,824  |                 |  |            | 41,519  |             |  |               |  |               |  |        |  |        |  |   | 16,142,801 |   |  |   |            |   |  |             |           |   |  |   | 16,184,320  |  
|Issuance of stock for services                                       |  |              | 1,628      |                 |  |            | 16      |             |  |               |  |               |  |        |  |        |  |   | 5,984      |   |  |   |            |   |  |             |           |   |  |   | 6,000       |  
|Issuance of stock related to
acquisition of Continuum
Engineering    |  |              | 5,062      |                 |  |            | 51      |             |  |               |  |               |  |        |  |        |  |   | 5,818      |   |  |   |            |   |  |             |           |   |  |   | 5,869       |  
|Repurchase of stock                                                  |  |              | (8,700     | )               |  |            | (87     | )           |  |               |  |               |  |        |  |        |  |   | (25,469    | ) |  |   |            |   |  |             |           |   |  |   | (25,556     | )
|Unrealized gain on marketable
securities                             |  |              |           |                 |  |            |        |             |  |               |  |               |  |        |  |        |  |   |           |   |  |   |            |   |  |             | 2,589,340  |   |  |   | 2,589,340   |  
|Net loss                                                             |  |              |           |                 |  |            |        |             |  |               |  |               |  |        |  |        |  |   |           |   |  |   | (1,224,765  | ) |  |             |           |   |  |   | (1,224,765  | )
|                                                                     |  |              |            |                 |  |            |         |             |  |               |   |               |  |        |   |        |  |   |            |   |  |   |             |   |  |             |            |   |  |   |             |  
|Balance, December 31, 2000                                           |  |              | 22,224,650 |                 |  |            | 222,247 |             |  |               |  |               |  |        |  |        |  |   | 52,628,372 |   |  |   | (26,995,290 | ) |  |             | 2,589,340  |   |  |   | 28,444,669  |  
|Stock issued upon exercise of
warrants and options                   |  |              | 26,013     |                 |  |            | 260     |             |  |               |  |               |  |        |  |        |  |   | 44,652     |   |  |   |            |   |  |             |           |   |  |   | 44,912      |  
|Issuance of stock for services                                       |  |              | 1,571      |                 |  |            | 16      |             |  |               |  |               |  |        |  |        |  |   | 4,884      |   |  |   |            |   |  |             |           |   |  |   | 4,900       |  
|Issuance of stock related to
acquisition of Continuum
Engineering    |  |              | 807        |                 |  |            | 8       |             |  |               |  |               |  |        |  |        |  |   | 3,808      |   |  |   |            |   |  |             |           |   |  |   | 3,816       |  
|Repurchase of stock                                                  |  |              | (18,700    | )               |  |            | (187    | )           |  |               |  |               |  |        |  |        |  |   | (55,456    | ) |  |   |            |   |  |             |           |   |  |   | (55,643     | )
|Change
in unrealized gain on marketable
securities                   |  |              |           |                 |  |            |        |             |  |               |  |               |  |        |  |        |  |   |           |   |  |   |            |   |  |             | (1,164,476 | ) |  |   | (1,164,476  | )
|Issuance of stock related to
legal settlement                        |  |              | 3,000      |                 |  |            | 30      |             |  |               |  |               |  |        |  |        |  |   | 10,316     |   |  |   |            |   |  |             |           |   |  |   | 10,346      |  
|Issuance of stock related to
acquisition of SAL                      |  |              | 603,051    |                 |  |            | 6,030   |             |  |               |  |               |  |        |  |        |  |   | 1,706,635  |   |  |   |            |   |  |             |           |   |  |   | 1,712,665   |  
|Net loss                                                             |  |              |           |                 |  |            |        |             |  |               |  |               |  |        |  |        |  |   |           |   |  |   | (14,701,534 | ) |  |             |           |   |  |   | (14,701,534 | )
|                                                                     |  |              |            |                 |  |            |         |             |  |               |   |               |  |        |   |        |  |   |            |   |  |   |             |   |  |             |            |   |  |   |             |  
|Balance, December 31, 2001                                           |  |              | 22,840,392 |                 |  | $          | 228,404 |             |  |               |  |               |  | $      |  |        |  | $ | 54,343,211 |   |  | $ | (41,696,824 | ) |  | $           | 1,424,864  |   |  | $ | 14,299,655  |  

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

F- 5



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##### Table of Contents



JMAR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999

|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |            |           |            |            |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ---------------------------------------- | ---------- | ----------------------- | --------- | ---------- | ---------- | ---------- | ---------- | ---------- | --------- | ---------- | ---------- | -
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            | Year ended December 31,
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                        
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            | 2001                    |           | 2000       |            | 1999      
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |           
|Cash flows from operating activities:                |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|                                                     | Net loss                                                                    |                                                                                                               | $                                     | (14,701,534                              | )          |                         | $         | (1,224,765 | )          |            | $          | (2,248,994 | )        
|                                                     | Adjustments to reconcile net loss to net cash
used in operating activities: |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |            |          
|                                                     |                                                                             | Depreciation and amortization                                                                                 |                                       |                                          | 1,540,395  |                         |           |            | 1,225,035  |            |            |            | 1,034,675 |           
|                                                     |                                                                             | Services received in exchange for
common stock or warrants                                                    |                                       |                                          | 16,120     |                         |           |            | 6,000      |            |            |            | 7,800     |           
|                                                     |                                                                             | Asset writedowns                                                                                              |                                       |                                          | 7,921,230  |                         |           |            |           |            |            |            |          |           
|                                                     |                                                                             | Gain on sale of marketable securities                                                                         |                                       |                                          | (1,189,273 | )                       |           |            | (2,184,476 | )          |            |            |          |           
|                                                     |                                                                             | Change in assets and liabilities, net of
effects from acquisitions, asset writedowns and non-recurring items: |                                       |                                          |            |                         |           |            |            |            |            |            |           |           
|                                                     |                                                                             |                                                                                                               |                                       | (Increase) decrease in:                  |            |                         |           |            |            |            |            |            |           |            |            |  
|                                                     |                                                                             |                                                                                                               |                                       | Accounts receivable, net                 |            |                         | 2,073,300 |            |            |            | 174,797    |            |           |            | 687,526    |  
|                                                     |                                                                             |                                                                                                               |                                       | Inventories                              |            |                         | 1,371,655 |            |            |            | (57,292    | )          |           |            | (404,400   | )
|                                                     |                                                                             |                                                                                                               |                                       | Prepaid expenses and other               |            |                         | 190,965   |            |            |            | (319,238   | )          |           |            | (73,024    | )
|                                                     |                                                                             |                                                                                                               |                                       | Other assets                             |            |                         | (83,812   | )          |            |            | (179,252   | )          |           |            | 1,155,819  |  
|                                                     |                                                                             |                                                                                                               |                                       | Increase (decrease) in:                  |            |                         |           |            |            |            |            |            |           |            |            |  
|                                                     |                                                                             |                                                                                                               |                                       | Customer deposits                        |            |                         | 1,482,024 |            |            |            | (6,162     | )          |           |            | (7,737     | )
|                                                     |                                                                             |                                                                                                               |                                       | Accounts payable and accrued liabilities |            |                         | 961,684   |            |            |            | 196,077    |            |           |            | (2,518,676 | )
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|                                                     | Net cash used in operating activities                                       |                                                                                                               |                                       | (417,246                                 | )          |                         |           | (2,369,276 | )          |            |            | (2,367,011 | )        
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|Cash flows from investing activities:                |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|                                                     | Expenditures for software development                                       |                                                                                                               |                                       | (2,479,809                               | )          |                         |           | (2,325,075 | )          |            |            | (342,383   | )        
|                                                     | Proceeds from sale of marketable securities                                 |                                                                                                               |                                       | 1,207,923                                |            |                         |           | 2,224,337  |            |            |            |           |          
|                                                     | Investment in marketable securities                                         |                                                                                                               |                                       |                                         |            |                         |           | (107,939   | )          |            |            |           |          
|                                                     | Patent costs                                                                |                                                                                                               |                                       | (144,928                                 | )          |                         |           | (110,273   | )          |            |            | (155,712   | )        
|                                                     | Capital expenditures                                                        |                                                                                                               |                                       | (1,170,477                               | )          |                         |           | (1,772,228 | )          |            |            | (1,186,661 | )        
|                                                     | Other assets                                                                |                                                                                                               |                                       | (489,512                                 | )          |                         |           |           |            |            |            |           |          
|                                                     | Increase in notes and other receivables                                     |                                                                                                               |                                       |                                         |            |                         |           |           |            |            |            | (13,938    | )        
|                                                     | Payments received on notes receivable                                       |                                                                                                               |                                       | 7,738                                    |            |                         |           | 42,648     |            |            |            |           |          
|                                                     | Acquisition costs, net of cash acquired                                     |                                                                                                               |                                       | (1,112,309                               | )          |                         |           |           |            |            |            | (12,228    | )        
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|                                                     |                                                                             |                                                                                                               | Net cash used in investing activities |                                          |            | (4,181,374              | )         |            |            | (2,048,530 | )          |            |           | (1,710,922 | )         
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|Cash flows from financing activities:                |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|                                                     | Net borrowings (payments) under line of credit                              |                                                                                                               |                                       | 1,900,000                                |            |                         |           | (3,890,000 | )          |            |            | 2,890,000  |          
|                                                     | Increase
in restricted cash                                                 |                                                                                                               |                                       | (3,000,000                               | )          |                         |           |           |            |            |            |           |          
|                                                     | Payments of notes payable and other long-term liabilities                   |                                                                                                               |                                       | (208,416                                 | )          |                         |           | (317,317   | )          |            |            | (570,934   | )        
|                                                     | Borrowings of notes payable and other long-term liabilities                 |                                                                                                               |                                       | 177,000                                  |            |                         |           |           |            |            |            | 350,000    |          
|                                                     | Repurchases of stock                                                        |                                                                                                               |                                       | (55,643                                  | )          |                         |           | (25,556    | )          |            |            | (134,639   | )        
|                                                     | Net proceeds from the exercise of options and warrants                      |                                                                                                               |                                       | 44,040                                   |            |                         |           | 16,184,320 |            |            |            | 18,450     |          
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|                                                     |                                                                             | Net
cash provided by (used in) financing activities                                                           |                                       |                                          | (1,143,019 | )                       |           |            | 11,951,447 |            |            |            | 2,552,877 |           
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                                                                               | (5,741,639                            | )                                        |            |                         | 7,533,641 |            |            |            | (1,525,056 | )         
|Cash and cash equivalents, beginning of period       |                                                                             |                                                                                                               | 9,856,768                             |                                          |            |                         | 2,323,127 |            |            |            | 3,848,183  |           
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           
|Cash and cash equivalents, end of period             |                                                                             | $                                                                                                             | 4,115,129                             |                                          |            | $                       | 9,856,768 |            |            | $          | 2,323,127  |           
|                                                     |                                                                             |                                                                                                               |                                       |                                          |            |                         |           |            |            |            |            |           

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: On December 7, 1998, the
Company acquired 100% of the outstanding common stock of Continuum Engineering,
Inc. As consideration for the acquisition, the Company issued an aggregate of
92,160 shares of its common stock and an additional 12,171, 5,062 and 807
earn-out shares issued in 1999, 2000 and 2001, respectively (See Note 3). In
April 2000, the Company entered into a series of agreements with Bede plc
(Bede), including a loan with various equity rights. In November 2000, the
Company exercised its equity rights into 1,935,500 shares of Bede. In December
2000 and April 2001, the Company sold 890,000 and 500,000 shares, respectively,
of Bede for net proceeds of approximately $2.2 million and $1.2 million,
respectively. Based on a current market value and prevailing foreign exchange
rate, the remaining 545,500 shares of Bede resulted in an unrealized gain of
$1,424,864 as of December 31, 2001.

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

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##### Table of Contents



JMAR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 and 2000

1. Description of the Company

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.

The Company is the worlds leading developer and manufacturer of
semiconductor X-ray lithography sources and systems and is a leading developer
of proprietary advanced laser, X-ray and EUV light sources for other high-value
microelectronics products. In addition, JMAR manufactures precision
measurement, positioning and light-based manufacturing systems for inspection
and repair of semiconductors and continues to play an important role in
adapting its precision semiconductor manufacturing technology to the
fabrication of data storage, advanced biomedical and optical communications
products.

Subsequent to December 31, 2001, 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
X-ray lithography products. This portion of JMAR Semiconductor
Inc.s (JSI) business has been a developmental
effort, involving the design, manufacture and introduction of new
standard product semiconductor chips. With the severe downturn in the
worldwide semiconductor market, JSI has had little success in selling
its new standard product chips to date. Given the required
substantial additional capital to get these chips established in the
market, as well as to develop newer, higher value chips, JMAR has
determined it is in the best interests of the Company and its
shareholders to focus its principal efforts on its other business
areas.

2. Summary of Significant Accounting Policies

a. Cash and Cash Equivalents

The Company defines cash and cash equivalents to include cash on hand and
cash invested in short-term securities that have original maturities of less
than 90 days. Restricted cash at December 31, 2001 includes $3 million as compensating
balance for the Companys line of credit (see Note 8).

b. Fair Value of Financial Instruments

The carrying value of certain of the Companys financial instruments,
including accounts receivable, accounts payable and accrued expenses,
approximates fair value due to their short maturities. Based on borrowing
rates currently available to the Company for loans with similar terms, the
carrying value of its notes payable, capital lease obligations and borrowings
under the Companys line of credit approximates fair value.

c. Pervasiveness of Estimates



| |  | The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

d. 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 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.

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##### Table of Contents



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

e. Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109. Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation
allowances are established for net deferred tax assets when it is uncertain
that such tax assets will be realized.

f. Property and Equipment

Property and equipment are recorded at cost. Depreciation and
amortization are provided over the assets estimated useful life of three to
ten years, using the straight-line method. Maintenance and repairs are
expensed as incurred. Costs capitalized for self-constructed assets include
direct material, labor and applicable overhead. Leasehold improvements are
amortized over the shorter of the assets estimated useful life or the life of
the related lease.

g. Capitalized Software Development Costs



| |  | The Companys policy for the treatment of software development costs are
based on SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. In accordance with SFAS No. 86, costs incurred
internally in creating a computer software product are charged to expense
when incurred until technological feasibility has been established, at
which time such costs are capitalized. Technological feasibility is
established upon completion of a detail program design. Thereafter, the
Company reports the costs at the lower of amortized cost or net
realizable value. Amortization is calculated based on the greater of the
amount capitalized as a percentage of estimated revenues over the total
estimated revenues for the software as a whole, or on a straight line
basis, based on estimated useful life of the products. Software
development costs currently being amortized are being amortized using the
straight line basis over three years. Capitalization of software
development costs cease when the product is available for general release
to customers. General release is typically when the product is first
shipped to a distributor and available for sale. Accumulated
amortization of capitalized software development costs was $723,880 and
$459,701 as of December 31, 2001 and 2000, respectively. During the
year ended December 31, 2001, the Company wrote down to fair value
$4,650,000 of capitalized software costs related to the Companys
semiconductor standard products based on an impairment analysis
pursuant to SFAS No. 121. Subsequent to December 31, 2001,
the Company decided to discontinue this line of business (see Note 16).
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

h. Other Assets

Patent costs are amortized over ten years, and other assets are amortized
over not more than five years. Accumulated amortization of other assets was
$311,577 and $160,618 at December 31, 2001 and 2000, respectively.

i. Long-Lived Assets



| |  | The Company periodically evaluates the carrying value of its long-lived
assets and applies the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. Under SFAS No. 121, long-lived assets and certain identifiable
assets to be held and used in operations are reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an
asset may not be fully recoverable. An impairment loss is recognized if
the sum of the expected long-term, undiscounted cash flows is less than
the carrying amount of the long-lived assets being evaluated. Management
believes the carrying value of its long-lived assets does not exceed
their estimated net realizable value.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



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

j. Marketable Securities



| |  | Marketable securities are accounted for in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, which
requires that the Company determine the appropriate classification of
marketable securities at the time of purchase based on managements
intent. Available for sale marketable securities are stated at fair
value, with net unrealized gains or losses, if any, net of tax, reported
as a separate component of stockholders equity. Realized gains or losses
from the sale of marketable securities are included in the accompanying
Statements of Operations and Comprehensive Income. As of December 31,
2001 the fair value, cost and unrealized gain of marketable securities
were $1,474,889, $50,025 and $1,424,864, respectively. As of
December 31, 2000, the fair value, cost and unrealized gain of
marketable securities were $2,657,418, $68,078 and $2,589,340,
respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

k. Revenues

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

In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. This SAB summarizes the SECs view in applying generally accepted
accounting principles to revenue recognition in financial statements. This SAB
became effective as of the quarter ending December 31, 2000. The Company
believes that its current revenue recognition principles comply with SAB No.
101.

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

Sales to distributors are recorded as revenue if all revenue recognition
criteria are met, including those of SFAS No. 48, Revenue
Recognition When Right of Return Exists, if applicable. Generally,
revenue is recorded upon shipment to distributors if 1) there is no right of
return, or returns can be estimated; and 2) product shipped is a standard product
for which the Company has a history of selling.

The Company does not record shipments of its semiconductor chip products
to All American Semiconductor, Inc, (All American) as revenue until the
product is sold to end users. All American has the right to return product upon
termination of the distribution agreement. The Company has delayed revenue
recognition pursuant to SFAS No.48 because returns cannot currently be
reasonably estimated since the product shipped to All American is a new product
to the Company, in a new market for the
Company (although in an existing market) and All American currently is the
only distributor of this product for the Company (see Note 16).

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##### Table of Contents



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

In contrast to distributors, sales representatives are merely elements of
the Companys sales force. Orders are obtained by or through sales
representatives, but the product is never sold to a sales representative;
rather the product is sold to and shipped directly to customers and recorded as
revenue at that time.

Warranty reserve is recorded based on 1% of product sales. Warranty costs
are offset against the reserve. Each quarter the reserve is analyzed to ensure
that it is adequate based on actual and expected warranty activity.

l. Earnings Per Share

The Company presents earnings per share in accordance with the provisions
of SFAS No. 128, Earnings Per Share (see Note 13).

m. Stock Options

The Company has adopted the disclosure only requirement of SFAS No. 123,
Accounting for Stock-Based Compensation (see Note 12). In accordance with
paragraph 8 of SFAS No. 123, options issued to non-employees (other than
directors) are accounted for based on the fair value of the equity instrument
issued, as that value has been more reliably measurable. The fair value is
determined based on the Black-Scholes method. The resulting value is amortized
over the service period.

n. Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses). This statement requires that an enterprise: (a)
classify items of other comprehensive income by their nature in a financial
statement; and (b) display the accumulated balance of other comprehensive
income separately from stockholders equity in the equity
section of the balance
sheet. In accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, for the years ended December 31, 2001
and 2000, the Company had an unrealized gain on marketable securities of
$115,542 and $2,589,340, respectively, resulting in comprehensive
(loss) income for 2001 and 2000 of $(14,585,992) and $1,364,575, respectively. The
unrealized gain for the year ended December 31, 2001 represents the difference
in market value of the shares held at December 31, 2001 of the Companys
investment in Bede plc (Bede) between December 31, 2000 and December 31,
2001. The unrealized gain for the year ended December 31, 2000 represents the
difference in market value of the Companys investment in Bede of the shares
held at December 31, 2000 between the original cost of the investment and the
market value at December 31, 2000. For the year ended December 31, 1999, the
Company did not have any elements of comprehensive income and, therefore, there
was no difference in the Companys net income or loss and comprehensive income
or loss for that year.

In April 2001, the Company sold 500,000 shares of its investment in Bede
for net proceeds of approximately $1.2 million. The net proceeds and gain from
that transaction are included in this Consolidated Statement of Operations for
the year ended December 31, 2001.

o. Reclassifications

Certain reclassifications have been made to the prior-year financial
statements to conform with the 2001 presentation.

p. New Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations. This statement addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, Business Combinations,and FASB Statement No. 38,

F- 10



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##### Table of Contents



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

Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of this statement are to be accounted for
using one method, the purchase method. The Company will adopt the provisions of
SFAS No. 141 for all business combinations initiated after June 30, 2001. The
adoption of this statement had no effect on the financial statements.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets.SFAS 142 addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted for
in financial statements upon their acquisition. This statement also addresses
how goodwill and other intangible assets should be accounted for after they
have been initially recognized in the financial statements. Upon adoption of
SFAS 142 on January 1, 2002, goodwill is no longer subject to amortization over
its estimated useful life. SFAS No. 142 requires that the Company establish
reporting units and apply a two-step fair value approach to evaluating goodwill
impairment, using at least an annual assessment, as compared to the current
model under SFAS No. 121 that is based on projected future cash flows. Upon
adoption of SFAS No. 142, the Company will cease the amortization of its
goodwill from business combinations completed prior to July 1, 2001 that were
accounted for on the purchase method and may be required to record an
impairment of goodwill under the fair value approach. Based on values assigned
to goodwill as of December 31, 2001, the Company expects that the elimination
of goodwill amortization would have a positive impact on reported net income
for the year ended December 31, 2002 of approximately $100,000. In addition,
the Company will be required to reassess, including useful lives, existing
intangible assets including goodwill, previously recorded in connection with
business combinations completed prior to July 1, 2001 that were accounted for
on the purchase method. The Company has not yet determined if an impairment
exists under the new fair value approach or the amount of any such impairment
that may exist upon adoption. Any impairment identified upon adoption will be
reported as a cumulative effect of a change in accounting method in the
statement of operations.

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. Management
has not determined the impact of the adoption of this statement on the
Companys financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that
Opinion). The provisions of SFAS 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001, with early
application encouraged and generally are to be applied prospectively. The
Company expects that the impact of the adoption of SFAS 144 will have no effect on
our financial condition and results of operations.

3. Acquisitions

Semiconductor Advanced
Lithography, Inc.

On August 7, 2001, the Companys wholly owned subsidiary, JMAR/SAL
NanoLithography, Inc. (Subsidiary) acquired (the Acquisition) all of the
outstanding equity of Semiconductor Advanced Lithography, Inc. (SAL), a
Delaware corporation, in a merger of SAL with and into Subsidiary (Merger).

F- 11



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##### Table of Contents



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

SAL (subsequently renamed JMAR/SAL NanoLithography,
Inc. or JSAL) is a provider of XRL lithography stepper systems.
Consideration for the Merger consisted of an aggregate of 603,051 shares of the
Companys Common Stock valued at $1.7 million, $1.2 million in cash and $1.2
million in notes (the Notes). The Notes are convertible into shares of the
Companys Common Stock at a price of $4.302. The Notes, bearing interest at 8%,
are convertible by the holders at any time and, after six months from
the closing, the Company can force conversion if the average price, as defined,
of the Companys Common Stock during any ten day trading period exceeds $6.45.
All stock options and warrants issued by SAL which were outstanding immediately prior to the acquisition were either exercised pursuant
to their terms or were terminated. There were no settlements of options or
warrants and there was no increase to JMARs purchase price as a result of the
issuance of additional SAL shares upon exercise of the outstanding options and
warrants. In addition, SALs former shareholders and creditors could receive
as contingent earnout consideration up to 354,736 shares of the Companys
Common Stock and up to $2.2 million of Convertible Notes upon achievement of
certain technical and market milestones over the next 17 months. The earnout
consideration will increase goodwill when and if it is paid. The Company has
accounted for the Acquisition as a purchase and, accordingly, results of
operations of JSAL have been included as of August 7, 2001.

The allocation of the purchase price of $4,246,284 is as follows:

|                                       |  |   |           |  
|-------------------------------------- |  | - | --------- | -
|Goodwill                               |  | $ | 3,739,777 |  
|Identifiable intangibles               |  |   | 785,000   |  
|Fair value of tangible assets acquired |  |   | 671,593   |  
|Liabilities assumed                    |  |   | (950,086  | )
|                                       |  |   |           |  
|                                       |  | $ | 4,246,284 |  
|                                       |  |   |           |  

The following unaudited proforma information gives effect to the
acquisition of SAL as if the acquisition occurred on January 1, 2000. In
connection with the Acquisition, SAL entered into agreements with several of
its creditors which reduced the related liabilities due those creditors by
approximately $8,000,000 through a combination of debt forgiveness and by
payment of the $1.2 million cash purchase price by the Company. Such debt
reductions are not reflected in the statement of operations of the Company.
The proforma loss from continuing operations excludes any impact, other than
interest expense, from the debt settlements of SAL directly attributable to the
Acquisition. The Company has recorded the transaction in accordance with SFAS
No. 141 during the third quarter of 2001. Pursuant to SFAS No. 141, goodwill
resulting from the SAL acquisition will not be amortized. The identifiable
intangibles acquired in the Acquisition will be amortized over three years
using the straight line method. Identifiable assets include patents and
technological know-how. Patents were valued based on a discounted cash flow
model and technological know-how was valued based on replacement cost of
underlying documentation. These statements do not purport to be indicative of
the results of operations which actually would have occurred had the
acquisition of SAL occurred on January 1, 2000 or which may be expected to
occur in the future.

|                                |  |                                 |             |      |  |   |             |  
|------------------------------- |  | ------------------------------- | ----------- | ---- |  | - | ----------- | -
|                                |  | For the Year Ended December 31,
|                                |  |                                
|                                |  | 2000                            |             | 2001
|                                |  |                                 |             |     
|                                |  |                                 | (Unaudited) |      |  |   | (Unaudited) |  
|Total revenues                  |  | $                               | 20,470,000  |      |  | $ | 19,431,000  |  
|                                |  |                                 |             |      |  |   |             |  
|Loss from continuing operations |  | $                               | (5,351,000  | )    |  | $ | (16,804,000 | )
|                                |  |                                 |             |      |  |   |             |  
|Loss per share                  |  | $                               | (.14        | )    |  | $ | (.70        | )
|                                |  |                                 |             |      |  |   |             |  

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##### Table of Contents



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

Continuum Engineering, Inc.

On December 7, 1998, the Company acquired 100 percent of the outstanding
common stock of Continuum Engineering, Inc. (CEI). As consideration, the
Company issued to the sole shareholder of CEI 92,160 shares of its Common
Stock. The purchase price was negotiated at arms length, and the acquisition
was accounted for as a purchase effective December 1, 1998.

In 1999, 2000 and 2001, the Company issued 12,171, 5,062 and 807 earn-out
shares, respectively, of Common Stock to the sole shareholder of CEI, accounted
for as additional purchase price. The earn-out related to the CEI acquisition
ceased on December 31, 2001. Included in the Consolidated Balance Sheet at
December 31, 2001 is goodwill, net of amortization, of $122,844 related to this
acquisition.

4. Inventories

At December 31, 2001 and 2000, inventories consisted of the following:

|                                                 |  |      |            |      |  |   |           |  
|------------------------------------------------ |  | ---- | ---------- | ---- |  | - | --------- | -
|                                                 |  | 2001 |            | 2000
|                                                 |  |      |            |     
|Raw materials, components and sub-assemblies     |  | $    | 4,449,071  |      |  | $ | 4,622,923 |  
|Work-in-process                                  |  |      | 1,422,452  |      |  |   | 1,655,989 |  
|Finished goods                                   |  |      | 760,766    |      |  |   | 1,024,176 |  
|                                                 |  |      |            |      |  |   |           |  
|                                                 |  |      | 6,632,289  |      |  |   | 7,303,088 |  
|Less  Reserve for excess and obsolete inventory |  |      | (2,115,143 | )    |  |   | (992,460  | )
|                                                 |  |      |            |      |  |   |           |  
|                                                 |  | $    | 4,517,146  |      |  | $ | 6,310,628 |  
|                                                 |  |      |            |      |  |   |           |  

5. Accounts Receivable

At December 31, 2001 and 2000, accounts receivable consisted of the
following:

|                                   |  |      |           |      |  |   |           |  
|---------------------------------- |  | ---- | --------- | ---- |  | - | --------- | -
|                                   |  | 2001 |           | 2000
|                                   |  |      |           |     
|Trade                              |  | $    | 1,030,565 |      |  | $ | 3,397,174 |  
|Trade  unbilled                   |  |      | 261,690   |      |  |   | 178,146   |  
|U.S. Government  billed           |  |      | 1,282,304 |      |  |   | 1,129,758 |  
|U.S. Government  unbilled         |  |      | 2,554,995 |      |  |   | 2,254,996 |  
|                                   |  |      |           |      |  |   |           |  
|                                   |  |      | 5,129,554 |      |  |   | 6,960,074 |  
|Less-Reserve for doubtful accounts |  |      | (27,812   | )    |  |   | (55,436   | )
|                                   |  |      |           |      |  |   |           |  
|                                   |  | $    | 5,101,742 |      |  | $ | 6,904,638 |  
|                                   |  |      |           |      |  |   |           |  

All unbilled receivables at December 31, 2001 are expected to be billed
and collected within one year. Payment to the Company for performance on
certain U.S. Government contracts is subject to progress payment audits by the
Defense Contract Audit Agency and are recorded at the amounts expected to be
realized.

6. Property and Equipment

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

|                              |  |      |            |      |  |   |            |  
|----------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                              |  | 2001 |            | 2000
|                              |  |      |            |     
|Equipment and machinery       |  | $    | 4,330,415  |      |  | $ | 6,255,944  |  
|Furniture and fixtures        |  |      | 560,594    |      |  |   | 792,350    |  
|Leasehold improvements        |  |      | 387,901    |      |  |   | 342,818    |  
|                              |  |      |            |      |  |   |            |  
|                              |  |      | 5,278,910  |      |  |   | 7,391,112  |  
|Less-Accumulated depreciation |  |      | (3,508,282 | )    |  |   | (4,099,635 | )
|                              |  |      |            |      |  |   |            |  
|                              |  | $    | 1,770,628  |      |  | $ | 3,291,477  |  
|                              |  |      |            |      |  |   |            |  

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##### Table of Contents



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

7. Commitments and Contingencies

The Company leases office facilities under operating leases. Minimum
future rental payments as of December 31, 2001, are as follows:

|     |  |                  |           | 
|---- |  | ---------------- | --------- | 
|     |  | Operating Leases
|     |  |                 
|2002 |  | $                | 1,103,106 | 
|2003 |  |                  | 637,106   | 
|2004 |  |                  | 585,391   | 
|2005 |  |                  | 606,070   | 
|2006 |  |                  |          | 
|     |  |                  |           | 
|     |  | $                | 2,931,673 | 
|     |  |                  |           | 

Related rent expense was $978,954, $563,800 and $491,159 for the years
ended December 31, 2001, 2000 and 1999, respectively.

In April, 2001, the Companys subsidiary, JMAR Precision Systems, Inc.
(JPSI) hired Shankar Rao as JPSIs Vice President of its Precision Motion
Control (PMC) business area. Subsequently, Mr. Rao was made Senior Vice
President of JPSI. Mr. Rao was formerly an employee of Anorad Corporation
(Anorad). Anorad competes with the PMC business area of
JPSI. In October, Anorad filed a Complaint in Los Angeles Superior Court against Mr.
Rao, JPSI and the Company seeking a Temporary Restraining Order and a
Preliminary Injunction against Mr. Rao, JPSI and the Company from using or
disclosing any Anorad trade secret information that may be in their possession.
The Complaint also seeks damages in an unspecified amount for the alleged
misappropriation of Anorad trade secrets, the breach by Mr. Rao of his employee
confidentiality agreement with Anorad, interference with contractual relations
and unfair competition. This matter has been stayed by the Court
pending arbitration of any claims between Anorad and Mr. Rao.
The Company denies that it possesses or has used any Anorad trade
secrets and if the court action is reinstated, the Company believes that
it has defenses to this lawsuit and
intends to vigorously contest this matter.

The Company has entered into employment agreements with several of its key
employees.

8. Line of Credit and Notes Payable

| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Line of credit and notes payable as of December 31, 2001 and 2000, were
as follows:

|                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |           |      |  |   |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 2001 |           | 2000
|                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |      |           |     
|Working capital line of
credit (the Line)in the amount of
$3,000,000 with Comerica
Bank  California (the Bank). At
December 31, 2001, the
line is secured by a $3
million compensating cash
balance. Advances bear
interest at prime rate
(4.75% and 9.5% at
December 31, 2001 and
2000, respectively). The
line expires March 31,
2003 and interest on the
line is payable monthly.
Advances are secured by
all assets of the Company |  | $    | 3,000,000 |      |  | $ | 1,100,000 | 
|Convertible notes payable
bearing interest at 8%
interest due quarterly,
principal due February 7,
2004                                                                                                                                                                                                                                                                                                                                     |  |      | 1,200,000 |      |  |   |          | 

F- 14



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##### Table of Contents



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

|                                                                                                                                                      |  |      |            |      |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                                                                                                                      |  | 2001 |            | 2000
|                                                                                                                                                      |  |      |            |     
|Note payable, due in
monthly principal
installments of $10,417
plus interest at prime
plus .5% through May 2002,
secured by all assets
of the Company |  | $    | 72,917     |      |  | $ | 197,917    |  
|Note payable, due in
monthly principal
installments plus interest
at prime through
June 2005, secured by
certain assets of the
Company                |  |      | 245,000    |      |  |   | 315,000    |  
|Other notes payable                                                                                                                                   |  |      | 181,752    |      |  |   | 18,169     |  
|                                                                                                                                                      |  |      |            |      |  |   |            |  
|                                                                                                                                                      |  |      | 4,699,699  |      |  |   | 1,631,086  |  
|Less: Current portion                                                                                                                                 |  |      | (3,280,037 | )    |  |   | (1,291,178 | )
|                                                                                                                                                      |  |      |            |      |  |   |            |  
|                                                                                                                                                      |  | $    | 1,419,632  |      |  | $ | 339,908    |  

In November 2001, the
Bank reduced the amount of the Line from $5 million to
$3 million and now requires a $3 million compensating
balance. Pursuant to this new line of credit, there are no financial
covenants or ratios. In addition, the Company has a $250,000 line of
credit with Howard Bank, secured by all of the assets of JSAL. This
line of credit requires a compensating balance of $256,250, however,
there were no amounts outstanding pursuant to this line of credit at
December 31, 2001.

The convertible notes (the Notes) were issued to the former shareholders
of SAL. The Notes are convertible into shares of the Companys Common Stock at
a price of $4.302. The Notes are convertible by the holders at any time and,
after February 7, 2002, the Company can force conversion if the average price,
as defined, of the Companys Common Stock during any ten day trading period
exceeds $6.45.

The weighted average interest rate on the loan with Comerica
Bank-California was 6.64% and 8.62% for 2001 and 2000, respectively. The
maximum amount outstanding was $3,000,000 and $4,990,000, respectively, for
2001 and 2000 and the average amount outstanding was $1,072,916 and $1,120,000
during 2001 and 2000, respectively.

Interest paid for the years ended December 31, 2001, 2000 and 1999 was
$106,176, $123,943 and $219,518, respectively.

Future principal payments on notes payable as of December 31, 2001 are as
follows:

|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|Year Ending December 31,
|                        
|2002                     |  | $ | 280,037   | 
|2003                     |  |   | 85,898    | 
|2004                     |  |   | 1,317,692 | 
|2005                     |  |   | 8,750     | 
|2006                     |  |   | 7,322     | 
|                         |  |   |           | 
|                         |  | $ | 1,699,699 | 
|                         |  |   |           | 

9. Related Party Transactions

On March 29, 1993, the Company loaned Dr. Martinez, the Companys Chief
Executive Officer, $59,000 with interest at 6% per annum to assist Dr. Martinez
in paying certain income taxes that he personally incurred in connection with a
transaction that he undertook in support of the Company. The loan amount,
including accrued interest, was $88,344 on December 31, 1999. In February
2000, in recognition of his contributions to the Company, the Board of
Directors of the Company agreed to forgive the loan. The writeoff of the loan
is included in other income (expense) for 1999.

10. Income Taxes

At December 31, 2001, the Company had Federal net operating loss
carryforwards as follows:

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##### Table of Contents



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

|        |  |   |            | 
|------- |  | - | ---------- | 
|Expires |  |   |            | 
|        |  |   |            | 
|2004    |  | $ | 1,184,000  | 
|2005    |  |   | 2,840,000  | 
|2006    |  |   | 961,000    | 
|2007    |  |   | 4,546,000  | 
|2008    |  |   | 6,932,000  | 
|2009    |  |   | 6,860,000  | 
|2010    |  |   | 2,265,000  | 
|2011    |  |   | 585,000    | 
|2014    |  |   | 2,297,000  | 
|2015    |  |   | 3,436,000  | 
|2016    |  |   | 7,106,000  | 
|        |  |   |            | 
|Total   |  | $ | 39,012,000 | 
|        |  |   |            | 

The Company has
approximately $9,825,000 of temporary differences that will
offset future taxable income subject to the change in ownership limitations
discussed below.

Realization of future tax benefits from utilization of the net operating
loss carryforwards for income tax purposes is limited by the change in
ownership (as defined for Federal Income Tax Reporting Purposes) as a result of
the Companys initial public offering in May 1990. As a result of additional
financings in 1992 and 1993, additional ownership changes have occurred which
restrict the Companys ability to utilize its net operating loss carryforwards
and any built in losses. In addition, the net operating losses of acquired
companies are also subject to separate change of ownership limitations. Of the
above net operating loss carryforwards, annual limitations of approximately
$985,000 apply to approximately $5,713,000 of Company and acquired company loss
carryforwards. Approximately $33,299,000 of the net operating loss
carryforwards are not subject to annual limitations.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 2001 and 2000 are presented below:

|                     |                                  |                                 |   |            |             |      |   |           |             |  
|-------------------- | -------------------------------- | ------------------------------- | - | ---------- | ----------- | ---- | - | --------- | ----------- | -
|                     |                                  |                                 |   | 2001       |             | 2000
|                     |                                  |                                 |   |            |             |     
|Deferred tax assets: |                                  |                                 |   |            |             |      |   |          
|                     | Net operating loss carryforwards |                                 | $ | 13,264,000 |             |      | $ | 9,837,000 |            
|                     | Asset
writedowns                 |                                 |   | 2,705,000  |             |      |   |          |            
|                     | Other                            |                                 |   | 636,000    |             |      |   | 834,000   |            
|                     |                                  |                                 |   |            |             |      |   |          
|                     |                                  | Total gross deferred tax assets |   |            | 16,605,000  |      |   |           | 10,671,000  |  
|                     |                                  | Less valuation reserve          |   |            | (16,085,000 | )    |   |           | (10,151,000 | )
|                     |                                  |                                 |   |            |             |      |   |          
|                     |                                  | Net deferred tax asset          |   | $          | 520,000     |      |   | $         | 520,000     |  
|                     |                                  |                                 |   |            |             |      |   |          

The valuation reserve as of December 31, 2001 represents deferred tax
assets which management believes, based on the Companys history of operating
losses, may not be realized in future periods. The net deferred tax asset of
$520,000 is included in other non-current assets on the accompanying
Consolidated Balance Sheet.

The effective income
tax rate for the years ended December 31, 2001, 2000
and 1999 varied from the statutory federal income tax rate as follows:

|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   
|---------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                                                 |  | 2001 |     | 2000 |  | 1999
|                                                                 |  |      |     |      |  |     
|Statutory federal income tax rate                                |  |      | (34 | )%   |  |      | (34 | )% |  |  | (34 | )%
|State income tax                                                 |  |      | (6  | )    |  |      | (6  | )  |  |  | (6  | ) 
|Permanent differences                                            |  |      |    |      |  |      | 1   |    |  |  | 1   |   
|Benefit recorded due to net operating loss
carryforward position |  |      | 40  |      |  |      | 39  |    |  |  | 39  |   
|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   
|                                                                 |  |      |    |      |  |      |    |    |  |  |    |   
|                                                                 |  |      |     |      |  |      |     |    |  |  |     |   

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##### Table of Contents



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

11. Stockholders Equity

During the years ended December 31, 2001, 2000 and 1999, the Company
received net proceeds of approximately $44,040, $16.2 million and $18,450,
respectively, from the exercise of warrants and options into approximately
26,013, 4,152,000 and 38,464 shares of common stock, respectively.

12. Stock-Based Compensation Plans

The Company has six stock option or warrant plans, the 1988 Stock Option
Plan (the 1988 Plan), 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), an incentive plan which provides for the issuance of
warrants to JRI employees (the JRI Plan), and an incentive plan which
provides for the issuance of warrants to JPSI employees (the JPSI 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 consistent with SFAS No. 123 the Companys net loss and loss
per share would have been the following pro forma amounts:

|                                  |  |                       |  |      |              |      |  |      |             |  |  |   |             |  
|--------------------------------- |  | --------------------- |  | ---- | ------------ | ---- |  | ---- | ----------- |  |  | - | ----------- | -
|                                  |  |                       |  | 2001 |              | 2000 |  | 1999
|                                  |  |                       |  |      |              |      |  |     
|Net loss:                         |  | As Reported           |  | $    | (14,701,534) |      |  | $    | (1,224,765) |  |  | $ | (2,248,994  | )
|                                  |  | Pro Forma             |  |      | (15,120,081  | )    |  |      | (2,914,864) |  |  |   | (2,488,380  | )
|Basic and diluted
loss per share: |  | As Reported
Pro Forma |  |      | (.65)(.67)   |      |  |      | (.06)
(.14) |  |  |   | (.12)
(.14) |  

The Company was authorized to grant options or warrants to its employees
(including directors) and consultants for up to 120,000 shares under the 1988
Plan, 1,480,000 shares under the 1991 Plan, 900,000 shares under the 1999 Plan,
806,637 shares under the Anti-Dilution Plan, 100,000 shares under the JRI Plan,
and 450,000 shares under the JPSI Plan. As of December 31, 2001, the Company
has granted options for 99,168 shares under the 1988 Plan, 1,422,671 options
under the 1991 Plan, 587,175 options under the 1999 Plan, 424,246 warrants
under the Anti-Dilution Plan, 91,500 warrants under the JRI Plan, and 188,500
warrants under the JPSI Plan. In addition, 75,000 non-qualified options have
been granted to two employees outside of the above 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.

A summary of the status of the total number of stock options or warrants
pursuant to all six of the above plans as of December 31, 1999, 2000 and 2001
and changes during the years then ended is presented in the tables below:

|                                                           |  |        |           |          |  |         |      |          |  |        |           |          |  |   |      |  |  |         |           |   |  |   |      | 
|---------------------------------------------------------- |  | ------ | --------- | -------- |  | ------- | ---- | -------- |  | ------ | --------- | -------- |  | - | ---- |  |  | ------- | --------- | - |  | - | ---- | 
|                                                           |  | 2001   |           | 2000     |  | 1999   
|                                                           |  |        |           |          |  |        
|                                                           |  |        |           |          |  | Wtd Avg |      |          |  |        |           | Wtd Avg  |  |   |      |  |  | Wtd Avg
|                                                           |  | Shares |           | Ex Price |  | Shares  |      | Ex Price |  | Shares |           | Ex Price
|                                                           |  |        |           |          |  |         |      |          |  |        |           |         
|Outstanding at beg. of year                                |  |        | 2,185,933 |          |  | $       | 3.85 |          |  |        | 2,008,351 |          |  | $ | 2.61 |  |  |         | 1,920,605 |   |  | $ | 2.66 | 
|Granted                                                    |  |        | 496,686   |          |  |         | 3.48 |          |  |        | 604,461   |          |  |   | 7.12 |  |  |         | 289,797   |   |  |   | 2.25 | 
|Exercised                                                  |  |        | (32,983   | )        |  |         | 3.11 |          |  |        | (325,603  | )        |  |   | 2.67 |  |  |         | (9,500    | ) |  |   | 0.82 | 
|Forfeited                                                  |  |        | (212,834  | )        |  |         | 6.74 |          |  |        | (101,276  | )        |  |   | 2.51 |  |  |         | (192,551  | ) |  |   | 2.67 | 
|                                                           |  |        |           |          |  |         |      |          |  |        |           |          |  |   |      |  |  |         |           |   |  |   |      | 
|Outstanding at end of year                                 |  |        | 2,436,802 |          |  |         | 3.53 |          |  |        | 2,185,933 |          |  |   | 3.85 |  |  |         | 2,008,351 |   |  |   | 2.61 | 
|                                                           |  |        |           |          |  |         |      |          |  |        |           |          |  |   |      |  |  |         |           |   |  |   |      | 
|Exercisable at end of year                                 |  |        | 1,586,912 |          |  |         |      |          |  |        | 1,249,173 |          |  |   |      |  |  |         | 729,479   |   |  |   |      | 
|                                                           |  |        |           |          |  |         |      |          |  |        |           |          |  |   |      |  |  |         |           |   |  |   |      | 
|Weighted average fair value
of options or warrants
granted |  |        | 3.48      |          |  |         |      |          |  |        | 7.12      |          |  |   |      |  |  |         | 2.25      |   |  |   |      | 

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##### Table of Contents



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

A summary of the options outstanding as of December 31, 2001, the range of
exercise prices, the weighted-average exercise price, the weighted-average
remaining contractual life, the amount of options currently exercisable and the
weighted-average exercise price of options currently exercisable is as follows:

|                  |              |             |           |                     |         |                     |     |                    |                |         |      |      |         |           |           |         |         |  |      |      |      | 
|----------------- | ------------ | ----------- | --------- | ------------------- | ------- | ------------------- | --- | ------------------ | -------------- | ------- | ---- | ---- | ------- | --------- | --------- | ------- | ------- |  | ---- | ---- | ---- | 
|                  |              |             |           | Options Outstanding |         | Options Exercisable
|                  |              |             |           |                     |         |                    
|                  |              |             |           | Number              |         | Weighted-Average    |     | Weighted-          |                |         |      |      |         | Weighted-
|Range of Exercise |              | Outstanding |           | Remaining           |         | Average             |     | Number Exercisable |                | Average
|Prices            |              | at 12/31/01 |           | Contractual Life    |         | Exercise Price      |     | at 12/31/01        | Exercise Price
|                  |              |             |           |                     |         |                     |     |                    |               
|$.53 to $2.94     |              |             | 815,942   |                     |         | 5.9 years           |     | $                  | 2.21           |         |      |      | 645,076 |           |           | $       | 2.54    | 
|                  |              | 3.00        |           |                     | 663,046 |                     |     |                    | 1.7            |         |      |      | 3.00    |           |           |         | 656,378 |  |      |      | 3.00 | 
|                  | 3.13 to 4.56 |             |           | 623,353             |         |                     |     | 8.8                |                |         |      | 3.67 |         |           |           | 143,667 |         |  |      | 4.31 |     
|                  | 5.19 to 7.46 |             |           | 183,232             |         |                     |     | 6.2                |                |         |      | 6.18 |         |           |           | 67,230  |         |  |      | 6.12 |     
|7.79 to 17.63     |              |             | 151,229   |                     |         |                     | 7.9 |                    |                |         | 9.22 |      |         |           | 74,561    |         |         |  | 9.27 |     
|                  |              |             |           |                     |         |                     |     |                    |                |         |      |      |         |           |           |         |         |  |      |     
|$.53 to $17.63    |              |             | 2,436,802 |                     |         |                     |     |                    |                |         |      |      |         |           | 1,586,912 |         |         |  |      |     
|                  |              |             |           |                     |         |                     |     |                    |                |         |      |      |         |           |           |         |         |  |      |     

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 used for grants in 1999, 2000 and 2001: risk-free
interest rate of approximately 6 percent; expected dividend yields of 0 percent
and expected lives of 6 years. For grants in 1999, 2000 and 2001, the expected
volatility used was 75 percent, 112 percent and 191 percent, respectively.

In accordance with paragraph 8 of SFAS No. 123, options issued to
non-employees (other than directors) are accounted for based on the fair value
of the equity instrument issued, as that value has been more reliably
measurable. The fair value is determined based on the Black-Scholes method.
The resulting value is amortized over the service period.

13. Earnings Per Share

The Company complies 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 year. Diluted
loss per common share for the years ended December 31, 2001, 2000 and 1999, was
computed by dividing net loss by the sum of the weighted average number of
shares of common stock (22,484,905, 21,468,763 and 18,045,914 for 2001, 2000
and 1999, respectively) plus dilutive employee stock options and warrants (none
for 2001, 2000 and 1999) and other dilutive warrants and options (none for
2001, 2000 and 1999). For the years ended December 31, 2001, 2000 and 1999,
dilutive stock options and warrants are not included in the calculation of loss
per share as their effect would be antidilutive.

14. Segment Information

In the Companys Form 10-K for the year ended December 31, 2000, two
segments were reported. These two segments were the Microelectronics Equipment
Segment and the Semiconductor Products and Processes Segment.

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

As a result of the acquisition of Semiconductor Advanced Lithography, Inc.
(renamed JMAR/SAL NanoLithography, Inc., or JSAL) in August 2001, the Company has changed its segments. The Companys three
Segments offer varying products and services that are affected by different
economic conditions. The Segments reflect the manner in which the
Company viewed the operating segments as of December 31, 2001.

Front-end Semiconductor Equipment and Services: This segment includes the
operations of JMAR Research, Inc. (JRI) and JSAL. In our JRI and JSAL
businesses, we conceive and create leading-edge microelectronics manufacturing
systems based on our patented X-ray and other advanced light sources for
higher-performance semiconductor manufacturing and inspection. With the
Companys acquisition of JSAL, we are now the leading supplier of X-ray
lithography steppers.

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

Semiconductor
Products and Processes Segment: This fabless supplier of semiconductors
focused on high performance integrated circuits for the broadband
communications market and the development and delivery of high-performance
custom microcircuits for a wide range of commercial and military electronics
uses. This segment also includes the Semiconductor Process Technology
Services business of JMAR Semiconductor, Inc. (JSI). Subsequent to December 31, 2001, the Company decided to discontinue and
sell its standard semiconductor products business. Accordingly, in
future financial statements, the standard semiconductor products
business will be treated as a discontinued operation and the remainder of
JSIs business, which represented the majority of the revenues
in 2001, 2000 and 1999 of this segment, will be included in the Front-end
Semiconductor Equipment and Services Segment.

The accounting
policies of the reportable segments are the same as those
described in Note 2. 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 years 2001, 2000 and 1999 was as follows:

|      |                               |                               |   |               |           |           |   |                        |            |           |   |            |           |  |   |            |           |  |   |             |            |  
|----- | ----------------------------- | ----------------------------- | - | ------------- | --------- | --------- | - | ---------------------- | ---------- | --------- | - | ---------- | --------- |  | - | ---------- | --------- |  | - | ----------- | ---------- | -
|      |                               |                               |   | Front-end     |           |           |   |                        |            |           |   |            |           |  |   |            |           |  |   |            
|      |                               |                               |   | Semiconductor |           |           |   |                        |            |           |   |            |           |  |   |            |           | 
|      |                               |                               |   | Precision     |           | Precision |   | Semiconductor          |            |           |   |            |           |  |   |           
|      |                               |                               |   | Services      |           | Equipment |   | Products and
Processes |            | Corporate |   | Total     
|      |                               |                               |   |               |           |           |   |                        |            |           |   |           
|2001: |                               |                               |   |               |           |           |   |                        |            |           |   |            |           |  |   |            |           |  |   |            
|      | Revenues                      |                               | $ | 9,852,994     |           |           | $ | 5,795,316              |            |           | $ | 3,064,297  |           |  | $ |           |           |  | $ | 18,712,607  |           
|      | Operating income (loss)       |                               |   | 139,102       |           |           |   | (6,133,842             | )          |           |   | (9,403,079 | )         |  |   | (652,865   | )         |  |   | (16,050,684 | )         
|      | Total assets                  |                               |   | 8,830,493     |           |           |   | 5,920,241              |            |           |   | 614,784    |           |  |   | 11,253,107 |           |  |   | 26,618,625  |           
|      | Capital expenditures          |                               |   | 258,333       |           |           |   | 353,044                |            |           |   | 422,381    |           |  |   | 136,719    |           |  |   | 1,170,477   |           
|      | Depreciation and
amortization |                               |   | 368,956       |           |           |   | 579,778                |            |           |   | 517,944    |           |  |   | 73,717     |           |  |   | 1,540,395   |           
|2000: |                               |                               |   |               |           |           |   |                        |            |           |   |            |           |  |   |            |           |  |   |            
|      | Revenues                      |                               |   | 5,263,850     |           |           |   | 10,512,243             |            |           |   | 3,850,507  |           |  |   |           |           |  |   | 19,626,600  |           
|      | Operating income (loss)       |                               |   | 223,109       |           |           |   | (3,072,269             | )          |           |   | (697,394   | )         |  |   |           |           |  |   | (3,546,554  | )         
|      | Total assets                  |                               |   | 3,927,125     |           |           |   | 11,655,812             |            |           |   | 8,810,992  |           |  |   | 9,797,645  |           |  |   | 34,191,574  |           
|      | Capital expenditures          |                               |   | 136,321       |           |           |   | 103,986                |            |           |   | 1,218,110  |           |  |   | 313,811    |           |  |   | 1,772,228   |           
|      | Depreciation and
amortization |                               |   | 219,017       |           |           |   | 618,553                |            |           |   | 364,185    |           |  |   | 23,280     |           |  |   | 1,225,035   |           
|1999: |                               |                               |   |               |           |           |   |                        |            |           |   |            |           |  |   |            |           |  |   |            
|      |                               | Revenues                      |   |               | 6,149,297 |           |   |                        | 10,315,685 |           |   |            | 8,302,758 |  |   |            |          |  |   |             | 24,767,740 |  
|      |                               | Operating income
(loss)       |   |               | 475,455   |           |   |                        | (2,935,176 | )         |   |            | 314,617   |  |   |            |          |  |   |             | (2,145,104 | )
|      |                               | Total assets                  |   |               | 3,034,750 |           |   |                        | 11,748,082 |           |   |            | 3,592,933 |  |   |            | 2,298,003 |  |   |             | 20,673,768 |  
|      |                               | Capital expenditures          |   |               | 379,261   |           |   |                        | 152,611    |           |   |            | 646,429   |  |   |            | 8,360     |  |   |             | 1,186,661  |  
|      |                               | Depreciation and
amortization |   |               | 139,660   |           |   |                        | 604,962    |           |   |            | 271,630   |  |   |            | 18,423    |  |   |             | 1,034,675  |  

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

In the table above, Corporate includes legal expenses not allocated to
reportable segments. Corporate assets are principally cash, deferred income
taxes and other assets.

Within the Precision Equipment segment, the Measurement and
Inspection Systems product line accounted for 12 percent, 21 percent and 19
percent of the Companys revenues in 2001, 2000 and 1999, respectively. In
addition, the Lithography Systems for Bio-Medical Applications product line
accounted for 6 percent, 18 percent and 13 percent of the Companys revenues
in 2001, 2000 and 1999, respectively. Within the Semiconductor
Products and Processes segment, the Semiconductor Process Technology Services
product line accounted for 14 percent, 18 percent and 33 percent of the
Companys revenues in 2001, 2000 and 1999, respectively.

Significant Customers

Sales to the United States Government aggregated $12,373,075, $8,780,205
and $14,284,957 in 2001, 2000 and 1999, respectively. Accounts receivable from
the United States Government at December 31, 2001 and 2000 was $3,837,299 and
$3,384,754, respectively. Within the Precision Equipment segment,
sales to one customer totaled $932,240, $1,095,257 and $2,555,500 in 2001, 2000
and 1999, respectively. Accounts receivable from this customer at December 31,
2001 and 2000 was $7,344 and $7,087, respectively. In addition, in 2001, 2000
and 1999 sales to another customer totaled $924,614, $3,206,912 and $3,324,580,
respectively. Accounts receivable from this customer at December 31, 2001 and
2000 was $164,660 and $1,162,441, respectively.

Export Sales

The following table presents revenues by country based on where the
products were shipped to or where the services were provided.

|              |       |   |            |            |      |   |            |            |  |   |            |            | 
|------------- | ----- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|              |       |   | 2001       |            | 2000 |   | 1999      
|              |       |   |            |            |      |   |           
|United States |       | $ | 18,100,213 |            |      | $ | 18,244,147 |            |  | $ | 21,954,053 |           
|Mexico        |       |   | 328,652    |            |      |   | 838,435    |            |  |   | 770,623    |           
|Malaysia      |       |   |           |            |      |   | 323,349    |            |  |   | 843,399    |           
|Others        |       |   | 283,742    |            |      |   | 220,669    |            |  |   | 1,199,665  |           
|              |       |   |            |            |      |   |            |            |  |   |            |           
|              | Total |   | $          | 18,712,607 |      |   | $          | 19,626,600 |  |   | $          | 24,767,740 | 
|              |       |   |            |            |      |   |            |            |  |   |            |           

All assets of the Company are located in the United States.

15. Quarterly Financial Information (Unaudited)

The following is a summary of unaudited quarterly results for the years
ended December 31, 2001 and 2000.

|                  |  |          |           |        |  |              |           |           |  |   |             |      |  |     |       |  
|----------------- |  | -------- | --------- | ------ |  | ------------ | --------- | --------- |  | - | ----------- | ---- |  | --- | ----- | -
|                  |  |          |           |        |  |              |           |           |  |   |             |      |  | Net
|Year Ended        |  |          |           |        |  | Gross Profit |           |           |  |   |             | Loss
|December 31, 2001 |  | Revenues |           | (Loss) |  | Net Loss     |           | Per Share
|                  |  |          |           |        |  |              |           |          
|December 31       |  | $        | 5,399,338 |        |  | $            | (472,027  | )         |  | $ | (10,674,081 | )    |  |     | (0.47 | )
|September 30      |  |          | 5,448,727 |        |  |              | 1,184,569 |           |  |   | (2,555,466  | )    |  |     | (0.11 | )
|June 30           |  |          | 3,318,379 |        |  |              | 972,484   |           |  |   | (477,546    | )    |  |     | (0.02 | )
|March 31          |  |          | 4,546,163 |        |  |              | 1,215,524 |           |  |   | (994,441    | )    |  |     | (0.04 | )

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

|                  |  |          |           |              |  |          |           |           |  |   |            |   |  |          |       |  
|----------------- |  | -------- | --------- | ------------ |  | -------- | --------- | --------- |  | - | ---------- | - |  | -------- | ----- | -
|Year Ended        |  |          |           |              |  |          |           |           |  |   |            |   |  | Net Loss
|December 31, 2000 |  | Revenues |           | Gross Profit |  | Net Loss |           | Per Share
|                  |  |          |           |              |  |          |           |          
|December 31       |  | $        | 5,890,485 |              |  | $        | 1,456,766 |           |  | $ | 581,654    |   |  | $        | 0.03  |  
|September 30      |  |          | 3,769,493 |              |  |          | 1,029,543 |           |  |   | (1,027,793 | ) |  |          | (0.05 | )
|June 30           |  |          | 5,167,577 |              |  |          | 1,790,487 |           |  |   | (198,030   | ) |  |          | (0.01 | )
|March 31          |  |          | 4,799,045 |              |  |          | 1,646,427 |           |  |   | (580,596   | ) |  |          | (0.03 | )

16. Subsequent Events

Subsequent to
December 31, 2001, 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 X-ray lithography products. This portion of
JMAR Semiconductor Inc.s (JSI) business has been a developmental effort,
involving the design, manufacture and introduction of new standard product
semiconductor chips. With the severe downturn in the worldwide semiconductor
market, JSI has had little success in selling its new standard product chips to
date. These products would require substantial additional capital to get these
chips established in the market, as well as to develop newer, higher value
chips.

Included in the Statement of Operations for the year ended December 31,
2001 is $7,420,000 in asset impairments and $547,000 in lease termination costs
at JSI. Based on an impairment analysis pursuant to SFAS
No. 121, the asset writedowns include $4,650,000 of capitalized software
development costs for products that have not generated significant
sales to date and are doubtful of generating future revenues, $2,056,000 of fixed assets including outside purchased
software for operating assets that will not be realizable as a result
of no future sales and $420,000 of other assets. In addition, the Company
wrote down $294,000 of inventory. In September 2000, JSI moved into a
significantly larger facility in anticipation of realizing its growth
plans. Prior to
December 31, 2001, the Company decided to sublease the facility used by JSI and
move JSI into a smaller facility. Accordingly, in the fourth quarter
of 2001 the Company accrued its
expected loss under that lease.

As a result of the Companys decision to discontinue this business, the
Company may have an acceleration of the payment of liabilities,
disputed liabilities may arise, and the Company may incur
liabilities that it otherwise would not have incurred primarily
including
distributor termination costs and employee related costs. These amounts are
expected to be approximately $950,000, of which approximately
$700,000 and approximately $183,000 was accrued at December
31, 2001 and 2000, respectively, the majority of which represents advance payments for
inventory by JSI's distributor. In March 2002, JSI had a reduction in force of 13 employees or 50%
of its total employees. In future financial statements, the standard semiconductor
products business will be reflected as a discontinued operation.

In March 2002, under its Universal Blank Shelf Registration Statement, the
Company sold 1 million shares of its Common Stock for gross proceeds of $2
million. In connection with this transaction, the Company issued to the
purchasers warrants to purchase 150,000 shares of its Common Stock at an
exercise price of $2.50 per share, expiring in four years. Also, the Company
paid a placement agent a fee of 6% of the gross proceeds, a $25,000
non-accountable expense allowance and warrants to purchase 20,000 shares of the
Companys Common Stock at an exercise price of $2.40 per share.

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SIGNATURES

Pursuant to the requirement of Section 13 or 15 (d) 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.                                           
|                    
|Date: March 29, 2002 | By:                                                                | /s/ John S. Martinez
|                     |                                                                   
|                     | John S. Martinez
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|                                                   |  |                                                             |  |               
|-------------------------------------------------- |  | ----------------------------------------------------------- |  | --------------
|Signature                                          |  | Title                                                       |  | Date          
|                                                   |  |                                                             |  |               
|                                                  
|/s/ John S. Martinez

John S. Martinez             |  | Chairman of the Board,
Chief Executive Officer
and Director |  | March 29, 2002
|                                                  
|/s/ Dennis E. Valentine

Dennis E. Valentine       |  | Chief Financial Officer
and Chief Accounting Officer        |  | March 29, 2002
|                                                  
|/s/ James H. Banister, Jr.

James H. Banister, Jr. |  | Director                                                    |  | March 29, 2002
|                                                  
|/s/ C. Neil Beer

C. Neil Beer                     |  | Director                                                    |  | March 29, 2002
|                                                  
|/s/ Vernon H. Blackman

Vernon H. Blackman         |  | Director                                                    |  | March 29, 2002
|                                                  
|/s/ Barry Ressler

Barry Ressler                   |  | Director                                                    |  | March 29, 2002
|                                                  
|/s/ Charles A. Dickinson

Charles A. Dickinson     |  | Director                                                    |  | March 29, 2002





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##### Table of Contents



Schedule II

JMAR TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

|                                      |                                               |                   |            |          |           |       |            |            |  |             |   |         |  |  |            |          |   |  |   |           | 
|------------------------------------- | --------------------------------------------- | ----------------- | ---------- | -------- | --------- | ----- | ---------- | ---------- |  | ----------- | - | ------- |  |  | ---------- | -------- | - |  | - | --------- | 
|                                      |                                               |                   |            |          |           |       | Additions  |            |  |             |   |         |  |  |           
|                                      |                                               |                   |            |          |           |       |            |            |  |             |   |         |  |  |           
|                                      |                                               |                   |            |          |           |       | Charged to |            |  |             |   |         |  |  |            |          |   |  |  
|                                      |                                               |                   | Balance at |          | Costs and |       |            |            |  |             |   |         |  |  | Balance at
|Description                           |                                               | Beginning of Year |            | Expenses |           | Other |            | Deductions |  | End of Year
|                                      |                                               |                   |            |          |           |       |            |            |  |            
|For the year ended December 31, 2001: |                                               |                   |            |          |           |       |            |            |  |             |   |         |  |  |            |          |   |  |   |          
|                                      | Warranty reserve                              |                   | $          | 72,734   |           |       | $          | 42,499     |  |             | $ |        |  |  | $          |         |   |  | $ | 115,233   | 
|                                      | Reserve for inventory excess and obsolescence |                   |            | 992,460  |           |       |            | 1,811,000  |  |             |   |        |  |  |            | (688,317 | ) |  |   | 2,115,143 | 
|                                      | Allowance for doubtful accounts               |                   |            | 55,436   |           |       |            |           |  |             |   |        |  |  |            | (27,624  | ) |  |   | 27,812    | 
|                                      |                                               |                   |            |          |           |       |            |            |  |             |   |         |  |  |            |          |   |  |   |          
|For the year ended December 31, 2000: |                                               |                   |            |          |           |       |            |            |  |             |   |         |  |  |            |          |   |  |   |          
|                                      | Warranty reserve                              |                   | $          |         |           |       | $          | 72,734     |  |             | $ |        |  |  | $          |         |   |  | $ | 72,734    | 
|                                      | Reserve for inventory excess and obsolescence |                   |            | 570,157  |           |       |            | 250,000    |  |             |   | 483,269 |  |  |            | (310,966 | ) |  |   | 992,460   | 
|                                      | Allowance for doubtful accounts               |                   |            | 71,193   |           |       |            | 39,889     |  |             |   |        |  |  |            | (55,646  | ) |  |   | 55,436    | 
|                                      |                                               |                   |            |          |           |       |            |            |  |             |   |         |  |  |            |          |   |  |   |          
|For the year ended December 31, 1999: |                                               |                   |            |          |           |       |            |            |  |             |   |         |  |  |            |          |   |  |   |          
|                                      | Warranty reserve                              |                   | $          |         |           |       | $          |           |  |             | $ |        |  |  | $          |         |   |  | $ |          | 
|                                      | Reserve for inventory excess and obsolescence |                   |            | 181,157  |           |       |            | 389,000    |  |             |   |        |  |  |            |         |   |  |   | 570,157   | 
|                                      | Allowance for doubtful accounts               |                   |            | 43,370   |           |       |            | 27,823     |  |             |   |        |  |  |            |         |   |  |   | 71,193    | 
|                                      |                                               |                   |            |          |           |       |            |            |  |             |   |         |  |  |            |          |   |  |   |          

S-1